As filed with the Securities and Exchange Commission on July 2, 2018

Registration No. 333-223034

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

AMENDMENT NO. 2 TO

FORM S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

 

 

 

BORQS TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

British Virgin Islands

 

7373

 

N/A

(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

 

Building B23-A,
Universal Business Park
No. 10 Jiuxianqiao Road
Chaoyang District, Beijing 100015,
China
(86) 10-5975-6336

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

 

Pat Sek Yuen Chan

Chief Executive Officer

Borqs Technologies, Inc.

Building B23-A,

Universal Business Park

No. 10 Jiuxianqiao Road

Chaoyang District, Beijing 100015
China
(86) 10-5975-6336

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 

Copies to

 

Barry I. Grossman

Ellenoff, Grossman & Schole LLP

1345 Avenue of the Americas

New York, NY 10105

(212) 370-1300

Mitchell S. Nussbaum

Loeb & Loeb LLP

345 Park Avenue

New York, NY 10154

(212) 407-4000

 

 

 

Approximate date of commencement of proposed sale to the public : As soon as practicable after the effective date of this Registration Statement.

 

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☒

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

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

 

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 7(a)(2)(B) of the Securities Act. ☐

 

 

 

CALCULATION OF REGISTRATION FEE

 

Title Of Each Class Of Securities To Be Registered   Amount to be Registered     Proposed Maximum Offering Price per Share    

Proposed Maximum Aggregate Offering
Price (1)(2)

    Amount Of Registration Fee  
Ordinary shares, no par value per share     -       -     $ 23,000,000     $ 2,863.50  
Representative’s warrants (3)     -       -       -       -  
Ordinary shares underlying representative’s warrants (2)(4)(5)     -       -     $ 1,932,000     $ 240.53  
Ordinary shares owned by selling stockholders (3)(6)     3,272,761     $ 5.425     $

17,754,728.40

    $ 2,210.46  
Total     -       -     $ 21,986,728.40     $ 5,314.49 (7)

 

 

(1) Includes the aggregate offering price of up to an additional shares (equivalent to 15% of the total number of ordinary shares sold in this offering) that the underwriters have the option to purchase to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended (the “Securities Act”).
(3) In accordance with Rule 457(g) under the Securities Act, because the ordinary shares underlying the Representative’s warrants are registered hereby, no separate registration fee is required with respect to the warrants registered hereby.
(4) Pursuant to Rule 416 under the Securities Act, the securities being registered hereunder include such indeterminate number of additional ordinary shares as may be issued after the date hereof as a result of stock splits, stock dividends or similar transactions.
(5)

Estimated solely for the purposes of calculating the registration fee pursuant to Rule 457(g) under the Securities Act. The warrants to be issued to the representative of the underwriters are exercisable at a per share exercise price equal to 120% of the public offering price. As estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities Act, the proposed maximum aggregate offering price of the ordinary shares underlying the representative’s warrants is $1,932,000 (which is equal to 120% of $1,610,000 (7% of $23,000,000)).

(6) Estimated solely for the purpose of calculating the registration fee for the secondary offering, pursuant to Rule 457(c) under the Securities Act, based on the average of the high and low prices of the Registrant’s ordinary shares on The NASDAQ Capital Market on June 28, 2018.
(7) $5,379.40 was previously paid.

 

 

 

 

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

EXPLANATORY NOTE

 

This registration statement contains two prospectuses:

 

  Offering Prospectus. A prospectus which covers the offering, issuance and sale by: (i) us of up to $23,000,000 of our ordinary shares and (ii) by the Participating Stockholders identified herein of up to $5,750,000 of the ordinary shares sold in this offering; and
     
  Resale Prospectus. A prospectus to be used for the resale by the Selling Stockholders of up to 3,272,761 of the Registrant’s ordinary shares.

 

The Resale Prospectus is substantively identical to the Offering Prospectus, except for the following principal points:

 

  the outside and inside covers are different;
     
  the tables of contents are different;
     
  page i of the Offering Prospectus is not included in the Resale Prospectus;
     
  the section entitled “The Offering” on page 7 of the Offering Prospectus is different;
     
  the section entitled “Use of Proceeds” on page 47 of the Offering Prospectus is different;
     
the section entitled “Description of Securities” beginning on page 97 of the Offering Prospectus is not included in the Resale Prospectus;
     
  a section entitled “Selling Stockholders” is included in the Resale Prospectus;
     
  the section entitled “Underwriters” beginning on page 112 of the Offering Prospectus is different and is entitled “Plan of Distribution;” and
     
  the section entitled “Legal Matters” beginning on page 115 of the Offering Prospectus is different.

 

The Registrant has included in this Registration Statement a set of alternate pages for the Resale Prospectus to reflect the foregoing differences. The Offering Prospectus will exclude the alternate pages and will be used for the public offering by the Registrant. The Resale Prospectus will be substantively identical to the Offering Prospectus except for the addition or substitution of the alternate pages and will be used for the resale offering by the Selling Stockholders.

 

 

 

 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

 

Dated July 2, 2018

 

        Ordinary Shares

 

 

Borqs Technologies, Inc. is offering         of its ordinary shares, and the Participating Stockholders identified in this prospectus are selling            ordinary shares. We will not receive any proceeds from the sale of ordinary shares sold by the Participating Stockholders.

 

 

 

Our ordinary shares are listed on The Nasdaq Capital Market under the symbol “BRQS.” On June 28, 2018, the last reported sale price of our ordinary shares on The Nasdaq Capital Market was US$5.40 per ordinary share.

 

 

 

We are an “emerging growth company” as defined under the federal securities laws. Investing in our ordinary shares involves risks. See “ Risk Factors ” beginning on page 12.

 

 

 

PRICE US$       PER ORDINARY SHARE

 

 

 

   

Price to
Public

 

Underwriting
Discounts and
Commissions (1)

 

Proceeds to
Borqs Technologies, Inc.

 

Proceeds to Participating Stockholders

Per Share   US$   US$   US$   US$
Total   US$   US$   US$   US $

 

 

(1) In addition to the underwriting discount, we have agreed to issue to the representative of the underwriters warrants to purchase a number of ordinary shares equal to 7% of the total number of ordinary shares being sold in the offering, including the over-allotments, if any, and to reimburse the underwriters for expenses incurred by it. See the section titled “Underwriters” for a description of the total compensation payable to the underwriters.

 

Borqs Technologies, Inc. and the Participating Stockholders have granted the underwriters the right to purchase up to an additional        ordinary shares (equivalent to 15% of the total number of ordinary shares sold in this offering) at the public offering price less underwriting discount.

 

The Securities and Exchange Commission and state regulators have not approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The underwriters expect to deliver the ordinary shares to purchasers on or about       , 2018.

 

Maxim Group LLC

 

       , 2018

 

 

 

 

TABLE OF CONTENTS

 

 

Page

Prospectus Summary 1
The Offering 7
Summary Consolidated Financial Data 8
Risk Factors 12
Market, Industry and Other Data 47
Use of Proceeds 47
Market Price of Our Ordinary Shares 47
Dividend Policy 48
Capitalization 48
Selected Consolidated Financial Data 49
Management’s Discussion and Analysis of Financial Condition and Results of Operations 51
Special Note Regarding Forward-Looking Statements 51
Business 69
Management 83
Executive Compensation 88
Certain Relationships and Related Person Transactions 92
Principal Shareholders 95
Description of Securities 97
Shares Eligible for Future Sale 101
Taxation 103
Underwriters 112
Legal Matters 115
Experts 115
Where You Can Find Additional Information 115
Index to Consolidated Financial Statements F-1

 

 

 

Neither we, the Participating Stockholders nor any of the underwriters have authorized anyone to provide you with additional information or information that is different from or to make any representations other than those contained in this prospectus or in any free-writing prospectus prepared by or on behalf of us or the Participating Stockholders to which we may have referred you in connection with this offering. We, the Participating Stockholders and the underwriters take no responsibility for, and can provide no assurances as to the reliability of, any other information that others may give you. We and the Participating Stockholders are offering to sell, and seeking offers to buy, our ordinary shares only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our ordinary shares. Our business, financial condition, results of operations and future growth prospects may have changed since that date.

 

Unless the context requires otherwise, the words “we,” “us,” “our,” “the Company” and “Borqs” refer to Borqs Technologies, Inc. and its subsidiaries and consolidated affiliated entities taken as a whole. For purposes of this prospectus, unless the context otherwise requires, the term “shareholders” shall refer to the holders of our ordinary shares.

 

For investors outside the United States, neither we, the Participating Stockholders nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus and any such free-writing prospectus outside the United States.

 

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PROSPECTUS SUMMARY

 

This summary highlights information contained in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider in making your investment decision. You should read the entire prospectus carefully before making an investment in our ordinary shares. You should carefully consider, among other things, our consolidated financial statements and related notes and the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

BORQS TECHNOLOGIES, INC.

 

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 Original Equipment Manufacturers (“OEMs”) and mobile operators, as well as complete product solutions of mobile connected devices for enterprise and consumer applications.

 

Our Connected Solutions Business Unit (“BU”) works closely with chipset partners to develop new connected devices. Borqs developed the reference Android software platform and hardware platform for Intel and Qualcomm phones and tablets. In recent years, we have been awarded significant business contracts from Intel and Qualcomm, leading global chipset manufacturers. 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 activities with Intel have reduced over the last two years due to Intel’s strategy to exit the mobile industry, and there are no material agreements with Intel on which we are substantially dependent. For the year 2017, Intel was no longer a customer of the Company. However, our activities with Qualcomm have increased over the last two years, including developmental work on chipsets for mobile devices and wearable products.

 

Our Mobile Virtual Network Operator (“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, and acts as a sales and promotion channel for the products developed by the Connected Solutions BU.

 

The Connected Solutions BU 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 March 31, 2018, Borqs had collaborated with 6 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 14 million units worldwide.

 

Borqs has dedicated significant resources to research and development, and has research and development centers in Beijing, China and Bangalore, India. As of March 31, 2018, 350 of our 502 employees were technical professionals dedicated to platform research and development and product specific customization.

 

Borqs has achieved significant growth since inception in 2007. Net revenues increased from $75.1 million in 2015 to $120.6 million in 2016, to $154.3 million in 2017. We recorded net income of $0.8 million and $2.6 million in the years 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; excluding such non-cash merger related costs would result in non-GAAP adjusted net income of $2.1 million for 2017 as compared to a net income of $2.6 million for 2016. We recorded a net income of $1.4 million in the three months ended March 31, 2018, as compared to a net income of $0.02 million in the three months ended March 31, 2017.

 

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Recent Developments

 

Potential acquisition of Shanghai KADI Machinery Technology Co., Ltd.  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. Pursuant to the letter of intent, and as is being negotiated in a definitive agreement, we intend to pay $11.7 million in cash to KADI and $3.3 million in our ordinary shares to the selling shareholders of KADI. KADI is not a customer or supplier of Borqs. In accordance with the letter of intent, we have made four scheduled cash advances to KADI totaling $600,000 which will be deducted from our initial cash payments to KADI under the definitive agreement being negotiated. If the transaction is not consummated within nine months after the 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 the parties reach a definitive agreement and proceed to closing, part of the proceeds from this offering as contemplated herewith will be used to fund the acquisition of KADI. See “Use of Proceeds.”

 

KADI has worked with the leading automotive companies in China, including Chery, Dong Feng Motors, Geely Auto, Shanghai Volkswagen and TRW. Its founder, Dr. Hu Lin, has nearly 20 years of professional experience working with companies in the automotive industry, including Volkswagen and Delphi.

 

KADI has been awarded a RMB320 million (US$50 million) multi-year supply contract for its core electric control modules from Shenzhen Espirit Technology Co., Ltd. (“Espirit”), which is a key automotive contractor in China. Borqs believes that KADI’s products will complement Borqs’ existing automobile in-vehicle-infotainment (IVI) solutions, in terms of sales and distribution, and research and development. Borqs anticipates that the experience of its software engineers will enhance KADI’s capabilities while Borqs’ supply chain management team will ensure efficient delivery of hardware products. Assuming the acquisition of KADI is completed, Borqs expects to provide $7.7 million to KADI in 2018 to service the Espirit supply contract, of which approximately $4 million is anticipated to be used for capital expenditures, and $3.7 million is anticipated to be used for working capital needs. Beginning in May 2018, KADI will deliver certain control modules, including steering control, air conditioning and for other electric bus functions, to Dong Feng Motor Group’s Super Dragon Electric Bus Program. Such products represent approximately 10% of the Espirit supply contract.

 

Upon the completion of our acquisition of 60% of KADI, we have an exclusive option, valid until December 31, 2021, to purchase the remaining 40% of KADI at a 9% premium to the consideration paid for the first 60%.

 

Repurchase of Shares from Zhengqi. 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) will become 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. We and Zhengqi are currently making arrangements for the completion of this transaction which we anticipate will be within 2018. Proceeds from this offering will not be used to repurchase the shares from Zhengqi.

 

Pursuant to the Stock Repurchase Agreement, we agreed to use our best efforts to amend our memorandum and articles of association (“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.

 

Investment in Shenzhen Crave Communication Co., Ltd. On January 18, 2018, we entered into an agreement with Shenzhen Crave Communication Co., Ltd (“Crave”) and Colmei Technology International Ltd. (“Colmei”), along with the shareholders of Crave and Colmei (“CC Selling Shareholders”), pursuant to which we agreed to acquire 13.8% of the outstanding shares of Crave and 13.8% of the outstanding shares of Colmei from the CC Selling Shareholders. The transaction closed on March 22, 2018, and under the agreement, the purchase consideration consists of ordinary shares and cash. On the closing, we issued 473,717 ordinary shares to the order of the CC Selling Shareholders and agreed to pay cash in the amount of $10.0 million to be paid to the CC Selling Shareholders over a period of 36 months. In addition, if approved by our Board, we will issue additional shares to the CC Selling Shareholders if the aggregate value of the ordinary shares initially issued at the closing to the CC Selling Shareholders under this agreement is less than $3.0 million on August 18, 2018. No proceeds from this offering will be used to pay any of the $10.0 million cash consideration to the CC Selling Shareholders.

 

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Crave is a manufacturer of mobile terminal devices located in Shenzhen China. With multiple high speed SMT lines, assembly lines and packaging lines, its annual capacity reaches over 10 million units in its Shenzhen facility. Crave exports final products for customers in South America, India, Indonesia, the Philippines and Vietnam. Colmei, which is under common ownership with Crave, is a sales entity located in Hong Kong that has established relationships with international banks to facilitate transactions with its global clients. Crave is one of our material suppliers from which we source necessary components for our customers, and we believe our investments in Colmei and Crave provide us with indirect access to supply chain financing, competitive component pricing and prioritized production capacity. Prior to this investment, we have contracted Crave and Colmei for multiple projects related to manufacturing our products, including a large variety of phone models and releases.

 

Risks Related to Our Business and Investment in Our Ordinary Shares

 

Investing in our ordinary shares involves a high degree of risk. You should carefully consider the risks highlighted in the section titled “Risk Factors” immediately following this prospectus summary before making an investment decision. We may be unable for many reasons, including those that are beyond our control, to implement our business strategy successfully. These risks include:

 

  Our future capital needs are uncertain and our independent registered public accounting firm has expressed in its report on our 2017 audited financial statements a substantial doubt about our ability to continue as a going concern;

 

  We generate a significant portion of our net revenues from a small number of major customers and key projects;

 

  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 control of our VIEs is based upon contract rather than equity;

 

  We face potential risks associated with our ability to fund our expansion plans, including acquisitions, and our operations due to fund restrictions both from currency transfer and conversion restrictions placed on us by the PRC government; and

 

  The current license to operate our services in the PRC is based on a government issued extension of a trial license that originally would have expired on December 31, 2015. If we cannot obtain a renewed license or the current extension is terminated, we will need to cease operating as a MVNO and our total revenues will be significantly reduced.

 

The risks and uncertainties related to our business and our industry also include, but are not limited to:

 

  Our ability to manage our business expansion and increasingly complicated operations effectively;

 

  Our ability to use, protect and enhance our brands;

 

  Our ability to compete effectively in the marketplace;

 

  Our ability to remediate our material weakness and maintain an effective system of internal controls; and

 

  Our ability to make acquisitions and to successfully integrate these acquisitions and establish and maintain strategic relationships.

 

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See “Risk factors” for a more detailed discussion of these and other risks and uncertainties that we may face.

 

If we are unable to adequately address these and other risks we face, our business, financial condition, operating results and prospects may be adversely affected.

 

Corporate History and Information

 

We were incorporated in the British Virgin Islands on July 1, 2015 as a blank check company, formed for the purpose of acquiring, engaging in a share exchange, share reconstruction and amalgamation with, purchasing all or substantially all of the assets of, entering into contractual arrangements with, or engaging in any other similar business combination with one or more businesses or entities. As a result of a merger on August 18, 2017 of one of our subsidiaries (which we formed for this purpose) with and into Borqs International Holding Corp (“Borqs International”), a company incorporated in the Cayman Islands in 2007, we acquired the entire issued share capital of Borqs International, which became our wholly-owned subsidiary, and we ceased to be a shell company. We conduct our business principally through BORQS Beijing Ltd. (“Borqs Beijing”), which is our wholly-owned Chinese subsidiary. In addition, we conduct parts of our operations through subsidiaries in China, India, Hong Kong and South Korea.

 

As of March 31, 2018, we were authorized to issue an unlimited number of shares and our share capital consisted of 31,307,522 issued and 31,303,350 outstanding ordinary shares, and we had issued 5,750,000 public warrants, 531,875 private warrants, and 417,166 assumed warrants. Our ordinary shares and public warrants began trading on The Nasdaq Capital Market (“Nasdaq”) under the symbols “BRQS” and “BRQSW,” respectively, on or around August 21, 2017. On October 12, 2017, we were notified by Nasdaq that we were not in compliance with Nasdaq Listing Rules 5505(a)(3) and 5515(a)(4), given that our ordinary shares and public warrants did not meet the minimum initial listing requirements of 300 round lot holders of ordinary shares and 400 round lot holders of public warrants. On December 11, 2017, we were notified that our request for continued listing of our ordinary shares on Nasdaq was granted, subject to providing an update regarding the status of our efforts to evidence compliance with the minimum 300 round lot shareholder requirement on or before February 14, 2018, and full compliance with that requirement by no later than April 10, 2018. The Panel also advised the Company that it had determined to delist our warrants. To regain compliance with Nasdaq’s listing requirement of 300 round lot holders of ordinary shares, we implemented a restricted ordinary shares purchase program with eligible employees of our wholly-owned subsidiary in India, Borqs Software Solutions Private Ltd. Pursuant to the program, 222 employees purchased an aggregate of 29,170 ordinary shares at a purchase price of $9.40 per share, which was deducted from their regular compensation on March 23, 2018. On April 12, 2018, we were notified by the Panel that we had regained compliance with the listing requirement of 300 round lot holders and that our ordinary shares would continue to be listed on Nasdaq. Our public warrants have been trading on the OTC Markets system under the symbol “BRQSW” since October 23, 2017.

 

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

 

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The following diagram illustrates our current corporate structure of each of our wholly-owned subsidiaries and consolidated affiliated entities.

 

Corporate Organizational Chart

 

 

 

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Borqs Subsidiaries and Consolidated Affiliated Entities

 

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

 

Borqs Beijing Ltd. (“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;

 

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;

 

Beijing Big Cloud Century Network Technology Co., Ltd. (“BC-NW”), a company established under the laws of the PRC in 2014, is the variable interest entity through which Borqs Beijing controls Yuantel Telecom, the entity which operates the MVNO business,

 

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 BC-NW, which is 100% beneficially owned and controlled by Borqs Beijing 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 2016 and 2017.

 

Implications of Being an Emerging Growth Company

 

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or “JOBS Act.” We have elected to take advantage of specified reduced reporting and other requirements available to us, as an emerging growth company, that are otherwise applicable to public companies. These provisions include, among other things:

 

  exemption from the auditor attestation requirement in the assessment of our internal controls over financial reporting;

 

  exemption from new or revised financial accounting standards applicable to public companies until such standards are also applicable to private companies;

 

  exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board (United States), requiring mandatory audit firm rotation or a supplement to our auditor’s report in which the auditor would be required to provide additional information about the audit and our financial statements;

 

  an exemption from the requirement to seek non-binding advisory votes on executive compensation and golden parachute arrangements; and

 

  reduced disclosure about executive compensation arrangements.

 

We may take advantage of these provisions until October 20, 2020, unless we earlier cease to be an emerging growth company, which would occur if our annual gross revenues exceed $1.0 billion, if we issue more than $1.0 billion in non-convertible debt in a three-year period, or if the market value of our ordinary shares held by non-affiliates exceeds $700.0 million as of any January 1 before that time, in which case we would no longer be an emerging growth company as of the following December 31. Investors may find our ordinary shares less attractive if we rely on the exemptions, which may result in a less active trading market and increased volatility in our stock price. We have taken advantage of the reduced reporting requirement with respect to disclosure regarding our executive compensation arrangements and expect to take advantage of the exemption from auditor attestation on the effectiveness of our internal control over financial reporting. For as long as we take advantage of the reduced reporting obligations, the information that we provide shareholders may be different from information provided by other public companies. We have not elected to “opt out” of the extended transition period relating to the exemption from new or revised financial accounting standards and as a result, we will not necessarily comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.

 

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THE OFFERING

 

Ordinary shares offered by us               shares
   

Ordinary shares offered by Participating Stockholders

              shares (representing up to 25% of the total number of ordinary shares sold in this offering)
   
Option to purchase additional shares exercisable for 45 days from the closing of this offering

       shares (equivalent to 15% of the total number of ordinary shares sold in this offering)

   
Ordinary shares to be outstanding after this offering                     shares (        shares if the option to purchase additional shares is exercised in full)
   
Use of proceeds

We intend to use our net proceeds from this offering to fund the acquisition of Shanghai KADI Machinery Technology Co., Ltd, and for general working capital purposes. See “Use of Proceeds.” We will not receive any proceeds from the sale of the ordinary shares by the Participating Stockholders.

   
Representative’s Warrants We have agreed to issue to Maxim Group LLC in connection with this offering a warrant to purchase 7% of the ordinary shares sold in the offering (“Representative’s Warrants”).  The Representative’s Warrants will have an exercise price equal to 120% of the offering price of the ordinary shares sold in this offering and may be exercised on a cashless basis. The Representative’s Warrants are exercisable commencing 180 days after the effective date of the registration statement related to this offering, and will be exercisable for three years after the effective date. The Representative’s Warrants are not redeemable by us and have certain demand and “piggyback” registration rights (See “Underwriters — Representative’s Warrants”).
   
Risk factors See “Risk Factors” beginning on page 12 and other information included in this prospectus for a discussion of factors that you should consider carefully before deciding to invest in our ordinary shares.
   
The Nasdaq Capital Market ticker symbol “BRQS”

 

The number of ordinary shares to be outstanding after this offering is based on 31,307,522 issued and 31,303,350 ordinary shares outstanding as of March 31, 2018, and excludes:

 

  2,825,273 ordinary shares issuable upon the exercise of stock options outstanding as of March 31, 2018, with a weighted-average exercise price of $5.07 per share;

 

  The repurchase and cancellation of 966,136 ordinary shares outstanding as of March 31, 2018 pursuant to our Stock Repurchase Agreement with Zhengqi, executed on January 10, 2018;

 

  6,699,041 ordinary shares issuable upon the exercise of warrants (See “Description of Securities — Warrants”);

 

  3,714,958 ordinary shares reserved for future issuance under our 2017 Equity Incentive Plan, or Incentive Plan, as of March 31, 2018;

 

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  640,000 ordinary shares issuable upon the exercise of EarlyBirdCapital’s purchase option (See “Description of Securities — Purchase Option”); and

 

  The number of ordinary shares issuable upon the exercise the Representative’s Warrants. The Representative’s Warrants will have an exercise price equal to 120% of the offering price of the ordinary shares sold in this offering and may be exercised on a cashless basis. The Representative’s Warrants are exercisable commencing 180 days after the effective date of the registration statement related to this offering, and will be exercisable for three years after the effective date. The Representative’s Warrants are not redeemable by us and have certain demand and “piggyback” registration rights (See “Underwriters — Representative’s Warrants”).

 

Our Incentive Plan also provides for automatic annual increases in the number of shares reserved thereunder. See “Executive Compensation — Employee Benefit Plans” for additional information.

 

Except as otherwise indicated, all information in this prospectus assumes:

 

  no exercise or cancellation of outstanding options or vesting of RSUs subsequent to March 31, 2018; and

 

  no exercise by the underwriters of their overallotment option.

 

SUMMARY CONSOLIDATED FINANCIAL DATA

 

We have derived the summary consolidated statement of operations data for the years ended December 31, 2015, 2016, and 2017 and the summary consolidated balance sheet data as of December 31, 2016 and 2017 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the summary consolidated statement of operations data for the three months ended March 31, 2017 and 2018 and the summary consolidated balance sheet data as of March 31, 2018 from our unaudited interim consolidated financial statements included elsewhere in this prospectus. Our unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, on the same basis as our audited annual consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal, recurring adjustments, that are necessary for the fair statement of our consolidated financial position as of March 31, 2018 and our consolidated results of operations for the three months ended March 31, 2017 and 2018. You should read the following summary consolidated financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected for any other period in the future.

 

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Statement of Operations:

 

    Year Ended December 31,     Three Months Ended March 31,  
    2015     2016     2017     2017     2018  
    US$     US$     US$              
    (US$ in thousands)  
Net revenues:                              
Software     22,468       14,912       11,212       3,084       2,256  
Hardware     32,647       70,536       111,021       21,679       48,118  
MVNO     16,007       29,309       30,118       5,932       7,509  
Others     3,950       5,829       1,956       515       373  
                                         
Total net revenues     75,072       120,586       154,307       31,210       58,256  
                                         
Cost of revenues                                        
Software     (12,699 )     (7,491 )     (7,247 )     (2,330 )     (769 )
Hardware     (26,101 )     (57,452 )     (96,247 )     (19,238 )     (43,399 )
MVNO     (16,225 )     (28,784 )     (22,836 )     (5,287 )     (5,061 )
Others     (2,980 )     (1,709 )     (811 )     (200 )     (171 )
                                         
Total cost of revenues     (58,005 )     (95,436 )     (127,141 )     (27,055 )     (49,400 )
                                         
Total gross profit     17,067       25,150       27,166       4,155       8,856  
                                         
Operating expenses:                                        
Sales and marketing expenses     (7,359 )     (5,874 )     (7,952 )     (1,339 )     (1,682 )
General and administrative expenses     (4,883 )     (10,042 )     (20,753 )     (1,558 )     (3,096 )
Research and development expenses     (7,206 )     (5,742 )     (6,443 )     (292 )     (889 )
Changes in the fair value of warrant liabilities           (12 )     (200 )     (161 )      
                                         
Total operating expenses     (19,448 )     (21,670 )     (35,348 )     (3,350 )     (5,667 )
                                         
Other operating income     3,094       1,760       272       266        
                                         
Operating income (loss)     713       5,240       (7,910 )     1,071       3,189  
Interest income     61       65       14       2       6  
Interest expense     (156 )     (797 )     (1,877 )     (619 )     (245 )
Other income     208       114       633       303       39  
Other expense     (35 )     (59 )     (121 )     (118 )     (45 )
Foreign exchange gain (loss)     855       692       (779 )     (177 )     (374 )

 

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    Year Ended December 31,     Three Months Ended
March 31,
 
    2015     2016     2017     2017     2018  
    US$     US$     US$              
    (US$ in thousands)  
Profit (loss) before income taxes     1,646       5,255       (10,040 )     462       2,570  
Income tax expense     (851 )     (2,659 )     (2,319 )     (444 )     (1,183 )
Net income (loss)     795       2,596       (12,359 )     18       1,387  
Less: net (loss) income attributable to noncontrolling interests     (1,316 )     (632 )     210       (78 )     188  
Net income (loss) attributable to Borqs Technologies, Inc.     2,111       3,228       (12,569 )     96       1,199  
Add: accretion to redemption value of convertible redeemable preferred shares     (2,417 )     (976 )     (6,956 )     (298 )      
Allocation to holders of Preferred Shares           (2,252 )                  
Net loss attributable to ordinary shareholders     (306 )           (19,525 )     (202 )     1,199  
                                         
Earnings (loss) per share:                                        
Basic     (0.07 )     0.00       (1.52 )     (0.05 )     0.05  
Diluted     (0.07 )     0.00       (1.52 )     (0.05 )     0.04  
                                         
Shares used in earnings (loss) per share computation:                                        
Basic     4,224,090       4,224,725       12,842,671       4,224,725       26,384,152  
Diluted     4,224,090       4,224,725       12,842,671       4,224,725       27,471,885  
Net income (loss)     795       2,596       (12,359 )     18       1,387  
Other comprehensive (loss) income, net of tax of nil:                                        
Foreign currency translation adjustments, net of tax of nil     (1,491 )     (1,575 )     2,207       312       1,392  
Other comprehensive income (loss), net of tax of nil     (1,491 )     (1,575 )     2,207       312       1,392  
                                         
Comprehensive income (loss)     (696 )     1,021       (10,152 )     330       2,779  

 

Balance Sheet:

 

    December 31,  

March 31,

 
    2016     2017   2018  
                 
Balance Sheet Data                
Current assets     58,079       119,531     90,930  
Total assets     78,030       148,732     136,376  
Current liabilities     50,487       92,748     66,053  
Total liabilities     64,519       101,727     83,198  
Shareholders’ equity (deficit)     (55,351 )     47,005     53,178  
Total liabilities, mezzanine equity, noncontrolling interest and shareholders’ equity (deficit)     78,030       148,732     136,376  

 

Non-GAAP Financial Measures

 

Adjusted EBITDA

 

Adjusted EBITDA is a supplemental non-GAAP financial measure exclusive of certain items to facilitate management’s review of the comparability of our core operating results on a period to period basis because such items are not related to our ongoing core operating results as viewed by management.

 

Adjusted EBITDA is not a measure of net income or cash flows as determined by GAAP. We define Adjusted EBITDA as net income plus income taxes, net interest expense, depreciation and amortization, other non-operational (income) expense, foreign exchange (gain) loss, and less certain non-cash charges, including non-cash merger related expenses, stock based compensation that was fully vested upon the merger, and stock based compensation advisory charges.

 

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We believe Adjusted EBITDA is useful because it allows us to more effectively evaluate our operating performance and compare the results of our operations from period to period without regard to our financing methods or capital structure. We exclude the items listed above in arriving at Adjusted EBITDA because these amounts can vary substantially from company to company within our industry depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income as determined in accordance with GAAP, or as an indicator of our operating performance or liquidity. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are components of Adjusted EBITDA. Our computations of Adjusted EBITDA may not be comparable to other similarly titled measures of other companies.

 

The following table presents a reconciliation of the non-GAAP financial measures of Adjusted EBITDA to the most directly comparable GAAP financial measure for years ended December 31, 2015, 2016 and 2017 and three months ended March 31, 2017 and 2018:

 

    Year ended December 31,     Three Months Ended
March 31,
 
    2015     2016     2017     2017     2018  
    (US$ in thousands)  
Net income (loss)     795       2,596       (12,359 )     18       1,387  
                                         
Interest expense (net)     95       732       1,863       617       239  
Taxes     851       2,659       2,319       444       1,183  
Depreciation and amortization     2,480       3,157       4,679       1,225       1,798  
Foreign exchange (gain) loss     (855 )     (692 )     779       177       374  
EBITDA     3,366       8,452       (2,719 )     2,481       4,981  
Other non-operational income     (173 )     (55 )     (512 )     (185 )     6  
Non-cash merger related expenses                                        
Stock based (historical awards fully vested upon merger)                 5,727                
Stock based compensation advisory fees                 8,777                
Adjusted EBITDA (excluding non-cash merger expenses)     3,193       8,397       11,273       2,296       4,987  

 

 

Non-GAAP measures presented above demonstrate our financial performance while removing the effects of interest expense, taxes, depreciation and amortization, other non-operational income or expense, gain or loss due to foreign exchange fluctuation, and also non-cash transactional expenses related to our merger in August 2017.

 

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RISK FACTORS

 

Investing in our ordinary shares involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this prospectus, including our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding whether to invest in our ordinary shares. 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. Additional risks and uncertainties not presently known to us or that we currently believe are not material may also impair our business, financial condition, results of operations and growth prospects.

 

Risks Related to our Business and Industry

 

Our future capital needs are uncertain and our independent registered public accounting firm has expressed in its report on our 2017 audited financial statements a substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to raise additional capital or obtain loans from financial institutions and our operations could be curtailed if we are unable to obtain the required additional funding when needed.  We may not be able to do so when necessary, and/or the terms of any financings may not be advantageous to us.

 

Our financial statements for the year ended December 31, 2017 included in our Annual Report on Form 10-K filed on April 2, 2018, have been prepared assuming we will continue to operate as a going concern.  However, due to our recurring losses from operations, and working capital deficiency, there is substantial doubt about our ability to continue as a going concern.  Because we continue to experience negative cash flow, our ability to continue as a going concern is subject to our ability to obtain necessary funding from outside sources, including obtaining additional funding from the sale of our securities, grants or other forms of financing.  Our continued negative cash flow increases the difficulty in completing such sales or securing alternative sources of funding, and there can be no assurances that we will be able to obtain such funding on favorable terms or at all.  If we are unable to obtain sufficient financing from the sale of our securities or from alternative sources, we may be required to reduce, defer or discontinue certain of our research and development and operating activities or we may not be able to continue as a going concern.  As a result, our independent registered public accounting firm has expressed in its auditors’ report on the financial statements included in Item 8 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, a substantial doubt regarding our ability to continue as a going concern.  Our financial statements do not include any adjustments that might result from the outcome of the uncertainty regarding our ability to continue as a going concern. If we cannot continue as a going concern, our shareholders may lose their entire investment in our ordinary shares.  Future reports from our independent registered public accounting firm may also contain statements expressing doubt about our ability to continue as a going concern.

 

Due to liquidity concerns arising from our negative cash flow, we anticipate that we will need to raise additional funds to finance operations.

 

As of March 31, 2018, we had accumulated deficit of $73.230 million, net income of $1.387 million and net cash flow from operation of $0.688 million for the quarter then ended. As of December 31, 2017, we had accumulated deficit of $74.231 million and suffered net loss of $12.359 million and negative cash flow from operating of $14.939 million for the year then ended. This condition raises substantial doubt about our ability to continue as a going concern.

 

To support our research and development activities and general corporate purposes as well as our pending acquisition of KADI, we will need to raise additional capital to fund our future operations. Our cash needs will depend on numerous factors, including our revenues, completion of our product development activities, our ability to realize synergies from the acquisition with KADI, market acceptance of electric, plug-in electric and fuel cell vehicles, customer and market acceptance and use of our products, and our ability to reduce and control costs. We expect to devote substantial capital resources to, among other things, fund operations, and continue research and development programs in China and in India. If we are unable to secure such additional financing, it will have a material adverse effect on our business and we may have to limit operations in a manner inconsistent with our development and commercialization plans. If additional funds are raised through the issuance of equity securities or convertible debt securities, it will be dilutive to our shareholders and could result in a decrease in our stock price.

 

We have funded our operations primarily with proceeds from public and private offerings of our ordinary shares and secured and unsecured debt instruments. Our negative cash flow and cash uses, our projections of the level of cash that will be required for our operations, the terms of the private placement transactions that we completed in the past, and the restricted availability of credit for emerging industries, may impair our ability to raise capital on terms that we consider reasonable and at the levels that we will require over the coming months. We cannot provide any assurances that we will be able to secure additional funding from public or private offerings on terms acceptable to us, if at all. If we are unable to obtain the requisite amount of financing needed to fund our planned operations, it would have a material adverse effect on our business and ability to continue as a going concern.

 

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The agreements governing the loan facilities we currently have contain restrictions and limitations that could significantly affect our ability to operate our business, raise capital, as well as significantly affect our liquidity, and therefore could adversely affect our results of operations.

 

Covenants governing our loan facilities with SPD Silicon Valley Bank Co., Ltd. (“SSVB”) and Partners For Growth IV, L.P. and Partners For Growth V, L.P. (collectively, “PFG”) restrict, among other things, our ability to:

 

  pay dividends or distributions, repurchase or redeem equity;

 

  incur or permit to exist any additional indebtedness or liens;

 

  guarantee or otherwise become liable with respect to the obligations of another party or entity;

 

  acquire any assets, except in the ordinary course of business, or make any investments; and

 

  sell all or substantially all of our assets.

 

Our ability to comply with these provisions may be affected by events beyond our control. We have notified each of SSVB and PFG as to the transactions with Crave/Colmei, KADI and repurchase of shares from Zhengqi. Additionally, we have notified SSVB and PFG as to the transactions contemplated by this offering. Although we have not been notified by either lender that they will not permit such transactions, neither lender has expressly waived such right, and we are in discussions with the lenders to confirm their consent. The breach of any such covenants or obligations not otherwise waived or cured could result in a default under the applicable debt obligations and could trigger acceleration of those obligations. In addition, the loan agreements with SSVB and PFG requires us to satisfy certain financial covenants, including quarterly EBITDA thresholds. Any defaults under our loan agreements with SSVB and PFG could adversely affect our growth, our financial condition, our results of operations and our ability to make payments on our debt. The ability to make payments of principal and interest on indebtedness will depend on our financial condition, which is subject to general economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are beyond our control. If sufficient cash flow is not generated from operations to service such debt, we may be required, among other things, to:

 

seek additional financing in the debt or equity markets;

 

delay, curtail or abandon altogether our research & development or investment plans;

 

refinance or restructure all or a portion of our indebtedness; or

 

sell selected assets.

 

Such measures might be insufficient to service the indebtedness. In addition, any such financing, refinancing or sale of assets may not be available on commercially reasonable terms, or at all. If funds are not available when needed, or available on acceptable terms, we may be required to delay, scale back or eliminate some of our obligations, including with respect to our commitments in connection with our investments into KADI and Crave/Colmei, the repurchase of our shares from Zhengqi, and this offering. In addition, we may not be able to grow market share, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, which could negatively impact our business, operating results and financial condition.

 

Defaults under our loan agreements with SSVB and PFG could result in a substantial loss of our assets.

 

We have pledged our assets as collateral under the loan agreements with SSVB and PFG. A failure to repay any of the indebtedness under such loan agreements as it becomes due or to otherwise comply with the covenants contained in any of the loan agreements could result in an event of default thereunder. If not cured or waived, an event of default under any of our loan agreements could enable the lenders thereunder to declare all borrowings outstanding on such debt, together with accrued and unpaid interest and fees, to be due and payable and terminate all commitments to extend further credit. The lenders could also elect to foreclose on our assets securing such debt. In such an event, the Company may not be able to refinance or repay all of its indebtedness, pay dividends or have sufficient liquidity to meet operating and capital expenditure requirements. Any such acceleration could cause us to lose a substantial portion of our assets and will substantially adversely affect our ability to continue our operations.

 

We have in the past failed to comply with financial covenants in certain of our loan documents, which has resulted in potential defaults under certain of our loan documents. These and similar breaches of our loan documents in the future could adversely affect our financial condition and our ability to meet our payment obligations on our indebtedness.

 

We have in the past breached certain financial covenants under our loan agreements with SSVB and PFG. Specifically, we failed to meet a monthly cash ratio threshold, under U.S. GAAP basis, for several months in the second, third and fourth quarters of 2017 under the SVB loan agreement and a minimum 3-month trailing EBITDA target under the PFG loan agreement as of the third quarter of 2017.  Such breach could result in acceleration of the repayment according to the contract term. Therefore, the outstanding balance of $4.75 million was reclassified as current liability as of March 31, 2018. We have not been notified by either lender that they seek to accelerate the loan payments because of such breaches and neither lender has expressly waived such breaches and any resulting defaults.  We are currently negotiating with both lenders to make adjustments to the specific financial covenants to more appropriately reflect the business nature of the Company in 2018 and going forward, particularly allowing for the inclusion of inventories while removing certain non-cash stock based compensation in deriving the covenant ratios.  In the event the lenders choose not to make adjustments to the covenant ratios and consider the occurrence of these breaches as events of default under our current loan agreements, the lenders may elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit to us.

 

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In the event of the acceleration of our indebtedness or if we are unable to otherwise maintain compliance with covenants set forth in these arrangements or if these arrangements are otherwise terminated for any reason, management may be forced to make further reductions in spending, extend payment terms with suppliers, liquidate assets where possible and/or curtail, suspend or cease planned programs or operations generally, which would have a material adverse effect on our business, results of operations, financial position and liquidity.

 

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

 

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

 

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

 

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

 

We have derived, and believe that in the foreseeable future we will continue to derive, a significant portion of our net revenues from a small number of major customers and key projects. Our top five customers in 2015, 2016 and 2017 accounted for 57.8%, 51.5% and 69.3% of our net revenues in 2015, 2016 and 2017, respectively. Our top five customers in the quarter ended March 31, 2018 accounted for 93.4% of our net revenues during such period.

 

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

 

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

 

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We have limited experience with our current product offerings, which makes it difficult to predict our future operating results.

 

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

 

We 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 that originally would have expired on December 31, 2015. If we cannot obtain a renewed license or the current extension is terminated, we will need to cease 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 BU contributed 26.6%, 29.1% and 20.8% of our net revenues in 2015, 2016 and 2017, respectively. Our MVNO BU contributed 13.5% of our net revenues for the quarter ended March 31, 2018.

 

The ability of our MVNO to provide mobile communication services in China is based on trial licenses granted by the Ministry of Industry & Information Technology of China (the “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 (the “Official Notice”) on April 28, 2018, which took effect on May 1, 2018. The Official Notice 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. The Pilot Enterprise is allowed to continue to carry out its MVNO business during such application period. According to the Official 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 of 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. In addition, the Official Notice requires the MVNO enterprise to establish network security management systems, deploy corresponding management personnel, implement the real-name registration for telephone users, protect users’ personal information, effectively implement the prevention and crackdown of communication information fraud, and standardize its user service agreements and financial management systems. We are preparing for application of the official MVNO license. However, uncertainties exist with respect to the interpretation and implementation of the newly issued Official Notice, and thus we cannot assure you that we will be able to obtain the official MVNO license or maintain such license once it is received.

 

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If we cannot obtain the official MVNO license by May 1, 2020 or maintain such license after it is received, 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 United Network Communications Group Co., Ltd (“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 BU entirely.

 

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 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.

 

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Our MVNO business is dependent upon China Unicom for voice and data service as well as reliability and accessibility of to China’s telecommunications and Internet infrastructure.

 

We provide our MVNO services via telecommunications and Internet networks, and therefore our ability to fulfill our contracts and generate revenue and profits is dependent on those systems remaining available and accessible with minimal disruption or interruption. Just as we are dependent on the reliability of our software and systems and the telecommunications networks of our customers, we are also dependent on the operational reliability and capacity of China’s overall telecommunications and Internet infrastructure. Should this infrastructure or key portions of it be disabled or become nonfunctional, we may not be able to secure alternate means of communication or alternate means of accessing needed information. Our operational results could suffer as a result.

 

Through our subsidiary, Yuantel Investment, we purchase wholesale rates for mobile voice and data services from China Unicom, a PRC state-owned telecommunications service provider, and repackage the voice and data services into competitive bundles for our Chinese customers.  We purchase bulk voice-per-minute and MB-of-data service from China Unicom at attractive wholesale rates pursuant to a Business Cooperation Agreement with China Unicom dated as of January 10, 2018.  The agreement is for a one year term, ending December 31, 2018.  There is no guarantee that the supply of telecommunications resources or competitive rates provided by China Unicom will be renewed when the contract term ends.  If the agreement is not renewed, we will not be able to maintain our gross margin and will not be able to operate profitably, which may lead us to cease operations of the MVNO BU entirely.

 

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.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We may undertake acquisitions, investments, joint ventures or other strategic alliances in the future, which could expose us to new operational, regulatory and market risks. In addition, such future and past 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, including but not limited to the proposed KADI acquisition, we may not be able to implement our strategies effectively or efficiently.

 

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

 

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

 

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

 

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

 

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

 

Our 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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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 excess 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.

 

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

 

Our customers generally retain us on project-by-project basis in connection with specific projects rather than on a recurring basis under long-term contracts. Historically, a significant portion of our net revenues has been comprised of 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, respectively, representing 29.9%, 12.4% and 7.3% of total net revenues. For the quarter ended March 31, 2018, our net revenues from software fees were $2.3 million, representing 3.9% 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.

 

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.

 

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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. There are numerous laws governing privacy and the storage, sharing, use, disclosure and protection of personally identifiable information and user data. Specifically, personally identifiable and other confidential information is increasingly subject to legislation and regulations in numerous domestic and international jurisdictions. The regulatory framework for privacy protection in China and worldwide is currently evolving and is likely to remain uncertain for the foreseeable future. We could be adversely affected if legislation or regulations in China and elsewhere on the world where we have business operations are expanded to require changes in business practices or privacy policies, or if the relevant governmental authorities in China and elsewhere on the world where we have business operations interpret or implement their legislation or regulations in ways that negatively affect our business, financial condition and results of operations. For example, in November 2016, China released the Cybersecurity Law, which took effect in June 2017. The Cybersecurity Law requires network operators to perform certain functions related to cybersecurity protection and the strengthening of network information management. For instance, under the Cybersecurity Law, network operators of key information infrastructure, including network operators of key information infrastructures in public communications and information industry, generally shall, during their operations in the PRC, store the personal information and important data collected and produced within the territory of the PRC and their purchase of network products and services that may affect national securities shall be subject to national cybersecurity review. While we take security measures relating to our Android+ software and service platform solutions, specifically, and our operations (including MVNO business operation), generally, those measures may not prevent security breaches that could harm our business and we cannot assure you that the measures we have taken or will take are adequate under the Cybersecurity Law and other relevant laws and regulations. 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.

 

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

 

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

 

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

 

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

 

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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.

 

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

 

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

 

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

 

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

 

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

 

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

 

  adverse effect of inflation and increase in labor costs;

 

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

 

  general global economic downturn;

 

  unexpected changes in political environment and regulatory requirements; and

 

  terrorist attacks and other acts of violence or war.

 

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

 

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

 

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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.

 

The mobile industry relies on the talents and efforts of highly skilled personnel, and our success depends to a significant extent on our ability to recruit, train, develop, retain and motivate qualified personnel for all areas of our organization. The mobile industry in China has experienced significant levels of employee attrition. Our attrition rates were 18% in 2015, 12% in 2016 and 14% 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 services of our senior executives and other key employees. In particular, we rely on the expertise, experience, customer relationships and reputation of Pat Chan, our founder, chairman and chief executive officer. We currently do not maintain key man life insurance for any of the senior members of our management team or other key employees. If one or more of our senior executives or key employees are unable or unwilling to continue in their present positions, it could disrupt our business operations, and we may not be able to replace them easily or at all. In addition, competition for senior executives and key employees in our industry is intense, and we may be unable to retain our senior executives and key employees or attract and retain new senior executive and key employees in the future, in which case our business may be severely disrupted, and our financial condition and results of operations may be materially and adversely affected.

 

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

 

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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 31, 2018, Zhengqi International Holding Limited, Intel Capital Corporation, Norwest Venture Partners X, L.P., Asset Horizon International Limited, Keytone Ventures L.P., and GSR Ventures II and affiliates, beneficially own approximately 12.6%, 12.5%, 11.0%, 10.8%, 10.0%, and 8.6% respectively, of our outstanding ordinary shares. 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.

 

Prior to our acquisition of Borqs International by way of merger, Borqs International was a private company with limited accounting personnel and other resources with which to address our internal controls and procedures for financial reporting. As of December 31, 2017, we identified a material weakness in our internal control over financial reporting, and are in the process of implementing remedial steps to improve our internal control over financial reporting. If we fail to timely achieve and maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal control over financial reporting. Moreover, effective internal control over financial reporting is necessary for us to produce reliable financial reports and is important to help prevent fraud. If we fail to maintain effective internal control over financial reporting, investors could lose confidence in the reliability of our financial statements, which could harm our business and the trading price of our ordinary shares. For instance, on September 25, 2017, we received a letter from Zhengqi International Holding Limited (“Zhengqi”), which stated that Zhengqi believed the Company had supplied to it material untrue and falsified financial statement information. Zhengqi also alleged it was damaged by the alleged untrue and falsified financial statement information. We concluded that the allegations by Zhengqi were unfounded, and responded on October 9, 2017, seeking additional information. Zhengqi has not responded to our inquiry. In addition, we anticipate that we will incur considerable costs and devote significant management time and efforts and other resources to our efforts to maintain effective internal control over financial reporting.

 

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.

 

We identified two material weaknesses in internal control over financial reporting during our preparation of the financial statements for the fiscal year ended December 31, 2016: (i) an insufficient number of financial reporting personnel with an appropriate level of knowledge and experience in U.S. GAAP and SEC reporting requirements and financial reporting programs; and (ii) insufficient controls to ensure that appropriate accruals are made for expenses. Since then, the Company has undertaken or is in the process of undertaking certain remedial steps to improve its internal control over financial reporting.

 

Following the above-mentioned efforts, as of December 31, 2017, based on an assessment performed by our management on the performance of the remediation measures described above, we determined that the material weakness in providing for effective accruals in internal control over financial reporting had been remediated. However the material weakness relating to hiring sufficient U.S. GAAP-qualified accounting personal had not yet been fully remediated. We plan to take additional measures to improve our internal control over financial reporting, including (i) hiring additional qualified professionals with U.S. GAAP accounting experience in the year 2018; (ii) providing U.S. GAAP and SEC reporting training to our accounting personnel; and (iii) preparing a comprehensive written accounting policies and procedures manual that can effectively and efficiently guide our finance and accounting personnel in addressing significant accounting issues and preparing financial statements that are in compliance with U.S. GAAP and SEC requirements. In addition, we intend to engage an external service provider by the end of 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.  

 

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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 prospectus, we have identified a material weakness 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. Additionally, such weaknesses and deficiencies in internal controls have adversely affected our disclosure controls and procedures, and as of December 31, 2017, such disclosure controls and procedures were ineffective. 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.

 

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 and adverse effect on our business and operating results and could cause a decline in the price of our ordinary shares. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the Nasdaq Stock Market.

 

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.

 

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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 securities, including 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, which could limit investors’ ability to make transactions in our securities and subject us to additional trading restrictions.

 

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). We were previously not in compliance with Nasdaq’s listing requirement that we have at least 300 round-lot shareholders but regained compliance with this requirement on April 12, 2018 by implementing a restricted shares purchase program with eligible employees of Borqs Software Solutions Private Ltd., our wholly-owned subsidiary in India, pursuant to which 222 employees voluntarily purchased an aggregate of 29,170 ordinary shares at a purchase price of $9.40 per share. Program participants paid for their purchase of shares by having the purchase amounts deducted from their regular compensation on March 23, 2018. On April 12, 2018, Nasdaq informed us that we had regained compliance with the listing requirement of 300 round lot holders and that our ordinary shares would continue to be listed on Nasdaq.

 

On December 11, 2017, Nasdaq advised the Company that it had determined to delist the Company’s public warrants. Our public warrants have been trading on the OTC Markets system under the symbol “BRQSW” since October 23, 2017. Our ordinary shares have continued to trade on Nasdaq regardless of the Panel’s decision to delist our public warrants.

 

We cannot assure you that we will be able to meet Nasdaq’s continued listing requirement or maintain other listing standards. If our ordinary shares are delisted by Nasdaq, and we are not able to list our securities on another national securities exchange, we expect our securities could be quoted on an over-the-counter market. If this were to occur, then, as with our public warrants, which have been delisted from Nasdaq and are trading on the OTC Markets, we could face significant material adverse consequences, including:

 

  less liquid trading market for our securities;

 

  more limited market quotations for our securities;

 

  determination that our ordinary shares and/or warrants 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 securities;

 

  more limited research coverage by stock analysts;

 

  loss of reputation; and

 

  more difficult and more expensive equity financings in the future.

 

The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” If our ordinary shares remain listed on NASDAQ, our ordinary shares will be covered securities. Although the states are preempted from regulating the sale of our securities, the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case. If our securities were no longer listed on Nasdaq and therefore not “covered securities”, we would be subject to regulation in each state in which we offer our securities.

 

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Risks Related to Doing Business in China

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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Recent trade policy initiatives announced by the United States administration against the PRC may adversely affect our business.

 

On August 14, 2017, the President of the United States issued a memorandum instructing the U.S. Trade Representative (“USTR”) to determine whether to investigate under section 301 of the U.S. Trade Act of 1974 (Trade Act), laws, policies, practices, or actions of the PRC government that may be unreasonable or discriminatory and that may be harming U.S. intellectual property rights, innovation, or technology development. Based on information gathered in that investigation, the USTR published a report on March 22, 2018 on the acts, policies and practices of the PRC government supporting findings that such are unreasonable or discriminatory and burden or restrict U.S. commerce.

 

On March 8, 2018, the President exercised his authority to issue the imposition of significant tariffs on imports of steel and aluminum from a number of countries, including the PRC. Subsequently, the USTR announced an initial proposed list of 1,300 goods imported from the PRC that could be subject to additional tariffs and initiated a dispute with the World Trade Organization against the PRC for alleged unfair trade practices. The President has indicated that his two primary concerns to be addressed by the PRC are (i) a mandatory $100 billion reduction in the PRC/U.S. trade deficit and (ii) limiting the planned $300 billion PRC government support for advanced technology industries including artificial intelligence, semiconductors, electric cars and commercial aircraft. On June 15, 2018, the President announced that the U.S. would go ahead with tariffs on $50 billion worth of Chinese goods, including agriculture and industrial machinery, which prompted the PRC government to consider imposing tariffs on $50 billion worth of goods from the U.S., including beef, poultry, tobacco and cars. In response to the PRC’s proposed retaliatory measures, the President announced on June 19, 2018 that the U.S. would compile a list of $200 billion in China goods for levies should the PRC move forward with their proposed tariffs.

 

In addition to the proposed retaliatory tariffs, the President has also directed the U.S. Secretary of the Treasury to develop new restrictions on PRC investments in the U.S. aimed at preventing PRC-controlled companies and funds from acquiring U.S. firms with sensitive technologies. Congress is currently considering new legislation, the Foreign Investment Risk Review Modernization Act, to modernize the restrictive powers imposed by the Committee on Foreign Investment in the United States.

 

This evolving policy dispute between the PRC and the U.S. is likely to have significant impact on the industries in which we participate, directly and indirectly, and no assurance can be given that any individual customer or product for whom we develop software solutions, or significant groups of companies or a particular industry, will not be adversely affected by any governmental actions taken by either the PRC or the U.S., perhaps materially. In view of the positions of the respective trade representatives, it is not possible to predict with any certainty the outcome of this dispute or whether it will involve other agencies or entities brought in to resolve the policy differences of the two countries.

 

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

 

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

 

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

 

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

 

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

 

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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 that supported by various types of documents including the articles of association, financial statements, records of cash movements, board meeting minutes, board resolutions, staffing and materials, relevant expenditures, functions and risk assumption as well as relevant contracts and other information. In August 2015, the SAT promulgated the Administrative Measures for Non-Resident Taxpayers to Enjoy Treatments under Tax Treaties, or SAT Circular 60, which became effective on November 1, 2015. SAT Circular 60 provides that non-resident enterprises are not required to obtain pre-approval from the relevant tax authority in order to enjoy the reduced withholding tax rate. Instead, non-resident enterprises may, if they determine by self-assessment that the prescribed criteria to enjoy the tax treaty benefits are met, directly apply for the reduced withholding tax rate, and file necessary forms and supporting documents when performing tax filings, which will be subject to post-filing examinations by the relevant tax authorities. 

 

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 the RMB against the U.S. Dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. On July 21, 2005, the PRC government changed its 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 prospectus, 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 issued and may in future issue shares to certain PRC citizens for the purpose of acquisition of other companies and we have or will request 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.

 

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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.

 

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, or the MOFCOM 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. A draft Foreign Investment Law drafted by the MOFCOM and the National Development and Reform Commission, or the NDRC, has been included in the list of draft laws submitted to the Standing Committee of the National People’s Congress for deliberation under the 2018 Legislation Plan of the State Council. However, it is uncertain when the draft would be signed into law and whether the draft version submitted for deliberation or the final version would have any substantial changes from the draft version published by the MOFCOM. 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.

 

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

 

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

 

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

 

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

 

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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 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.

 

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.

 

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The financial statements included in this prospectus 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.

 

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 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.

 

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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 our MVNO business in China. 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.

 

Risks Related to the Electric Vehicle Industry

 

Future growth is dependent upon consumers’ willingness to adopt electric vehicles.

 

Due to our contemplated acquisition of a controlling position of Shanghai KADI Machinery Technology Co., Ltd (“KADI”), our future prospects are highly dependent upon the timing and pace of consumer adoption of alternative fuel vehicles in general and electric vehicles in particular. The market for alternative fuel vehicles is relatively new and rapidly evolving, characterized by rapidly changing technologies, price and product competition, newly-emerging competitors, evolving government regulation and industry standards, frequent new vehicle announcements and changing consumer demands and behaviors. If the market for electric vehicles in China does not develop as we expect or develops more slowly than we expect, our business, prospects, financial condition and operating results will be harmed.

 

Developments in alternative technologies or improvements in the internal combustion engine may materially adversely affect the demand for our electric vehicle products.

 

Significant developments in alternative technologies, such as advanced diesel, ethanol, fuel cells or compressed natural gas, or improvements in the fuel economy of the internal combustion engine, may materially and adversely affect our business and prospects in ways we do not currently anticipate. Any failure by us to develop new or enhanced technologies or processes, or to react to changes in existing technologies, could materially delay our development and introduction of new and enhanced electric vehicle products, which could result in the loss of competitiveness of our vehicles, decreased revenue and a loss of market share to competitors.

 

If we are unable to keep up with advances in electric vehicle technology, we may suffer a decline in our competitive position.

 

We may be unable to keep up with changes in electric vehicle technology, and we may suffer a resulting decline in our competitive position. Any failure to keep up with advances in electric vehicle technology would result in a decline in our competitive position which would materially and adversely affect our business, prospects, operating results and financial condition. Our research and development efforts may not be sufficient to adapt to changes in electric vehicle technology.

 

Extended periods of low diesel or other petroleum-based fuel prices could adversely affect demand for electric vehicles, which would adversely affect our business and operating results.

 

We believe that much of the present and projected demand for commercial electric vehicles results from concerns about volatility in the cost of petroleum-based fuel, government regulations and economic incentives promoting fuel efficiency and alternative forms of energy, as well as the belief that climate change results in part from the burning of fossil fuels. If the cost of petroleum-based fuel decreased significantly, the government eliminated or modified its regulations or economic incentives related to fuel efficiency and alternative forms of energy, or if there is a change in the perception that the burning of fossil fuels negatively impacts the environment, the demand for commercial electric vehicles could be reduced, and our business and revenue could be harmed.

 

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We may be subject to product liability claims or recalls which could be expensive, damage our reputation or result in a diversion of management resources.

 

We may be subject to lawsuits resulting from injuries associated with the use of the vehicles in which the modules products of KADI are involved. We may incur losses relating to these claims or the defense of these claims. There is a risk that claims or liabilities will exceed our insurance coverage. In addition, we may be unable to retain adequate liability insurance in the future.

 

We may also be required to participate in recalls involving vehicles with our products, if any prove to be defective, or we may voluntarily initiate a recall or make payments related to such claims as a result of various industry or business practices or the need to maintain good customer relationships. Such a recall would result in a diversion of resources. While we do maintain product liability insurance, we cannot assure investors that it will be sufficient to cover all product liability claims, that such claims will not exceed our insurance coverage limits or that such insurance will continue to be available on commercially reasonable terms, if at all. Any product liability claim brought against us could have a material adverse effect on the results of our operations.

 

Since KADI’s products primarily involve the central control mechanism of electric vehicles, defective designs or defective components parts can cause significant damage or injury, and our liability risks will increase. While we have had no product liability claims to date, we have relatively little experience with these products, and our insurance coverage may not be sufficient to cover potential claims in the future.

 

Changes to the government subsidy support policies in the PRC and further delays in subsidy payments may have negative impacts on the electric vehicle market.

 

The subsidy support polices effective as of April 22, 2015 and the newly announced government subsidy support policies available in the PRC effective as of January 1, 2017, call for a 20% of reduction in central government subsidies per car in 2017 from the 2016 level, and a 20% of reduction in the subsidies for purchasers of certain new energy vehicles (except for fuel cell vehicles) in 2019 and 2020 as compared to 2017 subsidies and the total local government subsidy match to be not more than 50% of the total central government subsidies per car. The reduction of subsidies from both the central government and local governments will inevitably increase the costs to the consumers, which may cause temporary pressure for the EV market. The change in subsidy payment methods in 2017 from paid in advance to paid post-sale and any further delay in releasing subsidy payments for the EVs manufactured and sold in the prior years might also cause the adverse effects on the EV market.

 

Any of the above factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors presently not known to us or that we currently deem immaterial may also impair our business or results of operations. Although the production and sales of finished electric vehicles is subject to certain restrictions, we are not aware of any PRC regulations or proposed regulations that will specifically restrict or limit the electric vehicle component business currently conducted by KADI from foreign participation. As a result, we do not currently expect our pending ownership of KADI, or KADI’s relationships within the electric vehicle industry, to be adversely affected by our foreign ownership structure.

 

Risks Related to Our Recent Transactions

 

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 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 have made four scheduled cash advances to KADI totaling $600,000 which will be deducted from our initial cash payments to KADI under the definitive agreement being negotiated. We will use a portion of the proceeds from this offering to fund the acquisition of KADI. As a result, if the offering is not consummated, we will not be able to consummate the acquisition of KADI. If the acquisition 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.

 

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Our proposed acquisition of KADI involves multiple steps in seeing through the procurement of the supply contract awarded to KADI, and there is no assurance that KADI can satisfy its customer in the delivery of the products at this scale either in time or up to the quality standards acceptable to the customer. Assuming we proceed to enter into a definite agreement with KADI and consummate the proposed acquisition, there is no assurance that we can support KADI with the necessary funds in time for KADI to set up correctly for the manufacturing of the products. These and other factors unforeseen by both the Company and KADI, including but not limited to new competition, can also appear to affect the demand and pricing of the KADI products and ultimately cause our acquisition of KADI to fail. Also, there is no assurance that the management of KADI will successfully integrate with our management team to ensure a smooth operation going forward and to gain the intended benefits of this acquisition.

 

If we are unable to sign a definitive agreement and complete the acquisition of KADI, our directors, executive officers and other employees will have expended extensive time and effort and will have experienced significant distractions from their work during the period the transaction was pending and we will have incurred significant third party transaction costs, in each case, without any commensurate benefit. In addition, the current market price of our ordinary shares may reflect a market assumption that the KADI acquisition will occur, and a failure to complete the transaction could result in a negative perception by the market of ours generally and a resulting decline in the market price of our ordinary shares. Any delay in the consummation of the acquisition or any uncertainty about the consummation of the acquisition could also negatively impact our stock price and future business and results of operations.

 

Dependency on key personnel of KADI.

 

There is no assurance that the management of KADI will successfully integrate with our management team to realize the intended benefits of the acquisition transaction. The business of KADI is dependent on Mr. Hu Lin, KADI’s chairman and chief executive. In the event that Mr. Lin were 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. KADI has no “key person” insurance on Mr. Lin or any other employee, and no employment agreement with Mr. Lin.

 

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, at the original purchase price and for an aggregate amount of $10.05 million. The repurchase transaction has not yet completed, and although the purchase price for the transaction has been remitted, the 966,136 repurchase shares currently remain outstanding. This repurchase will limit our available cash and may adversely affect our ability to carry out our operations normally due to this reduction in working capital.

 

We are working with Zhengqi to satisfy certain conditions and make necessary arrangements before completing the repurchase, including confirming the consent of Borqs’ existing lenders with respect to the transaction, submitting the shares to the transfer agent for cancellation, releasing the escrowed earnout shares from escrow and returning such shares to former Borqs International shareholders in proportion to their ownership prior to the completion of the business combination on August 18, 2017, and we anticipate closing the transaction in 2018.

 

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

 

Our agreement to repurchase shares from Zhengqi was not extended to all investors who purchased shares in the August 2017 private placement. Since we are repurchasing 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 1,227,625 escrowed earnout shares to the former Borqs International shareholders, which will occur when the repurchase from Zhengqi closes. 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. Further, if the Zhengqi repurchase transaction is not completed, up to 1,278,776 ordinary 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. Any such litigation could be time-consuming and costly, and could materially adversely affect our financial condition and results of operations.

 

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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 both components and manufacturing. There is no assurance that Crave and Colmei continue to 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.

 

Risks Related to This Offering

 

Since the consummation of our acquisition of Borqs International by way of merger, our ordinary shares have not had an active, liquid trading market, and you may not be able to sell your ordinary shares at or above the public offering price, or at all.

 

Following the consummation of our acquisition of Borqs International by way of merger, there has not been an active, liquid public market for our ordinary shares. An active trading market for shares of our ordinary shares may never develop or be sustained following this offering. If an active trading market does not develop, you may have difficulty selling your shares of ordinary shares at an attractive price, or at all. The public offering price for our ordinary shares will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell your ordinary shares at or above the public offering price or at any other price or at the time that you would like to sell. An inactive market may also impair our ability to raise capital by selling our ordinary shares and may impair our ability to expand our business by using our ordinary shares as consideration in an acquisition.

 

The price of our ordinary shares could be volatile following this offering.

 

The market price of our ordinary shares following this offering may be volatile and could be subject to wide fluctuations in price in response to various factors, some of which are beyond our control. These factors include, among other things:

  actual or anticipated variations in our quarterly results of operations;

 

  recommendations by securities analysts;

 

  operating and stock price performance of other companies that investors deem comparable to us;

 

  news reports relating to trends, concerns and other issues in the financial services industry generally;

 

  perceptions in the marketplace regarding us and/or our competitors;

 

  new technology used, or services offered, by competitors; and

 

  changes in government regulations.

 

In addition, if the market for stocks in our industry, or the stock market in general, experiences a loss of investor confidence, the trading price of our ordinary shares could decline for reasons unrelated to our business, financial condition or results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.

 

Our insiders currently own, in the aggregate, approximately 75% of our outstanding ordinary shares and, as a result, are able to exert significant control over matters submitted to shareholders for approval.

 

After this offering, our officers, directors and shareholders who own more than 5% of our outstanding ordinary shares will, in the aggregate, beneficially own approximately 75% of our outstanding ordinary shares (assuming no exercise by the underwriters of their option to purchase additional shares and that none of such insiders purchase ordinary shares in this offering). As such, our insiders will be able to significantly influence or even unilaterally approve matters requiring approval by our shareholders, including the election of directors, certain decisions relating to our capital structure, amendments to our memorandum and articles of association, and the approval of mergers or other business combination transactions. The interests of these shareholders may not always coincide with the interests of our other shareholders and investors who acquired ordinary shares in this offering may have no effective voice in the management of our company.

 

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If equity research analysts publish unfavorable commentary or downgrade our ordinary shares, the price and trading volume of our ordinary shares could decline.

 

The trading market for our ordinary shares could be affected by whether equity research analysts publish research or reports about us and our business. We cannot predict at this time whether any research analysts will publish research and reports on us and our ordinary shares. If one or more equity analysts do cover us and our ordinary shares and publish research reports about us, the price of our stock could decline if one or more securities analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

 

If any of the analysts who elect to cover us downgrades our stock, our stock price could decline rapidly. If any of these analysts ceases coverage of us, we could lose visibility in the market, which in turn could cause our ordinary shares price or trading volume to decline and our ordinary shares to be less liquid.

 

Failure to maintain effective internal controls over financial reporting could have a material adverse effect on our business and stock price.

 

We are required to comply with the SEC’s rules implementing Sections 302 and 404(a) of the Sarbanes-Oxley Act, which requires management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. In particular, we are required to certify our compliance with Section 404(a) of the Sarbanes-Oxley Act, which requires us to furnish annually a report by management on the effectiveness of our internal control over financial reporting. Furthermore, unless we remain an emerging growth company and elect additional transitional relief available to emerging growth companies, or we qualify as a smaller reporting company under applicable SEC rules, then our independent registered public accounting firm will be required to report on the effectiveness of our internal control over financial reporting.

 

As described elsewhere herein, our management identified a material weakness in our internal control over financial reporting relating to our not yet having developed an entity level and financial reporting control environment that is designed with appropriate precision for a public company, including journal entry controls, and the accounting department infrastructure to account for complex transactions or to handle SEC reporting requirements. If we are unable to remediate this material weakness in our internal control over financial reporting, or if we identify additional material weaknesses in our internal control over financial reporting, our management will be unable to assert that our internal control over financial reporting is effective and investors, counterparties and customers may lose confidence in the accuracy and completeness of our financial statements and reports, which could have an adverse effect on our liquidity, access to capital markets and perceptions of our creditworthiness and/or a decline in the market price of our ordinary shares. In addition, we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, other regulatory authorities, which could require additional financial and management resources. These events could have an adverse effect on our business, financial condition and results of operations.

 

Future equity issuances could result in dilution, which could cause our ordinary shares price to decline.

 

We are generally not restricted from issuing additional ordinary shares, and there is no limit to the number of ordinary shares that we are authorized to issue by our memorandum and articles of association. We may issue additional ordinary shares in the future pursuant to current or future equity compensation plans, upon conversions of preferred shares or debt, upon exercise of warrants or in connection with future acquisitions or financings. If we choose to raise capital by selling our ordinary shares for any reason, the issuance would have a dilutive effect on the holders of our ordinary shares and could have a material negative effect on the market price of our ordinary shares.

 

Future sales of our ordinary shares may cause our ordinary shares price to decline.

 

If our existing shareholders sell, or indicate an intent to sell, amounts of our ordinary shares in the public market after the contractual lock-up and other legal restrictions on resale lapse, the trading price of our ordinary shares could decline. Based upon shares outstanding as of March 31, 2018, after this offering, assuming no exercise by the underwriters of their option to purchase additional shares, approximately        ordinary shares will be outstanding. Of these shares, the ordinary shares to be sold in this offering will be freely tradable, unless such shares are held by “affiliates,” as that term is defined in Rule 144 under the Securities Act of 1933, as amended, or the Securities Act.

 

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In connection with our acquisition of Borqs International by way of merger, the former shareholders of Borqs International have entered into a lock-up agreement for a period of one year following the closing of that merger, unless certain conditions are met.

 

Certain of our officers, directors and shareholders have entered into lock-up agreements with the underwriters in this offering for a period of 180 days following the date of this prospectus, unless certain conditions are met. Zhengqi has agreed to lock up for a period of 135 days that portion of the 1,464,938 shares that are registered for resale prospectus included in the registration statement of which this prospectus forms a part but are not sold in this offering except as may be waived by Maxim to the extent necessary with respect to any private placements taking place following the closing of this offering and as to which Maxim has been engaged as placement agent.

 

In addition to the registration of the sale of ordinary shares to investors in an underwritten public offering, we are also registering for resale 3,272,761 ordinary shares, which with the exception of ______ ordinary shares (out of the total 1,464,938 shares registered in the resale prospectus) that are not sold by Zhengqi in this offering and 1,542,347 shares held by certain officers, directors and shareholders, will not be subject to lock-up agreements. These shares are being registered pursuant to certain registration rights agreements pursuant to which we have agreed, under certain circumstances, to file a registration statement to register the resale of a substantial number of shares held by certain of our existing shareholders, as well as to cooperate in certain public offerings of such shares. Registration of these shares under the Securities Act would result in such shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of such registration, except for shares purchased or subscribed for by affiliates. After the closing of this offering, certain holders of our ordinary shares will continue to be entitled to registration rights to cover these and other shares purchased prior to or in connection with our acquisition of Borqs International. See “Shares Eligible for Future Sale — Registration Rights.” As such, upon registration of such shares, a substantial number of our ordinary shares may be sold in the public market, which may cause the trading price of our ordinary shares to decline. We may issue additional preferred shares in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our ordinary shares, which could depress the price of our ordinary shares.

 

Our board also has the power, without shareholder approval, to set the terms of any series of preferred shares that may be issued, including voting rights, dividend rights and preferences over our ordinary shares with respect to dividends or in the event of a dissolution, liquidation or winding up and other terms. In the event that we issue preferred shares in the future that have preference over our ordinary shares with respect to payment of dividends or upon our liquidation, dissolution or winding up, or if we issue preferred shares with voting rights that dilute the voting power of our ordinary shares, the rights of the holders of our ordinary shares or the market price of our ordinary shares could be adversely affected. In addition, the ability of our Board to issue preferred shares without any action on the part of our shareholders may impede a takeover of us and prevent a transaction perceived to be favorable to our shareholders.

 

We may be classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequence to U.S. holders of our ordinary shares.

 

We have not made a determination as to whether we would be classified as a “passive foreign investment company,” or PFIC, for U.S. federal income tax purposes for our preceding taxable year nor can we assure you that we will not be a PFIC for our current taxable year or any future taxable year. A foreign (non-U.S) corporation will be considered a PFIC for any taxable year if either (1) at least 75% of its gross income is passive income or (2) or least 50% of the value of its assets (generally based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income. PFIC status depends on the composition of our assets and income and the value of our assets (including, among others, a pro rata portion of the income and assets of each subsidiary in which we own, directly or indirectly, at least 25% (by value) of the equity interest) from time to time. Depending on the amount of cash or cash equivalents we currently hold and the amount of cash we raise in this offering, which are generally treated as passive assets, and because the calculation of the value of our assets may be based in part on the value of our ordinary shares, which is likely to fluctuate, we may be a PFIC for any taxable year. If we were treated as a PFIC for any taxable year during which a U.S. Holder (as defined in the section entitled “Taxation – U.S. Federal Income Taxation – General”) held an ordinary share, certain adverse U.S. federal income tax consequences could apply to such U.S. Holder. For more information, see “Taxation – U.S. Federal Income Taxation – U.S. Holders – Passive Foreign Investment Company Rules.”

 

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We are an “emerging growth company,” and the reduced regulatory and reporting requirements applicable to emerging growth companies may make our ordinary shares less attractive to investors.

 

We are an “emerging growth company,” as described in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of reduced regulatory and reporting requirements that are otherwise generally applicable to public companies. These include, without limitation, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced financial reporting requirements, reduced disclosure obligations regarding executive compensation, and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachute payments. The JOBS Act also permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies, which we intend to take advantage of.

 

We will remain an “emerging growth company” for up to five years following the acquisition of Borqs International by way of merger unless we earlier cease to be an emerging growth company, which would occur if our annual gross revenues exceed $1.0 billion, if we issue more than $1.0 billion in non-convertible debt in a three-year period, or if the market value of our ordinary shares held by non-affiliates exceeds $700.0 million as of any January 1 before that time, in which case we would no longer be an emerging growth company as of the following December 31. Investors may find our ordinary shares less attractive if we rely on the exemptions, which may result in a less active trading market and increased volatility in our stock price.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

Market acceptance of our products and services;

 

Competition from existing products or new products that may emerge;

 

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

 

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

 

Our financial performance;

 

Current and future government regulations;

 

Developments relating to our competitors; and

 

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

 

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

 

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MARKET, INDUSTRY AND OTHER DATA

 

This prospectus contains estimates and information concerning our industry, our business, and the market for our solutions, including market position, market size and growth rates of the markets in which we participate, that are based on industry publications, surveys and reports. Although we have not independently verified the accuracy or completeness of the data contained in these industry publications, surveys, and reports, we believe the publications, surveys and reports are generally reliable, although such information is inherently subject to uncertainties and imprecise. The industry in which we operate is subject to a high degree of uncertainty and risk due to variety of factors, including those described in the “Risk Factors.” These and other factors could cause results to differ materially from those expressed in these publications and reports.

 

USE OF PROCEEDS

 

We estimate that we will receive net proceeds of approximately $            million, or approximately $             million if the underwriter exercises its over-allotment option in full, after deducting the estimated underwriting discount and estimated offering expenses payable by us.

 

We intend to use part of the net proceeds from this offering for the acquisition of a controlling stake in KADI, including a payment of $15.0 million comprised of $11.7 million in cash to be paid to KADI in 2018 and 2019 for working capital and purchases of equipment, and $3.3 million in Borqs’ ordinary shares to be issued to the selling shareholders of KADI based on achievement of net income targets for the years 2018, 2019 and 2020. For 2018, we expect to provide $7.7 million to KADI to service the Espirit supply contract, of which approximately $4 million is anticipated to be used for capital expenditures, and $3.7 million is anticipated to be used for working capital needs. We intend to use any remaining net proceeds from this offering to fund research and development activities and for general corporate purposes, which may include capital expenditures and funding our working capital needs. We expect from time to time to evaluate the acquisition of businesses, products and technologies for which a portion of the net proceeds may be used, although we currently are not planning or negotiating any such transactions, other than as described above.

 

All of the ordinary shares offered by the Participating Stockholders pursuant to this prospectus will be sold by the Participating Stockholders for their respective accounts. We will not receive any of the proceeds from these sales.

 

As of the date of this prospectus and except as explicitly set forth herein, we cannot specify with certainty all of the particular uses of the net proceeds from this offering. Pending use of the net proceeds from this offering as described above, we may invest the net proceeds in short-term interest-bearing investment grade instruments.

 

MARKET PRICE OF OUR ORDINARY SHARES

 

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

 

    Low     High  
Fiscal Year ended December 31, 2016            
First Fiscal Quarter   $ 9.86     $ 10.20  
Second Fiscal Quarter   $ 10.00     $ 10.43  
Third Fiscal Quarter   $ 10.06     $ 11.20  
Fourth Fiscal Quarter   $ 10.20     $ 13.00  
Fiscal Year ended December 31, 2017                
First Fiscal Quarter   $ 10.25     $ 10.40  
Second Fiscal Quarter   $ 10.25     $ 10.50  
Third Fiscal Quarter   $ 5.10     $ 10.50  
Fourth Fiscal Quarter   $ 4.00     $ 6.02  
Fiscal Year ending December 31, 2018                
First Fiscal Quarter   $ 5.41     $ 10.00  
Second Fiscal Quarter (through June 28, 2018)   $ 9.80     $ 5.20  

 

The last reported sale price for our ordinary shares on Nasdaq on June 28, 2018 was $5.40 per share. As of June 28, 2018, there were approximately 270 holders of record of our ordinary shares.

 

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Dividend Policy

 

We have never declared or paid any cash dividends on our shares, and we do not currently intend to pay any cash dividends after the offering or 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 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.

 

CAPITALIZATION

 

The following table sets forth our cash, cash equivalents, and marketable securities and capitalization as of March 31, 2018 on an:

 

  actual basis; and

 

  as adjusted basis to give effect to the sale and issuance of          ordinary shares by us in this offering, based upon the receipt by us of the estimated net proceeds from this offering at an assumed public offering price of $       per share, the last reported sale price of our ordinary shares on The Nasdaq Capital Market on         , 2018, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us and the application of the net proceeds from this offering as described in “Use of Proceeds.”

 

The as adjusted information below is illustrative only, and our cash, cash equivalents, and marketable securities, additional paid-in capital, total shareholders’ equity, and total capitalization following the completion of this offering will be adjusted based on the actual public offering price and other terms of the offering determined at the pricing of this offering. You should read this information together with our consolidated financial statements and related notes appearing elsewhere in this prospectus and the information set forth in “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    March 31, 2018  
    Actual    

As Adjusted (1)

 
    (in thousands, except share and per share data)  
Cash and cash equivalents   $ 3,026                
Shareholders’ equity:                
Ordinary shares, no par value per share; unlimited authorized, 30,804,635 shares issued and outstanding, actual and as adjusted   $     $  
Additional paid-in capital   $ 124,058          
Statutory reserve   $ 2,074          
Accumulated deficit   $ (73,230 )        
Accumulated other comprehensive loss   $ (825 )        
Noncontrolling interest   $ (548 )        
Total shareholders’ equity   $ 53,178          
Total capitalization   $ 136,376          

 

The number of ordinary shares to be outstanding after this offering is based on 30,804,635 ordinary shares issued and outstanding as of March 31, 2018, and excludes:

 

  2,825,273 ordinary shares issuable upon the exercise of stock options outstanding as of March 31, 2018, with a weighted-average exercise price of $5.07 per share;

 

 

(1) Each $1.00 increase (decrease) in the assumed public offering price of $     per share, which is the last reported sale price of our ordinary shares on The Nasdaq Capital Market on       , 2018, would increase (decrease) our cash, cash equivalents and marketable securities, total shareholders’ equity and total capitalization by approximately $     million, assuming that the number of ordinary shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions payable by us. Each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) the amount of our cash, cash equivalents and marketable securities, total shareholders’ equity and total capitalization by approximately $     million, assuming a public offering price of $     per share, which is the last reported sale price of our ordinary shares on The Nasdaq Stock Market on       , 2018, after deducting estimated underwriting discounts and commissions payable by us. The as adjusted information discussed above is illustrative only and will adjust based on the actual initial price to the public and other terms of this offering determined at pricing.

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  6,699,041 ordinary shares issuable upon the exercise of warrants (See “Description of Securities — Warrants”);

 

  The cancellation of 966,136 shares when the Zhengqi repurchase transaction is completed;

 

  3,714,958 ordinary shares reserved for future issuance under our 2017 Equity Incentive Plan, or Incentive Plan, as of March 31, 2018; and

 

  640,000 ordinary shares issuable upon the exercise of EarlyBirdCapital’s purchase option (See “Description of Securities — Purchase Option”).

 

 

Ordinary shares issuable upon the exercise of a warrant issued to Maxim Group LLC in connection with this offering equal to 7% of the total number of ordinary shares sold in the offering (See “Underwriters — Representative’s Warrants”) .

 

Our Incentive Plan also provide for automatic annual increases in the number of shares reserved thereunder. See “Executive Compensation — Employee Benefit Plans” for additional information.

 

Except as otherwise indicated, all information in this prospectus assumes:

 

  no exercise or cancellation of outstanding options or vesting of RSUs subsequent to March 31, 2018; and

 

  no exercise by the underwriters of their option to purchase up to an additional ordinary shares in this offering (equivalent to 15% of the total ordinary shares sold in this offering).

 

SELECTED CONSOLIDATED FINANCIAL DATA

 

The selected consolidated statements of operations data for the years ended December 31, 2015, 2016 and 2017, and the selected consolidated balance sheet data as of December 31, 2016 and 2017, have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statements of operations data for the three months ended March 31, 2017 and 2018, and the selected consolidated balance sheet data as of March 31, 2017 and 2018, have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. You should read the consolidated financial and other data set forth below in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

Statement of Operations:

 

    Year Ended December 31,     Three Months Ended
March 31,
 
    2015     2016     2017     2017     2018  
    US$     US$     US$              
    (US$ in thousands)  
Net revenues:                              
Software     22,468       14,912       11,212       3,084       2,256  
Hardware     32,647       70,536       111,021       21,679       48,118  
MVNO     16,007       29,309       30,118       5,932       7,509  
Others     3,950       5,829       1,956       515       373  
                                         
Total net revenues     75,072       120,586       154,307       31,210       58,256  
                                         
Cost of revenues                                        
Software     (12,699 )     (7,491 )     (7,247 )     (2,330 )     (769 )
Hardware     (26,101 )     (57,452 )     (96,247 )     (19,238 )     (43,399 )
MVNO     (16,225 )     (28,784 )     (22,836 )     (5,287 )     (5,061 )
Others     (2,980 )     (1,709 )     (811 )     (200 )     (171 )
Total cost of revenues     (58,005 )     (95,436 )     (127,141 )     (27,055 )     (49,400 )
                                         
Total gross profit     17,067       25,150       27,166       4,155       8,856  
                                         
Operating expenses:                                        
Sales and marketing expenses     (7,359 )     (5,874 )     (7,952 )     (1,339 )     (1,682 )
General and administrative expenses     (4,883 )     (10,042 )     (20,753 )     (1,558 )     (3,096 )
Research and development expenses     (7,206 )     (5,742 )     (6,443 )     (292 )     (889 )
Changes in the fair value of warrant liabilities           (12 )     (200 )     (161 )      
                                         
Total operating expenses     (19,448 )     (21,670 )     (35,348 )     (3,350 )     (5,667 )
                                         
Other operating income     3,094       1,760       272       266        
                                         
Operating income     713       5,240       (7,910 )     1,071       3,189  
                                         
Interest income     61       65       14       2       6  
Interest expense     (156 )     (797 )     (1,877 )     (619 )     (245 )

 

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    Year Ended December 31,     Three Months Ended
March 31,
 
    2015     2016     2017     2017     2018  
    US$     US$     US$              
    (US$ in thousands)  
Other income     208       114       633       303       39  
Other expense     (35 )     (59 )     (121 )     (118 )     (45 )
Foreign exchange gain (loss)     855       692       (779 )     (177 )     (374 )
                                         
Profit (Loss) before income taxes     1,646       5,255       (10,040 )     462       2,570  
Income tax expense     (851 )     (2,659 )     (2,319 )     (444 )     (1,183 )
Net income (loss)     795       2,596       (12,359 )     18       1,387  

 

    Year Ended December 31,     Three Months Ended
March 31,
 
    2015     2016     2017     2017     2018  
    US$     US$     US$              
    (US$ in thousands)  
Less: net (loss) income attributable to noncontrolling interests     (1,316 )     (632 )     210       (78 )     188  
Net income (loss) attributable to Borqs Technologies, Inc.     2,111       3,228       (12,569 )     96       1,199  
Add: accretion to redemption value of convertible redeemable preferred shares     (2,417 )     (976 )     (6,956 )     (298 )      
Allocation to holders of Preferred Shares           (2,252 )                  
Net loss attributable to ordinary shareholders     (306 )           (19,525 )     (202 )     1,199  
                                         
Earnings (loss) per share:                                        
Basic     (0.07 )     0.00       (1.52 )     (0.05 )     0.05  
Diluted     (0.07 )     0.00       (1.52 )     (0.05 )     0.04  
                                         
Shares used in earnings (loss) per share computation:                                        
Basic     4,224,090       4,224,725       12,842,671       4,224,725       26,384,152  
Diluted     4,224,090       4,224,725       12,842,671       4,224,725       27,471,885  
Net income (loss)     795       2,596       (12,359 )     18       1,387  
Other comprehensive (loss) income, net of tax of nil:                                        
Foreign currency translation adjustments, net of tax of nil     (1,491 )     (1,575 )     2,207       312       1,392  
Other comprehensive income (loss), net of tax of nil     (1,491 )     (1,575 )     2,207       312       1,392  
Comprehensive income (loss)     (696 )     1,021       (10,152 )     330       2,779  
Less: comprehensive income (loss) attributable to noncontrolling interest     (1,519 )     (730 )     298       (71 )     248  
Comprehensive income (loss) attributable to the Borqs Technologies, Inc.     823       1,751       (10,450 )     401       2,531  

 

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Balance Sheet:

 

    December 31,  
March 31,
 
    2016     2017   2018  
    (US$ in thousands)  
Balance Sheet Data                
Current assets     58,079       119,531     90,930  
Total assets     78,030       148,732     136,376  
Current liabilities     50,487       92,748     66,053  
Total liabilities     64,519       101,727     83,198  
Shareholders’ equity (deficit)     (55,351 )     47,005     53,178  
Total liabilities and shareholders’ equity     78,030       148,732     136,376  

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

References in this prospectus 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 prospectus. 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 prospectus 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 prospectus 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 prospectus. 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”) focuses 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.

 

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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 BU works closely with chipset partners to develop new connected devices. Borqs developed the reference Android software platform and hardware platform for Intel and Qualcomm phones and tablets. In recent years, we have been awarded significant business contracts from Intel and Qualcomm, leading global chipset manufacturers. 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 activities with Intel have reduced over the last two years due to Intel’s strategy to exit the mobile industry, and there are no material agreements with Intel on which we are substantially dependent. For the year 2017, Intel was no longer a customer of the Company. However, our activities with Qualcomm have increased over the last two years, including developmental work on chipsets for mobile devices and wearable products.

 

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

 

The Connected Solutions BU 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%, respectively, of its net revenues from customers headquartered outside of China and 15%, 7% and 14%, respectively, of its net revenues from customers headquartered within China. As of March 31, 2018, 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 10 million units worldwide.

 

We have dedicated significant resources to research and development, and has research and development centers in Beijing, China and Bangalore, India. As of March 31, 2018, 350 of our 502 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 four scheduled cash advances to KADI totaling $600,000 which will be deducted from our initial cash payments to KADI under the definitive agreement being 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 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. The Company recorded a net income of $1.4 million in the three months ended March 31, 2018, as compared to a net income of $0.02 million in the three months ended March 31, 2017.

 

Key Factors Affecting Results of Operations

 

The Connected Solutions BU represented 73.4%, 70.9% and 79.2% of our net revenues for the years ended December 31, 2015, 2016 and 2017, respectively. For the years 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 March 31, 2018, 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 10 million units worldwide.

 

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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.
     
  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.

 

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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 March 31, 2018, we held total $3 million cash 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 prospectus. The operating results in any period are not necessarily indicative of results that may be expected for any future period.

 

Comparisons of Years Ended December 31, 2015, 2016 and 2017

 

    For the Year 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 )

 

Comparisons of Three Months Ended March 31, 2017 and 2018

 

    For Three Months Ended
March 31,
 
Consolidated Statement of Operations Data:   2017     2018  
    (US$ in thousands)  
Net revenues     31,210       58,256  
Cost of revenues     (27,055 )     (49,400 )
Gross profit     4,155       8,856  
                 
Operating expenses     (3,350 )     (5,667 )
Other operating income     266       -  
Operating income     1,071       3,189  
                 
Other (expense) income     (609 )     (619 )
Profit before income taxes     462       2,570  
                 
Income tax expense     (444 )     (1,183 )
Net Income     18       1,387  
                 
Less: net (loss) income attribute to noncontrolling interests     (78 )     188  
Net income attribute to Borqs Technologies, Inc.     96       1,199  
                 
Accretion to redemption value of convertible redeemable preferred shares     (298 )     -  
Net (loss) income attributable to ordinary shareholders     (202 )     1,199  

 

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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. 

 

We had net income of approximately $18,000 and $1.4 million for the three months ended March 31, 2017 and 2018, respectively. 

 

We had significant increases in the delivery of connected products for worldwide customers in the third and fourth quarters of 2017 which extended also into the first quarter of 2018. Revenue for connected products is recognized when delivery is made; cost incurred in the preparation of such products including testing, certification, and preparation for mass production is deferred to the period when revenue is recognized.

 

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 %

 

For the three months ended March 31, 2018, Connected Solutions BU net revenues were $50.4 million and MVNO BU net revenues were $7.9 million, compared to $24.8 million and $6.4 million, respectively, for the same period in 2017. Connected Solutions BU net revenues increased 103.4% for the three months ended March 31, 2018 from the same period in 2017 due primarily to increased hardware sales to Reliance Retail Limited of India. MVNO BU net revenues increased 22.3% for the three months ended March 31, 2018 from the same period in 2017. Total net revenues increased 86.7% for the first quarter of 2018 from the corresponding period in 2017.

 

    For Three Months Ended March 31,  
    2017     2018  
    US$     US$     %  
    (US$ in thousands)  
Connected Solutions BU     24,763       50,374       103.4 %
MVNO BU     6,447       7,882       22.3 %
Net revenues     31,210       58,256       86.7 %

 

Within the MVNO BU, the net revenues for the MVNO operation itself, excluding traditional telephony activities, increased to $7.5 million in the first quarter of 2018 from $5.9 million for the same period in 2017. The Company designed a new security check and activation system that simplified the sales procedure. Using this new activation system within our MVNO services, we were able to overcome the effect from tightened security measures for SIM card activation.

 

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.

 

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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.

 

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.

 

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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.

 

Supplier Concentration

 

For our Connected Solutions BU, we rely on several suppliers for components and materials, and for our MVNO BU, we rely solely on China Unicom for supply of voice calling minutes, texting and data related services. The following table sets forth our purchases from the key suppliers for good and services, both in absolute amount and as a percentage of our direct costs for the periods presented:

 

    For the year ended December 31,  
    2015     2016     2017  
    $     %     $     %     $     %  
    ($ in thousands)  
                                                 
China Unicom     13,745       23.7 %     25,937       27.2 %     17,088       13.4 %
Quanta Computer Inc.     18,489       31.9 %     23,480       24.6 %     12,848       10.1 %
Crave International Holdings     -       0.0 %     -       0.0 %     57,005       44.9 %
China Great Wall Computer (Shenzhen) Co. Ltd     -       0.0 %     14,202       14.9 %     -       0.0 %
SBCK Corp     -       0.0 %     11,325       11.9 %     -       0.0 %
Shenzhen Haihong Tianyuan Microelectronics Co. Ltd     4,021       6.9 %     -       0.0 %     -       0.0 %
Total purchases from key suppliers, and as percentage of direct costs     36,255       62.5 %     74,944       78.6 %     86,941       68.4 %

 

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Other than in the case of Reliance which requires us to fill their orders using components from Qualcomm, we purchase from suppliers on a non-exclusive basis. We are not bound by any minimum purchase commitments or other obligations to our suppliers and are able to source products and services at the most competitive prices available from various suppliers on an as needed basis. The above figures for Crave International Holdings included the value of Qualcomm components.

 

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.

 

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

 

    For Three Months Ended March 31,  
    2017     2018  
    US$     %     US$     %  
    (US$ in thousands)  
Software     3,084       12.5 %     2,256       4.5 %
Hardware     21,679       87.5 %     48,118       95.5 %
Connected Solutions BU net revenues     24,763       100 %     50,374       100 %

 

Software

 

Software net revenues were $3.1 million and $2.3 million for the three months ended March 31, 2017 and 2018, respectively, representing 12.5% and 4.5% of Connected Solutions BU net revenues in those periods.

 

 The 8% decrease primarily reflected the exit by one of the Company’s major chip manufacturer clients from the Android based product platform.

 

Hardware

 

Hardware net revenues were $21.7 million and $48.1 million for the three months ended March 31, 2017 and 2018, respectively, representing 87.5% and 95.5% of Connected Solutions BU net revenues in those periods.

 

The 122.0% increase in hardware net revenues (103% increases as a percentage of overall Connected Solutions BU net revenues) primarily reflects an increase in hardware product orders from the emerging markets in Asia.

 

All hardware sales were made to order in writing. Small percentages of replacement units and parts were provided to customers and those costs were included in cost of revenues. We provide engineering design work as specified by our customers, and production begins after the customer accepts the design. We are responsible for procurement of all components, materials and tooling, and for the selection of third-party factories for product assembly. Revenue is recognized when products are shipped to the customer, and payment is generally made within 30 to 60 days after shipment. We are not engaged in the marketing and distribution of the hardware products.

 

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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.

 

    For Three Months Ended
March 31,
 
    2017     2018  
    US$     US$  
    (US$ in thousands)  
MVNO     5,932       7,509  
Other     515       373  
MVNO BU net revenues     6,447       7,882  

 

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

 

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 %

 

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.

 

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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.

 

    For Three Months Ended
March 31,
 
    2017     2018  
    US$     US$  
    ($ in thousands)  
Connected Solutions BU     21,568       44,168  
MVNO BU     5,487       5,232  
Total cost of revenue     27,055       49,400  

 

Connected Solutions BU costs of revenues were $21.6 million and $44.2 million for the three months ended March 31, 2017 and 2018, respectively. These increases were generally in line with the associated revenues.

 

MVNO BU cost of revenues was $5.5 million and $5.2 million for the three months ended March 31, 2017 and 2018, respectively.

 

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 %

 

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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.

 

Our gross profits were $4.1 million and $8.9 million for the three months ended March 31, 2017 and 2018, respectively. The breakdown between the Connected Solutions BU and MVNO BU gross profit and gross margin was as follows:

 

    For Three Months Ended March 31,  
    2017     2018  
    US$     %     US$     %  
    (Gross Profit in thousands, Gross Margin in %)  
Connected Solutions BU     3,195       12.9 %     6,206       12.3 %
MVNO BU     960       14.9 %     2,650       33.6 %
Total     4,155       13.3 %     8,856       15.2 %

 

Connected Solutions BU gross margins were 12.9% and 12.3% for the three months ended March 31, 2017 and 2018, respectively, while MVNO BU gross margins were 14.9% and 33.6% for the three months ended March 31, 2017 and 2018, respectively. Despite significant volume increase in our Connected Solutions BU activities in the first quarter of 2018, its gross margin decreased because large orders from customers usually demanded more competitive pricing; the MVNO BU gross margin increased as we gained economies of scale. Our overall gross margin increased from 13.3% to 15.2% in the first quarter of 2018 from a year ago.

 

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

 

    For Three Months Ended
March 31,
 
    2017     2018  
    US$     US$  
    (Gross Profit in thousands)  
Software     754       1,487  
Hardware     2,441       4,719  
Total     3,195       6,206  

 

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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 liabilities     -       0.0 %     (12 )     0.0 %     (200 )     0.1 %
Total     (19,448 )     25.9 %     (21,670 )     18.0 %     (35,348 )     22.9 %

 

    For Three Months Ended
March 30,
 
    2017     2018  
    US$     US$  
    ($ in thousands)  
Research and development expenses     292       889  
Sales and marketing expenses     1,339       1,682  
General and administrative expenses     1,558       3,096  
Changes in the fair value of warrant liability     161       -  
Total     3,350       5,667  

 

Research and Development Expenses

 

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

 

Research and development expenses increased by $597,000 to $889,000 for the three months ended March 31, 2018, from $292,000 in the same period in 2017. The increase is due primarily to a research and development project for a new phone for a European customer. A significant portion of our design activities were directly expensed as cost of revenue when our hardware project revenue was recognized.

 

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.

 

Selling and marketing expenses increased by $0.34 million to $1.68 million for the three months ended March 31, 2018, from $1.34 million from the same period in 2017. The increase was primarily due to increased commissions paid to our MVNO franchisees, which was in line with the increase of MVNO revenue.

 

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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.

 

General and administrative expenses increased by $1.54 million to $3.10 million for the three months ended March 31, 2018, from $1.56 million for the three months ended March 31, 2017. This increase was primarily due to increase in number of employees.

 

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 recognized nil for the three months ended March 31, 2018.  

 

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. 

 

For the three months ended March 31, 2018, we had tax payable amounts of $1.2 million despite operational income of $3.2 million. Our actual tax rates have been higher than the statutory rates because losses experienced by certain of our subsidiaries could not be used to offset gains in other subsidiaries within the same jurisdiction.

 

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.

 

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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.

 

Cash generated from operating activities for the three months ended March 31, 2018 was $688,000.

 

Cash used in investing activities for the three months ended March 31, 2018 was $262,000 which was mainly used in the development of software assets for both our Connected Solutions BU and MVNO BU in the amount of $1.6 million and repayment of loan principle of $1.5 million.

 

Cash used in financing activities for the three months ended March 31, 2018 was $11.0 million which included prepayment of shares of $10.0 million and repayment of long-term borrowings of $1.0 million.

 

We entered into a loan agreement with Partners For Growth V, L.P. (“PFG5”) effective April 30, 2018, for a term loan in the maximum amount of $3 million at an interest rate of 8.0% per annum with a maturity date of April 30, 2021 (the “PFG5 Loan”). On May 16, 2018, after payment of a $45,000 commitment fee to PFG5, $2,955,000 was made available to us for general corporate purposes.  PFG5’s rights under the PFG5 Loan are pari passu with the rights of Partners For Growth IV, L.P. (“PFG4”), a related party of PFG5, under the existing Loan and Security Agreement, dated August 26, 2016, by and between Borqs Hong Kong Limited and PFG4, as amended (the “PFG4 Loan”), which remains in full force and effect according to its terms. Except for increased thresholds with respect to the financial covenants described below, the terms of the PFG5 Loan are substantially similar to those of the PFG4 Loan. Our financial covenants under the PFG5 Loan include the covenants to meet or exceed (i) quarterly revenues (as required to be classified as such under U.S. GAAP) of $32,500,000 and (ii) a three month trailing EBITDA target of $2,000,000, with compliance for each covenant determined as of the last day of each calendar quarter for revenues and each calendar month for EBITDA.

 

We have in the past breached certain financial covenants under our loan agreements with SPD Silicon Valley Bank Co., Ltd. (“SVB”) and PFG4. Specifically, we failed to meet a monthly cash ratio threshold, under U.S. GAAP basis, for several months in the second, third and fourth quarters of 2017 under the loan agreement with SVB and a minimum 3-month trailing EBITDA target under the PFG4 loan agreement as of the third quarter of 2017.  Such breach could result in acceleration of the repayment according to the contract term. Therefore, the outstanding balance of $4.75 million was reclassified as current liability as of March 31, 2018. We have not been notified by either lender that they seek to accelerate the loan payments because of such breaches and neither lender has expressly waived such breaches and any resulting defaults.  We are currently negotiating with both lenders to make adjustments to the specific financial covenants to more appropriately reflect the business nature of the Company in 2018 and going forward, particularly allowing for the inclusion of inventories while removing certain non-cash stock based compensation in deriving the covenant ratios.  In the event the lenders choose not to make adjustments to the covenant ratios and consider the occurrence of these breaches as events of default under our current loan agreements, the lenders may elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit to us.

 

We believe that our current cash level and anticipated cash flows from operations will not be sufficient to meet anticipated cash needs for at least the next 12 months, and this Registration Statement is being filed to conduct a public offering of our ordinary shares in the coming months to raise funds to finance our potential acquisition of KADI as well as for general working capital needs. Whether or not the intended public fundraise is successful, we may privately sell additional equity securities, debt securities or borrow from banks and other financial institutions.

 

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In recent periods, our accounts receivable balances have generally fallen in the range of 60 to 90 days. There were no related party accounts receivable as of March 31, 2018.

 

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 “Risk Factors — Risks Related to Doing Business in China — Our subsidiaries in China are subject to restrictions on making dividends and other payments to it or any other affiliated company” and “Restrictions on 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.

 

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.

 

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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

 

We follow the liability method in accounting for income taxes in accordance with ASC topic 740 (“ASC 740”). 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. We record 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.

 

We adopted ASC 740 to account for uncertainty in income taxes. ASC 740 clarifies the accounting for uncertainty in income taxes by prescribing the recognition threshold a tax position is required to meet before being recognized in the consolidated financial statements. We have elected to classify interest and penalties related to unrecognized tax benefits, if and when required, as part of “interest expense” and “other expenses,” respectively, in the consolidated statements of comprehensive loss.

 

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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 prospectus 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. 

 

Related Party Transactions

 

(a) Related parties

 

Names of related parties   Relationship
Intel Capital Corporation (“Intel”) and its affiliates   Intel is a shareholder *

 

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(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       *  

 

* Intel has ceased to participate in the mobile chipset business.

 

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

 

(d) Other than disclosed elsewhere, the Group had the following significant related party transactions for the three months ended March 31, 2017 and 2018:

 

    Three Months Ended
March 31,
 
    2017     2018  
    US$     US$  
Software services provided to:            
Intel Corporation     -       -  
Intel (China) Co., Ltd.     9       -  
Intel Asia-Pacific Research and Development Ltd.     19       -  
Intel (China) Research Center Co., Ltd.     34       -  

 

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.

 

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The Company typically has limited risk from a concentration of credit risk as usually 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.

 

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 BU works closely with chipset partners to develop new connected devices. Borqs developed the reference Android software platform and hardware platform for Intel and Qualcomm phones and tablets. In recent years, we have been awarded significant business contracts from Intel and Qualcomm, leading global chipset manufacturers. 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 activities with Intel have reduced over the last two years due to Intel’s strategy to exit the mobile industry, and there are no material agreements with Intel on which we are substantially dependent. For the year 2017, Intel was no longer a customer of the Company. However, our activities with Qualcomm have increased over the last two years, including developmental work on chipsets for mobile devices and wearable products.

 

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The following customers accounted for 10% or more of our total revenues for the years indicated, and they are not related to each other:

 

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 %

 

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

 

The Connected Solutions BU 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%, respectively, of its net revenues from customers headquartered outside of China and 15%, 7% and 14%, respectively, of its net revenues from customers headquartered within China. As of December 31, 2017, Borqs had collaborated with 6 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.

 

Borqs has dedicated significant resources to research and development, and has research and development centers in Beijing, China and Bangalore, India. As of March 31, 2018, 350 of our 502 employees were technical professionals dedicated to platform research and development and product specific customization.

 

Borqs has achieved significant growth since inception in 2007. Net revenues increased from $75.1 million in 2015 to $120.6 million in 2016, to $154.3 million in 2017. We recorded net income of $0.8 million and $2.6 million in the years 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; excluding such non-cash merger related costs would result in non-GAAP adjusted net income of $2.1 million for the year 2017 as compared to a net income of $2.6 million for 2016. We recorded a net income of $1.4 million in the three months ended March 31, 2018, as compared to a net income of $0.02 million in the three months ended March 31, 2017.

 

Recent Developments

 

Potential acquisition of Shanghai KADI Machinery Technology Co., Ltd.  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. Pursuant to the letter of intent, and as is being negotiated in a definitive agreement, at the closing of the transaction we intend to pay $11.7 million in cash to KADI and $3.3 million in our ordinary shares to the selling shareholders. KADI is not a customer or supplier of Borqs. In accordance with the letter of intent, we have made four scheduled cash advances to KADI totaling $600,000 which will be deducted from our initial cash payments to KADI under the definitive agreement being negotiated. If the transaction is not consummated within nine months after the signing of the letter of intent, the advance payments will be converted into shares representing five percent of the outstanding capital stock of KADI. Upon the completion of our acquisition of 60% of KADI, we have an exclusive option, valid until December 31, 2021, to purchase the remaining 40% of KADI at a 9% premium to the consideration paid for the first 60%. There are no termination fees or penalties under the letter of intent. Assuming the parties reach a definitive agreement and proceed to closing, part of the proceeds from the offering as contemplated herewith will be used to fund the acquisition of KADI. See “Use of Proceeds.”

 

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KADI has worked with the leading automotive companies in China, including Chery, Dong Feng Motors, Geely Auto, Shanghai Volkswagen and TRW. Its founder, Dr. Hu Lin, has nearly 20 years of professional experience working with companies in the automotive industry, including Volkswagen and Delphi.

 

KADI has been awarded a RMB320 million (US$50 million) multi-year supply contract for its core electric control modules from Shenzhen Espirit Technology Co., Ltd. (“Espirit”), which is a key automotive contractor in China. Borqs believes that KADI’s products will complement Borqs’ existing automobile in-vehicle-infotainment (IVI) solutions, in terms of sales and distribution, and research and development. Borqs anticipates that the experience of its software engineers will enhance KADI’s capabilities while Borqs’ supply chain management team will ensure efficient delivery of hardware products. Approximately $7.7 million will be needed from us in 2018 to service the Espirit supply contract, of which approximately $4 million is anticipated to be used for capital expenditures, and $3.7 million is anticipated to be used for working capital needs.

 

Repurchase of Shares from Zhengqi. On January 10, 2018, we entered into a stock repurchase agreement (“Stock Repurchase Agreement”) with 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) will become additional shares placed in an indemnity escrow account; and 1,227,625 shares are to be distributed to the former Borqs International shareholders based on their respective proportionate interests in the merger consideration. The Company and Zhengqi are working satisfy certain conditions and make necessary arrangements before completing the repurchase, including confirming the consent of Borqs’ existing lenders with respect to the transaction, submitting the shares to the transfer agent for cancellation, releasing the escrowed earnout shares from escrow and returning such shares to former Borqs International shareholders in proportion to their ownership prior to the completion of the business combination on August 18, 2017, and we anticipate closing the transaction in 2018. Proceeds from this offering will not be used to repurchase the shares from Zhengqi.

 

Pursuant to the Stock Repurchase Agreement, we agreed to use our best efforts to amend our 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.

 

Investment in Shenzhen Crave Communication Co., Ltd. On January 18, 2018, we entered into an agreement with Shenzhen Crave Communication Co., Ltd (“Crave”) and Colmei Technology International Ltd. (“Colmei”), along with the shareholders of Crave and Colmei (“CC Selling Shareholders”), pursuant to which we agreed to acquire 13.8% of the outstanding shares of Crave and 13.8% of the outstanding shares of Colmei from the CC Selling Shareholders. The transaction closed on March 22, 2018, and under the agreement, the purchase consideration consists of ordinary shares and cash. At the closing, we issued 473,717 ordinary shares to the order of the CC Selling Shareholders and agreed to pay cash in the amount of $10.0 million to be paid to the CC Selling Shareholders over a period of 36 months. As our experience in negotiations with ODM customers often leads to questions over quality and delivery schedule issues, our investment in Crave and Colmei helps to address such issues because the Company is now in a better position to provide assurances to customers as we have prioritized scheduling over using the manufacturing facilities. In addition, if approved by our Board, we will issue additional shares to the CC Selling Shareholders if the aggregate value of the ordinary shares initially issued at the closing to the CC Selling Shareholders under this agreement is less than $3.0 million on August 18, 2018. No proceeds from this offering will be used to pay any of the $10.0 million cash consideration to the CC Selling Shareholders.

 

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Crave is a manufacturer of mobile terminal devices located in Shenzhen China. With multiple high speed SMT lines, assembly lines and packaging lines, its annual capacity reaches over 10 million units in its Shenzhen facility. Crave exports final products for customers in South America, India, Indonesia, the Philippines and Vietnam. Colmei, which is under common ownership with Crave, is a sales entity located in Hong Kong that has established relationships with international banks to facilitate transactions with its global clients. Prior to this investment, we have contracted Crave and Colmei for multiple projects related to manufacturing our products, including a large variety of phone models and releases.

 

Our investment into Crave and Colmei create synergies, including (i) assurance of production capacity since they are capable in delivering over 10 million units of products annually, (ii) access to larger credit facilities for supply chain financing for purchases of components, (iii) ownership (although partial) of manufacturing plant increases the likelihood of winning more customer contracts, (iv) leveraging their large purchasing power, which is more than 10 times of Borqs’ in terms of number of units, which leads to savings from the suppliers of components and materials.

 

Colmei and Crave are controlled by two PRC nationals, and as of March 22, 2018, we currently own 13.8% of each of Crave and Colmei, which we do not believe results in the Company’s significant influence in either Crave or Colmei. However, in our role as a contract manufacturer, Crave is one of our material suppliers from which we source necessary components for our customers, and we believe our investments in Colmei and Crave provide us with access to acceptable financing terms, competitive component pricing and prioritized production capacity. Due to Crave’s large manufacturing volume, it is able to negotiate favorable component pricing. In addition, Colmei has the ability to obtain supply chain financing for the Company in order to procure large projects.

 

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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 prospectus.

 

 

 

Borqs Wholly-owned Subsidiaries and Consolidated Affiliated Entities

 

The following is a summary of our material subsidiaries and consolidated 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;

 

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;

 

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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;

 

 Beijing Big Cloud Century Network Technology Co., Ltd. (“BC-NW”), a company established under the laws of the PRC in 2014, is the variable interest entity through which Borqs Beijing controls Yuantel Telecom, the entity which operates the MVNO business,

 

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 BC-NW, which is 100% beneficially owned and controlled by Borqs Beijing through contractual control agreements; 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 2016 and 2017.

 

BUs

 

We have two BUs, 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.

 

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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 BU works closely with chipset partners to develop new connected devices. Borqs developed the reference Android software platform and hardware platform for Intel and Qualcomm phones and tablets. 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.

 

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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 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, 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 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 seven patents in the United States, and as of the date hereof it has 34 pending patent applications in China and one pending patent applications in the United States. The Company also has 100 software copyrights and 55 trademarks registered and 11 pending trademarks in China. In addition, the Company has registered its domain name with various domain name registration services.

 

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).

 

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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.

 

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Government Regulation

 

The Company’s operations are subject to extensive and complex state, provincial and local laws, rules and regulations. The PRC government restricts or imposes conditions on foreign investment in telecommunication business. Borqs International Holding Corp and its PRC subsidiaries are considered foreign persons or foreign-invested enterprises under PRC foreign investment related laws. As a result, they are subject to PRC legal restrictions on or conditions for foreign ownership of telecommunication business. Due to these restrictions, 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 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 (the “Official Notice”) on April 28, 2018, which took effect on May 1, 2018. The Official Notice 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. The Pilot Enterprise is allowed to continue to carry out its MVNO business during such application period. According to the Official 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 of 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. In addition, the Official Notice requires the MVNO enterprise to establish network security management systems, deploy corresponding management personnel, implement the real-name registration for telephone users, protect users’ personal information, effectively implement the prevention and crackdown of communication information fraud, and standardize its user service agreements and financial management systems. We are preparing for application of the official MVNO license. However, uncertainties exist with respect to the interpretation and implementation of the newly issued Official Notice, and thus we cannot assure you that we will be able to obtain the official MVNO license or maintain such license once it is received.

 

Employees 

 

As of March 31, 2018, we had 502 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.

 

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.

 

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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        

 

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 BU 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.

 

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Business Description of KADI

 

Organization . KADI was incorporated in the Shanghai Jiading District of China on February 5, 2006 by two Chinese individuals. It was formed for the purpose of developing core electric control modules with imbedded software and integrated power assembly systems for electric vehicles, or new energy vehicles as they are called in China. KADI currently has 16 full-time employees, almost entirely engineers. The founders of KADI are veterans of the Chinese automotive industry with deep rooted experience in world-renowned auto companies’ operations in China, including Volkswagen and Delphi.

 

The Technologists.

 

Dr. Hu Lin , Founder and CEO of KADI. He has nearly 20 years of experience in the automotive electronic controls sector. From 2006 to 2013, Dr. Lin served as Executive Director of Electronic Controls, China Division of Delphi Automotive Group. Prior to that, he was a Director of R&D in Shanghai Volkswagen from 2002 to 2006. He is also the Secretary of the China Automotive Electronic Basic Software Development and Industrialization Alliance (CASA), and a member of the National Information Security Standardization Technology Committee. Dr. Lin received his doctoral degree in Electronic Information System from Zhejiang University, China.

 

Dr. Zhijie Pan , Technology Consultant to KADI. Dr. Pan has over 20 years of experience in the automotive industry. He is the Director of the Intelligent Vehicle Research Center of Zhejiang University, and is the recipient of multiple awards including the China Automotive Industry Science and Technology First Prize Award, China Quality Evaluation Association Science and Technology Innovation Award, National Federation of Science and Technology Progress Award and the Zhejiang Science and Technology First Prize Award. He has published more than 90 papers in domestic and foreign journals including IEEE, SAE and JSAE. He also holds more than 100 patents and is a frequent keynote speaker at international academic and technical forums. Dr. Pan is an expert in computer science and automotive interdisciplinary research, intelligent electric car chassis control technology, intelligent driving, unmanned systems, intelligent city, intelligent traffic control and internet data cloud processing. Dr. Pan received his doctoral degree in Automotive Engineering from Shanghai Jiao Tong University.

 

The Products and IP . KADI’s products include direct current boost function (“DCDC”), on-board charger system (“OBC”), and vehicle main control unit (“VCU”). KADI owns the intellectual property of the core technologies used in its current products without the need for licensed 3rd party IP, including the technologies for: i) Vehicle Controller Product Platform Strategies for passenger cars and commercial vehicles, ii) Auxiliary Power Unit (“APU”) product technology roadmap, and iii) Vehicle Controller Product Platform Strategy Batch Loading.

 

Long Relationship with Customers.  KADI works closely with China’s leading automotive giants, including Geely Auto, TRW, Chery, Jiangte Motor, JAC, GAC Group, Dong Feng Motors (“DFM”), and Shanghai Volkswagen etc. KADI has several on-going R&D projects with China domestic manufacturers, including:

 

DFM — commercial vehicle DF45E controller development;

 

Dong Zhong Totyu — VCU controller integrated platform development;

 

Chery – electric vehicle controller platform; and

 

DFXK (a subsidiary of DFM for delivery vehicles) — VCU controller integrated platform development.

 

Supply Contract from Espirit.  KADI has secured a RMB320 million supply contract with, Shenzhen Espirit Technology Co., Ltd. (“Espirit”), one of the key automotive contractors in China for the delivery of EV control modules with imbedded software from 2018 through 2020. Such modules are to be used in electric delivery vehicles with a daily range of 100 kilometers. The term of the supply contract is from September 19, 2017 to June 30, 2020 with automatic renewal for a one-year term unless either party provides 30 day advance notice of non-renewal. Espirit does not have any right of cancellation, with or without penalty, under the supply contract.

 

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Espirit is an engineering company founded in September 2012 with the core of its technology team members from BYD. Its main product is the motor controller for electric vehicles. Espirit’s customers for logistical vehicles include, among others, Shanxi Tongjia, Fujian NLM motor, Victory Auto, Kawei Auto, and Chongqing Hengtong. These clients of Espirit will be using the modules produced by KADI.

 

Espirit is a contractor for BYD, and has a significant market share of the electric control technology for the logistical vehicles market in China. Once KADI demonstrates the ability to deliver the products, additional contracts can be expected. KADI’s control modules has passed stringent testing and evaluation by Espirit. Within Espirit’s motor controller system, the modules contracted to KADI to produce under the supply contract are:

 

  DC to DC Converter (“DCDC”) 1.5kw module: 65,000 sets

 

  DCDC 1.5kw module complete set: 15,000 sets

 

  Vehicle Control Unit (“VCU”): 65,000 sets

 

  On Board Charger (“OBC”) 3.3kw module: 60,000 sets

 

  OBC 6.6kw module: 62,000 sets

 

  Battery Management System: 30,000 sets

 

The products are to be delivered within China in the years of 2018, 2019 and 2020 with the delivery dates to be determined by particular purchase orders (“PO”). There is no latest delivery date as stipulated in the supply contract, but will be stated in each PO. There are no minimum quantities to be purchased by Espirit but recent monthly forecast updates indicate that all of the quantities of the DCDC, VCU and OBC as listed in the supply contract will be ordered and need to be delivered over the next two years. The value of the supply contract totals approximately US$50 million at the current Rmb-US$ exchange rate. Unit prices cannot be altered unless by mutual agreement between KADI and Espirit; and payments by Espirit shall be made in 90 days after delivery of products by KADI. Approximately $7.7 million will be needed from us in 2018 to service the Espirit supply contract, of which approximately $4 million is anticipated to be used for capital expenditures, and $3.7 million is anticipated to be used for working capital needs.

 

On April 28, 2018, KADI received clearance from Dong Feng Motor Group for KADI to start production and delivery starting in May 2018 of its electric vehicle control modules for its Super Dragon Electric Bus Program (“DFM Bus Program”), which tested samples from KADI over the prior 6-month period.  KADI’s control module designed for the DFM Bus Program is a 3.0 KW DCDC converter that converts from a high voltage of 540V to a low 24V for use in steering control, air conditioning and other bus operations.   Such products represent approximately 10% of the Espirit supply contract.

 

KADI estimates the gross margin of its products will average 31% based on the average prices of the components and direct engineering costs in March 2018. There is no arrangement with Espirit that pricing is based on a cost-plus structure. Although we do not anticipate substantial fluctuations in such market-determined costs, there is no assurance that such costs will not change and that the gross margin of 31% can be maintained.

 

Rationale for the Acquisition of Controlling Stake in KADI.  KADI is an engineering company focused on the development of certain software imbedded control modules for the EV industry in China. After years of R&D, KADI has demonstrated its technology and has been awarded with a supply contract by Espirit, one of the key automotive contractors in China, for its core products in the amount of approximately US$50 million to be delivered in the years 2018, 2019 and 2020. The modules will be used in logistical/delivery vehicles for inner-city use with a daily range of 100 kilometers. The favorable conditions for Borqs to make this acquisition and the synergy between Borqs and KADI include:

 

  KADI’s immediate need for working capital in the procurement of the hardware components and investment into equipment and facilities can be provided by approximately $7.7 million from the offering;

 

  Borqs has a seasoned team in supply-chain management to ensure successful delivery of the hardware products;

 

  Borqs’ expertise in imbedded software within hardware products will contribute to KADI’s continuous need to upgrade its software components;

 

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  Borqs has five years of experience, and on-going contracts, supplying software to Chinese auto makers including Geely for In-Vehicle-Infotainment systems;

 

  The gross margin at current prices of the KADI EV control modules is estimated at 31%, significantly higher than the blended gross margin of Borqs for its current connected solutions and MVNO activities;

 

  The supply of the EV control modules is not seasonal and will help in reducing the seasonality of Borqs’ revenues; and

 

  Increase in diversification of Borqs’ customer base.

 

MANAGEMENT

 

Directors and Executive Officers

 

The table below identifies our current directors and executive officers:

 

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   49   Director   I
Yaqi Feng   35   Director   III
Bill Huang   55   Director   I
Jason Zexian Shen   64   Director   II
Eric Tao   40   Director   III
Joseph Wai Leung Wong   62   Director   II
             
Executive Officers            
Bob Xiao Bo Li, Ph.D.   56   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 BU    
Hareesh Ramanna   57   Executive Vice President and Co-General Manager of Connected Solutions BU    
George Thangadurai   55   Executive Vice President and President of International Business    
Gene Wuu, Ph.D.   62   Executive Vice President and General Manager of MVNO BU    

 

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 BU 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.

 

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Honghui Deng,  49, 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.

 

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 2017. 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,  64, 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.

 

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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, 56, 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.

 

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 BU 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, 57, is our Executive Vice President, Co-General Manager of Connected Solutions BU, 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 BU 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.

 

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Classified Board of Directors

 

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.

 

Director Independence

 

Nasdaq listing standards require that a majority of our Board be independent. 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.

 

Leadership Structure and 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.

 

Compensation Committee Interlocks and Insider Participation

 

As of the date of this prospectus, 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.

 

Code of Ethics

 

Our Code of Business Conduct and Ethics for Employees and Directors (“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.

 

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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.

 

EXECUTIVE COMPENSATION

 

This section discusses the material components of the 2017 executive compensation program for our named executive officers, who are identified in the Summary Compensation Table below.

 

Summary of Cash and Certain Other Compensation

 

The Company has opted to comply with the executive compensation disclosure rules applicable to emerging growth companies. The scaled down disclosure rules are those applicable to “smaller reporting companies,” as such term is defined in the rules promulgated under the Securities Act, which require compensation disclosure for the Company’s principal executive officer and its two most highly compensated executive officers other than the principal executive officer whose total compensation for 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 prospectus 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
(US$)
    Bonus
(US$)
    Stock awards (US$)     Option awards (US$)     Non-equity incentive plan compensation (US$)     Nonqualified deferred compensation earnings
(US$)
    All other compensation (US$)     Total
(US$)
 
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, EVP   2017     259,400       1,202                                     260,642  
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  

 

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2017 Outstanding Equity Awards at Year-End Table

 

The following table provides information regarding each unexercised stock option held by the named executive officers as of December 31, 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
(US$) (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

 

 

* As adjusted for merger on August 18, 2017.

 

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

 

(2) Exercise price represents the exercise price of the options granted, as determined by the Board, 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.

 

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.

 

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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.

 

Borqs Technologies, Inc. 2017 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 (“2007 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 (“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 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 Plan were assumed under the 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 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 Incentive Plan:

 

  shares subject to options or share appreciation rights granted under our Incentive Plan that cease to be subject to the option or stock appreciation right for any reason other than exercise of the option or share appreciation right;

 

  shares subject to awards granted under our Incentive Plan that are subsequently forfeited or repurchased by us at the original issue price;

 

  shares subject to awards granted under our Incentive Plan that otherwise terminate without shares being issued;

 

  shares surrendered, cancelled or exchanged for cash or a different award (or combination thereof).

 

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

 

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

 

Administration.  The Incentive Plan is administered by the Board 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 Incentive Plan allows for the grant of options, restricted shares, restricted share units, share appreciation rights, share bonuses and performance awards.

 

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

 

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

 

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

 

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

 

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

 

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

 

Governing Law and Compliance with Law.  The 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 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 Incentive Plan at any time. Our Board generally may amend our Incentive Plan, without shareholder approval unless required by applicable law.

 

2017 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.

 

2017 Director Compensation Table

 

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  

 

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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

 

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.

 

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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.

 

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.

 

CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

 

In addition to the compensation arrangements, including employment, termination of employment and change of control arrangements and indemnification arrangements described in “Executive Compensation,” the following is a description of each transaction since January 1, 2015 and each currently proposed transaction in which:

 

  we have been or are to be a participant;

 

  the amount involved exceeds $120,000; and

 

  any of our directors, executive officers or holders of more than 5% of our capital stock, or any immediate family member of or person sharing the household with any of these individuals, had or will have a direct or indirect material interest.

 

Intel and Qualcomm

 

In the last three years, our Connected Solutions BU has worked closely with chipset partners, including Intel and Qualcomm, to develop new connected devices and commercially launch Android-based devices in 11 countries, and more than 10 million mobile devices sold worldwide have BorqsWare software platform solutions embedded. Intel and Qualcomm are shareholders of the Company, and we developed the reference Android software platform and hardware platform for their phones and tablets. We provided software services and hardware to Intel in 2015 and 2016. See “Note 17 - Related Party Transactions” to our financial statements for the fiscal year ended December 31, 2017 included herein.

 

Repurchase of Shares from Zhengqi

 

On January 10, 2018, we entered into a stock repurchase agreement (“Stock Repurchase Agreement”) with 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 Company is working with Zhengqi to satisfy certain conditions and make necessary arrangements before completing the repurchase, including confirming the consent of Borqs’ existing lenders with respect to the transaction, submitting the shares to the transfer agent for cancellation, releasing the escrowed earnout shares from escrow and returning such shares to the former Borqs International shareholders in proportion to their ownership prior to the completion of the business combination on August 18, 2017, and we anticipate closing the transaction in 2018. Proceeds from this offering will not be used to repurchase the shares from Zhengqi.

 

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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. 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.

 

Policies and Procedures for 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.

 

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 (“IPO”).

 

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.

 

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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.

 

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.”

 

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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, including the registration statement for this offering. 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.

 

PRINCIPAL SHAREHOLDERS AND PARTICIPATING STOCKHOLDERS

 

The following table presents information as to the beneficial ownership of our ordinary shares as of June 28, 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 the Participating Stockholders;

 

  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 June 28, 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 before this offering is based on 31,303,350 ordinary shares outstanding on June 28, 2018. Percentage ownership of our ordinary shares after this offering (assuming no exercise of the underwriters’ option to purchase additional shares) also assumes the foregoing as well as the sale of shares in this offering, before giving effect to shares withheld to satisfy the associated withholding tax obligations. 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.

 

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    Number of Shares  
    Before this offering     Offered Hereby     After this offering  
    Number of Shares     %     Number of Shares     Number of Shares     %  
Name and Address of Participating Stockholders and Beneficial Owners of 5% or more (1)                              
                               
Zhengqi International Holding Limited (11)(17)     4,709,850       15.05                            
Intel Capital Corporation (5)     3,799,172       12.5             3,799,172          
Norwest Venture Partners (6)     3,342,126       11.0             3,342,126          
Asset Horizon International Limited (2)     3,282,859       10.8             3,282,859          
Keytone Ventures LP (3)     3,025,627       10.0             3,025,627          
GSR Entities (4)     2,598,811       8.6             2,598,811          
EarlyBird Capital, Inc. (17)     183,248       *                          
Ninepoint Capital LLC (17)     536,067       1.8                          
                                         
Directors and Executive Officers                                        
Pat Sek Yuen Chan (7)(10)     1,038,264       3.2             1,038,264        
Honghui Deng (12)     60,000       *             60,000       *  
Yaqi Feng (12)     90,000       *             90,000       *  
Bill Huang (12)     30,000       *             30,000       *  
Jason Zexian Shen (12)     60,000       *             60,000       *  
Joseph Wai Leung Wong (12)     30,000       *             30,000       *  
Bob Li, Ph.D. (8)(10)     528,490       1.7             528,490        
Anthony K. Chan (9)(10)     209,562       *             209,562       *  
Eric Tao (12)     30,000       *             30,000       *  
Simon Sun (13)     34,716       *             34,716       *  
Hareesh Ramanna (14)     253,228       *             253,228       *  
George Thangadurai (15)     141,702       *             141,702       *  
Gene Wuu, Ph.D. (16)     98,712       *             98,712       *  
All directors and officers as a group (13 persons) (10)     2,604,674       8.1             2,604,674        

 

 

* Less than one percent
(1) Unless otherwise indicated, the business address of each of the individuals is Building B23-A, Universal Business Park, No.10 Jiuxianqiao Road, Chaoyang District, Beijing 100015, 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.
(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.

 

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(7) Includes 687,361 ordinary shares and 350,903 ordinary shares subject to options of which 295,424 options will be vested within 60 days from June 30, 2018.
(8) Includes 335,626 ordinary shares and 51,446 ordinary shares subject to options of which 51,235 options will be vested within 60 days from June 30, 2018.
(9) Includes 20,625 ordinary shares and 188,937 ordinary shares subject to options of which 161,384 options will be vested within 60 days from June 30, 2018.
(10) Includes 1,278,776 shares held for Escrowed Earn-out shares that will be returned to the Borqs shareholders prior to the business combination on August 18, 2017.
(11) Includes 966,136 shares subject to repurchase and 1,278,776 shares subject to forfeiture pursuant to the Stock Purchase Agreement. Zhengqi International Holding Limited, the Company’s former sponsor, is a wholly-owned indirect subsidiary of Pacific Securities Capital Management Co. Ltd., a company incorporated in the People’s Republic of China, which, in turn, is a wholly owned subsidiary of Pacific Securities Co. Ltd., a company incorporated in the People’s Republic of China (“Pacific Securities”). Jian Tu serves as a director and as Chairman of the Strategic Planning Committee of Pacific Securities, and Guoxiong Luo serves as Assistant Chairman and the Head of Global Business Department of Pacific Securities.
(12) Including 30,000 ordinary shares subject to options of which none will be vested within 60 days from June 30, 2018.
(13) Including 34,716 ordinary shares subject to options of which 33,225 options will be vested within 60 days from June 30, 2018.

(14)

 

Including 39,081 ordinary shares and 214,147 ordinary shares subject to options of which 161,867 options will be vested within 60 days from June 30, 2018.
(15)  Including 141,702 ordinary shares subject to options of which 129,894 options will be vested within 60 days from June 30, 2018.
(16)  Including 23,448 ordinary shares and 75,264 ordinary shares subject to options of which 72,126 options will be vested within 60 days from June 30, 2018. 
(17)  Participating Stockholder in the offering. 

 

Change of Control

 

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

 

DESCRIPTION OF SECURITIES

 

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

 

Ordinary Shares

 

As of March 31, 2018, there were 31,303,350 ordinary shares outstanding. Under the BVI Business Companies Act (as amended), the ordinary shares are deemed to be issued when the name of the shareholder is entered in our register of members. Our register of members is maintained by our transfer agent, Continental Stock Transfer & Trust Company. Our transfer agent has entered the name of Cede & Co. in our register of members as nominee for each of the respective public shareholders. If (a) information that is required to be entered in the register of members is omitted from the register or is inaccurately entered in the register, or (b) there is unreasonable delay in entering information in the register, a shareholder of the company, or any person who is aggrieved by the omission, inaccuracy or delay, may apply to the British Virgin Islands Courts for an order that the register be rectified, and the court may either refuse the application or order the rectification of the register, and may direct the company to pay all costs of the application and any damages the applicant may have sustained.

 

Any action required or permitted to be taken by our shareholders must be effected by a meeting of shareholders of our company, duly convened and held in accordance with our memorandum and articles of association. A resolution of our members may not be taken by a resolution consented to in writing.

 

At any general meeting of our shareholders, the chairman of the meeting is responsible for deciding in such manner as he or she considers appropriate whether any resolution proposed has been carried or not and the result of his decision shall be announced to the meeting and recorded in the minutes of the meeting. If the chairman has any doubt as to the outcome of the vote on a proposed resolution, the chairman shall cause a poll to be taken of all votes cast upon such resolution. If the chairman fails to take a poll then any member present in person or by proxy who disputes the announcement by the chairman of the result of any vote may immediately following such announcement demand that a poll be taken and the chairman shall cause a poll to be taken. If a poll is taken at any meeting, the result shall be announced to the meeting and recorded in the minutes of the meeting.

 

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A resolution of our shareholders shall be duly and validly passed if it is approved at a duly convened and constituted meeting of our shareholders by the affirmative vote of a majority of the votes of the shares entitled to vote thereon which were present at the meeting and were voted. Each ordinary share in our company confers upon the shareholder the right to one vote at any meeting of our shareholders or on any resolution of shareholders.

 

The rights and obligations attaching to our ordinary shares may only be varied by a resolution passed at a meeting by the holders of more than fifty percent (50%) of the ordinary shares present at a duly convened and constituted meeting of our shareholders holding ordinary shares which were present at the meeting. The other provisions of our memorandum and articles of association may be amended if approved by a resolution of our shareholders or by a resolution of our directors (save that no amendment may be made by a resolution of our directors (a) to restrict the rights or powers of our shareholders to amend the memorandum or articles, (b) to change the percentage of shareholders required to pass a resolution of shareholders to amend the memorandum or articles, (c) in circumstances where the memorandum or articles cannot be amended by our shareholders, or (d) to change clauses 7, 8 or 11 of our memorandum (or any of the defined terms used in any such clause or regulation).

 

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. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the votes of the shares entitled to vote at any general meeting of our members at which the election of directors is voted upon can elect all of the directors (and the holders of more than 50% of the votes of the shares entitled to vote at any general meeting of our members at which the removal of our directors is voted upon can remove a director with or without cause).

 

Our shareholders are entitled to receive ratable dividends when, as and if declared by the Board. Under the laws of the British Virgin Islands, and as provided in our memorandum and articles of association, our directors may authorize a distribution (including any interim dividend that the directors consider to be justified by the profits of our company) only if, immediately after the distribution, the value of our assets will exceed our liabilities, and we will be able to pay our debts as and when they fall due. In the event of a liquidation or winding up of the company, our shareholders are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision is made for each class of shares, if any, having preference over the ordinary shares. Our shareholders have no preemptive or other subscription rights. There are no sinking fund provisions applicable to the ordinary shares, except that we will provide our shareholders with the redemption rights set forth above.

 

Preferred Shares

 

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

 

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

 

The rights attached to any class of preferred shares in issue, may only be amended by a resolution passed at a meeting by the holders of more than fifty percent (50%) of the preferred shares of that same class present at a duly convened and constituted meeting of our members holding preferred shares in such class which were present at the meeting and voted, unless otherwise provided by the terms of issue of such class. If our preferred shareholders want us to hold a meeting of preferred shareholders (or of a class of preferred shareholders), they may requisition the directors to hold one upon the written request of preferred shareholders entitled to exercise at least 30 percent of the voting rights in respect of the matter for which the meeting is requested. Under British Virgin Islands law, we may not increase the required percentage to call a meeting above 30 percent.

 

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

 

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Warrants

 

As of March 31, 2018, we had outstanding 6,281,875 warrants to purchase ordinary shares, which warrants were registered in connection with our initial public offering. Each public warrant entitles the registered holder to purchase one half of one ordinary share at a price of $12.00 per full share, subject to adjustment as discussed below. Pursuant to the warrant agreement, a warrant holder may exercise its warrants only for a whole number of shares. This means that only an even number of warrants may be exercised at any given time by a warrant holder. However, no public warrants will be exercisable for cash unless we have an effective and current registration statement covering the ordinary shares issuable upon exercise of the warrants and a current prospectus relating to such ordinary shares. Notwithstanding the foregoing, if a registration statement covering the ordinary shares issuable upon exercise of the public warrants is not effective within 90 days from August 18, 2017, warrant holders may, until such time as there is an effective registration statement and during any period when we shall have failed to maintain an effective registration statement, exercise warrants on a cashless basis pursuant to an available exemption from registration under the Securities Act. If an exemption from registration is not available, holders will not be able to exercise their warrants on a cashless basis. The warrants will expire on the fifth anniversary of the consummation of the acquisition of Borqs International by way of merger at 5:00 p.m., New York City time.

 

As of March 31, 2018, we had outstanding 417,166 warrants to purchase ordinary shares that are not yet registered. These private warrants are identical to the public warrants except that such private warrants are not registered and will be exercisable for cash (even if a registration statement covering the ordinary shares issuable upon exercise of such warrants is not effective) or on a cashless basis, at the holder’s option, and will not be redeemable by us, in each case so long as they are still held by the initial purchasers or their affiliates. Warrants issued to the former holders of Borqs International warrants entitle each warrant holder to purchase ordinary shares at a price of $5.36 per share, and are exercisable for cash or on a cashless basis, at the holder’s option. The holders of these replacement warrants entered into Lock-up Agreements identical to the Lock-up Agreements executed by former shareholders of Borqs International and became party to the Registration Rights Agreement along with the former shareholders of Borqs International.

 

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

 

  at any time while the warrants are exercisable,

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

In connection with our acquisition of Borqs International by way of merger, holders of issued and outstanding warrants to purchase shares of Borqs International received replacement warrants to purchase an aggregate of 344,559 of our ordinary shares, the terms and conditions of which are as described above.

 

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Purchase Option

 

We have sold to EarlyBirdCapital (and/or its designees) an option to purchase up to 440,000 ordinary shares and 400,000 warrants to purchase 200,000 full shares.

 

The purchase option may be exercised for cash or on a cashless basis, at the holder’s option, at any time prior to October 14, 2020. Holders of the purchase option have demand registration rights until October 14, 2020 and “piggy back” registration rights until October 14, 2022. We will bear all fees and expenses attendant to registering the securities issuable upon exercise of the purchase option, other than underwriting commissions, which will be paid for by the holders themselves. The exercise price and number of units issuable upon exercise of the purchase option may be adjusted in circumstances such as in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. However, the purchase option will not be adjusted for issuances of ordinary shares at a prices below its exercise price. We will have no obligation to net cash settle the exercise of the purchase option or the rights or warrants underlying the purchase option. The holder of the purchase option will not be entitled to exercise the purchase option or the warrants underlying the purchase option unless a registration statement covering the securities underlying the purchase option is effective or an exemption from registration is available. If the holder is unable to exercise the purchase option or underlying warrants, the purchase option or warrants, as applicable, will expire worthless.

 

Dividends

 

We have not paid any cash dividends on our ordinary shares to date.

 

Stock Exchange Listing

 

Our ordinary shares are listed on The Nasdaq Capital Market under the symbol “BRQS.”

 

Transfer Agent and Registrar

 

The transfer agent and registrar for our ordinary shares is Continental Stock Transfer & Trust Company. The transfer agent’s address is One State Street, 30th Floor, New York, NY 10004, and its telephone number is (212) 509-4000.

 

SHARES ELIGIBLE FOR FUTURE SALE

 

Future sales of substantial amounts of our ordinary shares, including shares issued upon exercise of outstanding options, in the public market after this offering could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through the sale of our equity securities.

 

Upon the completion of this offering, based on the number of shares outstanding as of March 31, 2018, we will have         ordinary shares outstanding. Of these outstanding shares, all of the         shares sold in this offering will be freely tradable, except that any shares purchased by our affiliates, as that term is defined in Rule 144 under the Securities Act, may only be sold in compliance with the limitations described below.

 

The remaining outstanding ordinary shares will be deemed restricted securities as defined under Rule 144. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or Rule 701 promulgated under the Securities Act, which rules are summarized below. In addition, certain of our shareholders have entered into market standoff agreements with us or lock-up as further described in “— Lock-up Agreements” below, under which they agreed not to sell their shares until certain time or performance metrics have been met. Subject to the provisions of Rule 144 or Rule 701, shares are or will be available for sale in the public market as follows:

 

 

on the date of this prospectus,         ordinary shares (including all ordinary shares sold in this offering and 3,272,761 ordinary shares being registered for resale by the holders pursuant to the resale prospectus included in the registration statement of which this prospectus is a part) are available for sale in the public market, except for the shares purchased by affiliates which are subject to the volume and other restrictions of Rule 144 and those ordinary shares subject to contractual lock-ups;

 

                    shares will be eligible for sale on the earliest of (x) August 18, 2018, (y) the date after the closing of our acquisition of Borqs International by way of merger on which we consummates a liquidation, merger, share exchange or other similar transaction with an unaffiliated third party that results in all of our shareholders having the right to exchange their equity holdings for cash, securities or other property (a “Subsequent Transaction”), and (z) the date on which the closing sale price of our ordinary shares equals or exceeds $12.50 per share (as adjusted for share splits, share dividends, reorganizations and recapitalizations) for any twenty trading days within any trading day period commencing after the closing of our acquisition of Borqs International by way of merger;

 

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  additional shares will become eligible for sale on the earliest of (x) August 18, 2018, and (y) the date after the closing of our acquisition of Borqs International by way of merger on which we consummate a Subsequent Transaction; and

 

  the remainder of the shares will be eligible for sale in the public market from time to time thereafter, subject in some cases to the volume and other restrictions of Rule 144, as described below.

 

Lock-Up Agreements

 

In connection with our acquisition of Borqs International by way of merger, all of our directors, executive officers, representing the holders of substantially all of our the ordinary shares and securities convertible into or exchangeable for our ordinary shares, have agreed not to transfer, assign or sell any of their shares (except to certain permitted transferees) until, (i) with respect to 50% of the shares, the earlier of (x) August 18, 2018 or (y) 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 shares, on August 18, 2018; provided that in either case, the transfer restrictions may be lifted earlier upon our consummation of a Subsequent Transaction.

 

In connection with this offering, certain of our officers, directors, and shareholders have agreed to enter into Lock-up Agreements with the underwriters for a period of 180 days following the date of this prospectus, unless certain conditions are met. See “Underwriting” for more information. As a Participating Stockholder in this offering, Zhengqi has agreed to enter into a Lock-up Agreement for a period of 135 days following the date of this prospectus, with respect to its that portion of the 1,464,938 ordinary shares that are registered in the resale prospectus included in the registration statement of which this prospectus forms a part but not sold in this offering, which Lock-Up Agreement may be waived by Maxim to the extent necessary with respect to any private placements taking place following the closing of this offering and as to which Maxim has been engaged as a placement agent..

 

Rule 144

 

In general, under Rule 144 as currently in effect, a person who is not deemed to have been one of our affiliates for purposes of the Securities Act at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least six months, including the holding period of any prior owner other than our affiliates, is entitled to sell those shares without complying with the manner of sale, volume limitation or notice provisions of Rule 144, subject to compliance with the public information requirements of Rule 144. If such a person has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than our affiliates, then that person is entitled to sell those shares without complying with any of the requirements of Rule 144.

 

In general, under Rule 144, as currently in effect, our affiliates or persons selling shares on behalf of our affiliates are entitled to sell upon expiration of the lock-up agreements described above, within any three-month period beginning 90 days after the date of this prospectus, a number of shares that does not exceed the greater of:

 

  1% of the number of ordinary shares then outstanding, which will equal approximately        shares immediately after this offering; or

 

  The average weekly trading volume of the ordinary shares during the four calendar weeks preceding the filing of a notice on Form 144 with respect to that sale.

 

Sales under Rule 144 by our affiliates or persons selling shares on behalf of our affiliates are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us.

 

Rule 701

 

Rule 701 generally allows a shareholder who purchased ordinary shares pursuant to a written compensatory plan or contract and who is not deemed to have been an affiliate of our company during the immediately preceding 90 days to sell these shares in reliance upon Rule 144, but without being required to comply with the public information and holding period requirements of Rule 144. Rule 701 also permits affiliates of our company to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144.

 

Registration Rights

 

We have granted demand registration rights, rights to participate in offerings that we initiate and Form S-3 registration rights to certain of our shareholders to sell our ordinary shares. For a further description of these rights, see “Certain Relationships and Related Person Transactions”.

 

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TAXATION

 

The following discussion of British Virgin Islands, PRC and United States federal income tax consequences of an investment in our ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this prospectus, all of which are subject to change. This discussion does not deal with all possible tax consequences relating to an investment in our ordinary shares, such as the tax consequences under state, local and other tax laws.

 

British Virgin Islands Taxation

 

The Company and all dividends, interest, rents, royalties, compensation and other amounts paid by the Company to persons who are not resident in the BVI and any capital gains realized with respect to any shares, debt obligations, or other securities of the Company by persons who are not resident in the BVI are exempt from all provisions of the Income Tax Ordinance in the BVI.

 

No estate, inheritance, succession or gift tax, rate, duty, levy or other charge is payable by persons who are not resident in the BVI with respect to any shares, debt obligation or other securities of the Company.

 

All instruments relating to transfers of property to or by the Company and all instruments relating to transactions in respect of the shares, debt obligations or other securities of the Company and all instruments relating to other transactions relating to the business of the Company are exempt from payment of stamp duty in the BVI. This assumes that the Company does not hold an interest in real estate in the BVI.

 

There are currently no withholding taxes or exchange control regulations in the BVI applicable to the Company or its members.

 

People’s Republic of China Taxation  

 

Under the EIT Law, an enterprise established outside the PRC with “de facto management bodies” within the PRC is considered a “resident enterprise” for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. Under the implementation rules to the EIT Law, a “de facto management body” is defined as a body that has material and substantial management and control over the manufacturing and business operations, personnel and human resources, finances and properties of an enterprise.

 

Our PRC subsidiary and PRC consolidated VIE are companies incorporated under PRC law and, as such, are subject to PRC enterprise income tax on their taxable income in accordance with the relevant PRC income tax laws. Pursuant to the EIT Law, which became effective on January 1, 2008 and was amended on February 24, 2017, a uniform 25% enterprise income tax rate is generally applicable to both foreign-invested enterprises and domestic enterprises, except where a special preferential rate applies. The enterprise income tax of a PRC resident enterprise is calculated based on the entity’s global income as determined under PRC tax laws and accounting standards. We are subject to VAT at a rate of 6% on the services we provide, less any deductible VAT we have already paid or borne. We are also subject to surcharges on VAT payments in accordance with PRC law.

 

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In addition, the Circular 82 issued by the SAT in April 2009 specifies that certain offshore incorporated enterprises controlled by PRC enterprises or PRC enterprise groups will be classified as PRC resident enterprises if the following are located or resident in the PRC: senior management personnel and departments that are responsible for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books, company seals, minutes of board meetings and shareholders’ meetings; and half or more of the senior management or directors having voting rights. Further to Circular 82, the SAT issued the Bulletin No. 45, which took effect in September 2011, to provide more guidance on the implementation of Circular 82. Bulletin No. 45 provides for procedures and administration details of determination on resident status and administration on post-determination matters. Borqs Technologies, Inc. is a company incorporated outside the PRC. As a holding company, its key assets are its ownership interests in its subsidiaries, and its key assets are located, and its records (including the resolutions of its board of directors and the resolutions of its shareholders) are maintained, outside the PRC. As such, we do not believe that Borqs Technologies, Inc. meet all of the conditions above or are PRC resident enterprises for PRC tax purposes. For the same reasons, we believe our other entities outside of China are not PRC resident enterprises either. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” There can be no assurance that the PRC government will ultimately take a view that is consistent with us. If the PRC tax authorities determine that our British Virgin Islands holding company is a PRC resident enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. One example is that a 10% withholding tax would be imposed on dividends we pay to our non-PRC enterprise shareholders and with respect to gains derived by our non-PRC enterprise shareholders from transferring our shares and potentially a 20% of withholding tax would be imposed on dividends we pay to our non-PRC individual shareholders and with respect to gains derived by our non-PRC individual shareholders from transferring our shares. See “Risk Factors—Risk Related to Doing Business in China—Under the PRC Enterprise Income Tax Law, we may be classified as a PRC “resident enterprise” for PRC enterprise income tax purposes. Such classification would likely result in unfavorable tax consequences to us and our non-PRC shareholders and has a material adverse effect on our results of operations and the value of your investment.”

 

As a British Virgin Islands holding company, our Hong Kong subsidiary may receive dividends from our PRC subsidiaries. The EIT Law and its implementing rules provide that dividends paid by a PRC entity to a non-resident enterprise for income tax purposes is subject to PRC withholding tax at a rate of 10%, subject to reduction by an applicable tax treaty with China. 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, pursuant to which, 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 that supported by various types of documents including the articles of association, financial statements, records of cash movements, board meeting minutes, board resolutions, staffing and materials, relevant expenditures, functions and risk assumption as well as relevant contracts and other information. In August 2015, the SAT promulgated the Administrative Measures for Non-Resident Taxpayers to Enjoy Treatments under Tax Treaties, or SAT Circular 60, which became effective on November 1, 2015. SAT Circular 60 provides that non-resident enterprises are not required to obtain pre-approval from the relevant tax authority in order to enjoy the reduced withholding tax rate. Instead, non-resident enterprises may, if they determine by self-assessment that the prescribed criteria to enjoy the tax treaty benefits are met, directly apply for the reduced withholding tax rate, and file necessary forms and supporting documents when performing tax filings, which will be subject to post-filing examinations by the relevant tax authorities. 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 Treaty 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.

 

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On February 3, 2015, the SAT issued a Public Notice Regarding Certain Enterprise Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises, or Public Notice 7, 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 introduces safe harbor scenarios applicable to internal group restructurings. However, it also brings challenges to both the foreign transferor and transferee of the indirect transfer as they have to make self-assessment on whether the transaction should be subject to PRC tax and to file or withhold the PRC tax accordingly. Although it appears that Public Notice 7 was not intended to apply to share transfers of publicly traded companies if the purchase of the shares and the sale of the shares both take place in open-market transactions, there is uncertainty as to the application of Public Notice 7. As a result, we and our non-resident investors may be at risk of being required to file a return and being taxed under Public Notice 7, and we may be required to expend valuable resources to comply with Public Notice 7 or to establish that we should not be taxed under Public Notice 7.

 

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 repealed certain provisions of Public Notice 7. Pursuant to Announcement 37, the income from a property transfer, as stipulated in the second item under Article 19 of the EIT Law, shall include the income derived from transferring equity investment assets such as stock equity. The balance of deducting the equity’s net value from the total income from the equity transfer shall be taxable income from the equity transfer.

 

U.S. Federal Income Taxation

 

General

 

The following are the material U.S. federal income tax consequences of the acquisition, ownership and disposition of the ordinary shares covered by this prospectus. As used in this discussion, references to “we,” “us” or “our” refer to Borqs Technologies, Inc.

 

The discussion below of the U.S. federal income tax consequences to “U.S. Holders” will apply to a beneficial owner of the ordinary shares that is for U.S. federal income tax purposes:

 

an individual citizen or resident of the United States;

 

  a corporation (or other entity treated as a corporation) that is created or organized (or treated as created or organized) in or under the laws of the United States, any state thereof or the District of Columbia;

 

  an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or

 

  a trust if (i) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust, or (ii) it has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

 

A beneficial owner of the ordinary shares that is described above is referred to herein as a “U.S. Holder.” If a beneficial owner of the ordinary shares is not described as a U.S. Holder and is not an entity treated as a partnership or other pass-through entity for U.S. federal income tax purposes, such owner will be considered a “Non-U.S. Holder.” The material U.S. federal income tax consequences applicable specifically to Non-U.S. Holders are described below under the heading “Non-U.S. Holders.”

 

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This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), its legislative history, Treasury regulations promulgated thereunder, published rulings and court decisions, all as currently in effect. These authorities are subject to change or differing interpretations, possibly on a retroactive basis.

 

This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular holder based on such holder’s individual circumstances. In particular, this discussion considers only holders that purchase ordinary shares pursuant to this offering and own and hold the ordinary shares as capital assets within the meaning of Section 1221 of the Code, and does not address the potential application of the alternative minimum tax or the U.S. federal income tax consequences to holders that are subject to special rules, including:

 

  financial institutions or financial services entities;

 

  broker-dealers;

 

  persons that are subject to the mark-to-market accounting rules under Section 475 of the Code;

 

  tax-exempt entities;

 

  governments or agencies or instrumentalities thereof;

 

  insurance companies;

 

  regulated investment companies;

 

  real estate investment trusts;

 

  certain expatriates or former long term residents of the United States;

 

  persons that actually or constructively own 5% or more of our voting shares (including as a result of ownership of the ordinary shares);

 

  persons that acquired the ordinary shares pursuant to an exercise of employee options, in connection with employee incentive plans or otherwise as compensation;

 

  persons that hold the ordinary shares as part of a straddle, constructive sale, hedging, conversion or other integrated transaction;

 

  persons whose functional currency is not the U.S. dollar;

 

  passive foreign investment companies; or

 

  controlled foreign corporations.

  

This discussion does not address any aspect of U.S. federal non-income tax laws, such as gift or estate tax laws, or state, local or non-U.S. tax laws or, except as discussed herein, any tax reporting obligations applicable to a holder of the ordinary shares. Additionally, this discussion does not consider the tax treatment of partnerships or other pass-through entities or persons who hold the ordinary shares through such entities. If a partnership (or other entity classified as a partnership for U.S. federal income tax purposes) is the beneficial owner of the ordinary shares, the U.S. federal income tax treatment of a partner in the partnership generally will depend on the status of the partner and the activities of the partnership. This discussion also assumes that any distribution made (or deemed made) to a holder in respect of the ordinary shares and any consideration received (or deemed received) by a holder in connection with the sale or other disposition of the ordinary shares will be in U.S. dollars.

 

We have not sought, and will not seek, a ruling from the Internal Revenue Service, (the “IRS”), or an opinion of counsel as to any U.S. federal income tax consequence described herein. The IRS may disagree with the description herein, and its determination may be upheld by a court. Moreover, there can be no assurance that future legislation, regulations, administrative rulings or court decisions will not adversely affect the accuracy of the statements in this discussion.

 

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EACH PROSPECTIVE INVESTOR IN OUR ORDINARY SHARES IS URGED TO CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO SUCH INVESTOR OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS AND ANY APPLICABLE TAX TREATIES.

 

U.S. Holders

 

Taxation of Cash Distributions Paid on Ordinary Shares

 

Subject to the passive foreign investment company (“PFIC”) rules discussed below, a U.S. Holder generally will be required to include in gross income as ordinary income the amount of any cash dividend paid on the ordinary shares. A cash distribution on the ordinary shares generally will be treated as a dividend for U.S. federal income tax purposes to the extent the distribution is paid out of our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes). Such dividend generally will not be eligible for the dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations. The portion of such cash distribution, if any, in excess of such earnings and profits will be applied against and reduce (but not below zero) the U.S. Holder’s adjusted tax basis in the ordinary shares. Any remaining excess generally will be treated as gain from the sale or other taxable disposition of such ordinary shares.

 

With respect to non-corporate U.S. Holders, any such cash dividends may be subject to U.S. federal income tax at the lower applicable regular long term capital gains tax rate (see “—Taxation on the Disposition of Ordinary Shares” below) provided that (a) the ordinary shares are readily tradable on an established securities market in the United States or, in the event we are deemed to be a PRC “resident enterprise” under the EIT Law, we are eligible for the benefits of the Agreement between the Government of the United States of America and the Government of the People’s Republic of China for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income (the “U.S.-PRC Tax Treaty”), (b) we are not a PFIC, as discussed below, for either the taxable year in which the dividend was paid or the preceding taxable year, and (c) certain holding period requirements are met. Therefore, if the ordinary shares are not readily tradable on an established securities market in the United States, and we are not eligible for the benefits of the U.S. – PRC Tax Treaty, then cash dividends paid by us to non-corporate U.S. Holders will not be subject to U.S. federal income tax at the lower regular long term capital gains tax rate. Under published IRS authority, ordinary shares are considered for purposes of clause (a) above to be readily tradable on an established securities market in the United States only if they are listed on certain exchanges, which presently include Nasdaq. There can be no assurance that the ordinary shares will continue to be listed and traded on Nasdaq in future periods subsequent to this offering. U.S. Holders should consult their own tax advisors regarding the availability of the lower rate for any cash dividends paid with respect to the ordinary shares.

 

If a PRC income tax applies to any cash dividends paid to a U.S. Holder on the ordinary shares, such tax may be treated as a foreign tax eligible for a deduction from such holder’s U.S. federal taxable income or a foreign tax credit against such holder’s U.S. federal income tax liability (subject to applicable conditions and limitations). In addition, if such PRC tax applies to any such dividends, such U.S. Holder may be entitled to certain benefits under the U.S.-PRC Tax Treaty, if such holder is considered a resident of the United States for purposes of, and otherwise meets the requirements of, the U.S.-PRC Tax Treaty. U.S. Holders should consult their own tax advisors regarding the deduction or credit for any such PRC tax and their eligibility for the benefits of the U.S.-PRC Tax Treaty.

 

Taxation on the Disposition of Ordinary Shares

 

Upon a sale or other taxable disposition of the ordinary shares, and subject to the PFIC rules discussed below, a U.S. Holder generally will recognize capital gain or loss in an amount equal to the difference between the amount realized and the U.S. Holder’s adjusted tax basis in the ordinary shares.

 

The regular U.S. federal income tax rate on capital gains recognized by U.S. Holders generally is the same as the regular U.S. federal income tax rate on ordinary income, except that long term capital gains recognized by non-corporate U.S. Holders generally are subject to U.S. federal income tax at a maximum regular rate of 20%. Capital gain or loss will constitute long term capital gain or loss if the U.S. Holder’s holding period for the ordinary shares exceeds one year. The deductibility of capital losses is subject to various limitations.

 

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If a PRC income tax applies to any gain from the disposition of the ordinary shares by a U.S. Holder, such tax may be treated as a foreign tax eligible for a deduction from such holder’s U.S. federal taxable income or a foreign tax credit against such holder’s U.S. federal income tax liability (subject to applicable conditions and limitations). In addition, if such PRC tax applies to any such gain, such U.S. Holder may be entitled to certain benefits under the U.S.-PRC Tax Treaty, if such holder is considered a resident of the United States for purposes of, and otherwise meets the requirements of, the U.S.-PRC Tax Treaty. U.S. Holders should consult their own tax advisors regarding the deduction or credit for any such PRC tax and their eligibility for the benefits of the U.S.-PRC Tax Treaty.

 

Additional Taxes

 

U.S. Holders that are individuals, estates or trusts and whose income exceeds certain thresholds generally will be subject to a 3.8% Medicare contribution tax on unearned income, including, without limitation, dividends on, and gains from the sale or other taxable disposition of, the ordinary shares, subject to certain limitations and exceptions. Under applicable regulations, in the absence of a special election, such unearned income generally would not include income inclusions under the qualified electing fund (“QEF”), rules discussed below under “Passive Foreign Investment Company Rules,” but would include distributions of earnings and profits from a QEF. U.S. Holders should consult their own tax advisors regarding the effect, if any, of such tax on their ownership and disposition of the ordinary shares.

 

Passive Foreign Investment Company Rules

 

A foreign (i.e., non-U.S.) corporation will be a PFIC if either (a) at least 75% of its gross income in a taxable year of the foreign corporation, including its pro rata share of the gross income of any corporation in which it is considered to own at least 25% of the shares by value, is passive income, or (b) at least 50% of its assets in a taxable year of the foreign corporation, ordinarily determined based on fair market value and averaged quarterly over the year, including its pro rata share of the assets of any corporation in which it is considered to own at least 25% of the shares by value, are held for the production of, or produce, passive income. Passive income generally includes dividends, interest, rents and royalties (other than certain rents or royalties derived from the active conduct of a trade or business), and gains from the disposition of passive assets.

 

If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. Holder of the ordinary shares, and the U.S. Holder did not make a timely QEF election for our first taxable year as a PFIC in which the U.S. Holder held (or was deemed to hold) the ordinary shares, a QEF election along with a purging election, or a mark-to-market election, each as described below, such holder generally will be subject to special rules for regular U.S. federal income tax purposes with respect to:

 

  any gain recognized by the U.S. Holder on the sale or other disposition of its ordinary shares; and

 

any “excess distribution” made to the U.S. Holder (generally, any distributions to such U.S. Holder during a taxable year of the U.S. Holder that are greater than 125% of the average annual distributions received by such U.S. Holder in respect of the ordinary shares during the three preceding taxable years of such U.S. Holder or, if shorter, such U.S. Holder’s holding period for the ordinary shares).

 

Under these rules,

 

the U.S. Holder’s gain or excess distribution will be allocated ratably over the U.S. Holder’s holding period for the ordinary shares;

 

the amount allocated to the U.S. Holder’s taxable year in which the U.S. Holder recognized the gain or received the excess distribution or to the period in the U.S. Holder’s holding period before the first day of our first taxable year in which we qualified as a PFIC will be taxed as ordinary income;

 

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the amount allocated to other taxable years (or portions thereof) of the U.S. Holder and included in its holding period will be taxed at the highest tax rate in effect for that year and applicable to the U.S. Holder; and

 

the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such other taxable year of the U.S. Holder.

 

We have not made a determination as to whether we would be classified as a “passive foreign investment company,” or PFIC, for our preceding taxable year nor can we assure you that we will not be a PFIC for our current taxable year or any future taxable year. Depending on the amount of cash or cash equivalents we currently hold and the amount of cash we raise in this offering, which are generally treated as passive assets, and because the calculation of the value of our assets may be based in part on the value of our ordinary shares, which is likely to fluctuate, we may be a PFIC for any taxable year.

 

In general, if we are determined to be a PFIC, a U.S. Holder may avoid the PFIC tax consequences described above with respect to the ordinary shares by making a timely QEF election (or a QEF election along with a purging election). Pursuant to the QEF election, a U.S. Holder will be required to include in income its pro rata share of our net capital gains (as long term capital gain) and other earnings and profits (as ordinary income), on a current basis, in each case whether or not distributed, in the taxable year of the U.S. Holder in which or with which our taxable year ends if we are treated as a PFIC for that taxable year. A U.S. Holder may make a separate election to defer the payment of taxes on undistributed income inclusions under the QEF rules, but if deferred, any such taxes will be subject to an interest charge.

 

The QEF election is made on a shareholder-by-shareholder basis and, once made, can be revoked only with the consent of the IRS. A U.S. Holder generally makes a QEF election by attaching a completed IRS Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund), including the information provided in a PFIC annual information statement, to a timely filed U.S. federal income tax return for the taxable year to which the election relates. Retroactive QEF elections generally may be made only by filing a protective statement with such return and if certain other conditions are met or with the consent of the IRS.

 

In order to comply with the requirements of a QEF election, a U.S. Holder must receive certain information from us. Upon request from a U.S. Holder, we will endeavor to provide to the U.S. Holder no later than 90 days after the request such information as the IRS may require, including a PFIC annual information statement, in order to enable the U.S. Holder to make and maintain a QEF election. However, there is no assurance that we will have timely knowledge of our status as a PFIC in the future or of the required information to be provided.

 

If a U.S. Holder has made a QEF election with respect to the ordinary shares, and the special tax and interest charge rules do not apply to such ordinary shares (because of a timely QEF election for our first taxable year as a PFIC in which the U.S. Holder holds (or is deemed to hold) such ordinary shares or a QEF election, along with a purge of the PFIC taint pursuant to a purging election, as described below), any gain recognized on the sale or other taxable disposition of such ordinary shares generally will be taxable as capital gain and no interest charge will be imposed. As discussed above, for regular U.S. federal income tax purposes, U.S. Holders of a QEF generally are currently taxed on their pro rata shares of the QEF’s earnings and profits, whether or not distributed. In such case, a subsequent distribution of such earnings and profits that were previously included in income generally should not be taxable as a dividend to such U.S. Holders. The adjusted tax basis of a U.S. Holder’s ordinary shares in a QEF will be increased by amounts that are included in income, and decreased by amounts distributed but not taxed as dividends, under the above rules. Similar basis adjustments apply to property if by reason of holding such property the U.S. Holder is treated under the applicable attribution rules as owning ordinary shares in a QEF.

 

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Although a determination as to our PFIC status will be made annually, an initial determination that we are a PFIC generally will apply for subsequent years to a U.S. Holder who held the ordinary shares while we were a PFIC, whether or not we meet the test for PFIC status in those subsequent years. A U.S. Holder who makes the QEF election discussed above for our first taxable year as a PFIC in which the U.S. Holder holds (or is deemed to hold) the ordinary shares, however, will not be subject to the PFIC tax and interest charge rules discussed above with respect to such ordinary shares. In addition, such U.S. Holder will not be subject to the QEF inclusion regime with respect to such ordinary shares for any of our taxable years that end within or with a taxable year of the U.S. Holder and in which we are not a PFIC. On the other hand, if the QEF election is not effective for each of our taxable years in which we are a PFIC and during which the U.S. Holder holds (or is deemed to hold) the ordinary shares, the PFIC rules discussed above will continue to apply to such ordinary shares unless the holder files on a timely filed U.S. federal income tax return (including extensions) a QEF election and a “purging election” to recognize under the rules of Section 1291 of the Code any gain that it would otherwise recognize if the U.S. Holder sold the ordinary shares for their fair market value on the “qualification” date. The qualification date is the first day of our tax year in which we qualify as a QEF with respect to such U.S. Holder. The purging election can only be made if such U.S. Holder held the ordinary shares on the qualification date. A purging election generally creates a deemed sale of such ordinary shares at their fair market value. The gain recognized by the purging election generally will be subject to the special tax and interest charge rules treating the gain as an excess distribution, as described above. As a result of the purging election, the U.S. Holder generally will increase the adjusted tax basis in its ordinary shares by the amount of gain recognized and will also have a new holding period in its ordinary shares for purposes of the PFIC rules.

 

Alternatively, if a U.S. Holder, at the close of its taxable year, owns ordinary shares in a PFIC that are treated as marketable stock, the U.S. Holder may make a mark-to-market election with respect to such ordinary shares for such taxable year. If the U.S. Holder makes a valid mark-to-market election for the first taxable year of the U.S. Holder in which the U.S. Holder holds (or is deemed to hold) the ordinary shares and for which we are determined to be a PFIC, such holder generally will not be subject to the PFIC rules described above with respect to its ordinary shares as long as such ordinary shares continue to be treated as marketable stock. Instead, in general, the U.S. Holder will include as ordinary income each year that we are treated as a PFIC the excess, if any, of the fair market value of its ordinary shares at the end of its taxable year over the adjusted tax basis in its ordinary shares. The U.S. Holder also will be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted tax basis of its ordinary shares over the fair market value of its ordinary shares at the end of its taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). The U.S. Holder’s adjusted tax basis in its ordinary shares will be adjusted to reflect any such income or loss amounts, and any further gain recognized on a sale or other taxable disposition of the ordinary shares in a taxable year in which we are treated as a PFIC will be treated as ordinary income. Special tax rules may also apply if a U.S. Holder makes a mark-to-market election for a taxable year after the first taxable year in which the U.S. Holder holds (or is deemed to hold) the ordinary shares and for which we are treated as a PFIC.

 

The mark-to-market election is available only for stock that is regularly traded on a national securities exchange that is registered with the Securities and Exchange Commission, including Nasdaq, or on a foreign exchange or market that the IRS determines has rules sufficient to ensure that the market price represents a legitimate and sound fair market value. There can be no assurance that the ordinary shares will continue to be listed and traded on Nasdaq in future periods subsequent to this offering. U.S. Holders should consult their own tax advisors regarding the availability and tax consequences of a mark-to-market election with respect to the ordinary shares under their particular circumstances.

 

If we are a PFIC and, at any time, have a foreign subsidiary that is classified as a PFIC, a U.S. Holder of the ordinary shares generally should be deemed to own a portion of the shares of such lower-tier PFIC, and generally could incur liability for the deferred tax and interest charge described above if we receive a distribution from, or dispose of all or part of our interest in, or the U.S. Holder were otherwise deemed to have disposed of an interest in, the lower-tier PFIC. Upon request, we will endeavor to cause any lower-tier PFIC to provide to a U.S. Holder no later than 90 days after the request the information that may be required to make or maintain a QEF election with respect to the lower-tier PFIC. However, there is no assurance that we will have timely knowledge of the status of any such lower-tier PFIC or that we will be able to cause the lower-tier PFIC to provide the required information. A mark-to-market election generally would not be available with respect to such a lower-tier PFIC. U.S. Holders are urged to consult their own tax advisors regarding the tax issues raised by lower-tier PFICs.

 

A U.S. Holder that owns (or is deemed to own) ordinary shares in a PFIC during any taxable year of the U.S. Holder may have to file an IRS Form 8621 (whether or not a QEF election or mark-to-market election is or has been made) with such U.S. Holder’s U.S. federal income tax return and provide such other information as may be required by the U.S. Treasury Department.

 

The rules dealing with PFICs and with the QEF and mark-to-market elections are very complex and are affected by various factors in addition to those described above. Accordingly, U.S. Holders of the ordinary shares should consult their own tax advisors concerning the application of the PFIC rules to the ordinary shares under their particular circumstances.

 

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Non-U.S. Holders

 

Cash dividends paid or deemed paid to a Non-U.S. Holder with respect to the ordinary shares generally will not be subject to U.S. federal income tax unless such dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains or maintained in the United States).

 

In addition, a Non-U.S. Holder generally will not be subject to U.S. federal income tax on any gain attributable to a sale or other taxable disposition of the ordinary shares unless such gain is effectively connected with its conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment or fixed base that such holder maintains or maintained in the United States) or the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of such sale or other disposition and certain other conditions are met (in which case, such gain from U.S. sources generally is subject to U.S. federal income tax at a 30% rate or a lower applicable tax treaty rate).

 

Cash dividends and gains that are effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains or maintained in the United States) generally will be subject to regular U.S. federal income tax at the same regular U.S. federal income tax rates as applicable to a comparable U.S. Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S. federal income tax purposes, may also be subject to an additional branch profits tax at a 30% rate or a lower applicable tax treaty rate.

 

Backup Withholding and Information Reporting

 

In general, information reporting for U.S. federal income tax purposes should apply to cash distributions made on the ordinary shares within the United States to a U.S. Holder (other than an exempt recipient) and to the proceeds from sales and other dispositions of the ordinary shares by a U.S. Holder (other than an exempt recipient) to or through a U.S. office of a broker. Payments made (and sales and other dispositions effected at an office) outside the United States will be subject to information reporting in limited circumstances. In addition, certain information concerning a U.S. Holder’s adjusted tax basis in its ordinary shares and adjustments to that tax basis and whether any gain or loss with respect to such ordinary shares is long-term or short-term also may be required to be reported to the IRS, and certain holders may be required to file an IRS Form 8938 (Statement of Specified Foreign Financial Assets) to report their interest in the ordinary shares.

 

Moreover, backup withholding of U.S. federal income tax, at a current rate of 24%, generally will apply to cash dividends paid on the ordinary shares to a U.S. Holder (other than an exempt recipient) and the proceeds from sales and other dispositions of the ordinary shares by a U.S. Holder (other than an exempt recipient), in each case who:

 

  fails to provide an accurate taxpayer identification number;

 

  is notified by the IRS that backup withholding is required; or

 

  in certain circumstances, fails to comply with applicable certification requirements.

 

A Non-U.S. Holder generally may eliminate the requirement for information reporting and backup withholding by providing certification of its foreign status, under penalties of perjury, on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption.

 

Backup withholding is not an additional tax. Rather, the amount of any backup withholding will be allowed as a credit against a U.S. Holder’s or a Non-U.S. Holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required information is timely furnished to the IRS. Holders are urged to consult their own tax advisors regarding the application of backup withholding and the availability of and procedures for obtaining an exemption from backup withholding in their particular circumstances.

 

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THE PRECEDING DISCUSSION OF U.S. FEDERAL TAX CONSIDERATIONS IS FOR GENERAL INFORMATION PURPOSES ONLY. IT IS NOT TAX ADVICE. EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR REGARDING THE PARTICULAR U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF OUR ORDINARY SHARES, INCLUDING THE CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAWS.

 

UNDERWRITERS

 

Subject to the terms and conditions of the underwriting agreement, the underwriters named below, through their representative, Maxim Group LLC, located at 405 Lexington Avenue, New York, NY 10174, referred to herein as Maxim, have severally agreed to purchase from the Participating Stockholders and us on a firm commitment basis the following respective number of ordinary shares at a public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus:

 

Underwriter    

Number of Shares

 
Maxim Group LLC        
Total        

 

The underwriting agreement provides that the obligations of the underwriters to purchase all of the ordinary shares being offered to the public is subject to specific conditions, including the absence of any material adverse change in our business or in the financial markets and the receipt of certain legal opinions, certificates and letters from us, our counsel and the independent auditors. Subject to the terms of the underwriting agreement, the underwriters will purchase all of the ordinary shares being offered to the public, other than those covered by the over-allotment option described below, if any of these shares are purchased. The Participating Stockholders in this offering are Zhengqi International Holding Limited, EarlyBird Capital, Inc. and Ninepoint Capital LLC.

 

Over-Allotment Option

 

The Participating Stockholders and the Company have granted to the underwriters an option, exercisable not later than 45 days after the effective date of the registration statement, to purchase up to        additional ordinary shares (equivalent to 15% of the total number of ordinary shares sold in this offering) at the public offering price less the underwriting discounts and commissions set forth on the cover of this prospectus. The underwriters may exercise this option only to cover over-allotments made in connection with the sale of the ordinary shares in this offering. To the extent that the underwriters exercise this option, each of the underwriters will become obligated, subject to conditions, to purchase approximately the same percentage of these additional ordinary shares as the number of ordinary shares to be purchased by it in the above table bears to the total number of ordinary shares offered by this prospectus. We will be obligated, pursuant to the option, to sell these additional ordinary shares to the underwriters to the extent the option is exercised. If any additional ordinary shares are purchased, the underwriters will offer the additional shares on the same terms as those on which the other shares are being offered hereunder.

 

Commission and Expenses

 

The underwriting discounts and commissions are 7.0% of the public offering price. The Participating Stockholders and the Company have agreed to pay the underwriters the discounts and commissions set forth below, assuming either no exercise or full exercise by the underwriters of the underwriters’ over-allotment option. We have been advised by Maxim that the underwriters propose to offer the ordinary shares to the public at the public offering price set forth on the cover of this prospectus and to dealers at a price that represents a concession not in excess of $       per share under the public offering price of $       per share. The underwriters may allow, and these dealers may re-allow, a concession of not more than $       per share to other dealers. After the public offering, the representative of the underwriters may change the offering price and other selling terms.

 

The following table shows the underwriting discounts and commissions payable to the underwriters by us and the Participating Stockholders in connection with this offering:

 

    Fee Per
Share (1)
    Total Without Exercise of Over-Allotment     Total With Exercise of Over-Allotment  
Public offering price   $            $             $             
Discount paid by us   $     $     $  
Discount paid by the Participating Stockholders   $     $     $  
Expenses payable by us   $     $     $  
Expenses payable by the Participating Stockholders   $     $     $  
Proceeds, before expenses, to us   $     $     $  
Proceeds, before expenses, to the Participating Stockholders   $     $     $  

  

 

(1) The fees do not include the Representative’s Warrants or expense reimbursement as described below.

 

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In addition, we and the Participating Stockholders have agreed to reimburse Maxim for up to $200,000 of out-of-pocket expenses it incurs in connection with this offering, including, but not limited to, filing offering materials with the Financial Industry Regulatory Authority, or FINRA, background checks, “road show” expenses, costs of book-building, prospectus tracking and compliance software and the fees and disbursements of its counsel.

 

We estimate that expenses payable by the Participating Stockholders and us in connection with the offering of our ordinary shares, other than the underwriting discounts and commissions and the counsel fees and disbursement reimbursement provisions referred to above, will be approximately $917,779.

 

Representative’s Warrants

 

We have also agreed to issue to Maxim (or its permitted assignees) the warrants to purchase a number of our ordinary shares equal to an aggregate of 7% of the total number of ordinary shares sold in this offering (“Representative’s Warrants”). The Representative’s Warrants will have an exercise price equal to 120% of the offering price of the ordinary shares sold in this offering and may be exercised on a cashless basis. The Representative’s Warrants are exercisable commencing 180 days after the effective date of the registration statement related to this offering, and will be exercisable for three years after the effective date. The Representative’s Warrants are not redeemable by us. We have agreed to a one time demand registration of the ordinary shares underlying the Representative’s Warrants for a period of three years from the effective date of the registration statement related to this offering. The Representative’s Warrants also provide for unlimited “piggyback” registration rights at our expense with respect to the underlying ordinary shares during the three year period commencing from the effective date of the registration statement related to this offering. The Representative’s Warrants and the ordinary shares underlying the Representative’s Warrants, have been deemed compensation by FINRA and are therefore subject to a 180-day lock-up pursuant to Rule 5110(g)(1) of FINRA. The underwriters (or permitted assignees under the Rule) may not sell, transfer, assign, pledge or hypothecate the Representative’s Warrants or the securities underlying the Representative’s Warrants, nor will they engage in any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of the Representative’s Warrants or the underlying securities for a period of 12 months from the effective date of this offering, except to any FINRA member participating in the offering and their bona fide officers or partners. The Representative’s Warrants will provide for adjustment in the number and price of such Representative’s Warrants (and the ordinary shares underlying such Representative’s Warrants) in the event of recapitalization, merger or other structural transaction to prevent mechanical dilution or in the event of a future financing undertaken by us.

 

Indemnification

 

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the underwriting agreement, or to contribute to payments that the underwriters may be required to make in respect of those liabilities.

 

Lock-up Agreements

 

Certain of our directors and executive officers, and shareholders have agreed that, for a period of 180 days after the date of this prospectus, subject to certain limited exceptions, they will not directly or indirectly, without the prior written consent of the representative of the underwriters, (1) offer, sell, agree to offer or sell, solicit offers to purchase, grant any call option or purchase any put option with respect to, pledge, encumber, assign, borrow or otherwise dispose of or transfer any ordinary shares, warrant to purchase ordinary shares or any other security of the company or any other entity that is convertible into, or exercisable or exchangeable for, ordinary shares or any other equity security of the company owned beneficially or otherwise as of the date of this prospectus, which we refer to as relevant securities, or otherwise publicly disclose the intention to do so, (2) establish or increase any “put equivalent position” or liquidate or decrease any “call equivalent position” (in each case within the meaning of Section 16 of the Exchange Act) with respect to any relevant security or otherwise enter into any swap, derivative or other transaction or arrangement that transfers to another, in whole or in part, any economic consequence of ownership of relevant securities, whether or not such transaction is to be settled by the delivery of relevant securities, other securities, cash or other consideration, or otherwise publicly disclose the intention to do so, (3) file or participate in the filing with the SEC of any registration statement or circulate or participate in the circulation of any preliminary or final prospectus or other disclosure document, in each case with respect to any proposed offering or sale of relevant securities or (4) exercise any rights to require registration with the SEC of any proposed offering or sale of relevant securities. In addition, the underwriting agreement provides that we will not, for a period of six months following the closing of the offering of the ordinary shares, offer, sell or distribute any of our securities, without the prior written consent of Maxim. Zhengqi, one of the Participating Stockholders, has agreed to enter into a lock-up agreement for a period of 135 days following the date of this prospectus with respect to its that portion of the ordinary shares that are registered pursuant to the resale prospectus included in the registration statement of which this prospectus forms a part but are not sold in this offering, which Lock-Up Agreement may be waived by Maxim to the extent necessary with respect to any private placements taking place following the closing of this offering and as to which Maxim has been engaged as a placement agent.

 

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Price Stabilization, Short Positions and Penalty Bids

 

In connection with the offering the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Exchange Act:

 

  Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.

 

  Over-allotment involves sales by the underwriters of ordinary shares in excess of the number of ordinary shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of ordinary shares over-allotted by the underwriters is not greater than the number of ordinary shares that they may purchase in the over-allotment option. In a naked short position, the number of ordinary shares involved is greater than the number of ordinary shares in the over-allotment option. Maxim may close out any covered short position by either exercising their over-allotment option and/or purchasing ordinary shares in the open market.

 

  Syndicate covering transactions involve purchases of ordinary shares in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of ordinary shares to close out the short position, Maxim will consider, among other things, the price of ordinary shares available for purchase in the open market as compared to the price at which they may purchase ordinary shares through the over-allotment option. If the underwriters sell more ordinary shares than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying ordinary shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the ordinary shares in the open market after pricing that could adversely affect investors who purchase in the offering.

 

  Penalty bids permit Maxim to reclaim a selling concession from a syndicate member when the ordinary shares originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

 

These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our ordinary shares or preventing or retarding a decline in the market price of our securities. As a result, the price of our ordinary shares may be higher than the price that might otherwise exist in the open market.

 

Neither we nor the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our ordinary shares. In addition, neither we nor the underwriters make any representation that the underwriters will engage in these transactions or that any transaction, if commenced, will not be discontinued without notice.

 

Electronic Distribution

 

This prospectus in electronic format may be made available on websites or through other online services maintained by Maxim or by its affiliates. Other than this prospectus in electronic format, the information on Maxim’s website and any information contained in any other websites maintained by it is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or Maxim in its capacity as an underwriter, and should not be relied upon by investors.

 

Other Terms

 

In addition, we have agreed to grant to Maxim, upon the consummation of an offering of at least $15 million in gross proceeds, the right of first refusal to act as a lead managing underwriter and book runner or minimally as a co-lead manager and co-book runner and/or co-lead placement agent with at least 80% of the economics for any and all future public and private equity, equity-linked or debt (excluding commercial bank debt) offerings of the Company or any successor to or any subsidiary of the Company, for a period of twelve (12) months after the commencement of sales of this offering. Zhengqi and the other Participating Stockholders have also engaged Maxim to act as a placement agent in connection with potential private placements of shares held by them following the offering.

 

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Offers Outside the United States

 

Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the ordinary shares offered by this prospectus in any jurisdiction where action for that purpose is required. The ordinary shares offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such ordinary shares be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any ordinary shares offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.

 

LEGAL MATTERS

 

Maples and Calder, Hong Kong, will pass upon the validity of the issuance of the ordinary shares offered by this prospectus. Loeb & Loeb LLP, New York, New York is representing the underwriters in this offering.

 

EXPERTS

 

The consolidated balance sheets of Borqs Technologies, Inc. at 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, appearing in this prospectus and registration statement have been audited by Ernst & Young Hua Ming LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

 

WHERE YOU CAN FIND ADDITIONAL INFORMATION

 

We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the ordinary shares offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement, some items of which are contained in exhibits to the registration statement as permitted by the rules and regulations of the SEC. For further information with respect to us and our ordinary shares, we refer you to the registration statement, including the exhibits and the consolidated financial statements and notes filed as a part of the registration statement. Statements contained in this prospectus concerning the contents of any contract or any other document are not necessarily complete. If a contract or document has been filed as an exhibit to the registration statement, please see the copy of the contract or document that has been filed. Each statement in this prospectus relating to a contract or document filed as an exhibit is qualified in all respects by the filed exhibit. The exhibits to the registration statement should be reviewed for the complete contents of these contracts and documents. A copy of the registration statement, including the exhibits and the financial statements and notes filed as a part of the registration statement, may be inspected without charge at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from the SEC upon the payment of fees prescribed by it. You may call the SEC at 1-800-SEC-0330 for more information on the operation of the public reference facilities. The SEC maintains a website at http://www.sec.gov that contains reports, proxy and information statements and other information regarding companies that file electronically with it.

 

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BORQS TECHNOLOGIES, INC.

 

INDEX

 

  Page
   
Consolidated Financial Statements for the Years Ended December 31, 2016 and 2017  
   
Report of Independent Registered Public Accounting Firm F-2
   
Consolidated Balance Sheets as of December 31, 2016 and 2017 F-3 - F-6
   
Consolidated Statements of Operations for the Years Ended December 31, 2015, 2016 and 2017 F-7
   
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2015, 2016 and 2017 F-8
   
Consolidated Statements of Shareholders’ (Deficit) Equity for the Years Ended December 31, 2015, 2016 and 2017 F-9 - F-11
   
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015,  2016 and 2017 F-12 - F-13
   
Notes to the Consolidated Financial Statements F-14 - F-57

 

Unaudited Condensed Consolidated Financial Statements for the Three Months Ended March 31, 2017 and 2018    
     
Condensed Consolidated Balance Sheets as of December 31, 2017 and March 31, 2018   F-58 - F-61
     
Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2017 and 2018   F- 6 2
     
Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2017 and 2018   F-63
     
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2018   F-64
     
Notes to the Unaudited Condensed Consolidated Financial Statements   F-65

  

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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

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

  F- 9  

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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, 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.

 

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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.

 

  F- 12  

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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.

 

  F- 13  

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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.

 

  F- 14  

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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.

 

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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.

 

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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:

 

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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  

 

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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 )

  

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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.

 

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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

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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  

 

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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  


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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.

 

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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.

 

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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.

 

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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.

 

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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  

 

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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.

 

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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.

 

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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 )

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

 

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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     -  

 

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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.

 

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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  

 

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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.

 

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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  

 

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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  

 

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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  

 

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BORQS TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

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

 

          As of December 31,     As of March 31,  
    Note     2017     2018  
          US$     US$  
                (Unaudited)  
ASSETS                  
Current assets:                  
Cash and cash equivalents             13,060       3,026  
Restricted cash             3,459       21  
Accounts receivable             65,720       39,856  
Receivable from Mobile Virtual Network Operator (“MVNO”) franchisees             3,514       3,646  
Inventories             17,031       20,784  
Deferred cost of revenues             507       751  
Prepaid and other current assets     (3)     16,240       22,846  
                         
Total current assets             119,531       90,930  
                         
Non-current assets:                        
Property and equipment, net     (4)     1,362       1,316  
Intangible assets, net     (5)     20,004       20,588  
Goodwill     (6)     736       765  
Long-term investment     (7)     -       11,662  
Deferred tax assets             1,463       1,566  
Deferred cost of revenues             2,642       3,666  
Other non-current assets             2,994       5,883  
                         
Total non-current assets             29,201       45,446  
                         
Total assets             148,732       136,376  

   

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

 

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BORQS TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(Amounts in thousands of US$)

 

          As of December 31,     As of March 31,  
    Note     2017     2018  
          US$     US$  
                (Unaudited)  
LIABILITIES AND SHAREHOLDERS’ EQUITY                  
Current liabilities:                  
Accounts payable (including accounts payable of the Consolidated VIEs without recourse to the primary beneficiaries of US$4,143 and US$3,302 as of December 31, 2017 and March 31, 2018, respectively)             49,690       16,671  
Accrued expenses and other payables (including accrued expenses and other payables of the Consolidated VIEs without recourse to the primary beneficiaries of US$4,038 and US$4,339 as of December 31, 2017 and March 31, 2018, respectively)     (9)     12,163       16,425  
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, 2017 and March 31, 2018, respectively)             3,623       6,519  
Deferred revenues (including deferred revenues of the Consolidated VIEs without recourse to the primary beneficiaries of US$5,904 and US$4,800 as of December 31, 2017 and March 31, 2018, respectively)             7,960       7,307  
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, 2017 and March 31, 2018, respectively)             1,232       1,860  
Short-term bank borrowings (including short-term bank borrowings of the Consolidated VIEs without recourse to the primary beneficiaries of nil and US$40 as of December 31, 2017 and March 31, 2018, respectively)     (8)     12,648       12,792  
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, 2017 and March 31, 2018, respectively)     (8)     5,432       4,479  
                         
Total current liabilities             92,748       66,053  

 

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

 

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BORQS TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(Amounts in thousands of US$)

 

          As of December 31,     As of March 31,  
    Note     2017     2018  
          US$     US$  
                (Unaudited)  
LIABILITIES AND SHAREHOLDERS’ 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, 2017 and March 31, 2018, respectively)     (13)     2,121       3,091  
Deferred tax liabilities (including deferred tax liabilities of the Consolidated VIEs without recourse to the primary beneficiaries of US$1,550 and US$1,524 as of December 31, 2017 and March 31, 2018, respectively)     (13)     3,555       3,796  
Deferred revenues  (including deferred revenues of the Consolidated VIEs without recourse to the primary beneficiary of nil and nil as of December 31, 2017 and March 31, 2018, respectively)             1,346       2,693  
Long-term bank payable (including long-term payable of the Consolidated VIEs without recourse to the primary beneficiary of nil and nil as of December 31, 2017 and March 31, 2018, respectively)     (7)     -       5,531  
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, 2017 and March 31, 2018, respectively)     (10)     1,957       2,034  
                         
Total non-current liabilities             8,979       17,145  
                         
Total liabilities             101,727       83,198  
                         
Commitments and contingencies     (16)                

 

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

 

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BORQS TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

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

 

          As of December 31,     As of March 31,  
    Note     2017     2018  
          US$     US$  
                (Unaudited)  
LIABILITIES AND SHAREHOLDERS’ EQUITY                  
                   
Shareholders’ equity:                  
Ordinary shares (no par value; unlimited shares authorized; 30,804,635 shares issued and outstanding as of December 31, 2017  and 31,307,522 shares issued and 31,303,350 shares outstanding as of March 31, 2018, respectively)             -       -  
Additional paid-in capital             120,642       124,058  
Statutory reserve             1,898       2,074  
Accumulated deficit             (74,231 )     (73,230 )
Accumulated other comprehensive (loss) income     (11)     (507 )     825
                         
Total Borqs Technologies, Inc. shareholder’s equity             47,802       53,727  
                         
Noncontrolling interest             (797 )     (549 )
                         
Total shareholders’ equity             47,005     53,178  
                         
Total liabilities and shareholders’ equity             148,732       136,376  

  

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

 

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BORQS TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

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

 

          Three Months Ended March 31,  
    Note     2017     2018  
          US$     US$  
Net Revenues:                  
Software             3,084       2,256  
Hardware             21,679       48,118  
MVNO             5,932       7,509  
Others             515       373  
                         
Total net revenues             31,210       58,256  
                         
Software             (2,330 )     (769 )
Hardware             (19,238 )     (43,399 )
MVNO             (5,287 )     (5,061 )
Others             (200 )     (171 )
                         
Total cost of revenues             (27,055 )     (49,400 )
                         
Total gross profit             4,155       8,856  
                         
Operating expenses:                        
Sales and marketing expenses             (1,339 )     (1,682 )
General and administrative expenses             (1,558 )     (3,096 )
Research and development expenses             (292 )     (889 )
Changes in the fair value of warrant liabilities             (161 )     -  
                         
Total operating expenses             (3,350 )     (5,667 )
                         
Other operating income             266       -  
                         
Operating income             1,071       3,189
                         
Interest income             2       6  
Interest expense             (619 )     (245 )
Other income             303       39  
Other expense             (118 )     (45 )
Foreign exchange loss             (177 )     (374 )
                         
Profit before income taxes             462       2,570  
Income tax expenses     (13)     (444 )     (1,183 )
Net Income             18       1,387  
Less: net (loss) income attributable to noncontrolling interests             (78 )     188  
Net income attributable to Borqs Technologies, Inc.             96       1,199  
Add: accretion to redemption value of convertible redeemable preferred shares             (298 )     -  
Net ( loss) income attributable to ordinary shareholders             (202 )     1,199  
                         
(Loss) earnings  per share:                        
Basic             (0.05 )     0.05  
Diluted             (0.05 )     0.04  
                         
Number of ordinary shares used in (loss) earnings per share computation:                        
Basic             4,224,725       26,384,152  
Diluted             4,224,725       27,471,885  

 

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

 

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BORQS TECHNOLOGIES, INC.

UNAUDITED CONSOLIDATED CONDENSED INTERIM STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands of US$)

 

          Three Months Ended March 31,  
    Note     2017     2018  
          US$     US$  
Net Income             18       1,387  
Other comprehensive income, net of tax of nil:                        
Foreign currency translation adjustments, net of tax of nil             312       1,392  
Other comprehensive income, net of tax of nil     (11)     312       1,392  
Comprehensive Income             330       2,779  
Less: comprehensive (loss) income attributable to noncontrolling interest             (71 )     248  
Comprehensive Income attributable to the Borqs Technologies, Inc.             401       2,531  

 

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

 

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BORQS TECHNOLOGIES, INC.

UNAUDITED CONSOLIDATED CONDENSED INTERIM STATEMENTS OF CASH FLOWS

(Amounts in thousands of US$)

 

    Three Months Ended March 31,  
    2017     2018  
    US$     US$  
                 
CASH FLOWS FROM OPERATING ACTIVITIES                
Net cash generated from operating activities     1,183       688  
                 
CASH FLOWS FROM INVESTING ACTIVITIES                
Purchases of property and equipment     (76 )     (115 )
Purchases of intangible assets     (1,889 )     (1,617 )
Proceeds from disposal of property and equipment     -       1  
Repayments of a loan to a third party     121       1,469  
                 
Net cash used in investing activities     (1,844 )     (262 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Prepayment for repurchase of ordinary shares     -       (10,070 )
Proceeds from issuance of convertible redeemable preferred shares     9,007       -  
Issuance costs     (312 )     -  
Proceeds from short-term bank borrowings     -       40  
Proceeds from long-term bank borrowings     2,000       -  
Repayments of long-term bank borrowings     (143 )     (1,000 )
                 
Net cash generated from (used in) financing activities     10,552       (11,030 )
                 
Effect of foreign exchange rate changes on cash and cash equivalents     53       570  
                 
Net increase (decrease)  in cash and cash equivalents     9,944       (10,034 )
Cash and cash equivalents at beginning of period     3,610       13,060  
                 
Cash and cash equivalents at end of period     13,554       3,026  

 

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

 

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BORQS TECHNOLOGIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Amounts in thousands of 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”). Concurrent with the completion of the acquisition of Borqs International, the Company changed its name from Pacific Special Acquisition Corp.”, to Borqs Technologies, Inc.      

   

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

(a) Basis of presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) and applicable rules and regulations of the Securities and Exchange Commission, regarding financial reporting, and include all normal and recurring adjustments that management of the Group considers necessary for a fair presentation of its financial position and operation results. Certain information and footnote disclosures normally included in financial statements prepared in conformity with US GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these statements should be read in conjunction with the Group’s unaudited consolidated financial statements as of and for the three years in the periods ended December 31, 2017.

 

(b) Liquidity

 

As of March 31, 2018, the Group has accumulated deficit of US$73,230 and negative cash flow of US$10,034 for the three months then ended. These condition raises substantial doubt about the Group’s ability to continue as a going concern.

 

When preparing the unaudited condensed consolidated financial statements as of March 31, 2018 and for the three months 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. In preparing the forecasted cash flow analysis, management took into account of the expected net cash inflows to be funded by public offering of approximately US$20,000. As a result, management prepared the unaudited condensed 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 unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. 

 

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BORQS TECHNOLOGIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(c) Long-term investment

 

The Group’s long-term investment represents a cost method investment purchased during the three months period ended March 31, 2018.

 

In accordance with ASC 325-20 (“ASC 325-20”), Investments-Other: Cost Method Investments, for investments in investees over which the Group does not have significant influence, the Group carries the investments at cost and only adjusts for other-than-temporary declines in fair value and distributions of earnings. The Group’s management regularly evaluates the impairment of its cost method investments based on the performance and financial position of the investees as well as other evidence of estimated market values. Such evaluation includes, but is not limited to, reviewing the investees’ cash position, recent financing, projected and historical financial performance, cash flow forecasts and current and future financing needs. An impairment loss is recognized in the consolidated statements of comprehensive loss equal to the excess of the investment’s cost over its fair value at the balance sheet date of the reporting period for which the assessment is made. The fair value would then become the new cost basis of investment.

      

(d) Recent accounting pronouncements

 

The Group is an emerging growth company (“EGC’’) as defined by the Jumpstart Our Business Startups Act (“JOBS Act’’). The JOBS Act provides that an EGC can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an EGC to delay adoption of certain accounting standards until those standards would otherwise apply to private companies. The Group elected to take advantage of the extended transition period. However, this election will not apply should the company cease to be classified as an EGC.

 

In May 2014, the Financial Accounting Standards Board (“FASB’’) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenue recognition requirements in ASC 605, and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU 2014-09 by one year. As a result, ASU 2014-09 is effective for the Group for annual reporting periods beginning January 1, 2019 and interim periods within annual periods beginning January 1, 2020. In March 2016, the FASB issued 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 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 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 dates for these amendments are the same as the effective date of ASU No 2014-09. Early adoption is permitted, and the standard permits the use of either the retrospective or cumulative effect transition method. The Group does not plan to early adopt the standard and amendments and it is in the process of developing a plan for evaluating the impact of adoption of these guidance on its unaudited consolidated financial statements, including the selection of the adoption method, the identification of differences, if any, from the application of the guidance, and the impact of such differences, if any, on its consolidated unaudited financial statements.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments. ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. An entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. ASU 2016-01 also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. ASU 2016-01 is effective for the Group beginning January 1, 2019 with interim periods within annual periods beginning January 1, 2020. Early adoption is permitted no earlier than the fiscal year beginning January 1, 2018 including interim periods within that year. The Group does not plan to early adopt ASU 2016-01 and it is currently evaluating the impact of adopting this standard on its unaudited consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases, which 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 the Group for annual reporting periods beginning January 1, 2020 and interim periods within annual periods beginning January 1, 2021. Early adoption is permitted. The Group does not plan to early adopt ASU 2016-02 and it is currently evaluating the impact of adopting the standard on its unaudited consolidated financial statements.

 

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BORQS TECHNOLOGIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(d) Recent accounting pronouncements (Continued)

 

In June 2016, the FASB issued ASU No. 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 does not plan to early adopt ASU No. 2016-13 and it is evaluating the effect that this guidance will have on its unaudited consolidated financial statements.

 

In August 2016, the FASB issued ASU 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. In November 2016, the FASB issued ASU 2016-18, Statements of Cash Flow (Topic 230): Restricted Cash, which requires that a statement of cash flows explain the change during the period in the total 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 amount shown on the statement of cash flows. ASU 2016-15 and ASU 2016-18 are effective for the Group for annual reporting periods beginning January 1, 2019 and interim periods within annual periods beginning January 1, 2020. Early adoption is permitted. The Group does not plan to early adopt ASU 2016-15 and ASU 2016-18 and it is evaluating the impacts that these standards will have on its unaudited consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 clarifies the framework for determining whether an integrated set of assets and activities meets the definition of a business. The revised framework establishes a screen for determining whether an integrated set of assets and activities is a business and narrows the definition of a business, which is expected to result in fewer transactions being accounted for as business combinations. Acquisitions of integrated sets of assets and activities that do not meet the definition of a business are accounted for as asset acquisitions. ASU 2017-01 is effective for the Group for annual reporting periods beginning January 1, 2020 and interim periods within annual periods beginning January 1, 2021, with early adoption permitted for transactions that have not been reported in previously issued (or available to be issued) financial statements. The Group does not plan to early adopt ASU 2017-01 and does not expect the impact that this standard will have a material impact on its unaudited consolidated financial statements.

  

In January 2017, the FASB issued Accounting Standards Update No. 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. Early adoption is permitted. The Group does not plan to early adopt ASU 2017-04 and it is currently evaluating the impact of adopting this standard on its unaudited consolidated financial statements.

  

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BORQS TECHNOLOGIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

3. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following:

 

      As of
December 31,
    As of
March 31,
 
      2017     2018  
      US$     US$  
               
  Staff advances     312       430  
  Prepayment for ordinary share repurchase (i)     -       10,048  
  Prepayment for products     1,008       1,787  
  Advance to OEM     3,662       -  
  Rental and other deposits     1,203       1,103  
  VAT recoverable     2,189       2,898  
  Loan to third parties     1,469       -  
  Receivable from an agent     6,318       6,450  
  Others     79       130  
                   
        16,240       22,846  

 

(i)

On January 10, 2018, the Company entered into a stock repurchase agreement (“Stock Repurchase Agreement”) with Zhengqi International Holding Limited (“Zhengqi”), pursuant to which the Company agreed to repurchase 966,136 ordinary shares that were originally issued and sold to Zhengqi on August 18, 2017, at an aggregate purchase price of $10 million. The $10 million share repurchases consideration was transferred to Zhengqi, and the Company is working with Zhengqi to complete certain procedures to close the transaction in 2018.

   

4. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consist of the following:

 

      As of
December 31,
    As of
March 31,
 
      2017     2018  
      US$     US$  
  At cost:            
  Leasehold improvements     933       1,115  
  Computer and network equipment     6,458       6,595  
  Office equipment     918       987  
  Motor vehicles     233       234  
        8,542       8,931  
  Less: accumulated depreciation     (7,180 )     (7,615 )
                   
        1,362       1,316  

 

Depreciation expense was US$283 and US$139 for the three months ended March 31, 2017 and 2018, respectively, were included in the following captions:

 

      Three Months Ended
March 31,
 
      2017     2018  
      US$     US$  
               
  Cost of revenues     41       48  
  Sales and marketing expenses     2       3  
  General and administrative expenses     72       18  
  Research and development expenses     168       70  
                   
        283       139  

 

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BORQS TECHNOLOGIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

5. 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, 2017     2,294       6,874       6,330       15,498  
  Additions     31       1,858       -       1,889  
  Amortization expense     (60 )     (670 )     (212 )     (942 )
  Foreign currency translation difference     11       23       35       69  
                                   
  Balance as of March 31, 2017     2,276       8,085       6,153       16,514  
                                   
  Balance as of January 1, 2018     2,529       11,600       5,875       20,004  
  Additions     139       1,478       -       1,617  
  Amortization expense     (29 )     (1,339 )     (236 )     (1,604 )
  Foreign currency translation difference     98       243       230       571  
                                   
  Balance as of March 31, 2018     2,737       11,982       5,869       20,588  

 

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$942 and US$1,604 for the three months ended March 31, 2017 and 2018, respectively.

 

6. GOODWILL

 

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

 

      As of
December 31,
    As of
March 31,
 
      2017     2018  
      US$     US$  
               
  Balance at beginning of the period     693       736  
  Foreign currency translation difference     43       29  
                   
  Balance at end of the period     736       765  

 

No impairment charge was recorded in any of the three months ended March 31, 2017 and 2018, respectively.

 

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BORQS TECHNOLOGIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

7. LONG-TERM INVESTMENT

 

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 sold to the Company 13.8% of the outstanding shares of Crave and 13.8% of the outstanding shares of Colmei. Under the agreement, the Company paid purchase consideration consisting of the Company’s 473,717 ordinary shares issued and cash in the amount of US$10,000 to be paid to the Selling Shareholders over a period of 36 months from the date of agreement. 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$3,000 on August 18, 2018. This transaction was completed on March 22, 2018.

 

The Company does not have significant influence over the investees and therefore the investment was accounted for under the cost method. Cost of the long-term investment consisted of the fair value of the share consideration on the date of issuance and the present value of the cash consideration, which was determined based on management’s estimate of the payment schedule.  

 

8. BANK AND OTHER BORROWINGS

 

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

 

      As of
December 31,
    As of
March 31,
 
      2017     2018  
      US$     US$  
               
  Short-term bank and other borrowings     12,648       12,792  
  Long-term bank borrowings, current portion     5,432       4,479  
                   
  Total borrowings     18,080       17,271  

 

The short-term bank borrowings outstanding as of December 31, 2017 and March 31, 2018 bore a weighted average interest rate of 6.73% and 6.44% per annum, respectively, and were denominated in RMB and US$. These borrowings were obtained from financial institutions and have term s of one year.

 

The long-term bank borrowings, current portion outstanding as of March 31, 2018 bore a weighted average interest rate of 8%, and were denominated in US$. These borrowings were obtained from financial institutions located in the United States, and have terms of three years.

 

On November 28, 2017, the Company entered into short-term loan agreement with HHMC Microelectronic Co., Limited for US$5,000,000 with an interest rate of 14.6% per annum and a maturity term of three months, for working capital. The loan has been extended to May 28, 2018.

 

Bank borrowings as of March 31, 2018 were pledged by accounts receivable.

 

As of March 31, 2018, the Company was in breach of two of the financial covenants under a long-term bank borrowing with an outstanding balance of US$479. The breach could result in acceleration of the repayment according to the contractual term. Therefore, the outstanding balance was reclassified as current liability as of March 31, 2018.

 

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BORQS TECHNOLOGIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

9. ACCRUED EXPENSES AND OTHER PAYABLES

 

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

 

      As of
December 31,
    As of
March 31,
 
      2017     2018  
      US$     US$  
               
  Payroll and welfare payable     2,030       2,457  
  Payable for long-term investment (Note 7)     -       3,131  
  VAT, and other taxes payable     2,473       2,827  
  Payables for office supply and utilities     711       958  
  Payables for purchase of property and equipment     52       54  
  Professional service fees     3,161       2,964  
  Deposits from agents     3,509       3,614  
  Others     227       420  
        12,163       16,425  

 

10. 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.

 

      Three Months Ended
March 31,
 
      2017     2018  
      US$     US$  
               
  Balance at beginning of the period     2,108       1,957  
  Recognized as other operating income     (266 )     -  
  Foreign currency translation difference     12       77  
  Balance at ending of the period     1,854       2,034  

 

11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

The changes in accumulated other comprehensive income (loss), net of tax of nil, are as follows:

 

    Foreign currency translation     Total  
    US$     US$  
             
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 )
Current year other comprehensive income     1,332       1,332  
Balance as of March 31, 2018     825       825  

 

12. MAINLAND CHINA EMPLOYEE CONTRIBUTION PLAN

 

As stipulated by the regulations of the PRC, full-time employees of the Company in the PRC participate in a government-mandated multiemployer defined contribution plan organized by municipal and provincial governments. Under the plan, certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. The Company is required to make contributions to the plan based on certain percentages of employees’ salaries. The total expenses for the plan were US$558 and US$836 respectively, for the three months ended March 31, 2017 and 2018.

 

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BORQS TECHNOLOGIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

13. TAXATION

 

Profit before income taxes consists of:

 

      Three Months Ended
March 31,
 
      2017     2018  
      US$     US$  
               
  Non-PRC     1,903       590  
  PRC     (1,441 )     1,980  
                   
        462       2,570  

 

Income tax expenses comprise of:

 

      Three Months Ended
March 31,
 
      2017     2018  
      US$     US$  
               
  Current     (473 )     (1,050 )
  Deferred     29       (133 )
                   
        (444 )     (1,183 )

 

The reconciliation of tax computed by applying the statutory income tax rate of 25% for the three months ended March 31, 2017 and 2018 applicable to the PRC operations to income tax expenses is as follows:

 

      Three Months Ended
March 31,
 
      2017     2018  
      US$     US$  
               
  Profit before income taxes     462       2,570  
                   
  Income tax expenses computed at the statutory income tax rate at 25%     (116 )     (642 )
                   
  Non-deductible expenses     (123 )     (105 )
  Non-taxation income     67       -  
  Preferential rate     (99 )     355  
  Current and deferred tax rate differences     6       (834 )
  Foreign rate differences     (132 )     (149 )
  Change of valuation allowance     (16 )     545  
  Interest expenses     (31 )     (353 )
                   
  Income tax expenses     (444 )     (1,183 )

 

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BORQS TECHNOLOGIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

13. TAXATION (CONTINUED)

 

Deferred Taxes

 

The significant components of deferred taxes are as follows:

 

      As of
December 31,
    As of
March 31,
 
      2017     2018  
      US$     US$  
  Deferred tax assets            
  Inventories provision     229       -  
  AR provision     -       238  
  Accrued salary and welfare payable     165       284  
  Property and equipment     14       15  
  Tax losses     14,769       14,198  
  Valuation allowance     (13,714 )     (13,169 )
  Total deferred tax assets     1,463       1,566  
  Deferred tax liabilities                
  Intangible assets     2,004       1,964  
  Deferred cost of revenues     1,551       1,832  
                   
  Total deferred tax liabilities     3,555       3,796  

 

As of March 31, 2018, the Group had net tax operating losses from its PRC subsidiaries and its Consolidated VIEs, as per filed tax returns, of US$28,855, which will expire from 2018 to 2022. The Group has net tax operating loss from its HK subsidiary of US$14,949, which will not expire.

 

As of March 31, 2018, 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.

 

Unrecognized Tax Benefits

 

As of December 31, 2017 and March 31, 2018, the Group recorded an unrecognized tax benefits of US$4,047 and US$5,334, respectively, of which, US$2,764 and US$3,654, 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 interests 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, 2017 and March 31, 2018, unrecognized tax benefits of US$2,043 and US$2,983, if ultimately recognized, will impact the effective tax rate.

 

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

 

      Three Months Ended
March 31,
 
      2017     2018  
      US$     US$  
               
  Balance at beginning of period     4,053       4,547  
  Additions based on tax positions related to the current year     67       609  
  Foreign currency translation difference     (407 )     178  
                   
  Balance at end of period     3,713       5,334  

 

In the three months ended March 31, 2017 and 2018, the Group recorded interest expenses accrued in relation to the unrecognized tax benefits of US$31 and US$353 in income tax expenses, respectively. Accumulated interest expenses recorded by the Group was US$119 and US$691 as of March 31, 2017 and 2018, respectively. As of March 31, 2018, the tax years ended December 31, 2013 through 2018 for the PRC subsidiaries and the VIE remain open for statutory examination by the PRC tax authorities.

 

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BORQS TECHNOLOGIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

14. RELATED PARTY TRANSACTIONS

 

(a) Related parties

 

  Names of related parties   Relationship with the Group
  Intel Capital Corporation (“Intel”) and its affiliates   A substantial shareholder of the company, but exited from the mobile chipset activities.

 

(b) Other than disclosed elsewhere, the Group had the following significant related party transactions for the three months ended March 31, 2017 and 2018:

 

      Three Months Ended
March 31,
 
      2017     2018  
      US$     US$  
  Software services provided to:            
  Intel Corporation     -       -  
  Intel (China) Co., Ltd.     9       -  
  Intel Asia-Pacific Research and Development Ltd.     19       -  
  Intel (China) Research Center Co., Ltd.     34       -  

   

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BORQS TECHNOLOGIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

15. (LOSS) EARNINGS PER SHARE

 

Basic and diluted (loss) earnings per share for each of the three months presented are calculated as follows:

 

      Three Months Ended
March 31,
 
      2017     2018  
      US$     US$  
  Numerator:            
  Net income     18       1,387  
  Less: net (loss) income attributable to noncontrolling interests     (78 )     188  
                   
  Net income attributable to Borqs Technologies, Inc.     96       1,199  
  Accretion to redemption value of Convertible Redeemable Preferred Shares     (298 )     -  
  Net (loss) income attributable to Borqs Technologies, Inc.’s ordinary shareholders     (202 )     1,199  
                   
  Denominator:                
  Weighted-average number of ordinary shares outstanding—basic     4,224,725       26,384,152  
  Weighted-average number of ordinary shares outstanding—diluted     4,224,725       27,471,885  
                   
  (Loss) earnings per share—Basic:     (0.05 )     0.05  
  (Loss) earnings per share—Diluted:     (0.05 )     0.04  

  

For the three months ended March 31, 2017, convertible redeemable preferred shares and share options, replacement warrants to purchase ordinary shares were anti-dilutive and excluded from the calculation of diluted net loss per share

 

16. 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 three months ended March 2017 and 2018, total rental expenses for all operating leases amounted to US$354 and US$421, respectively.

 

As of March 31, 2018, 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     1,369  
  2019     2,070  
  2020     1,184  
  2021     526  
  2022 and thereafter     424  
           
        5,573  

 

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

 

Income Taxes

 

As of March 31, 2018, the Group recognized an accrual of US$3,091 for unrecognized tax benefits and its interest (Note 1 3). 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 March 31, 2018, the Group classified the accrual for unrecognized tax benefits as a non-current liability.

 

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BORQS TECHNOLOGIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

 

17. 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 three months ended March 31, 2017 and 2018:

 

        Connected     Total          
  Three months ended March 31, 2018   Yuantel     Solution     Segments     Eliminations     Consolidated  
                                 
  Net revenue                              
  -External customers     7,882       50,374       58,256       -       58,256  
  -Inter-segment     -       304       304       (304 )     -  
  Total net revenue     7,882       50,678       58,560       (304 )     58,256  
                                           
  Operating income     684       2,505       3,189       -       3,189  

 

          Connected     Total              
  Three months ended March 31, 2017   Yuantel     Solution     segments     Eliminations     Consolidated  
                                 
  Net revenue                              
  -External customers     6,447       24,763       31,210       -       31,210  
  -Inter-segment     -       449       449       (449 )     -  
  Total net revenue     6,447       25,212       31,659       (449 )     31,210  
                                           
  Operating (loss) income     (1,122 )     2,193       1,071       -       1,071  

 

      Three Months Ended
March 31,
 
      2017     2018  
      US$     US$  
               
  PRC     12,759       11,179  
  Outside PRC:                
  United States     1,553       4,196  
  India     2,088       42,074  
  Rest of the world     14,810       807  
  Total net revenue     31,210       58,256  

  

18. SUBSEQUENT EVENTS

 

Acquisition of KADI

 

On January 8, 2018, the Company 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, for an aggregate consideration of $15 million consisting of $11.7 million in cash and an agreed-upon value of $3.3 million in the Company’s ordinary shares with the selling shareholders of KADI. KADI is not a customer or a supplier of Borqs. In accordance with the letter of intent, the Company have made three of four scheduled cash advances to KADI amounted to $450,000, which is recorded as other non-current assets. The remaining fourth payment of $150,000 will be paid in May 2018. These advances will be deducted from the cash consideration to KADI under the definitive agreement to be negotiated.  If this transaction fails to be consummated within nine months after signing of the letter of intent, the advance payments will be exchanged into equity interest representing 5% of the outstanding capital stock of KADI on such date. There are no termination fees or penalties under the letter of intent.

 

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BORQS TECHNOLOGIES, INC.

 

ORDINARY SHARES


 
 
 
 
 
 
 
 

 

PROSPECTUS

 

 

 

 

 

 

 

 

 

Maxim Group LLC

 

           , 2018

 

 

 

 

Table of Contents  

 

[Alternate Page for Resale Prospectus]

 

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

     
Preliminary Prospectus   Subject to Completion, dated July 2, 2018

 

BORQS TECHNOLOGIES, INC.

 

3,272,761 Ordinary Shares

 

This prospectus relates to the offer for sale of up to an aggregate of 3,272,761 ordinary shares, no par value per share, of Borqs Technologies, Inc. consisting of (i) 1,437,500 ordinary shares (the “founder shares”) originally issued to Zhengqi International Holding Limited (“Zhengqi”) prior to the Company’s initial public offering (“IPO”), 520,000 of which were subsequently transferred to the Company’s former officers and directors; (ii) 585,062 ordinary shares issued in a private placement that closed contemporaneously with the consummation of the IPO; (iii) 72,115 ordinary shares issued in a private placement that closed contemporaneously with the consummation of the merger on August 18, 2017 of one of our subsidiaries with and into Borqs International Holding Corp. (the “Business Combination”); and (iv) 1,178,084 ordinary shares issued as compensation for certain advisory services rendered to Borqs International in connection with the Business Combination.

 

We will not receive any proceeds from the resale of any of the ordinary shares being registered hereby.

 

The distribution of securities offered hereby may be effected in one or more transactions that may take place in the NASDAQ Capital Market, including ordinary brokers’ transactions, privately negotiated transactions or through sales to one or more dealers for resale of such securities as principals, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. Usual and customary or specifically negotiated brokerage fees or commissions may be paid by the selling stockholders.

 

The selling stockholders and intermediaries through whom such securities are sold may be deemed “underwriters” within the meaning of the Securities Act of 1933, as amended (which we refer to as the Securities Act), with respect to the securities offered hereby, and any profits realized or commissions received may be deemed underwriting compensation.

 

On            , 2018, a registration statement under the Securities Act with respect to an underwritten public offering by us of $___ worth of ordinary shares (which amount includes a potential 15% over-allotment option) was declared effective by the Securities and Exchange Commission. We sold                 ordinary shares (which amount does not include exercise of the 15% over-allotment option). Additionally, [____] of the shares being registered for resale by the selling stockholders on this prospectus were sold by the underwriters in the public offering.

 

Investing in our ordinary shares involves a high degree of risk. You should carefully consider the matters discussed under the section entitled “Risk Factors” beginning on page 12 of this prospectus.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The date of this prospectus is    , 2018.

 

 

Table of Contents  

 

The Offering

 

Ordinary Shares Outstanding: 31,303,350 ordinary shares as of the date of this prospectus.
   
Ordinary Shares Offered by Selling Stockholders: Up to 3,272,761 ordinary shares for sale by the Selling Stockholders for their own account.  These shares include:

 

 

 

(i)

up to 1,437,500 founder shares originally issued to Zhengqi prior to the Company’s IPO, 520,000 of which were subsequently transferred to the Company’s former officers and directors;

     
  (ii)

up to 585,062 ordinary shares issued in a private placement that closed contemporaneously with the consummation of the IPO;

     
  (iii) up to 72,115 ordinary shares issued in a private placement that closed contemporaneously with the consummation of the Business Combination; and
     
  (iv) up to 1,178,084 ordinary shares issued as compensation for certain advisory services rendered to Borqs International in connection with the Business Combination.

 

Use of Proceeds: We will not receive any proceeds from the sale of the ordinary shares by the selling stockholders.
   
NASDAQ Capital Market symbol: BRQS
   
Risk Factors: An investment in our company is highly speculative and involves a significant degree of risk.  See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our ordinary shares.

  

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[Alternate Page for Resale Prospectus]

 

USE OF PROCEEDS

 

We will not receive any of the proceeds from the sale of the ordinary shares by the selling stockholders named in this prospectus. All proceeds from the sale of the ordinary shares will be paid directly to the selling stockholders.

 

  SS- 3  

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[Alternate Page for Resale Prospectus]

 

SELLING STOCKHOLDERS

 

An aggregate of up to 3,272,761 ordinary shares may be offered by certain security holders consisting of: (i) 1,437,500 founder shares originally issued to Zhengqi prior to the Company’s IPO, 520,000 of which were subsequently transferred to the Company’s former officers and directors; (ii) 585,062 ordinary shares issued in a private placement that closed contemporaneously with the consummation of the IPO; (iii) 72,115 ordinary shares issued in a private placement that closed contemporaneously with the consummation of the Business Combination; and (iv) 1,178,084 ordinary shares issued as compensation for certain advisory services rendered to Borqs International in connection with the Business Combination.

 

2,094,677 of the 3,272,761 ordinary shares are being registered herein pursuant to certain “piggy-back” registration rights of the selling stockholders with respect to registration statements filed after August 18, 2017.

 

The following table sets forth certain information with respect to each selling stockholder for whom we are registering shares for resale to the public. Other than as disclosed herein, no material relationships exist between any of the selling stockholders and us nor have any such material relationships existed within the past three years.

 

All of the founder shares held by the selling stockholders are subject to a lock-up agreement under which the stockholders 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 (x) August 18, 2018 or (y) 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, provided that, in either case, the transfer restrictions may be lifted earlier if, subsequent to our initial business combination, we consummate 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.

 

Except for EarlyBird Capital, Inc. (“EBC”), none of the selling stockholders is a broker dealer.

Name of Selling Stockholder   Number of
Ordinary Shares Owned
Prior to
Offering (7)
    Maximum
Number of
Ordinary Shares
to be Sold
Pursuant to this
Prospectus
    Number of
Ordinary Shares
Owned After
Offering Assuming
All Shares are
Sold (1)
    Percentage of
Ordinary Shares
Owned After
Offering Assuming
All Shares are
Sold (1)
 
EarlyBird Capital, Inc. (2)     183,248       109,739       73,509       *  
Zhengqi International Holding Limited (3)     4,709,850       1,464,938       3,244,912       10.37 %
David Boris (4)(5)     140,000       140,000       -       -  
Honghui Deng (5)(6)     30,000       30,000       -       -  
Yaqi Feng (5)(6)     60,000       60,000       -       -  
Guoxiong Luo (5)     30,000       30,000       -       -  
Zhouhong Peng (5)     80,000       80,000       -       -  
Jason Shen (5)(6)     30,000       30,000       -       -  
Jian Tu (5)     150,000       150,000       -       -  
Hui Liu     150,000       150,000       -       -  
Fengying Ma     144,521       144,521       -       -  
Xuefei Na     294,521       294,521       -       -  
Limiao Ouyang     58,921       58,921       -       -  
Qing Wang     117,800       117,800       -       -  
Jinjin Xu     294,521       294,521       -       -  
Bei Zhang     117,800       117,800       -       -  

  

* Less than 1%
(1) Assumes the sale of all shares offered pursuant to this prospectus. Applicable percentages based on 31,303,350 ordinary shares outstanding as of this prospectus.
(2) Steven Levine, David Nussbaum and Eileen Moore share voting and investment power over the securities held by EarlyBird Capital, Inc. EarlyBird Capital, Inc. was the lead underwriter in the Company’s IPO. Number of shares owned includes 73,509 shares that the selling shareholder is entitled to vote while held in escrow.
(3) Zhengqi International Holding Limited, the Company’s former sponsor, is a wholly-owned indirect subsidiary of Pacific Securities Capital Management Co. Ltd., a company incorporated in the People’s Republic of China, which, in turn, is a wholly owned subsidiary of Pacific Securities Co. Ltd., a company incorporated in the People’s Republic of China (“Pacific Securities”). Jian Tu serves as a director and as Chairman of the Strategic Planning Committee of Pacific Securities, and Guoxiong Luo serves as Assistant Chairman and the Head of Global Business Department of Pacific Securities. Number of ordinary shares owned includes 966,136 shares subject to repurchase and 1,278,776 shares subject to forfeiture pursuant to the Stock Purchase Agreement, and excludes 80,000 shares sold to David Boris, which shares have not been transferred as of the date hereof.
(4) Includes 80,000 shares purchased from Zhengqi International Holding Limited pursuant to a Director’s Agreement, dated January 10, 2017 with effect from December 23, 2016, which shares have not been transferred as of the date hereof.
(5) These individuals served as officers and/or directors of the Company prior to the closing of the Business Combination. Specifically, David Boris, Honghui Deng, Guoxiong Luo and Jason Shen served as directors of the Company, and Jian Tu served as President and Chairman of the Board, Zhouhong Peng served as Chief Executive Officer and Chief Financial Officer, and Yaqi Feng served as Chief Operating Officer and Secretary.
(6) This individuals currently serve as directors of the Company.
(7) Excludes shares underlying any warrants or options held by the holder.

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[Alternate Page for Resale Prospectus]

 

PLAN OF DISTRIBUTION

 

To the extent that Zhengqi and EarlyBird Capital, Inc. do not sell their ordinary shares in the underwritten public offering pursuant to the offering prospectus included in the registration statement of which the prospectus is a part, they are deemed to be selling stockholders. The selling stockholders, which as used herein includes donees, pledgees, transferees or other successors-in-interest selling ordinary shares or interests in ordinary shares received after the date of this prospectus from a selling stockholder as a gift, pledge, partnership distribution or other transfer, may, from time to time, sell, transfer or otherwise dispose of any or all of their ordinary shares or interests in ordinary shares on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices.

 

The selling stockholders may use any one or more of the following methods when disposing of shares or interests therein:

 

  ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
     
  block trades in which the broker-dealer will attempt to sell the shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction;
     
  purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
     
  an exchange distribution in accordance with the rules of the applicable exchange;
     
  privately negotiated transactions;
     
  short sales;
     
  through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;
     
 

broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share;

     
  a combination of any such methods of sale; and
     
  any other method permitted pursuant to applicable law.

 

The selling stockholders may, from time to time, pledge or grant a security interest in some or all of the ordinary shares owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the ordinary shares, from time to time, under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus. The selling stockholders also may transfer the ordinary shares in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus;  provided however , that prior to any such transfer the following information (or such other information as may be required by the federal securities laws from time to time) with respect to each such selling beneficial owner must be added to the prospectus by way of a prospectus supplement or post-effective amendment, as appropriate: (1) the name of the selling beneficial owner; (2) any material relationship the selling beneficial owner has had within the past three years with us or any of our predecessors or affiliates; (3) the amount of securities of the class owned by such security beneficial owner before the offering; (4) the amount to be offered for the security beneficial owner’s account; and (5) the amount and (if one percent or more) the percentage of the class to be owned by such security beneficial owner after the offering is complete.

 

In connection with the sale of our ordinary shares or interests therein, the selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the ordinary shares in the course of hedging the positions they assume. The selling stockholders may also sell our ordinary shares short and deliver these securities to close out their short positions, or loan or pledge the ordinary shares to broker-dealers that in turn may sell these securities. The selling stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

 

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[Alternate Page for Resale Prospectus]

 

The aggregate proceeds to the selling stockholders from the sale of the ordinary shares offered by them will be the purchase price of the ordinary shares less discounts or commissions, if any. Each of the selling stockholders reserves the right to accept and, together with their agents from time to time, to reject, in whole or in part, any proposed purchase of ordinary shares to be made directly or through agents. We will not receive any of the proceeds from this offering.

 

The selling stockholders also may resell all or a portion of the shares in open market transactions in reliance upon Rule 144 under the Securities Act, provided that they meet the criteria and conform to the requirements of that rule.

 

The selling stockholders and any underwriters, broker-dealers or agents that participate in the sale of the ordinary shares or interests therein may be “underwriters” within the meaning of Section 2(11) of the Securities Act. Any discounts, commissions, concessions or profit they earn on any resale of the shares may be underwriting discounts and commissions under the Securities Act. Selling stockholders who are “underwriters” within the meaning of Section 2(11) of the Securities Act will be subject to the prospectus delivery requirements of the Securities Act.

 

To the extent required, the ordinary shares to be sold, the names of the selling stockholders, the respective purchase prices and public offering prices, the names of any agents, dealer or underwriter, any applicable commissions or discounts with respect to a particular offer will be set forth in an accompanying prospectus supplement or, if appropriate, a post-effective amendment to the registration statement that includes this prospectus.

 

In order to comply with the securities laws of some states, if applicable, the ordinary shares may be sold in these jurisdictions only through registered or licensed brokers or dealers. In addition, in some states the ordinary shares may not be sold unless it has been registered or qualified for sale or an exemption from registration or qualification requirements is available and is complied with.

 

We have advised the selling stockholders that the anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of shares in the market and to the activities of the selling stockholders and their affiliates. In addition, we will make copies of this prospectus (as it may be supplemented or amended from time to time) available to the selling stockholders for the purpose of satisfying the prospectus delivery requirements of the Securities Act. The selling stockholders may indemnify any broker-dealer that participates in transactions involving the sale of the shares against certain liabilities, including liabilities arising under the Securities Act.

 

  SS- 6  

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[Alternate Page for Resale Prospectus]

 

LEGAL MATTERS

 

Maples and Calder, Hong Kong, will pass upon the validity of the issuance of the ordinary shares offered by this prospectus.

 

  SS- 7  

Table of Contents  

 

[Alternate Page for Resale Prospectus]

 

 

BORQS TECHNOLOGIES, INC.

 

3,272,761 ORDINARY SHARES


 
 
 
 
 
 
 
 

 

PROSPECTUS

 

           , 2018

 

 

 

Table of Contents  

 

PART II

 

INFORMATION NOT REQUIRED IN PROSPECTUS

 

Item 13. Other Expenses of Issuance and Distribution.

 

The following table sets forth the costs and expenses to be paid by the Registrant in connection with the sale of the ordinary shares being registered hereby. All amounts are estimates except for the Securities and Exchange Commission (SEC) registration fee and the Financial Industry Regulatory Authority (FINRA) filing fee.

 

SEC registration fee   $ 5,379  
FINRA filing fee   $ 7,400  
Printing and engraving expenses   $ 30,000  
Legal fees and expenses   $ 600,000  
Accounting fees and expenses   $ 200,000  
Transfer agent and registrar fees and expenses   $ 25,000  
Miscellaneous fees and expenses   $ 50,000  
Total   $ 917,779  

 

 

* To be provided by amendment.

 

Item 14. Indemnification of Directors and Officers.

 

British Virgin Islands law does not limit the extent to which a company’s memorandum and articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the British Virgin Islands Court to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime.

 

Our amended and restated memorandum and articles of association provide that, subject to certain limitations, the company may indemnify its directors and officers against all costs, fees and expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and actually and reasonably incurred in connection with legal, administrative or investigative proceedings. Such indemnity only applies if the person acted honestly and in good faith with a view to the best interests of the company and, in the case of criminal proceedings, the person had no reasonable cause to believe that their conduct was unlawful.

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is theretofore unenforceable.

 

The form of Underwriting Agreement to be filed as Exhibit 1.1 to this registration statement will also provide for indemnification of us and our officers and directors.

 

The Registrant has directors’ and officers’ liability insurance for securities matters.

 

Reference is made to the following documents filed as exhibits to this Registration Statement regarding relevant indemnification provisions described above and elsewhere herein:

 

Exhibit Document   Number  
Underwriting Agreement between the Registrant and Maxim Group LLC     1.1  
Amended and Restated Memorandum and Articles of Association     3.1  
Form of Indemnity Agreement entered into between the Registrant and its directors and executive officers     10.31  

 

  II- 1  

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Item 15. Recent Sales of Unregistered Securities.

 

Since July 1, 2015 and through June 28, 2018 the Registrant has issued and sold the following unregistered securities:

 

Unregistered Sales of Equity Securities

 

In July 2015, the Registrant’s initial shareholders purchased an aggregate of 1,437,500 ordinary shares (“founder shares”), for an aggregate offering price of $25,000, at an average purchase price of approximately $0.017 per share. The number of founder shares issued was determined based on the expectation that such founder shares would represent 20% of the outstanding shares upon completion of our initial public offering. The founder shares are identical to the public shares (the “ Public Shares ”) sold in our initial public offering, except that (1) the founder shares are subject to certain transfer restrictions, and (2) the initial shareholders agreed (i) to waive their redemption rights with respect to their founder shares in connection with the consummation of a business combination and (ii) to waive their liquidation rights with respect to their founder shares if we did not complete a business combination within the allotted period.

 

On October 20, 2015, simultaneously with the closing of our initial public offering, we consummated the sale of 252,250 ordinary shares and 477,500 private warrants, of which 497,750 ordinary shares and 452,500 private warrants were purchased by Zhengqi and 27,500 ordinary shares and 25,000 private warrants were purchased by EarlyBirdCapital (“ EBC ”), in each case, at a price of $10.00 per ordinary share and private warrants combination, in a private placement, generating gross proceeds of $4,775,000.

 

On October 23, 2015, we consummated the sale of an additional 59,813 ordinary shares and 54,375 private warrants at a price of $10.00 per ordinary share and private warrants combination, of which 49,689 ordinary shares and 45,171 private warrants were purchased by Zhengqi and 10,125 ordinary shares and 9,204 private warrants were purchased by EBC, generating gross proceeds of $543,750.

 

On August 18, 2017, the Registrant completed the acquisition of Borqs International Holding Corp in an all-stock transaction. The Registrant issued 25,913,950 of its ordinary shares, representing approximately $269.5 million in consideration, of which 5,038,686 ordinary shares were purchased by Zhengqi. The Registrant also sold an additional 1,038,251 shares to Zhengqi and EBC, for aggregate consideration of approximately $10.8 million. In addition, the Registrant issued 417,166 warrants to purchase ordinary shares with an exercise price of $5.36 per share.

 

On January 18, 2018, we entered into an agreement with Crave and Colmei, along with the shareholders of Crave and Colmei (“CC Selling Shareholders”), pursuant to which the CC 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 CC 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 CC Selling Shareholders and agreed to pay $10.0 million cash to the CC 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 CC Selling Shareholders if the aggregate value of the Company shares initially issued to the CC Selling Shareholders under this agreement is less than $3.0 million on August 18, 2018.

 

None of the foregoing transactions involved any underwriters, underwriting discounts or commissions, or any public offering. Unless otherwise stated, the sales of the above securities were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(a)(2) of the Securities Act (or Regulation D or Regulation S promulgated thereunder) or Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an issuer not involving any public offering or pursuant to benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of the securities in each of these transactions represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed upon the stock certificates issued in these transactions.

 

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Item 16. Exhibits and Financial Statement Schedules.

 

  (a) Exhibits.

 

        Incorporated by Reference
Exhibit Number   Exhibit Title   Form   File No.   Exhibit   Filing Date   Filed Herewith
1.1   Underwriting Agreement between the Registrant and Maxim Group LLC                  

X

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    

4.1

 

Form of Representative’s Warrant

                  X
5.1*   Opinion of Maples and Calder regarding the validity of the ordinary shares being registered and certain British Virgin Islands tax matters                  
10.1   Registration Rights Agreement, dated August 18, 2017, by and among each of CC 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 CC 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   Consulting Agreement, dated April 1, 2015, by and between Borqs International and Anthony K. Chan   8-K   001-37593   10.9   8/24/17    
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    
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    

 

  II- 3  

 

        Incorporated by Reference
Exhibit Number   Exhibit Title   Form   File No.   Exhibit   Filing Date   Filed Herewith
10.14   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    
10.15   Letter of Intent, dated January 8, 2018, by and between Borqs Technologies, Inc. and Shanghai KADI Technologies Co., Ltd.   10-K   001-37593   10.14   4/2/18    
10.16   Manufacturing & Service Agreement, dated September 1, 2015, by and between Borqs Hong Kong Ltd. And Alpha Network Ltd.   10-K   001-37593   10.16   4/2/18    
10.17   Reliance Retail Limited Form of Purchase Order dated November 23, 2015   10-K   001-37593   10.18   4/2/18    
10.18   Vendor Master Services Agreement, dated July 5, 2013, by and between Borqs Software Solutions Pvt. Ltd. And Qualcomm India Private Limited                   X
10.19   Stock Repurchase Agreement, dated January 10, 2018, by and among Borqs Technologies, Inc., Zhengqi International Holding Limited, Borqs International Holding Corp., Zhengqi International Holding Limited, solely in its capacity as the Issuer Representative and Zhengdong Zou, solely in its capacity as the Seller Representative  

8-K

 

  001-37593   99.1   1/12/18  
10.20   Loan and Security Agreement, effective as of April 30, 2018, by and between Borqs Hong Kong Limited and Partners For Growth V, L.P.                   X
10.21   Subordination Agreement, effective as of April 30, 2018, by and between Borqs Hong Kong Limited, Borqs International Holding Corp., SPD Silicon Valley Bank Co., Ltd. and Partners For Growth V, L.P.                   X
10.22   Deed of Guarantee and Indemnity, effective as of April 30, by and between Borqs International Holding Corp. and Partners For Growth V, L.P.                   X
10.23   Debenture, effective as of April 30, 2018, by and between Borqs International Holding Corp. and Partners For Growth V, L.P.                   X
10.24   Deed and Charge of Shares, effective as of April 30, 2018, by and between Borqs International Holding Corp. and Partners For Growth V, L.P.                   X
10.25   Deed of Guarantee and Indemnity, effective as of April 30, 2018, by and between Borqs Hong Kong Limited and Partners For Growth V., L.P.                   X
10.26   Debenture, effective as of April 30, 2018, by and between Borqs Hong Kong Limited and Partners For Growth V, L.P.                   X
10.27   Intellectual Property Security Agreement, effective as of April 30, 2018, by and between Borqs Hong Kong Limited and Partners For Growth V, L.P.                   X
10.28   Intellectual Property Security Agreement, effective as of April 30, 2018, by and between Borqs International Holding Corp. and Partners For Growth V, L.P.                   X
10.29   Equitable Mortgage, effective as of April 30, 2018, by and between Borqs Technologies, Inc., Borqs International Holding Corp. and Partners For Growth V, L.P.                   X
10.30   Waiver and Modification No. 2 to Loan and Security Agreement, effective as of April 30, 2018, by and between Borqs Hong Kong Limited and Partners for Growth IV, L.P.                     X
10.31  

Form of Indemnity Agreement, by and between Pacific Special Acquisition Corp. and its directors and executive offers

   S-1/A    6770   10.10   9/18/15     

 

  II- 4  

  

        Incorporated by Reference
Exhibit Number   Exhibit Title   Form   File No.   Exhibit   Filing Date   Filed Herewith
21.01**   List of subsidiaries                  
23.01*   Consent of Maples and Calder (Hong Kong) LLP (included in Exhibit 5.1)                  
23.02   Consent of Independent Registered Public Accounting Firm                   X
24.01**   Power of Attorney (included on the signature page to this Registration Statement)                    
101.INS   XBRL Instance Document                    
101.SCH   XBRL Schema Linkbase Document                    
101.CAL   XBRL Calculation Linkbase Document                    
101.DEF   XBRL Definition Linkbase Document                    
101.EXT   XBRL Extension Label Linkbase Document                    
101.PRE   XBRL Presentation Linkbase Document                    

 

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

** Previously included in the Registration Statement on Form S-1 filed on February 14, 2018.

 

  (b) Financial Statement Schedules.

 

All other financial statement schedules are omitted because they are not applicable or the information is included in the Registrant’s consolidated financial statements or related notes.

 

  II- 5  

Table of Contents  

 

Item 17. Undertakings.

 

The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to provisions described in Item 14 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

 

The undersigned Registrant hereby undertakes that:

 

  (1) for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

 

  (2) for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial  bona fide  offering thereof .

 

  II- 6  

Table of Contents  

 

SIGNATURES

 

Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Beijing, China, on July 2, 2018

 

  BORQS TECHNOLOGIES, INC.
     
  By: /s/ Pat Sek Yuen Chan
    Pat Sek Yuen Chan
    Chief Executive Officer

 

Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:

 

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

 

*By: /s/ Pat Sek Yuan Chan
  Pat Sek Yuan Chan  
  Attorney-in-fact  

 

 

II-7

 

 

Exhibit 1.1

 

[_____] ORDINARY SHARES

 

BORQS TECHNOLOGIES, INC.

 

UNDERWRITING AGREEMENT

 

July __, 2018

 

MAXIM GROUP LLC
405 Lexington Avenue
New York, NY 10174

 

As Representative of the Underwriters
named on Schedule A hereto

 

Ladies and Gentlemen:

 

BORQS Technologies, Inc., a British Virgin Islands corporation (the “ Company ), confirms its agreement, subject to the terms and conditions set forth herein, with each of the underwriters listed on Schedule A hereto (collectively, the “ Underwriters ), for whom Maxim Group LLC is acting as representative (in such capacity, the “ Representative ), to sell and issue to the Underwriters an aggregate of [____] ordinary shares, no par value (the “ Ordinary Shares ) of the Company (the “ Firm Shares ). In addition, the Company and certain stockholders of the Company (the “ Selling Stockholders ”) named in Schedule D hereto severally propose to sell an aggregate of [__________] shares (the “ Selling Stockholder Firm Shares” and collectively with the Company Firm Shares, the “ Firm Shares ”). Each Selling Stockholder has agreed to sell the number of Firm Shares set forth opposite such Selling Stockholder’s name in Schedule D hereto and, if and to the extent that the Representative shall have determined to exercise, on behalf of the Underwriters, the Over-allotment Option (as hereinafter defined), the number of Option Shares (as hereinafter defined) set forth opposite such Selling Stockholder’s name in Schedule D hereto. The Company and the Selling Stockholders are hereinafter sometimes collectively referred to as the “ Sellers. ” The Sellers agree with the several Underwriters as set forth below. In addition, the Sellers propose to sell to the Underwriters, upon the terms and conditions set forth herein, the Option Shares (as hereinafter defined). The Firm Shares and Option Shares are more fully described in the Registration Statement and Prospectus referred to below.

 

The offering and sale of the Ordinary Shares contemplated by this underwriting agreement (this “Agreement”) is referred to herein as the “Offering.”

 

1.1 Firm Shares; Over-Allotment Option.

 

(a) Purchase of Firm Shares. On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company agrees to issue and sell, severally and not jointly, to the several Underwriters, an aggregate of [____] Firm Shares of the Company at a purchase price (net of discounts and commissions) of $[_____] per Firm Share (the “ Per Share Purchase Price ”). The Underwriters, severally and not jointly, agree to purchase from the Company the number of Firm Shares set forth opposite their respective names on Schedule A attached hereto and made a part hereof at a purchase price (net of discounts and commissions) of $[_____] per Firm Share. In addition, on the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, each of the Selling Stockholders agrees to sell to the several Underwriters such number of Firm Shares as is set forth opposite such Selling Stockholder’s name on Schedule D hereto at a purchase price of $[____] per Firm Share (which is equal to the Per Share Purchase Price). The Underwriters, severally and not jointly, agree to purchase from the Selling Stockholders the Firm Shares set forth opposite their respective names on Schedule D attached hereto and made a part hereof

 

 

 

 

(b) Payment and Delivery. Delivery and payment for the Firm Shares shall be made at 10:00 A.M., New York time, on the second Business Day following the effective date (the “ Effective Date ”) of the Registration Statement (or the third Business Day following the Effective Date, if the Registration Statement is declared effective after 4:30 p.m.) or at such earlier time as shall be agreed upon by the Representative and the Company at the offices of the Representative or at such other place as shall be agreed upon by the Representative and the Company. The hour and date of delivery and payment for the Firm Shares is called the “ Closing Date .” The closing of the payment of the purchase price for, and delivery of certificates representing, the Firm Shares is referred to herein as the “ Closing .” Payment for the Company Firm Shares shall be made on the Closing Date at the Representative’s election by wire transfer in Federal (same day) funds or by certified or bank cashier’s check(s) in New York Clearing House funds. Any remaining proceeds (less commissions, expense allowance and actual expense payments or other fees payable pursuant to this Agreement) shall be paid to the order of the Company upon delivery to the Representative of certificates (in form and substance satisfactory to the Underwriters) representing the Firm Shares (or through the full fast transfer facilities of the Depository Trust Company (the “ DTC ”)) for the account of the Underwriters. The Firm Shares shall be registered in such name or names and in such authorized denominations as the Representative may request in writing at least two Business Days prior to the Closing Date. The Company shall permit the Representative to examine and package the Firm Shares for delivery, at least one full Business Day prior to the Closing Date. The Company shall not be obligated to sell or deliver the Firm Shares except upon tender of payment by the Representative for all the Firm Shares. Payment for Selling Stockholder Firm Shares shall be made on the Closing Date by wire transfer in Federal (same day) funds of the price for the Selling Stockholder Firm Shares being purchased to accounts designated by each Selling Stockholder in accordance with the Power of Attorney and Custody Agreement (as hereinafter defined) upon delivery to the Representative certificates (in form and substance satisfactory to the Underwriters) representing the Selling Stockholder Firm Shares (or through the full fast transfer facilities of the Depository Trust Company (the “DTC”)) for the account of the Underwriters. The certificates for the Selling Stockholder Firm Shares shall be registered in such name or names and in such authorized denominations as the Representative may request in writing at least two Business Days prior to the Closing Date. The Selling Stockholders agree to cause certificates for the Selling Stockholder Firm Shares to be delivered pursuant to this Agreement through the facilities of the DTC, New York, New York, or at such other places as may be designated by the Representative, and to be made available for checking and packaging at the above offices or such other places as may be designated by the Representative at least one full Business Day prior to the Closing Date.

 

(c) Option Shares. For the purposes of covering any over-allotments in connection with the distribution and sale of the Firm Shares, the Representative on behalf of the Underwriters is, hereby granted, an option to purchase up to an additional 15% of the number of Firm Shares, or [___] Ordinary Shares (the “ Option Shares ”) to be offered by the Company and the Selling Stockholders in the Offering (the “ Over-allotment Option ”). For the purposes of covering any over-allotments in connection with the distribution and sale of the Firm Shares, the Selling Stockholders, severally and not jointly, agree to sell to the Underwriters all or any portion of the Option Shares as specified by the Representative in the notice described in Section 1(d) hereof at a purchase price of $[____] per Option Share (which is equal to the Per Share Purchase Price). If any Option Shares are to be purchased, each Underwriter agrees, severally and not jointly, to purchase the Option Shares from each Selling Stockholder in the proportion that the number of Firm Shares set opposite the name of each Underwriter in Schedule D hereto bears to the total number of Firm Shares purchased (subject to such adjustments to eliminate fractional shares as the Representative may determine). The Firm Shares and the Option Shares are hereinafter collectively referred to as the “ Shares . The Shares and the Representative’s Securities (as hereinafter defined) are referred to as the “ Securities ”. The purchase price to be paid for the Option Shares (net of discounts and commissions) will be $[_____] per Option Share.

 

(d) Exercise of Option. The Over-allotment Option granted pursuant to Section 1.1(c) hereof may be exercised by the Representative as to all (at any time) or any part (from time to time) of the Option Shares within 45 days after the Effective Date. The Underwriters will not be under any obligation to purchase any Option Shares prior to the exercise of the Over-allotment Option. The Over-allotment Option granted hereby may be exercised by the giving of oral notice to the Company from the Representative, which must be confirmed in writing by overnight mail or facsimile transmission setting forth the number of Option Shares to be purchased and the date and time for delivery of and payment for the Option Shares, which will not be later than five Business Days after the date of the notice or such other time as shall be agreed upon by the Company and the Representative, at the offices of the Representative or at such other place as shall be agreed upon by the Company and the Representative. If such delivery and payment for the Option Shares does not occur on the Closing Date, the date and time of the closing for such Option Shares will be as set forth in the notice (hereinafter the “ Option Closing Date ”). Upon exercise of the Over-allotment Option, the Company shall become obligated to convey to the Underwriters, and, subject to the terms and conditions set forth herein, the Underwriters shall become obligated to purchase, the number of Option Shares specified in such notice.

 

2

 

 

(e) Payment and Delivery of Option Shares. Payment for the Company Option Shares shall be made on the Closing Date or the Option Closing Date, as the case may be, at the Representative’s election by wire transfer in Federal (same day) funds or by certified or bank cashier’s check(s) in New York Clearing House funds, by deposit of the sum of $[_____] per Option Share to the Company upon delivery to the Underwriters of certificates (in form and substance satisfactory to the Underwriters) representing the Option Shares (or through the full fast transfer facilities of DTC) for the account of the Underwriters. The certificates representing the Company Option Shares to be delivered will be in such denominations and registered in such names as the Representative requests not less than two Business Days prior to the Closing Date or the Option Closing Date, as the case may be, and will be made available to the Representative for inspection, checking and packaging at the aforesaid office of the Company’s transfer agent or correspondent not less than one full Business Day prior to such Closing Date or Option Closing Date. Payment for Selling Stockholders Option Shares shall be made on the Closing Date or Option Closing Date, as the case may be, by wire transfer in Federal (same day) funds of the price for the Option Shares being purchased to accounts designated by each Selling Stockholder against delivery to the Representative for the respective accounts of the several Underwriters of the Option Shares in the form of certificates for the securities comprising the Option Shares through the full fast transfer facilities of DTC for the account of the Underwriters. The certificates for the Selling Stockholders’ Option Shares shall be registered in the name or names and shall be in the denominations the Representative requests not less than two Business Days prior to the Closing Date or the Option Closing Date, as the case may be, and will be made available to the Representative for inspection, checking and packaging at the aforesaid office of the Company’s transfer agent or correspondent not less than one full Business Day prior to such Closing Date or Option Closing Date.

 

(f) Representative's Warrants. As additional consideration, the Company hereby agrees to issue and sell to the Representative (and/or their respective designees) on the Effective Date warrants (the “ Representative's Warrants ”) for the purchase of an aggregate of [_____] Ordinary Shares for an aggregate purchase price of $100.00. The Representative's Warrants shall be exercisable, in whole or in part, commencing on the date that is six months from the Effective Date and expiring on the three-year anniversary of the Effective Date at an initial exercise price per unit of $[____], which is equal to one hundred and twenty percent (120%) of the public offering price of a Share. The Representative's Warrants and the Ordinary Shares issuable upon exercise of the Representative’s Warrants are hereinafter referred to collectively as the “ Representative’s Securities .”

 

3

 

 

2. Representations and Warranties of the Company.

 

2.1 The Company represents, warrants and covenants to, and agrees with, each of the Underwriters that, as of the date hereof and as of the Closing Date:

 

(a) The Company has prepared and filed with the Securities and Exchange Commission (the “ Commission ”) a registration statement on Form S-1 (Registration No. 333-223034), and amendments thereto, and related preliminary prospectuses for the registration under the Securities Act of 1933, as amended (the “ Securities Act ”), of the Securities which registration statement, as so amended (including post-effective amendments, if any), has been declared effective by the Commission and copies of which have heretofore been delivered to the Underwriters. The registration statement, as amended at the time it became effective, including the prospectus, financial statements, schedules, exhibits and other information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Securities Act, is hereinafter referred to as the “Registration Statement.” If the Company has filed or is required pursuant to the terms hereof to file a registration statement pursuant to Rule 462(b) under the Securities Act registering additional Ordinary Shares (a “ Rule 462(b) Registration Statement ”), then, unless otherwise specified, any reference herein to the term “Registration Statement” shall be deemed to include such Rule 462(b) Registration Statement. Other than a Rule 462(b) Registration Statement, which, if filed, becomes effective upon filing, no other document with respect to the Registration Statement has heretofore been filed with the Commission. All of the Securities have been registered under the Securities Act pursuant to the Registration Statement or, if any Rule 462(b) Registration Statement is filed, will be duly registered under the Securities Act with the filing of such Rule 462(b) Registration Statement. The Company has responded to all requests of the Commission for additional or supplemental information. Based on communications from the Commission, no stop order suspending the effectiveness of either the Registration Statement or the Rule 462(b) Registration Statement, if any, has been issued and no proceeding for that purpose has been initiated or threatened by the Commission. The Company, if required by the Securities Act and the rules and regulations of the Commission (the “ Rules and Regulations ”), proposes to file the Prospectus with the Commission pursuant to Rule 424(b) under the Securities Act (“ Rule 424(b) ”). The prospectus, in the form in which it is to be filed with the Commission pursuant to Rule 424(b), or, if the prospectus is not to be filed with the Commission pursuant to Rule 424(b), the prospectus in the form included as part of the Registration Statement at the time the Registration Statement became effective, is hereinafter referred to as the “Prospectus,” except that if any revised prospectus or prospectus supplement shall be provided to the Underwriters by the Company for use in connection with the Offering which differs from the Prospectus (whether or not such revised prospectus or prospectus supplement is required to be filed by the Company pursuant to Rule 424(b)), the term “Prospectus” shall also refer to such revised prospectus or prospectus supplement, as the case may be, from and after the time it is first provided to the Underwriters for such use. Any preliminary prospectus or prospectus subject to completion included in the Registration Statement or filed with the Commission pursuant to Rule 424 under the Securities Act is hereafter called a “ Preliminary Prospectus .” Any reference herein to the Registration Statement, any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include the exhibits incorporated by reference therein pursuant to the Rules and Regulations on or before the effective date of the Registration Statement, the date of such Preliminary Prospectus or the date of the Prospectus, as the case may be. Any reference herein to the terms “amend”, “amendment” or “supplement” with respect to the Registration Statement, any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include: (i) the filing of any document under the Securities Exchange Act of 1934, as amended, and together with the Rules and Regulations promulgated thereunder (the “ Exchange Act ”) after the Effective Date, the date of such Preliminary Prospectus or the date of the Prospectus, as the case may be, which is incorporated therein by reference, and (ii) any such document filed as such with the Commission. All references in this Agreement to the Registration Statement, the Rule 462 (b) Registration Statement, a Preliminary Prospectus and the Prospectus, or any amendments or supplements to any of the foregoing shall be deemed to include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System (“ EDGAR ”).

 

(b) The Company has filed with the Commission a Form 8-A (File Number 001-37593) providing for the registration under the Exchange Act of the Ordinary Shares (the “Form 8-A”). The registration of the Ordinary Shares under the Exchange Act has been declared effective by the Commission prior the date hereof, no stop order suspending the effectiveness of the Form 8-A or any part thereof, or any amendment thereof have been issued and no proceedings for the issuance of such an order have been initiated or threatened.

 

(c) At the time of the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement or the effectiveness of any post-effective amendment to the Registration Statement, when the Prospectus is first filed with the Commission pursuant to Rule 424(b), when any supplement to or amendment of the Prospectus is filed with the Commission, when any document filed under the Exchange Act was or is filed, at all other subsequent times until the completion of the public offer and sale of the Securities, and at the Closing Date and the Option Closing Date, if any, the Registration Statement and the Prospectus and any amendments thereof and supplements or exhibits thereto complied or will comply in all material respects with the applicable provisions of the Securities Act, the Exchange Act and the Rules and Regulations, and did not and will not contain an untrue statement of a material fact and did not and will not omit to state any material fact required to be stated therein or necessary in order to make the statements therein: (i) in the case of the Registration Statement, not misleading, and (ii) in the case of the Prospectus in light of the circumstances under which they were made, not misleading. When any Preliminary Prospectus was first filed with the Commission (whether filed as part of the registration statement for the registration of the Securities or any amendment thereto or pursuant to Rule 424(a) under the Securities Act) and when any amendment thereof or supplement thereto was first filed with the Commission, such Preliminary Prospectus and any amendments thereof and supplements thereto complied in all material respects with the applicable provisions of the Securities Act, the Exchange Act and the Rules and Regulations and did not contain an untrue statement of a material fact and did not omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. No representation and warranty is made in this subsection (b), however, with respect to any information contained in or omitted from the Registration Statement or the Prospectus or any related Preliminary Prospectus or any amendment thereof or supplement thereto in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of any Underwriter through the Representative specifically for use therein. The parties acknowledge and agree that such information provided by or on behalf of any Underwriter consists solely of the subsections of the “Underwriters” section of the Prospectus captioned “Price Stabilization, Short Positions and Penalty Bids,” the information with respect to dealers’ concessions and reallowances contained in the section entitled “Commission and Expenses,” the table of underwriters in the first paragraph, the last sentence of “Other Terms” and the penultimate paragraph on the cover page of the Preliminary Prospectus and the Prospectus (the “ Underwriters’ Information ”).

 

4

 

 

(d) Neither: (i) any Issuer-Represented General Free Writing Prospectus(es) (as defined below) issued at or prior to the Time of Sale (as defined below) and the Statutory Prospectus (as defined below), all considered together (collectively, the “ General Disclosure Package ”), nor (ii) any individual Issuer-Represented Limited-Use Free Writing Prospectus(es) (as defined below), when considered together with the General Disclosure Package, includes or included as of the Time of Sale, any untrue statement of a material fact or omits or omitted as of the Time of Sale to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The preceding sentence does not apply to statements in or omissions from any Statutory Prospectus included in the Registration Statement or any Issuer-Represented Free Writing Prospectus (as defined below) based upon and in conformity with written information furnished to the Company by the Representative for use therein.

 

(e) Each Issuer-Represented Free Writing Prospectus, as of its issue date and at all subsequent times until the Closing Date or until any earlier date that the Company notified or notifies the Representative as described in the next sentence, did not, does not and will not include any information that conflicted, conflicts or will conflict with the information contained in the Registration Statement, any Statutory Prospectus or the Prospectus. If at any time following issuance of an Issuer-Represented Free Writing Prospectus there occurred or occurs an event or development as a result of which such Issuer-Represented Free Writing Prospectus conflicted or would conflict with the information contained in the Registration Statement, any Statutory Prospectus or the Prospectus relating to the Securities or included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances prevailing at that subsequent time, not misleading, the Company has notified or shall notify promptly the Representative so that any use of such Issuer-Represented Free Writing Prospectus may cease until it is promptly amended or supplemented by the Company, at its own expense, to eliminate or correct such conflict, untrue statement or omission. The foregoing two sentences do not apply to statements in or omissions from any Issuer-Represented Free Writing Prospectus based upon and in conformity with written information furnished to the Company by the Representative for use therein.

 

(f) Neither the Company nor any of the Selling Stockholders has distributed and neither the Company nor any Selling Stockholders will distribute any prospectus or other offering material in connection with the offering and sale of the Securities other than the General Disclosure Package or the Prospectus or other materials permitted by the Securities Act to be distributed by the Company. Unless the Company obtains the prior consent of the Representative, the Company has not made and shall not make any offer relating to the Securities that would constitute an “issuer free writing prospectus,” as defined in Rule 433 under the Securities Act, or that would otherwise constitute a “free writing prospectus,” as defined in Rule 405 under the Securities Act, required to be filed with the Commission. The Company has complied and shall comply with the requirements of Rules 164 and 433 under the Securities Act applicable to any Issuer-Represented Free Writing Prospectus as of its issue date and at all subsequent times through the Closing Date, including timely filing with the Commission where required, legending and record keeping. The Company has satisfied and shall satisfy the conditions in Rule 433 under the Securities Act to avoid a requirement to file with the Commission any electronic road show.

 

(g) Each Underwriter agrees that, unless it obtains the prior written consent of the Company, it shall not make any offer relating to the Securities that would constitute an Issuer-Represented Free Writing Prospectus (as defined below) or that would otherwise (without taking into account any approval, authorization, use or reference thereto by the Company) constitute a “free writing prospectus” required to be filed by the Company with the Commission (as defined herein) or retained by the Company under Rule 433 of the Securities Act; provided that the prior written consent of the Company hereto shall be deemed to have been given in respect of any Issuer-Represented General Free Writing Prospectuses referenced on Schedule C attached hereto.

 

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As used in this Agreement, the terms set forth below shall have the following meanings:

 

(i) “ Time of Sale ” means [10:00 a.m.] (Eastern time) on the date of this Agreement.

 

(ii) “ Statutory Prospectus ” as of any time means the prospectus that is included in the Registration Statement immediately prior to that time. For purposes of this definition, information contained in a form of prospectus that is deemed retroactively to be a part of the Registration Statement pursuant to Rule 430A or 430B shall be considered to be included in the Statutory Prospectus as of the actual time that form of prospectus is filed with the Commission pursuant to Rule 424(b) under the Securities Act.

 

(iii) “ Issuer-Represented Free Writing Prospectus ” means any “issuer free writing prospectus,” as defined in Rule 433 under the Securities Act, relating to the Securities that (A) is required to be filed with the Commission by the Company, or (B) is exempt from filing pursuant to Rule 433(d)(5)(i) under the Securities Act because it contains a description of the Securities or of the offering that does not reflect the final terms or pursuant to Rule 433(d)(8)(ii) because it is a “bona fide electronic road show,” as defined in Rule 433 of the Regulations, in each case in the form filed or required to be filed with the Commission or, if not required to be filed, in the form retained in the Company’s records pursuant to Rule 433 (g) under the Securities Act.

 

(iv) “ Issuer-Represented General Free Writing Prospectus ” means any Issuer-Represented Free Writing Prospectus that is intended for general distribution to prospective investors, as evidenced by its being specified in Schedule C to this Agreement.

 

(v) “ Issuer-Represented Limited-Use Free Writing Prospectus ” means any Issuer-Represented Free Writing Prospectus that is not an Issuer-Represented General Free Writing Prospectus. The term Issuer-Represented Limited-Use Free Writing Prospectus also includes any “bona fide electronic road show,” as defined in Rule 433 of the Regulations, that is made available without restriction pursuant to Rule 433(d)(8)(ii), even though not required to be filed with the Commission.

 

(h) Ernst & Young Hua Ming LLP (the “ Auditors ”), whose reports relating to the Company are included in the Registration Statement, are independent public accountants as required by the Securities Act, the Exchange Act and the Rules and Regulations, are registered as public accountants with the PCAOB and, to the Company’s knowledge, such accountants are not in violation of the auditor independence requirements of the Sarbanes-Oxley Act of 2002 (“ Sarb-Ox ”).

 

(i) Subsequent to the respective dates as of which information is presented in the Registration Statement, the General Disclosure Package and the Prospectus, and except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus: (i) the Company has not declared, paid or made any dividends or other distributions of any kind on or in respect of its capital stock, and (ii) there has been no material adverse change (or, to the knowledge of the Company, any development which has a high probability of involving a material adverse change in the future), whether or not arising from transactions in the ordinary course of business, in or affecting: (A) the business, condition (financial or otherwise), results of operations, shareholders’ equity, properties or prospects of the Company and its Subsidiaries (as defined below), taken as a whole; (B) the long-term debt or capital stock of the Company or any of its Subsidiaries; or (C) the Offering or consummation of any of the other transactions contemplated by this Agreement, the Registration Statement, the General Disclosure Package and the Prospectus (a “ Material Adverse Change ”). Since the date of the latest balance sheet presented in the Registration Statement, the General Disclosure Package and the Prospectus, and other than in the ordinary course of their respective businesses, neither the Company nor any Subsidiary has incurred or undertaken any liabilities or obligations, whether direct or indirect, liquidated or contingent, matured or unmatured, or entered into any transactions, including any acquisition or disposition of any business or asset, which are material to the Company and the Subsidiaries taken as a whole, except for liabilities, obligations and transactions which are disclosed in the Registration Statement and the Prospectus.

 

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(j) As of the dates indicated in the Registration Statement, the General Disclosure Package and the Prospectus, the authorized, issued and outstanding shares of capital stock of the Company were as set forth in the Registration Statement, the General Disclosure Package and the Prospectus in the column headed “Actual” under the section thereof captioned “Capitalization” and, after giving effect to the Offering and the other transactions (excluding the offer and sale of the Over-allotment Shares) contemplated by this Agreement, the Registration Statement, the General Disclosure Package and the Prospectus, will be as set forth in the column headed “As Adjusted” in such section. All of the issued and outstanding shares of capital stock of the Company, as well as any securities convertible or exercisable for capital stock of the Company, are fully paid and non-assessable and have been duly and validly authorized and issued, in compliance with all applicable state, federal and foreign securities laws and not in violation of or subject to any preemptive or similar right that does or will entitle any Person (as defined below), upon the issuance or sale of any security, to acquire from the Company or any Subsidiary any Relevant Security. As used herein, the term “ Relevant Security ” means any Ordinary Share or other security of the Company or any Subsidiary that is convertible into, or exercisable or exchangeable for Ordinary Shares or equity securities, or that holds the right to acquire any Ordinary Shares or equity securities of the Company or any Subsidiary or any other such Relevant Security, except for such rights as may have been fully satisfied or waived prior to the effectiveness of the Registration Statement. As used herein, the term “ Person ” means any foreign or domestic individual, corporation, trust, partnership, joint venture, limited liability company or other entity. Except as set forth in, or contemplated by, the Registration Statement, the General Disclosure Package and the Prospectus, on the Effective Date and on the Closing Date, there will be no options, warrants, or other rights to purchase or otherwise acquire any authorized, but unissued Ordinary Shares or any security convertible into Ordinary Shares, or any contracts or commitments to issue or sell Ordinary Shares or any such options, warrants, rights or convertible securities.

 

(k) The Shares have been duly and validly authorized and, when issued, delivered and paid for in accordance with this Agreement on the Closing Date, will be duly and validly issued, fully paid and non-assessable, will have been issued in compliance with all applicable state, federal and foreign securities laws and will not have been issued in violation of or subject to any preemptive or similar right that does or will entitle any Person to acquire any Relevant Security from the Company or any Subsidiary upon issuance or sale of the Shares in the Offering. The Ordinary Shares conform to the descriptions thereof contained in the Registration Statement, the General Disclosure Package and the Prospectus. Except as disclosed in the Registration Statement and the Prospectus, neither the Company nor any Subsidiary has outstanding warrants, options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, or any contracts or commitments to issue or sell, any Relevant Security.

 

(l) The Ordinary Shares underlying the Representative's Warrants have been duly authorized for issuance, will conform to the description thereof in the Registration Statement and in the Prospectus and have been validly reserved for future issuance and will, upon exercise of the Representative's Warrants and payment of the exercise price thereof, be duly and validly issued, fully paid and non-assessable and will not have been issued in violation of or subject to preemptive or similar rights to subscribe for or purchase securities of the Company. The issuance of such securities is not subject to any statutory preemptive rights under the laws of the British Virgin Islands or the Company's organization documents as in effect at the time of issuance, rights of first refusal or other similar rights of any securityholder of the Company (except for such preemptive or contractual rights as were waived).

 

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(m) The subsidiaries of the Company (collectively the “ Subsidiaries ”) are BORQS International Holding Corp. (“ BORQS Holdings ”), a Cayman Islands business company, which is the Company’s direct, wholly-owned subsidiary, BORQS Hong Kong Limited (“ BORQS HK ”), a Hong Kong company which is a direct wholly-owned subsidiary of BORQS Holdings, BORQS Korea, a company formed under the laws of the Republic of Korea, BORQS Japan Co., Ltd., a company formed under the laws of Japan, BOZZ Solutions, Inc., a corporation formed under the laws of the State of California, BORQS Beijing Ltd. (“ BORQS Beijing ”), a wholly foreign owned enterprise incorporated under the laws of the People’s Republic of China which is a direct wholly-owned subsidiary of BORQS HK, Beijing Big Cloud Century Technology Co., Ltd. (“ Big Cloud Century ”), an entity incorporated under the laws of the People’s Republic of China which is a direct wholly-owned subsidiary of BORQS Beijing, Beijing BORQS Software Technology Co, Ltd. (“ Beijing Software ”), an entity incorporated under the laws of the People’s Republic of China which is a direct wholly-owned subsidiary of Big Cloud Century, Beijing Borqs Wireless Technology Co, Ltd. (“ Beijing Wireless ”), an entity incorporated under the laws of the People’s Republic of China which is the direct wholly-owned subsidiary of Big Cloud Century, BORQS Software Solutions Private Limited, an entity incorporated under the laws of India, Beijing Big Cloud Network Technology Co., Ltd. (“ Big Cloud Network ”), an entity incorporated under the laws of the People’s Republic of China and a contractually controlled affiliate of BORQS Beijing, YuanTel (Beijing) Investment Management Co., Ltd., an entity incorporated under the laws of the People’s Republic of China and a contractually controlled affiliate of BORQS Beijing, YuanTel (Beijing) Telecommunications Technology Co., Ltd., an entity incorporated under the laws of the People’s Republic of China and a contractually controlled affiliate of BORQS Beijing, and Beijing Tongbaohuida Technology Co., Ltd., an entity incorporated under the laws of the People’s Republic of China and a contractually controlled affiliate of BORQS Beijing, and they are the only subsidiaries of the Company within the meaning of Rule 405 under the Securities Act. Except for the Subsidiaries, Beijing Huayi Shikong Technology Co., Ltd., BORQS Technologies (HK) Limited, BORQS Software Solutions Private Limited and BR. Droid Desenvolvimento de Software S.A., the Company holds no ownership or other interest, nominal or beneficial, direct or indirect, in any corporation, partnership, joint venture or other business entity. Except as set forth in the Registration Statement and the Prospectus, all of the issued and outstanding shares of capital stock of, or other ownership interests in, each Subsidiary have been duly and validly authorized and issued and are fully paid and non-assessable and are owned, directly or indirectly, by the Company, free and clear of any lien, charge, mortgage, pledge, security interest, claim, equity, trust or other encumbrance, preferential arrangement, defect or restriction of any kind whatsoever (any “ Lien ”). Except as described in the Registration Statement, no director, officer or key employee of the Company named in the Prospectus holds any direct equity, debt or other pecuniary interest in any Subsidiary or any Person with whom the Company or any Subsidiary does business or is in privity of contract with, other than, in each case, indirectly through the ownership by such individuals of Ordinary Shares.

 

(n) Each of the Company and the Subsidiaries has been duly incorporated, formed or organized, and validly exists as a corporation, partnership or limited liability company in good standing under the laws of its jurisdiction of incorporation, formation or organization. Each of the Company and the Subsidiaries has all requisite power and authority to carry on its business as it is currently being conducted and as described in the Registration Statement, the General Disclosure Package and the Prospectus, and to own, lease and operate its respective properties. Each of the Company and the Subsidiaries is duly qualified to do business and is in good standing as a foreign corporation, partnership or limited liability company in each jurisdiction in which the character or location of its properties (owned, leased or licensed) or the nature or conduct of its business makes such qualification necessary, except, in each case, for those failures to be so qualified or in good standing which (individually and in the aggregate) would not reasonably be expected to have a material adverse effect on: (i) the business, condition (financial or otherwise), results of operations, shareholders’ equity, properties or prospects of the Company and the Subsidiaries, taken as a whole; (ii) the long-term debt or capital stock of the Company or any Subsidiary; or (iii) the Offering or consummation of any of the other transactions contemplated by this Agreement, the Registration Statement, the General Disclosure Package and the Prospectus (any such effect being a “ Material Adverse Effect ”).

 

(o) Neither the Company nor any Subsidiary: (i) is in violation of its certificate or articles of incorporation, memorandum and articles of association, by-laws, certificate of formation, limited liability company agreement, joint venture agreement, partnership agreement or other organizational documents, (ii) other than as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, is in default under, and no event has occurred which, with notice or lapse of time or both, would constitute a default under or result in the creation or imposition of any Lien upon any of its property or assets pursuant to, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which it is a party or by which it is bound or to which any of its property or assets is subject or (iii) is in violation in any respect of any law, rule, regulation, ordinance, directive, judgment, decree or order of any judicial, regulatory or other legal or governmental agency or body, foreign or domestic, except for any Lien or violation disclosed in the Registration Statement, the General Disclosure Package and the Prospectus.

 

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(p) The Company has full right, power and authority to execute and deliver this Agreement, the Representative’s Warrants and all other agreements, documents, certificates and instruments required to be delivered pursuant to this Agreement. The Company has duly and validly authorized this Agreement, the Representative’s Warrants and each of the transactions contemplated by this Agreement and the Representative’s Warrants. This Agreement and the Representative’s Warrants have been duly and validly executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company and are enforceable against the Company in accordance with their terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).

 

(q) The execution, delivery, and performance of this Agreement, the Representative’s Warrants and all other agreements, documents, certificates and instruments required to be delivered pursuant to this Agreement, and consummation of the transactions contemplated by this Agreement do not and will not: (i) conflict with, require consent under or result in a breach of any of the terms and provisions of, or constitute a default (or an event which with notice or lapse of time, or both, would constitute a default) under, or result in the creation or imposition of any Lien upon any property or assets of the Company or any Subsidiary pursuant to, any indenture, mortgage, deed of trust, loan agreement or other agreement, instrument, franchise, license or permit to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary or their respective properties, operations or assets may be bound or (ii) violate or conflict with any provision of the certificate or articles of incorporation, by-laws, certificate of formation, limited liability company agreement, partnership agreement or other organizational documents of the Company or any Subsidiary, or (iii) violate or conflict with any law, rule, regulation, ordinance, directive, judgment, decree or order of any judicial, regulatory or other legal or governmental agency or body, domestic or foreign, except in the case of subsections (i) and (iii) for any default, conflict or violation that would not have or reasonably be expected to have a Material Adverse Effect.

 

(r) Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, each of the Company and the Subsidiaries has all consents, approvals, authorizations, orders, registrations, qualifications, licenses, filings and permits of, with and from all judicial, regulatory and other legal or governmental agencies and bodies and all third parties, foreign and domestic (collectively, the “ Consents ”), to own, lease and operate its properties and conduct its business as it is now being conducted and as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, and each such Consent is valid and in full force and effect, except to the extent the failure to obtain same is not reasonably expected to have a Material Adverse Effect. With respect to any Consent so required but as to which the Company and its Subsidiaries have not received as of the date hereof, as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, proper application has been made by the Company or a Subsidiary, as applicable, and neither the Company nor any Subsidiary has any reason to believe such Consent will not be received on a timely basis or containing any materially burdensome restriction that could reasonably be expected to have a Material Adverse Effect. Neither the Company nor any Subsidiary has received notice of any investigation or proceedings which results in or, if decided adversely to the Company or any Subsidiary, could reasonably be expected to result in, the revocation of, or imposition of a materially burdensome restriction on, any Consent. No Consent contains a materially burdensome restriction not adequately disclosed in the Registration Statement, the General Disclosure Package and the Prospectus.

 

(s) Each of the Company and the Subsidiaries is in compliance with all applicable laws, rules, regulations, ordinances, directives, judgments, decrees and orders, foreign and domestic, except for any non-compliance the consequences of which would not have or reasonably be expected to have a Material Adverse Effect. Neither the Company, nor any of its Affiliates (within the meaning of Rule 144 under the Securities Act) (“ Affiliates ”) has received any notice or other information from any regulatory or other legal or governmental agency which could reasonably be expected to result in any default or potential decertification by the Company, or any of its Affiliates.

 

(t) No Consent of, with or from any judicial, regulatory or other legal or governmental agency or body or any third party, foreign or domestic is required for the execution, delivery and performance of this Agreement, the Representative’s Warrants or consummation of each of the transactions contemplated by this Agreement, including the issuance, sale and delivery of the Securities to be issued, sold and delivered hereunder, except the registration under the Securities Act of the Securities, which has become effective, and such Consents as may be required under state securities or blue sky laws or the by-laws and rules of the NASDAQ Capital Market, where the Ordinary Shares have been approved for listing, and FINRA in connection with the purchase and distribution of the Securities by the Underwriters, each of which has been obtained and is in full force and effect.

 

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(u) Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, there is no judicial, regulatory, arbitral or other legal or governmental proceeding or other litigation or arbitration, domestic or foreign, pending to which the Company or any Subsidiary is a party or of which any property, operations or assets of the Company or any Subsidiary is the subject which, individually or in the aggregate, if determined adversely to the Company or any Subsidiary, would reasonably be expected to have a Material Adverse Effect. To the Company’s knowledge, no such proceeding, litigation or arbitration is threatened or contemplated; and the defense of all such proceedings, litigation and arbitration against or involving the Company or any Subsidiary would not reasonably be expected to have a Material Adverse Effect.

 

(v) The financial statements, including the notes thereto, and the supporting schedules included in the Registration Statement, the General Disclosure Package and the Prospectus comply in all material respects with the requirements of the Securities Act, the Exchange Act and present fairly the financial position as of the dates indicated and the cash flows and results of operations for the periods specified of the Company and its consolidated Subsidiaries. Except as otherwise stated in the Registration Statement, the General Disclosure Package and the Prospectus, said financial statements have been prepared in conformity with United States generally accepted accounting principles applied on a consistent basis throughout the periods involved, except in the case of unaudited financials which are subject to normal year end adjustments and do not contain certain footnotes. The supporting schedules included in the Registration Statement, the General Disclosure Package and the Prospectus present fairly the information required to be stated therein. No other financial statements or supporting schedules are required to be included or incorporated by reference in the Registration Statement, the General Disclosure Package or the Prospectus. The other financial and statistical information included in the Registration Statement, the General Disclosure Package and the Prospectus present fairly the information included therein and have been prepared on a basis consistent with that of the financial statements that are included in the Registration Statement, the General Disclosure Package and the Prospectus and the books and records of the respective entities presented therein.

 

(w) There are no pro forma or as adjusted financial statements which are required to be included in the Registration Statement, the General Disclosure Package and the Prospectus in accordance with Regulation S-X which have not been included as so required. The pro forma and pro forma as adjusted financial information included in the Registration Statement, the General Disclosure Package and the Prospectus has been properly compiled and prepared in accordance with the applicable requirements of the Securities Act and the Rules and Regulations and include all adjustments necessary to present fairly in accordance with generally accepted accounting principles the pro forma and as adjusted financial position of the respective entity or entities presented therein at the respective dates indicated and their cash flows and the results of operations for the respective periods specified. The assumptions used in preparing the pro forma and pro forma as adjusted financial information included in the Registration Statement, the General Disclosure Package and the Prospectus provide a reasonable basis for presenting the significant effects directly attributable to the transactions or events described therein. The related pro forma and pro forma as adjusted adjustments give appropriate effect to those assumptions; and the pro forma and pro forma as adjusted financial information reflect the proper application of those adjustments to the corresponding historical financial statement amounts.

 

(x) The statistical, industry-related and market-related data included in the Registration Statement, the General Disclosure Package and the Prospectus are based on or derived from sources which the Company reasonably and in good faith believes are reliable and accurate, and such data agree with the sources from which they are derived.

 

(y) The Company is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act and files reports with the Commission on the EDGAR system. The Ordinary Shares are registered pursuant to Section 12(b) or 12(g) of the Exchange Act and the outstanding Ordinary Shares are listed on the NASDAQ Capital Market stock market (the “NASDAQ Capital Market”). The Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Ordinary Shares under the Exchange Act or de-listing the Ordinary Shares from the NASDAQ Capital Market, nor has the Company received any notification that the Commission or NASDAQ Capital Market is contemplating terminating such registration or listing. Since August 18, 2017, the Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the Commission pursuant to the reporting requirements of the Exchange Act (all of the foregoing, and all other documents and registration statements heretofore filed by the Company with the Commission being hereinafter referred to as the “SEC Documents”). None of the SEC Documents, at the time they were filed with the Commission (except those SEC Documents that were subsequently amended), contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. As of their respective dates, the financial statements of the Company included (or incorporated by reference) in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the Commission or other applicable rules and regulations with respect thereto (except those SEC Documents that were subsequently amended).

 

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(z) The Company has established and maintains disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 under the Exchange Act) and such controls and procedures are designed to ensure that material information relating to the Company, including its Subsidiaries, is made known to the principal executive officer and the principal financial officer. Except as disclosed in the Registration Statement, in the General Disclosure Package and in the Prospectus, there are no material weaknesses or significant deficiencies in the Company’s disclosure controls and procedures. The Company has utilized such controls and procedures in preparing and evaluating the disclosures in the Registration Statement, in the General Disclosure Package and in the Prospectus.

 

(aa) Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, the Company and the Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurances that (A) transactions are executed in accordance with management’s general or specific authorization; (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with United States generally accepted accounting principles and to maintain accountability for assets; (C) access to assets is permitted only in accordance with management’s general or specific authorization; and (D) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as described in the Registration Statement, the General Disclosure Package or in the Prospectus, since August 18, 2017, there has been no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

(bb) The Company’s Board of Directors has validly appointed an audit committee whose composition satisfies the requirements of the rules and regulations of the NASDAQ Capital Market and the Board of Directors and/or audit committee has adopted a charter that satisfies the requirements of the rules and regulations of the NASDAQ Capital Market. The audit committee has reviewed the adequacy of its charter within the past twelve months. Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, the Board of Directors nor the audit committee has been informed, nor is any director of the Company aware, of: (i) any significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; or (ii) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

 

(cc) Neither the Company nor any of its Affiliates has taken, directly or indirectly, any action which constitutes or is designed to cause or result in, or which could reasonably be expected to constitute, cause or result in, the stabilization or manipulation of the price of any security to facilitate the sale or resale of the Securities.

 

(dd) Neither the Company nor any of its Affiliates has, prior to the date hereof, made any offer or sale of any securities which are required to be “integrated” pursuant to the Securities Act or the Rules and Regulations with the offer and sale of the Securities pursuant to the Registration Statement. Except as disclosed in the Registration Statement, the General Disclosure Package, the Prospectus, neither Company nor any of its Affiliates has sold or issued any Relevant Security during the six-month period preceding the date of the Prospectus, including but not limited to any sales pursuant to Rule 144A or Regulation D or S under the Securities Act, other than Ordinary Shares issued pursuant to employee benefit plans, qualified stock option plans or the employee compensation plans or pursuant to outstanding options, rights or warrants as described in the Registration Statement, the General Disclosure Package and the Prospectus.

 

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(ee) All information contained in the questionnaires completed by each of the Company’s officers and directors immediately prior to the Offering and provided to the Representative as well as the biographies of such individuals in the Registration Statement is true and correct in all material respects and the Company has not become aware of any information which would cause the information disclosed in the questionnaires completed by the directors and officers to become inaccurate and incorrect.

 

(ff) No director or officer of the Company is subject to any non-competition agreement or non-solicitation agreement with any current employer (other than the Company) or prior employer which could materially affect his ability to be and act in his respective capacity of the Company.

 

(gg) Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, no holder of any Relevant Security has any rights to require registration of any Relevant Security as part or on account of, or otherwise in connection with, the offer and sale of the Securities contemplated hereby, and any such rights so disclosed have either been fully complied with by the Company or effectively waived by the holders thereof, and any such waivers remain in full force and effect.

 

(hh) The conditions for use of Form S-1 to register the Offering under the Securities Act, as set forth in the General Instructions to Form S-1, have been satisfied.

 

(ii) The Company is not and, at all times up to and including consummation of the transactions contemplated by this Agreement, and after giving effect to application of the net proceeds of the Offering, will not be, subject to registration as an “investment company” under the Investment Company Act of 1940, as amended, and is not and will not be an entity “controlled” by an “investment company” within the meaning of such act.

 

(jj) No relationship, direct or indirect, exists between or among any of the Company or any Affiliate of the Company, on the one hand, and any director, officer, shareholder, customer or supplier of the Company or any affiliate of the Company, on the other hand, which is required by the Securities Act, the Exchange Act or the Rules and Regulations to be described in the Registration Statement or the Prospectus which is not so described as required. There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company to or for the benefit of any of the officers or directors of the Company or any of their respective family members, except as described in the Registration Statement, the General Disclosure Package and the Prospectus. The Company has not, directly or indirectly, including through a Subsidiary, extended or maintained credit, arranged for the extension of credit, or renewed an extension of credit, in the form of a personal loan to or for any director or executive officer of the Company, except as described in the Registration Statement, the General Disclosure Package and the Prospectus.

 

(kk) The Company is in material compliance with the provisions of Sarb-Ox currently applicable to it and the Rules and Regulations promulgated thereunder and related or similar rules and regulations promulgated by the NASDAQ Capital Market or any other governmental or self regulatory entity or agency, except for such violations which, singly or in the aggregate, would not have a Material Adverse Effect. Without limiting the generality of the foregoing: (i) all members of the Company’s board of directors who are required to be “independent” (as that term is defined under applicable laws, rules and regulations), including, without limitation, all members of the audit committee of the Company’s board of directors, meet the qualifications of independence as set forth under applicable laws, rules and regulations and (ii) the audit committee of the Company’s board of directors has at least one member who is an “audit committee financial expert” (as that term is defined under applicable laws, rules and regulations).

 

(ll) Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, there are no contracts, agreements or understandings between the Company and any Person that would give rise to a valid claim against the Company or any Underwriter for a brokerage commission, finder’s fee or other like payment in connection with the transactions contemplated by this Agreement or, to the Company’s knowledge, any arrangements, agreements, understandings, payments or issuance with respect to the Company or any of its officers, directors, shareholders, partners, employees, Subsidiaries or Affiliates that may affect the Underwriters’ compensation as determined by FINRA.

 

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(mm) The Company and each Subsidiary owns, leases or possesses land use rights for all such properties as are necessary to the conduct of its business as presently operated and as proposed to be operated as described in the Registration and the Prospectus. The Company and the Subsidiaries have good and marketable title in fee simple or valid and subsisting land use rights to all real property and good and marketable title to all personal property owned by them, in each case free and clear of all Liens except such as are described in the Registration Statement, the General Disclosure Package and the Prospectus or such as do not (individually or in the aggregate) materially affect the business or prospects of the Company or any of the Subsidiaries. Any real property and buildings held under lease or sublease by the Company and the Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material to, and do not interfere with, the use made and proposed to be made of such property and buildings by the Company and the Subsidiaries. Neither the Company nor any Subsidiary has received any notice of any claim adverse to its ownership of any real or personal property or of any claim against the continued possession of any real property, whether owned or held under lease or sublease by the Company or any Subsidiary.

 

(nn) The Company and each Subsidiary: (i) owns or possesses adequate right to use all patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses, formulae, customer lists, and know-how and other intellectual property (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures, “ Intellectual Property”) necessary for the conduct of their respective businesses as being conducted and as described in the Registration Statement, the General Disclosure and Prospectus and (ii) have no knowledge that the conduct of their respective businesses do or will conflict with, and they have not received any notice of any claim of conflict with, any such right of others. Except as set forth in the Registration Statement, the General Disclosure Package or the Prospectus, neither the Company nor any Subsidiary has granted or assigned to any other Person any right to sell the current products and services of the Company and its Subsidiaries or those products and services described in the Registration Statement and Prospectus. To the Company’s best knowledge, there is no infringement by third parties of any such Intellectual Property; there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others challenging the Company’s or any Subsidiary’s rights in or to any such Intellectual Property, and the Company is unaware of any facts which would form a reasonable basis for any such claim; and there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others that the Company or any Subsidiary infringes or otherwise violates any patent, trademark, copyright, trade secret or other proprietary rights of others, and the Company is unaware of any other fact which would form a reasonable basis for any such claim.

 

(oo) The agreements and documents described in the Registration Statement, the General Disclosure Package and the Prospectus conform to the descriptions thereof contained therein and there are no agreements or other documents required by the applicable provisions of the Securities Act to be described in the Registration Statement, the General Disclosure Package or the Prospectus or to be filed with the Commission as exhibits to the Registration Statement, that have not been so described or filed. Each agreement or other instrument (however characterized or described) to which the Company is a party or by which its property or business is or may be bound or affected and (i) that is referred to in the Registration Statement, the General Disclosure Package or the Prospectus or attached as an exhibit thereto, or (ii) is material to the Company’s business, has been duly and validly executed by the Company, is in full force and effect in all material respects and is enforceable against the Company and, to the Company’s knowledge, the other parties thereto, in accordance with its terms, except (x) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally, (y) as enforceability of any indemnification or contribution provision may be limited under the foreign, federal and state securities laws, and (z) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought, and none of such agreements or instruments has been assigned by the Company, and neither the Company nor, to the Company’s knowledge, any other party is in breach or default thereunder and, to the Company’s knowledge, no event has occurred that, with the lapse of time or the giving of notice, or both, would constitute a breach or default thereunder, in any such case, which would result in a Material Adverse Effect. To the Company’s knowledge, performance by the Company of the material provisions of such agreements or instruments will not result in a violation of any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court, domestic or foreign, having jurisdiction over the Company or any of its assets or businesses, including, without limitation, those relating to environmental laws and regulations.

 

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(pp) No securities of the Company have been sold by the Company or by or on behalf of, or for the benefit of, any person or persons controlling, controlled by, or under common control with the Company since August 18, 2017, except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus.

 

(qq) The disclosures in the Registration Statement, the General Disclosure Package and the Prospectus concerning the effects of foreign, federal, state and local regulation on the Company’s business as currently contemplated are correct in all material respects and do not omit to state a material fact necessary to make the statements therein, in light of the circumstances in which they were made, not misleading.

 

(rr) Each of the Company and the Subsidiaries has accurately prepared and timely filed all federal, state, foreign, including the PRC, and other tax returns that are required to be filed by it and has paid or made provision for the payment of all taxes, assessments, governmental or other similar charges, including without limitation, all sales and use taxes and all taxes which the Company or any Subsidiary is obligated to withhold from amounts owing to employees, creditors and third parties, with respect to the periods covered by such tax returns (whether or not such amounts are shown as due on any tax return). No deficiency assessment with respect to a proposed adjustment of the Company’s or any Subsidiary’s federal, state, local or foreign, including the PRC, taxes is pending or, to the Company’s knowledge, threatened. The accruals and reserves on the books and records of the Company and the Subsidiaries in respect of tax liabilities for any taxable period not finally determined are adequate to meet any assessments and related liabilities for any such period and, since the date of the Company’s most recent audited financial statements, the Company and the Subsidiaries have not incurred any liability for taxes other than in the ordinary course of its business. There is no tax lien, whether imposed by any federal, state, foreign or other taxing authority, outstanding against the assets, properties or business of the Company or any Subsidiary.

 

(ss) No labor disturbance by the employees of the Company or any Subsidiary currently exists or, to the Company’s knowledge, is likely to occur.

 

(tt) Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, the Company and each Subsidiary have at all times operated their respective businesses in material compliance with all Environmental Laws, and no material expenditures are or will be required in order to comply therewith. Neither the Company nor any Subsidiary has received any notice or communication that relates to or alleges any actual or potential violation or failure to comply with any Environmental Laws that will result in a Material Adverse Effect. As used herein, the term “ Environmental Laws ” means all applicable laws and regulations, including any licensing, permits or reporting requirements, and any action by a federal state or local government entity pertaining to the protection of the environment, protection of public health, protection of worker health and safety, or the handling of hazardous materials.

 

(uu) Neither the Company nor any Subsidiary is a party to an “employee benefit plan,” as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974 (“ ERISA ”) or similar rules and regulations of the PRC which: (i) is subject to any provision of ERISA or such rules and regulations of the PRC and (ii) is or was at any time maintained, administered or contributed to by the Company or any Subsidiary and covers any employee or former employee of the Company or any Subsidiary or any ERISA Affiliate (as defined hereafter). These plans are referred to collectively herein as the “ Employee Plans. ” For purposes of this Section, “ ERISA Affiliate ” of any person or entity means any other person or entity which, together with that person or entity, could be treated as a single employer under Section 414(m) of the Internal Revenue Code of 1986, as amended (the “ Code ”), or is an “affiliate,” whether or not incorporated, as defined in Section 407(d)(7) of ERISA, of the person or entity.

 

(vv) The Registration Statement, the General Disclosure Package and the Prospectus identify each employment, severance or other similar agreement, arrangement or policy and each material plan or arrangement providing for insurance coverage (including any self- insured arrangements), workers’ compensation, disability benefits, severance benefits, supplemental unemployment benefits, vacation benefits, retirement benefits or for deferred compensation, profit-sharing, bonuses, stock options, stock appreciation or other forms of incentive compensation, or post-retirement insurance, compensation or benefits which: (i) is not an Employee Plan, (ii) is entered into, maintained or contributed to, as the case may be, by the Company or any Subsidiary or any of their respective ERISA Affiliates, and (iii) covers any employee or former employee of the Company or any Subsidiary or any of their respective ERISA Affiliates. These contracts, plans and arrangements are referred to collectively in this Agreement as the “ Benefit Arrangements. ” Each Benefit Arrangement has been maintained in substantial compliance with its terms and with requirements prescribed by any and all statutes, orders, rules and regulations that are applicable to that Benefit Arrangement.

 

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(ww) Except as set forth in the Registration Statement, the General Disclosure Package or the Prospectus, neither the Company nor any Subsidiary is a party to or subject to any employment contract or arrangement providing for annual future compensation, or the opportunity to earn annual future compensation (whether through fixed salary, bonus, commission, options or otherwise) of more than $120,000 to any officer, consultant, director or employee.

 

(xx) The execution of this Agreement or consummation of the Offering does not constitute a triggering event under any Employee Plan or any other employment contract, whether or not legally enforceable, which (either alone or upon the occurrence of any additional or subsequent event) will or may result in any payment (of severance pay or otherwise), acceleration, increase in vesting, or increase in benefits to any current or former participant, employee or director of the Company or any Subsidiary other than an event that is not material to the financial condition or business of the Company or any Subsidiary, either individually or taken as a whole.

 

(yy) Neither the Company, any Subsidiary nor, to the Company’s knowledge, any of their respective employees or agents has at any time during the last five (5) years: (i) made any unlawful contribution to any candidate for foreign office, or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any federal or state governmental officer or official, including the PRC, or other Person charged with similar public or quasi-public duties, other than payments that are not prohibited by the laws of the United States of any jurisdiction thereof.

 

(zz) The Company has not offered, or caused the Underwriters to offer, the Firm Shares to any Person or entity with the intention of unlawfully influencing: (i) a customer or supplier of the Company or any Subsidiary to alter the customer’s or supplier’s level or type of business with the Company or any Subsidiary or (ii) a journalist or publication to write or publish favorable information about the Company, any Subsidiary or its products or services.

 

(aaa) As of the date hereof and as of the Closing Date, and except as contemplated by this Agreement, neither the Company nor any Subsidiary operates within the United States or any state or territory thereof in such a manner so as to subject the Company or its operations or businesses to registration as a foreign company doing business in any state within the United States or to any of the following laws in any material respect: (i) the Bank Secrecy Act, as amended, (ii) the Uniting and Strengthening of America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, as amended, (iii) the Foreign Corrupt Practices Act of 1977, as amended, (iv) the Currency and Foreign Transactions Reporting Act of 1970, as amended, (v) the Employee Retirement Income Security Act of 1974, as amended, (vi) the Money Laundering Control Act of 1986, as amended (vii) the rules and regulations promulgated under any such law, or any successor law, or any judgment, decree or order of any applicable administrative or judicial body relating to such law and (viii) any corresponding law, rule, regulation, ordinance, judgment, decree or order of any state or territory of the United States or any administrative or judicial body thereof.

 

(bbb) The operations of the Company and its Subsidiaries are and have been conducted at all times in compliance with applicable financial record keeping and reporting requirements and money laundering statutes of the PRC and the United States and, to the Company’s knowledge, all other jurisdictions to which the Company and its Subsidiaries are subject, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any applicable governmental agency (collectively, the “ Money Laundering Laws ”) and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its Subsidiaries with respect to the Money Laundering Laws is pending or, to the best knowledge of the Company, threatened.

 

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(ccc) Except as set forth in the Registration Statement and the Prospectus, no holders of any securities of the Company or any rights exercisable for or convertible or exchangeable into securities of the Company have the right to require the Company to register any such securities of the Company under the Securities Act or to include any such securities in a registration statement to be filed by the Company.

 

(ddd) Neither the Company nor, to the knowledge of the Company, any director, officer, agent, employee or affiliate of the Company (as such term is defined under Rule 144 under the Securities Act, an “ Affiliate ”) is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“ OFAC ”); and the Company shall not directly or indirectly use the proceeds of the offering, or lend, contribute or otherwise make available such proceeds to any joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC.

 

(eee) Except as disclosed in the Registration Statement, General Disclosure Package and the Prospectus, none of the entities or natural persons holding any shares or other equity securities of the Company, directly or indirectly, immediately before the Offering, is a PRC resident which shall be subject to the approval and registration requirements under the PRC laws and regulations in connection with its holding of shares or equity securities in the Company, including the Notice on Issues Relating to Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies and any implementing rules and guidelines related thereto.

 

(fff) As used in this Agreement, references to matters being “ material ” with respect to the Company or its Subsidiaries shall mean a material event, change, condition, status or effect related to the condition (financial or otherwise), properties, assets (including intangible assets), liabilities, business, prospects, operations or results of operations of the Company or the applicable Subsidiaries, either individually or taken as a whole, as the context requires.

 

(ggg) As used in this Agreement, the term “ knowledge of the Company ” (or similar language) shall mean the knowledge of the officers and directors of the Company and the applicable Subsidiaries who are named in the Prospectus, with the assumption that such officers and directors shall have made reasonable and diligent inquiry of the matters presented (with reference to what is customary and prudent for the applicable individuals in connection with the discharge by the applicable individuals of their duties as officers, directors or managers of the Company or the applicable Subsidiaries).

 

Any certificate signed by or on behalf of the Company and delivered to the Underwriters or to Loeb & Loeb LLP (“ Underwriters’ Counsel ”) shall be deemed to be a representation and warranty by the Company to each Underwriter listed on Schedule A hereto as to the matters covered thereby.

 

2.2 Representations and Warranties of the Company Regarding the People’s Republic of China (“ PRC ”).

 

(a) PRC Subsidiaries. The Company conducts substantially all of its operations and generates substantially all of its revenue through its indirect wholly-owned subsidiary, BORQS Beijing, which conducts its operations through its contractually controlled affiliate Big Cloud Network and its subsidiaries and affiliates listed and described in the Registration Statement and the Prospectus (such subsidiaries and affiliates, together with Big Cloud Century, Beijing Software and Beijing Wireless, collectively shall be referred to herein as the “ PRC Subsidiaries ”).

 

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(b) Each PRC Subsidiary organized in the PRC has been duly established, is validly existing as a company in good standing under the laws of the PRC, has the corporate power and authority to own, lease and operate its property and to conduct its business as described in the Registration Statement and the Prospectus, and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not reasonably be likely to result in a Material Adverse Effect on the assets, business or financial condition of the Company and its Subsidiaries, individually or taken as a whole. Each of the PRC Subsidiaries has applied for and, except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, obtained, all requisite business licenses, clearance and permits required under the laws and regulations of the PRC as necessary for the conduct of its businesses, and each of the PRC Subsidiaries has complied in all material respects with all laws and regulations of the PRC in connection with foreign exchange. Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, all fillings and applications necessary to the conduct of each PRC Subsidiary’s business have been made to the applicable PRC authorities, including without limitation the State Administration for Industry and Commerce of the PRC, and such filings and applications are true and correct in all material respects. The registered capital of each of the PRC Subsidiaries has been fully paid up in accordance with the schedule of payment stipulated in its respective articles of association, approval document, certificate of approval and legal person business license (hereinafter referred to as the “Establishment Documents”) and in compliance with the PRC laws and regulations, and there is no outstanding capital contribution commitment for any of the PRC Subsidiaries. The Establishment Documents of the PRC Subsidiaries have been duly approved in accordance with the laws of the PRC and are valid and enforceable. The business scope specified in the Establishment Documents of each of the PRC Subsidiaries complies with the requirements of all relevant the PRC laws and regulations. The outstanding equity interests of each of the PRC Subsidiaries is owned of record by the Company or a wholly owned subsidiary, except for such specific entities or individuals identified as the registered holders thereof in the Registration Statement and the Prospectus. The Company possesses, directly or indirectly, the power to direct, or cause the direction of, the management and policies of the PRC Subsidiaries.

 

(c) Dividends. No PRC Subsidiary is currently prohibited, directly or indirectly, from paying any dividends to the Company (or the Company’s subsidiary that holds the outstanding equity interest of such PRC Subsidiary). No PRC Subsidiary is prohibited, directly or indirectly, from making any other distribution on such PRC Subsidiary’s equity capital, from repaying to the Company any loans or advances to such the PRC Subsidiary from the Company or any of the Company’s Subsidiaries.

 

(d) Immunity. None of the PRC Subsidiaries nor any of their properties, assets or revenues are entitled to any right of immunity on the grounds of sovereignty from any legal action, suit or proceeding, from set-off or counterclaim, from the jurisdiction of any court, from services of process, from attachment prior to or in aid of execution of judgment, or from any other legal process or proceeding for the giving of any relief or for the enforcement of any judgment.

 

(e) Filing with the PRC. It is not necessary that this Agreement, the Registration Statement, the Prospectus or any other document be filed or recorded with any governmental agency, court or other authority in the PRC.

 

(f) Transfer Taxes. No transaction, stamp, capital or other issuance, registration, transaction, transfer or withholding taxes or duties are payable in the PRC by or on behalf of the Underwriters to any the PRC taxing authority in connection with (i) the issuance, sale and delivery of any Shares by the Company and the delivery of any Shares to or for the account of the Underwriter, (ii) the purchase from the Company and the initial sale and delivery by the Underwriters of any Shares to purchasers thereof, or (iii) the execution and delivery of this Agreement.

 

(g) Compliance. The Company has taken all necessary steps to ensure compliance by each of its shareholders, option holders, directors, officers and employees that is, or is directly or indirectly owned or controlled by, a PRC resident or citizen, with any applicable rules and regulations of the relevant the PRC government agencies.

 

(h) PRC Approvals. The issuance and sale of the Shares and Representative’s Securities to the underwriters, the listing and trading of the Shares on the NASDAQ Capital Market and the consummation of the other transactions contemplated by this Agreement, the Representative’s Securities, the Registration Statement and the Prospectus are not and will not be, as of the date hereof and on the Closing Date and each Option Closing Date, if any, subject to any approval by any the PRC governmental or regulatory authority.

 

(i) PRC Tax Benefits, etc. The PRC governmental tax benefits, exemptions, waivers, or other relief, enjoyed by any PRC Subsidiary as described in the Registration Statement and the Prospectus are valid, binding and enforceable and in accordance with PRC law and regulations and no PRC Subsidiary has received any notice of any deficiency in its applications for such tax benefits, exemptions, waivers or other relief as so described.

 

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3. Representations, Warranties and Covenants of the Selling Stockholders . Each Selling Stockholder represents and warrants to and agrees with each of the Underwriters that:

 

(a) This Agreement has been duly authorized, executed and delivered by such Selling Stockholder and each of this Agreement is a valid and binding agreement of such Selling Stockholder enforceable against such Selling Stockholder in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equity principles.

 

(b) Such Selling Stockholder has, and on the Option Closing Date will have, good and marketable title to the Selling Stockholder Firm Shares and the Option Shares to be sold by such Selling Stockholder hereunder, free and clear of any mortgage, pledge, lien, encumbrance, security interest or equity whatsoever, and has full right, power and authority to enter into this Agreement and to sell, assign, transfer and deliver the Selling Stockholder Firm Shares and the Option Shares to be delivered by such Selling Stockholder on the Closing Date or the Option Closing Date, as the case may be; and upon the delivery of and payment for such Selling Stockholder Firm Shares and Option Shares in accordance with this Agreement, the Underwriters will acquire valid and unencumbered title to such Selling Stockholder Firm Shares and Option Shares.

 

(c) The execution and delivery by such Selling Stockholder of, and the performance by such Selling Stockholder of its obligations under this Agreement will not contravene any provision of applicable law, or the organizational documents of such Selling Stockholder (if such Selling Stockholder is an entity), or any agreement or other instrument binding upon such Selling Stockholder or any judgment, order or decree of any governmental body, agency or court having jurisdiction over such Selling Stockholder, and no governmental authorization of any government agency is required for the performance by such Selling Stockholder of its obligations under this Agreement, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of such Selling Stockholder Firm Shares and Option Shares.

 

(d) The statements in the sections entitled [“Principal and Selling Stockholders”] relating to such Selling Stockholder in the Registration Statement and the Prospectus did not and do not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.

 

(e) The sale of the Selling Stockholder Firm Shares and Option Shares by such Selling Stockholder pursuant to this Agreement is not prompted by any material information concerning the Company or its Subsidiary that is not set forth the Registration Statement and the Prospectus.

 

(f) Except as disclosed in the Registration Statement and the Prospectus, there are no contracts, agreements or understandings between such Selling Stockholder and any person that would give rise to a valid claim against such Selling Stockholder or any Underwriter for a brokerage commission, finder’s fee or other like payment in connection with this Offering.

 

(g) Such Selling Stockholder has not taken, directly or indirectly, any action that is designed to or that has constituted or that would reasonably be expected to cause or result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares.

 

(h) Upon initiation of payment for the Selling Stockholder Firm Shares and Option Shares sold by such Selling Stockholder under this Agreement and the delivery by such Selling Stockholder to DTC or its agent of such Selling Stockholder Firm Shares and Option Shares in book entry form to a securities account maintained by the Underwriters at DTC or its nominee, and payment therefor in accordance with this Agreement, the Underwriters will acquire a securities entitlement (within the meaning of Section 8 of the Uniform Commercial Code (the “UCC”)) with respect to such Selling Stockholder Firm Shares and Option Shares, and no action based on an “adverse claim” (as defined in UCC Section 8) may be asserted against the Underwriters with respect to such security entitlement if, at such time, the Underwriters do not have notice of any adverse claim within the meaning of UCC Section 8.

 

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(i) Such Selling Stockholder has previously provided a selling stockholder questionnaire (the “Questionnaire”) that was completed by such Selling Stockholder and submitted to the Company on or before the date hereof and it does not, and as of the Closing Date and the Option Closing Date will not, contain any untrue statement of material fact nor does it omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading.

 

(j) Except as disclosed in the Registration Statement and the Prospectus, such Selling Stockholder has no affiliations or associations with any member of the FINRA; and none of the proceeds received by such Selling Stockholder from the sale of the Selling Stockholder Firm Shares and Option Shares to be sold by such Selling Stockholder hereunder will be paid to a member of the FINRA or any affiliate (or person “associated with,” as such terms are used in the rules of the FINRA).

 

(k) No transaction, transfer or withholding taxes or duties are payable by or on behalf of the Underwriters in connection with (i) the sale of the Selling Stockholder Firm Shares and Option Shares by such Selling Stockholder, (ii) the delivery of such Selling Stockholder Firm Shares and Option Shares to or for the account of the Underwriters, (iii) the purchase from such Selling Stockholder and the initial sale and delivery by the Underwriters of such Selling Stockholder Firm Shares and Option Shares to purchasers thereof or (iv) the execution and delivery by such Selling Stockholder of the Power of Attorney and Custody Agreement.

 

(l) Such Selling Stockholder has not distributed and will not distribute, prior to the later of the latest Option Closing Date and the completion of the Underwriters’ distribution of the Shares, any offering material in connection with the offering and sale of the Shares, including any free writing prospectus.

 

(m) Such Selling Stockholder agrees that it shall be responsible for all taxes as well as all applicable compliance and regulatory obligations related to such taxes which may arise from or in connection with the sale of the Selling Stockholder Firm Shares and Option Shares by such Selling Stockholder. Such Selling Stockholder will indemnify and hold harmless the Underwriters against any tax, including any interest and penalties, on the issue and sale of the Selling Stockholder Firm Shares and Option Shares by such Selling Stockholder.

 

(n) The Selling Stockholder Firm Shares and Option Shares to be sold by such Selling Stockholder pursuant to this Agreement are subject to the interest of the Underwriters and the obligations of such Selling Stockholder under this Agreement, when executed, shall not be terminated by any act of such Selling Stockholder, by operation of law, by the death or incapacity of such Selling Stockholder or, in the case of a trust, by the death or incapacity of any executor or trustee or the termination of such trust, or the occurrence of any other event.

 

(o) As of the date of this Agreement, such Selling Stockholder has deposited, or caused to be deposited on its behalf, the Selling Stockholder Firm Shares and Option Shares to be sold by such Selling Stockholder in accordance with this Agreement and the Power of Attorney and Custody Agreement.

 

(p) Such Selling Stockholder agrees to procure delivery to the Representative on or prior to the Closing Date of a properly completed and executed U.S. Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof).

 

(q) Such Selling Stockholder will not (and will cause its affiliates not to) take, directly or indirectly, any action which is designed to or which constitutes or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any securities of the Company to facilitate the sale or resale of the Shares.

 

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(r) Such Selling Stockholder will cooperate to the extent necessary to cause the Registration Statement or any post-effective amendment thereto to become effective at the earliest practicable time and to do and perform all things to be done and performed under this Agreement prior to the Closing Date and the Option Closing Date and to satisfy all conditions precedent of such Selling Stockholder to the delivery of the Selling Stockholder Firm Shares and Option Shares to be sold by such Selling Stockholder pursuant to this Agreement.

 

4. Offering. Upon authorization of the release of the Firm Shares by the Representative, the Underwriters propose to offer the Shares for sale to the public upon the terms and conditions set forth in the Prospectus.

 

5. Covenants of the Company. The Company acknowledges, covenants and agrees with the Underwriters that:

 

(a) The Registration Statement and any amendments thereto have been declared effective, and if Rule 430A is used or the filing of the Prospectus is otherwise required under Rule 424(b), the Company shall file the Prospectus (properly completed if Rule 430A has been used) pursuant to Rule 424(b) within the prescribed time period and shall provide evidence satisfactory to the Representative of such timely filing.

 

(b) During the period beginning on the date hereof and ending on the later of the Closing Date or such date, as in the opinion of counsel for the Representative, the Prospectus is no longer required by law to be delivered (or in lieu thereof the notice referred to in Rule 173(a) under the Securities Act is no longer required to be provided), in connection with sales by an underwriter or dealer (the “ Prospectus Delivery Period ”), prior to amending or supplementing the Registration Statement, the General Disclosure Package or the Prospectus, the Company shall furnish to the Representative for review a copy of each such proposed amendment or supplement, and the Company shall not file any such proposed amendment or supplement to which the Representative reasonably object within 36 hours of delivery thereof to the Representative and its counsel.

 

(c) After the date of this Agreement, the Company shall promptly advise the Underwriter in writing (i) of the receipt of any comments of, or requests for additional or supplemental information from, the Commission, (ii) of the time and date of any filing of any post- effective amendment to the Registration Statement or any amendment or supplement to any Prospectus, the General Disclosure Package or the Prospectus, (iii) of the time and date that any post-effective amendment to the Registration Statement becomes effective and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto or of any order preventing or suspending its use or the use of any Prospectus, the General Disclosure Package, the Prospectus or any Issuer- Represented Free Writing Prospectus, or of any proceedings to remove, suspend or terminate from listing the Ordinary Shares from any securities exchange upon which it is listed for trading, or of the threatening or initiation of any proceedings for any of such purposes. If the Commission shall enter any such stop order at any time, the Company shall use all commercially reasonable efforts to obtain the lifting of such order at the earliest possible moment. Additionally, the Company agrees that it shall comply with the provisions of Rules 424(b), 430A and 430B, as applicable, under the Securities Act and shall use all commercially reasonable efforts to confirm that any filings made by the Company under Rule 424(b) or Rule 433 were received in a timely manner by the Commission (without reliance on Rule 424(b)(8) or Rule 164(b)).

 

(d) (1) During the Prospectus Delivery Period, the Company shall comply as far as it is able with all requirements imposed upon it by the Securities Act, as now and hereafter amended, and by the Rules and Regulations, as from time to time in force, and by the Exchange Act so far as necessary to permit the continuance of sales of or dealings in the Securities as contemplated by the provisions hereof, the General Disclosure Package, and the Registration Statement and the Prospectus. If during such period any event occurs as a result of which the Prospectus (or if the Prospectus is not yet available to prospective purchasers, the General Disclosure Package ) would include an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances then existing, not misleading, or if during such period it is necessary or appropriate in the opinion of the Company or its counsel or the Underwriter or counsel to the Underwriter to amend the Registration Statement or supplement the Prospectus (or if the Prospectus is not yet available to prospective purchasers, the General Disclosure Package ) to comply with the Securities Act or to file under the Exchange Act any document which would be deemed to be incorporated by reference in the Prospectus in order to comply with the Securities Act or the Exchange Act, the Company shall promptly notify the Underwriter and shall amend the Registration Statement or supplement the Prospectus (or if the Prospectus is not yet available to prospective purchasers, the General Disclosure Package) or file such document (at the expense of the Company) so as to correct such statement or omission or effect such compliance.

 

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(i) If at any time following issuance of an Issuer-Represented Free Writing Prospectus there occurred or occurs an event or development as a result of which such Issuer-Represented Free Writing Prospectus conflicted or would conflict with the information contained in the Registration Statement, the Statutory Prospectus or the Prospectus or included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances prevailing at that subsequent time, not misleading, the Company shall promptly notify the Underwriter and shall promptly amend or supplement, at its own expense, such Issuer-Represented Free Writing Prospectus to eliminate or correct such conflict, untrue statement or omission.

 

(e) The Company shall promptly deliver to the Underwriters and Underwriters’ Counsel a signed copy of the Registration Statement, as initially filed and all amendments thereto, including all consents and exhibits filed therewith, and shall maintain in the Company’s files manually signed copies of such documents for at least five (5) years after the date of filing thereof. The Company shall promptly deliver to each of the Underwriters such number of copies of any Preliminary Prospectus, the Prospectus, the Registration Statement, and all amendments of and supplements to such documents, if any, and all documents which are exhibits to the Registration Statement and Prospectus or any amendment thereof or supplement thereto, as the Underwriters may reasonably request. Prior to 10:00 A.M., New York time, on the business day next succeeding the date of this Agreement and from time to time thereafter, the Company shall furnish the Underwriters with copies of the Prospectus in New York City in such quantities as the Underwriters may reasonably request.

 

(f) The Company consents to the use and delivery of the Preliminary Prospectus by the Underwriters in accordance with Rule 430 and Section 5(b) of the Securities Act.

 

(g) If the Company elects to rely on Rule 462(b) under the Securities Act, the Company shall both file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) and pay the applicable fees in accordance with Rule 111 of the Securities Act by the earlier of: (i) 10:00 p.m., New York City time, on the date of this Agreement, and (ii) the time that confirmations are given or sent, as specified by Rule 462(b)(2).

 

(h) The Company shall use all commercially reasonable efforts, in cooperation with the Representative, at or prior to the time of effectiveness of the Registration Statement, to qualify the Securities for offering and sale under the securities laws relating to the offering or sale of the Securities of such jurisdictions, domestic or foreign, as the Representative may designate and to maintain such qualification in effect for so long as required for the distribution thereof; except that in no event shall the Company be obligated in connection therewith to qualify as a foreign corporation or to execute a general consent to service of process or to subject itself to taxation if it is otherwise not so subject.

 

(i) The Company shall make generally available to its security holders as soon as practicable, but in any event not later than 15 months after the end of the Company’s current fiscal quarter, an earnings statement (which need not be audited) covering a 12-month period that shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 of the Rules and Regulations.

 

(j) For a period of six (6) months from the effective date of the Registration Statement, the Company may not sell or issue, or agree to sell or issue, any equity security (which, for the purposes of this paragraph, shall include Ordinary Shares, preferred stock, or any similar security, regardless of how classified for accounting purposes) or security convertible, exercisable or exchangeable for an equity security, except for (i) securities issued to the sellers of an operating business in bona fide transactions that result in the Company acquiring an operating business or other strategic transaction, provided that such transaction is not for the primary purpose of benefiting the affiliates of the Company or any of their respective affiliates or family members, and (ii) options to purchase Ordinary Shares issued to employees, directors and consultants of the Company (“ Employee Options ”). The maximum number of Employee Options that may be issued pursuant to (ii), above, is equal to 9% of the number Ordinary Shares outstanding immediately after the Closing ((i) and (ii), collectively, the “ Exempt Issuances ”).

 

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(k) Except with respect to any Exempt Issuances, during the six (6) months following the Closing Date, without the consent of the Representative which shall not be unreasonably withheld, the Company shall not file any registration statement relating to the offer or sale of any of the Company’s securities, except Form S-8 filed with the Commission in connection with any Company stock incentive plan.

 

(l) Following the Closing Date, the Company and any of the individuals listed on Schedules B-1 and B-2 hereto (collectively, the “ Lock-Up Parties ”) shall not sell or otherwise dispose of any securities of the Company, whether publicly or in a private placement during the period that their respective lock-up agreements are in effect. The Company shall deliver to the Representative the agreements of Lock-Up Parties to the foregoing effect prior to the Closing Date, which agreements shall be substantially in the form attached hereto as Annex I-A with respect to the persons listed on Schedule B-I and Annex I-B with respect to the persons named on Schedule B-II.

 

(m) For a period of one (1) year from the effective date of the Registration Statement, the Company, at its expense, shall, at the Representative’s request, provide the Representative on a weekly basis with a copy of the Company’s weekly transfer sheets from the previous week and securities positions listings.

 

(n) If the Company fails to maintain the listing of its Ordinary Shares on a nationally recognized exchange, for a period of three (3) years from the effective date of the Registration Statement, the Company, at its expense, shall obtain and keep current a listing in the Standard & Poor’s Corporation Records Services or the Moody’s Industrial Manual; provided that Moody’s OTC Industrial Manual is not sufficient for these purposes.

 

(o) During the period of three (3) years from the effective date of the Registration Statement, the Company shall make available to the Underwriters copies of all reports or other communications (financial or other) furnished to security holders or from time to time published or publicly disseminated by the Company, and shall deliver to the Underwriters: (i) as soon as they are available, copies of any reports, financial statements and proxy or information statements furnished to or filed with the Commission or any national securities exchange on which any class of securities of the Company is listed; and (ii) such additional information concerning the business and financial condition of the Company as the Representative may from time to time reasonably request (such financial information to be on a consolidated basis to the extent the accounts of the Company and the Subsidiaries are consolidated in reports furnished to its security holders generally or to the Commission); provided, that any such item which is available on the EDGAR system (or successor thereto) need not be furnished in physical form.

 

(p) The Company shall not issue press releases or engage in any other publicity relating to the Offering, without the Representative’ prior written consent, for a period ending at 5:00 p.m. Eastern time on the first business day following the fortieth (40th) day following the Closing Date, other than normal and customary releases issued in the ordinary course of the Company’s business.

 

(q) Prior to the consummation of the Offering, the Company shall engage or continue to engage (for no less than two (2) years from the date of the Closing Date) a financial public relations firm mutually acceptable to the Company and the Representative. The Company further agrees to consult with the Representative as is customary within the securities industry prior to distribution to third parties of any financial information, news releases, and/or other publicity regarding the Company, its business, or any terms of the proposed Offering, it being agreed that the Company shall give the Representative no less than twelve (12) hours prior notice of any such distribution and a reasonable opportunity during or prior to such period to review the contents of the proposed distribution.

 

(r) The Company has or shall retain Continental Stock Transfer & Trust Company (or a transfer agent reasonably acceptable to the Representative) as transfer agent for the Securities and shall continue to retain such transfer agent (or a transfer agent reasonably acceptable to the Representative) for a period of three (3) years following the Closing Date.

 

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(s) The Company has or shall retain EDGAR Agents, LLC (or a financial printer of similar competence and quality) as financial printer for the Offering and shall continue to retain such financial printer for a period of 45 days following the Closing Date.

 

(t) The Company has or shall retain the Auditors (or other independent PCAOB registered public accounting firm reasonably acceptable to the Representative) as independent public accountants for the Company and shall continue to retain independent PCAOB registered public accountants of comparable quality for a period of three (3) years following the Closing Date.

 

(u) The Company shall apply the net proceeds from the sale of the Securities as set forth under the caption “Use of Proceeds” in the Prospectus. Without the written consent of the Representative, no proceeds of the Offering may be used to pay outstanding loans from officers, directors or shareholders or to pay any accrued salaries or bonuses to any employees or former employees.

 

(v) The Company will obtain, within 60 days from Closing, and will use its good faith best efforts to maintain its key person life insurance in the amount of $1,000,000 each on the lives of Pat Chan and Anthony Chan with an insurer rated at least AA or better in the most recent edition of “Best’s Life Reports” in full force and effect for a period of three (3) years from the Closing Date.”

 

(w) The Company shall use all commercially reasonable efforts to effect and maintain the listing of the Securities on the NASDAQ Capital Market for at least three (3) years after the Closing Date.

 

(x) The Company, during the period when the Prospectus is required to be delivered under the Securities Act or the Exchange Act, shall use all commercially reasonable efforts to file all documents required to be filed with the Commission pursuant to the Securities Act, the Exchange Act and the Rules and Regulations within the time periods required thereby.

 

(y) The Company shall use all commercially reasonable efforts to do and perform all things required to be done or performed under this Agreement by the Company prior to the Closing Date, and to satisfy all conditions precedent to the delivery of the Firm Shares.

 

(z) The Company shall not take, and shall cause its Affiliates, including the Selling Stockholders, not to take, directly or indirectly, any action which constitutes or is designed to cause or result in, or which could reasonably be expected to constitute, cause or result in, the stabilization or manipulation of the price of any security to facilitate the sale or resale of the Securities.

 

(aa) The Company shall cause to be prepared and delivered to the Representative, at its expense, within two (2) business days from the effective date of this Agreement, an Electronic Prospectus to be used by the Underwriters in connection with the Offering. As used herein, the term “ Electronic Prospectus ” means a form of prospectus, and any amendment or supplement thereto, that meets each of the following conditions: (i) it shall be encoded in an electronic format, satisfactory to the Representative, that may be transmitted electronically by the other Underwriters to offerees and purchasers of the Securities for at least the period during which a Prospectus relating to the Securities is required to be delivered under the Securities Act; (ii) it shall disclose the same information as the paper prospectus and prospectus filed pursuant to EDGAR, except to the extent that graphic and image material cannot be disseminated electronically, in which case such graphic and image material shall be replaced in the electronic prospectus with a fair and accurate narrative description or tabular representation of such material, as appropriate; and (iii) it shall be in or convertible into a paper format or an electronic format, satisfactory to the Representative, that will allow recipients thereof to store and have continuously ready access to the prospectus at any future time, without charge to such recipients (other than any fee charged for subscription to the Internet as a whole and for on-line time).

 

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(bb) The Company represents and agrees that, unless it obtains the prior written consent of the Representative, and the Representative represents and agrees that, unless it obtains the prior written consent of the Company, it has not made and will not make any offer relating to the Securities that would constitute an “issuer free writing prospectus,” as defined in Rule 433 under the Securities Act, or that would otherwise constitute a “free writing prospectus,” as defined in Rule 405 under the Securities Act, required to be filed with the Commission; provided that the prior written consent of the parties hereto shall be deemed to have been given in respect of the free writing prospectuses included in Schedule C. Any such free writing prospectus consented to by the Company and the Representative is hereinafter referred to as a “Permitted Free Writing Prospectus.” Each of the Company and the Representative represents that it has treated or agrees that it will treat each Permitted Free Writing Prospectus as an “issuer free writing prospectus,” as defined in Rule 433, and has complied and will comply with the requirements of Rule 433 applicable to any Permitted Free Writing Prospectus, including timely Commission filing where required, legending and record keeping.

 

(cc) The Company shall use all commercially reasonable efforts to resolve the material weaknesses or significant deficiencies in the Company’s disclosure controls and procedures described in the Registration Statement, in the General Disclosure Package and in the Prospectus prior to December 31, 2018.

 

6. Consideration; Payment of Expenses.

 

(a) In consideration of the services to be provided for hereunder, the Company shall pay to the Underwriters or their respective designees their pro rata portion (based on the Securities purchased) of the following compensation with respect to the Shares which they are offering:

 

(i) An underwriting discount of seven percent (7%) of the public offering price; and

 

(ii) The Representative’s Warrants.

 

(b) The Company grants the Representative the right of first refusal to act as lead managing underwriter and book runner or minimally as a co-lead manager and co-book runner and/or co-lead placement agent for a period of twelve (12) months from the Closing Date, for any and all public and private equity and debt offerings (excluding commercial bank debt) or any transaction involving any sale or transfer of the Company’s equity or equity-linked securities (including warrants and debt securities with any equity feature), except for any transaction pursuant to which a person or group acquires more than 50% of the outstanding Ordinary Shares of the Company or otherwise results in the merger, consolidation, recapitalization or reorganization of the Company. The Company shall provide written notice to Representative with terms of such offering and if Representative fails to accept in writing any such proposal for such public or private sale within 20 days after receipt of a written notice from the Company containing such proposal, then Representative will have no claim or right with respect to any such sale contained in any such notice. If, thereafter, such proposal is modified on any material respect, the Company shall adopt the same procedures as with respect to the original offering, and the Representative shall have the right of first negotiation with respect to such revised proposal in accordance with the terms of this paragraph (b).

 

(c) The Representative reserves the right to reduce any item of compensation or adjust the terms thereof as specified herein in the event that a determination shall be made by FINRA to the effect that the Underwriters’ aggregate compensation is in excess of FINRA Rules or that the terms thereof require adjustment.

 

(d) Whether or not the transactions contemplated by this Agreement, the Registration Statement and the Prospectus are consummated or this Agreement is terminated, the Company hereby agrees to pay all costs and expenses incident to the performance of its obligations hereunder, including the following:

 

(i) the fees, disbursements and expenses of the Company’s counsel and accountants in connection with the registration of the Securities under the Securities Act and the Offering;

 

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(ii) all expenses in connection with the preparation, printing, formatting for EDGAR and filing with the Commission of the Registration Statement, any Preliminary Prospectus and the Prospectus and any and all amendments, post-effective amendments and supplements thereto and the Underwriting Agreement and related documents, and the mailing and delivering of copies thereof to the Underwriters and dealers (all in such quantities as the Representative may reasonably require);

 

(iii) the cost of preparing stock certificates representing the Securities;

 

(iv) the costs of any "due diligence" meetings;

 

(v) all fees, expenses and disbursements relating to the registration or qualification of the Securities under the “blue sky” securities laws of such states and other jurisdictions as Representative may reasonably designate;

 

(vi) all reasonable and documented fees and expenses for conducting a net road show presentation;

 

(vii) all filing fees (including SEC filing fees) and communication expenses relating to the registration of the Shares to be sold in the Offering;

 

(viii) all fees and expenses in connection with filings with FINRA;

 

(ix) all fees and expenses in connection with listing the Securities on the NASDAQ Capital Market;

 

(x) any stock transfer taxes incurred in connection with this Agreement or the Offering;

 

(xi) the fees and expenses of the transfer agent and registrar for the Ordinary Shares; and

 

(xii) all other costs and expenses incident to the performance of the Company obligations hereunder which are not otherwise specifically provided for in this Section 6.

 

(e) The Company shall reimburse the Underwriters for their legal fees incurred relating to this Offering (the “Legal Cost Reimbursement”). The Representative, on behalf of itself and the Underwriters, acknowledge and agree that the sum of the accountable expenses and the Legal Cost Reimbursement in an aggregate amount up to $200,000 represents the maximum amount of fees, disbursements and expenses incurred by the Underwriters relating to the Offering for which the Company shall be responsible. The Company shall provide funds to pay all such accountable expenses and the Legal Cost Reimbursement (less any advances previously paid) at the Closing of the Offering.

 

(f) It is understood, however, that except as provided in this Section, and Sections 7, 8 and 12(d) hereof, the Underwriters shall pay all of their own costs and expenses, including the fees of their counsel. Notwithstanding anything to the contrary in this Section 6, in the event that this Agreement is terminated pursuant to Section 6 or 12(b) hereof, or subsequent to a Material Adverse Change, the Company shall pay, up to $200,000 (less any advances previously paid), all out-of-pocket expenses of the Underwriters (including but not limited to fees and disbursements of counsel to the Underwriters) incurred in connection herewith which shall be limited to expenses which are actually incurred as allowed under FINRA Rule 5110.

 

7. Conditions of Underwriters’ Obligations. The obligations of the Underwriters to purchase and pay for the Firm Shares or the Option Shares, as the case may be, as provided herein shall be subject to: (i) the accuracy of the representations and warranties of the Company and the Selling Stockholders herein contained, as of the date hereof, as of the Closing Date and Option Closing Date (ii) the absence from any certificates, opinions, written statements or letters furnished to the Representative or to Underwriters’ Counsel pursuant to this Section 7 of any misstatement or omission (iii) the performance by the Company and the Selling Stockholders of their respective obligations hereunder, and (iv) each of the following additional conditions. For purposes of this Section 7, the terms “Closing Date” and “Closing” shall refer to the Closing Date for the Firm Shares and the Option Closing Date for the Option Shares, as the case may be, and each of the foregoing and following conditions must be satisfied as of each Closing.

 

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(a) The Registration Statement shall have become effective and all necessary regulatory or listing approvals shall have been received not later than 5:30 P.M., New York time, on the date of this Agreement, or at such later time and date as shall have been consented to in writing by the Representative. If the Company shall have elected to rely upon Rule 430A under the Securities Act, the Prospectus shall have been filed with the Commission in a timely fashion in accordance with the terms hereof and a form of the Prospectus containing information relating to the description of the Securities and the method of distribution and similar matters shall have been filed with the Commission pursuant to Rule 424(b) within the applicable time period; and, at or prior to the Closing Date or the actual time of the Closing, no stop order suspending the effectiveness of the Registration Statement or any part thereof, or any amendment thereof, nor suspending or preventing the use of the General Disclosure Package, the Prospectus or any Issuer Free Writing Prospectus shall have been issued; no proceedings for the issuance of such an order shall have been initiated or threatened; any request of the Commission for additional information (to be included in the Registration Statement, the General Disclosure Package, the Prospectus, any Issuer Free Writing Prospectus or otherwise) shall have been complied with to the Representative’s satisfaction; and FINRA shall have raised no objection to the fairness and reasonableness of the underwriting terms and arrangements.

 

(b) The Representative shall not have reasonably determined, and advised the Company, that the Registration Statement, the General Disclosure Package or the Prospectus, or any amendment thereof or supplement thereto, or any Issuer Free Writing Prospectus, contains an untrue statement of fact which, in the Representative’s reasonable opinion, is material, or omits to state a fact which, in the Representative’s reasonable opinion, is material and is required to be stated therein or necessary to make the statements therein not misleading.

 

(c) The Representative shall have received (i) the favorable written opinion of Ellenoff Grossman & Schole LLP, United States legal counsel for the Company, dated as of the Closing Date addressed to the Underwriters in the form attached hereto as Annex II; (ii) the favorable written opinion of Maples and Calder, Hong Kong, British Virgin Islands legal counsel for the Company and the Subsidiaries, dated as of the Closing Date addressed to the Underwriters in the form attached hereto as Annex III; and (iii) the favorable written opinion of Han Kun Law Offices, legal counsel for the Company with respect to the laws of the PRC dated as of the Closing Date, addressed to the Company in the form attached hereto as Annex IV.

 

(d) The Representative shall have received a certificate of the Chief Executive Officer and Chief Financial Officer of the Company, dated as of each Closing Date to the effect that: (i) the condition set forth in subsection (a) of this Section 7 has been satisfied, (ii) as of the date hereof and as of the applicable Closing Date, the representations and warranties of the Company set forth in Section 2 hereof is accurate, (iii) as of the applicable Closing Date, all agreements, conditions and obligations of the Company to be performed or complied with hereunder on or prior thereto have been duly performed or complied with, (iv) the Company and the Subsidiaries have not sustained any material loss or interference with their respective businesses, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding, (v) no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereof has been issued and no proceedings therefor have been initiated or threatened by the Commission, (vi) there are no pro forma or as adjusted financial statements that are required to be included or incorporated by reference in the Registration Statement and the Prospectus pursuant to the Rules and Regulations which are not so included or incorporated by reference and (vii) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus there has not been any Material Adverse Change or any development involving a prospective Material Adverse Change, whether or not arising from transactions in the ordinary course of business.

 

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(e) On the date of this Agreement and on the Closing Date, the Representative shall have received a “cold comfort” letter from the Auditors as of the date of delivery and addressed to the Underwriters and in form and substance reasonably satisfactory to the Representative, confirming that they are independent certified public accountants with respect to the Company and its Subsidiaries within the meaning of the Securities Act and the Rules and Regulations, and stating, as of the date of delivery (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than five (5) days prior to the date of such letter), the conclusions and findings of such firm with respect to the financial information and other matters relating to the Registration Statement covered by such letter.

 

(f) Subsequent to the execution and delivery of this Agreement or, if earlier, the dates as of which information is given in the Registration Statement (exclusive of any amendment thereof) and the Prospectus (exclusive of any supplement thereto), there shall not have been any change in the capital stock or long-term debt of the Company or any Subsidiary or any change or development involving a change, whether or not arising from transactions in the ordinary course of business, in the business, condition (financial or otherwise), results of operations, shareholders’ equity, properties or prospects of the Company and the Subsidiaries, taken as a whole, including but not limited to the occurrence of any fire, flood, storm, explosion, accident, act of war or terrorism or other calamity, the effect of which, in any such case described above, is, in the sole judgment of the Representative, so material and adverse as to make it impracticable or inadvisable to proceed with the Offering on the terms and in the manner contemplated in the Prospectus (exclusive of any supplement).

 

(g) The Representative shall have received a lock-up agreement from each Lock-Up Party, duly executed by the applicable Lock-Up Party, in each case substantially in the forms attached as Annex I-A or Annex I-B, as the case may be.

 

(h) The Securities shall have been approved for quotation on the NASDAQ Capital Market.

 

(i) FINRA shall have confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements.

 

(j) No action shall have been taken and no statute, rule, regulation or order shall have been enacted, adopted or issued by any federal, state or foreign governmental or regulatory authority that would, as of the Closing Date, prevent the issuance or sale of the Securities; and no injunction or order of any federal, state or foreign court shall have been issued that would, as of the Closing Date, prevent the issuance or sale of the Securities.

 

(k) The Company shall have furnished the Underwriters and Underwriters’ Counsel with such other certificates, opinions or other documents as they may have reasonably requested.

 

(l) Satisfactory completion by the Representative of its due diligence investigation and analysis of: (i) the Company's arrangements with its officers, directors, employees, affiliates, customers and suppliers, and (ii) the audited historical financial statements of the Company for the fiscal years ended December 31, 2015, 2016 and 2017.

 

(m) Neither the Company, the Subsidiaries nor any of its affiliates has, either prior to the initial filing or the effective date of the Registration Statement, made any offer or sale of any securities which are required to be "integrated" pursuant to the Securities Act or the regulations thereunder with the offer and sale of the Shares pursuant to the Registration Statement.

 

(n) The Representative shall have received a certificate of each of the Selling Stockholders, dated as of the Closing Date and Option Closing Date, as the case may be, to the effect that: (i) as of the date hereof and as of the applicable Closing Date, the representations and warranties of the Company set forth in Sections 2 hereof are accurate and (ii) as of the applicable Closing Date and Option Closing Date, as the case may be, all agreements, conditions and obligations of the Selling Stockholders to be performed or complied with hereunder on or prior thereto have been duly performed or complied with.

 

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(o) If any of the conditions specified in this Section 7 shall not have been fulfilled when and as required by this Agreement, or if any of the certificates, opinions, written statements or letters furnished to the Representative or to Underwriters’ Counsel pursuant to this Section 7 shall not be reasonably satisfactory in form and substance to the Representative and to Underwriters’ Counsel, all obligations of the Underwriters hereunder may be cancelled by the Representative at, or at any time prior to, the consummation of the Closing. Notice of such cancellation shall be given to the Company in writing, or by telephone. Any such telephone notice shall be confirmed promptly thereafter in writing.

 

8. Indemnification.

 

(a) The Company agrees to indemnify and hold harmless the Underwriters and each Person, if an, who controls each Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, against any losses, claims, damages or liabilities to which such party may become subject, under the Securities Act or otherwise (including in settlement of any litigation if such settlement is effected with the written consent of the Company), insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) an untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, including the information deemed to be a part of the Registration Statement at the time of effectiveness and at any subsequent time pursuant to Rules 430A and 430B of the Rules and Regulations, the General Disclosure Package, the Prospectus, or any amendment or supplement thereto (including any documents filed under the Exchange Act and deemed to be incorporated by reference into the Prospectus), any Issuer Free Writing Prospectus or in any materials or information provided to investors by, or with the approval of, the Company in connection with the marketing of the offering of the Shares (“ Marketing Materials ”) , including any roadshow or investor presentations made to investors by the Company (whether in person or electronically) or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse such indemnified party for any legal or other expenses reasonably incurred by it in connection with investigating or defending against such loss, claim, damage, liability or action; or (ii) in whole or in part upon any inaccuracy in the representations and warranties of the Company contained herein; or (iii) in whole or in part upon any failure of the Company to perform its obligations hereunder or under law; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the General Disclosure Package, the Prospectus, or any such amendment or supplement, any Issuer Free Writing Prospectus or in any Marketing Materials, in reliance upon and in conformity with the Underwriters Information.

 

(b) The Selling Stockholders, severally and not jointly, shall indemnify and hold harmless each Underwriter (including specifically each person who may be substituted for an Underwriter as provided in Section 10 hereof), who controls any Underwriter within the meaning of Section 15 of the Securities Act, and each Person, if any, who controls each Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, against any losses, liabilities, claims, damages and expenses whatsoever as incurred (including but not limited to reasonable attorneys’ fees and any and all expenses whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation), joint or several, to which they or any of them may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, as originally filed or any amendment thereof, or any related Preliminary Prospectus or the Prospectus, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in each case to the extent, but only to the extent, that any such loss, liability, claim, damage or expense arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with information relating to such Selling Stockholder furnished in writing by or on behalf of such Selling Stockholder expressly for use in the Registration Statement, any Preliminary Prospectus, or the Prospectus. The liability of each Selling Stockholder under the indemnity agreement contained in this paragraph shall be limited to the net proceeds received by it from the sale of Selling Stockholder Firm Shares and Option Shares under this Agreement.

 

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(c) Each Underwriter, severally and not jointly, shall indemnify and hold harmless the Company, each of the directors of the Company, each of the officers of the Company who shall have signed the Registration Statement, and each other Person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, against any losses, liabilities, claims, damages and expenses whatsoever as incurred (including but not limited to attorneys’ fees and any and all expenses whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation), joint or several, to which they or any of them may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, as originally filed or any amendment thereof, or any related Preliminary Prospectus or the Prospectus, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that any such loss, liability, claim, damage or expense arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with the Underwriters’ Information; provided, however, that in no case shall any Underwriter be liable or responsible for any amount in excess of the aggregate underwriting discount applicable to the Securities to be purchased by such Underwriter hereunder. The parties agree that such information provided by or on behalf of any Underwriter through the Representative consists solely of the material referred to in the last sentence of Section 1(b) hereof.

 

(d) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of any claims or the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify each party against whom indemnification is to be sought in writing of the claim or the commencement thereof (but the failure so to notify an indemnifying party shall not relieve the indemnifying party from any liability which it may have under this Section 8 to the extent that it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability that such indemnifying party may have otherwise than on account of the indemnity agreement hereunder). In case any such claim or action is brought against any indemnified party, and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate, at its own expense in the defense of such action, and to the extent it may elect by written notice delivered to the indemnified party within fourteen (14) days after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel satisfactory to such indemnified party; provided however, that counsel to the indemnifying party shall not (except with the written consent of the indemnified party) also be counsel to the indemnified party. Notwithstanding the foregoing, the indemnified party or parties shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless (i) the employment of such counsel shall have been authorized in writing by one of the indemnifying parties in connection with the defense of such action, (ii) the indemnifying parties shall not have employed counsel to have charge of the defense of such action within a reasonable time after notice of commencement of the action, (iii) the indemnifying party does not diligently defend the action after assumption of the defense, or (iv) such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to one or all of the indemnifying parties (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events such fees and expenses shall be borne by the indemnifying parties. For the avoidance of doubt, where the fees and expenses of counsel engaged by an indemnified party are at the expense of the indemnifying parties, the indemnifying parties agree to advance any retainer fees required by legal counsel to an indemnified party simultaneously with the engagement of counsel by the indemnified party, it being understood and agreed that the amount of such retainer shall not exceed $40,000 and that such retainer shall be credited to fees incurred with the balance (if any) refundable to the indemnifying parties. No indemnifying party shall, without the prior written consent of the indemnified parties, effect any settlement or compromise of, or consent to the entry of judgment with respect to, any pending or threatened claim, investigation, action or proceeding in respect of which indemnity or contribution may be or could have been sought by an indemnified party under this Section 8 or Section 9 hereof (whether or not the indemnified party is an actual or potential party thereto), unless (x) such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability arising out of such claim, investigation, action or proceeding and (ii) does not include a statement as to or an admission of fault, culpability or any failure to act, by or on behalf of the indemnified party, and (y) the indemnifying party confirms in writing its indemnification obligations hereunder with respect to such settlement, compromise or judgment.

 

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9. Contribution. In order to provide for contribution in circumstances in which the indemnification provided for in Section 8 hereof is for any reason held to be unavailable from any indemnifying party or is insufficient to hold harmless a party indemnified thereunder, the Sellers and the Underwriters shall contribute to the aggregate losses, claims, damages, liabilities and expenses of the nature contemplated by such indemnification provision (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claims asserted, but after deducting in the case of losses, claims, damages, liabilities and expenses suffered by the Sellers, any contribution received by the Sellers from Persons, other than the Underwriters, who may also be liable for contribution, including Persons who control the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, officers of the Company who signed the Registration Statement and directors of the Company) as incurred to which the Sellers and one or more of the Underwriters may be subject, in such proportions as is appropriate to reflect the relative benefits received by the Sellers and the Underwriters from the Offering or, if such allocation is not permitted by applicable law, in such proportions as are appropriate to reflect not only the relative benefits referred to above but also the relative fault of the Sellers and the Underwriters in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Sellers and the Underwriters shall be deemed to be in the same proportion as (x) the total proceeds from the Offering (net of underwriting discounts and commissions but before deducting expenses) received by the Sellers bears to (y) the underwriting discount or commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of each of the Sellers and of the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Sellers or the Underwriters and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Sellers and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 9 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any judicial, regulatory or other legal or governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 9: (i) no Underwriter shall be required to contribute any amount in excess of the amount by which the discounts and commissions applicable to the Shares underwritten by it and distributed to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission and (ii) no Person guilty of fraudulent misrepresentation (within the meaning of Section 11 (f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 9, each Person, if any, who controls an Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as such Underwriter, and each Person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to clauses (i) and (ii) of the immediately preceding sentence. Any party entitled to contribution shall, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties, notify each party or parties from whom contribution may be sought, but the omission to so notify such party or parties shall not relieve the party or parties from whom contribution may be sought from any obligation it or they may have under this Section 9 or otherwise. The obligations of the Underwriters to contribute pursuant to this Section 9 are several in proportion to the respective number of Shares to be purchased by each of the Underwriters hereunder and not joint.

 

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10. Underwriter Default.

 

(a) If any Underwriter or Underwriters shall default in its or their obligation to purchase Firm Shares hereunder, and if the Firm Shares with respect to which such default relates (the “ Default Shares ”) do not (after giving effect to arrangements, if any, made by the Representative pursuant to subsection (b) below) exceed in the aggregate 10% of the number of Firm Shares, each non-defaulting Underwriter, acting severally and not jointly, agrees to purchase from the Company or the Selling Stockholders, as applicable, that number of Default Shares that bears the same proportion of the total number of Default Shares then being purchased as the number of Firm Shares set forth opposite the name of such Underwriter on Schedule A hereto bears to the aggregate number of Firm Shares set forth opposite the names of the non-defaulting Underwriters, subject, however, to such adjustments to eliminate fractional shares as the Representative in its sole discretion shall make.

 

(b) In the event that the aggregate number of Default Shares exceeds 10% of the number of Firm Shares, the Representative may in their discretion arrange for themselves or for another party or parties (including any non-defaulting Underwriter or Underwriters who so agree) to purchase the Default Shares on the terms contained herein. In the event that within five calendar days after such a default the Representative does not arrange for the purchase of the Default Shares as provided in this Section 10, this Agreement shall thereupon terminate, without liability on the part of the Company with respect thereto or the Underwriters, but nothing in this Agreement shall relieve a defaulting Underwriter or Underwriters of its or their liability, if any, to the other Underwriters and the Company for damages occasioned by its or their default hereunder.

 

(c) In the event that any Default Shares are to be purchased by the non-defaulting Underwriters, or are to be purchased by another party or parties as aforesaid, the Representative, the Company or the Selling Stockholders shall have the right to postpone the Closing Date for a period, not exceeding five (5) business days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus or in any other documents and arrangements, and the Company agrees to file promptly any amendment or supplement to the Registration Statement or the Prospectus which, in the reasonable opinion of Underwriters’ Counsel, may thereby be made necessary or advisable. The term “Underwriter” as used in this Agreement shall include any party substituted under this Section 10 with like effect as if it had originally been a party to this Agreement with respect to such Firm Shares.

 

11. Survival of Representations and Agreements. All representations and warranties, covenants and agreements of the Company, the Selling Stockholders and the Underwriters contained in this Agreement or in certificates of the Selling Stockholders or in the certificates of the officers of the Company or any Subsidiary submitted pursuant hereto, including the agreements contained in Section 6, the indemnity agreements contained in Section 8 and the contribution agreements contained in Section 9 hereof, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter or any controlling Person thereof or by or on behalf of the Company, any of its officers and directors or any controlling Person thereof, and shall survive delivery of and payment for the Shares to and by the Underwriters. The representations contained in Section 2 hereof and the covenants and agreements contained in Sections 5, 6, 8, 9, this Section 11 and Sections 15 and 16 hereof shall survive any termination of this Agreement, including termination pursuant to Section 10 or 12 hereof, for a period of six (6) months.

 

12. Effective Date of Agreement; Termination.

 

(a) This Agreement shall become effective upon the later of: (i) receipt by the Representative and the Company of notification of the effectiveness of the Registration Statement or (ii) the execution of this Agreement. Notwithstanding any termination of this Agreement, the provisions of this Section 12 and of Sections 1, 5, 7, 8 and 13 through 17, inclusive, shall remain in full force and effect at all times after the execution hereof.

 

(b) The Representative shall have the right to terminate this Agreement at any time prior to the consummation of the Closing if: (i) any domestic or international event or act or occurrence has materially disrupted, or in the opinion of the Representative will in the immediate future materially disrupt, the market for the Company’s securities or securities in general; or (ii) trading on the New York Stock Exchange, the NASDAQ or the NYSE American shall have been suspended or been made subject to material limitations, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required, on the New York Stock Exchange, the NASDAQ Capital Market or by order of the Commission or any other governmental authority having jurisdiction; or (iii) a banking moratorium has been declared by any state or federal authority or if any material disruption in commercial banking or securities settlement or clearance services shall have occurred; or (iv) (A) any outbreak or escalation of hostilities or acts of terrorism involving the United States or there is a declaration of a national emergency or war by the United States or (B) there shall have been any other calamity or crisis or any change in political, financial or economic conditions if the effect of any such event in (A) or (B), in the judgment of the Representative, is so material and adverse that such event makes it impracticable or inadvisable to proceed with the offering, sale and delivery of the Firm Shares on the terms and in the manner contemplated by the Prospectus.

 

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(c) Any notice of termination pursuant to this Section 12 shall be in writing.

 

(d) If this Agreement shall be terminated pursuant to any of the provisions hereof (other than pursuant to Section 10(b) hereof), or if the sale of the Shares provided for herein is not consummated because any condition to the obligations of the Underwriters set forth herein is not satisfied or because of any refusal, inability or failure on the part of the Company to perform any agreement herein or comply with any provision hereof, the Company shall, subject to demand by the Representative, reimburse the Underwriters for only those out-of-pocket expenses (including the fees and expenses of their counsel), actually incurred by the Underwriters in connection herewith up to $50,000 less any amounts previously paid by the Company.

 

13. Notices. All communications hereunder, except as may be otherwise specifically provided herein, shall be in writing, and:

 

(a) if sent to the Representative or any Underwriter, shall be mailed, delivered, or faxed and confirmed in writing, to Maxim Group LLC, 405 Lexington Avenue, New York, New York 10174, Attention: Clifford A. Teller, Director of Investment Banking, with a copy to Underwriters’ Counsel at Loeb & Loeb LLP, 345 Park Ave, New York, NY 10154, Attention: Mitchell Nussbaum, Esq.; and

 

(b) if sent to the Company, shall be mailed, delivered, or faxed and confirmed in writing to the Company and its counsel at the addresses set forth in the Registration Statement.

 

(c) if sent to the Selling Stockholders, shall be mailed, delivered or faxed and confirmed in writing to such Selling Stockholder c/o the Company at the address set forth in the Registration Statement.

 

14. Parties; Limitation of Relationship. This Agreement shall inure solely to the benefit of, and shall be binding upon, the Underwriters, the Company, the Selling Stockholders and the controlling Persons, directors, officers, employees and agents referred to in Section 8 hereof, and their respective successors and assigns, and no other Person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the parties hereto and said controlling Persons and their respective successors, officers, directors, heirs and legal Representative, and it is not for the benefit of any other Person. The term “successors and assigns” shall not include a purchaser, in its capacity as such, of Shares from any of the Underwriters.

 

15. Governing Law. This Agreement shall be deemed to have been executed and delivered in New York and both this Agreement and the transactions contemplated hereby shall be governed as to validity, interpretation, construction, effect, and in all other respects by the laws of the State of New York, without regard to the conflicts of laws principals thereof (other than Section 5-1401 of The New York General Obligations Law). Each of the Underwriters, the Selling Stockholders and the Company: (a) agrees that any legal suit, action or proceeding arising out of or relating to this Agreement and/or the transactions contemplated hereby shall be instituted exclusively in the Supreme Court of the State of New York, New York County, or in the United States District Court for the Southern District of New York, (b) waives any objection which it may have or hereafter to the venue of any such suit, action or proceeding, and (c) irrevocably consents to the jurisdiction of Supreme Court of the State of New York, New York County, or in the United States District Court for the Southern District of New York in any such suit, action or proceeding. Each of the Underwriters and the Company further agrees to accept and acknowledge service of any and all process which may be served in any such suit, action or proceeding in the Supreme Court of the State of New York, New York County, or in the United States District Court for the Southern District of New York and agrees that service of process upon the Company mailed by certified mail to the Company’s address or delivered by Federal Express via overnight delivery shall be deemed in every respect effective service of process upon the Company, in any such suit, action or proceeding; service of process upon any Selling Stockholder mailed by certified mail to the address of such Selling Stockholder or delivered by Federal Express via overnight delivery to the address of such Selling Stockholder shall be deemed in every respect effective service of process upon such Selling Stockholder, in any such suit, action or proceeding, and service of process upon the Underwriters mailed by certified mail to the Underwriters’ address or delivered by Federal Express via overnight delivery shall be deemed in every respect effective service process upon the Underwriter, in any such suit, action or proceeding. THE COMPANY (ON BEHALF OF ITSELF, THE SUBSIDIARIES AND, TO THE FULLEST EXTENT PERMITTED BY LAW, ON BEHALF OF ITS RESPECTIVE EQUITY HOLDERS AND CREDITORS) HEREBY WAIVE ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED UPON, ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, THE REGISTRATION STATEMENT AND THE PROSPECTUS. EACH OF THE SELLING STOCKHOLDERS HEREBY WAIVES ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED UPON, ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, THE REGISTRATION STATEMENT AND THE PROSPECTUS.

 

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16. Entire Agreement. This Agreement, together with the schedule and exhibits attached hereto and as the same may be amended from time to time in accordance with the terms hereof, contains the entire agreement among the parties hereto relating to the subject matter hereof and there are no other or further agreements outstanding not specifically mentioned herein.

 

17. Severability. If any term or provision of this Agreement or the performance thereof shall be invalid or unenforceable to any extent, such invalidity or unenforceability shall not affect or render invalid or unenforceable any other provision of this Agreement and this Agreement shall be valid and enforced to the fullest extent permitted by law.

 

18. Amendment. This Agreement may only be amended by a written instrument executed by each of the parties hereto.

 

19. Waiver, etc. The failure of any of the parties hereto to at any time enforce any of the provisions of this Agreement shall not be deemed or construed to be a waiver of any such provision, nor to in any way effect the validity of this Agreement or any provision hereof or the right of any of the parties hereto to thereafter enforce each and every provision of this Agreement. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Agreement shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.

 

20. No Fiduciary Relationship. The Company and each of the Selling Stockholders hereby acknowledges that the Underwriters are acting solely as underwriters in connection with the offering of the Company’s securities. The Company and each of the Selling Stockholders further acknowledge that the Underwriters are acting pursuant to a contractual relationship created solely by this Agreement entered into on an arm’s length basis and in no event do the parties intend that the Underwriters act or be responsible as a fiduciary to the Company, its management, shareholders, creditors, the Selling Stockholders or any other person in connection with any activity that the Underwriters may undertake or have undertaken in furtherance of the offering of the Company’s securities, either before or after the date hereof,. The Underwriters hereby expressly disclaim any fiduciary or similar obligations to the Company and the Selling Stockholders, either in connection with the transactions contemplated by this Agreement or any matters leading up to such transactions, and the Company and each of the Selling Stockholders hereby confirms its understanding and agreement to that effect. The Company and each of the Selling Stockholders hereby further confirms its understanding that no Underwriter has assumed an advisory or fiduciary responsibility in favor of the Company or any of the Selling Stockholders with respect to the Offering contemplated hereby or the process leading thereto, including any negotiation related to the pricing of the Shares; and the Company and each of the Selling Stockholders has consulted its own legal and financial advisors to the extent it has deemed appropriate in connection with this Agreement and the Offering. The Company, and each of the Selling Stockholders and the Underwriters agree that they are each responsible for making their own independent judgments with respect to any such transactions, and that any opinions or views expressed by the Underwriters or any of the Selling Stockholders to the Company regarding such transactions, including but not limited to any opinions or views with respect to the price or market for the Company’s securities, do not constitute advice or recommendations to the Company or any of the Selling Stockholders. The Company and each of the Selling Stockholders hereby waives and releases, to the fullest extent permitted by law, any claims that they may have against the Underwriters with respect to any breach or alleged breach of any fiduciary or similar duty to the Company or any of the Selling Stockholders in connection with the transactions contemplated by this Agreement or any matters leading up to such transactions.

 

21. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. Delivery of a signed counterpart of this Agreement by facsimile transmission shall constitute valid and sufficient delivery thereof.

 

22. Headings. The headings herein are inserted for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement.

 

[Signature Pages Follow]

 

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If the foregoing correctly sets forth your understanding, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among us.

 

  Very truly yours,
   
  BORQS TECHNOLOGIES, INC.
     
  By:              
  Name:  
  Title:  
     
  Selling Stockholders:
   
  Zhengqi International Holding Limited
     
  By:  
  Name:  
  Title:  
     
  Ninepoint Capital LLC
     
  By:  
  Name:  
  Title:  
     
  EarlyBirdCapital, Inc.
     
  By:  
  Name:  
  Title:  

 

Accepted by the Representative, acting for themselves and as Representative of the Underwriters named on Schedule A attached hereto, as of the date first written above:

 

MAXIM GROUP LLC  
     
By:               
Name:    
Title:    

 

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SCHEDULE A

 

Underwriters   Number of Firm Shares Being Purchased from the Company     Number of Firm Shares Being Purchased from the Selling Stockholders     Number of Option Shares Being Purchased from the Company     Number of Option Shares Being Purchased from the Selling Stockholders  
Maxim Group LLC     [___]       [___]       [___]       [___]  
TOTAL     [___]       [___]       [___]       [___]  

 

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SCHEDULE B-I

 

Lock-Up Parties

 

Pat Sek Yuen Chan

 

Anthony K. Chan

 

Qing Wang

 

Bei Zhang

 

Limiao Ouyang

 

SCHEDULE B-II

 

Lock-Up Parties

 

Zhengqi International Holding Limited

 

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SCHEDULE C

 

Issuer-Represented General Free Writing Prospectus

 

[None]

 

37

 

 

SCHEDULE D

 

SELLING STOCKHOLDERS

 

Name of Selling Stockholder   Number of Selling Stockholder Firm Shares Being Sold     Number of Option Shares Being Sold  
Zhengqi International Holding Limited     [_______]       [_______]  
Ninepoint Capital LLC     [_______]       [_______]  
EarlyBirdCapital, Inc.     [_______]       [_______]  

 

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ANNEX I-A

 

Lock-up Agreement

 

___________, 2018

 

MAXIM GROUP LLC
405 Lexington Avenue
New York, NY 10174

 

as underwriter

 

Re: BORQS Technologies, Inc.

 

Ladies and Gentlemen:

 

As an inducement to the underwriter (the “Underwriter” ) to execute an underwriting agreement (the “Underwriting Agreement” ) providing for a public offering (the “Offering” ) of shares, no par value (the “Shares” ), of BORQS Technologies, Inc., a British Virgin Islands corporation (the “Company” ), the undersigned hereby agrees that without, in each case, the prior written consent of the Underwriter during the period specified in the second succeeding paragraph (the “Lock-Up Period” ), the undersigned shall not (1) offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, make any short sale or otherwise transfer or dispose of, directly or indirectly, any Shares or any securities convertible into, exercisable or exchangeable for or that represent the right to receive Shares (including without limitation, Shares which may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations of the Securities and Exchange Commission and securities which may be issued upon exercise of a stock option or warrant) whether now owned or hereafter acquired (the “Undersigned’s Securities” ) or (2) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Undersigned’s Securities, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Shares or such other securities, in cash or otherwise. The foregoing restriction is expressly agreed to preclude the undersigned from engaging in any hedging or other transaction which is designed to or which reasonably could be expected to lead to or result in a sale or disposition of the Undersigned’s Securities even if such Undersigned’s Securities would be disposed of by someone other than the undersigned. Such prohibited hedging or other transactions would include without limitation any short sale or any purchase, sale or grant of any right (including without limitation any put or call option) with respect to any of the Undersigned’s Securities or with respect to any security that includes, relates to, or derives any significant part of its value from such Undersigned’s Securities.

 

In addition, the undersigned agrees that, without the prior written consent of the Representative, it shall not, during the Lock-Up Period, make any demand for or exercise any right with respect to, the registration of any Shares or any security convertible into or exercisable or exchangeable for Shares.

 

The initial Lock-Up Period will commence on the date of this Lock-Up Agreement and continue and include the date that is one hundred eighty (180) days after the date of effectiveness of registration statement number 333-223034, of which the final prospectus used to sell Shares in the Offering pursuant to the Underwriting Agreement forms a part.

 

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Notwithstanding the foregoing, (1) the undersigned may transfer the Undersigned’s Securities (i) as a bona fide gift or gifts and (ii) to any trust for the direct or indirect benefit of the undersigned or the immediate family of the undersigned, (2) if the undersigned is a corporation, company, business trust, association, limited liability company, partnership, limited liability partnership, limited liability limited partnership or other entity (collectively, the “ Entities ” or, individually, the “ Entity ”), the undersigned may transfer Shares or securities convertible into or exchangeable or exercisable for any Shares to any person or Entity which controls, is directly or indirectly controlled by, or is under common control with the undersigned and, if the undersigned is a partnership or limited liability company, it may transfer the Shares or securities convertible into or exchangeable or exercisable for any Shares to its partners, former partners or an affiliated partnership (or members, former members or an affiliated limited liability company) managed by the same manager or managing partner (or managing member, as the case may be) or management company, or managed by an entity controlling, controlled by, or under common control with, such manager or managing partner (or managing member) or management company in accordance with partnership (or membership) interests, (3) by testate or intestate succession, (4) by operation of law, such as pursuant to a qualified domestic order or in connection with a divorce settlement, (5) or pursuant to the Underwriting Agreement; provided, in each case of transfer pursuant to any of clauses (1) through (4), that (x) such transfer shall not involve a disposition for value, and (y) the transferee agrees in writing with the Underwriters to be bound by the terms of this Lock-Up Agreement. For purposes of this Lock-Up Agreement, “immediate family” shall mean any relationship by blood, marriage or adoption not more remote than first cousin.

 

In addition, the foregoing restrictions shall not apply to (i) the exercise of stock options granted pursuant to the Company’s equity incentive plans or to any of the Undersigned’s Securities issued upon such exercise, (ii) exercise of warrants; provided that it shall apply to any of the Undersigned’s Securities issued upon such exercise, (iii) pursuant to an existing contract, instruction or plan (a “Plan” ) that satisfies all of the requirements of Rule 10b5-1(c)(1)(i)(B) under the Exchange Act, or (iv) the establishment of any new Plan; provided that no sales of the Undersigned’s Securities shall be made pursuant to such new Plan prior to the expiration of the Lock-Up Period (as such may have been extended pursuant to the provisions hereof), and such a Plan may only be established if no public announcement of the establishment or existence thereof and no filing with the Securities and Exchange Commission or other regulatory authority in respect thereof or transactions thereunder or contemplated thereby, by the undersigned, the Company or any other person, shall be required, and no such announcement or filing is made voluntarily, by the undersigned, the Company or any other person, prior to the expiration of the Lock-Up Period (as such may have been extended pursuant to the provisions hereof).

 

In furtherance of the foregoing, the Company and its transfer agent and registrar are hereby authorized to decline to make any transfer of Shares if such transfer would constitute a violation or breach of this Lock-Up Agreement.

 

The undersigned understands that the undersigned shall be released from all obligations under this Lock-Up Agreement if (i) the Company or the Underwriters inform the other that it does not intend to proceed with the Offering, (ii) the Underwriting Agreement (other than the provisions thereof which survive termination) shall terminate or be terminated prior to payment for and delivery of the Shares to be sold thereunder, or (iii) the Offering is not completed by [    ], 2018.

 

The undersigned understands that the Underwriters are entering into the Underwriting Agreement and proceeding with the Offering in reliance upon this Lock-Up Agreement.

 

This Lock-Up Agreement shall be governed by, and construed in accordance with, the laws of the State of New York.

 

Whether or not the Offering actually occurs depends on a number of factors, including market conditions. Any Offering will only be made pursuant to the Underwriting Agreement, the terms of which are subject to negotiation among the parties thereto.

 

[Signature Page Follows]

 

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The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this Lock-Up Agreement and that, upon request, the undersigned will execute any additional documents necessary in connection with the enforcement hereof. All authority herein conferred or agreed to be conferred and any obligations of the undersigned shall be binding upon the successors, assigns, heirs or personal representatives of the undersigned.

 

  Very truly yours,
     
  Printed Name of Holder
     
  By:
    Signature
    Printed Name of Person Signing
     
    (and indicate capacity of person signing if signing as custodian, trustee, or on behalf of an entity)

 

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ANNEX I-B

 

Lock-up Agreement

 

___________, 2018

 

MAXIM GROUP LLC
405 Lexington Avenue
New York, NY 10174

 

as underwriter

 

Re: BORQS Technologies, Inc.

 

Ladies and Gentlemen:

 

As an inducement to the underwriter (the “Underwriter” ) to execute an underwriting agreement (the “Underwriting Agreement” ) providing for a public offering (the “Offering” ) of shares, no par value (the “Shares” ), of BORQS Technologies, Inc., a British Virgin Islands corporation (the “Company” ), the undersigned hereby agrees that without, in each case, the prior written consent of the Underwriter during the period specified in the second succeeding paragraph (the “Lock-Up Period” ), the undersigned shall not (1) offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, make any short sale or otherwise transfer or dispose of, directly or indirectly, any Shares or any securities convertible into, exercisable or exchangeable for or that represent the right to receive Shares (including without limitation, Shares which may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations of the Securities and Exchange Commission and securities which may be issued upon exercise of a stock option or warrant), which securities have been registered pursuant to the Registration Statement (as defined below) but are not sold as part of the Offering (such unsold securities, the “Undersigned’s Securities” ) or (2) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Undersigned’s Securities, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Shares or such other securities, in cash or otherwise. The foregoing restriction is expressly agreed to preclude the undersigned from engaging in any hedging or other transaction which is designed to or which reasonably could be expected to lead to or result in a sale or disposition of the Undersigned’s Securities even if such Undersigned’s Securities would be disposed of by someone other than the undersigned. Such prohibited hedging or other transactions would include without limitation any short sale or any purchase, sale or grant of any right (including without limitation any put or call option) with respect to any of the Undersigned’s Securities or with respect to any security that includes, relates to, or derives any significant part of its value from such Undersigned’s Securities.

 

In addition, the undersigned agrees that, without the prior written consent of the Representative, it shall not, during the Lock-Up Period, make any demand for or exercise any right with respect to, the registration of any Shares or any security convertible into or exercisable or exchangeable for Shares.

 

The initial Lock-Up Period will commence on the date of this Lock-Up Agreement and continue and include the date that is one hundred thirty-five (135) days after the date of effectiveness of registration statement number 333-223034, of which the final prospectus used to sell Shares in the Offering pursuant to the Underwriting Agreement forms a part (the “ Registration Statement ”).

 

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Notwithstanding the foregoing, (1) the undersigned may transfer the Undersigned’s Securities (i) as a bona fide gift or gifts and (ii) to any trust for the direct or indirect benefit of the undersigned or the immediate family of the undersigned, (2) if the undersigned is a corporation, company, business trust, association, limited liability company, partnership, limited liability partnership, limited liability limited partnership or other entity (collectively, the “ Entities ” or, individually, the “ Entity ”), the undersigned may transfer Shares or securities convertible into or exchangeable or exercisable for any Shares to any person or Entity which controls, is directly or indirectly controlled by, or is under common control with the undersigned and, if the undersigned is a partnership or limited liability company, it may transfer the Shares or securities convertible into or exchangeable or exercisable for any Shares to its partners, former partners or an affiliated partnership (or members, former members or an affiliated limited liability company) managed by the same manager or managing partner (or managing member, as the case may be) or management company, or managed by an entity controlling, controlled by, or under common control with, such manager or managing partner (or managing member) or management company in accordance with partnership (or membership) interests, (3) by testate or intestate succession, (4) by operation of law, such as pursuant to a qualified domestic order or in connection with a divorce settlement, (5) or pursuant to the Underwriting Agreement; provided, in each case of transfer pursuant to any of clauses (1) through (4), that (x) such transfer shall not involve a disposition for value, and (y) the transferee agrees in writing with the Underwriters to be bound by the terms of this Lock-Up Agreement. For purposes of this Lock-Up Agreement, “immediate family” shall mean any relationship by blood, marriage or adoption not more remote than first cousin.

 

In addition, the foregoing restrictions shall not apply to (i) the exercise of stock options granted pursuant to the Company’s equity incentive plans or to any of the Undersigned’s Securities issued upon such exercise, (ii) exercise of warrants; provided that it shall apply to any of the Undersigned’s Securities issued upon such exercise, (iii) pursuant to an existing contract, instruction or plan (a “Plan” ) that satisfies all of the requirements of Rule 10b5-1(c)(1)(i)(B) under the Exchange Act, or (iv) the establishment of any new Plan; provided that no sales of the Undersigned’s Securities shall be made pursuant to such new Plan prior to the expiration of the Lock-Up Period (as such may have been extended pursuant to the provisions hereof), and such a Plan may only be established if no public announcement of the establishment or existence thereof and no filing with the Securities and Exchange Commission or other regulatory authority in respect thereof or transactions thereunder or contemplated thereby, by the undersigned, the Company or any other person, shall be required, and no such announcement or filing is made voluntarily, by the undersigned, the Company or any other person, prior to the expiration of the Lock-Up Period (as such may have been extended pursuant to the provisions hereof).

 

In furtherance of the foregoing, the Company and its transfer agent and registrar are hereby authorized to decline to make any transfer of Shares if such transfer would constitute a violation or breach of this Lock-Up Agreement.

 

The undersigned understands that the undersigned shall be released from all obligations under this Lock-Up Agreement if (i) the Company or the Underwriters inform the other that it does not intend to proceed with the Offering, (ii) the Underwriting Agreement (other than the provisions thereof which survive termination) shall terminate or be terminated prior to payment for and delivery of the Shares to be sold thereunder, or (iii) the Offering is not completed by [    ], 2018.

 

The undersigned understands that the Underwriters are entering into the Underwriting Agreement and proceeding with the Offering in reliance upon this Lock-Up Agreement.

 

This Lock-Up Agreement shall be governed by, and construed in accordance with, the laws of the State of New York.

 

Whether or not the Offering actually occurs depends on a number of factors, including market conditions. Any Offering will only be made pursuant to the Underwriting Agreement, the terms of which are subject to negotiation among the parties thereto.

 

[Signature Page Follows]

 

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The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this Lock-Up Agreement and that, upon request, the undersigned will execute any additional documents necessary in connection with the enforcement hereof. All authority herein conferred or agreed to be conferred and any obligations of the undersigned shall be binding upon the successors, assigns, heirs or personal representatives of the undersigned.

 

  Very truly yours,
   
  Printed Name of Holder
   
  By:  
    Signature
    Printed Name of Person Signing
     
    (and indicate capacity of person signing if signing as custodian, trustee, or on behalf of an entity)

 

 

 

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Exhibit 4.1

 

NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT SECURED BY SUCH SECURITIES.

 

BORQS TECHNOLOGIES, INC.

 

FORM OF WARRANT

 

Warrant No. [___] Original Issue Date: ________, 2018

 

BORQS Technologies, Inc., a British Virgin Islands corporation (the “Company”), hereby certifies that, as partial compensation for services, [Maxim Partners LLC] or its registered assigns (the “Holder”), is entitled to purchase from the Company up to a total of [______ (____________)] ordinary shares, no par value (each such share, a “Warrant Share” and all such shares, the “Warrant Shares”), at any time and from time to time beginning on _______________, 2019 and through and including _________, 2021 (the “Expiration Date”), and subject to the following terms and conditions:

 

1. Definitions . As used in this Warrant, the following terms shall have the respective definitions set forth in this Section 1.

 

Affiliate ” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 144.

 

Business Day ” means any day except Saturday, Sunday and any day which is a federal legal holiday or a day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close.

 

Exchange Act ” means the Securities Exchange Act of 1934, as amended.

 

Exercise Price ” means $[___] 1 , subject to adjustment in accordance with Section 9.

 

Fundamental Transaction ” means any of the following: (1) the Company effects any merger or consolidation of the Company with or into another Person, (2) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, provided however, that the sale by the Company of any manufacturing business segment, product line or division shall not be deemed to be a sale of substantially all of its assets, (3) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, or (4) the Company effects any reclassification of the Ordinary Shares or any compulsory share exchange pursuant to which the Ordinary Shares are effectively converted into or exchanged for other securities, cash or property.

 

 

 

 

1 One hundred and twenty percent (120%) of the public offering price of a share

 

 

 

 

New York Courts ” means the state and federal courts sitting in the City of New York, Borough of Manhattan.

 

Ordinary Shares ” means the ordinary shares of the Company, no par value, and any securities into which such ordinary shares may hereafter be reclassified or for which it may be exchanged as a class. “ Original Issue Date ” means the Original Issue Date first set forth on the first page of this Warrant.

 

Person ” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.

 

Rule 144 ” means Rule 144 promulgated by the SEC pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the SEC on having substantially the same effect as such Rule.

 

SEC ” means the Securities and Exchange Commission.

 

Securities Act ” means the Securities Act of 1933, as amended.

 

Subsidiary ” means any “significant subsidiary” as defined in Rule 1-02(w) of Regulation S-X promulgated by the SEC under the Exchange Act.

 

Trading Day ” means (i) a day on which the Ordinary Shares are traded or quoted on a Trading Market, or (ii) if the Ordinary Shares are not traded or quoted on any Trading Market, a day on which the Ordinary Shares are quoted in the over-the-counter market as reported on the applicable tier of OTC Markets LLC (or any similar organization or agency succeeding to its functions of reporting prices); provided, that in the event that the Ordinary Shares are not traded or quoted as set forth in (i) or (ii) hereof, then Trading Day shall mean a Business Day.

 

Trading Market ” means whichever of the New York Stock Exchange, NYSE Amex Equities, the NASDAQ Global Select Market, the NASDAQ Global Market, the NASDAQ Capital Market or OTC Bulletin Board on which the Ordinary Shares arelisted or quoted for trading on the date in question.

 

Underwriting Agreement ” means the Underwriting Agreement dated [___], 2018 between the Company and Maxim Group LLC, as Representative of the Underwriters named on Schedule A thereto.

 

Warrant Shares ” means the Ordinary Shares issuable upon exercise of this Warrant.

 

2. Registration of Warrant . The Company shall register this Warrant upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.

 

3. Registration of Transfers . Subject to the limitation set forth in the last sentence of Section 4 hereof, the Company shall register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Company at its address specified herein. Upon any such registration or transfer, a new Warrant to purchase Ordinary Shares, in substantially the form of this Warrant (any such new Warrant, a “New Warrant”), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance by such transferee of all of the rights and obligations of a holder of a Warrant.

 

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4. Exercise and Duration of Warrants . This Warrant shall be exercisable by the registered Holder at any time and from time to time from and after ____, 2019 (unless earlier exercisable pursuant to Section 11 hereof) through and including the Expiration Date. At 6:30 p.m., New York City time on the Expiration Date, which in accordance with FINRA Rule 5110(f)(2)(H) shall not be more than five (5) years from ______, 2018, the portion of this Warrant not exercised prior thereto shall be and become void and of no value. The Company may not call or redeem any portion of this Warrant without the prior written consent of the affected Holder. This Warrant shall not be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of this Warrant by any person for a period of six months immediately following ___________, 2018, except that such warrant may be assigned, in whole or in part, to any successor, officer, manager or member of such holder or to officers, managers or members of such successor or member, and to members of the underwriting syndicate or selling group.

 

5. Delivery of Warrant Shares .

 

(a) To effect exercises hereunder, the Holder shall not be required to physically surrender this Warrant unless the aggregate Warrant Shares represented by this Warrant is being exercised. Upon delivery of the Exercise Notice (in the form attached hereto) to the Company (with the attached Warrant Shares Exercise Log) at its address for notice set forth herein and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder (provided, that, in lieu of the payment of the Exercise Price, the Holder may have notified the Company in its Exercise Notice that such exercise was made pursuant to a Cashless Exercise (as defined in Section 11 hereof)), the Company shall promptly (but in no event later than five Trading Days) after the Date of Exercise (as defined herein)) issue and deliver to the Holder, a certificate for the Warrant Shares issuable upon such exercise. The Company shall, upon request of the Holder and subsequent to the date on which a registration statement covering the resale of the Warrant Shares, if any, has been declared effective by the SEC, use its reasonable best efforts to deliver Warrant Shares hereunder electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions, if available, provided, that, the Company may, but will not be required to change its transfer agent if its current transfer agent cannot deliver Warrant Shares electronically through the Depository Trust Corporation. A “Date of Exercise” means the date on which the Holder shall have delivered to the Company: (i) the Exercise Notice (with the Warrant Exercise Log attached to it), appropriately completed and duly signed and (ii) payment of the Exercise Price for the number of Warrant Shares so indicated by the Holder to be purchased.

 

(b) If by the fifth Trading Day after a Date of Exercise the Company fails to deliver the required number of Warrant Shares in the manner required pursuant to Section 5(a), then the Holder will have the right to rescind such exercise.

 

(c) The Company’s obligations to issue and deliver Warrant Shares in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with the issuance of Warrant Shares. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver certificates representing Warrant Shares upon exercise of the Warrant as required pursuant to the terms hereof.

 

6. Charges , Taxes and Expenses. Issuance and delivery of Warrant Shares upon exercise of this Warrant shall be made without charge to the Holder for any issue or transfer tax, withholding tax, transfer agent fee or other incidental tax or expense in respect of the issuance of such certificates, all of which taxes and expenses shall be paid by the Company; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof.

 

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7. Replacement of Warrant . If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and customary and reasonable indemnity (which shall not include a surety bond), if requested. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable third-party costs as the Company may prescribe. If a New Warrant is requested as a result of a mutilation of this Warrant, then the Holder shall deliver such mutilated Warrant to the Company as a condition precedent to the Company’s obligation to issue the New Warrant.

 

8. Reservation of Warrant Shares . The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued and otherwise unreserved Ordinary Shares, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other contingent purchase rights of Persons other than the Holder (taking into account the adjustments and restrictions of Section 9). The Company covenants that all Warrant Shares so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable.

 

9. Certain Adjustments . The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 9.

 

(a) Stock Dividends and Splits . If the Company, at any time while this Warrant is outstanding, (i) pays a stock dividend on its Ordinary Shares or otherwise makes a distribution on any class of capital stock that is payable in Ordinary Shares, (ii) subdivides outstanding Ordinary Shares into a larger number of shares, or (iii) combines outstanding shares of Ordinary Shares into a smaller number of shares, then in each such case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of Ordinary Shares outstanding immediately before such event and of which the denominator shall be the number of Ordinary Shares outstanding immediately after such event. Any adjustment made pursuant to clause (i) of this paragraph shall become effective immediately after the record date for the determination of shareholders entitled to receive such dividend or distribution, and any adjustment pursuant to clause (ii) or (iii) of this paragraph shall become effective immediately after the effective date of such subdivision or combination.

 

(b) Fundamental Transactions . If, at any time while this Warrant is outstanding there is a Fundamental Transaction, then the Holder shall have the right thereafter to receive, upon exercise of this Warrant, the same amount and kind of securities, cash or property as it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it had been, immediately prior to such Fundamental Transaction, the holder of the number of Warrant Shares then issuable upon exercise in full of this Warrant (the “Alternate Consideration”). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Ordinary Shares in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Ordinary Shares are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. At the Holder’s option and request, any successor to the Company or surviving entity in such Fundamental Transaction shall issue to the Holder a new warrant substantially in the form of this Warrant and consistent with the foregoing provisions and evidencing the Holder’s right to purchase the Alternate Consideration for the aggregate Exercise Price upon exercise thereof. The terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with the provisions of this paragraph (b) and insuring that the Warrant (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction.

 

(c) Number of Warrant Shares . Simultaneously with any adjustment to the Exercise Price pursuant to this Section 9, the number of Warrant Shares that may be purchased upon exercise of this Warrant shall be increased or decreased proportionately, so that after such adjustment the aggregate Exercise Price payable hereunder for the adjusted number of Warrant Shares shall be the same as the aggregate Exercise Price in effect immediately prior to such adjustment.

 

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(d) Calculations . All calculations under this Section 9 shall be made to the nearest cent or the nearest 1/100th of a share, as applicable. The number of Ordinary Shares outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Ordinary Shares.

 

(e) Notice of Adjustments . Upon the occurrence of each adjustment pursuant to this Section 9, the Company at its expense will promptly compute such adjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment, including a statement of the adjusted Exercise Price and adjusted number or type of Warrant Shares or other securities issuable upon exercise of this Warrant (as applicable), describing the transactions giving rise to such adjustments and showing in detail the facts upon which such adjustment is based. Upon written request, the Company will promptly deliver a copy of each such certificate to the Holder and to the Company’s Transfer Agent.

 

(f) Notice of Corporate Events . If the Company (i) declares a dividend or any other distribution of cash, securities or other property in respect of its Ordinary Shares , including without limitation any granting of rights or warrants to subscribe for or purchase any capital stock of the Company or any Subsidiary, (ii) authorizes or approves, enters into any agreement contemplating or solicits shareholder approval for any Fundamental Transaction or (iii) authorizes the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall deliver to the Holder a notice describing the material terms and conditions of such transaction (but only to the extent such disclosure would not result in the dissemination of material, non-public information to the Holder) at least 10 calendar days prior to the applicable record or effective date on which a Person would need to hold Ordinary Shares in order to participate in or vote with respect to such transaction, and the Company will take all steps reasonably necessary in order to give the Holder the practical opportunity to exercise this Warrant prior to such time so as to participate in or vote with respect to such transaction; provided, however, that the failure to deliver such notice or any defect therein shall not affect the validity of the corporate action required to be described in such notice.

 

10. Payment of Exercise Price. The Holder shall pay the Exercise Price by delivering immediately available funds if the Holder did not notify the Company in the Exercise Notice that the exercise was made pursuant to a Cashless Exercise as further described in Section 11 hereof.

 

11. Cashless Exercise . If at any time after a date that is three months after the date of the Underwriting Agreement, there is no effective Registration Statement registering, or no current prospectus available for, the resale of the Warrant Shares by the Holder, then this Warrant may also be exercised, in whole or in part, at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive a number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:

 

(A) = the VWAP on the Trading Day immediately preceding the date on which Holder elects to exercise this Warrant by means of a “cashless exercise,” as set forth in the applicable Notice of Exercise;

 

(B) = the Exercise Price of this Warrant, as adjusted hereunder; and

 

(X) = the number of Warrant Shares that would be issuable upon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were by means of a cash exercise rather than a cashless exercise.

 

If Warrant Shares are issued in such a cashless exercise, the parties acknowledge and agree that in accordance with Section 3(a)(9) of the Securities Act, the Warrant Shares shall take on the characteristics of the Warrants being exercised, and the holding period of the Warrants being exercised may be tacked on to the holding period of the Warrant Shares.  The Company agrees not to take any position contrary to this Section 11.

 

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“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Ordinary Shares is then listed or quoted on a Trading Market, the daily volume weighted average price of the Ordinary Shares for such date (or the nearest preceding date) on the Trading Market on which the Ordinary Shares arethen listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b) if OTCQB or OTCQX is not a Trading Market, the volume weighted average price of the Ordinary Shares for such date (or the nearest preceding date) on OTCQB or OTCQX as applicable, (c) if the Ordinary Shares are not then listed or quoted for trading on OTCQB or OTCQX and if prices for the Ordinary Shares are then reported in the “Pink Sheets” published by OTC Markets, Inc. (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Ordinary Shares so reported, or (d) in all other cases, the fair market value of a share of Ordinary Shares as determined by an independent appraiser selected in good faith by the Holders of a majority in interest of the Securities then outstanding and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.

 

Notwithstanding anything herein to the contrary, on the Expiration Date, this Warrant shall be automatically exercised via cashless exercise pursuant to this Section 11.

 

12. Limitations on Exercise. Notwithstanding anything to the contrary contained herein, the number of Warrant Shares that may be acquired by the Holder upon any exercise of this Warrant (or otherwise in respect hereof) shall be limited to the extent necessary to insure that, following such exercise (or other issuance), the total number of Ordinary Shares then beneficially owned by such Holder and its Affiliates and any other Persons whose beneficial ownership of Ordinary Shares would be aggregated with the Holder’s for purposes of Section 13(d) of the Exchange Act, does not exceed 9.99% of the total number of issued and outstanding Ordinary Shares (including for such purpose the shares of Ordinary Shares issuable upon such exercise). For such purposes, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. This provision shall not restrict the number of Ordinary Shares which a Holder may receive or beneficially own in order to determine the amount of securities or other consideration that such Holder may receive in the event of a Fundamental Transaction as contemplated in Section 9 of this Warrant. This restriction may not be waived. Notwithstanding anything to the contrary contained in this Warrant, (a) no term of this Section may be waived by any party, nor amended such that the threshold percentage of ownership would be directly or indirectly increased, (b) this restriction runs with the Warrant and may not be modified or waived by any subsequent holder hereof and (c) any attempted waiver, modification or amendment of this Section will be void ab initio.

 

13. Demand Registration Rights. The Company hereby grants to the Holder a one-time demand registration right for three (3) years from the Original Issuance Date with respect to the Warrant Shares at the Company’s expense.

 

14. “ Piggy-Back” Registration Rights . The Holder shall have the right, for a period of three (3) years from the Original Issue Date, to include the Ordinary Shares underlying the Warrants (the “Registrable Securities”) as part of any other registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Securities Act or pursuant to Form S-8 or any equivalent form); provided, however, that if, solely in connection with any primary underwritten public offering for the account of the Company, the managing underwriter(s) thereof shall, in its reasonable discretion, impose a limitation on the number of Ordinary Shares underlying the Warrants which may be included in the registration statement because, in such underwriter(s)’ judgment, marketing or other factors dictate such limitation is necessary to facilitate public distribution, then the Company shall be obligated to include in such registration statement only such limited portion of the Registrable Securities with respect to which the Holder requested inclusion hereunder as the underwriter(s) shall reasonably permit. Any exclusion of Registrable Securities shall be made pro rata among the Holders seeking to include Registrable Securities in proportion to the number of Registrable Securities sought to be included by such Holders; provided, however, that the Company shall not exclude any Registrable Securities unless the Company has first excluded all outstanding securities, the holders of which are not entitled to inclusion of such securities in such registration statement or are not entitled to pro rata inclusion with the Registrable Securities. The Holders shall be entitled to unlimited piggy-back registration rights pursuant to this Section 12(b). Any holder of Registrable Securities may elect to withdraw such Holder’s request for inclusion of Registrable Securities in any piggy-back registration by giving written notice to the Company of such request to withdraw prior to the effectiveness of the registration statement. The Company (whether on its own determination or as the result of a withdrawal by persons making a demand pursuant to written contractual obligations) may withdraw a registration statement at any time prior to the effectiveness of the registration statement. Notwithstanding any such withdrawal, the Company shall pay all expenses incurred by the Holders of Registrable Securities in connection with such piggy-back registration as provided in this Section 13. The Company shall bear all fees and expenses attendant to registering the Registrable Securities pursuant to this Section 13, including the reasonable and documented expenses of a single legal counsel selected by the Holders to represent them in connection with the sale of the Registrable Securities, but the Holders shall pay any and all underwriting commissions or brokerage fees related to the Registrable Securities. In the event of such a proposed registration, the Company shall furnish the then Holders of outstanding Registrable Securities with not less than fifteen (15) days written notice prior to the proposed date of filing of such registration statement. Such notice to the Holders shall continue to be given for each registration statement filed by the Company until such time as all of the Registrable Securities have been sold by the Holder. The holders of the Registrable Securities shall exercise the “piggy-back” rights provided for herein by giving written notice, within ten (10) days of the receipt of the Company’s notice of its intention to file a registration statement. The Company shall use its commercially reasonable efforts to cause any registration statement filed pursuant to the piggyback right granted under this Section 13 to remain effective for a period of at least nine (9) consecutive months from the date that the Holders of the Registrable Securities covered by such registration statement are first given the opportunity to sell all of such securities.

 

6

 

 

15. No Fractional Shares . No fractional Ordinary Shares will be issued in connection with any exercise of this Warrant. In lieu of any fractional shares which would, otherwise be issuable, the Company shall pay cash equal to the product of such fraction multiplied by the closing price of one Warrant Share as reported by the applicable Trading Market on the date of exercise.

 

16. Notices . Any and all notices or other communications or deliveries hereunder (including, without limitation, any Exercise Notice) shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section prior to 6:30 p.m. (New York City time) on a Trading Day, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section on a day that is not a Trading Day or later than 6:30 p.m. (New York City time) on any Trading Day, (iii) the Trading Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: (i) if to the Company, to Building B23-A, Universal Business Park, No. 10 Jiuxianqiao Road, Chaoyang District, Beijing, China 100015, Attn: Chief Executive Officer, or to Facsimile No.: [____________] (or such other address as the Company shall indicate in writing in accordance with this Section), or (ii) if to the Holder, to the address or facsimile number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section.

 

17. Warrant Agent . The Company shall serve as warrant agent under this Warrant. Upon 10 days’ notice to the Holder, the Company may appoint a new warrant agent. Any corporation into which the Company or any new warrant agent may be merged or any corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or any corporation to which the Company or any new warrant agent transfers substantially all of its corporate trust or shareholders services business shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder’s last address as shown on the Warrant Register.

 

18. Miscellaneous .

 

(a) This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and assigns. Subject to the preceding sentence, nothing in this Warrant shall be construed to give to any Person other than the Company and the Holder any legal or equitable right, remedy or cause of action under this Warrant. This Warrant may be amended only in writing signed by the Company and the Holder and their successors and assigns.

 

7

 

 

(b) All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of this Warrant and the transactions herein contemplated (“Proceedings”) (whether brought against a party hereto or its respective Affiliates, employees or agents) shall be commenced exclusively in the New York Courts. Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any Proceeding, any claim that it is not personally subject to the jurisdiction of any New York Court, or that such Proceeding has been commenced in an improper or inconvenient forum. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such Proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Warrant and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Warrant or the transactions contemplated hereby. If either party shall commence a Proceeding to enforce any provisions of this Warrant, then the prevailing party in such Proceeding shall be reimbursed by the other party for its attorney’s fees and other costs and expenses incurred with the investigation, preparation and prosecution of such Proceeding.

 

(c) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof.

 

(d) In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant.

 

(e) Prior to exercise of this Warrant, the Holder hereof shall not, by reason of being a Holder, be entitled to any rights of a shareholder with respect to the Warrant Shares.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,

 

SIGNATURE PAGE FOLLOWS]

 

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IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above.

 

  BORQS TECHNOLOGIES, INC.
   
  By  
  Name:
  Title:

 

[Signature Page to Warrant]

 

 

 

 

EXERCISE NOTICE

BORQS TECHNOLOGIES, INC.

WARRANT DATED ________

 

The undersigned Holder hereby irrevocably elects to purchase _____ Ordinary Shares pursuant to the above referenced Warrant. Capitalized terms used herein and not otherwise defined have the respective meanings set forth in the Warrant.

 

(1) The undersigned Holder hereby exercises its right to purchase _____ Warrant Shares pursuant to the Warrant.

 

(2) The holder intends that payment of the Exercise Price shall be made as:

 

_____ a “Cash Exercise” with respect to _____ Warrant Shares; and/or

 

_____ a “Cashless Exercise” with respect to _____ Warrant Shares.

 

(3) Pursuant to this Exercise Notice, the Company shall deliver to the holder _____ Warrant Shares in accordance with the terms of the Warrant.

 

(4) By its delivery of this Exercise Notice, the undersigned represents and warrants to the Company that in giving effect to the exercise evidenced hereby the Holder will not beneficially own in excess of the number of Ordinary Shares (determined in accordance with Section 13(d) of the Securities Exchange Act of 1934) permitted to be owned under Section 12 of this Warrant to which this notice relates.

 

Dated: _________________________, __________ Name of Holder:
     
  (Print)
     
  By:
    Name
    Title
    (Signature must conform in all respects to name of holder as specified on the face of the Warrant)

 

 

 

 

Warrant Shares Exercise Log

 

Date

    Number of Warrant Shares Available to be Exercised    

Number of Warrant Shares Exercised

    Number of Warrant Shares Remaining to be Exercised
                   

 

 

 

 

BORQS TECHNOLOGIES, INC.

WARRANT DATED ________

WARRANT NO. [___]

 

FORM OF ASSIGNMENT

 

[To be completed and signed only upon transfer of Warrant]

 

FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto _____ the right represented by the above-captioned Warrant to purchase _____ Ordinary Shares to which such Warrant relates and appoints _____ attorney to transfer said right on the books of the Company with full power of substitution in the premises.

 

Dated: __________________, __________  
    (Signature must conform in all respects to name of holder as specified on the face of the Warrant)
     
   
   

Address of Transferee:

     
     
     
   
     
In the presence of    
     
     

 

EXHIBIT 10.18

 

BANGALORE AFFIX STAMP DUTY RS 300/-

 

VENDOR MASTER SERVICES AGREEMENT
NUMBER BOR-189677

 

THIS VENDOR MASTER SERVICES AGREEMENT (the “Agreement”) is entered into on ____________ and effective as of July 5, 2013 (the “Effective Date”) between QUALCOMM INDIA PRIVATE LTD., a company constituted under the laws of India and having its registered office at DEF Centre. 3rd Floor. Parliament Street. New Delhi India 110001 and having its place of business at Building No.8. 5th floor. Raheja IT Park Hitec City. Madhapur. Hyderabad Andhra Pradesh 500 081, India and its place of business at Plot No 125 — 127. EPIP IInd Phase. Whitefield. Bangalore -560066 (hereinafter referred to as “Qualcomm” which expression shall. unless repugnant to the context or meaning thereof, be deemed to mean and include the successors and permitted assigns of Qualcomm India Private Ltd., as well as divisions, subsidiaries and affiliates of Qualcomm India Private Ltd. and their successors and assigns), and Borqs Software Solutions Pvt. Ltd., a company incorporated under the Companies Act 1956, having its registered office al Prestige Al Kareem. Ground Floor. 113 Edward Road. Bangalore 560052. India (hereinafter referred to as “Service Provider” which expression shall. unless repugnant to the context or meaning thereof. be deemed to mean and include its successors and permitted assigns). Qualcomm and Service Provider are hereinafter referred to in this Agreement individually as a “Party” and collectively as “Parties”.

 

In consideration of the promises and mutual covenants set forth below, and for other valuable consideration, the receipt and sufficiency of which the Parties hereby acknowledge, the Parties agree as follows:

 

1. SERVICES

 

Service Provider shall provide services in accordance with the terms and conditions of this Agreement (“Services”). Such Services shall be performed pursuant to statement(s) of work mutually agreed upon and executed by the Parties, which will set forth the detailed description of the work. Schedules, deliverables and consideration for each project authorized under this Agreement (each a “SOW”). Services will he provided from the Service Provider’s facility in accordance with the terms of this Agreement and any applicable SOW.

 

To the extent that an affiliate of Qualcomm requests Services and executes a SOW with Service Provider under this Agreement the Service Provider and that affiliate shall be deemed to have executed a Vendor Master Services Agreement on identical terms as this Vendor Master Services Agreement except that references to Qualcomm shall he deemed to be references to the affiliate.

 

2. CONSIDERATION

 

All Services shall he paid for in accordance with Exhibit A (Service Fees and Reimbursement) and the applicable SOW. Except as authorized and ordered by a fully-executed shall not be obligated to compensate Service Provider for services provided, items or data delivered, or costs incurred, and Service Provider shall not be obligated to perform or deliver services, or otherwise incur costs.

 

3. DELAYS

 

Service Provider shall notify Qualcomm immediately in writing of any delay or anticipated delay in its performance of Services, the reason for and anticipated length of the delay, and an initial proposal for remedying the delay. The Parties may in their sole discretion, extend the date of performance in a writing signed by both Parties. Service Provider shall not be eligible under any circumstances for additional consideration due to any such extension of time unless otherwise agreed to in writing by Qualcomm in its sole discretion.

 

 

 

 

4. ACCEPTANCE

 

Service Provider shall provide each deliverable required in a SOW for acceptance by Qualcomm. Any relevant acceptance criteria will be described in such SOW. Acceptance of the Services or any deliverable shall occur upon Qualcomm providing written acceptance of all deliverables required under such SOW. Service Provider acknowledges that Qualcomm’s payment in accordance with the SOW does not constitute acceptance. Such acceptance will occur only as stated in this Section 4 or by way of a fully-executed SOW.

 

5. SERVICES

 

(a)  Performance . The manner and means by which Service Provider chooses to complete the Services are in Service Provider’s sole control: provided, however, that Service Provider shall perform the Services to the satisfaction of Qualcomm and in accordance with the highest standards of professionalism in Service Provider’s industry and that Service Provider has performed a background check of all Service Provider’s employees/personnel that will have access to the Qualcomm network and data. In performing the Services. Service Provider shall provide its own equipment, tools and other materials at its own expense and shall determine the appropriate location, place and time for such performance. Qualcomm shall not be responsible I’m any loss to an) of the Service Provider’s equipment, tools and other materials during the performance of Services. Qualcomm shall notify Service Provider ii Qualcomm believes that the performance or conduct of any person employed, hired or retained by Service Provider to perform under this Agreement is unsatisfactory. Within two (2) business days of receiving Qualcomm’s notice. Service Provider shall take such actions as necessary to implement a remedial plan to substantially improve the performance or conduct of such person or shall reassign and replace such person.

 

(b)  Dedicated Personnel . Both Parties agree that continuity of Service Provider’s personnel assigned to perform the Services is essential for timely completion and quality of the Services. To the extent it is commercially reasonable, those personnel assigned to perform the Services shall continue to do so. In the event that a change of personnel is required. Service Provider shall: (i) immediately notify Qualcomm of such a change, (ii) ensure that a lull knowledge transfer occurs between new and incumbent personnel without cost to Qualcomm, and (iii) ensure that any new personnel have the skills and experience necessary to perform the Services.

 

(c)  Subcontractors . Service Provider shall perform the Services only through its employees. Should there be any requirement for Services to he performed by third-party subcontractors. Service Provider shall first obtain prior written consent from Qualcomm procurement or legal and ensure that all subcontractors execute written agreements with Service Provider containing provisions necessary to comply with Sections 7 (Confidentiality), 8 (Proprietary Rights). 9 (Representations, Warranties and Conditions) and 14 (Export Compliance Assurance) of this Agreement. Service Provider shall at all times be responsible for the acts and omissions of subcontractors and personnel directly or indirectly employed by them and the performance or all the Services, whether performed by Service Provider or its subcontractors. This Agreement shall not give rise to any contractual relationship between Qualcomm and a subcontractor to Service Provider, unless Qualcomm chooses in its discretion to join as a party to the agreement entered into between the Service Provider and the subcontractor in which case Service Provider shall ensure that the necessary agreements are signed to protect Qualcomm’s rights and remedies against such subcontractor. Qualcomm shall not undertake any obligation to pay or to be responsible for the payment or any sums or provision of any amenities to any subcontractor or its employees or personnel. Service Provider shall indemnify Qualcomm and hold Qualcomm harmless against all losses, damages, expenses and costs incurred or suffered by Qualcomm directly or indirectly attributable to any act or omission on the part of any subcontractor.

 

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(d)  Obligations of Service Provider

 

(i) Compensation and Benefits to Employees/Personnel and Applicable Taxes . All employees/personnel shall be employees or the Service Provider. Service Provider will he required to confirm the employees/personnel status on the Employees/Personnel Confirmation Form (Exhibit B) . Service Provider shall be solely responsible for (1) payment or all compensation to the employees/personnel in compliance with all applicable laws. (2) the withholding or all applicable taxes from such compensation and the payment of all such withheld amounts to the appropriate agencies or authorities within the statutory timeline stipulated, and of all legally required payments including, but not limited to income tax, provident fund, gratuity, employee State Insurance and labour welfare fund contributions (Service Provider shall produce receipts evidencing such payments as and when required by Qualcomm). (3) providing the employees/personnel with all benefits required by and under relevant law, including but not limited to Provident Fund, gratuity, bonus and maternity benefit and medical bonus, to the extent applicable, and additionally providing the employees/personnel with all necessary and appropriate benefits commensurate with their employment by the Service Provider.

 

(ii) Compliance with Qualcomm’s Safety and Security Rules . Service Provider agrees that it employees/personnel will at all times comply with all known safety and security rules and regulations reasonably established by Qualcomm.

 

(iii) Compliance With Applicable Laws . Service Provider agrees and warrants that it will comply with all requirements of all applicable laws, regulations or standards applicable to its properties, employees/personnel or the operation of its business. Qualcomm shall have no liability for any of Service Providers debts, liabilities or obligations including the Service Providers liability for (1) non procurement of any applicable license and generally not complying with applicable laws : (2) non-compliance with the Maternity Benefit Act including payment of maternity benefits and other obligations thereunder: (3) lack of registration under the relevant state Shops and Establishments legislation and compliance with the provisions set out thereunder and (4) non- compliance with laws relating to Provident Fund. Gratuity, Employee State Insurance, bonus and labour welfare fund contributions and other statutory benefits, to the extent applicable.

 

(iv) Work Authorization . Service Provider represents that, prior to placement of each employees/personnel, it has verified employment authorization for each such employees/personnel who will he providing services to Qualcomm for the duration of the assignment. In the case of foreign nationals needing sponsored work authorization. Service Provider shall obtain and shall ensure proper work authorization remains in force for all employees/personnel who are providing services to Qualcomm. Qualcomm reserves the right to request further documentation and to conduct audits to ensure that Service Provider is in compliance with the Indian immigration and work permit laws.

 

  3  

 

 

(v) Employees/Personnel Background Checks . Qualcomm at its sole discretion, may conduct background checks or request Service Provider to conduct background checks. Qualcomm will inform Service Provider if any background check is required and prior to any Qualcomm background check being initiated.

 

(vi) Inadvertent or Intentional Disclosures . For the purpose of avoiding any inadvertent or intentional disclosures of Qualcomm’s proprietary or confidential information by employees/personnel: (1) during any period of time that the employees/personnel arc performing Services under this Agreement, such employees/personnel shall not be performing services for any third party without the express written authorization of the Qualcomm Program Manager:

 

(vii) Compliance with Anti-Corruption Laws . Service Provider represents and warrants to Qualcomm that, in connection with the transactions contemplated by this Agreement or in connection with any other business transactions involving Qualcomm, Service Provider, and everyone acting on its behalf including its employees/personnel, will comply with and will not violate any Indian or other anti-corruption law or international anti-corruption standards. including but not limited to the U.S. Foreign Corrupt Practices Act, in connection with the services it has agreed to perform under this Agreement Service Provider represents and warrants to Qualcomm that Service Provider has not, and covenants and agrees that it will not in connection with the transactions contemplated by this Agreement or in connection with any other business transactions involving. Qualcomm make, promise, or offer to make any payment or transfer anything of value, directly or indirectly to any individual to secure an improper advantage. It is the intent of the panics that no payments or transfer of value shall be made which have the purpose or effect of public or commercial bribery acceptance of or acquiescence in extortion, kickbacks, or other unlawful or improper means or obtaining or retaining business.

 

(viii) Remedies for Violation of Obligations of Service Provider / Remedies Nonexclusive . If Service Provider violates any of the provisions of this Clause 5 (Obligations of Service Provider) with respect to any employees/personnel, Service Provider agrees that as a nonexclusive remedy Qualcomm is entitled to deduct all prior lees paid by Qualcomm to Service Provider for each such employees/personnel. Service Provider also agrees that Qualcomm may deduct such lees from any outstanding or future invoices of Service Provider. The panics agree that the remedies listed in this section are in addition to any other remedies available to Qualcomm in law, equity or pursuant to this Agreement.

 

6. CHANGES

 

From time to time during the course of performing the Services, either Party may submit to the other Part) a written request for a change in the Services (a “Change Request”). Neither Party shall be obligated by any Change Request unless agreed in writing by both Parties. Service Provider shall not commence work related to any Change Request until executed by both Parties. Service Provider expressly waives any consideration or payment for any change not authorized in writing by Qualcomm.

 

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7. CONFIDENTIALITY

 

(a)  Qualcomm Confidential Information . Qualcomm may from time to time communicate to Service Provider, or Service Provider may otherwise gain access to certain confidential information, including but not limited to business and/or technical information with respect to Qualcomm’s operations, business plans and/or intellectual property (the “Information”). In addition to any other confidentiality obligations that apply to such Information in any separate non-disclosure agreement entered into by the Parties for Services performed under this Agreement (as per format provided by Qualcomm), Service Provider and its employee/personnel shall treat all Information as confidential, whether or not so identified, and shall not disclose, or permit the disclosure of any Information without the prior written consent of Qualcomm. Service Provider shall limit the use and disclosure of the Information within its organization to the extent necessary to perform the Services. By agreement, • Service Provider shall ensure that any of its personnel/employees or others to whom it gives access to the Information under the terms or this Agreement shall (i) have executed an Acknowledgment of Proprietary Information and Confidentiality Obligations written agreement with Service Provider as per Exhibit C hereto prior to the date that any such personnel/employees performs any services at Qualcomm and shall provide a signed copy of each such form to Qualcomm and (ii) at the request of Qualcomm, shall execute a written agreement directly with Qualcomm obligating such employees /personnel to comply with the obligations of confidentiality set forth in this Section 7. The terms of this Agreement are in addition to the Icons of any nondisclosure agreement currently in effect between Qualcomm and Service Provider, and in the event °fatty inconsistency between the terms of such agreements those terms which are most protective of the Information shall prevail. Notwithstanding the foregoing, Service Provider may disclose Information to Qualcomm-approved subcontractors or Service Provider, provided that (i) Service Provider notifies Qualcomm in advance that Service Provider desires to make such disclosure to such subcontractor and has received from Qualcomm a written approval for the making of such disclosure, (ii) Service Provider warrants that all Information to be disclosed to such subcontractor shall be disclosed on a strict need-to-know basis only and (iii) each Qualcomm-approved subcontractor has agreed in writing to be under a contractual duty to hold Information disclosed by Service Provider to them, and any Work Product (as defined below) provided by such subcontractor to Qualcomm. confidential to Qualcomm, at least to the same extent as Service Provider is obligated to keep such Information confidential to Qualcomm under this Agreement including under the terms of any separate non-disclosure agreement entered into by the Parties for Services to be performed under this Agreement. Service Provider shall be responsible for any improper disclosure or use of Information made by any such subcontractors to the same extent as it- Service Provider itself had made such improper disclosure or use. Furthermore. Service Provider agrees, at its sole cost and expense, to undertake all measures (including but not limited to the potential immediate initiation of any court proceedings) to restrain such subcontractors from any prohibited or unauthorized disclosure or use of the Information. The foregoing obligations of this Section 7 shall not apply to any Information that has been or is, through no fault of Service Provider hereafter disclosed in publicly available sources of information. The terms of this Agreement are in addition to the terms of any separate nondisclosure agreement in effect between Qualcomm and Service Provider, and in the event of any inconsistency between the terms or such agreements, those terms which are most protective of the Information shall prevail. With respect to work or other activities to be performed by or for Service Provider under this Agreement, the terms in any such separate nondisclosure agreement between Qualcomm and Service Provider shall be binding for the longer of (i) the termination date of this Agreement plus two (2) years thereafter, or (ii) the term of such separate non-disclosure agreement.

 

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(b)  Confidentiality of Work Product . Service Provider shall not disclose to any part), including but not limited to any subcontractor. without the prior written consent of Qualcomm any of ( i) Service Provider’s works of authorship, discoveries, inventions and innovations resulting from performance or the Services; (ii) any work in progress and all deliverables created issued or delivered to Qualcomm under any SOW: or (iii) any proposals, research, records, reports, recommendations, manuals, training materials, findings, evaluations, forms, reviews, information, data, computer programs and software originated or prepared by Service Provider for or in the performance or the Services (the items listed in clauses (i), (ii), and (iii) being hereinafter referred to collectively- and severally as “Work Product”).

 

(c)  Terms of Agreement . Without the express prior written consent of Qualcomm Corporate Communications, Service Provider shall not make use of any Qualcomm trademark, trade name or logo, or publicize or disclose the existence or terms of this Agreement to any third party (other than its accountants and attorneys) by any method including but not limited to any news release, advertisement, publicity or promotional material, except as required by law or a valid court order.

 

8. PROPRIETARY RIGHTS

 

(a)  Rights to Information . Service Provider acknowledges and agrees that all Qualcomm Information shall remain the property of Qualcomm and no license, express or implied, to use an) of Qualcomm’s Information or other intellectual property is granted under this Agreement, except as specifically required to perform the Services under this Agreement for Qualcomm.

 

(b)  Works Made for Hire . Service Provider hereby agrees that any Work Product which is a work of authorship (including but not limited to any computer program or software) and has been created by Service Provider based on work performed by Service Provider under this Agreement shall, to the maximum extent permitted tinder applicable law be a “work made for hire”. Such Work Product shall be deemed to be a work that has been specially ordered or commissioned by Qualcomm for use as it’ applicable, a contribution to a collective work, as part of an audiovisual work, as a translation, as a supplementary work, as a compilation and/or as an instructional text. To the extent that any such Work Product is not a “work made for hire” under applicable law, then all of Service Provider’s rights, title and interests in and to such Work Product, together with all intellectual property rights embodied therein, shall stand assigned by Service Provider to Qualcomm pursuant to Section 8(e) below.

 

(c)  Assignment of Work Product . All Work Product shall be promptly communicated to Qualcomm. As consideration for the fees paid/to be paid to Service Provider under this Agreement. Service Provider hereby assigns and agrees to assign in the future (when any such Work Product is first reduced to practice or fixed in a tangible medium as applicable) to Qualcomm in substantially the same form of assignment set forth in Exhibit C all of’ Service Provider’s rights. title and interest in and to all Work Product, and to any and all intellectual property rights therein or relating thereto, including but not limited to all patents and copyrights which have been or may be obtained with respect to such Work Product, effective immediately upon their conception, origination, creation, preparation or discovery thereof and determined regardless of the medium of expression thereof. Service Provider shall communicate to Qualcomm or its representatives all facts known to it respecting such Work Product. Further, whenever requested, Service Provider and its employee/personnel immediately shall execute a confirmatory assignment letter as per Qualcomm requirements for any such Work Product, together with any and all intellectual property rights therein or relating thereto, in such reasonable form as may be satisfactory to Qualcomm. and the Service Provider and its employee/personnel shall testily in all legal proceedings, sign all lawful papers and otherwise perform all acts necessary or appropriate to enable Qualcomm and its successors and assigns to obtain and enforce all available legal protections for all such Work Product in all countries. All Work Product shall become the exclusive property of Qualcomm and Service Provider and its employee/personnel shall be deemed to have assigned and relinquished all rights, title and interest in and to such Work Product by virtue of this Section 8(c).

 

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(d)  Service Provider Pre-Existing Intellectual Property . Qualcomm acknowledges that Service Provider may claim certain ownership rights in or to certain know-how, trade secrets, plans, designs and construction information, processes and flowcharts, formulas. manufacturing techniques, discoveries, inventions and ideas, product specifications, machinery, drawings, photographs, computer source codes, equipment, devices, tools and apparatus and any other engineering or other technical information that is in existence prior to the date of the Agreement, whether or not protected by law (“Pre-existing Intellectual Property”). To the extent that any such Pre-Existing Intellectual Property is (i) incorporated into the Work Product and (ii) has expressly been identified to Qualcomm in writing prior to the commencement of any Services hereunder such Pre-existing Intellectual Property shall remain the property of Service Provider and Service Provider hereby grants on behalf of itself and its affiliates, to Qualcomm and its affiliates a royalty-free fully paid-up, non-exclusive, unrestricted, unconditional, irrevocable, perpetual, worldwide right and license, with the right to sublicense to use, execute, reproduce, display perform. distribute copies of modify and prepare derivative works based upon such Pre-Existing Intellectual Property as may be necessary for Qualcomm to use the Work Product, including but not limited to Qualcomm’s right to provide such Pre-Existing Intellectual Property as embedded in final deliverables comprising the Work Product, to other third parties. This right and license also includes the right to make, have made use, sell, offer to sell, import and otherwise dispose of such Pre-Existing Intellectual Property under any patents that Service Provider or any of its affiliates owns controls or otherwise possesses a right to grant any rights thereunder or thereto.

 

(e)  No License to Qualcomm Patents . Nothing in this Agreement shall be deemed to grant any rights (whether express. or by way of implication or estoppel or otherwise) under any patents patent applications or inventions of Qualcomm or any or its affiliates. Service Provider hereby acknowledges and agrees that it has no right by virtue of this Agreement to commercialize any product or service, or to offer to sell, sell, import or otherwise dispose of any product or service. Each party acknowledges and agrees that the exclusion of any rights from this Agreement with respect to the patents, patent applications and inventions of Qualcomm and its affiliates is not a derogation of the benefits of the rights provided in this Agreement, and that neither party shall take any inconsistent or contrary position as to this matter.

 

9. REPRESENTATIONS, WARRANTIS AND CONDITIONS

 

(a)  Right to Perform Services . Service Provider represents and warrants that it has the full right, power and authority to enter into this Agreement and perform the Services and its other obligations hereunder, and that its execution of this Agreement and its performance or the Services shall not result in a breach of or default under any other agreement to which Service Provider is a party or by which it is bound.

 

(b)  Conflicts of Interest; Compliance with Laws . Service Provider represents and warrants that it shall not, during the term of this Agreement, accept any work or enter into any agreement or obligation inconsistent or incompatible with Service Provider’s obligations under this Agreement. Also. Service Provider represents and warrants that during the term of this Agreement, Service Provider shall remain in full compliance with all applicable laws, regulations and permit requirements, including but not limited to labor, safety, human rights and environmental laws.

 

(c)  Open Source . Except as expressly permitted in a Statement of Work entered into with Qualcomm India Private Ltd. (“Qualcomm”) and solely with respect to software identified by Qualcomm in such Statement of Work as “open source”. Service Provider hereby agrees and shall cause its affiliates and subcontractors to agree. not to incorporate, link, distribute or use any third party software or code in conjunction with any Work Product or deliverable provided to Qualcomm under this Agreement (if any) in such a way that: (i) creates, purports to create or has the potential to create, obligations with respect to any Qualcomm software, including without limitation the distribution or disclosure of any source code: or (ii) grants, purports to grant, or has the potential to grant to any third party any rights to or immunities under any Qualcomm intellectual property or proprietary rights. Without limiting the generality of the foregoing, neither Service Provider nor any of its affiliates or subcontractors shall incorporate, link, distribute or use, in conjunction with the Work Product or any deliverable provided to Qualcomm, any code or software licensed under the GNU General Public License (“GPI.’”). Lesser General Public License (“LGPL”), Affero GPL (AGPL), European community Public license (“ECPL”), Mozilla or any other open source license in any manner that could cause or could be interpreted or asserted to cause any Qualcomm software (or any modifications thereto) to become subject to the terms or the GPL, LGPL, Mozilla or such other open source license.

 

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Without limiting the generality of the foregoing, neither Service Provider nor any of its affiliates or subcontractors shall use any software or technology in a manner that will cause any patents. copyrights or other intellectual property which are owned or controlled by Qualcomm or any of its affiliates (or for which Qualcomm or any of its affiliates has received license rights) to become subject to any encumbrance or terms and conditions of any third party or open source license (including, without limitation, any open source license listed on http://www.opensource.org/licenses/alphabetical) (each an “Open Source License”). These restrictions, limitations, exclusions and conditions shall apply even if’ Qualcomm or any of its affiliates becomes aware of or fails to act in a manner to address any violation or failure to comply therewith. No act by Qualcomm or any of its affiliates that is undertaken under this Agreement shall be construed as being inconsistent with the intent to not cause any patents, copyrights or other intellectual property that are owned or controlled by Qualcomm or any of its affiliates (or for which Qualcomm or any of its affiliates has received license rights) to become subject to any encumbrance or terms and conditions of any Open Source license. Notwithstanding the terms and conditions set forth in this paragraph, Service Provider may cause such copyrightable material expressly identified by Qualcomm in an SOW to become subject to the terms and conditions of an Open Source License that is expressly approved by Qualcomm in such SOW (or in accordance with the open source training provided by Qualcomm to Service Provider). For the avoidance of doubt, Service Provider may not subject -Qualcomm Technologies, Inc.” software (and any and all Intellectual Property Rights therein) to the terms of an Open Source License.

 

(d)  Proprietary Rights . Service Provider represents and warrants that 0) the Work Product shall he an original work of Service Provider and in performing the Services and furnishing Work Product, Service Provider shall not violate the proprietary rights of any third party: (ii) Service Provider has not transferred or assigned to any third party any proprietary rights in the Work Product: (iii) no portion of the Work Product shall be subject to any lien, encumbrance, security interest, or other restriction of any nature: and (iv) Service Provider has all rights necessary to grant to Qualcomm licenses to Service Provider’s Pre-Existing Intellectual Property.

 

(e)  Services Warranty . Service Provider represents and warrants that all Services provided under this Agreement shall be performed in a timely manner and in accordance with highest applicable industry, government and professional standards. As a remedy for breach of the foregoing warranty. Qualcomm may elect. at Qualcomm’s option: (i) the re-performance of any Services not in compliance with this warranty at no additional cost to Qualcomm; or (ii) refund to Qualcomm of the purchase price of the Services. Notwithstanding the foregoing, this Section 9(e) in no way limits the other remedies available to Qualcomm under this Agreement.

 

(f)  Work Product Warranty . Service Provider represents and warrants that all Work Products delivered shall be free from defects in workmanship and materials and shall be fit for the purposes for which such Work Products are intended. As a remedy for breach of the foregoing warranty. Qualcomm may elect, at Qualcomm’s option: (i) the replacement of non-conforming Products or work, which shall be accomplished by Service Provider at no charge to Qualcomm (ii) repair modification or adaptation of the non-conforming Work Products at Service Provider’s expense, or (iii) return of the non-conforming Work Products to Service Provider and a lull refund to Qualcomm of the aggregate purchase price paid therefore.

 

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(g)  Compliance with Anti-Corruption Laws . Service Provider represents and warrants to Qualcomm that in connection with the transactions contemplated by this Agreement or in connection with any other business transactions involving Qualcomm. Service Provider, and everyone acting on its behalf, will comply with and will not violate any Indian or other anti-corruption law or international anti-corruption standards, including but not limited to the U.S. Foreign Corrupt Practices Act, in connection with the services it has agreed to perform under this Agreement. Service Provider represents and warrants to Qualcomm that Service Provider has not, and covenants and agrees that it will not, in connection with the transactions contemplated by this Agreement or in connection with any other business transactions involving Qualcomm, make, promise, or offer to make any payment or transfer anything of value, directly or indirectly, to any individual to secure an improper advantage. It is the intent of the parties that no payments or transfer of value shall he made which have the purpose or effect of public or commercial bribery, acceptance of or acquiescence in extortion, kickbacks, or other unlawful or improper means of obtaining or retaining business.

 

(h) Disclaimer and Limitation of Liability . EXCEPT AS OTHERWISE EXPLICITY SET FORTH IN THIS SECTION 9, NEMIER PARTY MAKES ANY REPRESENTATIONS, WARRANTIES OR CONDITIONS OF ANY KIND. EMIER EXPRESS OR IMPLIED, STATUTORY OR OTHER WISE, INCLUDING, BUT NOT LIMITED TO. THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. F.XCEITI. FOR CONTRACTOR’S OBLIGATIONS UNDER SECTIONS 7 (CONFIDENTIALITY). 8 (PROPRIETARY RIGI ITS) 9 (REPRESENTATIONS, WARRANTIES AND CONDITIONS) AND 10 (INDEMNIFICATION), NEITHER PARTY SHALL BE LIABLE FOR ANY SPECIAL. INCIDENTAL INDIRECT, EXEMPLARY OR CONSEQUENTIAL DAMAGIES ARISING OUT OF THIS AGREEMENT OR ANY RESULTING OBLIGATIONS, WHETHER IN AN ACTION FOR OR ARISING OUT OF BRF.ACII OF CONTRACT. TORT OR ANY OTHER CAUSE OF ACTION. AND EVEN IF INFORMED OF THE POSSIBILITY OF SUCH DAMAGES. EACH PARTY AGREES THAT THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING THE FAILURE OF AN ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.

 

10. INDEMNIFICATION

 

Service Provider shall defend, indemnify and hold Qualcomm. its affiliates and each of their respective officers, directors, employees, affiliates, agents and customers (each an -Indemnified Party-) harmless from and against any and all claims, losses, liabilities, damages, costs and expenses (including attorneys’ fees) arising from or related to (i) any breach or alleged breach by Service Provider of this Agreement including any representations and warranties made by Service Provider in this Agreement, (ii) any non-compliance with applicable law (iii) any negligence, recklessness, willful or intentional act or omission of Service Provider or any of its employees agents. representatives or subcontractors in the performance of the Services (at Qualcomm’s facilities or elsewhere) and (iv) any payments or liabilities for which Service Provider is or becomes liable (as described in Section 12 below). If any third party asserts or initiates any claim or action against any Indemnified Party for which Service Provider is responsible for indemnification under this Section 10. Qualcomm will promptly notify Service Provider of such claim or action where it becomes aware, provided however Qualcomm’s failure to provide such notice thereof in a prompt manner to Service Provider shall not relieve Service Provider from any obligations owed hereunder, except to the extent that Service Provider has been materially prejudiced by Qualcomm’s failure in giving such prompt notice. Qualcomm shall have the right to participate at its own expense in the defense of such claim or action, including any related settlement negotiations. No such claim or action shall be settled or compromised without Qualcomm’s express written consent which consent may be withheld or conditioned by Qualcomm at its sole discretion, including requiring the execution of a full and complete release or all claims and actions made against the Indemnified Parties by each party bringing any such claims or actions. Qualcomm shall have the right to withhold from any payments due to Service Provider the amount of Qualcomm’s actual and projected costs of defending or settling any such claim or action, plus any other reasonable additional amounts, as security for the performance by Service Provider or its obligations under this Section 10.

 

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11. INSURANCE

 

Service Provider shall maintain at its sole expense during the term of this Agreement: (i) Workers’ Compensation insurance as prescribed by the law of the state or nation in which the Work is performed; (ii) employer’s liability insurance with limits of at least US $1,000010 or equivalent to INR 45,000,000, for each occurrence; (iii) automobile liability insurance if the use of motor vehicles is required, with limits of at least US $1,000,000 or equivalent to INR 45,000,000 combined single limit for bodily injury and property damage per occurrence: (iv) Commercial General Liability (“CGL”) insurance, including Blanket Contractual Liability and Broad Form Property Damage, with limits of at least US$1,000,000 or equivalent to INR 45,000,000 combined single limit for bodily injury and property damage per occurrence; (v) in the event that Service Provider’s employee(s) or subcontractor(s) are providing Services on Qualcomm premises, a fidelity bond (which includes third party liability) insuring against the dishonest act(s) committed by its employees assigned to Qualcomm’s premises under this Agreement. Service Provider shall maintain such fidelity bond in the amount of not less than US $1,000,000 or equivalent to INR 45,000,000. Service Provider shall have all CO. and automobile liability insurance policies endorsed to name Qualcomm as an additional insured. All such insurance must be primary and non-contributory and shall contain a provision waiving the insurer’s right of subrogation against Qualcomm. Prior to the commencement of any services, Service Provider will furnish Qualcomm with certificates of’ insurance which evidence the minimum levels of’ insurance set forth above. Qualcomm shall be notified in writing at least thirty (30) days prior to cancellation of or any change in the policy. Insurance companies providing coverage under this Agreement must be rated by | A-M Best | with at least an A-VII rating or equivalent rating in that state or nation.

 

12. RELATIONSHIP OF THE PARTIES

 

(a) The Parties expressly intend and agree that Service Provider is acting as an independent contractor and not as an agent, employee or partner of Qualcomm. Service Provider understands and agrees that it shall not be entitled to any of the rights and privileges established for Qualcomm’s employees, including but not limited to retirement benefits; medical, life insurance or disability coverage: severance pay; and paid vacation or sick pay. Service Provider understands and agrees that Qualcomm shall not pay or withhold from the tees paid to Service Provider any sums customarily paid or withheld for or on behalf of employees for income tax, unemployment insurance, social security, workers compensation, or any other payroll or similar employment withholding tax, insurance or payment, and all such payments as may he required by law are the sole responsibility of Service Provider. Service Provider shall he solely responsible for all tax returns and payments required to be filed with or made to an. union, state or local las authority with respect to Service Provider’s performance of the Services and receipt of lees under this Agreement. Qualcomm shall have no responsibility for any of Service Provider’s debts, liabilities or other obligations or for the intentional, reckless or negligent acts or omissions of Service Provider or Service Provider’s employees or agents.

 

(b) All employees/personnel of the Service Provider shall remain the employees of the Service Provider and the Service Provider is and shall remain their employer. Qualcomm shall in no form or manner be construed as the employer of the employees/personnel. Further, all employees/personnel shall remain subject to the supervision and control of Service Provider, notwithstanding the fact that they may be performing services on the premises of Qualcomm.

 

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(c) Qualcomm shall have no right or duty to compensate or remunerate or to hire or lire the employees/personnel of the Service Provider.

 

13. TERM AND TERMINATION

 

(a)  Initial Term . This Agreement shall become effective on the Effective Date and shall remain in effect until terminated in accordance with this Section 13.

 

(b)  Termination for Convenience . Qualcomm may terminate this Agreement, or any SOW issued against it, at any time, with or without cause, effective thirty (30) calendar days after written notice to Service Provider.

 

(c)  Termination for Cause . Service Provider may terminate this Agreement if Qualcomm breaches any material term or condition or this Agreement and fails to cure such breach within thirty (30) days after receipt of written notice specifying the nature of the breach.

 

(d)  Consequences of Termination; Return of Qualcomm Property . Services to be performed pursuant to this Agreement or any SOW shall came immediately upon any termination of this Agreement provided that Qualcomm may in its sole discretion permit any subsisting SOW to continue upon such terms as it deems fit and kw this purpose and this purpose alone the Agreement may continue till the SOW is completed /terminated. Upon expiration or termination of this Agreement or any SOW issued against it, if applicable, for any reason. Service Provider shall within Iwo weeks: i) return to Qualcomm all equipment, and ii) either return all documents and other materials containing any Qualcomm Information, all Work Product, and all copies thereof made by Service Provider or at Qualcomm’s written direction certify destruction or the same. Qualcomm’s sole obligation shall be to pay Service Provider in accordance with Section 2 (Consideration) the fees due for Services completed before such expiration or termination.

 

(e)  Survival . Those provisions, which by their nature arc intended to survive the termination or expiration or this Agreement shall survive the termination or expiration or this Agreement.

 

14. EXPORT COMPLIANCE ASSURANCE

 

Service Provider acknowledges that all hardware, software, source code and technology (collectively. “Products”) obtained from Qualcomm are subject to the US government export control and economic sanction laws, including the Export Administration Regulations (“EAR”, 15 CFR 730 et seq.) administered by the Department of Commerce. Bureau of Industry and Security, and the Foreign Asset Control Regulations (31 CFR 500 et seq.) administered by the Department of Treasury. Office of Foreign Assets Control (“OFAC”).

 

Service Provider assures that it, its subsidiaries, affiliates and subcontractors will not directly or indirectly export, re-export, transfer or release (collectively “Export”) any Products or direct product thereof to any destination, person, entity or end use prohibited or restricted under US law without prior US government authorization to the extent required by regulation. The US government maintains embargoes and sanctions against the countries listed in Country Groups E1/2 of the EAR (Supplement I to part 740). The Service Provider agrees not to directly or indirectly employ any Product received from Qualcomm in missile technology, sensitive nuclear or chemical biological weapons activities, or in any manner knowingly Export any Product to any party for such end use. Furthermore, Service Provider shall not Export Products listed in Supplement 2 to part 744 of the EAR for military end-uses, as defined in part 744.21 to the People’s Republic of China. Service Provider shall not Export any Product to any party listed on any of the denied parties lists or specially designated nationals lists maintained under said regulations without appropriate US government authorization to the extent required by regulation. Service Provider acknowledges that other countries may have trade laws pertaining to the Export, import, use, or distribution of Products, and that compliance with same is the responsibility of the Service Provider.

 

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Service Provider agrees to notify Qualcomm prior to delivery if Products to be delivered or sold to Qualcomm are subject to the International Traffic in Arms Regulations (“ITAR”, 22 (CFR 120 et seq..________________________) or the Wassenaar International Munitions List (“IMI” ____________________). Service Provider agrees it will notify Qualcomm Export Compliance Department via c-mail at ____________________with Service Provider part number, purchase order number, and ITAR/IMI, number for Products subject to ’TAR or NI compliance. Additionally, any Products controlled under the ITAR or IMI delivered to Qualcomm shall he marked in accordance with US export law.

 

If Service Provider supplies personnel employed, hired, assigned or retained by Service Provider to work on-site at a Qualcomm location and/or with access to internal Qualcomm systems. Service Provider will first notify Qualcomm in writing via e-mail at if any such person is a national or citizen of a country other than the US or those listed in Supplement 3 to part 740 of the EAR. Service Provider shall be solely responsible for determining the nationality of IN employees and contractors.

 

Service Provider may not subcontract work involving the transfer of Qualcomm Products unless and until the terms in this Section 14 have been provided in writing to the subcontractor(s).

 

This Section 14 shall survive the expiration or termination of this Agreement.

 

15. USE OF QUALCOMM PROPERTY

 

Should Qualcomm permit Service Provider to use any of Qualcomm’s equipment, tools, or facilities during the term or this Agreement Service Provider shall be responsible the any injury to any person (including death) or damage to property (including Qualcomm’s) arising out of’ use of such equipment tools or facilities whether or not such claim is based upon its condition or on the alleged negligence of Qualcomm in permitting its use. Service Provider shall take all necessary precautions to prevent injury to any persons (including employees or Qualcomm) or damage to property (including Qualcomm’s property) during the term of this Agreement. Unless already so marked by Qualcomm, Service Provider shall identify and conspicuously mark all Qualcomm property as belonging to Qualcomm and, upon request, shall promptly furnish Qualcomm with a list of all Qualcomm property being held by Service Provider.

 

16. RECORDS AND TAX INFORMATION

 

During the term of this Agreement and for two (2) years thereafter. Service Provider shall maintain detailed and accurate records with respect to Service Provider’s performance of the Services, shall maintain such records in the manner required by applicable law and shall make such records available to Qualcomm upon Qualcomm’s request.

 

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17. ORDER OF PRECEDENCE

 

Except as specifically provided otherwise in this Agreement, in the event of any conflict between this Agreement and the other documents referenced herein, the following order of precedence shall be controlling: (a) this Agreement, (b) any exhibit hereto (“Exhibit(s)”), (c) any non-disclosure agreement between the Parties, (d) SOW, and (e) any Qualcomm purchase order. Notwithstanding the foregoing, to the extent that the terms of a SOW explicitly override the terms of the Agreement, such SOW’s terms shall take primary precedence with respect to performance of that SOW.

 

18. TAXES

 

(a) Unless required by applicable law, all amounts due Service Provider shall he paid without deduction for any levies or charges of any nature which may be imposed. Qualcomm will be solely responsible for any and all applicable taxes, including but not limited to sales and use taxes, value added tax, excise tax, consumption tax, customs duties or similar charges or fees, and any funds received by Service Provider from Qualcomm as payment for the foregoing taxes will be remitted by Service Provider to the applicable taxing authority. At the request of Qualcomm, Service Provider will provide documentation reasonably satisfactory to Qualcomm evidencing payment of such taxes by Service Provider to the applicable taxing authority.

 

(b) Notwithstanding the foregoing, if Qualcomm is required by applicable law to withhold taxes from any payment due Service Provider, then the amount due to Service Provider in respect to such payment shall be reduced by the amount of such withholding; then Qualcomm will deliver to Service Provider a tax withholding certificate or similar documentation reasonably satisfactory to Service Provider evidencing payment of any such withholding. Upon receipt by Service Provider of the tax withholding certificate, the portion of the invoice represented by the tax withholding certificate will be deemed fully paid.

 

(c) Service Provider shall provide to Qualcomm all documentation (including, without limitation, the necessary withholding application, form, or residency certificate) required for the application of any applicable Double Taxation Agreement. Such documentation shall he delivered promptly after Qualcomm’s request and it shall be true correct and complete as of the date or the delivery. If valid documentation is not provided, the federal statutory withholding rate will be applied instead of the withholding rate provided by the applicable Double Taxation Agreement. Service Provider acknowledges that California withholding will apply to Services performed in the State of California unless Service Provider provides proper certification that it is exempt from California withholding (e.g. Form 590).

 

19. WORK AUTHORIZATION

 

Service Provider represents that, prior to commencing performance it has verified employment authorization for each Service Provider employee who will be providing services to Qualcomm. In the case of foreign nationals needing sponsored work authorization. Service Provider shall obtain and shall ensure proper work authorization remains in force for all Service Provider employees who are providing services to Qualcomm.

 

20. QUALCOMM’S HIRING POLICN AND NONCOMPETE:

 

(a) Qualcomm shall not hire a Service Provider employee/personnel as an employee of Qualcomm before eighteen (18) months of Service Provider employee/personnel assignment to the Services as described any Statement of Work have elapsed. Alter the eighteen (18) months of Service Provider employee/personnel’s assignment to the Services as described in the Statement of Work have lapsed, or who have resigned during or after the Services have been performed. Qualcomm shall be eligible to hire a maximum or six (6) engineers in Engineering Band 1 and II over the course or the next twelve (12) month period and any subsequent twelve (12) month period thereafter. Before rolling out the offer to Service Provider employee/personnel, the contractual representatives or both Qualcomm and the Service Provider shall review the possible impact, if any of such hire by Qualcomm, on the contractual terms or on the Services as described any relevant Statement or Work and waive any notice period requirements. Service Provider agrees that it will not have agreements with the Service Provider employee/personnel that would prevent them from working for Qualcomm. The above section does not apply to preexisting candidates of Qualcomm or temporary employees who are covered under the terms and conditions of a separate Staffing Agreement between the Parties.

 

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(b) The Service Provider hereby agrees that it shall not in any manner assign/transfer/permit its employees/personnel who are providing Services under this Agreement to provide similar or other services to a competitor of Qualcomm without the express prior written consent of Qualcomm and without an agreed cool off period. In the event that a cool off period is not identified it will be deemed to be a period of at least six months after provision of services to Qualcomm. It is agreed that the said provision will not apply in the event of cessation of service/voluntary termination on the part of the personnel/employee of the Service Provider however the Service Provider shall make good faith efforts to notify Qualcomm in the event that it becomes aware of any of its earlier personnel/employees taking up employment with a Qualcomm competitor.

 

21. GENERAL PROVISIONS

 

(a)  Notices and Invokes . All notices given by either Party under this Agreement must be in writing and delivered by postage prepaid certified mail (return receipt requested) overnight courier, or facsimile with confirmation, to the address first set forth above on page one with cc to:

 

QUALCOMM India Private Limited Borqs Software Solutions Pvt. lid.
Attn: Qualcomm’s Legal Counsel Ann: Hareesh Ramanna
DEF Centre. 3"1 Floor. Parliament Street. Prestige Al Kareem. Ground Floor,
New Delhi, India 110001 #3 Edward Road, Bangalore - 560052
  India

 

And a copy to

 

QUALCOMM India Private Limited

Plot No 125 - 127. EPIP IInd Phase, Whitefield, Bangalore -560066

Attn: Legal Counsel

 

Notices will be effective upon receipt or when delivery is refused. Each Party may change its address by giving notice to the other Party of the new address.

 

(b)  Assignment . Service Provider shall not assign any of its rights or obligations under this Agreement without the express prior written consent of Qualcomm: any attempted assignment in violation of the foregoing shall be void. This Agreement shall he binding upon and inure to the benefit of the Parties and their successors and permitted assigns.

 

At no additional cost and without the prior consent of Service Provider, Qualcomm shall have the right to assign this Agreement or any rights, obligations or interests under this Agreement to (i) any Qualcomm affiliate in which Qualcomm directly or indirectly owns at least a majority equity interest or (ii) a Spin-off Entity, in each case so long as such assignee agrees to be hound by the terms and conditions of this Agreement or a replacement version of this Agreement. A “Spin-off Entity- is defined as an entity into which Qualcomm has divested some of its properties, assets, and/or subsidiaries, and the capital stock of which has been distributed to some or all of Qualcomm’s stockholders. Qualcomm will notify Service Provider in writing of any assignment pursuant to this section.

 

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(c)  Injunctive Relief . Service Provider acknowledges that any breach of Sections K (Proprietary Rights) or 9 (Representations, Warranties and Conditions) of this Agreement by Service Provider would cause irreparable damage to Qualcomm for which monetary damages would he inadequate. Accordingly, Service Provider agrees that injunctive relief is an appropriate remedy for any such breach, in addition to all other remedies Qualcomm may have. Subject to Clause 21(c), the Courts of Bangalore shall have the jurisdiction and (Or all matters in connection with this Agreement.

 

(d)  Governing Law . All matters arising in connection with this Agreement or the enforcement or construction thereof will be governed by (without regard to conflict-of-laws provisions) and resolved in accordance with the laws of India.

 

(e)  Dispute Resolution . The Parties shall try and resolve all disputes through mutual negotiation in good faith. All disputes arising out of or in connection with the Agreement and which remain unresolved by such good faith negotiation within thirty (30) days of either Party seeking such negotiations, shall be submitted to binding arbitration in accordance with the Arbitration and Conciliation Act. 1996 or any other corresponding law for the time being in force before a single arbitrator to be mutually decided by the Parties. In case the parties are unable to mutually agree on an arbitrator, the arbitration shall he conducted by a panel of three arbitrators, one to he appointed I y each Party and the two appointed arbitrators shall appoint the third arbitrator who shall serve as the chairman of the panel. The place of arbitration will he Delhi • India. The language of the arbitration shall be English. The arbitrator’s decision shall he final and binding. Notwithstanding the determination by the Parties to utilize arbitration as specified above for resolution of disputes arising out of or in connection with this Agreement, nothing herein shall preclude Qualcomm from seeking and obtaining from a court of competent jurisdiction appropriate injunctive relief, to prevent a breach of this Agreement or to otherwise maintain the status quo pending outcome of any arbitration proceeding. Service of process in any suit, action or arbitration proceeding may be made in any manner permitted by applicable law.

 

(f)  Attorneys’ Fees . The prevailing Party in any dispute, litigation or arbitration between the Parties relating to this Agreement shall be entitled to recover its reasonable attorneys’ fees and court costs, in addition to any other relief it may be awarded, from the non-prevailing Party.

 

(g)  Severability; Non-Waiver . If any provision of this Agreement is held to be illegal, unenforceable or invalid by any court of competent jurisdiction, the remaining provisions hereof shall remain in full cause and effect. The failure or delay of either Party to enforce at any time any provision of this Agreement shall not constitute a waiver of such Party’s right thereafter to enforce each and every provision or this Agreement.

 

(h)  Headings . The section holdings appearing in this Agreement are inserted only as a matter or convenience and in no way define, limit, construe, or describe the scope or extent or such section or in any way affect this Agreement.

 

(i)  Entire Agreement; Modification . This Agreement, together with the attached exhibits, constitutes the entire agreement between the Parties and supersedes all prior oral or written negotiations and agreements between the Parties with respect to the subject matter hereof: No modification or amendment of this Agreement (including any exhibit hereto) shall be effective unless in writing signed by both Parties.

 

(j)  Counterparts . This Agreement may be executed in counterparts, each of which shall be deemed an original and which together shall he one and the same agreement.

 

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In Witness Whereof , the Parties have executed this Agreement as of the Effective Date through their duly authorized representatives.

 

 

Attachments:

Exhibit A - Service Fees and Reimbursement

Exhibit B - Off-Site Design Center Requirements, Terms and Conditions

Exhibit C - Acknowledgement of Proprietary Information and Confidentiality between Service Provider/Employer and its Employee/Personnel

Exhibit D - Deed of Assignment

 

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EXHIBIT A

 

SERVICE FEES AND REIMBURSEMENT

 

Qualcomm has requested, and Service Provider has agreed that Service Provider shall provide a secure. dedicated off-site design center (the “OD(”) subject to the provisions in this Exhibit A titled -Service Fees and Reimbursement- and Exhibit B titled “‘Off-Site Design Center Requirements, Terms, and Conditions- located at Service Provider’s facility at Prestige Al Kareem. II Floor. 113 Edward Road. Bangalore - 560052. India.

 

Job Area/Category/Position   Technology Category   Location   Daily Service Rate in US Dollars  
Software Testing   Software Test Engineer   India   $ 162.00  
Software Development   Software Dev Engineer   India   $ 219.00  

 

Service Provider shall he paid Service Fees for performing the Services by either: (i) a firm fixed fee for the performance of the Services, or (ii) a daily fee per engineer based on the above daily service fees. When quoted as a firm fixed fee Service Provider’s bid to Qualcomm shall contain the resource plan for the resource portion of the bid and will not exceed the daily rates for services shown above for the performance of the Services. To clarify, these fees do not include any additional fees associated with the performance of the Services in the Service Provider’s ODC

 

Qualcomm shall pay to Service Provider the daily time and material fees as shown above for all time and material projects as agreed upon in a Statement of Work (“SOW”) for the performance of the Services or in the case of a firm fixed fee. Service Provider’s resource plan for the resource portion of the SOW bid shall not exceed the daily service fees as shown above for the performance of the Services.

 

The specified fees shall include all elements of cost including but not limited to services rendered, overhead, general and administrative expenses, all Offsite Design Centre costs and any applicable taxes and profit other than i) out of pocket expenses authorized by Qualcomm and ii) India service tax, which will be captured as a separate line item. Notwithstanding anything to the contrary, Qualcomm’s total payment obligation under this Agreement shall not exceed the aggregate total amount authorized in accordance with the applicable SOW(s).

 

To support payment for Services provided on firm fixed fee basis, each invoice submitted shall state the; (i) monthly payment as detailed in the SOW, (ii) any India service tax shall be included on a separate line, and (iii) all authorized out of pocket expenses for which reimbursement is requested which shall be accompanied with proper documentation.

 

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To support payment for Services provided on a time and material bases, each invoice submitted shall state the; (i) individual’s name, (ii) number of days Services performed by such individual during the period for which the invoice is submitted. (iii) resource category of the individual, (iv) any applicable 01X” Fees shall be included on a separate line, (v) any India Service tax shall be include(‘ on a separate line, and (vi) all authorized out of pocket expenses for which reimbursement is requested shall be accompanied with proper documentation.

 

NOTE: When prices quoted and/or amounts invoiced will include applicable taxes, Service Provider shall clearly identify, on the invoice, the type and rate of tax being applied, as well as the jurisdiction imposing the tax. Each invoice shall include a statement by the Service Provider indicating that the Service Provider’s overhead and 00C fee is included in the invoiced amount.

 

In the event that travel is required of Service Provider in connection with its performance of the Services and is expressly stated in the applicable SOW. Service Provider shall be authorized in accordance with the SOW for such travel, provided that, Service Provider adheres to the guidelines set forth in this Exhibit A.

 

If applicable, Qualcomm shall reimburse Service Provider for reasonable and necessary out of pocket expenses pm-approved in connection with its performance of the Services, authorized in accordance with Qualcomm’s Travel Management Policy then in effect, and supported by reasonably detailed documentation. All such out or pocket expenses shall be itemized on each invoice submitted to Qualcomm and shall be accompanied by the appropriate supporting documentation. The following costs shall not be charged to Qualcomm: (a) local transportation costs of travel to and from Qualcomm’s offices (b) local telephone service and calls: and (c) office stall and supplies used in the normal course of performing the Services. Qualcomm’s total payment obligation under this Agreement shall not exceed the aggregate total amount authorized in accordance with the applicable SOW(s).

 

Qualcomm’s Travel Management Policy includes the following guidelines to be adhered to Service Provider:

 

(i) The lowest fares available, coach, or less expensive fares, are to be used on all nights (business or first class. full tare bookings are not reimbursable unless approved in advance by Qualcomm).

 

(ii) Rental cars up to mid-size are acceptable unless three (3) or more individuals are traveling together, in which case a hill-size car is allowed, luxury car rentals will not be fully reimbursed unless the rate is equal to or lower than the authorized car size. Special equipment and accessory charges such as a luggage rack, snow tires. etc., should be explained on the invoice. Charge for rental car telephones is not reimbursable.

 

(iii) Meals and incidental expenses will be reimbursed based on reasonable and actual expenses incurred. (When receipts arc required, Service Provider must submit original meal receipts displaying itemized purchases and/or the credit card receipts. No handwritten meal stubs will be accepted).

 

(iv) Hotels should not exceed a rate of $150.00 per night, unless otherwise agreed to and approved in advance by Qualcomm.

 

Invoices . Service Provider shall be paid only upon submission of invoices to Qualcomm. For Services provided on a time and material basis, invoices shall be submitted on a monthly basis for Services performed and/or other fees the prior month. For Services provided on a firm fixed fee basis, invoices shall be submitted pursuant to the schedule set forth in the individual SOW. Invoices for reimbursement of out of pocket expenses, if any, should be on a separate invoice. All invoices shall be submitted to the mailing address or email address set forth below:

 

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QUALCOMM INDIA PRIVATE LTD.

 

Attn: India.ap@qualcomm.com

 

Building No. 8, 5th Floor Mind Space

 

Raheja IT Park Hitec City

 

Madhapur, Hyderabad Andhra Pradesh 500 081, India

 

All invoices shall cite Qualcomm’s applicable purchase order number and shall contain the information and supporting documentation specified in this Exhibit A. Qualcomm shall pay all properly submitted and undisputed invoices within thirty (30) days after receipt of such invoice.

 

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EXHIBIT B
Off-Site Design Center (ODC) Security Requirements, Terms, and Conditions

 

A. Security Program . Service Provider shall adhere to a security program that meets industry best practices and shall regularly perform both external and internal vulnerability scanning. In the event that Service Provider does not have a formal security program, prior to Service Provider providing services to Qualcomm, Service Provider shall notify Qualcomm’s Information. Security & Risk Management team of such (through the Qualcomm Point of Contact). In response. Qualcomm will review Service Provider’s security practices for approval.

 

B. Physical Security Requirements . Qualcomm will control and manage the access control devices and CCTV systems in the ODC space that is physically and logically separate from the Service Provider’s general systems. The Service Provider must provide a list of employees that require access to the °DC to complete their job duties for Qualcomm’s approval and authorization. When needed, Qualcomm reserves the right to re-key any applicable entry doors to the ODC space that would override the access control system.

 

Qualcomm reserves the right to require, maintain, and control additional reasonable physical and logical security controls for the UDC during the term of the agreement. Additional controls will be implemented at Qualcomm’s expense, unless the additional controls are a direct result non-compliance with the provisions of this agreement, in which case the Service Provider will be responsible for the cost.

 

C. Equipment . Each Party agrees to perform all ongoing maintenance and technical support on the Equipment for which it is responsible and each Party further agrees that printers are prohibited in the DIX environment. The following is the Equipment to be provided by Qualcomm and Service Provider to support Service Provider’s location within the ODC’ and shall remain within the ODC premise at all times:

 

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Equipment

  Qty   Specs   Purchased by   Responsible Party
Engineering Desktops with default Windows OS   1 per Consultant   TBD   Service Provider   Service Provider
File Server and admin host   1   TBD   Service Provider    
Fixed Lines       Service Provider Standard - are they VOW enabled PSTN. No VoIP)   Service Provider   Service Provider
Access control equip   1   ADT equipment   Service Provider (Qualcomm payment included in ODC fee)   Qualcomm
CCTV cameras   1   ADT equipment   Service Provider (Qualcomm payment (included in ODC fee)   Qualcomm
Microsoft Office Suite   1 license per consultant   Most recent CIA version   Service Provider   Service Provider

 

 

D. Access . Qualcomm employees, subcontractors, and authorized agents with proper identification and complying with Service Provider’s standard access procedures shall be permitted into Service Provider’s facility to access the UDC.

 

E. Audits . Qualcomm reserves the right to perform periodic audits of Service Provider’s ODC facilities systems and records to ensure compliance with the terms of the Agreement. These audits may be performed by Qualcomm or its designated agents upon reasonable notice to Service Provider. The information requested by Qualcomm shall be provided promptly following Service Provider’s receipt of the request. For emergency situations or situations arising out of Force Majeure. Qualcomm and Service Provider will follow defined and mutually agreed upon emergency response and disaster recovery plans that shall he established by mutual agreement of the Parties within a reasonable period of time alter the ODC becomes operational. Qualcomm, or its designated third party, will have the right to audit:

 

a. General Controls - General controls implemented by Service Provider’s Information Security function to comply with the provisions of this agreement, as well as specific controls listed below.

 

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b. Network segregation Penetration testing procedures may include tests that verily all Qualcomm equipment is physically and/or logically segregated from the Service Provider network. Additionally, other monitoring tools and activities may be deployed by Qualcomm to assure the ODC has remained segregated from Service Provider’s network.
c. Physical Security- Badge access logs and access control lists related to the ODC space and its access.
d. Physical Security - CCIA/ recordings as requested.
e. Physical Security - Processes and procedures in place to prevent removable data storage devices in the ODC.
f. Physical Security - Processes and procedures in place to the removal of Qualcomm equipment from the ODC.

 

F. Technical Controls.

 

a. With respect to Service Provider IT infrastructure, servers, databases, or networks that process, store, or transmit Data. Service Provider shall adhere to the following password parameters, i.e., each password shall:

 

i Be at least eight characters in length;

 

ii Include a combination of letters and numbers:

 

iii Include at least one special character, such as ! & @ * ?:

 

iv Never be shared; and

 

v Must be changed no longer than every 180 days.

 

b. With respect to IT infrastructure, servers, databases, or networks that process, store, or transmit Data, Service Provider shall use the following technical security controls where applicable (and keep them current by incorporating and using all commercially available updates):

 

vi Network Protection.

 

vii Network based firewalls:

 

viii Network intrusion detection systems.

 

Client Protection.

 

- A commercially supported anti-virus software program on systems that are commonly susceptible to virus and malware attacks;
- Host-based firewall/intrusion prevention software that blocks activity not directly related to or useful for business purposes;
- A vendor supported operating system with all critical patches and security fixes installed.
- System and Software Protection.
- All system and applications associated with Data must utilize secure authentication and authorization mechanisms.
- All Service Provider-developed applications associated with Data must be designed and implemented using secure coding standards and design principles (e.g. (OWASP) Operating systems must he hardened according to industry best practices (e.g. NISI’ 800 series, NSA guidelines, CIS benchmark, etc.)

 

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Encryption.

 

- Service Provider shall utilize only industry recognized encryption algorithms with a minimum key length or 256 hits.

 

Data Security.

 

- Removable data storage devices are prohibited in the ODC. Service Provider will take appropriate steps to prevent its employees from violating this requirement including regular verbal and written reminders, signage posted on entrance/exit doors to the ODC, and regular audits of removable data storage device usage. Qualcomm can request copies of the audit reports at any time during the course of the project. Any Data that Service Provider handles or gains access to shall he processed, stored and/or transmitted by Service Provider solely on designated servers or media.
- All transmission or exchange of Data by Service Provider shall be performed utilizing industry recognized secure protocol standards, such as HTTPS, IPSIV, and SSII.
- Service Provider shall prohibit its employees and agents from removing any Qualcomm equipment from the ODC.
- In the event that Qualcomm is able to establish USB over IP functionality on the equipment located at the ODC, Service Provider agrees that Qualcomm shall have the right to remove or disable all USB connectivity from equipment located at the ODC.

 

G. Incidents . Service Provider shall report all incidents involving any type of security breach or unauthorized access to Data (“Incident”) Qualcomm IT Security (isrmir.ext@qualcomm.com). Promptly after discovery of an Incident and at no additional cost to Qualcomm, Service Provider shall: (i) immediately institute appropriate controls to maintain and preserve all electronic evidence relating to the Incident in accordance with industry best practices, and (ii) provide an initial report to Qualcomm providing: (a) a list of the Data that was subject to the breach or unauthorized access, (b) the time and date the breach or unauthorized access occurred, and (c) if ascertainable, a list of any Data that was copied or otherwise removed from the applicable systems (“Initial Incident Report”). Also, at no additional cost to Qualcomm, Service Provider shall provide Qualcomm a root cause analysis of the security breach and/or unauthorized access to Data. Service Provider shall use good faith efforts to provide the Initial Incident Report within one business day after discovery (lithe Incident, and to provide a root cause analysis within one week after discovery of the Incident. In the event any Incident of security or confidentiality by Service Provider or its agents requires notification to an individual under any Privacy Law, Qualcomm will have sole control over the timing, content, and method of notification and Service Provider will promptly reimburse Qualcomm for all costs and expenses incurred as a result attic Incident, including but not limited to, notice, print and mailing costs, and the costs of obtaining credit monitoring services and identity theft insurance kw the individuals whose Personally Identifiable Information was or may have been compromised as well as any damages or compensation Qualcomm may be required to pay by a court of law or other legal forum or regulatory body under any Privacy law.

 

H Termination . Within 30 days after termination of this Agreement, or within seven days after the request by Qualcomm (whichever occurs first), Service Provider shall (i) electronically erase. destroy, and render unreadable all Data, or (ii) physically destroy Data through shredding all physical media containing such, or (iii) provide with all physical media containing Data. Service Provider shall certify in writing to Qualcomm that these actions have been completed.

 

At Qualcomm’s request, at any time and at Qualcomm’s discretion, Service Provider, and any third Parties to whom Service Provider has transferred or made available Data, shall return some or all Data to Qualcomm and purge all copies from all systems.

 

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H. Compliance . If Service Provider violates any of the security provisions set forth in this Exhibit, Service Provider shall: (i) immediately notify Qualcomm, (ii) cooperate with any investigation by Qualcomm or independent third Parties, and (iii) remedy the violation promptly. The obligations of this section shall apply in addition to any other rights Qualcomm may have under such circumstances. The subjects to whom the Data relates shall he third Party beneficiaries of this section with a right to directly enforce this section against Service Provider under the laws of the jurisdiction in which the subject resides or has its principal place of business.

 

I. Network Access . Qualcomm shall provide, control, and manage an IPScc point to point access over leased line as required for Service Provider to perform the Services described in this agreement.

 

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EXHIBIT C

 

ACKNOWLEDGEMENT OF PROPRIETARY INFORMATION AND CONFIDENTIALITY OBLIGATIONS IWI’WEEN SERVICE PROVIDER/EMPLOYER AND ITS EMPLOYEE/PERSONNEL.

 

1. Nondisclosure. In connection with my employment by _____________ (“Service Provider /Employer”), I may gain access to certain confidential and/or proprietary information of Qualcomm India Private Limited (“Qualcomm”) or its parent or affiliates during the period of my assignment at Qualcomm. This information may include, but may not be limited to, matters (i) of a technical nature (such as products. discoveries, specifications, inventions, software, computer programs, and similar items), (ii) °fa business nature (such as cost, profit, marketing or customer lists) or (iii) pertaining to future operations and developments, all of which is of a confidential nature and which contains valuable trade secrets and know-how proprietary to Qualcomm (the “Information”). Service Provider /Employer has entered into an agreement with Qualcomm effective as of ___________2013 (the “Agreement”) pursuant to which Service Provider/Employer has agreed to certain confidentiality obligations with respect to the Information. Therefore, as a condition of my receiving access to the Information, and for other good and valuable consideration including, but not limited to, the compensation paid by Qualcomm to Service Provider /Employer in connection with my assignment at Qualcomm, I agree to the following:

 

In particular, and without limiting the foregoing. I acknowledge and understand that the Information to which I will gain access is the confidential and proprietary information of Qualcomm and I agree I will (i) not remove such Information from its site unless needed as part of your assignment or if authorized by Qualcomm management; (ii) not disclose, or permit disclosure of, any Information without the prior written consent of Qualcomm; (iii) promptly notify Service Provider /Employer and Qualcomm of any such unauthorized use or disclosure of which I learn: (iv) limit use of such to the extent necessary to perk= my assignment at Qualcomm: and (v) return to Qualcomm any and all copies of the Information in my possession or control, and any portion thereof, whether prepared by me or not, promptly upon receipt of notice from Service Provider /Employer or Qualcomm requesting such return or upon termination of my assignment at Qualcomm. I further acknowledge that my right of access to the Information expires upon termination of my assignment at Qualcomm, either by notice from Service Provider /Employer or Qualcomm. I acknowledge and agree that my obligations set forth herein (and in the Agreement) regarding the non-disclosure non-use and/or return of the Information shall survive any such termination or expiration of my access to the Information.

 

2. Assignment of Work Product. I promise to promptly and fully disclose to Service Provider /Employer and hereby assign, transfer and convey to Service Provider /Employer all my entire right, title and interest in and to any and all (i) inventions, discoveries, developments. formulae, processes, improvements, ideas and innovations, and (ii) computer programs, sales brochures, reports, and other works of authorship (and all proprietary rights, including but not limited to trade secret rights, patent rights, copyrights, mask work rights and all other rights throughout the world in connection therewith) whether or not patentable or registrable under copyright or similar statutes, made, conceived, reduced to practice, authored, or fixed in a tangible medium of expression by me, either alone or jointly with others, which results from my work or socialization with Qualcomm (hereinafter collectively’ and severally referred to as “Work Product”). I do hereby release Service Provider /Employer including its successors, assigns. Affiliates, subsidiaries, licensees, directors, employees, agents and representatives (each a “Affiliate”) from any and all claims by me by reason of any use or disclosure by Qualcomm or a Affiliate of any Work Product. Further I hereby agree, whenever requested by the Service Provider /Employer. to immediately execute a confirmatory assignment or any particular items(s) of Work Product in a form substantially similar to the deed of assignment set out in Exhibit D of the Agreement or in any other from satisfactory to the Service Provider /Employer, to testify in all legal proceedings, sign all lawful papers and otherwise perform all acts necessary or appropriate to enable Service Provider / Employer and its successors and assigns to obtain and enforce all available legal protections for all such Work Product in all countries, for which Service Provider /Employer will reimburse my reasonable out -of pocket expenses. In the event that Service Provider /Employer, is unable for any reason whatsoever to secure my signature to any lawful or necessary document, including but not limited to those required to apply for or execute patent, copyright, trademark or similar applications or assignments in relation to the Work Product, as deemed reasonably necessary by Service Provider Employer to carry out the purpose of this acknowledgement. I irrevocably appoint Service Provider / Employer and it’s duly authorized officers and agents as MY attorney in fact and at law to execute and file any such application, assignment or document and do all other lawfully permitted acts to further the procurement and maintenance of patents, copyrights, trademarks and other proprietary rights in relation to the Work Product, with the same legal force and effect as if executed by me.

 

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3. Third Party Beneficiary. I acknowledge that Qualcomm is a third-party beneficiary to this acknowledgment since this acknowledgment contains provisions which relate to my access to and use of the Information. I understand that such provisions are made expressly for the benefit of Qualcomm and are enforceable by Qualcomm in addition to Service Provider /Employer.

 

Signature: DATE
   
   
   
Printed Name:  

 

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EXHIBIT D

 

STAMP DUTY TO BE PAID UNDER THE INDIAN STAMP ACT ON THE CONSIDERATION

 

DEED OF ASSIGNMENT

 

This ASSIGNMENT is made on this on this _____ day of _________, 2013

 

BETWEEN

 

______________ of the One Part (hereinafter referred to as “the Assignor”)

 

And

 

_______________ (hereinafter referred to as “the Assignee”) or the Other Part.

 

WHEREAS the Assignor is the proprietor of the _______________, as set out in the schedule attached hereto (hereinafter referred to as “IP Rights”)

 

AND WHEREAS the Assignor has agreed to assign the IP Rights to the Assignee for consideration hereinafter appearing.

 

NOW THIS DEED WITNESSETH that in pursuance of the _______________, Agreement between the Assignor and the Assignee and in consideration of the sum of US One Dollar (US$1.00) duly paid to the Assignor by the Assignee, the receipt of which is hereby acknowledged, the Assignor hereby assigns the IP Rights worldwide to the Assignee in perpetuity to hold the same unto the Assignee, its successors and assigns absolutely.

 

IN WITNESS WHEREOF the Assignor and the Assignee have caused their name and seal to be hereunto affixed the day and year first above written.

 

SEAL For (Assignee)
   
ATTEST  
   
   
   
   
SEAL For (Assignee)
   
ATTEST  

 

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EXHIBIT 10.20

 

Loan and Security Agreement

 

Borrower: BORQS Hong Kong Limited , a private company limited by shares under Hong Kong law, registered with the Companies Registry under number 1151010
Address: Office B, 21/F, Legend Tower, 7 Shing Yip Street, Kwun Tong, Kowloon, Hong Kong
Date: April 30, 2018

 

THIS LOAN AND SECURITY AGREEMENT (“Agreement”) is entered into on the above date (the “Effective Date”) between PARTNERS FOR GROWTH V, L.P. (“PFG”), whose address is 1660 Tiburon Blvd., Suite D, Tiburon, CA 94920 and Borrower(s) named above (jointly and severally, the “Borrower”), whose registered offices are located at the above addresses (“Borrower’s Address”). The Schedule to this Agreement (the “Schedule”) being signed by the parties concurrently, is an integral part of this Agreement. (Definitions of certain terms used in this Agreement are set forth in Section 7 below.)

 

1. LOANS.

 

1.1 Loans. PFG will make loans to Borrower (the “Loan” or “Loans”) in the amount (s) shown on the Schedule subject at all times to, and notwithstanding any other provision of this Agreement, no Default or Event of Default having occurred and being continuing at any time a Loan is requested or made.

 

1.2 Interest. All Loans and all other monetary Obligations shall bear interest at the rates shown on the Schedule, except where expressly set forth to the contrary in this Agreement. Interest shall be payable monthly, on the first day of each month for interest accrued during the prior month.

 

1.3 Fees. Borrower shall pay PFG the fees shown on the Schedule, which are in addition to all interest, Lender Expenses and other sums payable to PFG and are not refundable.

 

1.4 Loan Requests. To obtain a Loan, Borrower shall make a Qualifying Request to PFG compliant with Section 8.5. Loan Requests are not deemed made until PFG acknowledges receipt of the same by electronic mail or otherwise in writing. Without limiting the effect of Section 8.22, each Borrower appoints the Responsible Officer(s) as its authorized agent to make Loan Requests and any Loan Request made by such Responsible Officer(s) shall be binding on each Borrower as if made by its own respective directors or officers who are duly authorized to bind such Borrower in respect of this Agreement. PFG’s obligation to fund a Loan Request shall be subject to its receipt of such reports, certificates and other information as may be set forth in the Schedule. Loan Requests received after 12:00 Noon Pacific time will not be deemed to have been received by PFG until the next Business Day. PFG may rely on any Loan Request given by a person whom PFG believes in good faith is a Responsible Officer, and Borrower will indemnify PFG for any loss PFG suffers as a result of such reliance.

 

1.5 Late Fee. If any payment of accrued interest for any month is not made within three business days after the later of the date a bill therefor is sent by PFG or three business days after the due date therefor, or if any payment of principal or any other payment is not made within three Business Days after the date due, then Borrower shall pay PFG a one-time late payment fee equal to 5% of the amount of each such late payment. The provisions of this paragraph shall not be construed as PFG’s consent to Borrower’s failure to pay any amounts when due, and PFG’s acceptance of any such late payments shall not restrict PFG’s exercise of any remedies arising out of any such failure. Unless expressly waived in writing by PFG in its sole discretion, interest at the Default Rate shall commence to apply to outstanding monetary Obligations as from the date the above grace periods expire.

 

2. SECURITY INTEREST.

 

2.1 Grant of Security Interest. To secure the payment and performance of all of the Obligations when due, Borrower hereby grants to PFG and agrees to procure that each Guarantor grant to PFG a continuing security interest in, and pledges to PFG, all of the following (collectively, the “Collateral”): all right, title and interest of Borrower and any Guarantor in and to all of the following, whether now owned or hereafter arising or acquired and wherever in the world located: all Accounts; all Inventory; all Equipment; all Collateral Accounts (including Deposit Accounts); all General Intangibles (including without limitation all Intellectual Property); all Investment Property; all Other Property; and any and all claims, rights and interests in any of the above, and all guaranties and security for any of the above, and all substitutions and replacements for, additions, accessions, attachments, accessories, and improvements to, and proceeds (including proceeds of any insurance policies, proceeds of proceeds and claims against third parties) of, any and all of the above and all Borrower’s and Guarantor’s books relating to any and all of the above, and provided that if any asset cannot be secured without consent of a third party (and such consent is not given), this Agreement will constitute security over all proceeds and other amounts receivable from such asset.

 

 

Partners for Growth Schedule to Loan and Security Agreement

 

2.2 Execution of Debentures; Creation of Charges . Borrower and Guarantor shall concurrently enter into Security Instruments for the benefit PFG under the laws of the Hong Kong Special Administrative Region of the People's Republic of China (“Hong Kong”), a First Ranking floating charge over all of the present and future assets of Borrower and Guarantor (including Intellectual Property) whether now existing or hereafter created, subject to any carve-out or exception provided therein. Notwithstanding anything else to the contrary set forth herein or in any other Loan Document, including governing law, jurisdiction or enforcement and rights and remedies available thereunder, the Security Instruments are intended to be independent of and supplemental to the security interests, Liens, rights and remedies of PFG under this Agreement and the other Loan Documents.

 

3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF BORROWER.

 

In order to induce PFG to enter into this Agreement and to make Loans, subject to such exceptions as are set forth with specificity in Exhibit A , Borrower represents and warrants to PFG as follows, and Borrower covenants that the following representations will continue to be true, except for representations expressly specified to be made as of a particular date, and that Borrower will at all times comply with all of the following covenants, throughout the term of this Agreement and thereafter until all Obligations (other than inchoate indemnity obligations) have been paid and performed in full:

 

3.1 Corporate Existence, Authority and Consents. Borrower is and will continue to be, duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation and has in full force and effect all material Governmental Authorizations required for Borrower to lawfully conduct its business as conducted on the Effective Date. Any change to Borrower’s or any Guarantor’s jurisdiction or form or organization is subject to PFG’s prior consent, which consent shall not be unreasonably withheld if, in PFG’s judgment, its security interest, Collateral, priority of Lien and remedies remain unimpaired and unprejudiced by such change. Borrower is and will continue to be qualified and licensed to do business in all jurisdictions in which any failure to do so could result in an adverse effect on Borrower or its business or result in a monetary or non-monetary obligation with a value in excess of $50,000. The execution, delivery and performance by Borrower of this Agreement, and all other documents contemplated hereby (i) have been duly and validly authorized, (ii) are enforceable against Borrower in accordance with their terms (except as enforcement may be limited by equitable principles and by bankruptcy, insolvency, reorganization, moratorium or similar Legal Requirements relating to creditors' rights generally, and subject to any Governmental Authorization to be obtained in connection with the granting of security interest hereunder), and (iii) do not violate Borrower’s Constitutional Documents, or any Legal Requirement or any material agreement or instrument of Borrower or relating to its property, (iv) do not require any action by, filing, registration or qualification with, or Governmental Authorization from, any Governmental Body (except such Governmental Authorizations which have already been obtained and are in full force and effect, and such actions, filings, registrations specifically listed in this Agreement or the documents contemplated hereby, including without limitation the registration of security interest with the Hong Kong Companies Registry), and (v) do not constitute grounds for acceleration of any material Indebtedness or obligation under any agreement or instrument of Borrower or relating to its property. Without limiting the foregoing: (A) the Board has the authority under Borrower’s Constitutional Documents to enter into and cause Borrower to perform, or to delegate such authority to a Responsible Officer to enter into and cause Borrower to perform, its Obligations, and (B) other than the approval of the requisite members of the Board, no consent is required of any Person to make the representation set forth in clause (A) absolutely true in all respects (except for such consents that have already been obtained and are in full force and effect).

 

3.2 Name; Trade Names and Styles. As of the Effective Date, the name of Borrower set forth in the heading to this Agreement is its correct name, as set forth in its Constitutional Documents. Listed in the Representations are all prior names of Borrower and all of Borrower’s present and prior trade names as of the Effective Date. Borrower shall give PFG 30 days’ prior written notice before changing its name or doing business under any other name. Borrower has complied, and will in the future comply, in all material respects, with all laws relating to the conduct of business under a fictitious business name, if applicable to Borrower.

 

3.3 Place of Business; Location of Collateral. As of the Effective Date, the address set forth in the heading to this Agreement is Borrower’s chief executive or registered office. In addition, as of the Effective Date, Borrower has places of business and Collateral is located only at the locations set forth in the Representations. Borrower will give PFG at least 30 days prior written notice before opening any additional place of business. In addition, any relocation of its chief executive office or movement of any Collateral valued at greater than $50,000 to a non-PRC location other than Borrower’s Address or one of the non-PRC locations set forth in the Representations shall require PFG’s prior written consent, which consent shall not unreasonably be withheld if, in PFG’s judgment, its security interest, Collateral, priority of Lien and remedies remain unimpaired and unprejudiced by such change(s). Notwithstanding the foregoing, Borrower may maintain sales offices in the ordinary course of business at which not more than a total of $50,000 fair market value of Collateral is located.

 

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Partners for Growth Schedule to Loan and Security Agreement

 

3.4 Title to Collateral; Perfection; Permitted Liens.

 

(a)  Borrower is as of the Effective Date, and will at all times in the future be, the sole owner of its Collateral, except for Collateral which is leased or licensed to Borrower. The Collateral is as of the Effective Date and will remain free and clear of any and all liens, charges, security interests, encumbrances and adverse claims, except for Permitted Liens. As of the Effective Date, PFG will have, and will continue to have, a First-Priority perfected and enforceable security interest in all of the Collateral and Borrower will at all times defend PFG and the Collateral against all claims of others.

 

(b)  Borrower has set forth in the Representations all of Borrower’s Collateral Accounts as of the Effective Date, and Borrower shall (i) give PFG ten (10) Business Days advance written notice before establishing any new Collateral Accounts or (ii) depositing any Cash or Cash Equivalents or Investment Property into any new Collateral Account and (iii) shall cause the institution where any such new Collateral Account is maintained to execute and deliver to PFG a Control Agreement in form sufficient to perfect PFG’s security interest in the Collateral Account and otherwise satisfactory to PFG in its good faith business judgment.

 

(c)  In the event that Borrower shall at any time after the Effective Date have any commercial tort claims against others, which it is asserting, and in which the potential recovery exceeds $100,000, Borrower shall promptly notify PFG thereof in writing and provide PFG with such information regarding the same as PFG shall request (unless providing such information would waive Borrower’s attorney-client privilege). Such notification to PFG shall constitute a grant of a security interest in the commercial tort claim and all proceeds thereof to PFG, and Borrower shall execute and deliver all such documents and take all such actions as PFG shall request in connection therewith.

 

(d)   No Collateral with a value in excess of $250,000 is affixed to any real property in such a manner or with such intent as to become a fixture, except as disclosed in detail in Exhibit A . From and after the Effective Date, without PFG’s consent in each instance, no material part of the Collateral will be affixed to any real property in such a manner, or with such intent, as to become a fixture. Borrower is not, except as set forth in Exhibit A , and will not become a lessee under any real property lease pursuant to which the lessor may obtain any rights in any of the Collateral and no such lease now prohibits, restrains, impairs or will prohibit, restrain or impair Borrower’s right to remove any Collateral from the leased premises. Whenever any Collateral is located upon premises in which any third party has an interest, Borrower shall, whenever requested by PFG, use commercially reasonable efforts to cause such third party to execute and deliver to PFG, in form acceptable to PFG, such waivers and subordinations as PFG shall specify in its good faith business judgment. Borrower will keep in full force and effect, and will comply with all material terms of, any lease of real property where any of the Collateral now or in the future may be located.

 

(e)  Except as specified in the Representations, Borrower is not party to, nor is it bound by, any Restricted License.

 

3.5 Maintenance of Collateral. Borrower will maintain the Collateral in good working condition (ordinary wear and tear excepted), and Borrower will not use the Collateral for any unlawful purpose. Borrower will promptly advise PFG in writing of any material loss or damage to the Collateral.

 

3.6 Books and Records. Borrower has maintained and will maintain at Borrower’s Address complete and accurate books and records, comprising an accounting system in accordance with IFRS or other generally acceptable accounting method (such as GAAP) as Borrower may adopt with notice to PFG.

 

3.7 Financial Condition, Statements and Reports. All Financial Statements now or in the future delivered to PFG have been, and will be, prepared in conformity with IFRS or such other generally acceptable accounting method as Borrower may adopt and now and in the future will fairly present the results of operations and financial condition of Borrower in all material respects, in accordance with IFRS or such other generally acceptable accounting method as Borrower may adopt, at the times and for the periods therein stated. Between the last date covered by any such statement provided to PFG and the Effective Date, there has been no Material Adverse Change.

 

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Partners for Growth Schedule to Loan and Security Agreement

 

3.8 Tax Returns and Payments; Pension Contributions. Borrower has timely filed, and will timely file, all required Tax Returns, and Borrower has timely paid, and will timely pay, all Taxes now or in the future owed by Borrower. Borrower may, however, defer payment of any of the foregoing which are contested by Borrower in good faith, provided that Borrower (i) contests the same by appropriate proceedings promptly and diligently instituted and conducted, (ii) notifies PFG in writing of the commencement of, and any material development in, the contesting proceedings initiated by the Borrower, and (iii) posts bonds or takes any other steps required to keep the same from becoming a lien upon any of the Collateral. Borrower is unaware of any claims or adjustments proposed for any of Borrower’s prior tax years which could result in additional Taxes becoming due and payable by Borrower. Borrower has paid, and shall continue to pay all amounts necessary to fund all present and future pension, profit sharing and deferred compensation plans in accordance with their terms, and Borrower has not and will not withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any such plan which could reasonably be expected to result in any liability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other Governmental Body.

 

3.9 Compliance with Law. Borrower has, to the best of its knowledge, complied, and will comply, in all material respects, with all provisions of all Legal Requirements applicable to Borrower, including, but not limited to, those relating to Borrower’s ownership of real or personal property, the conduct and licensing of Borrower’s business, and all environmental matters.

 

3.10 Litigation. There is no claim, suit, litigation, proceeding or investigation pending or (to the best of Borrower’s Knowledge) threatened against or affecting Borrower in any court or before any Governmental Body (or any basis therefor known to Borrower) (i) involving any single claim of $100,000 or more, or involving $250,000 or more in the aggregate, or (ii) which could reasonably be expected to result, either separately or in the aggregate, in any Material Adverse Change. Borrower will promptly inform PFG in writing of any claim, proceeding, litigation or investigation in the future about which it has Knowledge threatened or instituted against Borrower involving any single claim of $100,000 or more, or involving $250,000 or more in the aggregate.

 

3.11 Use of Proceeds. All proceeds of all Loans shall be used solely for lawful business purposes, including any purposes detailed in the Schedule. Borrower is not purchasing or carrying any “margin stock” (as defined in Regulation U of the Board of Governors of the Federal Reserve System of the United States) and no part of the proceeds of any Loan will be used to purchase or carry any “margin stock” or to extend credit to others for the purpose of purchasing or carrying any “margin stock.”

 

3.12 No Default. At the Effective Date, no Default or Event of Default has occurred, and no Default or Event of Default will have occurred after giving effect to any Loans being made concurrently herewith.

 

3.13 Protection and Registration of Intellectual Property Rights . Borrower owns or otherwise holds the right to use all Intellectual Property rights material to Borrower’s business or necessary for the conduct of its business as currently conducted and reflected in any Borrower’s financial plans covering future periods. Borrower shall: (a) protect, defend and maintain the validity and enforceability of its Intellectual Property, other than Intellectual Property that is not material to Borrower’s business, has a fair value of less than $50,000 and that Borrower has affirmatively determined not to maintain or to abandon; (b) promptly advise PFG in writing of Known third-party infringements of its Intellectual Property material to its business; (c) not allow any Intellectual Property material to Borrower’s business to be abandoned, forfeited or dedicated to the public without PFG’s written consent, (d) (i) provide written notice to PFG at least ten (10) days prior to entering into or becoming bound by any Restricted License (other than over-the-counter software that is commercially available to the public and licenses or agreements of Borrower with customers in which Borrower is an original equipment manufacturer), and (ii) use all commercially reasonable efforts to obtain the consent or waiver of any Person whose consent or waiver is necessary for (A) any Restricted License to be deemed “Collateral” and for PFG to have a Lien in it that might otherwise be restricted or prohibited by law or by the terms of any such Restricted License, whether now existing or entered into in the future, and (B) PFG to have the ability in the event of a liquidation of any Collateral to dispose of such Collateral in accordance with PFG’s rights and remedies under this Agreement and the other Loan Documents, and (e) while any Obligations are outstanding, shall not Transfer any Intellectual Property without PFG’s consent, which consent shall not be unreasonably withheld if no Default or Event of Default has occurred and is then continuing, the Transfer of such Intellectual Property would not give rise to such a Default or Event of Default, and if such Intellectual Property meets the three criteria set forth as the exceptions to Borrower’s duties to protect, defend and maintain under clause (a), above. If, before the Obligations have been paid and/or performed in full, Borrower shall (i) adopt, use, acquire or apply for registration of any trademark, service mark or trade name, (ii) apply for registration of any patent or obtain any patent or patent application; (iii) create or acquire any published or material unpublished works of authorship material to the business that is or is to be registered with the U.S. Copyright Office or any non-U.S. jurisdiction registry; or (iv) register or acquire any domain name or domain name rights, then the provisions of Section 2.1 shall automatically apply thereto, and Borrower shall use all commercially reasonable efforts to give PFG advance written notice thereof and in any event shall thereafter give PFG prompt written notice thereof (which for purposes hereof shall be deemed to be not more than ten (10) Business Days from the occurrence of each and any of the foregoing). Borrower shall further provide PFG with all information and details relating to the foregoing and take such further actions as PFG may reasonably request from time to time to enable PFG to perfect or continue the perfection of PFG’s interest in such Collateral.

 

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Partners for Growth Schedule to Loan and Security Agreement

 

3.14 Domain Rights and Related Matters . Borrower (a) together with other Group Members, are the sole record, legal and beneficial owner of all domain names and domain name rights used in connection with its business and that of its Subsidiaries, free and clear of any rights or claims of any third party; (b) has set forth in the Representations such domain names and ownership thereof, domain registry, domain servers, location and administrative contact information, web hosting and related services and facilities (collectively, “Domain Rights”), which are true, accurate and complete and Borrower shall promptly notify PFG of any material changes to such information; (c) shall maintain all Domain Rights that Borrower has not affirmatively determined to abandon in full force and effect so long as any Obligations remain outstanding; (d) shall, upon request of PFG, notify such third parties (including domain registrars, hosting companies and internet service providers) of PFG’s security interest in Borrower’s Domain Rights; and (e) shall promptly advise PFG in writing of any material Known disputes or infringements of its Domain Rights. The obligations of Borrower under this Section shall not be limited by any Borrower obligations under the IP Security Agreement and related Collateral Agreements and Notices executed in connection with this Agreement.

 

3.15 No Insolvency Proceeding . No Insolvency Proceeding has occurred in respect of any Borrower or Guarantor or any of their respective direct and indirect Subsidiaries.

 

3.16 Repetition . The representations of Borrower in this Agreement and in any other Loan Document in relation to itself and other Group Members are deemed to be made by Borrower by reference to the facts and circumstances then existing at all times and on each date until all amounts owed to PFG hereunder or under any Loan Document are paid in full, subject only to such changes that are expressly permitted hereunder.

 

3.17 Solvency . The fair salable value of the assets of Borrower and the Guarantor (including goodwill minus disposition costs) exceeds the fair amount of their respective liabilities (taking into account actual and prospective liabilities); no Borrower or Guarantor is left with unreasonably small capital after the transactions in this Agreement; no Borrower or Guarantor is unable to pay its debts (including trade debts) as they fall due.

 

4. ADDITIONAL DUTIES OF BORROWER.

 

Borrower will at all times comply with all of the following covenants throughout the term of this Agreement:

 

4.1 Financial and Other Covenants. Borrower shall at all times comply with the financial and other covenants set forth in the Schedule.

 

4.2. Remittance of Proceeds. Subject to the rights of the Senior Lender, all proceeds arising from the disposition of any Collateral shall be delivered, in kind, by Borrower to PFG in the original form in which received by Borrower not later than the following Business Day after receipt by Borrower, to be applied to the Obligations in such order as PFG shall determine; provided that, if no Default or Event of Default has occurred and is continuing, Borrower shall not be obligated to remit to PFG (i) the proceeds of Accounts arising in the ordinary course of business, or (ii) the proceeds of the sale of surplus, worn out or obsolete Equipment disposed of by Borrower in good faith in an arm’s length transaction for an aggregate purchase price of $50,000 or less (for all such transactions in any fiscal year). For the avoidance of doubt, payment of trade payables in the ordinary course does not constitute a “disposition of Collateral” for purposes of this Section. Borrower agrees that it will not commingle proceeds of Collateral (other than those described in subclauses (i) and (ii) above) with any of Borrower’s other funds or property, but will hold such proceeds separate and apart from such other funds and property and in an express trust for PFG, except as set forth above, and subject to the rights of the Senior Lender. Upon the occurrence and during the continuance of a Default or an Event of Default, PFG may, in its good faith business judgment, require that all proceeds of Collateral be deposited by Borrower into a Lock-Box account, or such other “blocked account” as PFG may specify, pursuant to a blocked account agreement in such form as PFG may specify in its good faith business judgment. Nothing in this Section limits the restrictions on disposition of Collateral set forth elsewhere in this Agreement.

 

4.3 Insurance. Borrower shall at all times use commercially reasonably efforts to insure all of the tangible personal property Collateral and carry such other business insurance, with insurers reasonably acceptable to PFG, in such form and amounts as PFG may reasonably require and as are customary and in accordance with standard practices for Borrower’s industry and locations, and Borrower shall provide evidence of such insurance to PFG. All such insurance policies shall name PFG as an additional loss payee, and shall contain a lenders loss payee endorsement in form reasonably acceptable to PFG. Upon receipt of the proceeds of any such insurance, subject to the rights of the Senior Lender, PFG shall apply such proceeds in reduction of the Obligations as PFG shall determine in its good faith business judgment, except that, provided no Default or Event of Default has occurred and is continuing, PFG shall release to Borrower insurance proceeds with respect to Collateral totaling less than $100,000, which shall be utilized by Borrower for the replacement of the Collateral with respect to which the insurance proceeds were paid. PFG may require reasonable assurance that the insurance proceeds so released will be so used. If Borrower fails to provide or pay for any insurance, PFG may, but is not obligated to, obtain the same at Borrower’s expense. Borrower shall promptly deliver to PFG copies of all material reports made to insurance companies.

 

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Partners for Growth Schedule to Loan and Security Agreement

 

4.4 Reports. Borrower, at its expense, shall provide PFG with the written reports set forth in the Schedule, and such other written reports with respect to Borrower (including budgets, projections, operating plans and other financial documentation), as PFG shall from time to time specify in its good faith business judgment.

 

4.5 Access to Collateral, Books and Records; Additional Reporting and Notices. At reasonable times, and on three (3) Business Days” notice, PFG, or its agents, shall have the right to inspect the Collateral, and the right to audit and copy Borrower's books and records. The foregoing inspections and audits shall be at Borrower’s expense and the charge therefor shall be $850 per person per day (or such higher amount as shall represent PFG’s then current standard charge for the same), plus Lender Expenses, provided that so long as no Default or Event of Default has occurred and is then continuing and no prior inspection or audit has revealed material deficiencies or inaccuracies in Borrower’s books and records, only one such inspection and audit shall be at Borrower’s expense during any calendar year. Notwithstanding the foregoing, Borrower shall not be required to disclose to PFG any document or information (i) where disclosure is prohibited by applicable law, or (ii) is subject to attorney-client or similar privilege or constitutes attorney work product. If Borrower is withholding any information under the preceding sentence, it shall so advise PFG in writing, giving PFG a general description of the nature of the information withheld. Without limiting the scope of reporting under Section 6 of the Schedule, Borrower shall promptly disclose to PFG any efforts to sell Borrower, its business or assets or any material part thereof or to refinance the Loan and shall disclose the salient details of any offers received from time to time in respect of the foregoing. At any time when a Default or Event of Default has occurred and is continuing (whether or not PFG has agreed to forbear), PFG shall be entitled (i) to be briefed by Borrower as to such matters as PFG may require in its business discretion, (ii) to receive advance notice of any and all Board meetings or written consents, together with the agendas for the foregoing, and (iii) to observe any such Board meetings, whether or not formally constituted as such.

 

4.6 Negative Covenants. Except as may be permitted in the Schedule, Borrower shall not, without PFG's prior written consent (which shall be a matter of its good faith business judgment and shall be conditioned on Borrower then being in compliance with the terms of this Agreement), do any of the following:

 

(i) acquire any assets, except in the ordinary course of business, or make any Investments other than Permitted Investments;

 

(ii) enter into any transaction outside the ordinary course of business with a value in excess of $150,000 (which non-ordinary course transactions shall include mergers, amalgamations, consolidations in respect of any Borrower or other Group Member, provided that with not less than thirty (30) days’ notice to PFG, one Borrower may merge with another Borrower and a Non-Borrower Group Member may merge with a Borrower or another Non-Borrower Group Member;

 

(iii) Transfer any part of its business or property, except for (A) the sale of finished Inventory in the ordinary course of Borrower’s business, (B) the sale of obsolete or unneeded Equipment in the ordinary course of business and otherwise in compliance with the terms of this Agreement, (C) the making of Permitted Investments, and (D) the granting of Permitted Liens; and, for the avoidance of any doubt, a Transfer of business or property, as contemplated above, would include (1) Borrower or any Subsidiary making or causing any payment to be made on Subordinated Debt unless expressly permitted under the terms of the subordination, intercreditor or other agreement to which the Subordinated Debt is subject (and, if permitted in this Agreement, only to the extent permitted), and (2) other than with the express consent of PFG in its sole business discretion, the amendment or modification of any such subordination, intercreditor or other agreement to provide for earlier or greater principal, interest or other payments thereon or adversely affect the subordination thereof to Obligations owed to PFG;

 

(iv) store any Inventory or other Collateral with any warehouseman or other third party with an aggregate value (per location) of $50,000 or greater, unless there is in place a bailee agreement in such form as PFG shall specify in its good faith business judgment between PFG and such warehouseman or other third party;

 

(v) sell any Inventory on a sale-or-return, guaranteed sale, consignment, or other contingent basis;

 

(vi) make any loans of any money or other assets, other than Permitted Investments;

 

(vii) incur or permit to exist any Indebtedness, other than Permitted Indebtedness;

 

(viii) guarantee or otherwise become liable with respect to the obligations of another party or entity;

 

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Partners for Growth Schedule to Loan and Security Agreement

 

(ix) pay or declare any Dividends (except for dividends payable solely in shares of Borrower or any dividends in connection with the Accumulated Dividends (as defined in the articles of association of the Guarantor as in effect as of the Effective Date);

 

(x) redeem, retire, purchase or otherwise acquire, directly or indirectly, any of Borrower's equity, except as required in the ordinary course of business and consistent with past practice in connection with redeeming or purchasing equity of departing employees, up to a maximum aggregate redemption or purchase price of $100,000 in any fiscal year;

 

(xi) engage, directly or indirectly, in any business other than the businesses currently engaged in by Borrower or reasonably related thereto;

 

(xii) in addition to any limitations that may apply under clause (xiii), after the Effective Date, cause or permit Borrower or any Guarantor to make Permitted Investments in Group Members not a Borrower or Guarantor or incur Permitted Indebtedness (other than the Senior Debt not in excess of the Senior Debt Limit specified in Section 8(a)(2) of the Schedule) to Group Members not a Borrower or Guarantor of more than $50,000 (in the aggregate) in any calendar year;

 

(xiii) with respect to Non-Borrower Group Members, cause or permit (A) any Non-Borrower Group Member to hold cash or Cash Equivalents greater in amount than 150% of the amount required for such Non-Borrower Group Member to carry on its business in the ordinary course and maintain its corporate existence, or (B) Borrower to make Permitted Investments in any Non-Borrower Group Member or incur Permitted Indebtedness to any Non-Borrower Group Member in amounts materially greater than required in order to enable such Non-Borrower Group Member to carry on its business in the ordinary course and maintain its corporate existence under Legal Requirements applicable to such Non-Borrower Group Member;

 

(xiv) make or permit any payment on any Subordinated Debt, except under the terms of the subordination, intercreditor, or other similar agreement to which such Subordinated Debt is subject, or (b) amend any provision in any document relating to the Subordinated Debt which would increase the amount thereof, provide for earlier or greater principal, interest, or other payments thereon, or adversely affect the subordination thereof to Obligations owed to PFG;

 

(xv) (A) without at least thirty (30) days prior written notice to PFG: (1) add any new offices or business locations, including warehouses (unless such new offices or business locations contain less than $50,000 in Borrower’s assets or property), (2) change its jurisdiction of organization, (3) change its organizational structure or type, (4) change its legal name, (5) change any organizational number (if any) assigned by its jurisdiction of organization; (6) form any new Subsidiaries (non-PRC or PRC), and in each case, subject to (x) Borrower’s and such Subsidiary(ies) compliance with Section 4.9 and 4.14 hereof, (y) subject to the control mechanism being available in the jurisdiction in which a Subsidiary may hold its Collateral Accounts, such Subsidiary(ies) compliance with Section 3.4(b), and (z) such Subsidiary(ies) compliance with Section 8(b) of the Schedule; or (B) fail to provide notice to PFG of any Key Person departing from or ceasing to be actively in the employ of Borrower within the earlier to occur of promptly after Knowledge thereof and (2) two days after such Key Person’s departure from Borrower;

 

(xvi) liquidate or dissolve, or elect or resolve to liquidate or dissolve;

 

(xvii) use proceeds of the Loan for other than the purposes permitted under Section 1 of the Schedule;

 

(xviii) with respect to any Person who is or becomes a Guarantor of Obligations on or after the Effective Date, cause or permit any Guarantor to take an action in violation of any negative covenant set forth in this Section 4.6 on an “as if applicable” to Guarantor basis (for example only, a breach of this clause would occur if a Guarantor were to make a payment on its Subordinated Debt as contemplated under clause (xiv), or as contemplated under clause (iii), if a Guarantor were to Transfer shares it owns in a Subsidiary to any Person); or

 

(xix) the Board shall permit or shall resolve to or approve, or Borrower shall otherwise take any steps to effect, any of the foregoing actions in clauses (i) through (xviii), inclusive, which are not otherwise expressly permitted herein.

 

Transactions permitted by the foregoing provisions of this Section are only permitted if no Default or Event of Default would occur as a result of such transaction.

 

4.7 Litigation Cooperation. Should any third-party suit or proceeding be instituted by or instituted or threatened in writing against PFG with respect to any Collateral or relating to Borrower, Borrower shall, without expense to PFG, make available Borrower and its officers, employees and agents and Borrower’s books and records, to the extent that PFG may deem them reasonably necessary in order to prosecute or defend any such suit or proceeding unless such cooperation would waive Borrower’s attorney-client privilege.

 

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Partners for Growth Schedule to Loan and Security Agreement

 

4.8 Changes. Borrower agrees to promptly notify PFG in writing of any changes in the information set forth in the Representations.

 

4.9 Further Assurances. Subject always to the rights of the Senior Lender, Borrower agrees, at its expense, on reasonable request by PFG, to execute all documents and take all actions, as PFG, may, in its good faith business judgment, deem necessary or useful in order to perfect and maintain PFG’s perfected First-Priority security interest in the Collateral (subject to Permitted Liens), and in order to fully consummate the transactions contemplated by this Agreement, including without limitation, the joinder of any non-PRC New Subsidiaries to this Agreement and execution of such other agreements and instruments as PFG reasonably request, including execution of a cross-corporate continuing guaranty among Borrower and non-PRC Non-Borrower Group Members. In addition, Borrower shall Deliver to PFG, within five (5) days after the same are sent or received, copies of all correspondence, reports, documents and other filings with any Governmental Body regarding compliance with or maintenance of Governmental Authorizations or Legal Requirements or that could reasonably be expected to have a material effect on any of the Governmental Authorizations or otherwise on the operations of Borrower or any of its Subsidiaries.

 

4.10 Collateral Accounts . Subject to Section 8(b) of the Schedule: (a) At all times thereafter, maintain all of its Collateral Accounts depositary institutions in respect of which a Control Agreement in favor of PFG is at all times in effect; and (b) provide PFG five (5) days prior written notice before establishing any Collateral Account at or with any bank or financial institution other than the Senior Lender.

 

4.11 Authorization to File Security Instruments . By executing and delivering a term sheet in respect of the Loans, Borrower shall be deemed to have authorized PFG to file Security Instruments on or prior to the Effective Date, without notice to Borrower, with all appropriate jurisdictions to perfect or protect PFG’s interest or rights hereunder, including a notice that any disposition of the Collateral, by either Borrower or any other Person not made in compliance of this Agreement, shall be deemed to violate the rights of PFG under the Code. Such Security Instruments may indicate the Collateral as “all assets of the Debtor” or words of similar effect, or as being of an equal or lesser scope, or with greater detail, all in PFG’s discretion.

 

4.12 Burdensome Agreements . Directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any of its Subsidiaries to (a) pay dividends or make any other distributions on its capital stock or any other interest or participation in its profits owned by US Borrower or any of its Subsidiaries, or pay any Indebtedness owed to Borrower or any of its Subsidiaries, (b) make loans or advances to Borrower or any of their respective Subsidiaries or (c) transfer any of its properties to Borrower or any of their respective Subsidiaries, except for such encumbrances or restrictions existing under or by reason of (i) applicable Legal Requirements; (ii) this Agreement and the other Loan Documents; (iii) customary provisions restricting subletting or assignment of any lease governing a leasehold interest of any of its Subsidiaries; (iv) customary provisions restricting assignment of any agreement entered into by a Subsidiary in the ordinary course of business; (v) any holder of a Permitted Lien restricting the transfer of the property subject thereto; or (vi) the rights of the Senior Lender.

 

4.13 Full Disclosure . No written representation, warranty or other statement of Borrower in any certificate or written statement given to PFG, as of the date such representation, warranty, or other statement was made, taken together with all such written certificates and written statements given to PFG, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained in the certificates or statements not misleading (it being recognized by PFG that the projections and forecasts provided by Borrower in good faith and based upon reasonable assumptions are not viewed as facts and that actual results during the period or periods covered by such projections and forecasts may differ from the projected or forecasted results).

 

4.14 Formation or Acquisition of Subsidiaries . Notwithstanding and without limiting the affirmative covenant contained in Section 4.9 and the negative covenants contained in Sections 4.6(xv) hereof, at the time that Borrower forms any direct or indirect non-PRC Subsidiary or acquires any direct or indirect non-PRC Subsidiary after the Effective Date, Borrower shall, unless otherwise directed by PFG in writing, (a) cause such new non-PRC Subsidiary to provide to PFG a joinder to the Loan Agreement to cause such non-PRC Subsidiary to become a co-borrower hereunder or a guarantor of Obligations under the Guaranty, together with such Security Instruments and/or Control Agreements, all in form and substance reasonably satisfactory to PFG (including being sufficient to grant PFG a first ranking Lien (subject only to Permitted Liens (which may only have superior priority to PFG’s Lien as expressly permitted herein)) in and to the assets of such newly formed or acquired Subsidiary), (b) provide to PFG appropriate certificates and powers and financing statements, pledging all of the direct or beneficial ownership interest in such new non-PRC Subsidiary, in form and substance reasonably satisfactory to PFG, and (c) provide to PFG all other documentation in form and substance reasonably satisfactory to PFG, including one or more opinions of counsel reasonably satisfactory to PFG, which in its opinion is appropriate with respect to the execution and delivery of the applicable documentation referred to above. Any document, agreement, or instrument executed or issued pursuant to this Section 4.14 shall be a Loan Document.

 

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Partners for Growth Schedule to Loan and Security Agreement

 

5. TERM.

 

5.1 Maturity Date. This Agreement shall continue in effect until the respective Maturity Date of Tranche 1 Loans and Tranche 2 Loans, subject to Sections 5.2, 5.3 and 5.4, below.

 

5.2 Early Termination. This Agreement may be terminated prior to the respective Maturity Date of Tranche 1 Loans and Tranche 2 Loans as follows: (i) if expressly permitted in the Schedule, by Borrower, effective three Business Days after written notice of termination is given to PFG and payment in full in cash of all Obligations (other than inchoate indemnity obligations); or (ii) by PFG at any time after the occurrence and during the continuance of an Event of Default, without notice, effective immediately. If a Borrower right to prepay Obligations is provided in the Schedule and the exercise of such right is subject to payment of any consideration to PFG as a condition to such exercise, a Borrower Default or Event of Default that results in an acceleration of Obligations and/or termination of this Agreement shall not relieve Borrower of the obligation to pay such consideration, which shall be included in the Obligations required to be paid or performed by Borrower.

 

5.3 Payment of Obligations. On the Maturity Date or on any earlier effective date of termination, Borrower shall pay and perform in full all Obligations, whether evidenced by installment notes or otherwise, and whether or not all or any part of such Obligations are otherwise then due and payable. Notwithstanding any termination of this Agreement, (i) all of PFG’s security interests in all of the Collateral and all of the terms and provisions of this Agreement shall continue in full force and effect until all Obligations have been paid and performed in full, and (ii) no further Loans will be made to Borrower unless PFG otherwise agrees in its sole and absolute discretion. No termination shall in any way affect or impair any right or remedy of PFG, nor shall any such termination relieve Borrower of any Obligation to PFG, until all of the Obligations have been paid and performed in full. Upon payment and performance in full of all the Obligations and termination of this Agreement, PFG shall promptly terminate its financing statements with respect to Borrower and deliver to Borrower such other documents as may be required to fully terminate PFG’s security interests.

 

5.4 Survival of Certain Obligations . Without limiting the survival of obligations addressed otherwise in this Agreement and notwithstanding any other provision of this Agreement, all covenants, representations and warranties made in this Agreement continue in full force until this Agreement has terminated pursuant to its terms and all Obligations (other than inchoate indemnity obligations and any other obligations which, by their terms, are to survive the termination of this Agreement) have been paid in full and satisfied. The obligation of Borrower in Section 8.9 to indemnify PFG shall survive until the statute of limitations with respect to such claim or cause of action shall have run.

 

6. EVENTS OF DEFAULT AND REMEDIES.

 

6.1 Events of Default. The occurrence of any of the following events shall constitute an “Event of Default” under this Agreement regardless of whether notice thereof is given by PFG, and Borrower shall give PFG immediate written notice thereof:

 

(a) Any warranty, representation, covenant, statement, report or certificate made or delivered to PFG by Borrower or any Guarantor or any of their respective officers, employees or agents, now or in the future shall be untrue or misleading in a material respect when made or deemed to be made; or

 

(b) Borrower shall fail to pay any Loan or any interest thereon or any other monetary Obligation when due; or

 

(c) (i) Borrower shall fail to comply with any of the financial covenants set forth in the Schedule, or (ii) Borrower or any Guarantor shall breach any of the provisions of Section 4.6 hereof, or (iii) Borrower or any Guarantor shall fail to perform any other non-monetary Obligation which by its nature cannot be cured, or (iv) Borrower shall fail to permit PFG to conduct an inspection or audit as provided in Section 4.5 hereof or shall fail to provide the notices, information, briefing and other rights set forth in Section 4.5, or (v) Borrower shall fail to provide PFG with a Report under Section 6 of the Schedule within three (3) Business Days after the date due; or

 

(d) Borrower shall fail to perform any other non-monetary Obligation, which failure is not cured within ten (10) Business Days after the date due; provided, however, if such failure results from a Default or an Event of Default for which there is a shorter cure period set forth in this Section 6.1, then the applicable cure period shall be such shorter period; or

 

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Partners for Growth Schedule to Loan and Security Agreement

 

(e) any levy, assessment, attachment or seizure is made on all or any part of the Collateral having an aggregate value of no less than $100,000 which is not cured within five (5) Business Days after the occurrence of the same, or any lien or encumbrance (other than a Permitted Lien) is made on all or any part of the Collateral which is not cured within ten (10) Business Days after the occurrence of the same; or

 

(f) any default or event of default occurs under any obligation secured by a Permitted Lien in the amount of no less than $100,000, which is not cured within any applicable cure period or unconditionally waived in writing by the holder of the Permitted Lien (and for purposes of the foregoing, a waiver does not include a forbearance); or

 

(g) there is, under any agreement to which Borrower is a party with a third party or parties, (i) any default resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount individually or in the aggregate in excess of $100,000; or (ii) any breach or default by Borrower, the result of which could result in a Material Adverse Change or have a material adverse effect on Borrower, any Guarantor or its business or prospects (the term “material adverse effect” for purposes hereof, shall be deemed to include (non-exclusively) any event having at such time or cumulatively in the following 12-month period, a dollar impact of $5,000,000 or more; or

 

(h) (i) Dissolution, termination of existence, insolvency or business failure of Borrower or any Guarantor; or (ii) appointment of a receiver, trustee or custodian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any Insolvency Proceeding by, against or in respect of Borrower or any Guarantor under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect, in each above case that is not dismissed or stayed within 45 days (and for the avoidance of doubt, PFG shall have no obligation to advance any Loan while any of the foregoing conditions or those set forth in clauses (iii) and (iv), below, exist); or (iii) Borrower shall generally not pay its debts as they become due; or (iv) Borrower shall conceal, remove or Transfer any part of its property, with intent to hinder, delay or defraud its creditors, or make or suffer any Transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or

 

(i) Revocation or termination of, or limitation or denial of liability upon, any guaranty of the Obligations or any attempt to do any of the foregoing, or commencement of proceedings by any guarantor of any of the Obligations under any bankruptcy or insolvency law; or

 

(j) revocation or termination of, or limitation or denial of liability upon, any pledge of any certificate of deposit, securities or other property or asset of any kind pledged by any third party to secure any or all of the Obligations, or any attempt to do any of the foregoing, or commencement of proceedings by or against any such third party under any bankruptcy or insolvency law; or

 

(k) Borrower makes any payment on account of any indebtedness or obligation which has been subordinated to the Obligations (other than as permitted in the applicable subordination agreement), or if any Person who has subordinated such indebtedness or obligations terminates or in any way repudiates or breaches the terms of his subordination agreement; or); or

 

(l) Borrower shall, without the prior consent of PFG (which shall be a matter of its sole business discretion unless all Obligations are to be repaid as a condition precedent to such Change in Control being consummated), (i) enter into any agreement, binding or non-binding, that would result in a Change in Control, or (ii) effect or suffer a Change in Control; or

 

(m) a default or breach shall occur under any other Loan Document, which default or breach shall be continuing after the later of cure period expressly specified in such Loan Document or five (5) Business Days; or

 

(n) a Material Adverse Change shall occur.

 

PFG may cease making any Loans hereunder during any of the cure periods provided above, and thereafter if an Event of Default has occurred and is continuing.

 

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Partners for Growth Schedule to Loan and Security Agreement

 

6.2 Remedies. Upon the occurrence and during the continuance of any Event of Default, and at any time thereafter, PFG, at its option, and without notice or demand of any kind (all of which are hereby expressly waived by Borrower), may, subject to the rights of the Senior Lender, do any one or more of the following: (a) Cease making Loans or otherwise extending credit to Borrower under this Agreement or any other Loan Document; (b) Accelerate and declare all or any part of the Obligations to be immediately due, payable, and performable, notwithstanding any deferred or installment payments allowed by any instrument evidencing or relating to any Obligation; (c) Take possession of any or all of the Collateral wherever it may be found, and for that purpose Borrower hereby authorizes PFG without judicial process to enter onto any of Borrower’s premises without interference to search for, take possession of, keep, store, or remove any of the Collateral, and remain on the premises or cause a custodian to remain on the premises in exclusive control thereof, without charge for so long as PFG deems it necessary, in its good faith business judgment, in order to complete the enforcement of its rights under this Agreement or any other agreement; provided, however, that should PFG seek to take possession of any of the Collateral by court process, Borrower hereby irrevocably waives: (i) any bond and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession; (ii) any demand for possession prior to the commencement of any suit or action to recover possession thereof; and (iii) any requirement that PFG retain possession of, and not dispose of, any such Collateral until after trial or final judgment; (d) Require Borrower to assemble any or all of the Collateral and make it available to PFG at places designated by PFG which are reasonably convenient to PFG and Borrower, and to remove the Collateral to such locations as PFG may deem advisable; (e) Complete the processing, manufacturing or repair of any Collateral prior to a disposition thereof and, for such purpose and for the purpose of removal, PFG shall have the right to use Borrower's premises, vehicles, hoists, lifts, cranes, and other Equipment and all other property without charge; (f) Sell, lease or otherwise dispose of any of the Collateral, in its condition at the time PFG obtains possession of it or after further manufacturing, processing or repair, at one or more public and/or private sales, in lots or in bulk, for cash, exchange or other property, or on credit, and to adjourn any such sale from time to time without notice other than oral announcement at the time scheduled for sale. PFG shall have the right to conduct such disposition on Borrower's premises without charge, for such time or times as PFG deems reasonable, or on PFG's premises, or elsewhere and the Collateral need not be located at the place of disposition. PFG may directly or through any affiliated company purchase or lease any Collateral at any such public disposition, and if permissible under applicable law, at any private disposition. Any sale or other disposition of Collateral shall not relieve Borrower of any liability Borrower may have if any Collateral is defective as to title or physical condition or otherwise at the time of sale; (g) Demand payment of, and collect any Accounts and General Intangibles comprising Collateral and, in connection therewith, Borrower irrevocably authorizes PFG to endorse or sign Borrower's name on all collections, receipts, instruments and other documents, to take possession of and open mail addressed to Borrower and remove therefrom payments made with respect to any item of the Collateral or proceeds thereof, and, in PFG's good faith business judgment, to grant extensions of time to pay, compromise claims and settle Accounts and the like for less than face value; (h) Exercise any and all rights under any present or future Control Agreements relating to Deposit Accounts or Investment Property; (i) Demand and receive possession of any of Borrower's federal and state income tax returns and the books and records utilized in the preparation thereof or referring thereto; and (j) without limiting the rights and remedies of PFG under clauses (a) through (i), inclusive, PFG may exercise any rights and remedies it may have under the Security Instruments in any jurisdiction where such Security Instruments may be enforced. All Lender Expenses, liabilities and obligations incurred by PFG with respect to the foregoing shall be added to and become part of the Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. Without limiting any of PFG's rights and remedies, from and after the occurrence and during the continuance of any Event of Default, the interest rate applicable to the Obligations shall be the Default Rate.

 

6.3 Standards for Determining Commercial Reasonableness. Without limiting the standards that may be applicable to the enforcement of Security Instruments in any non-U.S. jurisdiction in which such Security Instruments may be enforced, Borrower and PFG agree that a sale or other disposition (collectively, “sale”) of any Collateral which complies with the following standards will conclusively be deemed to be commercially reasonable: (i) Notice of the sale is given to Borrower at least ten days prior to the sale, and, in the case of a public sale, notice of the sale is published at least five days before the sale in a newspaper of general circulation in the county where the sale is to be conducted; (ii) Notice of the sale describes the collateral in general, non-specific terms; (iii) The sale is conducted at a place designated by PFG, with or without the Collateral being present; (iv) The sale commences at any time between 8:00 a.m. and 6:00 p.m.; (v) Payment of the purchase price in cash or by cashier’s check or wire transfer is required; (vi) With respect to any sale of any of the Collateral, PFG may (but is not obligated to) direct any prospective purchaser to ascertain directly from Borrower any and all information concerning the same. PFG shall be free to employ other methods of noticing and selling the Collateral, in its discretion, if they are commercially reasonable. Without limiting the foregoing, if Exigent Circumstances exist, Borrower and PFG agree that notice periods may be shorter than as set forth above and such shorter notice periods are commercially reasonable in Exigent Circumstances. Borrower further acknowledges and agrees that if PFG’s or third parties’ access to Collateral is inhibited, restricted or denied, it shall be commercially reasonable for PFG to conduct a sale of Collateral under such circumstances even though the lack of access to Collateral would likely give rise to a sale price less than if parties had unfettered access to Collateral for purposes of conducting a sale.

 

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Partners for Growth Schedule to Loan and Security Agreement

 

6.4 Power of Attorney. Upon the occurrence and during the continuance of any Event of Default, without limiting PFG’s other rights and remedies, Borrower grants to PFG an irrevocable power of attorney coupled with an interest, authorizing and permitting PFG (acting through any of its employees, attorneys or agents) at any time, at its option, but without obligation, with or without notice to Borrower, and at Borrower’s expense, to do any or all of the following, in Borrower’s name or otherwise, but PFG agrees that if it exercises any right hereunder, it will do so in good faith and in a commercially reasonable manner and the exercise of any rights will be subject to the rights of the Senior Lender: (a) Execute on behalf of Borrower any documents that PFG may, in its good faith business judgment, deem advisable in order to perfect and maintain PFG’s security interest in the Collateral, or in order to exercise a right of Borrower or PFG, or in order to fully consummate all the transactions contemplated under this Agreement, and all other Loan Documents; (b) Execute on behalf of Borrower, any invoices relating to any Account, any draft against any Account Debtor and any notice to any Account Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of mechanic’s, materialman’s or other lien, or assignment or satisfaction of mechanic’s, materialman’s or other lien; (c) Take control in any manner of any cash or non-cash items of payment or proceeds of Collateral; endorse the name of Borrower upon any instruments, or documents, evidence of payment or Collateral that may come into PFG’s possession; (d) Endorse all checks and other forms of remittances received by PFG; (e) Pay, contest or settle any lien, charge, encumbrance, security interest and adverse claim in or to any of the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; (f) Grant extensions of time to pay, compromise claims and settle Accounts and General Intangibles for less than face value and execute all releases and other documents in connection therewith; (g) Pay any sums required on account of Borrower’s taxes or to secure the release of any liens therefor, or both; (h) Settle and adjust, and give releases of, any insurance claim that relates to any of the Collateral and obtain payment therefor; (i) Instruct any third party having custody or control of any books or records belonging to, or relating to, Borrower to give PFG the same rights of access and other rights with respect thereto as PFG has under this Agreement; (j) Execute on behalf of Borrower and file in Borrower’s name such documents and instruments as may be necessary or appropriate to effect the Transfer of Domain Rights, domain names, domain registry administrative contacts and domain and website hosting services into the name of PFG or its designees, and (k) Take any action or pay any sum required of Borrower pursuant to this Agreement and any other Loan Documents. Any and all Lender Expenses incurred by PFG with respect to the foregoing shall be added to and become part of the Obligations, shall be payable on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. In no event shall PFG’s rights under the foregoing power of attorney or any of PFG’s other rights under this Agreement be deemed to indicate that PFG is in control of the business, management or properties of Borrower.

 

6.5 Application of Proceeds. All proceeds realized as the result of any sale of the Collateral shall be applied by PFG first to Lender Expenses incurred in the exercise of its rights under this Agreement, second to the interest due upon any of the Obligations, and third to the principal of the Obligations, in such order as PFG shall determine in its sole discretion. Any surplus shall be paid to Borrower or other persons legally entitled thereto; Borrower shall remain liable to PFG for any deficiency. If, PFG, in its good faith business judgment, directly or indirectly enters into a deferred payment or other credit transaction with any purchaser at any sale of Collateral, PFG shall have the option, exercisable at any time, in its good faith business judgment, of either reducing the Obligations by the principal amount of purchase price or deferring the reduction of the Obligations until the actual receipt by PFG of the cash therefor.

 

6.6 Remedies Cumulative. In addition to the rights and remedies set forth in this Agreement, PFG shall have all the other rights and remedies accorded a secured party under the Code and under all other applicable laws, and under any other instrument or agreement now or in the future entered into between PFG and Borrower, including the Security Instruments, and all of such rights and remedies are cumulative and none is exclusive. Exercise or partial exercise by PFG of one or more of its rights or remedies shall not be deemed an election, nor bar PFG from subsequent exercise or partial exercise of any other rights or remedies. The failure or delay of PFG to exercise any rights or remedies shall not operate as a waiver thereof, but all rights and remedies shall continue in full force and effect until all of the Obligations have been fully paid and performed. The rights of PFG hereunder shall be supplemental to any rights and remedies of PFG under the Security Instruments.

 

7.  Definitions. As used in this Agreement, the following terms have the following meanings:

 

Account Debtor ” means the obligor on an Account.

 

Accounts ” means all present and future “accounts” as defined in the Code in effect on the Effective Date with such additions to such term as may hereafter be made, and includes without limitation all accounts receivable, healthcare receivables and other sums owing to Borrower.

 

Affiliate ” means, with respect to any Person, a relative, partner, shareholder, director, officer, or employee of such Person, or any parent or Subsidiary of such Person, or any Person directly or indirectly through any other Person controlling, controlled by or under common control with such Person.

 

Back-End Fee ” has the meaning set forth in Section 8(e) of the Schedule.

 

Board ” means the Board of Directors of Borrower.

 

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Partners for Growth Schedule to Loan and Security Agreement

 

Borrower ” means the entity identified on the first page of this Agreement and any other Person who may from time to time be joined as a borrower under this Agreement; a reference to “Borrower” means “each Borrower”.

 

Business Day ” or “ business day ” means a day on which PFG is open for business.

 

BVI Security Documents ” means that certain Share Mortgage given by Group Parent in favor of PFG and PFG4 in respect of its ownership in Parent, together with such other documents and instruments as may be executed and delivered in connection therewith.

 

Cash ” means unrestricted and unencumbered (except for the Liens of PFG and the Senior Lender) cash or cash equivalents in Deposit Accounts or other Collateral Accounts for which there is in effect a Control Agreement among Borrower, PFG and the depositary institution in respect of such accounts, unless the requirement for a Control Agreement has been waived by PFG.

 

Cash Equivalents ” means (a) marketable direct obligations issued or unconditionally guaranteed by the United States, any agency or any State thereof, or the Governmental Body of any other country (including without limitation the PRC, Hong Kong, Japan, the Cayman Islands or India), having maturities of not more than one (1) year from the date of acquisition; (b) commercial paper maturing no more than one (1) year after its creation and having a rating of at least A-1 or the equivalent thereof by Standard & Poor’s Ratings Group or a rating of P-1 or the equivalent thereof by Moody’s Investors Service, Inc.; (c) certificates of deposit, time deposits and bankers’ acceptances maturing no more than one (1) year after the date of acquisition, and overnight bank deposits, in each case which are issued by a commercial bank organized under the laws of the United States, any state thereof or any other jurisdiction (including without limitation the PRC, Hong Kong, Japan, the Cayman Islands or India), having capital and surplus in excess of $500,000,000; and (d) money market funds at least ninety-five percent (95%) of the assets of which constitute Cash Equivalents of the kinds described in clauses (a) through (c) of this definition and (e) Investments pursuant to Borrower’s Investment Policy, provided that such investment policy (and any such amendment thereto) has been provided by Borrower to PFG and approved in writing by PFG.

 

Cayman Security Documents ” means the Loan Documents to be executed and delivered by Parent under or in connection with the Loan Agreement, including a general debenture (incorporating fixed and floating charges), a deed of guarantee and indemnity of the Obligations of Borrower, BORQS Hong Kong Limited, a share charge in relation to the shares Parent owns in BORQS Hong Kong Limited, an Intellectual Property Security Agreement, Parent corporate authorizations and related consents and certificates.

 

Change in Control ” means any event, transaction, or occurrence as a result of which (a) any “person” (as such term is defined in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as an amended (the “Exchange Act”)), other than a trustee or other fiduciary holding securities under an employee benefit plan of Borrower, is or becomes a beneficial owner (within the meaning Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of Borrower, representing thirty-five percent (35%) or more of the combined voting power of Borrower’s then outstanding securities in a single transaction or a series of related transactions (other than by the sale of Borrower’s equity securities in a public offering or to venture capital or private equity investors so long as Borrower identifies to PFG the venture capital or private equity investors at least seven (7) Business Days prior to the initial closing of the transaction and provides to PFG a description of the material terms of the transaction and such other information as PFG may reasonably request); or (b) during any period of twelve consecutive calendar months, individuals who at the beginning of such period constituted the Board of Borrower (together with any new directors whose election by the Board of Borrower was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason other than death or disability to constitute a majority of the directors then in office (other than as a result of the above-referenced venture capital / private equity exception, subject to the same notice and information requirements as specified above).

 

Code ” means the Uniform Commercial Code as adopted and in effect in the State of California from time to time.

 

Collateral ” has the meaning set forth in Section 2 above.

 

Collateral Account ” is any Deposit Account.

 

Compliance Certificate ” means Borrower’s certification of its compliance with the terms and conditions of this Agreement and such other matters as PFG may require to be addressed in such certificate, in the form as initially set forth as Exhibit B hereto, as such form may be amended from time to time upon advance notice from PFG.

 

Constitutional Document ” means for any Person, such Person’s formation documents, as last certified by the Secretary of State (or equivalent Governmental Body) of such Person’s jurisdiction of organization, if applicable, together with, (a) if such Person is a corporation, its bylaws in current form, (b) if such Person is a limited liability company, its certificate of incorporation, articles of association and/or limited liability company agreement (or operating or similar agreement), (c) if such Person is a partnership, its partnership agreement (or similar agreement), and (d) if such Person is a statutory joint venture company or similar entity, its joint venture (or similar) agreement, each of the foregoing with all current amendments or modifications thereto.

 

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Partners for Growth Schedule to Loan and Security Agreement

 

Contingent Obligation ” is, for any Person, any direct or indirect liability, contingent or not, of that Person for (a) any indebtedness, lease, Dividend, letter of credit or other obligation of another such as an obligation, in each case directly or indirectly guaranteed, endorsed, co made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (b) any obligations for undrawn letters of credit for the account of that Person; and (c) all obligations from any interest rate, currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; but “Contingent Obligation” does not include endorsements in the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under any guarantee or other support arrangement.

 

continuing ” and “ during the continuance of ” when used with reference to a Default or Event of Default means that the Default or Event of Default has occurred and has not been either waived in writing by PFG or cured within any applicable cure period.

 

Control Agreement ” means (i) a written agreement among PFG, Borrower and a depositary bank or other custodian in respect of Borrower’s Collateral Accounts by which the depositary bank or other custodian, as appropriate, agrees to comply with instructions given from time to time by PFG directing the disposition of the funds, investments and securities in Borrower’s Collateral Accounts without further consent of Borrower, which instructions may include not complying with instructions (which term may include the honoring of checks written by Borrower against funds in said accounts) given by Borrower, and containing other terms acceptable to PFG, and (ii) such other notices and depositary acknowledgments as may be customary and appropriate to perfect a security interest in Collateral Accounts under the laws of non-U.S. jurisdictions.

 

Current Depositary(ies) ” means the banking and / or other financial institutions at which Borrower maintains Collateral Accounts on the Effective Date.

 

Default ” means any event which with notice or passage of time or both, would constitute an Event of Default.

 

Default Rate ” means the lesser of (i) the applicable rate(s) set forth in the Schedule, plus six percent (6%) per annum, and (ii) the maximum rate of interest that may lawfully be charged to a commercial borrower under applicable usury laws.

 

Deposit Accounts ” means all present and future “deposit accounts” as defined in the Code in effect on the Effective Date in the name of the Borrower or any Guarantor, with such additions to such term as may hereafter be made, and includes without limitation all general and special bank accounts, demand accounts, checking accounts, savings accounts and certificates of deposit, and as used in this Agreement, the term “Deposit Accounts” shall be construed to also include securities, commodities and other Investment Property accounts.

 

Dividend ” means a payment or other distribution in respect to equity to an owner thereof, (A) whether or not (i) in respect of net profits or otherwise, (ii) declared by Borrower’s (or other relevant party’s) (iii) Board, previously paid, or (iv) authorized in its Constitutional Documents or otherwise, and (B) for the avoidance of doubt, includes distributions to members of a limited liability company.

 

Dormant Group Member ” means any Group Member, other than a Borrower, that does not actively conduct business, and such term may include a Guarantor whose role within the Group is principally to hold the shares of another Group Member.

 

Equipment ” means all present and future “equipment” as defined in the Code in effect on the Effective Date with such additions to such term as may hereafter be made, and includes without limitation all machinery, fixtures, goods, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing.

 

Event of Default ” means any of the events set forth in Section 6.1 of this Agreement.

 

Executive Director ” means a corporate director of a Person who has the inherent or lawfully-granted executive authority to contractually bind such Person by his or her signature or other action.

 

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Partners for Growth Schedule to Loan and Security Agreement

 

Exigent Circumstances ” means circumstances that substantially inhibit an orderly sale process or that imply urgency due to rapid erosion of value or opportunity, including Borrower closing its business or “going dark”, inability or refusal (express or implied by non-response) to provide for the security of Collateral.

 

Financial Statements ” means consolidated and consolidating financial statements of Parent, including a balance sheet, income statement and cash flow and, in the case of monthly-required financial statements, showing data for the month being reported and a history showing each month from the beginning of the relevant fiscal year.

 

First-Priority ” means, in relation to PFG’s Lien in Collateral, a security interest that is prior to any other security interest, with the exception of the Liens of the Senior Lender, the Liens of PFG4 (pari passu with PFG), and other Permitted Liens, which other Permitted Liens may only have superior priority to PFG’s Lien as expressly specified herein or pursuant to the terms of a subordination agreement between PFG and the holder of such other Permitted Lien, and “ First Ranking ” in relation to charges created under debentures executed by Borrower and Guarantor means a charge that is prior to charges other than those of the Senior Lender, PFG4 (pari passu with PFG) and any other charges to which PFG expressly consents, in its business discretion.

 

General Intangibles ” means all present and future “general intangibles” as defined in the Code in effect on the Effective Date with such additions to such term as may hereafter be made, and includes without limitation all Intellectual Property, payment intangibles, royalties, contract rights, goodwill, franchise agreements, purchase orders, customer lists, route lists, telephone numbers, domain names, claims, income tax refunds, security and other deposits, options to purchase or sell real or personal property, rights in all litigation presently or hereafter pending (whether in contract, tort or otherwise), insurance policies (including without limitation key man, property damage, and business interruption insurance), payments of insurance and rights to payment of any kind.

 

good faith business judgment ” means honesty in fact and good faith (as defined in Section 1201 of the Code) in the exercise of PFG’s business judgment.

 

Governmental Authorization ” means any: (a) permit, license, certificate, franchise, concession, approval, consent, ratification, permission, clearance, confirmation, endorsement, waiver, certification, designation, rating, registration, qualification or authorization that is, has been issued, granted, given or otherwise made available by or under the authority of any Governmental Body or pursuant to any Legal Requirement; or (b) right under any Contract with any Governmental Body.

 

Governmental Body ” means any: (a) nation, principality, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature; (b) local, municipal, foreign or other government; (c) governmental or quasi-governmental authority of any nature (including any governmental division, subdivision, department, agency, bureau, branch, office, commission, council, board, instrumentality, officer, official, representative, organization, unit, body or entity and any court or other tribunal); (d) multi-national organization or body; or (e) individual, entity or body exercising, or entitled to exercise, any executive, legislative, judicial, administrative, regulatory, police, military or taxing authority or power of any nature.

 

Group ” means Borrower, Guarantor, the direct or indirect Subsidiaries and controlled Affiliates of Group Parent, Guarantor or Borrower, and “ Group Member ” means any of such foregoing Persons.

 

Group Parent ” means Borqs Technologies, Inc., a BVI company (NASDAQ:BRQS), the parent company of Parent and the top tier entity in the Group.

 

Guarantor ” means Parent (together with any other Persons who may from time to time be joined to the Guaranty or otherwise guaranty the Obligations hereunder).

 

Guaranty ” means that certain Deed of Guarantee and Indemnity executed and delivered by Parent in favor of PFG on the Effective Date in respect of Borrower’s Obligations.

 

Hong Kong Security Documents ” means the Loan Documents to be executed and delivered by HK Borrower under or in connection with the Loan Agreement, including a general debenture (incorporating fixed and floating charges) by Parent, a deed of guarantee and indemnity of the Obligations by Parent and related charges, HK Borrower corporate authorizations and related consents and certificates.

 

IFRS ” means International Financial Reporting Standards.

 

including ” means including (but not limited to).

 

Indebtedness ” means (a) indebtedness for borrowed money or the deferred purchase price of property or services (other than trade payables arising in the ordinary course of business), (b) obligations evidenced by bonds, notes, debentures or other similar instruments, (c) reimbursement obligations in connection with letters of credit, (d) capital lease obligations and (e) Contingent Obligations.

 

  - 15 -  

 

 

Partners for Growth Schedule to Loan and Security Agreement

 

Insolvency Proceeding ” means (a) any proceeding by or against any Person under the United States Bankruptcy Code, or any other bankruptcy or insolvency law in any jurisdiction, including winding-up procedures, assignments for the benefit of creditors, compositions, receiverships, administrations, extensions generally with its creditors, or proceedings seeking reorganization, arrangement or other relief; or (b) if any step is taken with a view to a moratorium or a composition, assignment or similar arrangement with any of a Person’s creditors; (c) if a meeting of a Person’s shareholders, directors or other officers is convened for the purpose of considering any resolution for, to petition for or to make an application to or to file documents with a court or any registrar for, such Person’s winding-up, administration or dissolution or any such resolution is passed; or (d) if an order is made for a Person’s winding-up, administration or dissolution, or any Person presents a petition, or makes an application to or files documents with a court or any registrar, for such Person’s winding-up, administration or dissolution, or gives notice to Agent and Lenders of an intention to appoint an administrator; or (e) if any liquidator, receiver, administrative receiver, administrator or similar officer is appointed in respect of a Person or any of such Person’s assets; or (f) if a Person’s shareholders, directors or other officers request the appointment of, or give notice of their intention to appoint, a liquidator, receiver, administrator or similar officer.

 

Intellectual Property ” means all present and future: (a) copyrights, copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work thereof, whether published or unpublished, (b) trade secret rights, including all rights to unpatented inventions and know-how, and confidential information; (c) mask work or similar rights available for the protection of semiconductor chips; (d) patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same; (e) trademarks, servicemarks, trade styles, and trade names, whether or not any of the foregoing are registered, and all applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by any such trademarks; (f) Domain Rights as described in Section 3.14 hereof, (g) computer software and computer software products; (h) designs and design rights; (i) technology; (j) all claims for damages by way of past, present and future infringement of any of the rights included above; and (k) all licenses or other rights to use any property or rights of a type described above.

 

Inventory ” means all present and future “inventory” as defined in the Code in effect on the Effective Date with such additions to such term as may hereafter be made, and includes without limitation all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products, including without limitation such inventory as is temporarily out of Borrower’s custody or possession or in transit and including any returned goods and any documents of title representing any of the above.

 

Investment ” means any beneficial ownership interest in any Person (including any stock, partnership interest or other equity or debt securities issued by any Person), and any loan, advance or capital contribution to any Person.

 

Investment Property ” means all present and future investment property, securities, stocks, bonds, debentures, debt securities, partnership interests, limited liability company interests, options, security entitlements, securities accounts, commodity contracts, commodity accounts, and all financial assets held in any securities account or otherwise, and all options and warrants to purchase any of the foregoing, wherever located, and all other securities of every kind, whether certificated or uncertificated.

 

Key Person ” means Borrower’s Chairman and Chief Executive Officer, Pat Chan, and Borrower’s Senior Vice President Corporate Finance, Anthony Chan.

 

Knowledge ” or “ best of knowledge ” and words of similar import mean either (i) the actual knowledge of any of Borrower’s officers, including its Executive Directors, any Chief Executive Officer, President, designated legal representative under the Legal Requirements of any non-U.S. jurisdiction, Chief Information/Intelligence Officer (if any), Chief Technology Officer (or equivalent), Chief Financial Officer and Corporate Controller, or Borrower's Vice Presidents or General Managers supervising a business unit or division, or any persons succeeding or performing the responsibilities of such identified positions including Directors with executive authority, or (ii) such knowledge as the persons in such identified positions would have assuming (A) Borrower policies in accordance with generally-accepted norms of corporate governance and (B) the actual exercise of reasonable diligence and prudence by such persons in accordance with such policies.

 

Legal Requirement ” means any written local, municipal, foreign or other law, statute, legislation, constitution, principle of common law, resolution, ordinance, code, edict, decree, proclamation, treaty, convention, rule, regulation, ruling, directive, pronouncement, requirement, specification, determination, decision, opinion or interpretation that is, has been issued, enacted, adopted, passed, approved, promulgated, made, implemented or otherwise put into effect by or under the authority of any Governmental Body.

 

  - 16 -  

 

 

Partners for Growth Schedule to Loan and Security Agreement

 

Lender Expenses ” means, in each case without limitation as to type and kind: reasonable Professional Costs, and all filing, recording, search, title insurance, appraisal, audit, and other reasonable costs incurred by PFG, pursuant to, or in connection with, or relating to this Agreement (whether or not a lawsuit is filed), including, but not limited to, Professional Costs PFG pays or incurs in order to do the following: (i) prepare and negotiate this Agreement and all present and future documents relating to this Agreement; (ii) obtain legal advice in connection with this Agreement or Borrower; enforce, or seek to enforce, any of its rights or retain the services of consultants to do so; (iii) prosecute actions against, or defend actions by, Account Debtors; (iv) commence, intervene in, or defend any action or proceeding; (v) initiate any complaint to be relieved of the automatic stay in bankruptcy; (vi) file or prosecute any probate claim, bankruptcy claim, third-party claim, or other claim; (vii) examine, audit, copy, and inspect any of the Collateral or any of Borrower’s books and records, subject to Section 4.5; (viii) protect, obtain possession of, lease, dispose of, or otherwise enforce PFG’s security interest in, the Collateral; and (ix) otherwise represent PFG in any litigation relating to Borrower.

 

Lien ” or “ lien ” is a security interest, claim, mortgage, deed of trust, levy, charge, pledge or other encumbrance of any kind, whether voluntarily incurred or arising by operation of law or otherwise against any property.

 

Liquidity Event ” means a transaction in respect of the Group where an investor would reasonably be expected to realize upon its investment in the Group, such as, for example only, an initial public offering or listing, a transaction in which the Group (or the material operating members thereof) are merged or acquired, or a sale of a substantial part of the assets of the Group, in each case other than as part of an internal reorganization of the Group.

 

Loan Documents ” means, collectively, this Agreement, the Representations, and all other present and future documents, instruments and agreements between PFG and Borrower, including, but not limited to those relating to this Agreement, and all amendments and modifications thereto and replacements therefor.

 

Loan Request ” means any request that may be made by a Borrower in connection with this Agreement, including a borrowing request, consent request, a waiver request and any other accommodation that may be given by PFG under or relating to the Loan Agreement.

 

Material Adverse Change ” means any of the following: (i) a material adverse change in the business, operations, or financial or other condition of Borrower, or (ii) a material impairment of the prospect of repayment of any portion of the Obligations; or (iii) a material impairment of the value or priority of PFG’s security interests in the Collateral, or (iv) PFG’s determination, based upon information available to it and in its reasonable judgment, that there is a reasonable likelihood that Borrower shall fail to comply with one or more of the financial covenants in Section 5 of the Schedule during the next succeeding financial reporting period.

 

Maturity ” means the day on which the Obligations become due and payable whether at the Maturity Date or by acceleration or otherwise, or when such Obligations are in fact repaid (such as, by prepayment),

 

Maturity Date ” means the relevant Maturity Date set forth in Section 4 of the Schedule.

 

New Subsidiary(ies) ” means any person that becomes a direct or indirect Subsidiary of a Borrower or Guarantor after the date hereof.

 

Non-Borrower Group Member(s) ” means any direct or indirect Group Member not joined as a co-Borrower hereunder.

 

Non-Overdue Senior Monetary Obligations ” means, at any time, the amount of monetary Obligations other than principal Indebtedness owed by Borrower to the Senior Lender but not then due, such as accrued and unpaid interest not yet due.

 

Non-PRC ” (or “non-PRC”) in relation to a Subsidiary means a Subsidiary that is not formed under the laws of the Peoples Republic of China.

 

Obligations ” means all present Loans and future Loans, advances, debts, liabilities, obligations, guaranties, covenants, duties and indebtedness at any time owing by Borrower to PFG, including obligations and covenants intended to survive the termination of this Agreement, whether evidenced by this Agreement or any note or other instrument or document, or otherwise, including indebtedness under any obligation to purchase equity derivatives (including stock warrants) purchased or otherwise issued to PFG from time to time, whether arising from an extension of credit, opening of a letter of credit, banker’s acceptance, loan, guaranty, indemnification or otherwise, whether direct or indirect (including, without limitation, those acquired by assignment and any participation by PFG in Borrower's debts owing to others), absolute or contingent, due or to become due, including, without limitation, all interest, charges, expenses, fees, attorney's fees, expert witness fees, audit fees, collateral monitoring fees, closing fees, facility fees, commitment fees, contingent fees, back-end and performance-based fees, termination fees, minimum interest charges and any other sums chargeable to Borrower under this Agreement or under any other Loan Documents.

 

  - 17 -  

 

 

Partners for Growth Schedule to Loan and Security Agreement

 

Ordinary (or “ordinary”) course of business ” and derivatives shall apply to an action taken or an action required to be taken and not taken by or on behalf of a Borrower. An action will not be deemed to have been taken in the “ordinary course of business” unless : (a) such action is consistent with its past practices (if such type of action has been taken in the past and, if not, such action shall be deemed not in the ordinary course of business) and is similar in nature and magnitude to actions customarily taken by it; (b) such action is taken in accordance with sound and prudent business practices in its jurisdiction of organization; and (c) such action is not required to be authorized by its shareholders and does not require any other separate or special authorization of any nature.

 

Other Property ” means the following as defined in the Code in effect on the Effective Date with such additions to such terms as may hereafter be made, and all rights relating thereto: all present and future “commercial tort claims” (including without limitation any commercial tort claims identified in the Representations), “documents”, “instruments”, “promissory notes”, “chattel paper”, “letters of credit”, “letter-of-credit rights”, “fixtures”, “farm products” and “money”; and all other goods and personal property of every kind, tangible and intangible, whether or not governed by the Code.

 

Parent ” means Guarantor, BORQS International Holding Corp., an exempted limited liability company incorporated under the laws of the Cayman Islands bearing Company No. 192127.

 

Payment ” means all checks, wire transfers and other items of payment received by PFG for credit to Borrower’s outstanding Obligations.

 

Permitted Indebtedness ” means:

 

(i) the Loans and other Obligations;

 

(ii) Indebtedness existing on the Effective Date and shown on Exhibit A hereto;

 

(iii) Subordinated Debt;

 

(iv) Indebtedness owing to Senior Lender as set forth Section 8(a)(2) of the Schedule, but in no event in excess of the Senior Debt Limit specified therein;

 

(v) other Indebtedness secured by Permitted Liens described in clauses (i) and (iii) of that definition;

 

(vi) unsecured Indebtedness to trade creditors incurred in the ordinary course of business;

 

(vii) Liens of carriers, warehouseman, suppliers, or other Persons that are possessory in nature arising in the ordinary course of business so long as such Liens attach only to Inventory, securing liabilities in the aggregate amount not to exceed $50,000 and which are not delinquent or remain payable without penalty or which are being contested in good faith and by appropriate proceedings which proceedings have the effect of preventing the forfeiture or sale of the property subject thereto;

 

(viii) extensions, refinancings, modifications, amendments and restatements of any items of Permitted Indebtedness (i) through (vii) above, provided that the principal amount thereof is not increased or the terms thereof are not modified to impose materially more burdensome terms upon Borrower;

 

(ix) Indebtedness owing to Partners for Growth IV, L.P.; and

 

(x) reimbursement obligations in respect of letters of credit in an aggregate face amount outstanding not to exceed $300,000 at any time outstanding, which have been reported to PFG in writing, and, in the case of reimbursement obligations to the Senior Lender in respect of letters of credit which do not exceed the Senior Debt Limit (taking into account all other Indebtedness to Senior Lender).

 

Permitted Investments ” are:

 

(i) Investments (if any) shown on Exhibit A and existing on the Effective Date;

 

(ii) Investments consisting of Cash Equivalents;

 

(iii) Investments consisting of the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of Borrower;

 

(iv) Investments in Subsidiaries existing on the Effective Date in amounts consistent with past practice; and

 

  - 18 -  

 

 

Partners for Growth Schedule to Loan and Security Agreement

 

(v) at any time when no Default or Event of Default has occurred and is continuing, Investments in Borrower’s PRC and India Subsidiaries consisting of cash required in the ordinary course of such Subsidiaries’ business to maintain ordinary course operations and pay ordinary course expenses.

 

Permitted Liens ” means the following:

 

(i) purchase money Liens (including Liens arising under any retention of title, hire purchase or conditional sales arrangement or arrangements having similar effect) (i) on Equipment acquired or held by Borrower incurred for financing the acquisition of the Equipment securing no more than $250,000 in the aggregate amount outstanding, or (ii) existing on such Equipment when acquired, if the Lien is confined to the property and improvements and the proceeds of the Equipment;

 

(ii) Liens for Taxes not yet payable;

 

(iii) additional Liens consented to in writing by PFG, which consent may be withheld in its good faith business judgment. PFG shall have the right to require, as a condition to its consent under this subparagraph (iii), that the holder of the additional security interest or lien sign a subordination agreement in PFG’s then standard form, acknowledge that the security interest is subordinate to the security interest in favor of PFG, and agree not to take any action to enforce its subordinate security interest so long as any Obligations remain outstanding, and that Borrower agrees that any uncured default in any obligation secured by the subordinate security interest shall also constitute an Event of Default under this Agreement;

 

(iv) Liens being terminated substantially concurrently with this Agreement;

 

(v) Liens of materialmen, mechanics, warehousemen, carriers, or other similar liens arising in the ordinary course of business and securing obligations which are not delinquent;

 

(vi) Liens to secure payment of workers’ compensation, employment insurance, old-age pensions, social security and other like obligations incurred in the ordinary course of business (other than Liens imposed by ERISA);

 

(vii) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by liens of the type described above in clauses (i), (ii), (iii) and (x), provided that any extension, renewal or replacement lien is limited to the property encumbered by the existing lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase and other terms are holistically not less favorable to Borrower;

 

(viii) Liens in favor of customs and revenue authorities which secure payment of customs duties in connection with the importation of goods;

 

(ix) Liens to secure the Loans or other Obligations;

 

(x) non-exclusive licenses of Intellectual Property granted to third parties in the ordinary course of business;

 

(xi) Liens existing on the Effective Date and specified in Exhibit A hereto;

 

(xii) Liens securing Indebtedness owing to Partners for Growth IV, L.P.; and

 

(xiii) Liens in favor of Senior Lender securing an amount not in excess of the Senior Debt Limit.

 

Person ” means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, government, or any agency or political division thereof, or any other entity.

 

PFG4 ” means Partners for Growth IV, L.P., a Delaware limited partnership and secured lender to Borrower.

 

Plan ” means Borrower’s financial plan as presented to PFG on April 11, 2018, in PDF format in a file entitled “BORQS 2015-2019 PL 20180411 V1.1” for the 2018-2019 calendar years, as such plan may be delivered by Borrower and approved by PFG (for purposes of setting financial covenants covering future periods) for periods not reflected in the initial financial plan.

 

Professional Costs ” means all reasonable fees and expenses of auditors, accountants, valuation experts, Collateral disposition service providers, restructuring and other advisory services in connection with restructurings, workouts and Insolvency Proceedings, and fees and costs of attorneys.

 

Qualifying Request ” means a request made by a Responsible Officer of Borrower under Section 1.4 for any matter for which PFG’s consent, waiver or forbearance is required under the Loan Documents, accompanied by such supporting materials as may be required by PFG in connection therewith.

 

  - 19 -  

 

 

Partners for Growth Schedule to Loan and Security Agreement

 

Representations ” means the written Representations and Warranties provided by Borrower to PFG referred to in the Schedule.

 

Responsible Officer(s) ” means Borrower’s Chairman and Chief Executive Officer, Pat Chan, and Borrower’s Senior Vice President Corporate Finance, Anthony Chan, and any other person authorized to bind Borrower and notified to PFG in writing by a Responsible Officer as a new Responsible Officer.

 

Restricted License ” means any material license or other agreement with respect to which Borrower is the licensee (a) that prohibits or otherwise restricts Borrower from granting a security in Borrower’s interest in such license or agreement or any other property, or (b) for which a default under or termination of could interfere with PFG’s right to sell any Collateral.

 

RMB ” means Renminbi, the lawful currency of the People’s Republic of China.

 

Security Instruments ” means financing statements, mortgages, charges and similar notices filed under the Code or other relevant local law (U.S., Cayman Islands, British Virgin Islands, Hong Kong or other non-U.S. law) in any jurisdiction in which such financing statements, mortgages, debentures, charges and similar agreements, instruments and notices may be filed, including fixed and floating charges, share charges, mortgage debentures, and any other notices, instruments and filings that reflect the “all assets” security granted hereunder to PFG, including first ranking fixed and floating charges over Borrower’s and Guarantor’s registered and unissued share capital, reputation and goodwill, Intellectual Property, Accounts, its rights to receive funds from its customers, and other fixed assets and any tax benefit it may have.

 

Senior Debt ” has the meaning set forth in Section 8 of the Schedule.

 

Senior Lender ” has the meaning set forth in Section 8 of the Schedule.

 

Subordinated Debt ” means debt incurred by Borrower subordinated to Borrower’s debt to PFG pursuant to a subordination agreement entered into between PFG, Borrower and the subordinated creditor(s) upon terms acceptable to PFG in its sole business discretion, but which may at PFG’s option include: (i) subordination of subordinated creditor Lens, (ii) restrictions or prohibition of payments on subordinated debt until all Obligations to PFG are fully repaid and performed, and (iii) a prohibition on the exercise of remedies by a subordinated creditor until all Obligations to PFG are fully repaid and performed.

 

Senior Subordination Agreement ” means that certain subordination agreement, dated as of the date hereof, by and between PFG and Senior Lender.

 

Subsidiary ” means, with respect to any Person, (i) any Person of which more than 50% of the voting stock or other equity interests is owned or (ii) a Person controlled, directly or indirectly, by such Person or one or more Affiliates of such Person and which, for the avoidance of doubt, shall include a “sister” company to a Person under common direct or indirect ownership meeting the above specified percentage for being considered a “Subsidiary”.

 

Tax ” means any tax (including any income tax, franchise tax, capital gains tax, estimated tax, gross receipts tax, value-added tax, surtax, excise tax, ad valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax, business tax, occupation tax, inventory tax, occupancy tax, withholding tax or payroll tax), levy, assessment, tariff, impost, imposition, toll, duty (including any customs duty), deficiency or fee, and any related charge or amount (including any fine, penalty or interest), that is, has been or may in the future be (a) imposed, assessed or collected by or under the authority of any Governmental Body, or (b) payable pursuant to any tax-sharing agreement or similar contract.

 

Tax Return ” means any return (including any information return), report, statement, declaration, estimate, schedule, notice, notification, form, election, certificate or other document or information that is, has been or may in the future be filed with or submitted to, or required to be filed with or submitted to, any Governmental Body in connection with the determination, assessment, collection or payment of any Tax or in connection with the administration, implementation or enforcement of or compliance with any Legal Requirement relating to any Tax.

 

Transfer ” or “ transfer ” shall include any sale, assignment with or without consideration, encumbrance, hypothecation, pledge, or other transfer or disposition of any kind, including, but not limited to, transfers to receivers, levying creditors, trustees or receivers in bankruptcy proceedings or general assignees for the benefit of creditors, whether voluntary or by operation of law, directly or indirectly.

 

$ ” means United States dollars.

 

Other Terms . All accounting terms used in this Agreement, unless otherwise indicated, shall have the meanings given to such terms in accordance with IFRS or such other generally acceptable accounting method as Borrower later adopts with notice to PFG, consistently applied. All other terms contained in this Agreement, unless otherwise indicated, shall have the meanings provided by the Code, to the extent such terms are defined therein.

 

  - 20 -  

 

 

Partners for Growth Schedule to Loan and Security Agreement

 

8.  GENERAL PROVISIONS.

 

8.1 Confidentiality . PFG agrees to use the same degree of care that it exercises with respect to its own proprietary information, to maintain the confidentiality of any and all proprietary, trade secret or other information identified by Borrower as confidential provided to or received by PFG from Borrower or its Affiliates or representatives, including business plans and forecasts, non-public financial information, confidential or secret processes, formulae, devices and contractual information, customer lists, and employee relation matters, provided that PFG may disclose such information (i) to its officers, directors, employees, attorneys, accountants, affiliates, and advisory boards (provided they are informed of the confidential nature of the information and instructed to keep it confidential), (ii) subject to an agreement containing provisions substantially the same as this Section, to any participants, prospective participants, assignees and prospective assignees, (iii) to such other Persons to whom PFG shall at any time be required to make such disclosure in accordance with applicable law or legal process, provided that PFG shall use commercially reasonably efforts to notify such Persons the confidential nature of the information, and (iv) in its good faith business judgment in connection with the enforcement of its rights or remedies after an Event of Default, or in connection with any dispute with Borrower or any other Person relating to Borrower. The confidentiality agreement in this Section supersedes any prior confidentiality agreement of PFG relating to Borrower.

 

8.2 Interest Computation. In computing interest on the Obligations, all Payments received after 12:00 Noon, Pacific Time, on any day shall be deemed received on the next Business Day.

 

8.3 Payments . All Payments may be applied, and in PFG's good faith business judgment reversed and re-applied, to the Obligations, in such order and manner as PFG shall determine in its good faith business judgment.

 

8.4 Monthly Accountings. PFG may provide Borrower monthly with an account of advances, charges, expenses and payments made pursuant to this Agreement. Such account shall be deemed correct, accurate and binding on Borrower and an account stated (except for reverses and reapplications of payments made and corrections of errors discovered by PFG), unless Borrower notifies PFG in writing to the contrary within 60 days after such account is rendered, describing the nature of any alleged errors or omissions.

 

8.5 Notices. All notices to be given under this Agreement or any other Loan Documents shall be in writing and shall be given either personally, or by nationally recognized overnight air courier, or by regular first-class mail, certified mail return receipt requested, or by fax to the most recent fax number a party has for the other party (and if by fax, sent concurrently by one of the other methods provided herein), or by electronic mail, addressed to PFG at the address shown in the heading to this Agreement, to Borrower or its Affiliates at Tower A, Building B23, Universal Business Park, No. 10 Jiuxianqiao Road, Chaoyang District, Beijing 100015, PRC (北京市朝阳区酒仙桥路10号恒通商务园B23楼A座) (attention: President), Email: akchan@borqs.com, with a copy to Jessica Yuan, Esq., Ellenoff Grossman & Schole LLP, 1345 Avenue of the Americas, New York, NY 10105, USA; p;hone: (212) 370-1300; fax: (212) 370-7889; email: jyuan@egsllp.com, or at any other address designated in writing by one party to the other party. All notices shall be deemed to have been given upon delivery in the case of notices personally delivered, or at the expiration of one Business Day if sent by a nationally recognized overnight air courier, or the date of actual delivery following the deposit thereof in the United States mail, with postage prepaid, or on the first business day of receipt during business hours in the case of notices sent by fax or electronic mail, as provided herein.

 

8.6 Authorization to Use Borrower Name, Etc. Borrower irrevocably authorizes PFG to: (i) use Borrower’s logo on PFG’s website and in its marketing materials to denote the lending relationship between PFG and Borrower; (ii) use a “tombstone” to highlight the transaction(s) from time to time between PFG and Borrower; and (iii) to issue press releases in a form reasonable acceptable to Borrower and PFG highlighting and summarizing the credit facilities extended by PFG to Borrower from time to time under this Agreement, as amended from time to time, all of the above (i) through (iii), for marketing purposes.

 

8.7 Severability. Should any provision of this Agreement be held by any court of competent jurisdiction to be void or unenforceable, such defect shall not affect the remainder of this Agreement, which shall continue in full force and effect.

 

8.8 Integration. This Agreement and such other written agreements, documents and instruments as may be executed in connection herewith are the final, entire and complete agreement between Borrower and PFG and supersede all prior and contemporaneous negotiations and oral representations and agreements, all of which are merged and integrated in this Agreement. There are no oral understandings, representations or agreements between the parties which are not set forth in this Agreement or in other written agreements signed by the parties in connection herewith.

 

  - 21 -  

 

 

Partners for Growth Schedule to Loan and Security Agreement

 

8.9 Waivers; Indemnity. The failure of PFG at any time or times to require Borrower to strictly comply with any of the provisions of this Agreement or any other Loan Document shall not waive or diminish any right of PFG later to demand and receive strict compliance therewith. Any waiver of any default shall not waive or affect any other default, whether prior or subsequent, and whether or not similar. None of the provisions of this Agreement or any other Loan Document shall be deemed to have been waived by any act or knowledge of PFG or its agents or employees, but only by a specific written waiver signed by an authorized officer of PFG and delivered to Borrower. Borrower waives the benefit of all statutes of limitations relating to any of the Obligations or this Agreement or any other Loan Document, and Borrower waives demand, protest, notice of protest and notice of default or dishonor, notice of payment and nonpayment, release, compromise, settlement, extension or renewal of any commercial paper, instrument, account, General Intangible, document or guaranty at any time held by PFG on which Borrower is or may in any way be liable, and notice of any action taken by PFG, unless expressly required by this Agreement. Borrower hereby agrees to indemnify PFG and its affiliates, subsidiaries, parent, directors, officers, employees, agents, and attorneys, and to hold them harmless from and against any and all claims, debts, liabilities, demands, obligations, actions, causes of action, penalties and Lender Expenses of every kind, which they may sustain or incur based upon or arising out of any of the Obligations, or any relationship or agreement between PFG and Borrower, or any other matter, relating to Borrower or the Obligations; provided that this indemnity shall not extend to damages determined by a court of competent jurisdiction in a final judgment to have been proximately caused by the indemnitee’s own gross negligence or willful misconduct. Notwithstanding any provision in this Agreement to the contrary, the indemnity agreement set forth in this Section shall survive any termination of this Agreement and shall for all purposes continue in full force and effect.

 

8.10 No Liability for Ordinary Negligence. Borrower agrees that any and all claims it may have under this Agreement shall be limited to claims against PFG and not its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing PFG. Neither PFG, nor any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing PFG shall be liable for any claims, demands, losses or damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower or any other party through the negligence of PFG, or any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing PFG, but nothing herein shall relieve PFG from liability for its own gross negligence or willful misconduct.

 

8.11 Amendment. The terms and provisions of this Agreement may not be waived or amended, except in a writing executed by Borrower and a duly authorized officer of PFG. No purported amendment or modification of any Loan Document, or waiver, discharge or termination of any obligation under any Loan Document, shall be enforceable or admissible unless, and only to the extent, expressly set forth in a writing signed by the party against which enforcement or admission is sought. Without limiting the generality of the foregoing, no oral promise or statement, nor any action, inaction, delay, failure to require performance or course of conduct shall operate as, or evidence, an amendment, supplement or waiver or have any other effect on any Loan Document. Any waiver granted shall be limited to the specific circumstance expressly described in it, and shall not apply to any subsequent or other circumstance, whether similar or dissimilar, or give rise to, or evidence, any obligation or commitment to grant any further waiver.

 

8.12 Time of Essence. Time is of the essence in the performance by Borrower of each and every obligation under this Agreement.

 

8.13 Lender Expenses. Borrower shall reimburse PFG for all Lender Expenses. All Lender Expenses to which PFG may be entitled pursuant to this Paragraph shall immediately become part of Borrower’s Obligations, shall be due on demand, and if not paid within two (2) Business Days after demand, shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations.

 

8.14 Benefit of Agreement. The provisions of this Agreement shall be binding upon and inure to the benefit of the respective successors, assigns, heirs, beneficiaries and representatives of Borrower and PFG; provided, however, that Borrower may not assign or Transfer any of its rights under this Agreement without the prior written consent of PFG, and any prohibited assignment shall be void. No consent by PFG to any assignment shall release Borrower from its liability for the Obligations.

 

8.15 Joint and Several Liability. If Borrower consists of more than one Person, their liability shall be joint and several, and the compromise of any claim with, or the release of, any Borrower shall not constitute a compromise with, or a release of, any other Borrower.

 

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Partners for Growth Schedule to Loan and Security Agreement

 

8.16 Limitation of Actions. Any claim or cause of action by Borrower against PFG, its directors, officers, employees, agents, accountants or attorneys, based upon, arising from, or relating to this Loan Agreement, or any other Loan Document, or any other transaction contemplated hereby or thereby or relating hereto or thereto, or any other matter, cause or thing whatsoever, incurred, done, omitted or suffered to be done by PFG, its directors, officers, employees, agents, accountants or attorneys, shall be barred unless asserted by Borrower by the commencement of an action or proceeding in a court of competent jurisdiction by (a) the filing of a complaint within one year after the earlier to occur of (i) the first act, occurrence or omission upon which such claim or cause of action, or any part thereof, is based, or (ii) the date this Agreement is terminated, and (b) the service of a summons and complaint on an officer of PFG, or on any other person authorized to accept service on behalf of PFG, within thirty (30) days thereafter. Borrower agrees that such one-year period is a reasonable and sufficient time for Borrower to investigate and act upon any such claim or cause of action. The one-year period provided herein shall not be waived, tolled, or extended except by the written consent of PFG in its sole discretion. This provision shall survive any termination of this Loan Agreement or any other Loan Document.

 

8.17 Loan Monitoring. At reasonable times and upon reasonable advance notice to Borrower, PFG shall have the right to visit personally with Borrower up to two times per calendar year at its principal place of business or such other location as the parties may mutually agree, for the purpose of meeting with Borrower’s management in order to remain as up-to-date with Borrower’s business as is practicable and to maintain best practices in terms of lender loan monitoring and diligence. Lender Expenses incurred for travel, lodging and similar expenses for up to three PFG staff for such visits shall be at Borrower’s expense and reimbursed in the same manner as other PFG expenses under this Agreement.

 

8.18 Paragraph Headings; Construction; Counterparts. Paragraph headings are only used in this Agreement for convenience. Borrower and PFG acknowledge that the headings may not describe completely the subject matter of the applicable paragraph, and the headings shall not be used in any manner to construe, limit, define or interpret any term or provision of this Agreement. This Agreement has been fully reviewed and negotiated between the parties with the benefit of independent counsel and no uncertainty or ambiguity in any term or provision of this Agreement shall be construed strictly against PFG or Borrower under any rule of construction or otherwise. References to “Borrower” are construed to mean “each Borrower”, unless otherwise expressly specified. Amounts set off in brackets or parentheses are negative. The word “shall” is mandatory, the word “may” is permissive, and the word “or” is not exclusive. The term “Agreement” includes the Schedule. Obligations of a similar nature addressed in different sections of this Agreement shall be deemed supplemental to one another and not exclusive unless expressly set forth as such. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, is an original, and all taken together, constitute one Agreement.

 

8.19 Correction of Loan Documents. PFG may correct patent errors and fill in any blanks in the Loan Documents consistent with the agreement of the parties so long as PFG provides Borrower with written notice of such correction and allows Borrower at least ten (10) days to object to such correction. In the event of such objection, such correction shall not be made except by an amendment signed by both PFG and Borrower.

 

8.20 Governing Law; Jurisdiction; Venue. This Agreement and all acts and transactions hereunder and all rights and obligations of PFG and Borrower hereunder shall be governed by the laws of the State of California. As a material part of the consideration to PFG to enter into this Agreement, Borrower (i) agrees that all actions and proceedings relating directly or indirectly to this Agreement shall, at PFG’s sole option, be litigated in courts located within California and that the exclusive venue therefor shall, at PFG’s sole option, be Santa Clara County; (ii) consents to the jurisdiction and venue of any such court (or such other court and jurisdiction as PFG may elect to enforce the Loan Documents or exercise remedies against Collateral) and consents to service of process in any such action or proceeding by personal delivery or by internationally-recognized commercial courier or overnight delivery service or by certified mail, return receipt requested, to the last known address for Borrower; and (iii) waives any and all rights Borrower may have to object to the jurisdiction of any such court, or to transfer or change the venue of any such action or proceeding. Notwithstanding anything to the contrary in the foregoing, (x) PFG may enforce the Obligations (including the obligations of each Guarantor), the Security Instruments and the other Loan Documents in any jurisdiction in which Borrower, Guarantor or any of their respective Collateral resides or is deemed to reside, including the Cayman Islands and Hong Kong, and (y) execution and delivery of this Loan Agreement “as a deed” by non-U.S. Persons shall be construed under Hong Kong law.

 

8.21 Withholding; Gross-up . Payments received by PFG from Borrower under this Agreement will be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, duties, deductions, withholdings, assessments, fees or other charges imposed by any Governmental Body (including any interest, additions to tax or penalties applicable thereto). Specifically, however, if at any time any Governmental Body, applicable law, regulation or international agreement requires Borrower to make any withholding or deduction from any such payment or other sum payable hereunder to PFG, Borrower hereby covenants and agrees that the amount due from Borrower with respect to such payment or other sum payable hereunder will be increased to the extent necessary to ensure that, after the making of such required withholding or deduction, PFG receives a net sum equal to the sum which it would have received had no withholding or deduction been required, and Borrower shall pay the full amount withheld or deducted to the relevant Governmental Body. Borrower will, upon request, furnish PFG with proof reasonably satisfactory to PFG indicating that Borrower has made such withholding payment; provided, however, that Borrower need not make any withholding payment if the amount or validity of such withholding payment is contested in good faith by appropriate and timely proceedings and as to which payment in full is bonded or reserved against by Borrower. The agreements and obligations of Borrower contained in this Section 8.21 shall survive the termination of this Agreement.

 

  - 23 -  

 

 

Partners for Growth Schedule to Loan and Security Agreement

 

8.22 Multiple Borrowers; Suretyship Waivers. If at any time there is more than one Borrower under this Agreement:

 

(a) Borrowers' Agent . Each Borrower hereby irrevocably appoints each other Borrower, as the agent, attorney-in-fact and legal representative of all Borrowers for all purposes, including requesting disbursement of the Loan and receiving account statements and other notices and communications to Borrowers (or any of them) from PFG. PFG may rely, and shall be fully protected in relying, on any request for a Loan, disbursement instruction, report, information or any other notice or communication made or given by any Borrower, whether in its own name, as Borrowers' agent, or on behalf of one or more Borrowers, and PFG shall not have any obligation to make any inquiry or request any confirmation from or on behalf of any other Borrower as to the binding effect on it of any such request, instruction, report, information, other notice or communication, nor shall the joint and several character of Borrowers' obligations hereunder be affected thereby.

 

(b)   Waivers . Each Borrower hereby waives: (i) any right to require PFG to institute suit against, or to exhaust its rights and remedies against, any other Borrower or any other Person, or to proceed against any property of any kind which secures all or any part of the Obligations, or to exercise any right of offset or other right with respect to any reserves, credits or deposit accounts held by or maintained with PFG or any indebtedness of PFG to any other Borrower, or to exercise any other right or power, or pursue any other remedy PFG may have; (ii) any defense arising by reason of any disability or other defense of any other Borrower or any guarantor or any endorser, co-maker or other Person, or by reason of the cessation from any cause whatsoever of any liability of any other Borrower or any guarantor or any endorser, co-maker or other Person, with respect to all or any part of the Obligations, or by reason of any act or omission of PFG or others which directly or indirectly results in the discharge or release of any other Borrower or any guarantor or any other Person or any Obligations or any security therefor, whether by operation of law or otherwise; (iii) any defense arising by reason of any failure of PFG to obtain, perfect, maintain or keep in force any Lien on, any property of any Borrower or any other Person; (iv) any defense based upon or arising out of any Insolvency Proceeding, liquidation or dissolution proceeding commenced by or against or in respect of any Borrower or any guarantor or any endorser, co-maker or other Person, including without limitation any discharge of, or bar against collecting, any of the Obligations (including without limitation any interest thereon), in or as a result of any such proceeding. Until all of the Obligations have been paid, performed, and discharged in full, nothing shall discharge or satisfy the liability of Borrower hereunder except the full performance and payment of all of the Obligations. If any claim is ever made upon PFG for repayment or recovery of any amount or amounts received by PFG in payment of or on account of any of the Obligations, because of any claim that any such payment constituted a preferential Transfer or fraudulent conveyance, or for any other reason whatsoever, and PFG repays all or part of said amount by reason of any judgment, decree or order of any court or administrative body having jurisdiction over PFG or any of its property, or by reason of any settlement or compromise of any such claim effected by PFG with any such claimant (including without limitation the any other Borrower), then and in any such event, Borrower agrees that any such judgment, decree, order, settlement and compromise shall be binding upon Borrower, notwithstanding any revocation or release of this Agreement or the cancellation of any note or other instrument evidencing any of the Obligations, or any release of any of the Obligations, and Borrower shall be and remain liable to PFG under this Agreement for the amount so repaid or recovered, to the same extent as if such amount had never originally been received by PFG, and the provisions of this sentence shall survive, and continue in effect, notwithstanding any revocation or release of this Agreement. Each Borrower hereby expressly and unconditionally waives all rights of subrogation, reimbursement and indemnity of every kind against any other Borrower, and all rights of recourse to any assets or property of any other Borrower, and all rights to any collateral or security held for the payment and performance of any Obligations, including (but not limited to) any of the foregoing rights which Borrower may have under any present or future document or agreement with any other Borrower or other Person, and including (but not limited to) any of the foregoing rights which Borrower may have under any equitable doctrine of subrogation, implied contract, or unjust enrichment, or any other equitable or legal doctrine. Each Borrower further hereby waives any other rights and defenses that are or may become available to Borrower by reason of California Civil Code Sections 2787 to 2855 (inclusive), 2899, and 3433, as now in effect or hereafter amended, and under all other similar statutes and rules now or hereafter in effect.

 

  - 24 -  

 

 

Partners for Growth Schedule to Loan and Security Agreement

 

(c)   Consents . Each Borrower hereby consents and agrees that, without notice to or by Borrower and without affecting or impairing in any way the obligations or liability of Borrower hereunder, PFG may, from time to time before or after revocation of this Agreement, do any one or more of the following in PFG's sole and absolute discretion: (i) accept partial payments of, compromise or settle, renew, extend the time for the payment, discharge, or performance of, refuse to enforce, and release all or any parties to, any or all of the Obligations; (ii) grant any other indulgence to any Borrower or any other Person in respect of any or all of the Obligations or any other matter; (iii) accept, release, waive, surrender, enforce, exchange, modify, impair, or extend the time for the performance, discharge, or payment of, any and all property of any kind securing any or all of the Obligations or any guaranty of any or all of the Obligations, or on which PFG at any time may have a Lien, or refuse to enforce its rights or make any compromise or settlement or agreement therefor in respect of any or all of such property; (iv) substitute or add, or take any action or omit to take any action which results in the release of, any one or more other Borrowers or any endorsers or guarantors of all or any part of the Obligations, including, without limitation one or more parties to this Agreement, regardless of any destruction or impairment of any right of contribution or other right of Borrower; (v) apply any sums received from any other Borrower, any guarantor, endorser, or co-signer, or from the disposition of any Collateral or security, to any indebtedness whatsoever owing from such Person or secured by such Collateral or security, in such manner and order as PFG determines in its sole discretion, and regardless of whether such indebtedness is part of the Obligations, is secured, or is due and payable. Borrower consents and agrees that PFG shall be under no obligation to marshal any assets in favor of Borrower, or against or in payment of any or all of the Obligations. Borrower further consents and agrees that PFG shall have no duties or responsibilities whatsoever with respect to any property securing any or all of the Obligations. Without limiting the generality of the foregoing, PFG shall have no obligation to monitor, verify, audit, examine, or obtain or maintain any insurance with respect to, any property securing any or all of the Obligations.

 

(d)   Independent Liability . Each Borrower hereby agrees that one or more successive or concurrent actions may be brought hereon against Borrower, in the same action in which any other Borrower may be sued or in separate actions, as often as deemed advisable by PFG. Each Borrower is fully aware of the financial condition of each other Borrower and is executing and delivering this Agreement based solely upon its own independent investigation of all matters pertinent hereto, and Borrower is not relying in any manner upon any representation or statement of PFG with respect thereto. Each Borrower represents and warrants that it is in a position to obtain, and each Borrower hereby assumes full responsibility for obtaining, any additional information concerning any other Borrower's financial condition and any other matter pertinent hereto as Borrower may desire, and Borrower is not relying upon or expecting PFG to furnish to it any information now or hereafter in PFG's possession concerning the same or any other matter.

 

(e) Subordination . All indebtedness of a Borrower now or hereafter arising held by another Borrower is subordinated to the Obligations and Borrower holding the indebtedness shall take all actions reasonably requested by PFG to effect, to enforce and to give notice of such subordination.

 

8.23 Electronic Execution of Documents. The words “execution,” “signed,” “signature” and words of like import in any Loan Document shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity and enforceability as a manually executed signature or the use of a paper-based recordkeeping systems, as the case may be, to the extent and as provided for in any applicable law, including, without limitation, any state law based on the Uniform Electronic Transactions Act.

 

8.24 Relationship . The relationship of the parties to this Agreement is determined solely by the provisions of this Agreement. The parties do not intend to create any agency, partnership, joint venture, trust, fiduciary or other relationship with duties or incidents different from those of parties to an arm’s-length contract.

 

8.25 Third Parties . Nothing in this Agreement, whether express or implied, is intended to: (a) confer any benefits, rights or remedies under or by reason of this Agreement on any persons other than the express parties to it and their respective permitted successors and assigns; (b) relieve or discharge the obligation or liability of any person not an express party to this Agreement; or (c) give any person not an express party to this Agreement any right of subrogation or action against any party to this Agreement.

 

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Partners for Growth Schedule to Loan and Security Agreement

 

8.26 Mutual Waiver of Jury Trial. Borrower and PFG each hereby waive the right to trial by jury in any action or proceeding based upon, arising out of, or in any way relating to, this Agreement or any other present or future instrument or agreement between PFG and Borrower, or any conduct, acts or omissions of PFG or Borrower or any of their directors, officers, employees, agents, attorneys or any other persons affiliated with PFG or Borrower, in all of the foregoing cases, whether sounding in contract or tort or otherwise. WITHOUT INTENDING IN ANY WAY TO LIMIT THE PARTIES’ AGREEMENT TO WAIVE THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY , if the above waiver of the right to a trial by jury is not enforceable, the parties hereto agree that any and all disputes or controversies of any nature between them arising at any time shall be decided by a reference to a private judge, mutually selected by the parties (or, if they cannot agree, by the Presiding Judge of the Santa Clara County, California Superior Court) appointed in accordance with Code of Civil Procedure Section 638 (or pursuant to comparable provisions of federal law if the dispute falls within the exclusive jurisdiction of the federal courts), sitting without a jury, in Santa Clara County, California; and the parties hereby submit to the jurisdiction of such court. The reference proceedings shall be conducted pursuant to and in accordance with the provisions of Code of Civil Procedure §§ 638 through 645.1, inclusive. The private judge shall have the power, among others, to grant provisional relief, including without limitation, entering temporary restraining orders, issuing preliminary and permanent injunctions and appointing receivers. All such proceedings shall be closed to the public and confidential and all records relating thereto shall be permanently sealed. If during the course of any dispute, PFG desires to seek provisional relief, but a judge has not been appointed at that point pursuant to the judicial reference procedures, then PFG may apply to the Santa Clara County, California Superior Court for such relief. The proceeding before the private judge shall be conducted in the same manner as it would be before a court under the rules of evidence applicable to judicial proceedings. The parties shall be entitled to discovery which shall be conducted in the same manner as it would be before a court under the rules of discovery applicable to judicial proceedings. The private judge shall oversee discovery and may enforce all discovery rules and order applicable to judicial proceedings in the same manner as a trial court judge. The parties agree that the selected or appointed private judge shall have the power to decide all issues in the action or proceeding, whether of fact or of law, and shall report a statement of decision thereon pursuant to the Code of Civil Procedure § 644(a). Nothing in this paragraph shall limit the right of PFG at any time to exercise self-help remedies, foreclose against Collateral, or obtain provisional remedies. The private judge shall also determine all issues relating to the applicability, interpretation, and enforceability of this paragraph.

 

[Signature Page Follows]

 

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Partners for Growth Schedule to Loan and Security Agreement

 

Executed and Delivered as a Deed by ) Lender:
BORQS Hong Kong Limited )  
     
Acting by:   Partners for Growth V, L.P.

 

/s/ PAT SEK YUEN CHAN      
       
Name: PAT SEK YUEN CHAN   By:  
     
Title: Director ( SOLE DIRECTOR )   Name:  
      Title: Manager, Partners for Growth V, LLC,
        Its General Partner

 

in the presence of :

/s/ ANTHONY K. CHAN    
Witness name: ANTHONY K. CHAN  
Witness occupation: CFO  

 

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Partners for Growth Schedule to Loan and Security Agreement

 

Partners For Growth

 

Schedule to

Loan and Security Agreement

 

Borrower: BORQS Hong Kong Limited , a private company limited by shares under Hong Kong law, registered with the Companies Registry under number 1151010
Address: Office B, 21/F, Legend Tower, 7 Shing Yip Street, Kwun Tong, Kowloon, Hong Kong
Date: April 30, 2018

 

This Schedule forms an integral part of the Loan and Security Agreement between PARTNERS FOR GROWTH V, L.P. and the above-referenced Borrower dated the Effective Date.

 

1.    LOAN (Section 1.1):

 

  The Loan : The Loan shall consist of a term loan in the maximum amount of $3,000,000, to be advanced to Borrower upon the later to occur of (x) one (1) Business Day following the Effective Date and (y) two (2) Business Days following the Business Day during which the conditions set forth in Section 9 of this Schedule have been satisfied, waived by PFG or deferred as conditions subsequent by PFG, each in its sole discretion.
     
  Repayment : Borrower shall pay interest only on Loan principal for the twelve (12) months immediately following the Effective Date (the “Interest-Only Period”). Commencing with a principal payment due on the first day of the calendar month following the expiry of the Interest-Only Period, Borrower shall make twenty-four (24) equal monthly principal payments due on the first day of each calendar month, equal in amount to the principal amount of the Loan outstanding on the last day of each preceding calendar month, divided by the number of months then remaining to the Maturity Date, plus interest on the principal outstanding during such prior month , with such payments continuing on the same day of each month until the Maturity Date, on which date the entire unpaid principal balance of the Loan plus any and all accrued and unpaid interest and other monetary Obligations then owing shall be paid. Repaid principal may not be reborrowed.
     
  Prepayment: Borrower may prepay the Loan in whole or in part at any time without prepayment fee or penalty of any kind.

 

  - 1 -  

 

 

Partners for Growth Schedule to Loan and Security Agreement

 

2.    Interest.

 

Interest Rate (Section 1.2):

   

    The Loan shall bear interest at a per annum rate equal to 8.00%, fixed; provided, however , if the Loan is not fully repaid on or before October 31, 2018, then the per annum interest rate shall increase to 12%, fixed, as from such date through the Maturity Date.
     
    Interest shall be calculated on the basis of a 360-day year and a year of twelve months of 30 days each for the actual number of days elapsed. Accrued interest for each month shall be payable monthly, on the first day of each month for interest accrued during the prior month.

 

3.    Fees (Section 1.3):

 

  Commitment Fee : $45,000, payable promptly upon PFG invoice following the Effective Date.
     
  Back-End Fee : $300,000, fully earned at the Effective Date and due at Maturity, provided, however, if the Loan has not been fully repaid by 5:00 p.m. US Pacific Time on October 31, 2018 (the “ Early Repayment Date ”) and on the expiry of the next two succeeding thirty (30) day periods thereafter, the Back-End Fee shall increase by $100,000, up to an aggregate maximum Back-End Fee of $600,000 ($300,000 earned on the Effective Date and up to a maximum of $300,000 earned $100,000 on the Early Repayment Date and an additional $100,000 on the expiry of each of the following thirty (30) day periods following the Early Repayment Date). For example only, if Borrower repays all Loan Obligations seventy-five (75) days following the Early Repayment Date, the Back-End Fee payable would be $500,000, $300,000 earned at the expiry of the Early Repayment Date, $100,000 earned thirty (30) days thereafter and another $100,000 earned sixty (60) days after the Early Repayment Date.

 

4.     Maturity Date  

 

  (Section 5.1):  April 30, 2021.

 

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Partners for Growth Schedule to Loan and Security Agreement

 

5.     Financial Covenants

 

  (Section 4.1): The Group shall meet or exceed (i) Revenues of $32,500,000 on a calendar quarterly basis and (ii) three (3) month trailing EBITDA, tested monthly, of $2,000,000, with compliance determined as of the last day each calendar quarter (Revenues) and each calendar month (EBITDA).
     
  Definitions : For purposes of the foregoing financial covenants, the following term shall have the following meaning:
     
    EBITDA ” means (a) Net Income, plus (b) Interest Expense, plus (c) to the extent deducted in the calculation of Net Income, depreciation expense and amortization expense, plus (d) income tax expense.
     
    Revenue(s) ” means revenues required to be classified as such under U.S. GAAP.
     
  Future Periods : For future periods not covered by the above requirements, the thresholds shall be set by PFG in consultation with Borrower based on its then-current Plan, but in no event (for each measurement period) less than the immediately prior measurement period. For instance, the minimum EBITDA threshold for January 2019 would be as set, but in no event less than $32,500,000, and for March 2019 (for Revenues) would be as set but in no event less than $2,000,000.

 

6.    Reporting.

(Section 4.4):

 

Borrower shall provide PFG with the following:

 

  (a) Monthly accounts payable, accounts receivable and deferred Revenue schedules, aged by invoice date, and outstanding or held check registers, if any, within 20 days after the end of each month.
  (b) Monthly unaudited consolidated and consolidating Financial Statements, as soon as available, and in any event within 20 days after the end of each month.
  (c) Monthly Compliance Certificates within 20 days after the end of each month and at each Loan request, signed by the Chief Financial Officer of Borrower, certifying that as of the end of such month or as at such date of Loan request Borrower was in full compliance with all of the terms and conditions of this Agreement and setting forth calculations showing compliance with the financial covenants set forth in this Schedule and such other information as PFG shall reasonably request.

 

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Partners for Growth Schedule to Loan and Security Agreement

 

  (d) Updates to the Representations, as and when required to render the information therein true, correct, accurate and complete as of the date of such date: (i) in all respects as to matters addressed in Part A of the Representations (except for the Collateral values set forth in Part A, Section 3(g), which must be true and correct in all material respects) and Part B, Section 11, and (ii) in all material respects with respect to all other sections of the Representations.
     
  (e) Annual Borrower Board-approved Budgets and Forecasts, as soon as available and in any event within thirty (30) days of approval by Borrower’s Board.  
     
  (f) Annual consolidated and consolidating Financial Statements, as soon as available, and in any event within 120 days following the end of Borrower's fiscal year, certified by, and with an opinion containing no material qualifications of, independent certified public accountants acceptable to PFG. If Borrower is required to file and is current in its filings with a securities regulatory agency and the same information is generally available to the public within said period through such agency (such as, through EDGAR with respect to US public companies), this requirement will be deemed satisfied.
     
  (g) Upon request, copies of all reports and statements provided by Borrower to the Senior Lender.
     
  (h) Notification of any changes in the executive management (including directors) of any Group Members, promptly upon such change(s).

 

7.    Borrower Information :

 

Borrower represents and warrants that the information set forth in the Representations and Warranties of Borrower dated April 18, 2018, previously submitted to PFG (the “Representations”) is true and correct as of the Effective Date.

 

  - 4 -  

 

 

Partners for Growth Schedule to Loan and Security Agreement

 

8.    ADDITIONAL PROVISIONS

 

(a) Senior Lender.

 

(1) Senior Lender . As used herein, “Senior Lender” means SPD Silicon Valley Bank Co., Ltd. and its successors, and “Senior Loan Documents” means all present and future documents, instruments and agreements entered into between Borrower and Senior Lender or by third parties relating to Borrower and Senior Lender.

 

(2) Senior Debt Limit. In the absence of PFG’s consent, which shall be a matter of its sole business discretion, Borrower shall not permit the total Indebtedness of Borrower (whether by way of direct liability or obligations of another Group Member guaranteed by Borrower to Senior Lender), other than Non-Overdue Senior Monetary Obligations, to exceed the aggregate of (i) $6,000,000, whether under that certain Facility Agreement in effect on the Effective Date or otherwise (regardless of the amendment thereof or any other agreement for Indebtedness), plus (ii) an amount not to exceed RMB25 million under a credit facility made available by the Senior Lender to a PRC Subsidiary (collectively, the “Senior Debt Limit”), including, but not limited to, monies borrowed by Borrower, interest on loans due from Borrower (other than Non-Overdue Senior Monetary Obligations as aforesaid), Lender Expenses for which Borrower is obligated, sums due from Borrower in connection with issuance of commercial letters of credit, issuance of forward contracts for foreign exchange reserve, and any other direct or indirect financial accommodation Senior Lender may provide to Borrower.

 

(3) Senior Loan Documents. Borrower represents and warrants that it has provided PFG with true and complete copies of all existing Senior Loan Documents, and Borrower covenants that it will, in the future, provide PFG with true and complete copies of any future Senior Loan Documents, including without limitation any amendments to any existing Senior Loan Documents.

 

  - 5 -  

 

 

Partners for Growth Schedule to Loan and Security Agreement

 

(b) Collateral Accounts. To the fullest extent available in the jurisdictions in which Borrower holds its Collateral Accounts, concurrently, Borrower shall cause the banks and other institutions where its Collateral Accounts are maintained to enter into Control Agreements with PFG, in form and substance legally sufficient and otherwise satisfactory to PFG in its good faith business judgment and sufficient to perfect PFG’s security interest in said Collateral Accounts, subject to the security interest of the Senior Lender, provided that no Control Agreement shall be required in respect of any Collateral Account that does not at any time have a value in excess of $25,000. Any Control Agreements required to be in effect under this Agreement shall, subject to applicable law, permit PFG upon a Default to exercise exclusive control over said Collateral Accounts and proceeds thereof (subject to the rights of the Senior Lender). As a continuing obligation, all primary operating accounts and excess Cash of Borrower shall be maintained with the Senior Lender and its affiliates.

 

(c) Subordination of Inside Debt . All present and future indebtedness of Borrower to its officers, directors and shareholders (“Inside Debt”) shall, at all times, be subordinated to the Lien of PFG in respect of and prior payment of Obligations. Borrower represents and warrants that there is no Inside Debt presently outstanding, except as set forth in Exhibit A . Prior to incurring any Inside Debt in the future, Borrower shall cause the person to whom such Inside Debt will be owed to execute and deliver to PFG a subordination agreement on PFG’s standard form.

 

(d) Adjustment for Extraordinary Events . In the event that Borrower engages in a corporate transaction or other restructure that would bear in any non-trivial way on any of the financial covenant thresholds set forth in Section 5 of this Schedule, such as an acquisition that accretes to EBITDA or Revenue or a change in fiscal year or other periods, then PFG shall be entitled to reset the financial covenant thresholds to reasonably adjust for the effect of such corporate or other restructure transactions.

 

  - 6 -  

 

 

Partners for Growth Schedule to Loan and Security Agreement

 

9.    CONDITIONS

 

  In addition to any other conditions to the Loan set out in this Agreement, PFG will not make any Loan until PFG shall have received from Borrower, in form and substance reasonably satisfactory to PFG, such documents, and completion of such other matters, as PFG may reasonably deem necessary or appropriate, including that there shall be no discovery of any facts or circumstances which would, as determined by PFG in its good faith business judgment, materially negatively affect or be reasonably expected to materially negatively affect the collectability of the Obligations, PFG’s security interest in Borrower’s Collateral or the value thereof. Notwithstanding the foregoing, Borrower agrees to deliver to PFG each item required to be delivered to PFG under this Agreement as a condition precedent to any Loan. Borrower expressly agrees that a Loan made prior to the receipt by PFG of any such item shall not constitute a waiver by PFG of Borrower’s obligation to deliver such item, and the making of any Loan in the absence of a required item shall be in PFG’s sole discretion. Without limiting the foregoing, as conditions precedent to the Loan, Borrower shall provide:
   
  (i) duly executed original signatures of Borrower and Guarantor to this Agreement, the Intellectual Property Security Agreement and related Collateral Agreements and Notices, share charges in respect of shares in the Borrower, a deed of guarantee executed in favor of PFG by Guarantor; and debentures (incorporating fixed and floating charges) in favor of PFG executed by Guarantor;
   
  (ii) a Certificate for Borrower and Guarantor signed by a Responsible Officer (in the case of Borrower) or a Person authorized to lawfully act on behalf of Guarantor (in the case of Guarantor) in respect of obligations such as the Guaranty, appending copies of (A) its Constitutional Documents, (B) its register of members, (C) its register of charges, and (D) the written resolutions or minutes of its board of directors authorizing the execution, delivery and performance of the Loan Documents to which such Borrower is a party and authorizing the Responsible Officer(s), and certifying that such documents are true, correct and in full force and effect on the date of this Agreement;
   
  (iii) Any Control Agreements as required by Section 8(b) of this Schedule, duly executed by Borrower and each relevant depositary institution in favor of PFG;
   
  (iv) to the extent reasonably practicable, certified copies, dated as of a recent date, of Security Instrument searches, as PFG shall request, accompanied by written evidence (including any UCC termination statements) that the Liens indicated in any such Security Instruments either constitute Permitted Liens or have been or, in connection with the Loan, will be terminated or released;

 

  - 7 -  

 

 

Partners for Growth Schedule to Loan and Security Agreement

 

  (v) the Representations, duly executed by Borrower on behalf of Borrower and each Guarantor;
   
  (vi) the insurance policies and/or endorsements required pursuant to Section 4.3;
   
  (vii) payment of the payable Fees specified in Section 3 of this Schedule and Lender Expenses incurred in connection with the Loan;
   
  (viii) any third party consents required in order for Borrower to enter into and perform the Loan Documents;
   
  (ix) the Senior Subordination Agreement, in agreed form between PFG, PFG4 and the Senior Lender;
   
  (x) subordination agreements in favor of PFG from holders of Indebtedness;
   
  (xi) execution and delivery of the BVI Security Documents;
   
  (xii) execution and delivery of the Cayman Security Documents;
   
  (xiii) execution and delivery of the Hong Kong Security Documents;
   
  (xiv) execution, delivery of all other Security Instruments contemplated under the Cayman Security Documents or Hong Kong Security Documents; and
   
  (xv) to the extent that the conditions to this Agreement have not been completed as of the Effective Date, a post-closing obligations letter in PFG’s customary form by which PFG waives or defers performance of such conditions as PFG is willing to defer in its sole business discretion.

 

[Signature Page Follows]

 

  - 8 -  

 

 

Partners for Growth Schedule to Loan and Security Agreement

 

Executed and Delivered as a Deed by ) Lender:
BORQS Hong Kong Limited )  
     
Acting by:   Partners for Growth V, L.P.

 

/s/ Pat Sek Yuen Chan   By: /s/ Geoffrey Allan
Name: Pat Sek Yuen Chan   Name: Geoffrey Allan
Title: Director   Title: Manager, Partners for Growth V, LLC,
        Its General Partner

 

in the presence of :

/s/ ANTHONY K. CHAN  
Witness name: ANTHONY K. CHAN  
Witness occupation: CFO  

 

 

 

 

Partners for Growth Schedule to Loan and Security Agreement

 

Exhibit A to Loan and Security Agreement

 

Section 3.4(d) – Fixtures, Etc. – None.

 

Section 7—“Permitted Indebtedness”—Other Existing Permitted Indebtedness: – None

 

Section 7—“Permitted Investments”—Other Existing Permitted Investments: – None.

 

Section 7— “Permitted Liens” —Other Existing Permitted Liens: – None.

 

Schedule Section 8—“Inside Debt”: – None.

 

 

 

 

Partners for Growth Schedule to Loan and Security Agreement

 

Exhibit B to Loan and Security Agreement – Compliance Certificate

 

 

 

 

 

 

EXHIBIT 10.21

 

SUBORDINATION AGREEMENT

 

between SPD Silicon Valley Bank Co., Ltd. and Partners for Growth V, L.P.

 

Borrower: BORQS Hong Kong Limited

 

Guarantor: BORQS International Holding Corp

 

This Subordination Agreement (this “ Agreement ”) is dated April 30, 2018 and by and between Partners for Growth V, L.P., a Delaware limited partnership (“ Creditor ”), and SPD Silicon Valley Bank Co., Ltd., a PRC banking institution (“ SSVB ”), and is acknowledged by Creditor’s affiliate, Partners for Growth IV, L.P. (the “ Prior Fund ”) for purposes of Section 17 hereof.

 

Recitals

 

A. The above-named Borrower (“ Borrower ”) has requested and/or obtained loans and/or other credit accommodations from SSVB which may be secured by their respective assets and property, and the obligations of Borrower have been guaranteed by the above-named Guarantor.

 

B. Creditor has extended credit to Borrower under that certain Loan and Security Agreement and related documents dated on or about the date of this Agreement, as may be amended from time to time (the “ PFG Debt Documents ”).

 

C. To induce SSVB to extend credit to Borrower and make further extensions of credit to or for Borrower, or to purchase or extend credit pursuant to any instrument or writing on which Borrower is liable or to grant renewals or extensions of any loan, extension of credit, purchase, or other accommodation, Creditor will subordinate: (a) all of Borrower’s indebtedness and obligations to Creditor, existing now or later (the “Subordinated Debt”) to all of Borrower’s indebtedness and obligations to SSVB, existing now or later, consisting of principal indebtedness under the Facility Agreement for working capital loans dated as of August 31, 2015 as amended from time to time (the “ Senior Debt Document ”) in an amount up to US$6,000,000, plus principal under a facility agreement between SSVB and a PRC subsidiary of Borrower in an amount up to RMB25,000,000, plus (i) interest and all collection costs (including attorneys’ fees), (ii) all interest accruing after any bankruptcy, reorganization or similar proceeding, (iii) the amount of all Protective Advances, and (iv) all other products and/or credit services facilities up to $25,000 in the aggregate at any given time (collectively, the “ Senior Debt ”); and (b) all of Creditor’s security interests to all of SSVB’s security interests in the Borrower’s property securing the Senior Debt, each in accordance with the terms of this Agreement.

 

D. SSVB and the Prior Fund have entered into a like Subordination Agreement pursuant to which the Prior Fund has subordinated its security interests and liens and payment to the obligations owing to SSVB under the Senior Debt.

 

THE PARTIES AGREE AS FOLLOWS:

 

1. Creditor subordinates to SSVB any security interest or lien that it has in any property of Borrower (to the extent perfected and enforceable). Despite attachment or perfection dates of Creditor’s security interest and SSVB’s security interest, SSVB’s security interest in all assets of Borrower is prior to Creditor’s security interest.

 

2. Except as otherwise expressly provided in this Agreement, all Subordinated Debt payments are subordinated to all of Borrower’s obligations to SSVB for the Senior Debt.

 

3. Except as expressly allowed pursuant to the below provisions of Section 4 below, Creditor will not demand or receive from Borrower any part of the Subordinated Debt, by payment, prepayment, or otherwise, exercise any remedy against any of Borrower’s property, or (c) accelerate the Subordinated Debt, or begin to or participate in any action against Borrower in any way related to the Subordinated Debt, until all the Senior Debt is paid. This does not prohibit Creditor from converting any Subordinated Debt into equity securities of Borrower.

 

 

 

 

4. Except as otherwise provided in this Section 4:

 

(a) Creditor may receive (i) regularly scheduled payments on the Subordinated Debt, including, without limitation, regularly-scheduled, non-accelerated payments of fees, costs, principal and interest (including default interest) that are contemplated under the PFG Debt Documents, a true and correct final copy of which has been delivered to SSVB (the “ Permitted Payments ”). Notwithstanding the foregoing, Creditor agrees that if there shall have occurred and continues an event of default (however denominated) under any of the documents evidencing or otherwise related to the Senior Debt (or if there would be such an event of default immediately after giving effect to any such Permitted Payment), and Creditor shall have received written notice thereof at the address set forth below Creditor’s signature block (a “ Blockage Notice ”) from SSVB imposing a Blockage Period as defined below (which notice shall be deemed to have been validly served, given, delivered, and received upon the earlier of: (x) the first business day after transmission by facsimile or hand delivery or deposit with an internationally-recognized express courier delivery service; or (y) the first business day following a business day on which notice has been sent by electronic mail to an authorized representative of a party, if confirmed concurrently by facsimile or promptly by any other authorized mode of delivery as set forth herein, then no Permitted Payment shall be demanded or received by Creditor until the end of such a Blockage Period (and Creditor shall pay to SSVB any such payments so received). In any 360 day period, no more than one (1) Blockage Period may be imposed.

 

(b) Notwithstanding anything to the contrary in this Agreement, upon the occurrence of an event of default under and as defined in the documents evidencing the Subordinated Debt and subject to the rights and priorities of SSVB as described in this Agreement, Creditor may accelerate the Subordinated Debt and may exercise all of its rights and remedies with respect to such an event of default; provided, however, Creditor may commence such exercise of remedies and enforcement actions only after providing SSVB with 10 business days prior written notice of Creditor’s intent to commence such exercise of remedies or enforcement actions and so long as SSVB has not delivered a Blockage Notice to Creditor prior to the expiration of such a 10 business day notice period (which Blockage Notice, if sent by SSVB, prevents Creditor from taking any such actions during the Blockage Period); provided further, however, any payment, distribution, security, or proceeds that Creditor receives in connection with the exercise of any of its rights and remedies shall first be turned over to SSVB for application to the Senior Debt up to the full amount of the Senior Debt outstanding at such time (provided that if such amounts are applied to the Senior Debt, such application shall not result in the Senior Debt being “paid” as against the Borrower for the purposes of Creditor subrogation). Additionally, notwithstanding anything to the contrary in this Agreement but subject to the rights and remedies of SSVB as described in this Agreement, Creditor may accelerate the Subordinated Debt upon commencement of any insolvency, bankruptcy, receivership, custodianship, or similar proceeding for the liquidation or dissolution of Borrower. Notice to SSVB in accordance with this paragraph shall be sent to SSVB at the address set forth below its signature block below and shall be deemed to be validly delivered and received in accordance with the notice provision set forth in the first paragraph of this Section 4.

 

(c) As used in this Agreement, (i) “Blockage Period” shall mean a period of time beginning upon the delivery of the Blockage Notice as set forth above and ending on the earlier to occur of 60 days following such date or SSVB’s written consent to such termination and (ii) “Protective Advances” shall mean all sums up to a maximum amount of $100,000 expended by SSVB which were determined by SSVB to be necessary or appropriate to: (1) protect the priority, validity and enforceability of the liens and security interests which secure the Senior Debt and the instruments evidencing the Senior Debt; (2) prevent the value of the collateral for the Senior Debt from being diminished (assuming the lack of such a payment within the necessary time frame could potentially cause such collateral to lose value); (3) protect any of such collateral from being damaged, impaired, mismanaged or taken; or (4) cure any default or non-performance of obligations of Borrower as required by the Loan Agreements.

 

5. If Creditor sends the Borrower a notice of default related to the Subordinated Debt, Creditor shall use best efforts to promptly deliver a copy of the notice of default to SSVB, but failure to do so shall not be a breach of this Agreement nor, in and of itself, affect any of Creditor’s rights in respect of the Subordinated Debt.

 

6. Creditor must deliver to SSVB in the form received (except for endorsement or assignment by Creditor) any payment, distribution, security or proceeds it receives on the Subordinated Debt other than according to this Agreement, provided that if SSVB applies such turnover to the Senior Debt, such application shall not result in the Senior Debt being “paid” as against the Borrower for the purposes of Creditor subrogation.

 

  2  

 

 

7. These provisions remain in full force and effect, despite Borrower’s insolvency, reorganization or any case or proceeding under any bankruptcy or insolvency law, and SSVB’s claims against Borrower and Borrower’s estate will be fully paid before any payment is made to Creditor. Creditor agrees not to encourage any other person or entity to initiate or prosecute any claim, action or other proceeding: (a) challenging the enforceability of SSVB’s claim; (b) challenging the enforceability of any liens in assets securing SSVB; (c) asserting any claims which the Borrower may hold with respect to SSVB; or (d) seeking the equitable subordination of the Senior Debt or any aspect of SSVB’s claim.

 

8. Until the Senior Debt is paid, Creditor irrevocably appoints SSVB as its attorney-in-fact, with power of attorney with power of substitution, in Creditor’s name or in SSVB’s name, for SSVB’s use and benefit without notice to Creditor, to do the following in any bankruptcy, insolvency or similar proceeding involving Borrower:

 

(a) File any claims for the Subordinated Debt for Creditor if Creditor does not do so at least 30 days before the time to file claims expires, and

 

(b) Accept or reject any plan of reorganization or arrangement for Creditor and vote Creditor’s claims in respect of the Subordinated Debt in any way it chooses.

 

9. Creditor shall immediately affix a legend to the instruments evidencing the Subordinated Debt stating that the instruments are subject to the terms of this Agreement. No amendment of the documents evidencing or relating to the Subordinated Debt shall directly or indirectly modify the provisions of this Agreement in any manner which might terminate or impair the subordination of the Subordinated Debt or the subordination of the security interest or lien that Creditor may have in any property of Borrower. By way of example, such instruments shall not be amended to (a) increase the rate of interest with respect to the Subordinated Debt, or (b) accelerate the payment of the principal or interest or any other portion of the Subordinated Debt.

 

10. This Agreement is effective until the Senior Debt Document has been terminated and all of the Senior Debt has been paid in full. If, after full payment of the Senior Debt and termination of the Senior Debt Document, SSVB must disgorge any payments made on the Senior Debt, this Agreement and the relative rights and priorities provided in it, will be reinstated as to all disgorged payments as though the payments had not been made, and Creditor will immediately pay SSVB all payments received under the Subordinated Debt to the extent the payments would have been prohibited under this Agreement. At any time without notice to Creditor, SSVB may take actions it considers appropriate on the Senior Debt such as terminating advances, increasing the principal, extending the time of payment, increasing interest rates, renewing, compromising or otherwise amending any documents affecting the Senior Debt and any collateral securing the Senior Debt, and enforcing or failing to enforce any rights against Borrower or any other person. No action or inaction will impair or otherwise affect SSVB’s rights under this Agreement. Creditor waives the benefits, if any, of any statutory or common law rule that may permit a subordinating creditor to assert any defenses of a surety or guarantor, or that may give the subordinating creditor the right to require a senior creditor to marshal assets, and Creditor agrees that it shall not assert any such defenses or rights.

 

11. This Agreement shall be binding upon, and shall inure to the benefit of, any heirs, successors and assigns of Creditor and SSVB. This Agreement is for Creditor’s and SSVB’s benefit and not for the benefit of Borrower or any other party. If Borrower is refinancing any of the Senior Debt with a new lender, upon SSVB’s request of creditor, Creditor will enter into a new subordination agreement with the new lender on substantially the terms of this Agreement.

 

12. This Agreement may be executed in two or more counterparts, each of which is an original and all of which together constitute one instrument.

 

13. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of California without giving effect to conflicts of law principles. Subject to clause (c) of this Section 13, Creditor and SSVB submit to the jurisdiction of the state and federal courts located in Santa Clara County, California. CREDITOR AND BANK WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN.

 

  3  

 

 

(b) WITHOUT INTENDING IN ANY WAY TO LIMIT THE PARTIES’ AGREEMENT TO WAIVE THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY, if the above waiver of the right to a trial by jury is not enforceable, the parties hereto agree that any and all disputes or controversies of any nature between them arising at any time shall be decided by a reference to a private judge, mutually selected by the parties (or, if they cannot agree, by the Presiding Judge of the Santa Clara County, California Superior Court) appointed in accordance with California Code of Civil Procedure Section 638 (or pursuant to comparable provisions of federal law if the dispute falls within the exclusive jurisdiction of the federal courts), sitting without a jury, in Santa Clara County, California; and the parties hereby submit to the jurisdiction of such court. The reference proceedings shall be conducted pursuant to and in accordance with the provisions of California Code of Civil Procedure §§ 638 through 645.1, inclusive. The private judge shall have the power, among others, to grant provisional relief, including without limitation, entering temporary restraining orders, issuing preliminary and permanent injunctions and appointing receivers. All such proceedings shall be closed to the public and confidential and all records relating thereto shall be permanently sealed. If during the course of any dispute, a party desires to seek provisional relief, but a judge has not been appointed at that point pursuant to the judicial reference procedures, then such party may apply to the Santa Clara County, California Superior Court for such relief. The proceeding before the private judge shall be conducted in the same manner as it would be before a court under the rules of evidence applicable to judicial proceedings. The parties shall be entitled to discovery which shall be conducted in the same manner as it would be before a court under the rules of discovery applicable to judicial proceedings. The private judge shall oversee discovery and may enforce all discovery rules and order applicable to judicial proceedings in the same manner as a trial court judge. The parties agree that the selected or appointed private judge shall have the power to decide all issues in the action or proceeding, whether of fact or of law, and shall report a statement of decision thereon pursuant to the California Code of Civil Procedure § 644(a). Nothing in this paragraph shall limit the right of any party at any time to exercise self-help remedies, foreclose against collateral, or obtain provisional remedies. The private judge shall also determine all issues relating to the applicability, interpretation, and enforceability of this paragraph.

 

(c) Notwithstanding the submission of the parties to the federal and state courts located in Santa Clara County, California, the parties also submit to the non-exclusive jurisdiction of the courts of Hong Kong.

 

14. This Agreement is the entire agreement about this subject matter, and supersedes prior negotiations or agreements. Creditor is not relying on any representations by SSVB or Borrower in entering into this Agreement. Creditor will keep itself informed of Borrower’s financial and other conditions. This Agreement may be amended only by written instrument signed by Creditor and SSVB.

 

15. If there is an action to enforce the rights of a party under this Agreement, the party prevailing will be entitled, in addition to other relief, all reasonable costs and expenses, including reasonable attorneys’ fees, incurred in the action.

 

16. Each of the undersigned hereby represents and warrants that (a) the execution and delivery of this

 

Agreement and the consummation of the transactions contemplated herein have each been duly authorized by all necessary action on the part of such party, and (b) this Agreement has been duly executed and delivered and constitutes a enforceability thereof may be limited by bankruptcy, insolvency or other similar laws of general application relating to or affecting the enforcement of creditors’ rights or by general principles of equity.

 

17. This Agreement is acknowledged by the Prior Fund for purposes of consenting to the credit extended under the PFG Debt Documents and the pari passu treatment of Creditor and the Prior Fund in respect of their respective security interests and liens in Borrower and payment of their respective credits.

 

[Signature page follows.]

 

  4  

 

 

IN WITNESS WHEREOF, the undersigned have executed this Agreement on the date first written above.

 

“Creditor”   “SSVB”
     
PARTNERS FOR GROWTH V, L.P.   SPD SILICON VALLEY BANK CO., LTD.
     
By: /s/ Andrew Kahn   By: /s/ Harvey Lum                                             
         
Name: Andrew Kahn   Name:  Harvey Lum
         
Title: Manager, Partners for Growth V, LLC,   Title: Vice President, Head of Risk Management
         
  Its General Partner    
       
Address: 1660 Tiburon Blvd., Suite D, Tiburon, CA 94920   Address: 21/F, Block B, Baoland Plaza, No.588
    Dalian Road, Shanghai, 200082
     
Telephone (415) 912-5899   Telephone (86 21) 3596 3068
     
Facsimile (415) 781-0510   Facsimile (86 21) 3596 3099
     
Email: notices@pfgrowth.com   Email: hlum@spd-svbank.com

 

[Signature page to Subordination Agreement (PFG5) (BORQS Hong Kong Limited)]

 

 

 

 

EXHIBIT 10.22

 

 

Date: 30 April 2018

 

BORQS International Holding Corp  

as Guarantor

 

Partners for Growth V, L.P. 

as Lender

 

 

 

 

 

 

 

 

.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DEED OF GUARANTEE AND INDEMNITY

 

Deed of Guarantee and Indemnity  

 

 

THIS GUARANTEE (this “ Guarantee ”) is made as a deed this 30 day of April 2018,

 

BETWEEN:

 

(1) BORQS INTERNATIONAL HOLDING CORP , a company duly incorporated and validly existing under and by virtue of the Laws of The Cayman Islands, registered under company number 192127 and with registered office address at P.O. Box 309, Ugland House, Grand Cayman KY1-1104 (the “ Guarantor ”); and

 

(2) PARTNERS FOR GROWTH V, L.P. , a Delaware limited partnership, with its principal place of business at 1660 Tiburon Blvd., Suite D, Tiburon, CA 94920 USA (the “ Lender ”).

 

IT IS AGREED as follows:

 

1. Definitions and Interpretation

 

1.1. Definitions

 

Unless otherwise defined herein, capitalised terms used in this Guarantee have the meaning given to such terms in the Loan Agreement (as defined below). In addition, in this Guarantee, unless the context otherwise requires, the following expressions shall have the following meanings:

 

  Encumbrance means any mortgage, charge, pledge, lien (otherwise than arising by statute or operation of law) or other encumbrance, priority or security interest, deferred purchase, title retention, leasing, sale-and-repurchase, sale-and-leaseback arrangement whatsoever over or in any property, assets or rights or interest of whatsoever nature or any agreement for any of the same;
     
  Loan Agreement means the California law loan and security agreement dated on or about the date hereof between the Lender as lender and the Principals as the borrowers;
     
  Principals means BORQS Hong Kong Limited and such other borrowers as may accede to the Loan Agreement from time to time; and
     
  Principals’ Obligations means all present and future obligations and liabilities of the Principals to the Lender under the Loan Agreement and the other Loan Documents whether actual or contingent and whether owed or incurred alone or jointly and/or severally with another and as principal or as surety or in any other capacity or of any nature.

 

Deed of Guarantee and Indemnity 1  

 

 

1.2. Construction

 

1.2.1. Any reference in this Guarantee to:

 

  (a) the Lender or the Guarantor or any other person includes its respective successors in title, permitted assigns and/or permitted transferees;

 

  (b) a Clause is a reference to a clause of this Guarantee;

 

  (c) this Guarantee , the Loan Agreement or any other agreement or document is a reference to this Guarantee, the Loan Agreement or such other agreement or document as the same may have been, or may from time to time be, amended, varied, supplemented or novated;

 

  (d) the Principal’s Obligations includes a reference to any part of them;

 

  (e) the singular shall include the plural and vice versa;

 

  (f) a person includes any person, firm, company, corporation, government, state or agency of a state or any association, trust or partnership (whether or not having a separate legal personality) and any other entity or two or more of the foregoing; and

 

  (g) any statute or statutory provision or ordinance shall include any statute or statutory provision or ordinance which amends, extends, consolidates or replaces the same (whether before or after the date of this Guarantee) or which has been amended, extended, consolidated or replaced by the same and shall include any order, regulation, instrument or other subordinate legislation made under the relevant statute or statutory provision or ordinance.

 

  1.2.2. Apart from a permitted assignee of the Lender pursuant to Clause 15.1, a person who is not a party to this Guarantee has no rights under the Contracts (Rights of Third Parties) Ordinance (Cap. 623 of the laws of Hong Kong) to enforce or enjoy the benefit of any term of this Guarantee.

 

2. Guarantee

 

In consideration of the Lender agreeing to enter into the Loan Agreement and making available loans or other banking facilities, or giving time, credit or accommodation to the Principals, the Guarantor hereby irrevocably, unconditionally and absolutely:

 

  (a) guarantees to the Lender punctual payment and performance of the Principals’ Obligations; and

 

  (b) undertakes that the Guarantor will on demand make good any default by any Principal in the payment or discharge of the Principals’ Obligations as if the Guarantor instead of the Principal were expressed to be the primary obligor in respect of the Principals’ Obligations.

 

Deed of Guarantee and Indemnity 2  

 

 

3. Indemnity

 

For the same consideration, the Guarantor agrees as a primary obligor to indemnify the Lender immediately on demand against any loss, cost or liability suffered by the Lender if any Principals’ Obligations or any actual or purported agreement, arrangement or instruction relating to any Principals’ Obligations is or becomes invalid, unenforceable or illegal, irrespective of whether the reason for such invalidity, unenforceability or illegality was or ought to have been known to the Lender. The amount of such loss shall be the amount which the Lender would otherwise have been entitled to recover from the Principals.

 

4. Representations and Warranties

 

The Guarantor makes the representations and warranties set out in this Clause 4 (Representations and Warranties) to the Lender.

 

4.1. Status

 

The Guarantor is a company, duly incorporated, and validly existing under the laws of its jurisdiction of incorporation and has the power to carry on its business as it is now being conducted and to own property and other assets and is in good standing.

 

4.2. Powers, Authority and Non-Conflict

 

The execution, delivery and performance of this Guarantee is within the corporate powers of the Guarantor, has been duly authorised by all necessary corporate and other action and does not and will not conflict with (a) any law or regulation applicable to it; (b) any constitutional documents of the Guarantor; or (c) any agreement or instrument binding on the Guarantor.

 

4.3. Legal Validity

 

The obligations and liabilities expressed to be assumed by the Guarantor under this Guarantee are legal, valid, binding and enforceable obligations of the Guarantor (subject to applicable equitable principles and insolvency laws) and it is not necessary in order to ensure the legality, validity and enforceability of this Guarantee that it be filed, recorded or enrolled with any court or authority anywhere or that any stamp duty, registration or similar tax be paid on or in relation to it.

 

4.4. Authorisations

 

All authorisations, consents, approvals, resolutions, licences, exemptions, filings or registrations required under any applicable law or regulation (a) to enable it lawfully to carry on its business and to enter into, exercise its rights and comply with its obligations in this Guarantee, and (b) to make this Guarantee admissible in evidence in its jurisdiction of incorporation have been obtained or effected and are in full force and effect.

 

4.5. Choice of Law

 

The choice of the law of Hong Kong as the governing law of this Guarantee will be recognised and enforced in its jurisdiction of incorporation.

 

Deed of Guarantee and Indemnity 3  

 

 

4.6. No litigation

 

No litigation, arbitration or administrative proceeding is current, pending or (to the knowledge of the Guarantor) threatened against the Guarantor:

 

  (a) to restrain the entry into by the Guarantor of, the exercise by the Guarantor of its rights and/or performance or enforcement of or compliance with its obligations under this Guarantee; or

 

  (b) which has or could have a material adverse effect on or on the financial condition of the Guarantor or the ability of the Guarantor to make any payment when due or to perform any of its other obligations in accordance with this Guarantee.

 

4.7. Security and Ranking

 

Save for any Permitted Liens, no Encumbrance exists over any of the undertaking or the present or future revenues or assets of the Guarantor and the obligations of the Guarantor under this Guarantee are or will be its direct, general and unconditional obligations and rank or will rank at least pari passu in all respects with all its other present and future unsecured and unsubordinated indebtedness and obligations (including contingent obligations), with the exception of indebtedness and obligations mandatorily preferred by law and not by contract.

 

4.8. Time when representations and warranties are made

 

The Guarantor represents, warrants and agrees that each of the representations and warranties contained in this Clause 4 will be and remain correct so long as it has any liability (contingent or actual) under this Guarantee.

 

5. Continuing Guarantee

 

This Guarantee is a continuing guarantee for all the Principals’ Obligations and will extend to the ultimate balance of the Principals’ Obligations, regardless of any intermediate discharge or payment of or on account of the Principals’ Obligations or any intermediate settlement of accounts between the Lender and any Principal or any other person. No demand made by the Lender under this Guarantee shall restrict the right of the Lender to make further or other demands.

 

6. Interest

 

The Guarantor shall on demand pay to the Lender interest at the Default Rate on any amount for the time being due from the Guarantor to the Lender under this Guarantee (both before and after judgement) from the date of a demand for payment under this Guarantee until actual payment in full.

 

7. Opening of New Accounts

 

If for any reason this Guarantee ceases to be a continuing security, the Lender may open a new account for each Principal. If the Lender does not open a new account, it shall nevertheless be treated as if it had done so at the time this Guarantee ceased to be a continuing security. As from that time all payments made to the Lender will be credited or treated as having been credited to the new account and will not operate to reduce the obligations of the Guarantor under this Guarantee.

 

Deed of Guarantee and Indemnity 4  

 

 

8. Waiver of Defences

 

The liability of the Guarantor under this Guarantee shall not be reduced, discharged or otherwise adversely affected by any of the events or circumstances set out in this Clause 8 (Waiver of Defences).

 

8.1. Variations

 

Any determination, renewal, variation (however fundamental), replacement, discharge, release or increase of, or composition or arrangement by the Lender relating to, any credit or facilities to the Principals or of or relating to the Principals’ Obligations.

 

8.2. Time or Indulgence

 

The grant by the Lender to any Principal or any other person of any time, waiver, consent or indulgence.

 

8.3. Dealings with Security

 

Any taking, dealing, exchange, renewal, variation, release, compromise, discharge, composition, arrangement or modification in relation to any guarantee, security or right which the Lender may now or after the date of this Guarantee have in respect of the Principals’ Obligations.

 

8.4. Negotiable Instruments

 

The renewal by the Lender of any bill, promissory note or other negotiable instrument or security.

 

8.5. Other Guarantees or Security

 

The Lender obtaining or refusing, neglecting or otherwise failing to obtain, perfect, enforce or claim any other guarantee, security or right (whether contemporaneously with this Guarantee or otherwise) or any non-presentation or non-observance of any formality or other requirement in respect of any instrument or any failure to realise the full value of any security.

 

8.6. Incapacity

 

Any incapacity or lack of power, authority or legal personality of or dissolution or change in the members or status of the Principal or any other person.

 

8.7. Unenforceability

 

Any unenforceability, illegality, invalidity or non-provability of any obligation of the Principal or any person under any document, agreement or security.

 

Deed of Guarantee and Indemnity 5  

 

 

8.8. Insolvency

 

Any liquidation, composition, insolvency, administration, bankruptcy, death or other incapacity, or any alteration in the corporate existence or structure, of any of the Principals, the Guarantor or any other person.

 

8.9. Other Circumstances

 

Any other act, omission, matter or thing which, but for this provision, would or might reduce, discharge or otherwise adversely affect the obligations of the Guarantor under this Guarantee.

 

9. Reinstatement

 

If any payment by any Principal or any other person or any discharge given by the Lender (whether in respect of the Principals’ Obligations or any security for those obligations or otherwise) is avoided or reduced as a result of insolvency or any similar event:

 

  (a) the liability of the Guarantor shall continue as if the payment, discharge, avoidance or reduction had not occurred; and

 

  (b) the Lender shall be entitled to recover the value or amount of that security or payment from the Guarantor, as if the payment, discharge, avoidance or reduction had not occurred.

 

10. Deferral of Guarantor’s Rights

 

10.1. Restriction on Rights or Claims

 

Until all of the Principals’ Obligations have been irrevocably paid or discharged in full, the Guarantor will not, unless the Lender otherwise directs:

 

  (c) make or enforce any claim (including, but not limited to, a claim by way of set-off or counterclaim) or right against any Principal or prove as a creditor of any Principal in competition with the Lender, whether in respect of any payment under this Guarantee made by the Guarantor or otherwise; or

 

  (d) be entitled to claim or have the benefit of, any set-off, counterclaim or proof against, or dividend paid on a winding-up or administration of or composition with creditors by any Principal or any Principal’s estate; or

 

  (e) be entitled to claim or otherwise obtain the benefit (by way of subrogation or otherwise) of any security or guarantee or indemnity at any time held by the Lender for or in respect of any of the Principals’ Obligations; or

 

  (f) claim or enforce any right of contribution against any co-surety.

 

Deed of Guarantee and Indemnity 6  

 

 

10.2. Proof at the Lender’s Request

 

If requested by the Lender the Guarantor shall:

 

  (a) exercise any right of proof or claim in the winding-up, administration, voluntary arrangement, bankruptcy or estate of any Principal on behalf of the Lender and hold any dividend or other money received in respect of such proof or claim upon trust for the Lender to the extent of the Principals’ Obligations; and

 

  (b) hold upon trust for the Lender any money which it may receive or recover from any co-surety by virtue of any rights of contribution.

 

10.3. Monies held on Trust

 

If while the Guarantor remains under any liability to the Lender under this Guarantee, any monies or other property or assets shall be received or recovered by the Guarantor in breach of any provisions of this Clause 10 (Deferral of Guarantor’s Rights), such monies or other property or assets shall, to the extent of such liability, be held upon trust to pay or transfer the same to the Lender.

 

11. Suspense Account

 

The Lender may at any time place and keep to the credit of a separate interest bearing suspense account any monies received under this Guarantee for so long and in such manner as the Lender may determine without any obligation to apply such monies or any part of them in or towards the discharge of the Principals’ Obligations. In the event of any proceedings in or analogous to bankruptcy, liquidation, composition or arrangement of or concerning any Principal, the Lender may notwithstanding any payment made under this Guarantee prove for a claim and agree to accept any dividend or composition in respect of the whole or any part of the Principals’ Obligations as if this Guarantee had not been given.

 

12. Other Means of Payment

 

Lender may make a demand under this Guarantee:

 

  (a) before making any demand on any Principal or any Principal’s estate or any other person or enforcing any other guarantee or security for the Principals’ Obligations; and

 

  (b) for the payment of the ultimate balance after resorting to other means of payment, or for the balance due at any time notwithstanding that the Lender has not resorted to other means of payment (in which case the Guarantor shall not be entitled to any benefit from such other means of payment so long as the Principals’ Obligations remain outstanding).

 

13. Expenses

 

13.1. Costs

 

The Guarantor shall pay to the Lender on demand all reasonable costs and expenses (including, but not limited to, legal fees) from time to time paid or incurred by the Lender in connection with taking, perfecting, preserving, defending or enforcing this Guarantee or in exercising any right or power under or in connection with this Guarantee, and shall indemnify the Lender against all such costs and expenses.

 

Deed of Guarantee and Indemnity 7  

 

 

13.2. Stamp Duty

 

The Guarantor shall pay on demand all stamp, documentary, registration and other similar duties and taxes of any kind and from any source, if any, to which this Guarantee may be subject or give rise and shall indemnify the Lender against any and all liability with respect to or resulting from any delay or failure by the Guarantor in making such payment.

 

13.3. Value Added Tax

 

Where this Guarantee requires the Guarantor to re-imburse the Lender for any costs or expenses the Guarantor shall at the same time pay and indemnify the Lender against any value added tax (or any tax of a similar nature) incurred by the Lender in respect of the costs and expenses to the extent that the Lender determines that it is not entitled to credit or repayment of the value added tax (or other tax of a similar nature).

 

14. Miscellaneous

 

14.1. Additional Security

 

This Guarantee is in addition to and is not in any way prejudiced by any bill, note, guarantee, mortgage, charge or other security now or subsequently held by the Lender for any of the Principals’ Obligations.

 

14.2. No Deduction or Withholding

 

All payments made by the Guarantor to the Lender under this Guarantee shall (save insofar as required by law to the contrary) be paid in full without set-off or counterclaim and free and clear of and without any deduction or withholding or payment for or on account of any present or future tax, levy, duty, impost or other charge or withholding of a similar nature. If the Guarantor shall be required by law to effect any such deduction or withholding or payment the Guarantor shall immediately pay to the Lender such additional amount as will result in the immediate receipt by the Lender of the full amount which would otherwise have been received had no such deduction or withholding or payment been made.

 

14.3. Set-off

 

The Lender may set-off any matured obligation owed by the Guarantor to the Lender against any obligation (whether or not matured) owed by the Lender to the Guarantor regardless of the place of payment, or currency of either obligation. If the obligations are in different currencies, the Lender may convert either obligation at a market rate of exchange for the purpose of the set-off in an amount estimated by it in good faith to be the amount of that obligation.

 

14.4. Waivers; Rights Cumulative

 

No delay or omission of the Lender in exercising any right, power or privilege (each a “ right ”) under this Guarantee or otherwise available to it at law shall impair such right, or be construed as a waiver of such right nor shall any single or partial exercise of any such right preclude its further exercise or the exercise of any other right. The rights and remedies provided in this Guarantee are cumulative and not exclusive of any rights or remedies provided by law and may be waived only in writing and specifically.

 

Deed of Guarantee and Indemnity 8  

 

 

14.5. Severability

 

Any provision of this Guarantee which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Guarantee or affecting the validity or enforceability of such provision in any other jurisdiction.

 

14.6. Certificates and Determinations

 

A certificate or determination by the Lender of the amount of the Principals’ Obligations outstanding at any time or of any other amount payable by the Guarantor under this Guarantee is, in the absence of manifest error, conclusive evidence for all purposes of this Guarantee as against the Guarantor.

 

14.7. Currency Indemnity

 

14.7.1. The Guarantor’s liability under this Guarantee is to pay to the Lender the full amount of the Principals’ Obligations in the currency in which they are for the time being denominated. If, for any reason, any payment due from the Guarantor under or in connection with this Guarantee is made or is satisfied in a currency (the “ Other Currency ”) other than the currency in which the relevant payment is due (the “ Contractual Currency ”), then to the extent that the payment (when converted into the Contractual Currency at the rate of exchange on the date of payment or, in the case of the liquidation or insolvency of the Guarantor, at the rate of exchange on the latest date permitted by applicable law for the determination of liabilities in such liquidation or insolvency) actually received by the Lender falls short of the amount expressed to be due under the terms of this Guarantee, the Guarantor shall, as a separate and independent obligation, indemnify the Lender and hold the Lender harmless against the amount of such shortfall.

 

14.7.2. For the purpose of this Clause “rate of exchange” means the rate at which the Lender is able on the relevant date to purchase the Contractual Currency with the Other Currency and shall take into account any premium and other costs of exchange.

 

15. Benefit of this Guarantee

 

15.1. Assignment by the Lender

 

The Lender may assign or transfer all or any part of its rights under this Guarantee in connection with the assignment of its rights and obligations in accordance with the terms of Section 8.14 (Benefit of Agreement) of the Loan Agreement. The Guarantor shall enter into any documents reasonably specified by the Lender to be necessary to give effect to such assignment or transfer.

 

15.2. No Assignment by the Guarantor

 

The Guarantor may not assign or transfer all or any part of its rights and/or obligations under this Guarantee.

 

Deed of Guarantee and Indemnity 9  

 

 

15.3. Disclosure of Information

 

The Lender may not disclose such information about the Guarantor unless such disclosure is made in compliance with Section 8.1 (Confidentiality) of the Loan Agreement.

 

16. Notices and Demands

 

16.1. Address

 

The Guarantor’s address and fax number for any notice, demand or other communication under or in connection with this Guarantee are set forth in Section 8.5 (Notices) of the Loan Agreement. Any such notice, demand or other communication shall also be effective if sent to the Guarantor’s registered office or the address of the Guarantor last known to the Lender.

 

16.2. Method and Receipt

 

Any notice, demand or other communication to be given or made pursuant to this Guarantee to the Guarantor may be given or made in such manner and be deemed delivered at such time specified under Section 8.5 (Notices) of the Loan Agreement.

 

16.3. English language

 

Any notice given under or in connection with this Guarantee must be in English.

 

17. Governing Law

 

17.1. This Guarantee shall be governed by and construed in accordance with the laws of Hong Kong. The parties hereto hereby submit to the non-exclusive jurisdiction of the Hong Kong Courts.

 

17.2. The submission of the parties hereto to the jurisdiction of the Hong Kong Courts shall not restrict the right of the Lender to take proceedings in connection with this Guarantee in any other courts having, claiming or accepting jurisdiction in respect of matters pertaining to this Guarantee, including but not limited to the California Courts, nor shall the taking of proceedings in any one or more jurisdictions preclude the taking of proceedings in any other jurisdiction whether concurrently or not.

 

17.3. The Guarantor hereby irrevocably consents to the granting of any relief and/or the issue of any process in connection with any legal action or proceedings in connection with this Guarantee, including the making, enforcement or execution of any judgment or order against any of the property, assets or revenues of the Guarantor whatsoever.

 

18. Process Agent

 

The service of any process connected with proceedings in the Hong Kong courts and relating to this Guarantee will be deemed to have been validly served on the Guarantor if it is received by any Principal at its registered address or the address specified in Section 8.5 (Notices) of the Loan Agreement and service will be deemed to have been acknowledged by the Chargor if it is acknowledged by such Principal.

 

EXECUTED as a Deed and delivered on the date stated at the beginning of this document.

 

Deed of Guarantee and Indemnity 10  

 

 

EXECUTED and DELIVERED )
as a DEED by BORQS International Holding Corp )

 

Acting by:

 

/s/ PAT SEK YUEN CHAN

 

Name: PAT SEK YUEN CHAN

Title: CEO

 

in the presence of :

  

/s/ ANTHONY K. CHAN    

Witness name: ANTHONY K. CHAN

Witness occupation: CFO

 

EXECUTED and DELIVERED )
as a DEED by Partners for Growth V, L.P. )

 

Acting by:

 

/s/ Geoffrey Allan

 

Name: Geoffrey Allan

Title: Manager, Partners for Growth V, LLC, its General Partner

  

Witnessed by:

 

/s/ Amy Spencer

 

Name: Amy Spencer

Title: Exhibition Director

 

   

Witness name:

Witness occupation:

 

 

Deed of Guarantee and Indemnity 11

 

EXHIBIT 10.23

 

Date: 30 April 2018

 

BORQS International Holding Corp

as Chargor

 

Partners for Growth V, L.P.

as Lender

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DEBENTURE

 

(constituting a fixed and floating charge over all the assets of

BORQS International Holding Corp )

  

Debenture  

 

 

THIS DEED (this “ Deed ”) is made as a deed this 30 day of April 2018,

 

BETWEEN:

 

(1) BORQS INTERNATIONAL HOLDING CORP , a company duly incorporated and validly existing under and by virtue of the Laws of The Cayman Islands, registered under company number 192127 and with registered office address at P.O. Box 309, Ugland House, Grand Cayman KY1-1104 (the “ Chargor ”); and

 

(2) PARTNERS FOR GROWTH V, L.P. , a Delaware limited partnership, with its principal place of business at 1660 Tiburon Blvd., Suite D, Tiburon, CA 94920 USA (the “ Lender ”).

 

IT IS AGREED as follows:

 

1. Definitions and Interpretation

 

1.1. Definitions

 

Unless otherwise defined herein, capitalised terms used in this Deed have the meaning given to such terms in the Loan Agreement (as defined below). In addition, in this Deed unless the context otherwise requires, the following expressions shall have the following meanings:

 

Bank Accounts ” means all present and future bank accounts held in the name of the Chargor from time to time, including but not limited to the bank accounts listed in Schedule 1 hereto;

 

Charged Assets means all assets listed in Clause 2.2, excluding any Excluded Property;

 

CPO ” means the Conveyancing and Property Ordinance (Cap. 219 of the Laws of Hong Kong);

 

Encumbrance ” means any mortgage, charge, pledge, lien (otherwise than arising by statute or operation of law) or other encumbrance, priority or security interest, deferred purchase, title retention, leasing, sale-and-repurchase, sale-and-leaseback arrangement whatsoever over or in any property, assets or rights or interest of whatsoever nature or any agreement for any of the same;

 

Exchange Rate ” means the rate for converting one currency into another currency which the Lender determines to be prevailing in the relevant foreign exchange market at the relevant time, such determination to be conclusive and binding (except in the case of manifest error);

 

Guarantee ” means the Hong Kong law deed of guaranty and indemnity dated on or about the date hereof between the Chargor and the Lender;

 

HK$ ” means Hong Kong Dollars, the lawful currency for the time being of Hong Kong;

 

Hong Kong ” means the Hong Kong Special Administrative Region of the People’s Republic of China;

 

Loan Agreement ” means the California law loan and security agreement dated on or about the date hereof between the Lender as lender and BORQS Hong Kong Limited as the borrower;

 

Debenture 1  

 

 

Party ” means a party to this Deed;

 

Receiver ” means each of the receivers and/or receivers and managers appointed under this Deed, any of the other Loan Documents or under the powers conferred on the Lender by any law or regulation whether appointed simultaneously or to act jointly and/or severally or to act in place of any one or more receivers and/or receivers and managers previously appointed under this Deed or otherwise, and includes all delegates, attorneys or agents of any such Receiver;

 

Secured Obligations ” means all present and future obligations and liabilities of the Chargor, BORQS Hong Kong Limited and any other person to the Lender under the Loan Agreement, the Guarantee, this Deed and the other Loan Documents, whether actual or contingent and whether owed or incurred alone or jointly and/or severally with another and as principal or as surety or in any other capacity or of any nature;

 

Security ” means the Encumbrances created by or pursuant to this Deed;

 

Security Period ” means the period beginning on the date of this Deed and ending on the date on which all the Secured Obligations have been unconditionally and irrevocably paid and discharged in full and the Lender has no further commitment under or pursuant to the Loan Documents; and

 

Shares means the assets listed in Clause 2.2(a)(ii), including but not limited to the shares listed in Schedule 1 hereto , but excluding any Excluded Property .

 

1.2. Construction

 

Any reference in this Deed to:

 

(a) the Lender or the Chargor or any other person includes its respective successors in title, permitted assigns and/or permitted transferees;

 

(b) a Clause is a reference to a clause of this Deed;

 

(c) this Deed , the Loan Agreement , the Guarantee or any other agreement or document is a reference to this Deed, the Loan Agreement, the Guarantee or such other agreement or document as the same may have been, or may from time to time be, amended, varied, supplemented or novated;

 

(d) the Secured Obligations includes a reference to any part of them;

 

(e) the singular shall include the plural and vice versa;

 

(f) a person includes any person, firm, company, corporation, government, state or agency of a state or any association, trust or partnership (whether or not having a separate legal personality) and any other entity or two or more of the foregoing; and

 

(g) any statute or statutory provision or ordinance shall include any statute or statutory provision or ordinance which amends, extends, consolidates or replaces the same (whether before or after the date of this Deed) or which has been amended, extended, consolidated or replaced by the same and shall include any order, regulation, instrument or other subordinate legislation made under the relevant statute or statutory provision or ordinance.

 

Apart from a permitted assignee of the Lender pursuant to Clause 20.3, a person who is not a party to this Deed has no rights under the Contracts (Rights of Third Parties) Ordinance (Cap. 623 of the laws of Hong Kong) to enforce or enjoy the benefit of any term of this Deed.

 

Debenture 2  

 

 

2. Grant of Security

 

2.1. Covenant to Pay

 

The Chargor covenants to pay and discharge in full the Secured Obligations on demand made by the Lender at any time and to provide cash cover on demand in respect of any contingent or future obligations.

 

2.2. Charge

 

As continuing security for the payment and discharge of the Secured Obligations, the Chargor agrees to charge and hereby charges to the Lender:

 

(a) by way of first fixed charge:

 

(i) all present and future book and other debts, receivables, monies, revenues, royalties, claims and things in action due or owing to or purchased or otherwise acquired by the Chargor (including all credit balances and deposits of the Chargor with the Lender or any other bank or financial institution and any monies credited to any suspense account by the Lender, together with the debts represented by them, and any surplus arising on a realisation of any Encumbrance whether in favour of the Lender or any other person), the proceeds of the same, all legal, beneficial or equitable interests and rights in trust (including any beneficial interest, claim or entitlement in or to the assets of any occupational retirement scheme belonging to or held by the Chargor, the benefit of all discretionary payments and the proceeds of any claim or receivable of the Chargor not itself capable of being charged and the full benefit of all guarantees, indemnities, Encumbrances, rights of set-off, security reservations of proprietary rights, rights of tracing and all other rights and remedies in respect of the same or otherwise);

 

(ii) all present and future shares, namely all right, title and interest held by the Chargor in and to all stocks, shares, debentures, bonds or other securities or investments and all other interests of the Chargor in any person and all rights, benefits and advantages arising in respect of or incidental to the same;

 

(iii) all present and future uncalled capital, goodwill and all patents, patent applications, inventions, trademarks and service marks and applications therefor, trade names, registered designs, copyrights, know-how and other intellectual property rights held by the Chargor and all licences and all rights, benefits and advantages arising in respect of or incidental to the same;

 

Debenture 3  

 

 

(iv) all present and future real property and all rights and interests in or affecting land (or the proceeds of sale of land or the documents of title to land) of the Chargor and all buildings, structures, fixtures (including trade fixtures), owned by the Chargor, including the full benefit of all Encumbrances, options, agreements, rights and interests of the Chargor over or affecting land of the Chargor and all fixed plant, other plant, machinery, fittings and equipment and all other chattels now or at any time after the date of this Deed belonging to the Chargor and its interest in any plant, machinery, equipment or chattels in its possession, including the benefit of all contracts and warranties relating to the same (excluding any of the same for the time being forming part of its stock in trade or work in progress);

 

(v) all present and future rights under any sale or purchase agreements and distributorship or any similar agreements entered into by it, any letters of credit issued in its favour and all bills of exchange and other negotiable instruments held by it;

 

(vi) all present and future benefits of all licences, quota, consents and authorities (statutory or otherwise) held in connection with its business or the use of any asset charged by any other sub-paragraph in this Clause 2.2 and the right to recover and receive all proceeds and/or compensation which may be payable to it in respect of them; and

 

(vii) all present and future benefits in respect of all contracts and policies of insurance of whatever nature which are from time to time taken out by or on behalf of the Chargor or (to the extent of such interest) in which the Chargor has an interest and all claims and returns of premiums in respect of them; and

 

(b) by way of first floating charge, the undertaking and all present and future property, assets and rights of the Chargor, whatsoever and wheresoever not otherwise effectively charged by way of first fixed charge by Clause 2.2(a),

 

in each case, excluding any Excluded Property, and provided that if any asset cannot be secured without consent of a third party, this Agreement will constitute security over all proceeds and other amount receivable from such asset.

 

2.3. Crystallisation

 

The Lender may, by notice in writing to the Chargor, convert the floating charge referred to in Clause 2.2(b) into a specific fixed charge as regards all or part of the Charged Assets described therein, if an Event of Default has occurred and is continuing, or the Lender considers those assets to be in danger of being seized or sold under any distress, execution or sequestration or to be otherwise in jeopardy.

 

Debenture 4  

 

 

The floating charge referred to in Clause 2.2(b) shall (in addition to the circumstances in which the same shall occur under general law) automatically be converted into a specific fixed charge:

 

(c) if the Chargor takes steps to create any subsequent Encumbrance (other than Permitted Liens) on any of the Charged Assets without the prior approval of the Lender;

 

(d) on the convening of any meeting of the members of the Chargor to consider a resolution to wind up the Chargor (or not to wind up the Chargor);

 

(e) immediately prior to the presentation of a petition (other than a frivolous or vexatious petition) to wind up the Chargor; or

 

(f) if any person levies or attempts to levy distress, execution or sequestration against any of the Charged Assets.

 

2.4. Documents Supporting Security

 

In furtherance of the Security created under this Deed, the Chargor shall at its own cost, deliver or procure that there shall be delivered to the Lender the following (in each case, in form and substance satisfactory to the Lender):

 

(a) any documents necessary or conducive to enable the Lender to register such Charged Assets in its name or in the name of its nominee(s); and

 

(b) all documents necessary and satisfactory to the Lender in order to effect a valid transfer of any Charged Assets following an Event of Default.

 

2.5. Registration

 

The Chargor shall at its own cost:

 

(a) immediately after the execution of this Deed, enter particulars of the Security in its register of mortgages and charges (“ Register of Mortgages and Charges ”) maintained at its registered office in the Cayman Islands pursuant to section 54 of the Companies Law (2013 Revision) of the Cayman Islands;

 

(b) promptly and in any event within three (3) Business Days from and including the date of execution of this Deed , deliver or procure that there shall be delivered to the Lender:

 

(i) a certified copy of the updated Register of Mortgages and Charges recording the particulars of the Security; and

 

(ii) a copy of the written notice of charge to each bank where Bank Accounts are held substantially in the form as set out in Schedule 2 hereto; and

 

(c) use its best efforts to obtain written acknowledgement of the notice(s) sent in accordance with Clause 2.5(b)(ii) by each relevant bank as soon as practical after the date of execution of this Deed.

 

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3. Continuing Security

 

(a) The Security is continuing and shall extend to the ultimate balance of all the Secured Obligations regardless of any intermediate payment or discharge in whole or in part. This Deed shall remain in full force and effect as a continuing security for the duration of the Security Period.

 

(b) This Deed is in addition to, without prejudice to, and shall not merge with, any other right, remedy, guarantee or Encumbrance which the Lender may at any time hold for any Secured Obligation.

 

(c) This Deed may be enforced against the Chargor without the Lender first having to take recourse to any other right, remedy, guarantee or Encumbrance held by or available to it.

 

4. Covenants

 

4.1. General Covenants

 

The Chargor covenants that it will observe and perform each of the following covenants and undertakings in relation to its business, property and assets or (as the case may be) the Charged Assets, except as expressly permitted under the Loan Documents:

 

(a) conduct and carry on its business in a proper and efficient manner and not make any substantial alteration in the nature or mode of conduct of its business;

 

(b) keep or cause to be kept proper books of accounts relating to its business and from time to time within a reasonable time after being requested by the Lender, furnish the Lender with such information about the assets, business and financial condition of the Chargor as the Lender may require;

 

(c) use commercially reasonable endeavours to duly and punctually pay and discharge all debts, obligations and liabilities, and all rents, rates, taxes, outgoings and impositions payable in respect of any premises now or from time to time after the date of this Deed owned, tenanted, occupied or used by the Chargor and, when required, produce to the Lender receipts or other evidence satisfactory to the Lender that such payments have been made, or (as the case may be) such obligations and liabilities have been discharged;

 

(d) (i) use commercially reasonable endeavours to take all steps to maintain, preserve and protect its revenues and assets (tangible and intangible) and maintain and (where applicable) take out insurances in respect of its business, undertaking, property and assets and against such risks and contingencies as is prudent (given the industry practice in relation to the business, undertaking, property or asset concerned) with the interest of the Lender noted on the policies and with the policies containing such provisions for the benefit of the Lender as the Lender may require; (ii) on demand produce to the Lender the policies of such insurances and proof of payment of all premiums and other monies necessary for effecting and keeping such insurances; and (iii) immediately upon receipt pay to the Lender and pending such payment hold on trust for the Lender all monies received by the Chargor by virtue of any insurances maintained or effected by it (whether or not effected pursuant to the above) for application in making good the loss or damage in respect of which such monies are received or, at the option of the Lender, for payment to such account(s) as the Lender may specify;

 

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(e) if so required by the Lender, give notice (in such form as the Lender may require) to any person requiring payment into such account(s) as the Lender may specify of all monies due or to become due to the Chargor from that person;

 

(f) deposit with the Lender all certificates and documents of title, duly executed transfers and any other documents relating to the Charged Assets as the Lender may from time to time require;

 

(g) use its commercially reasonable endeavours to observe and perform all covenants and stipulations (under any agreement, law, regulation or otherwise) from time to time affecting any of the Charged Assets, take such action as may from time to time be necessary or desirable to preserve and maintain the Charged Assets or any registration thereof, and not do or omit to be done any act, matter or thing whereby any provision of any applicable law, decree, order or regulation from time to time affecting any of the Charged Assets is infringed;

 

(h) if requested to do so by the Lender, make entries in any public register or give such notices as the Lender may consider appropriate to record the existence of this Deed, any security created by it or the restrictions contained in it;

 

(i) not declare any dividends or pay any similar distribution to shareholders or redeem or purchase its own shares unless explicitly permitted under the Loan Agreement or with the prior written consent of the Lender;

 

(j) inform the Lender immediately on contracting to purchase any estate or interest in real property and provide to the Lender such information in relation to the same as the Lender may from time to time require;

 

(k) keep all its buildings and erections and all the plant, machinery, equipment, accessories, fixtures, fittings, vehicles and other effects and every part of them in good and substantial repair and in good working order and condition, and not to pull down or remove any of the same without the prior written consent of the Lender;

 

(l) not make any application under the Buildings Ordinance (Cap. 123 of the Laws of Hong Kong) to carry out any development of any of the immovable property for the time being owned by the Chargor;

 

(m) not call up or receive in advance of calls any of the uncalled capital for the time being of the Chargor;

 

(n) not continue its existence in a jurisdiction outside of the Cayman Islands or attempt or resolve to do so; and

 

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(o) generally not to do or cause or permit to be done anything which may in any way jeopardise or otherwise prejudice the value of the Charged Assets as a whole or the Security and not (without the prior written consent of the Lender) incur any expenditure or liabilities of an exceptional or unusual nature.

 

4.2. Negative pledge and Disposals

 

The Chargor shall not do or agree to do any of the following without the prior written consent of the Lender, except as expressly permitted under the Loan Documents:

 

(a) create or permit to subsist any Encumbrance on any Charged Asset other than Permitted Liens;

 

(b) sell, transfer, lease, lend or otherwise dispose of (whether by a single transaction or a number of transactions and whether related or not) the whole or any part of its interest in any Charged Asset (other than the Charged Assets subject to the floating charge under Clause 2.2(b)); or

 

(c) take or permit the taking of any action which may result in the rights attaching to any Charged Asset being altered.

 

4.3. Subsequent Encumbrances

 

If the Lender receives notice (actual or otherwise) of any subsequent Encumbrance, assignment or other disposition affecting the Charged Assets or any interest in the Charged Assets or the proceeds of sale thereof, the Lender shall be deemed to have opened a new account when such notice was received and as from that time all payments in respect of or on account of the Secured Obligations shall be deemed to have been credited to the new account and shall not, as between the Chargor and the Lender, operate to reduce the amount of the Secured Obligations outstanding when such notice was received.

 

4.4. Lien

 

The Lender shall have and shall be authorised to exercise a lien over all property of the Chargor (excluding any Excluded Property) coming into the possession or control of the Lender, for custody or any other reason and whether or not in the ordinary course of banking business, with power for the Lender to sell such property to satisfy the Secured Obligations if an Event of Default has occurred and is continuing.

 

4.5. Voting Rights and Dividends

 

(a) Until an Event of Default occurs, the Chargor shall be entitled to:

 

(i) receive and retain all dividends, distributions and other monies paid on or derived from the Shares; and

 

(ii) exercise all voting and other rights and powers attaching to the Shares, provided that it must not do so in a manner which has the effect of changing the terms of the Shares (or any class of them) or of any related rights or is prejudicial to the interests of the Lender.

 

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(b) At any time following the occurrence of an Event of Default, the Lender may effectuate the transfer for all or any Shares on behalf of the Chargor in favour of itself or such other person as it may select and all dividends, interest payments, distributions of an income nature or other monies which may be paid on or in respect of the Shares, if received by the Chargor or its nominee(s), shall be paid over to (and pending such payment shall be held on trust for) the Lender and may be applied, at the discretion of the Lender, in or towards discharging the Secured Obligations.

 

5. Further Assurances

 

5.1. Further action

 

The Chargor shall, at its own expense, promptly on request do all acts and execute all documents as the Lender or a Receiver may reasonably specify (and in such form as the Lender or a Receiver may reasonably require) for:

 

(a) creating, perfecting or protecting the Security intended to be created by this Deed or any other Loan Document;

 

(b) facilitating the realisation of any Charged Asset;

 

(c) facilitating the exercise of any rights, powers and remedies exercisable by the Lender, or any Receiver or any delegate in respect of any Charged Asset or provided by or pursuant to the Loan Documents or by law; or

 

(d) creating and perfecting Security in favour of the Lender over any Charged Asset located in any jurisdiction outside Hong Kong equivalent or similar to the Security intended to be created by or pursuant to this Deed or any other Loan Document.

 

This includes:

 

i. the re-execution of this Deed or such Loan Document;

 

ii. the execution of any legal mortgage, charge, transfer, conveyance, assignment, assignation or assurance of any property, whether to the Lender or to its nominee; and

 

iii. the giving of any notice, order or direction and the making of any filing or registration,

 

which, in any such case, the Lender may think expedient.

 

5.2. Loan Documents

 

The Chargor shall take all such action as is available to it (including making all filings and registrations) as may be necessary for the purpose of the creation, perfection, protection or maintenance of any Security conferred or intended to be conferred on the Lender by or pursuant to the Loan Documents.

 

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6. Power to remedy

 

6.1. Power to remedy

 

If at any time the Chargor does not comply with any of its obligations under this Deed, the Lender (without prejudice to any other rights arising as a consequence of such non-compliance) shall be entitled (but not bound) to rectify that default. The Chargor irrevocably authorises the Lender and its employees and agents by way of security to do all things which are necessary or desirable to rectify that default.

 

6.2. Mortgagee in possession

 

The exercise of the powers of the Lender under this Clause 6 shall not render it liable as a mortgagee in possession.

 

6.3. Monies expended

 

The Chargor shall pay to the Lender on demand any monies which are expended by the Lender in exercising its powers under this Clause 6 together with interest at the Default Rate from the date on which those monies were expended by the Lender (both before and after judgment).

 

7. Representations and Warranties

 

7.1. Representations and Warranties

 

The Chargor represents and warrants to the Lender in addition to any warranties implicit under any applicable law that:

 

(a) it is duly incorporated and validly existing under its place of incorporation as a limited liability company with power to carry on its business as it is now being conducted and to own its assets and is in good standing;

 

(b) it has the power and authority to enter into and perform this Deed and no limitation on its powers will be exceeded by doing so;

 

(c) this Deed constitutes its legal, valid and binding obligations, enforceable in accordance with its terms (except as enforcement may be limited by equitable principles and by bankruptcy, insolvency, reorganization, moratorium or similar Legal Requirements relating to creditors’ rights generally);

 

(d) neither the execution of this Deed nor the creation of any of the charges contained in this Deed contravenes, or is inconsistent or in conflict with, any provision of its constitutional documents or any applicable enactment, law, decree, order, regulation, authorisation, franchise, consent, permit, security, instrument, agreement or document binding upon or affecting the Chargor or any of its undertaking, property, assets or rights;

 

(e) this Deed creates those Encumbrances it purports to create and is not liable to be avoided or otherwise set aside on the liquidation of the Chargor in whole or in part;

 

Debenture 10  

 

 

(f) the Chargor is now and will during the subsistence of this Deed be the sole legal and beneficial owner of the Charged Assets and has good title to (and has full right and authority to charge and assign under this Deed) the Charged Assets and the Charged Assets are free from any Encumbrance or other rights or interests in favour of third parties (other than the Security and Permitted Liens);

 

(g) as at the date of this Deed, the contents of Schedule 1 hereto, and the other information and reports furnished by the Chargor to the Lender in connection with the negotiation and preparation of this Deed and/or in connection with the advance or continuance of any facilities are true and accurate in all material respects, and not misleading and do not omit material facts and all reasonable enquiries have been made to verify the facts and statements contained in them; and

 

(h) no litigation, arbitration or administrative proceedings are current or, to its knowledge, pending or threatened, which might, if adversely determined, have a material adverse effect on the business or financial condition of the Chargor and its Subsidiaries (or any of them) or the ability of the Chargor to perform or discharge any of the Secured Obligations.

 

7.2. Times when Representations and Warranties are made

 

The representations and warranties set out in this Clause 7 are:

 

(a) made on the date of this Deed; and

 

(b) except for Clause 7.1(g), deemed to be repeated by the Chargor every day with reference to the facts and circumstances then existing until this Deed is discharged.

 

7.3. Acknowledgement of Reliance

 

The Chargor acknowledges that the Lender has entered into this Deed in reliance upon the representations and warranties set out in Clause 7.1.

 

8. Enforcement of Security

 

8.1. When Security becomes enforceable

 

The Security (and any powers implied by statute) shall become immediately enforceable upon the occurrence of an Event of Default and shall remain so for so long as such Event of Default is continuing.

 

8.2. Statutory powers

 

The power of sale and other powers conferred to the Lender pursuant to the CPO (as amended or extended by this Deed) shall be immediately exercisable upon and at any time after the occurrence of any Event of Default and for so long as such Event of Default is continuing.

 

8.3. Enforcement

 

After the Security has become enforceable, the Lender may in its absolute discretion enforce all or any part of the Charged Assets in such manner as it sees fit.

 

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8.4. Powers on Enforcement

 

At the same time as or at any time after this Deed has become enforceable, the Lender may, without prejudice to any other rights available to the Lender in respect of the Secured Obligations or to any other security held for or in respect of the Secured Obligations:

 

(a) dispose of the Charged Assets or any part thereof in such manner and for such consideration (whether payable or deliverable immediately or by instalments) as the Lender considers appropriate; and/or

 

(b) effect the transfer of any and all of the Charged Assets into its name or the name(s) of its nominee(s) and/or without liability on the part of the Lender in the event of loss, act in all respects as the legal or beneficial owner of the Charged Assets and assume the management and control of any subsidiary companies; and/or

 

(c) apply all payments, dividends, interest payments, distributions or other monies accruing on the Charged Assets in or towards satisfaction of the Secured Obligations; and/or

 

(d) dispose of all or any of the Lender’s other rights under this Deed for such consideration (whether payable or deliverable immediately or by instalments) and in such manner as the Lender considers appropriate.

 

8.5. Statutory Restrictions

 

No restrictions imposed by any applicable law on any immediate or other power of sale, application of proceeds or on any other right or on the consolidation of mortgages or other Encumbrance shall apply to this Deed, the Lender or any Receiver or to any Encumbrance given to the Lender pursuant to this Deed.

 

8.6. Valid Receipt

 

Upon any such sale or other disposition and upon any other dealing or transaction under the provisions of this Deed, the receipt of the Lender or any Receiver for the purchase money of the property or asset sold or for any other monies paid to or other consideration received by the Lender or any Receiver shall effectually discharge the purchaser or person paying or giving the same therefrom and from being concerned to see to the application or being answerable for the loss, non-application or mis-application thereof.

 

8.7. Protection of Third Party

 

No person (including a purchaser) dealing with the Lender, any Receiver, their respective delegate or sub-delegate or any of their respective agents will be concerned to enquire:

 

(a) whether the Secured Obligations have become payable;

 

(b) whether any power which the Lender or the Receiver is purporting to exercise has become exercisable;

 

(c) whether any money remains due under any Loan Document; or

 

(d) how any money paid to the Lender or to the Receiver is to be applied.

 

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8.8. Exercise of Rights not Foreclosure

 

If the Lender exercises the rights conferred on it by Clause 8.4, the same shall not be treated as an absolute appropriation of or foreclosure on the Charged Assets to the exclusion of the Chargor and in extinguishment of its interests therein, unless the Lender otherwise notifies the Chargor (whether before or after the relevant appropriation or foreclosure has been effected), in which latter event any such appropriation or foreclosure shall be treated as a sale of the Charged Assets at a fair market value and the Secured Obligations shall be reduced by an equivalent amount.

 

8.9. Lender may purchase Charged Assets

 

In the event of any disposal pursuant to Clause 8.4, the Lender may itself purchase the whole or any part of the Charged Assets free from any rights of redemption on the part of the Chargor which are hereby waived and released.

 

8.10. No Claims against the Lender

 

(a) The Chargor shall not have any right or claim against the Lender and the Lender shall not have any liability of any nature whatsoever to the Chargor or any other person in respect of any loss arising out of any disposal of the Secured Obligations or the disposal or exercise of any other rights under this Deed or any part thereof, however such loss may have been caused, and whether or not a better price could or might have been obtained on such disposal, by either deferring or advancing the date of such disposal or otherwise howsoever, except for any loss caused by the gross negligence or wilful misconduct of the Lender.

 

(b) Neither the Lender nor any Receiver shall be liable to account as a mortgagee in possession in respect of all or any part of the Charged Assets or be liable for any loss upon realisation or for any neglect, default or omission in connection with the Charged Assets to which a mortgagee or a mortgagee in possession might otherwise be liable.

 

9. Receivership

 

9.1. Appointment of Receiver

 

On or at any time after the occurrence of an Event of Default or, if the Chargor so requests the Lender in writing, the Lender may, without further notice, legal process or any other action with respect to the Chargor appoint any one or more persons to be a Receiver under this Deed of all or any part of the Charged Assets and may from time to time fix his remuneration (which shall be of such amount as may be agreed from time to time between the Lender and the Receiver) and may remove any Receiver so appointed and/or appoint another in his place or in place of any Receiver whose appointment may for any reason have terminated.

 

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9.2. Receiver Agent of the Chargor

 

Each Receiver shall be the agent of the Chargor, and the Chargor shall be solely responsible for his acts or defaults and for his remuneration.

 

9.3. Rights of the Receiver

 

Each Receiver shall have all the rights conferred on any mortgagee and/or receiver under the CPO as well as the following rights:

 

(a) to take possession of, collect and get in the Charged Assets, exercise all voting or other powers or rights available to a registered and/or beneficial (as appropriate) owner of the Charged Assets in such manner as such Receiver may think fit and to take, defend or abandon any proceedings in the name of the Chargor or otherwise as may seem expedient;

 

(b) to carry on or authorise or concur in carrying on the business or any part of the business of the Chargor and to manage, conduct, reconstruct, amalgamate or diversify the business of the Chargor or any part of it (including power to acquire, develop or improve properties or other assets) without being responsible for loss or damage;

 

(c) to raise or borrow money from or incur any other liability to the Lender or others on such terms with or without security as such Receiver may think fit and so that any such security may be or include a charge on the Charged Assets ranking in priority to this security or otherwise;

 

(d) to sell by public auction or private contract, let, surrender or accept surrenders, grant leases, options, rights of pre-emption, tenancies or licences or otherwise dispose of or deal with the Charged Assets in such manner, for such consideration and generally on such terms and conditions as such Receiver may think fit, with full power to convey or otherwise transfer such Charged Assets in the name of the Chargor or other estate owner. Any such consideration may be cash, debentures or other obligations, shares, stock or other consideration and may be payable immediately or by instalments spread over such period or periods as he shall think fit and so that any consideration received or receivable shall immediately be and become charged with the payment and discharge of the Secured Obligations. Plant, machinery, equipment, accessories and other fixtures and fittings may be severed and sold separately from any premises of the Chargor containing them and such Receiver may apportion any rent and the performance of any obligations affecting the premises sold without the consent of the Chargor;

 

(e) to promote the formation of companies with a view to such companies purchasing the Charged Assets or otherwise;

 

(f) to make any arrangement, settlement or compromise or enter into or complete, cancel, abandon or disregard any contracts which such Receiver shall think expedient in the interests of the Lender;

 

(g) to make and effect all repairs, renewals and improvements and to maintain, renew, take out or increase insurances in relation to the Charged Assets;

 

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(h) to appoint and remunerate any person for any of the purposes of this Deed and/or to guard or protect the Charged Assets for such periods as such Receiver may determine and to dismiss the same or any other person appointed by the Chargor;

 

(i) to make calls, conditionally or unconditionally on the members of the Chargor, in respect of uncalled capital, with the same powers of enforcing payment of any calls so made as are, by the constitutional documents of the Chargor, conferred upon its directors and to the exclusion of the directors’ powers in that regard;

 

(j) to do anything which such Receiver shall think necessary or expedient to preserve, protect, maintain or manage the Charged Assets; and

 

(k) to sign any document, execute any deed (with authorisation to use the common seal of the Chargor for such purposes) and generally, on behalf and at the cost of the Chargor (notwithstanding liquidation of the Chargor or any similar event), to do or omit to do anything incidental to the matters referred to in this Clause 8.3 or to the realisation of this security or which the Chargor could do or omit to do in relation to the Charged Assets and to use the name of the Chargor for all the above purposes.

 

9.4. More Than One Receiver

 

If more than one person is appointed as a Receiver under this Deed, such persons shall throughout the duration of their office (unless the documents appointing them state otherwise) be entitled to exercise all or any of the powers conferred on a Receiver under this Deed individually.

 

10. Sale of Charged Assets

 

10.1. Statutory Restrictions

 

No restrictions imposed by any applicable law on any immediate or other power of sale, application of proceeds or on any other right or on the consolidation of mortgages or other Encumbrances shall apply to this Deed, the Lender or any Receiver or to any Encumbrance given to the Lender pursuant to this Deed.

 

10.2. Indemnity

 

Any sale or other disposition by or on behalf of the Lender or any of its nominees or any Receiver under the provisions of this Deed may be made upon such terms for the safety and protection of the purchaser or upon such terms as to indemnity as the Lender or such Receiver may think fit.

 

10.3. Valid Receipt

 

Upon any such sale or other disposition referred to in Clause 10.2 and upon any other dealing or transaction under the provisions of this Deed, the receipt of the Lender or any Receiver for the purchase money of the property or asset sold or for any other moneys paid to or other consideration received by the Lender or any Receiver shall effectually discharge the purchaser or person paying or giving the same therefrom and from being concerned to see to the application or being answerable for the loss, non-application or mis-application thereof.

 

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10.4. Enquiries by Purchaser

 

No purchaser or other person shall be bound or concerned to see or enquire whether the right of the Lender or any of its nominees or agents or any Receiver to exercise any of the rights conferred by this Deed has arisen or not, or be concerned with notice to the contrary, or with the propriety of the exercise or purported exercise of such rights.

 

10.5. Limitation of Liability

 

Neither the Lender nor any Receiver shall be liable for any losses which may arise:

 

(a) in the exercise or non-exercise of any of their rights;

 

(b) by reason of any entry into possession of the Charged Assets to account as mortgagee in possession;

 

(c) on realisation of the Charged Assets; or

 

(d) as a result of any default or omission for which a mortgagee in possession may be liable,

 

except for any loss caused by the gross negligence or wilful misconduct of the Lender or Receiver.

 

11. Power of Attorney

 

11.1. Appointment

 

For the purpose of securing the interest of the Lender in the Charged Assets and the performance of its obligations to the Lender, the Chargor, irrevocably, by way of security, appoints the Lender and separately each Receiver and any of their delegates or sub-delegates severally to be its attorney (with full power to appoint substitutes and to sub-delegate including power to authorise the person so appointed to make further appointments, in both cases, with regard to the Charged Assets) on behalf of and in the name of the Chargor or otherwise, to execute, seal and deliver and otherwise perfect and do all such deeds, agreements, acts and things which:

 

(l) (before the Security becomes enforceable) the Chargor is obliged to do under this Deed, but has not done;

 

(m) (after the Security becomes enforceable) the Chargor is or may become obliged to do under this Deed; and/or

 

(n) (after the Security becomes enforceable) otherwise may be required for or deemed proper on or in connection with the full exercise of all or any of the rights conferred by this Deed on the Lender or on any Receiver and its rights to give full force and effect to the terms and conditions contained in this Deed.

 

This power of attorney is coupled with an interest and is irrevocable and shall remain irrevocable as long as this Deed remains outstanding.

 

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11.2. Ratification

 

The Chargor ratifies and confirms and agrees to ratify and confirm any deed, agreement, act or thing which any attorney appointed under this Deed may lawfully execute, seal, deliver or do.

 

12. Expenses and Indemnity

 

12.1. Expenses

 

The Chargor will pay the Lender, on demand, all the Lender’s and Receiver’s expenses (including legal and out-of-pocket expenses) incurred:

 

(a) in connection with the negotiation, preparation and execution of this Deed and any amendment to, or waiver or consent or release of or under, this Deed; and/or

 

(b) in contemplation of, or in connection with, the preservation, enforcement or exercise of any rights under this Deed.

 

12.2. Indemnity

 

The Chargor will indemnify the Lender and the Receiver, on demand, against all losses, actions, claims, expenses, demands and liabilities whether in contract, tort or otherwise now or after the date of this Deed incurred by the Lender or the Receiver (except for any losses, actions, claims, expenses, demands and liabilities caused by the gross negligence or wilful misconduct of the Lender or the Receiver):

 

(a) for anything done or omitted in the exercise or purported exercise or non-exercise of the rights contained in this Deed;

 

(b) as a result of any breach by the Chargor of any of its covenants or other obligations to the Lender or any other person;

 

(c) in consequence of any payment in respect of the Secured Obligations (whether made by the Chargor or any other person) being impeached or declared void for any reason whatsoever; and/or

 

(d) as a result of any taxes, duties, rates or outgoings assessed upon or payable in respect of the Charged Assets or in connection with the entry into preservation, enforcement or exercise of any rights under this Deed.

 

12.3. Documentary Duties and Taxes

 

The Chargor will pay all documentary stamp, registration and other duties or similar taxes, including any payable by the Lender, which are imposed on or are payable in connection with this Deed.

 

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12.4. Default Interest

 

The amounts payable under this Clause 12 shall carry interest at the Default Rate after as well as before judgment from the date on which they were incurred by the Lender or any Receiver (as the case may be) and such amounts and interest shall form part of the Secured Obligations.

 

13. Application of Proceeds

 

13.1. Order of Application

 

All monies received or recovered by any Receiver and/or by the Lender from the Chargor pursuant to this Deed shall, subject to any claims ranking in priority to the Secured Obligations to the extent of such priority, be applied, in or towards discharging, in the following order of priority:

 

(a) the amount of all fees and remuneration of, and all other costs, charges, expenses and liabilities incurred by the Lender and/or each Receiver in connection with or as a result of the exercise of their respective rights, including the remuneration of each Receiver, or otherwise in relation to this Deed or any other agreement entered into between the Chargor and the Lender in such order as the Lender or any Receiver may from time to time determine;

 

(b) all other Secured Obligations in such order as the Lender may from time to time determine; and

 

(c) the Chargor and/or the claims of those entitled to any surplus.

 

13.2. Currency Conversion

 

The Lender and/or each Receiver may convert any monies received, recovered or realised under this Deed (including the proceeds of any previous conversion under this Clause 13.2) from their existing currency of denomination into such other currency of denomination as the Lender and/or any Receiver may think fit and any such conversion shall be effected at the Exchange Rate. If and to the extent that the Chargor fails to pay any amount due on demand, the Lender and/or each Receiver may in its absolute discretion without notice to the Chargor purchase at any time after the demand has been made so much of any currency as the Lender and/or any Receiver considers necessary or desirable to cover the Secured Obligations at the Exchange Rate and the Chargor agrees to indemnify the Lender and each Receiver against the full cost (including all costs, charges and expenses) paid.

 

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13.3. Currency Indemnity

 

If the currency of a sum due from the Chargor under this Deed (the “ contractual currency ”) or a sum due from the Chargor under any judgment or order relating to this Deed in the contractual currency is converted from the contractual currency into another currency for the purpose of:

 

(a) making or filing a claim or proof;

 

(b) obtaining a judgment or order; or

 

(c) enforcing a judgment or order,

 

the Chargor will indemnify the Lender against any loss or liability incurred as a result of any difference between (i) the rate of exchange used to convert the sum in question from the contractual currency into the other currency and (ii) the rate or rates of exchange at which the Lender, in the ordinary course of business, can purchase the contractual currency with the other currency on receipt of a sum paid to it in full or part satisfaction of that claim, proof, judgment or order.

 

Any amount due from the Chargor under this Clause 13.3 will be a separate and independent debt and will not be affected by judgment being obtained for any other sum due under or in respect of this Deed. The term “ rate of exchange ” in this Clause 13.3 includes any premium and exchange costs payable in connection with the purchase of the contractual currency with the other currency.

 

14. Protection of Lender

 

14.1. Suspense Account

 

Any moneys paid to or received by the Lender in respect of the Secured Obligations or under this Deed may be applied in or towards satisfaction of the Secured Obligations or placed to the credit of such account as the Lender may determine with a view to preserving its rights to prove for the whole of the Secured Obligations.

 

14.2. No Withholding

 

Payments by the Chargor shall be made to the Lender as specified by the Lender without any set-off, counterclaim, withholding or condition of any kind except that, if the Chargor is compelled by law to make such withholding, the sum payable by the Chargor shall be increased so that the amount actually received by the Lender is the amount it would have received if there had been no withholding.

 

14.3. Claw Back

 

If the Lender considers that an amount paid by the Chargor or any other person is capable of being avoided or otherwise set aside (on the liquidation of the Chargor or otherwise) then that amount shall not be considered to have been paid for the purposes of this Deed. Furthermore, the Lender may in its absolute discretion concede or compromise any claim that any payment, security or other disposition is liable to be avoided, reduced or repaid.

 

14.4. Conditional Discharge

 

Any release, discharge or settlement under this Deed shall be conditional upon no payment or discharge in respect of the Secured Obligations by the Chargor or any other person being avoided, reduced or repaid for any reason and the Lender shall be entitled to enforce this Deed if such condition is not fulfilled as if such release, discharge or settlement had not occurred.

 

Debenture 19  

 

 

14.5. Set-Off

 

The Lender may at any time without notice:

 

(a) combine or consolidate all or any of the Chargor’s accounts with the Lender;

 

(b) apply any credit balance to which the Chargor is entitled on any account with the Lender or any other moneys owing to the Chargor in or towards satisfaction of the Secured Obligations; or

 

(c) in the absolute discretion of the Lender, refuse to permit the withdrawal or utilisation of any deposit or moneys for such period as the Lender may consider appropriate (notwithstanding the terms of the deposit or moneys and whether or not any Secured Obligation has become due).

 

For these purposes, the Lender is authorised to purchase, at the Exchange Rate, such other currencies as may be necessary to effect such application with the monies standing to the credit of such account.

 

15. Trusteeship

 

The Chargor declares that:

 

(a) as and when the security created by this Deed shall become enforceable, it will hold all the Charged Assets (subject to the Chargor’s right of redemption) upon trust to convey, assign, transfer or otherwise dispose of or deal with the same in such manner and to such person as the Lender shall direct; and

 

(b) it shall be lawful for the Lender to appoint new trustees of the Charged Assets from time to time in place of the Chargor or in place of any trustee appointed under this power.

 

16. Redemption of Prior Encumbrances

 

On or at any time after the Security has become enforceable, the Lender may:

 

(a) redeem any prior Encumbrance against the Charged Assets;

 

  (b) procure the transfer of that Encumbrance to itself; and/or

 

(c) settle and pass the accounts of the prior mortgagee, chargee or encumbrancer; any accounts so settled and passed shall be conclusive and binding on the Chargor;

 

and all principal moneys, interest, costs, charges and expenses of and incidental to any such redemption and/or transfer shall be paid by the Chargor to the Lender on demand.

 

Debenture 20  

 

 

17. Delegation

 

The Lender and any Receiver may:

 

(a) delegate by power of attorney or in any other manner to any person any right exercisable by them under this Deed on such terms (including power to sub-delegate) as the Lender or any Receiver (as the case may be) sees fit; and/or

 

(b) employ agents, managers, employees, advisers and others on such terms as the Lender or any Receiver (as the case may be) sees fit for the purposes of this Deed.

 

Neither the Lender nor any Receiver will in any way be liable or responsible to the Chargor for any loss or liability arising from any act, default, omission or misconduct on the part of any such delegate or sub-delegate.

 

18. No Waiver

 

No failure or delay by the Lender or any Receiver to exercise any right under this Deed or otherwise will operate as a waiver of that right or any other right, nor will any single or partial exercise of any such right preclude any other or further exercise of that right or the exercise of any other right.

 

19. Remedies Cumulative

 

The rights of the parties or any Receiver under this Deed are cumulative and do not exclude or restrict any other rights.

 

20. Assignment

 

20.1. Successors and Permitted Assigns

 

This Deed shall be binding upon and enure to the benefit of each party to this Deed and its successors in title and permitted assigns.

 

20.2. Assignment by the Chargor

 

The Chargor shall not be entitled to assign or transfer any of its rights, benefits or obligations under this Deed without the prior written consent of the Lender.

 

20.3. Assignment by the Lender

 

The Lender may assign all or any of its rights under this Deed to any person in accordance with the terms of Section 8.14 (Benefit of Agreement) of the Loan Agreement.

 

21. Notices

 

21.1. In Writing and Methods of Delivery

 

Any notice, demand or other communication under this Deed shall be sent in accordance with Section 8.5 (Notices) of the Loan Agreement.

 

Debenture 21  

 

 

21.1. Deemed Giving of Notice and Receipt

 

Any such notice, demand or other communication shall be deemed effective in such manner and at such time specified under Section 8.5 (Notices) of the Loan Agreement.

 

22. Severance

 

If any provision of this Deed is not or ceases to be legal, valid, binding and enforceable under the law of any jurisdiction, neither the legality, validity, binding effect or enforceability of the remaining provisions under that law nor the legality, validity, binding effect or enforceability of that provision under the law of any other jurisdiction shall be affected.

 

23. Counterparts

 

This Deed may be executed in any number of counterparts and by different parties on separate counterparts, each of which is an original but, together, they constitute one and the same agreement.

 

24. Amendments

 

No amendment to this Deed will be effective unless in writing and executed by all the Parties.

 

25. Governing Law and Jurisdiction

 

25.1. Governing Law

 

This Deed is governed by and will be construed in accordance with Hong Kong Law.

 

25.2. Hong Kong Jurisdiction

 

The parties submit to the non-exclusive jurisdiction of the Hong Kong courts and each party waives any objection to proceedings in Hong Kong on the grounds of venue or inconvenient forum.

 

25.3. Waiver of Sovereign Immunity

 

To the extent that the Chargor may, in any jurisdiction, be entitled to claim for itself or its assets immunity from suit, execution, attachment (whether in aid of execution, before judgement or otherwise) or other legal process and to the extent that in any such jurisdiction there may be attributed to itself or its assets such immunity (whether or not claimed), the Chargor irrevocably agrees not to claim and irrevocably waives such immunity to the full extent permitted by the laws of such jurisdiction.

 

25. Process Agent

 

The service of any process connected with proceedings in the Hong Kong courts and relating to this Deed will be deemed to have been validly served on the Chargor if it is received by the Borrower at its registered address or the address specified in Section 8.5 (Notices) of the Loan Agreement and service will be deemed to have been acknowledged by the Chargor if it is acknowledged by the Borrower.

 

Debenture 22  

 

 

SCHEDULE 1

 

Asset Information

 

(a) Offices / locations where movable assets are held

 

Borqs Hong Kong Limited

Office B, 21/F., Legend Tower, 7 Shing Yip Street

Kwun Tong, Kowloon, Hong Kong

 

Borqs Beijing Ltd.

Tower A, Building B23, Universal Business Park

No. 10 Jiuxianqiao Road, Chaoyang District

Beijing 100015, China

 

Borqs Software Solutions Private Limited

Prestige Al-Kareem, NO.3 Edward Road, Civil Station

Corporation Division NO.72

Bangalore, Karnataka, INDIA 560052

 

(b) Intellectual Property Rights

 

As listed on Schedules A, B, C and D attached to the

Borqs Cayman – Intellectual Property Security Agreement

 

(c) Shares

 

100% of all the shares of Borqs Hong Kong Limited

and

9,999 out of 10,000 shares of Borqs Software Solutions Private Limited

 

(d) Bank Accounts

 

Silicon Valley Bank

Account number 3300710352

 

Debenture 23  

 

 

SCHEDULE 2

 

Form of Notice

 

To: [ insert account bank ]

 

Date:

 

Dear Sirs,

 

NOTICE OF CHARGE

 

We hereby give you notice that we have charged to Partners For Growth V, L.P. (the “ Lender ”) all our rights, title and interest in our bank account[s] held with you with account number[s] [●] (including any renewal or redesignation thereof) (the “Accounts[s] ”) and all monies standing to the credit of the Account from time to time under a deed of debenture dated April __, 2018 (the “ Debenture ”).

 

We hereby irrevocably and unconditionally instruct you that, with effect from the service of a notice by or on behalf of the Lender on you notifying you that an event of default has occurred under the Debenture: (i) any then existing payment instructions affecting the Account[s] shall immediately and automatically be terminated and payments and communications in respect of the Account[s] should be made to the Lender and (ii) all rights, title and interest in the Account[s] shall vest in the Lender.

 

This letter is governed by the laws of Hong Kong.

 

Please acknowledge receipt of this notice by signing the acknowledgement enclosed and returning it to us with a copy to the Lender:

 

PARTNERS FOR GROWTH V, L.P.

1660 Tiburon Blvd., Suite D

Tiburon, CA 94920 USA

 

Yours faithfully,

 

__________________

For and on behalf of [●]

 

Form of Acknowledgement

 

To: [Chargor]

Copy to: PARTNERS FOR GROWTH V, L.P.

 

We acknowledge receipt of the Notice of Charge dated [●] 2016 and confirm that we will comply with the terms set out in the Notice of Charge. We further confirm that, following receipt of the notice of an event of default as set out in the Notice of Charge we will not act in relation to the Account[s] except as instructed by the Lender or any persons authorised by the Lender and we shall send all statements and other notices in relation to the Account[s] to the Lender.

 

__________________

For and on behalf of [ insert account bank ]

 

Debenture 24  

 

 

IN WITNESS of which this Deed has been duly executed by the Chargor as a deed and duly executed by the Lender.

 

EXECUTED and DELIVERED )
as a DEED by BORQS INTERNATIONAL HOLDING CORP )

 

Acting by: /s/ Pat Sek Yuen Chan   

 

Name:  Pat Sek Yuen Chan

Title: CEO

 

in the presence of :

 

/s/ Anthony K. Chan

 

Witness name:  Anthony K. Chan

Witness occupation:  CFO

 

EXECUTED and DELIVERED )
as a DEED by PARTNERS FOR GROWTH V, L.P. )

  

Acting by: /s/ Geoffrey Allan  

 

Name: Geoffrey Allan

Title: Manager, Partners for Growth V, LLC, its General Partner

 

Witnessed by: /s/ Amy Spencer  

 

Name: Amy Spencer

Title: Exhibition Director

 

 

 

Witness name:

Witness occupation:

 

 

Debenture 25

 

 

EXHIBIT 10.24

  

Date: 30 April 2018

 

 

 

 

 

BORQS International Holding Corp

as Chargor

 

 

 

 

 

 

Partners for Growth V, L.P.

as Lender

 

DEED OF CHARGE OF SHARES

 

 

 

( over all shares in the capital of

BORQS Hong Kong Limited)

 

Deed of Charge of Shares

 

 

 

THIS DEED (this “ Deed ”) is made as a deed this 30th day of April 2018,

 

BETWEEN:

 

(1) BORQS INTERNATIONAL HOLDING CORP , a company duly incorporated and validly existing under and by virtue of the Laws of The Cayman Islands, registered under company number 192127 and with registered office address at P.O. Box 309, Ugland House, Grand Cayman KY1-1104 (the “ Chargor ”); and

 

(2) PARTNERS FOR GROWTH V, L.P. , a Delaware limited partnership, with its principal place of business at 1660 Tiburon Blvd., Suite D, Tiburon, CA 94920 USA (the “ Lender ”).

 

IT IS AGREED as follows:

 

1. Definitions and Interpretation

 

1.1. Definitions

 

Unless otherwise defined herein, capitalised terms used in this Deed have the meaning given to such terms in the Loan Agreement (as defined below). In addition, in this Deed unless the context otherwise requires, the following expressions shall have the following meanings:

 

Charged Assets ” means:

 

(a) the Shares;

 

(b) any further shares in the Company issued to the Chargor after the date of this Deed;

 

(c) all stocks, shares, securities, rights, monies or other assets accruing, offered or issued at any time (whether by way of bonus, redemption, exchange, purchase, substitution, conversion, preference, option or otherwise) to or in respect of any of the Shares or the shares referred to in paragraph (b) above; and

 

(d) all dividends, interest and other income at any time deriving from the Shares or the shares referred to in paragraph (b) above or any asset referred to in paragraph (c) above;

 

Company ” means BORQS Hong Kong Limited, a company incorporated under the laws of Hong Kong with registration number 1151010 and its registered address at Office B, 21/F., Legend Tower, 7 Shing Yip Street, Kwun Tong, Kowloon;

 

CPO ” means the Conveyancing and Property Ordinance (Cap. 219 of the Laws of Hong Kong);

 

Encumbrance ” means any mortgage, charge, pledge, lien (otherwise than arising by statute or operation of law) or other encumbrance, priority or security interest, deferred purchase, title retention, leasing, sale-and-repurchase, sale-and-leaseback arrangement whatsoever over or in any property, assets or rights or interest of whatsoever nature or any agreement for any of the same;

 

Exchange Rate ” means the rate for converting one currency into another currency which the Lender determines to be prevailing in the relevant foreign exchange market at the relevant time, such determination to be conclusive and binding (except in the case of manifest error);

 

Guarantee ” means the Hong Kong law deed of guarantee and indemnity dated on or about the date hereof between the Chargor and the Lender;

 

Deed of Charge of Shares

1  

 

 

HK$ ” means Hong Kong Dollars, the lawful currency for the time being of Hong Kong;

 

Hong Kong ” means the Hong Kong Special Administrative Region of the People’s Republic of China;

 

Loan Agreement ” means the California law loan and security agreement dated on or about the date hereof between the Lender as lender and the Company as the borrower;

 

Party ” means a party to this Deed;

 

Receiver ” means each of the receivers and/or receivers and managers appointed under this Deed, any of the other Loan Documents or under the powers conferred on the Lender by any law or regulation whether appointed simultaneously or to act jointly and/or severally or to act in place of any one or more receivers and/or receivers and managers previously appointed under this Deed or otherwise, and includes all delegates, attorneys or agents of any such Receiver;

 

Related Rights ” means:

 

(a) any dividend, distribution or interest paid or payable in relation to the Shares; and

 

(b) any right, money or property (including any shares, stocks, debentures, bonds or other securities or investments) accruing or offered at any time in relation to the Shares by way of redemption, substitution, exchange, bonus or preference, under option rights or otherwise;

 

Secured Obligations ” means all present and future obligations and liabilities of the Chargor, the Company and any other person to the Lender under the Loan Agreement, the Guarantee, this Deed and the other Loan Documents, whether actual or contingent and whether owed or incurred alone or jointly and/or severally with another and as principal or as surety or in any other capacity or of any nature;

 

Security ” means the Encumbrances created by or pursuant to this Deed;

 

Security Period ” means the period beginning on the date of this Deed and ending on the date on which all the Secured Obligations have been unconditionally and irrevocably paid and discharged in full and the Lender has no further commitment under or pursuant to the Loan Documents; and

 

Shares ” means 1 ordinary share in the share capital of the Company of HK$ 1 which represent the entire issued share capital of the Company at the date of this Deed.

 

1.2. Construction

 

Any reference in this Deed to:

 

(a) the Lender or the Chargor or any other person includes its respective successors in title, permitted assigns and/or permitted transferees;

 

(b) a Clause is a reference to a clause of this Deed;

 

(c) this Deed , the Loan Agreement , the Guarantee or any other agreement or document is a reference to this Deed, the Loan Agreement, the Guarantee or such other agreement or document as the same may have been, or may from time to time be, amended, varied, supplemented or novated;

 

Deed of Charge of Shares

2  

 

 

(d) the Secured Obligations includes a reference to any part of them;

 

(e) the singular shall include the plural and vice versa;

 

(f) a person includes any person, firm, company, corporation, government, state or agency of a state or any association, trust or partnership (whether or not having a separate legal personality) and any other entity or two or more of the foregoing; and

 

(g) any statute or statutory provision or ordinance shall include any statute or statutory provision or ordinance which amends, extends, consolidates or replaces the same (whether before or after the date of this Deed) or which has been amended, extended, consolidated or replaced by the same and shall include any order, regulation, instrument or other subordinate legislation made under the relevant statute or statutory provision or ordinance.

 

Apart from a permitted assignee of the Lender pursuant to Clause 21.3, a person who is not a party to this Deed has no rights under the Contracts (Rights of Third Parties) Ordinance (Cap. 623 of the Laws of Hong Kong) to enforce or enjoy the benefit of any term of this Deed.

 

2. Grant of Security

 

2.1. Covenant to Pay

 

The Chargor covenants to pay and discharge in full the Secured Obligations on demand made by the Lender at any time and to provide cash cover on demand in respect of any contingent or future obligations.

 

2.2. Charge

 

As continuing security for the payment and discharge of the Secured Obligations, the Chargor as beneficial owner agrees to charge and hereby charges to the Lender by way of fixed charge, all of its present and future rights, title, benefit and interest in and to the Charged Assets.

 

2.3. Documents Supporting Security

 

In furtherance of the Security created under this Deed, the Chargor shall at its own cost, deliver or procure that there shall be delivered to the Lender the following:

 

(a) on the date of the execution of this Deed, valid and duly issued share certificate(s) in the name of the Chargor in respect of the Shares and any other Charged Assets then held by the Chargor to the intent that the same shall be, following an Event of Default, immediately registered in the name of the Lender (or its nominee);

 

(b) on the date of the execution of this Deed, undated duly executed instrument(s) of transfer and sold note(s) in respect of the Shares and such other Charged Assets, all substantially in the form set out in Schedule 1 hereto;

 

(c) on the date of the execution of this Deed duly signed but undated letters of resignation of all the directors of the Company and an undated written resolution of all the directors of the Company to accept the directors’ resignations, appoint person(s) as the Lender may nominate as new director(s) and approve the transfer of the Charged Assets, together with an authority to complete the same following an Event of Default, all in the forms set out in Schedule 1 hereto; and

 

Deed of Charge of Shares

3  

 

 

(d) all other documents requested by the Lender in order to register such Charged Assets in its name or in the name of its nominee(s) or to effect a valid transfer of any Charged Assets.

 

2.4. Registration

 

The Chargor shall immediately after the execution of this Deed, enter particulars of the security created pursuant to this Deed in its register of mortgages and charges (“ Register of Mortgages and Charges ”) maintained at its registered office in the Cayman Islands pursuant to section 54 of the Companies Law (2013 Revision) of the Cayman Islands, and promptly and in any event within three (3) Business Days from and including the date of execution of this Deed, deliver or procure to be delivered to the Lender a certified copy of the updated Register of Mortgages and Charges recording the particulars of the security created pursuant to this Deed.

 

2.5. Continuing Obligations

 

The Chargor covenants to and agrees with the Lender that it will at its own cost:

 

(a) deposit promptly with the Lender valid and duly issued share certificate(s) in respect of any Charged Assets and all other securities in the share capital of the Company which become subject to this Deed after the date of this Deed to the intent that the same shall be, following an Event of Default, immediately registered in the name of the Lender or its nominee, together with an undated duly executed instrument of transfer and sold note in respect thereof, all substantially in the form set out in Schedule 1 hereto and such other documents as the Lender may reasonably require for perfecting its title to the Charged Assets;

 

(b) procure the prompt delivery of those documents referred to in Clause 2.3(c) in respect of any directors of the Company appointed after the date of this Deed; and

 

(c) on demand made by the Lender following an Event of Default, procure that the Shares and such other Charged Assets as the Lender may stipulate in writing are transferred into the name of the Lender and/or its nominee(s) who shall hold the Shares upon and subject to the terms of this Deed and such transfers are registered in the books of the Company and that new share certificates in respect thereof in the name of the Lender and/or its nominee(s) are issued and delivered to the Lender.

 

3. Continuing Security

 

(a) The Security is continuing and shall extend to the ultimate balance of all the Secured Obligations regardless of any intermediate payment or discharge in whole or in part. This Deed shall remain in full force and effect as a continuing security for the duration of the Security Period.

 

(b) This Deed is in addition to, without prejudice to, and shall not merge with, any other right, remedy, guarantee or Encumbrance which the Lender may at any time hold for any Secured Obligation.

 

(c) This Deed may be enforced against the Chargor without the Lender first having to take recourse to any other right, remedy, guarantee or Encumbrance held by or available to it.

 

Deed of Charge of Shares

4  

 

 

4. Covenants

 

4.1. Negative pledge and Disposals

 

The Chargor shall not do or agree to do any of the following without the prior written consent of the Lender:

 

(a) create or permit to subsist any Encumbrance on any Charged Asset other than Permitted Liens;

 

(b) sell, transfer, lease, lend or otherwise dispose of (whether by a single transaction or a number of transactions and whether related or not) the whole or any part of its interest in any Charged Asset;

 

(c) take or permit the taking of any action which may result in (i) the rights attaching to any Charged Asset being altered or (ii) further securities in the Company being issued, provided that such restriction does not apply to:

 

(A) any alteration which is necessary for effecting any action or step permitted under the Loan Documents and which would not result in any Material Adverse Change or otherwise prejudice any right or remedy of the Lender under the Loan Documents, provided that the Chargor shall notify the Lender in writing promptly upon any such alteration; and

 

(B) any further issuance of securities in the Company to the Chargor permitted under the Loan Documents and provided that the Chargor shall promptly deliver to the Lender all documents referred to in Clause 2.5(a) above in relation to the newly issued shares; or

 

(d) continue its existence in a jurisdiction outside of the Cayman Islands or attempt or resolve to do so.

 

4.2. Notification

 

The Chargor shall notify the Lender within 14 days of receipt of every notice received by it in relation to the Charged Assets; and (if required by the Lender) shall immediately provide it with a copy of that notice and either (A) comply with such notice or (B) make such objections to it as the Lender may reasonably require or approve.

 

4.3. Calls

 

The Chargor shall punctually pay, or procure the punctual payment of all calls, instalments and other payments that may become due in respect of the Charged Assets and agrees that if the Chargor fails to do so, the Lender may, in its absolute discretion, make such payments on its behalf. Any sums so paid by the Lender shall be repayable by the Chargor to the Lender on demand together with interest at the Default Rate (both before and after judgment) from the date on which those payments were made by the Lender.

 

4.4. Compliance with laws

 

The Chargor shall comply in all material respects with all obligations in relation to the Charged Assets under any present or future law, regulation, order or instrument or under bye-laws, regulations or requirements of any competent authority or other approvals, licences and consents.

 

Deed of Charge of Shares

5  

 

 

4.5. Not prejudice

 

The Chargor shall not do, cause or permit to be done anything which may in any way depreciate, jeopardise or otherwise prejudice the value or marketability of any Charged Asset (or make any omission which has such an effect).

 

5. Further Assurances

 

5.1. Further action

 

The Chargor shall, at its own expense, promptly on request do all acts and execute all documents as the Lender or a Receiver may reasonably specify (and in such form as the Lender or a Receiver may reasonably require) for:

 

(b) creating, perfecting or protecting the Security intended to be created by this Deed or any other Loan Document;

 

(c) facilitating the realisation of any Charged Asset;

 

(d) facilitating the exercise of any rights, powers and remedies exercisable by the Lender, or any Receiver or any delegate in respect of any Charged Asset or provided by or pursuant to the Loan Documents or by law; or

 

(e) creating and perfecting Security in favour of the Lender over any Charged Asset located in any jurisdiction outside Hong Kong equivalent or similar to the Security intended to be created by or pursuant to this Deed or any other Loan Document.

 

This includes:

 

(A) the re-execution of this Deed or such Loan Document;

 

(B) the execution of any legal mortgage, charge, transfer, conveyance, assignment, assignation or assurance of any property, whether to the Lender or to its nominee; and

 

(C) the giving of any notice, order or direction and the making of any filing or registration,

 

which, in any such case, the Lender may think expedient.

 

5.2. Loan Documents

 

The Chargor shall take all such action as is available to it (including making all filings and registrations) as may be necessary for the purpose of the creation, perfection, protection or maintenance of any Security conferred or intended to be conferred on the Lender by or pursuant to the Loan Documents.

 

6. Rights and obligations in respect of Shares

 

6.1. Before Event of Default

 

Until an Event of Default occurs, the Chargor shall be entitled to:

 

(a) receive and retain all dividends, distributions and other monies paid on or derived from the Shares; and

 

Deed of Charge of Shares

6  

 

 

(b) exercise all voting and other rights and powers attaching to the Shares, provided that it must not do so in a manner which is prejudicial to the interests of the Lender.

 

6.2. Following an Event of Default

 

At any time following the occurrence of an Event of Default and for so long as such Event of Default is continuing, the Lender may complete the instrument(s) of transfer for all or any Shares on behalf of the Chargor in favour of itself or such other person as it may select and all dividends, interest payments, distributions of an income nature or other monies which may be paid on or in respect of the Shares, if received by the Chargor or its nominee(s), shall be paid over to (and pending such payment shall be held on trust for) the Lender and may be applied, at the discretion of the Lender, in or towards discharging the Secured Obligations.

 

6.3. Exoneration of the Lender

 

At any time when any Share is registered in the name of the Lender or its nominee, the Lender shall be under no duty to:

 

(a) ensure that any dividends, distributions or other monies payable in respect of such Share are duly and promptly paid or received by it or its nominee; or

 

(b) verify that the correct amounts are paid or received; or

 

(c) take any action in connection with the taking up of any (or any offer of any) Related Rights in respect of or in substitution for such Share.

 

7. Power to remedy

 

7.1. Power to remedy

 

If at any time the Chargor does not comply with any of its obligations under this Deed, the Lender (without prejudice to any other rights arising as a consequence of such non-compliance) shall be entitled (but not bound) to rectify that default. The Chargor irrevocably authorises the Lender and its employees and agents by way of security to do all things which are necessary or desirable to rectify that default.

 

7.2. Mortgagee in possession

 

The exercise of the powers of the Lender under this Clause 7 shall not render it liable as a mortgagee in possession.

 

7.3. Monies expended

 

The Chargor shall pay to the Lender on demand any monies which are expended by the Lender in exercising its powers under this Clause 7 together with interest at the Default Rate from the date on which those monies were expended by the Lender (both before and after judgment).

 

8. Representations and Warranties

 

8.1. Representations and Warranties

 

The Chargor represents and warrants to the Lender in addition to any warranties implicit under any applicable law that:

 

(a) it is duly incorporated and validly existing under its place of incorporation as a limited liability company with power to carry on its business as it is now being conducted and to own its assets and is in good standing;

 

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(b) it has the power and authority to enter into and perform this Deed and no limitation on its powers will be exceeded by doing so;

 

(c) this Deed constitutes its legal, valid and binding obligations, enforceable in accordance with its terms (except as enforcement may be limited by equitable principles and by bankruptcy, insolvency, reorganization, moratorium or similar Legal Requirements relating to creditors’ rights generally);

 

(d) neither the execution of this Deed nor the creation of any of the charges contained in this Deed contravenes, or is inconsistent or in conflict with, any provision of its constitutional documents or any applicable enactment, law, decree, order, regulation, authorisation, franchise, consent, permit, security, instrument, agreement or document binding upon or affecting the Chargor or any of its undertaking, property, assets or rights;

 

(e) this Deed creates those Encumbrances it purports to create and is not liable to be avoided or otherwise set aside on the liquidation of the Chargor in whole or in part;

 

(f) the Shares are fully paid and constitute the entire issued share capital of the Company;

 

(g) the Chargor is now and will during the subsistence of this Deed be the sole legal and beneficial owner of the Charged Assets and has good title to (and has full right and authority to charge and assign under this Deed) the Charged Assets and the Charged Assets are free from any Encumbrance or other rights or interests in favour of third parties (other than the Security and Permitted Liens);

 

(h) as at the date of this Deed, the information and reports furnished by the Chargor to the Lender in connection with the negotiation and preparation of this Deed and/or in connection with the advance or continuance of any facilities are true and accurate in all material respects, and not misleading and do not omit material facts and all reasonable enquiries have been made to verify the facts and statements contained in them; and

 

(i) no litigation, arbitration or administrative proceedings are current or, to its knowledge, pending or threatened, which might, if adversely determined, have a material adverse effect on the business or financial condition of the Chargor and its Subsidiaries (or any of them) or the ability of the Chargor to perform or discharge any of the Secured Obligations.

 

8.2. Times when Representations and Warranties are made

 

The representations and warranties set out in this Clause 8 are:

 

(a) made on the date of this Deed; and

 

(b) except for Clause 8.1(h), deemed to be repeated by the Chargor every day with reference to the facts and circumstances then existing until this Deed is discharged.

 

8.3. Acknowledgement of Reliance

 

The Chargor acknowledges that the Lender has entered into this Deed in reliance upon the representations and warranties set out in Clause 8.1.

 

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9. Enforcement of Security

 

9.1. When Security becomes enforceable

 

The Security (and any powers implied by statute) shall become immediately enforceable upon the occurrence of an Event of Default and shall remain so for so long as such Event of Default is continuing.

 

9.2. Statutory powers

 

The power of sale and other powers conferred to the Lender pursuant to the CPO (as amended or extended by this Deed) shall be immediately exercisable upon and at any time after the occurrence of any Event of Default and for so long as such Event of Default is continuing.

 

9.3. Enforcement

 

After the Security has become enforceable, the Lender may in its absolute discretion enforce all or any part of the Charged Assets in such manner as it sees fit.

 

9.4. Powers on Enforcement

 

At the same time as or at any time after this Deed has become enforceable, the Lender may, without prejudice to any other rights available to the Lender in respect of the Secured Obligations or to any other security held for or in respect of the Secured Obligations:

 

(a) dispose of the Charged Assets or any part thereof in such manner and for such consideration (whether payable or deliverable immediately or by instalments) as the Lender considers appropriate; and/or

 

(b) implement the resignations of the directors of the Company and appoint the Lender’s nominees in their stead and/or, if it has not already done so, effect the transfer of any and all of the Charged Assets into its name or the name(s) of its nominee(s) and/or without liability on the part of the Lender in the event of loss, act in all respects as the legal or beneficial owner of the Charged Assets and assume the management and control of the Company; and/or

 

(c) apply all dividends, interest payments, distributions or other monies accruing on the Charged Assets in or towards satisfaction of the Secured Obligations; and/or

 

(d) dispose of all or any of the Lender’s other rights under this Deed for such consideration (whether payable or deliverable immediately or by instalments) and in such manner as the Lender considers appropriate.

 

9.5. Statutory Restrictions

 

No restrictions imposed by any applicable law on any immediate or other power of sale, application of proceeds or on any other right or on the consolidation of mortgages or other Encumbrance shall apply to this Deed, the Lender or any Receiver or to any Encumbrance given to the Lender pursuant to this Deed.

 

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9.6. Valid Receipt

 

Upon any such sale or other disposition and upon any other dealing or transaction under the provisions of this Deed, the receipt of the Lender or any Receiver for the purchase money of the property or asset sold or for any other monies paid to or other consideration received by the Lender or any Receiver shall effectually discharge the purchaser or person paying or giving the same therefrom and from being concerned to see to the application or being answerable for the loss, non-application or mis-application thereof.

 

9.7. Protection of Third Party

 

No person (including a purchaser) dealing with the Lender, any Receiver, their respective delegate or sub-delegate or any of their respective agents will be concerned to enquire:

 

(a) whether the Secured Obligations have become payable;

 

(b) whether any power which the Lender or the Receiver is purporting to exercise has become exercisable;

 

(c) whether any money remains due under any Loan Document; or

 

(d) how any money paid to the Lender or to the Receiver is to be applied.

 

9.8. Exercise of Rights not Foreclosure

 

If the Lender exercises the rights conferred on it by Clause 9.4, the same shall not be treated as an absolute appropriation of or foreclosure on the Charged Assets to the exclusion of the Chargor and in extinguishment of its interests therein, unless the Lender otherwise notifies the Chargor (whether before or after the relevant appropriation or foreclosure has been effected), in which latter event any such appropriation or foreclosure shall be treated as a sale of the Charged Assets at a fair market value and the Secured Obligations shall be reduced by an equivalent amount.

 

9.9. Lender may purchase Charged Assets

 

In the event of any disposal pursuant to Clause 9.4, the Lender may itself purchase the whole or any part of the Charged Assets free from any rights of redemption on the part of the Chargor which are hereby waived and released.

 

9.10. No Claims against the Lender

 

(a) The Chargor shall not have any right or claim against the Lender and the Lender shall not have any liability of any nature whatsoever to the Chargor or any other person in respect of any loss arising out of any disposal of the Secured Obligations or the disposal or exercise of any other rights under this Deed or any part thereof, however such loss may have been caused, and whether or not a better price could or might have been obtained on such disposal, by either deferring or advancing the date of such disposal or otherwise howsoever, except for any loss caused by the gross negligence or wilful misconduct of the Lender.

 

(b) Neither the Lender nor any Receiver shall be liable to account as a mortgagee in possession in respect of all or any part of the Charged Assets or be liable for any loss upon realisation or for any neglect, default or omission in connection with the Charged Assets to which a mortgagee or a mortgagee in possession might otherwise be liable.

 

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10. Receivership

 

10.1. Appointment of Receiver

 

On or at any time after the occurrence of an Event of Default or, if the Chargor so requests the Lender in writing, the Lender may, without further notice, legal process or any other action with respect to the Chargor, appoint any one or more persons to be a Receiver under this Deed of all or any part of the Charged Assets and may from time to time fix his remuneration (which shall be of such amount as may be agreed from time to time between the Lender and the Receiver) and may remove any Receiver so appointed and/or appoint another in his place or in place of any Receiver whose appointment may for any reason have terminated.

 

10.2. Receiver Agent of the Chargor

 

Each Receiver shall be the agent of the Chargor, and the Chargor shall be solely responsible for his acts or defaults and for his remuneration.

 

10.3. Rights of the Receiver

 

Each Receiver shall have all the rights conferred on any mortgagee and/or receiver under the CPO as well as the following rights:

 

(a) to take possession of, collect and get in the Charged Assets, exercise all voting or other powers or rights available to a registered and/or beneficial (as appropriate) owner of the Charged Assets in such manner as such Receiver may think fit and to take, defend or abandon any proceedings in the name of the Chargor or otherwise as may seem expedient;

 

(b) to carry on or authorise or concur in carrying on the business or any part of the business of the Chargor and to manage, conduct, reconstruct, amalgamate or diversify the business of the Chargor or any part of it (including power to acquire, develop or improve properties or other assets) without being responsible for loss or damage;

 

(c) to raise or borrow money from or incur any other liability to the Lender or others on such terms with or without security as such Receiver may think fit and so that any such security may be or include a charge on the Charged Assets ranking in priority to this security or otherwise;

 

(d) to sell by public auction or private contract, let, surrender or accept surrenders, grant leases, options, rights of pre-emption, tenancies or licences or otherwise dispose of or deal with the Charged Assets in such manner, for such consideration and generally on such terms and conditions as such Receiver may think fit, with full power to convey or otherwise transfer such Charged Assets in the name of the Chargor or other estate owner. Any such consideration may be cash, debentures or other obligations, shares, stock or other consideration and may be payable immediately or by instalments spread over such period or periods as he shall think fit and so that any consideration received or receivable shall immediately be and become charged with the payment and discharge of the Secured Obligations. Plant, machinery, equipment, accessories and other fixtures and fittings may be severed and sold separately from any premises of the Chargor containing them and such Receiver may apportion any rent and the performance of any obligations affecting the premises sold without the consent of the Chargor;

 

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(e) to promote the formation of companies with a view to such companies purchasing the Charged Assets or otherwise;

 

(f) to make any arrangement, settlement or compromise or enter into or complete, cancel, abandon or disregard any contracts which such Receiver shall think expedient in the interests of the Lender;

 

(g) to make and effect all repairs, renewals and improvements and to maintain, renew, take out or increase insurances in relation to the Charged Assets;

 

(h) to appoint and remunerate any person for any of the purposes of this Deed and/or to guard or protect the Charged Assets for such periods as such Receiver may determine and to dismiss the same or any other person appointed by the Chargor;

 

(i) to make calls, conditionally or unconditionally on the members of the Chargor, in respect of uncalled capital, with the same powers of enforcing payment of any calls so made as are, by the constitutional documents of the Chargor, conferred upon its directors and to the exclusion of the directors’ powers in that regard;

 

(j) to do anything which such Receiver shall think necessary or expedient to preserve, protect, maintain or manage the Charged Assets; and

 

(k) to sign any document, execute any deed (with authorisation to use the common seal of the Chargor for such purposes) and generally, on behalf and at the cost of the Chargor (notwithstanding liquidation of the Chargor or any similar event), to do or omit to do anything incidental to the matters referred to in this Clause 8.3 or to the realisation of this security or which the Chargor could do or omit to do in relation to the Charged Assets and to use the name of the Chargor for all the above purposes.

 

10.4. More Than One Receiver

 

If more than one person is appointed as a Receiver under this Deed, such persons shall throughout the duration of their office (unless the documents appointing them state otherwise) be entitled to exercise all or any of the powers conferred on a Receiver under this Deed individually.

 

11. Sale of Charged Assets

 

11.1. Statutory Restrictions

 

No restrictions imposed by any applicable law on any immediate or other power of sale, application of proceeds or on any other right or on the consolidation of mortgages or other Encumbrances shall apply to this Deed, the Lender or any Receiver or to any Encumbrance given to the Lender pursuant to this Deed.

 

11.2. Indemnity

 

Any sale or other disposition by or on behalf of the Lender or any of its nominees or any Receiver under the provisions of this Deed may be made upon such terms for the safety and protection of the purchaser or upon such terms as to indemnity as the Lender or such Receiver may think fit.

 

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11.3. Valid Receipt

 

Upon any such sale or other disposition referred to in Clause 11.2 and upon any other dealing or transaction under the provisions of this Deed, the receipt of the Lender or any Receiver for the purchase money of the property or asset sold or for any other moneys paid to or other consideration received by the Lender or any Receiver shall effectually discharge the purchaser or person paying or giving the same therefrom and from being concerned to see to the application or being answerable for the loss, non-application or mis-application thereof.

 

11.4. Enquiries by Purchaser

 

No purchaser or other person shall be bound or concerned to see or enquire whether the right of the Lender or any of its nominees or agents or any Receiver to exercise any of the rights conferred by this Deed has arisen or not, or be concerned with notice to the contrary, or with the propriety of the exercise or purported exercise of such rights.

 

11.5. Limitation of Liability

 

Neither the Lender nor any Receiver shall be liable for any losses which may arise:

 

(a) in the exercise or non-exercise of any of their rights;

 

(b) by reason of any entry into possession of the Charged Assets to account as mortgagee in possession;

 

(c) on realisation of the Charged Assets; or

 

(d) as a result of any default or omission for which a mortgagee in possession may be liable,

 

except for any loss caused by the gross negligence or wilful misconduct of the Lender or Receiver.

 

12. Power of Attorney

 

12.1. Appointment

 

For the purpose of securing the interest of the Lender in the Charged Assets and the performance of its obligations to the Lender, the Chargor, irrevocably, by way of security, appoints the Lender and separately each Receiver and any of their delegates or sub-delegates severally to be its attorney (with full power to appoint substitutes and to sub-delegate including power to authorise the person so appointed to make further appointments, in both cases, with regard to the Charged Assets) on behalf of and in the name of the Chargor or otherwise, to execute, seal and deliver and otherwise perfect and do all such deeds, agreements, acts and things which:

 

(a) (before the Security becomes enforceable) the Chargor is obliged to do under this Deed, but has not done;

 

(b) (after the Security becomes enforceable) the Chargor is or may become obliged to do under this Deed; and/or

 

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(c) (after the Security becomes enforceable) otherwise may be required for or deemed proper on or in connection with the full exercise of all or any of the rights conferred by this Deed on the Lender or on any Receiver and its rights to give full force and effect to the terms and conditions contained in this Deed.

 

This power of attorney is coupled with an interest and is irrevocable and shall remain irrevocable as long as this Deed remains outstanding.

 

12.2. Ratification

 

The Chargor ratifies and confirms and agrees to ratify and confirm any deed, agreement, act or thing which any attorney appointed under this Deed may lawfully execute, seal, deliver or do.

 

13. Expenses and Indemnity

 

13.1. Expenses

 

The Chargor will pay the Lender, on demand, all the Lender’s and Receiver’s expenses (including legal and out-of-pocket expenses) incurred:

 

(a) in connection with the negotiation, preparation and execution of this Deed and any amendment to, or waiver or consent or release of or under, this Deed; and/or

 

(b) in contemplation of, or in connection with, the preservation, enforcement or exercise of any rights under this Deed.

 

13.2. Indemnity

 

The Chargor will indemnify the Lender and the Receiver, on demand, against all losses, actions, claims, expenses, demands and liabilities whether in contract, tort or otherwise now or after the date of this Deed incurred by the Lender or the Receiver (except for any losses, actions, claims, expenses, demands and liabilities caused by the gross negligence or wilful misconduct of the Lender or the Receiver):

 

(a) for anything done or omitted in the exercise or purported exercise or non-exercise of the rights contained in this Deed;

 

(b) as a result of any breach by the Chargor of any of its covenants or other obligations to the Lender or any other person;

 

(c) in consequence of any payment in respect of the Secured Obligations (whether made by the Chargor or any other person) being impeached or declared void for any reason whatsoever; and/or

 

(d) as a result of any taxes, duties, rates or outgoings assessed upon or payable in respect of the Charged Assets or in connection with the entry into preservation, enforcement or exercise of any rights under this Deed.

 

13.3. Documentary Duties and Taxes

 

The Chargor will pay all documentary stamp, registration and other duties or similar taxes, including any payable by the Lender, which are imposed on or are payable in connection with this Deed.

 

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13.4. Default Interest

 

The amounts payable under this Clause 13 shall carry interest at the Default Rate after as well as before judgment from the date on which they were incurred by the Lender or any Receiver (as the case may be) and such amounts and interest shall form part of the Secured Obligations.

 

14. Application of Proceeds

 

14.1. Order of Application

 

All monies received or recovered by any Receiver and/or by the Lender from the Chargor pursuant to this Deed shall, subject to any claims ranking in priority to the Secured Obligations to the extent of such priority, be applied, in or towards discharging, in the following order of priority:

 

(a) the amount of all fees and remuneration of, and all other costs, charges, expenses and liabilities incurred by the Lender and/or each Receiver in connection with or as a result of the exercise of their respective rights, including the remuneration of each Receiver, or otherwise in relation to this Deed or any other agreement entered into between the Chargor and the Lender in such order as the Lender or any Receiver may from time to time determine;

 

(b) all other Secured Obligations in such order as the Lender may from time to time determine; and

 

(c) to the Chargor and/or the claims of those entitled to any surplus.

 

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14.2. Currency Conversion

 

The Lender and/or each Receiver may convert any monies received, recovered or realised under this Deed (including the proceeds of any previous conversion under this Clause 14.2) from their existing currency of denomination into such other currency of denomination as the Lender and/or any Receiver may think fit and any such conversion shall be effected at the Exchange Rate. If and to the extent that the Chargor fails to pay any amount due on demand, the Lender and/or each Receiver may in its absolute discretion without notice to the Chargor purchase at any time after the demand has been made so much of any currency as the Lender and/or any Receiver considers necessary or desirable to cover the Secured Obligations at the Exchange Rate and the Chargor agrees to indemnify the Lender and each Receiver against the full cost (including all costs, charges and expenses) paid.

 

14.3. Currency Indemnity

 

If the currency of a sum due from the Chargor under this Deed (the “ contractual currency ”) or a sum due from the Chargor under any judgment or order relating to this Deed in the contractual currency is converted from the contractual currency into another currency for the purpose of:

 

(a) making or filing a claim or proof;

 

(b) obtaining a judgment or order; or

 

(c) enforcing a judgment or order,

 

the Chargor will indemnify the Lender against any loss or liability incurred as a result of any difference between (i) the rate of exchange used to convert the sum in question from the contractual currency into the other currency and (ii) the rate or rates of exchange at which the Lender, in the ordinary course of business, can purchase the contractual currency with the other currency on receipt of a sum paid to it in full or part satisfaction of that claim, proof, judgment or order.

 

Any amount due from the Chargor under this Clause 14.3 will be a separate and independent debt and will not be affected by judgment being obtained for any other sum due under or in respect of this Deed. The term “ rate of exchange ” in this Clause 14.3 includes any premium and exchange costs payable in connection with the purchase of the contractual currency with the other currency.

 

15. Protection of Lender

 

15.1. Suspense Account

 

Any moneys paid to or received by the Lender in respect of the Secured Obligations or under this Deed may be applied in or towards satisfaction of the Secured Obligations or placed to the credit of such account as the Lender may determine with a view to preserving its rights to prove for the whole of the Secured Obligations.

 

15.2. No Withholding

 

Payments by the Chargor shall be made to the Lender as specified by the Lender without any set-off, counterclaim, withholding or condition of any kind except that, if the Chargor is compelled by law to make such withholding, the sum payable by the Chargor shall be increased so that the amount actually received by the Lender is the amount it would have received if there had been no withholding.

 

15.3. Claw Back

 

If the Lender considers that an amount paid by the Chargor or any other person is capable of being avoided or otherwise set aside (on the liquidation of the Chargor or otherwise) then that amount shall not be considered to have been paid for the purposes of this Deed. Furthermore, the Lender may in its absolute discretion concede or compromise any claim that any payment, security or other disposition is liable to be avoided, reduced or repaid.

 

15.4. Conditional Discharge

 

Any release, discharge or settlement under this Deed shall be conditional upon no payment or discharge in respect of the Secured Obligations by the Chargor or any other person being avoided, reduced or repaid for any reason and the Lender shall be entitled to enforce this Deed if such condition is not fulfilled as if such release, discharge or settlement had not occurred.

 

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15.5. Set-Off

 

The Lender may at any time without notice:

 

(a) combine or consolidate all or any of the Chargor’s accounts with the Lender;

 

(b) apply any credit balance to which the Chargor is entitled on any account with the Lender or any other moneys owing to the Chargor in or towards satisfaction of the Secured Obligations; or

 

(c) in the absolute discretion of the Lender, refuse to permit the withdrawal or utilisation of any deposit or moneys for such period as the Lender may consider appropriate (notwithstanding the terms of the deposit or moneys and whether or not any Secured Obligation has become due).

 

For these purposes, the Lender is authorised to purchase, at the Exchange Rate, such other currencies as may be necessary to effect such application with the monies standing to the credit of such account.

 

16. Trusteeship

 

The Chargor declares that:

 

(a) as and when the security created by this Deed shall become enforceable, it will hold all the Charged Assets (subject to the Chargor’s right of redemption) upon trust to convey, assign, transfer or otherwise dispose of or deal with the same in such manner and to such person as the Lender shall direct; and

 

(b) it shall be lawful for the Lender to appoint new trustees of the Charged Assets from time to time in place of the Chargor or in place of any trustee appointed under this power.

 

17. Redemption of Prior Encumbrances

 

On or at any time after the Security becomes enforceable, the Lender may:

 

(a) redeem any prior Encumbrance against the Charged Assets;

 

(b) procure the transfer of that Encumbrance to itself; and/or

 

(c) settle and pass the accounts of the prior mortgagee, chargee or encumbrancer; any accounts so settled and passed shall be conclusive and binding on the Chargor;

 

and all principal moneys, interest, costs, charges and expenses of and incidental to any such redemption and/or transfer shall be paid by the Chargor to the Lender on demand.

 

18. Delegation

 

The Lender and any Receiver may:

 

(a) delegate by power of attorney or in any other manner to any person any right exercisable by them under this Deed on such terms (including power to sub-delegate) as the Lender or any Receiver (as the case may be) sees fit; and/or

 

(b) employ agents, managers, employees, advisers and others on such terms as the Lender or any Receiver (as the case may be) sees fit for the purposes of this Deed.

 

Neither the Lender nor any Receiver will in any way be liable or responsible to the Chargor for any loss or liability arising from any act, default, omission or misconduct on the part of any such delegate or sub-delegate.

 

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19. No Waiver

 

No failure or delay by the Lender or any Receiver to exercise any right under this Deed or otherwise will operate as a waiver of that right or any other right, nor will any single or partial exercise of any such right preclude any other or further exercise of that right or the exercise of any other right.

 

20. Remedies Cumulative

 

The rights of the parties or any Receiver under this Deed are cumulative and do not exclude or restrict any other rights.

 

21. Assignment

 

21.1. Successors and Permitted Assigns

 

This Deed shall be binding upon and enure to the benefit of each party to this Deed and its successors in title and permitted assigns.

 

21.2. Assignment by the Chargor

 

The Chargor shall not be entitled to assign or transfer any of its rights, benefits or obligations under this Deed without the prior written consent of the Lender.

 

21.3. Assignment by the Lender

 

The Lender may assign all or any of its rights under this Deed to any person in accordance with the terms of Section 8.14 (Benefit of Agreement) of the Loan Agreement.

 

22. Notices

 

22.1. In Writing and Methods of Delivery

 

Any notice, demand or other communication under this Deed shall be sent in accordance with Section 8.5 (Notices) of the Loan Agreement.

 

22.1. Deemed Giving of Notice and Receipt

 

Any such notice, demand or other communication shall be deemed effective in such manner and at such time specified under Section 8.5 (Notices) of the Loan Agreement.

 

23. Severance

 

If any provision of this Deed is not or ceases to be legal, valid, binding and enforceable under the law of any jurisdiction, neither the legality, validity, binding effect or enforceability of the remaining provisions under that law nor the legality, validity, binding effect or enforceability of that provision under the law of any other jurisdiction shall be affected.

 

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24. Counterparts

 

This Deed may be executed in any number of counterparts and by different parties on separate counterparts, each of which is an original but, together, they constitute one and the same agreement.

 

25. Amendments

 

No amendment to this Deed will be effective unless in writing and executed by all the Parties.

 

26. Governing Law and Jurisdiction

 

26.1. Governing Law

 

This Deed is governed by and will be construed in accordance with Hong Kong Law.

 

26.2. Hong Kong Jurisdiction

 

The parties submit to the non-exclusive jurisdiction of the Hong Kong courts and each party waives any objection to proceedings in Hong Kong on the grounds of venue or inconvenient forum.

 

26.3. Waiver of Sovereign Immunity

 

To the extent that the Chargor may, in any jurisdiction, be entitled to claim for itself or its assets immunity from suit, execution, attachment (whether in aid of execution, before judgement or otherwise) or other legal process and to the extent that in any such jurisdiction there may be attributed to itself or its assets such immunity (whether or not claimed), the Chargor irrevocably agrees not to claim and irrevocably waives such immunity to the full extent permitted by the laws of such jurisdiction.

 

25. Process Agent

 

The service of any process connected with proceedings in the Hong Kong courts and relating to this Deed will be deemed to have been validly served on the Chargor if it is received by the Company at its registered address or the address specified in Section 8.5 (Notices) of the Loan Agreement and service will be deemed to have been acknowledged by the Chargor if it is acknowledged by the Company.

 

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schedule 1

 

Part 1

Authority

 

To: Partners For Growth V, L.P. (the “ Lender ”)

Date: April ___, 2018

Dear Sirs,

 

BORQS HONG KONG LIMITED (the “ Company ”)

 

We refer to the deed of charge of shares dated April __, 2018 (as may be amended from time to time, the “ Share Charge ”) by BORQS International Holding Corp and the Lender.

 

The undersigned irrevocably authorises the Lender or any of its directors or duly authorised officers, to complete, date and put into effect and/or otherwise use the following at any time after the Share Charge has become enforceable pursuant to its terms as the Lender considers fit in the Lender’s absolute discretion:

 

(a) the annexed signed resignation letter and acknowledgment;

 

(b) the attached signed instrument(s) of transfer and signed sold notes by the Chargor; and

 

(c) the attached signed written resolutions of all directors of the Company.

 

IN WITNESS of which this Authority has been executed by the undersigned as a deed and has been delivered.

 

   

SIGNED, SEALED AND DELIVERED

by [◆]

 

)

)

)

)

)

 

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Part 2

Resignation of Directors

 

 

To: The Board of Directors

 

BORQS HONG KONG LIMITED

 

Date: April ___, 2018

Dear Sirs,

 

BORQS HONG KONG LIMITED (“Company”)

 

I, ________________________ [ Name of Director ], hereby tender my unconditional and irrevocable resignation as director of the Company effective as of today’s date.

 

I confirm that I have no claim against the Company for fees, compensation for loss of office or otherwise and that there is no outstanding agreement or arrangement under which the Company or any of its subsidiaries or associated company has or would have any obligation to me or under which I would derive any benefit in my capacity as the director of the Company.

 

Yours faithfully,

 

SIGNED, SEALED AND DELIVERED

by [◆]

)

)
)

 

 

 

 

 

 

 

 

 

__________________________________________________________________________________

[on Duplicate Copy ]

 

To: Registrar of Companies

 

Certificate

pursuant to Section 464(3)

Companies Ordinance

 

I hereby confirm that the original copy of this letter was left at the Registered Office of the Company on .

 

Signed: _____________________________

[ Name of Director ]

 

Deed of Charge of Shares

21  

 

 

Part 3

Resolutions

BORQS HONG KONG LIMITED

( “Company” )

 

Written Resolutions of the Directors of the Company in accordance with

the Company’s Articles of Association

__________________________________________________________________________________

 

 

1. Transfer of Shares

 

That the following transfer(s) be approved, subject to stamping, and that the original share certificate(s) be cancelled and new share certificate(s) be issued in favour of the transferee(s) and such transfer(s) be registered and entered in the Register of Members of the Company:

 

Transferor Transferee(s) No. of Share(s)

 

[◆]

 

 

[◆]

 

2. Waiver of Rights of Refusal

 

That any rights of refusal which we may have under the constitutional documents of the Company for the transfer of shares referred to in paragraph 1 above or otherwise are hereby waived by us.

 

3. Waiver of Lien

 

That any lien on any share of the Company under the constitutional documents of the Company or otherwise is hereby waived by each of us.

 

4. Appointment of Director(s)

 

That the following person(s) be appointed as Director(s) of the Company with immediate effect:

 

5. Resignation of Director(s)

 

That the unconditional and irrevocable resignation of each of the following Director(s) of the Company be accepted with immediate effect.

 

Dated: [◆]

 

[ signed by Directors ]    
     
[ Name of Director ]   [ Name of Director ]

 

Deed of Charge of Shares

22  

 

Part 4

Instrument of Transfer

 

 

BORQS HONG KONG LIMITED

 

 

 

We, BORQS INTERNATIONAL HOLDING CORP, a company duly organized and existing under and by virtue of the Laws of The Cayman Islands, registered under company number 192127 and with registered office address at Maples Corporate Services Limited, P.O. Box 309, Ugland House, Grand Cayman, KY1-1104 ( Transferor ),

 

for good and valuable consideration

 

paid to us by [ Partners for Growth V, L.P. , a Delaware limited partnership, with its principal place of business at 1660 Tiburon Blvd., Suite D, Tiburon, CA 94920 USA] ( Transferee ),

 

do hereby transfer to the said Transferee the [1] ordinary share[s] standing in our name in the Register of

 

BORQS HONG KONG LIMITED

 

to hold unto the said Transferee his/its Executors, Administrators or Assigns, subject to the several conditions upon which we hold the same at the time of execution hereof.

 

And we the said Transferee do hereby agree to take the said share subject to the same conditions.

 

Witness to our hands

 

Witness to the signature(s) of [◆]

 

   

 

Witness signature

   

 

Witness name

   

 

 

   

 

Witness address

  (Transferor)
   

 

 

   

 

Place of execution

 

Place of execution

   

 

Witness to the signature(s) of    

 

Witness signature

   

 

Witness name

   

 

 

 

 

 

 

Witness address

 

 

(Transferee)

 

 

   

 

 

 

 

Place of execution

 

Place of execution

 

   

 

Deed of Charge of Shares

23  

 

 

Part 5

Bought and Sold Notes

SOLD NOTE

 

Buyer  
Address  
Occupation  

 

Name of company in which the share(s) to be transferred -

 

BORQS HONG KONG LIMITED

 

Number of share(s) 1ordinary share of HK$ 1.00

 

Consideration received  

 

Dated

 

BOUGHT NOTE

 

Seller BORQS International Holding Corp
Address Maples Corporate Services Limited, P.O. Box 309, Ugland House, Grand Cayman, KY1-1104
Occupation Corporation

 

Name of company in which the share(s) to be transferred -

 

BORQS HONG KONG LIMITED

 

Number of share(s) 1 ordinary share of [HK$] 1.00  
Consideration paid  

 

  (Buyer)

 

    Director

 

Dated

 

Deed of Charge of Shares

24  

 

 

IN WITNESS of which this Deed has been duly executed by the Chargor as a deed and duly executed by the Lender.

 

EXECUTED and DELIVERED )
as a DEED by   BORQS INTERNATIONAL HOLDING CORP )

 

Acting by:  /s/ Pat Sek Yuen Chan  
Name: Pat Sek Yuen Chan  
Title: CEO  

  

in the presence of :

 

/s/ Anthony K. Chan  
Witness name: Anthony K. Chan  
Witness occupation: CFO  

 

EXECUTED and DELIVERED )
as a DEED by PARTNERS FOR GROWTH V, L.P. )

 

Acting by:   /s/ Geoffrey Allan  
     
Name: Geoffrey Allan  
Title: Manager, Partners for Growth, LLC its General Partner
     
Witnessed by:  /s/ Amy Spencer       

 

Name: Amy Spencer

Title: Exhibition Director

 

________________

Witness name:

Witness occupation:

 

 

Deed of Charge of Shares 25

 

 

EXHIBIT 10.25

 

Date: 30 April 2018

 

 

 

 

 

BORQS Hong Kong Limited

as Guarantor

 

Partners for Growth V, L.P.

as Lender

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DEED OF GUARANTEE AND INDEMNITY

  

Deed of Guarantee and Indemnity

 

 

 

THIS GUARANTEE (this “ Guarantee ”) is made as a deed this 30th day of April 2018,

 

BETWEEN:

 

(1) BORQS Hong Kong Limited , a private company limited by shares incorporated under the laws of Hong Kong with registration number 1151010 and registered address at Office B, 21/F., Legend Tower, 7 Shing Yip Street, Kwun Tong, Kowloon (the “ Guarantor ”); and

 

(2) PARTNERS FOR GROWTH V, L.P. , a Delaware limited partnership, with its principal place of business at 1660 Tiburon Blvd., Suite D, Tiburon, CA 94920 USA (the “ Lender ”).

 

IT IS AGREED as follows:

 

1. Definitions and Interpretation

 

1.1. Definitions

 

Unless otherwise defined herein, capitalised terms used in this Guarantee have the meaning given to such terms in the Loan Agreement (as defined below). In addition, in this Guarantee, unless the context otherwise requires, the following expressions shall have the following meanings:

 

  Encumbrance means any mortgage, charge, pledge, lien (otherwise than arising by statute or operation of law) or other encumbrance, priority or security interest, deferred purchase, title retention, leasing, sale-and-repurchase, sale-and-leaseback arrangement whatsoever over or in any property, assets or rights or interest of whatsoever nature or any agreement for any of the same;
     
  Loan Agreement means the California law loan and security agreement dated on or about the date hereof between the Lender as lender and the Principals as the borrowers;
     
  Principals means the Guarantor and such other borrowers as may accede to the Loan Agreement from time to time; and
     
  Principals’ Obligations means all present and future obligations and liabilities of the Principals to the Lender under the Loan Agreement and the other Loan Documents whether actual or contingent and whether owed or incurred alone or jointly and/or severally with another and as principal or as surety or in any other capacity or of any nature.

 

Deed of Guarantee and Indemnity

1  

 

 

1.2. Construction

 

1.2.1. Any reference in this Guarantee to:

 

(a) the Lender or the Guarantor or any other person includes its respective successors in title, permitted assigns and/or permitted transferees;

 

(b) a Clause is a reference to a clause of this Guarantee;

 

(c) this Guarantee , the Loan Agreement or any other agreement or document is a reference to this Guarantee, the Loan Agreement or such other agreement or document as the same may have been, or may from time to time be, amended, varied, supplemented or novated;

 

(d) the Principal’s Obligations includes a reference to any part of them;

 

(e) the singular shall include the plural and vice versa;

 

(f) a person includes any person, firm, company, corporation, government, state or agency of a state or any association, trust or partnership (whether or not having a separate legal personality) and any other entity or two or more of the foregoing; and

 

(g) any statute or statutory provision or ordinance shall include any statute or statutory provision or ordinance which amends, extends, consolidates or replaces the same (whether before or after the date of this Guarantee) or which has been amended, extended, consolidated or replaced by the same and shall include any order, regulation, instrument or other subordinate legislation made under the relevant statute or statutory provision or ordinance.

 

1.2.2. Apart from a permitted assignee of the Lender pursuant to Clause 15.1, a person who is not a party to this Guarantee has no rights under the Contracts (Rights of Third Parties) Ordinance (Cap. 623 of the laws of Hong Kong) to enforce or enjoy the benefit of any term of this Guarantee.

 

2. Guarantee

 

In consideration of the Lender agreeing to enter into the Loan Agreement and making available loans or other banking facilities, or giving time, credit or accommodation to the Principals, the Guarantor hereby irrevocably, unconditionally and absolutely:

 

(a) guarantees to the Lender punctual payment and performance of the Principals’ Obligations; and

 

(b) undertakes that the Guarantor will on demand make good any default by any Principal in the payment or discharge of the Principals’ Obligations as if the Guarantor instead of the Principal were expressed to be the primary obligor in respect of the Principals’ Obligations.

 

Deed of Guarantee and Indemnity

2  

 

 

3. Indemnity

 

For the same consideration, the Guarantor agrees as a primary obligor to indemnify the Lender immediately on demand against any loss, cost or liability suffered by the Lender if any Principals’ Obligations or any actual or purported agreement, arrangement or instruction relating to any Principals’ Obligations is or becomes invalid, unenforceable or illegal, irrespective of whether the reason for such invalidity, unenforceability or illegality was or ought to have been known to the Lender. The amount of such loss shall be the amount which the Lender would otherwise have been entitled to recover from the Principals.

 

4. Representations and Warranties

 

The Guarantor makes the representations and warranties set out in this Clause 4 (Representations and Warranties) to the Lender.

 

4.1. Status

 

The Guarantor is a company, duly incorporated, and validly existing under the laws of its jurisdiction of incorporation and has the power to carry on its business as it is now being conducted and to own property and other assets and is in good standing.

 

4.2. Powers, Authority and Non-Conflict

 

The execution, delivery and performance of this Guarantee is within the corporate powers of the Guarantor, has been duly authorised by all necessary corporate and other action and does not and will not conflict with (a) any law or regulation applicable to it; (b) any constitutional documents of the Guarantor; or (c) any agreement or instrument binding on the Guarantor.

 

4.3. Legal Validity

 

The obligations and liabilities expressed to be assumed by the Guarantor under this Guarantee are legal, valid, binding and enforceable obligations of the Guarantor (subject to applicable equitable principles and insolvency laws) and it is not necessary in order to ensure the legality, validity and enforceability of this Guarantee that it be filed, recorded or enrolled with any court or authority anywhere or that any stamp duty, registration or similar tax be paid on or in relation to it.

 

4.4. Authorisations

 

All authorisations, consents, approvals, resolutions, licences, exemptions, filings or registrations required under any applicable law or regulation (a) to enable it lawfully to carry on its business and to enter into, exercise its rights and comply with its obligations in this Guarantee, and (b) to make this Guarantee admissible in evidence in its jurisdiction of incorporation have been obtained or effected and are in full force and effect.

 

4.5. Choice of Law

 

The choice of the law of Hong Kong as the governing law of this Guarantee will be recognised and enforced in its jurisdiction of incorporation.

 

Deed of Guarantee and Indemnity

3  

 

 

4.6. No litigation

 

No litigation, arbitration or administrative proceeding is current, pending or (to the knowledge of the Guarantor) threatened against the Guarantor:

 

(a) to restrain the entry into by the Guarantor of, the exercise by the Guarantor of its rights and/or performance or enforcement of or compliance with its obligations under this Guarantee; or

 

(b) which has or could have a material adverse effect on or on the financial condition of the Guarantor or the ability of the Guarantor to make any payment when due or to perform any of its other obligations in accordance with this Guarantee.

 

4.7. Security and Ranking

 

Save for any Permitted Liens, no Encumbrance exists over any of the undertaking or the present or future revenues or assets of the Guarantor and the obligations of the Guarantor under this Guarantee are or will be its direct, general and unconditional obligations and rank or will rank at least pari passu in all respects with all its other present and future unsecured and unsubordinated indebtedness and obligations (including contingent obligations), with the exception of indebtedness and obligations mandatorily preferred by law and not by contract.

 

4.8. Time when representations and warranties are made

 

The Guarantor represents, warrants and agrees that each of the representations and warranties contained in this Clause 4 will be and remain correct so long as it has any liability (contingent or actual) under this Guarantee.

 

5. Continuing Guarantee

 

This Guarantee is a continuing guarantee for all the Principals’ Obligations and will extend to the ultimate balance of the Principals’ Obligations, regardless of any intermediate discharge or payment of or on account of the Principals’ Obligations or any intermediate settlement of accounts between the Lender and any Principal or any other person. No demand made by the Lender under this Guarantee shall restrict the right of the Lender to make further or other demands.

 

6. Interest

 

The Guarantor shall on demand pay to the Lender interest at the Default Rate on any amount for the time being due from the Guarantor to the Lender under this Guarantee (both before and after judgement) from the date of a demand for payment under this Guarantee until actual payment in full.

 

7. Opening of New Accounts

 

If for any reason this Guarantee ceases to be a continuing security, the Lender may open a new account for each Principal. If the Lender does not open a new account, it shall nevertheless be treated as if it had done so at the time this Guarantee ceased to be a continuing security. As from that time all payments made to the Lender will be credited or treated as having been credited to the new account and will not operate to reduce the obligations of the Guarantor under this Guarantee.

 

Deed of Guarantee and Indemnity

4  

 

 

8. Waiver of Defences

 

The liability of the Guarantor under this Guarantee shall not be reduced, discharged or otherwise adversely affected by any of the events or circumstances set out in this Clause 8 (Waiver of Defences).

 

8.1. Variations

 

Any determination, renewal, variation (however fundamental), replacement, discharge, release or increase of, or composition or arrangement by the Lender relating to, any credit or facilities to the Principals or of or relating to the Principals’ Obligations.

 

8.2. Time or Indulgence

 

The grant by the Lender to any Principal or any other person of any time, waiver, consent or indulgence.

 

8.3. Dealings with Security

 

Any taking, dealing, exchange, renewal, variation, release, compromise, discharge, composition, arrangement or modification in relation to any guarantee, security or right which the Lender may now or after the date of this Guarantee have in respect of the Principals’ Obligations.

 

8.4. Negotiable Instruments

 

The renewal by the Lender of any bill, promissory note or other negotiable instrument or security.

 

8.5. Other Guarantees or Security

 

The Lender obtaining or refusing, neglecting or otherwise failing to obtain, perfect, enforce or claim any other guarantee, security or right (whether contemporaneously with this Guarantee or otherwise) or any non-presentation or non-observance of any formality or other requirement in respect of any instrument or any failure to realise the full value of any security.

 

8.6. Incapacity

 

Any incapacity or lack of power, authority or legal personality of or dissolution or change in the members or status of the Principal or any other person.

 

8.7. Unenforceability

 

Any unenforceability, illegality, invalidity or non-provability of any obligation of the Principal or any person under any document, agreement or security.

 

Deed of Guarantee and Indemnity

5  

 

 

8.8. Insolvency

 

Any liquidation, composition, insolvency, administration, bankruptcy, death or other incapacity, or any alteration in the corporate existence or structure, of any of the Principals, the Guarantor or any other person.

 

8.9. Other Circumstances

 

Any other act, omission, matter or thing which, but for this provision, would or might reduce, discharge or otherwise adversely affect the obligations of the Guarantor under this Guarantee.

 

9. Reinstatement

 

If any payment by any Principal or any other person or any discharge given by the Lender (whether in respect of the Principals’ Obligations or any security for those obligations or otherwise) is avoided or reduced as a result of insolvency or any similar event:

 

(a) the liability of the Guarantor shall continue as if the payment, discharge, avoidance or reduction had not occurred; and

 

(b) the Lender shall be entitled to recover the value or amount of that security or payment from the Guarantor, as if the payment, discharge, avoidance or reduction had not occurred.

 

10. Deferral of Guarantor’s Rights

 

10.1. Restriction on Rights or Claims

 

Until all of the Principals’ Obligations have been irrevocably paid or discharged in full, the Guarantor will not, unless the Lender otherwise directs:

 

(c) make or enforce any claim (including, but not limited to, a claim by way of set-off or counterclaim) or right against any Principal or prove as a creditor of any Principal in competition with the Lender, whether in respect of any payment under this Guarantee made by the Guarantor or otherwise; or

 

(d) be entitled to claim or have the benefit of, any set-off, counterclaim or proof against, or dividend paid on a winding-up or administration of or composition with creditors by any Principal or any Principal’s estate; or

 

(e) be entitled to claim or otherwise obtain the benefit (by way of subrogation or otherwise) of any security or guarantee or indemnity at any time held by the Lender for or in respect of any of the Principals’ Obligations; or

 

(f) claim or enforce any right of contribution against any co-surety.

 

Deed of Guarantee and Indemnity

6  

 

 

10.2. Proof at the Lender’s Request

 

If requested by the Lender the Guarantor shall:

 

(a) exercise any right of proof or claim in the winding-up, administration, voluntary arrangement, bankruptcy or estate of any Principal on behalf of the Lender and hold any dividend or other money received in respect of such proof or claim upon trust for the Lender to the extent of the Principals’ Obligations; and

 

(b) hold upon trust for the Lender any money which it may receive or recover from any co-surety by virtue of any rights of contribution.

 

10.3. Monies held on Trust

 

If while the Guarantor remains under any liability to the Lender under this Guarantee, any monies or other property or assets shall be received or recovered by the Guarantor in breach of any provisions of this Clause 10 (Deferral of Guarantor’s Rights), such monies or other property or assets shall, to the extent of such liability, be held upon trust to pay or transfer the same to the Lender.

 

11. Suspense Account

 

The Lender may at any time place and keep to the credit of a separate interest bearing suspense account any monies received under this Guarantee for so long and in such manner as the Lender may determine without any obligation to apply such monies or any part of them in or towards the discharge of the Principals’ Obligations. In the event of any proceedings in or analogous to bankruptcy, liquidation, composition or arrangement of or concerning any Principal, the Lender may notwithstanding any payment made under this Guarantee prove for a claim and agree to accept any dividend or composition in respect of the whole or any part of the Principals’ Obligations as if this Guarantee had not been given.

 

12. Other Means of Payment

 

Lender may make a demand under this Guarantee:

 

(a) before making any demand on any Principal or any Principal’s estate or any other person or enforcing any other guarantee or security for the Principals’ Obligations; and

 

(b) for the payment of the ultimate balance after resorting to other means of payment, or for the balance due at any time notwithstanding that the Lender has not resorted to other means of payment (in which case the Guarantor shall not be entitled to any benefit from such other means of payment so long as the Principals’ Obligations remain outstanding).

 

13. Expenses

 

13.1. Costs

 

The Guarantor shall pay to the Lender on demand all reasonable costs and expenses (including, but not limited to, legal fees) from time to time paid or incurred by the Lender in connection with taking, perfecting, preserving, defending or enforcing this Guarantee or in exercising any right or power under or in connection with this Guarantee, and shall indemnify the Lender against all such costs and expenses.

 

Deed of Guarantee and Indemnity

7  

 

 

13.2. Stamp Duty

 

The Guarantor shall pay on demand all stamp, documentary, registration and other similar duties and taxes of any kind and from any source, if any, to which this Guarantee may be subject or give rise and shall indemnify the Lender against any and all liability with respect to or resulting from any delay or failure by the Guarantor in making such payment.

 

13.3. Value Added Tax

 

Where this Guarantee requires the Guarantor to re-imburse the Lender for any costs or expenses the Guarantor shall at the same time pay and indemnify the Lender against any value added tax (or any tax of a similar nature) incurred by the Lender in respect of the costs and expenses to the extent that the Lender determines that it is not entitled to credit or repayment of the value added tax (or other tax of a similar nature).

 

14. Miscellaneous

 

14.1. Additional Security

 

This Guarantee is in addition to and is not in any way prejudiced by any bill, note, guarantee, mortgage, charge or other security now or subsequently held by the Lender for any of the Principals’ Obligations.

 

14.2. No Deduction or Withholding

 

All payments made by the Guarantor to the Lender under this Guarantee shall (save insofar as required by law to the contrary) be paid in full without set-off or counterclaim and free and clear of and without any deduction or withholding or payment for or on account of any present or future tax, levy, duty, impost or other charge or withholding of a similar nature. If the Guarantor shall be required by law to effect any such deduction or withholding or payment the Guarantor shall immediately pay to the Lender such additional amount as will result in the immediate receipt by the Lender of the full amount which would otherwise have been received had no such deduction or withholding or payment been made.

 

14.3.

Set-off’

 

The Lender may set-off any matured obligation owed by the Guarantor to the Lender against any obligation (whether or not matured) owed by the Lender to the Guarantor regardless of the place of payment, or currency of either obligation. If the obligations are in different currencies, the Lender may convert either obligation at a market rate of exchange for the purpose of the set-off in an amount estimated by it in good faith to be the amount of that obligation.

 

14.4. Waivers; Rights Cumulative

 

No delay or omission of the Lender in exercising any right, power or privilege (each a “ right ”) under this Guarantee or otherwise available to it at law shall impair such right, or be construed as a waiver of such right nor shall any single or partial exercise of any such right preclude its further exercise or the exercise of any other right. The rights and remedies provided in this Guarantee are cumulative and not exclusive of any rights or remedies provided by law and may be waived only in writing and specifically.

 

Deed of Guarantee and Indemnity

8  

 

 

14.5. Severability

 

Any provision of this Guarantee which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Guarantee or affecting the validity or enforceability of such provision in any other jurisdiction.

 

14.6. Certificates and Determinations

 

A certificate or determination by the Lender of the amount of the Principals’ Obligations outstanding at any time or of any other amount payable by the Guarantor under this Guarantee is, in the absence of manifest error, conclusive evidence for all purposes of this Guarantee as against the Guarantor.

 

14.7. Currency Indemnity

 

14.7.1. The Guarantor’s liability under this Guarantee is to pay to the Lender the full amount of the Principals’ Obligations in the currency in which they are for the time being denominated. If, for any reason, any payment due from the Guarantor under or in connection with this Guarantee is made or is satisfied in a currency (the “ Other Currency ”) other than the currency in which the relevant payment is due (the “ Contractual Currency ”), then to the extent that the payment (when converted into the Contractual Currency at the rate of exchange on the date of payment or, in the case of the liquidation or insolvency of the Guarantor, at the rate of exchange on the latest date permitted by applicable law for the determination of liabilities in such liquidation or insolvency) actually received by the Lender falls short of the amount expressed to be due under the terms of this Guarantee, the Guarantor shall, as a separate and independent obligation, indemnify the Lender and hold the Lender harmless against the amount of such shortfall.

 

14.7.2. For the purpose of this Clause “rate of exchange” means the rate at which the Lender is able on the relevant date to purchase the Contractual Currency with the Other Currency and shall take into account any premium and other costs of exchange.

 

15. Benefit of this Guarantee

 

15.1. Assignment by the Lender

 

The Lender may assign or transfer all or any part of its rights under this Guarantee in connection with the assignment of its rights and obligations in accordance with the terms of Section 8.14 (Benefit of Agreement) of the Loan Agreement. The Guarantor shall enter into any documents reasonably specified by the Lender to be necessary to give effect to such assignment or transfer.

 

15.2. No Assignment by the Guarantor

 

The Guarantor may not assign or transfer all or any part of its rights and/or obligations under this Guarantee.

 

Deed of Guarantee and Indemnity

9  

 

 

15.3. Disclosure of Information

 

The Lender may not disclose such information about the Guarantor unless such disclosure is made in compliance with Section 8.1 (Confidentiality) of the Loan Agreement.

 

16. Notices and Demands

 

16.1. Address

 

The Guarantor’s address and fax number for any notice, demand or other communication under or in connection with this Guarantee are set forth in Section 8.5 (Notices) of the Loan Agreement. Any such notice, demand or other communication shall also be effective if sent to the Guarantor’s registered office or the address of the Guarantor last known to the Lender.

 

16.2. Method and Receipt

 

Any notice, demand or other communication to be given or made pursuant to this Guarantee to the Guarantor may be given or made in such manner and be deemed delivered at such time specified under Section 8.5 (Notices) of the Loan Agreement.

 

16.3. English language

 

Any notice given under or in connection with this Guarantee must be in English.

 

17. Governing Law

 

17.1. This Guarantee shall be governed by and construed in accordance with the laws of Hong Kong. The parties hereto hereby submit to the non-exclusive jurisdiction of the Hong Kong Courts.

 

17.2. The submission of the parties hereto to the jurisdiction of the Hong Kong Courts shall not restrict the right of the Lender to take proceedings in connection with this Guarantee in any other courts having, claiming or accepting jurisdiction in respect of matters pertaining to this Guarantee, including but not limited to the California Courts, nor shall the taking of proceedings in any one or more jurisdictions preclude the taking of proceedings in any other jurisdiction whether concurrently or not.

 

17.3. The Guarantor hereby irrevocably consents to the granting of any relief and/or the issue of any process in connection with any legal action or proceedings in connection with this Guarantee, including the making, enforcement or execution of any judgment or order against any of the property, assets or revenues of the Guarantor whatsoever.

 

EXECUTED as a Deed and delivered on the date stated at the beginning of this document.

 

Deed of Guarantee and Indemnity

10  

 

 

EXECUTED and DELIVERED )
as a DEED by BORQS HONG KONG LIMITED )

 

Acting by:

 

/s/ Pat Sek Yuen Chan

 

Name: Pat Sek Yuen Chan

Title: CEO

 

in the presence of :

 

/s/ Anthony K. Chan

 

Witness name: Anthony K. Chan

Witness occupation: CFO

 

EXECUTED and DELIVERED )
as a DEED by PARTNERS FOR GROWTH V, L.P. )

 

Acting by:

 

/s/ Geoffrey Allan

 

Name: Geoffrey Allan

Title: Manager, Partners for Growth V, LLC, its General Partner

 

Witnessed by:

 

/s/ Amy Spencer

 

Name: Amy Spencer

Title: Exhibition Director

 

_______________

Witness name:

Witness occupation:

 

 

Deed of Guarantee and Indemnity

11

 

 

EXHIBIT 10.26

 

Date: 30 April 2018

 

 

BORQS Hong Kong Limited
as Chargor  

 

Partners for Growth V, L.P.
as Lender

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

DEBENTURE

 
(constituting a fixed and floating charge over all the assets of

BORQS Hong Kong Limited)

 

Debenture  

 

 

Execution version

 

 

THIS DEED (this “ Deed ”) is made as a deed this 30th day of April 2018,

 

BETWEEN:

 

(1) BORQS HONG KONG LIMITED , a private company limited by shares incorporated under the laws of Hong Kong with registration number 1151010 and registered address at Office B, 21/F., Legend Tower, 7 Shing Yip Street, Kwun Tong, Kowloon (the “ Chargor ”); and

 

(2) PARTNERS FOR GROWTH V, L.P. , a Delaware limited partnership, with its principal place of business at 1660 Tiburon Blvd., Suite D, Tiburon, CA 94920 USA (the “ Lender ”).

 

IT IS AGREED as follows:

 

1. Definitions and Interpretation

 

1.1. Definitions

 

Unless otherwise defined herein, capitalised terms used in this Deed have the meaning given to such terms in the Loan Agreement (as defined below). In addition, in this Deed unless the context otherwise requires, the following expressions shall have the following meanings:

 

Bank Accounts ” means all present and future bank accounts held in the name of the Chargor from time to time, including but not limited to the bank accounts listed in Schedule 1 hereto;

 

Charged Assets ” means all assets listed in Clause 2.2, excluding any Excluded Property;

 

CPO ” means the Conveyancing and Property Ordinance (Cap. 219 of the Laws of Hong Kong);

 

Encumbrance ” means any mortgage, charge, pledge, lien (otherwise than arising by statute or operation of law) or other encumbrance, priority or security interest, deferred purchase, title retention, leasing, sale-and-repurchase, sale-and-leaseback arrangement whatsoever over or in any property, assets or rights or interest of whatsoever nature or any agreement for any of the same;

 

Exchange Rate ” means the rate for converting one currency into another currency which the Lender determines to be prevailing in the relevant foreign exchange market at the relevant time, such determination to be conclusive and binding (except in the case of manifest error);

 

Guarantee ” means the Hong Kong law deed of guaranty and indemnity dated on or about the date hereof between the Chargor and the Lender;

 

HK$ ” means Hong Kong Dollars, the lawful currency for the time being of Hong Kong;

 

Hong Kong ” means the Hong Kong Special Administrative Region of the People’s Republic of China;

 

Loan Agreement ” means the California law loan and security agreement dated on or about the date hereof between the Lender as lender and the Guarantor as the borrower;

 

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Party ” means a party to this Deed;

 

Receiver ” means each of the receivers and/or receivers and managers appointed under this Deed, any of the other Loan Documents or under the powers conferred on the Lender by any law or regulation whether appointed simultaneously or to act jointly and/or severally or to act in place of any one or more receivers and/or receivers and managers previously appointed under this Deed or otherwise, and includes all delegates, attorneys or agents of any such Receiver;

 

Secured Obligations ” means all present and future obligations and liabilities of the Guarantor and any other person to the Lender under the Loan Agreement, the Guarantee, this Deed and the other Loan Documents, whether actual or contingent and whether owed or incurred alone or jointly and/or severally with another and as principal or as surety or in any other capacity or of any nature;

 

Security ” means the Encumbrances created by or pursuant to this Deed;

 

Security Period ” means the period beginning on the date of this Deed and ending on the date on which all the Secured Obligations have been unconditionally and irrevocably paid and discharged in full and the Lender has no further commitment under or pursuant to the Loan Documents; and

 

Shares ” means the assets listed in Clause 2.2(a)(ii), including but not limited to the shares listed in Schedule 1 hereto, but excluding any Excluded Property.

 

1.2. Construction

 

Any reference in this Deed to:

 

(a) the Lender or the Chargor or any other person includes its respective successors in title, permitted assigns and/or permitted transferees;

 

(b) a Clause is a reference to a clause of this Deed;

 

(c) this Deed , the Loan Agreement , the Guarantee or any other agreement or document is a reference to this Deed, the Loan Agreement, the Guarantee or such other agreement or document as the same may have been, or may from time to time be, amended, varied, supplemented or novated;

 

(d) the Secured Obligations includes a reference to any part of them;

 

(e) the singular shall include the plural and vice versa;

 

(f) a person includes any person, firm, company, corporation, government, state or agency of a state or any association, trust or partnership (whether or not having a separate legal personality) and any other entity or two or more of the foregoing; and

 

(g) any statute or statutory provision or ordinance shall include any statute or statutory provision or ordinance which amends, extends, consolidates or replaces the same (whether before or after the date of this Deed) or which has been amended, extended, consolidated or replaced by the same and shall include any order, regulation, instrument or other subordinate legislation made under the relevant statute or statutory provision or ordinance.

 

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Apart from a permitted assignee of the Lender pursuant to Clause 20.3, a person who is not a party to this Deed has no rights under the Contracts (Rights of Third Parties) Ordinance (Cap. 623 of the laws of Hong Kong) to enforce or enjoy the benefit of any term of this Deed.

 

2. Grant of Security

 

2.1. Covenant to Pay

 

The Chargor covenants to pay and discharge in full the Secured Obligations on demand made by the Lender at any time and to provide cash cover on demand in respect of any contingent or future obligations.

 

2.2. Charge

 

As continuing security for the payment and discharge of the Secured Obligations, the Chargor agrees to charge and hereby charges to the Lender:

 

(a) by way of first fixed charge:

 

(i) all present and future book and other debts, receivables, monies, revenues, royalties, claims and things in action due or owing to or purchased or otherwise acquired by the Chargor (including all credit balances and deposits of the Chargor with the Lender or any other bank or financial institution and any monies credited to any suspense account by the Lender, together with the debts represented by them, and any surplus arising on a realisation of any Encumbrance whether in favour of the Lender or any other person), the proceeds of the same, all legal, beneficial or equitable interests and rights in trust (including any beneficial interest, claim or entitlement in or to the assets of any occupational retirement scheme belonging to or held by the Chargor, the benefit of all discretionary payments and the proceeds of any claim or receivable of the Chargor not itself capable of being charged and the full benefit of all guarantees, indemnities, Encumbrances, rights of set-off, security reservations of proprietary rights, rights of tracing and all other rights and remedies in respect of the same or otherwise);

 

(ii) all present and future shares, namely all right, title and interest held by the Chargor in and to all stocks, shares, debentures, bonds or other securities or investments and all other interests of the Chargor in any person and all rights, benefits and advantages arising in respect of or incidental to the same;

 

(iii) all present and future uncalled capital, goodwill and all patents, patent applications, inventions, trademarks and service marks and applications therefor, trade names, registered designs, copyrights, know-how and other intellectual property rights held by the Chargor and all licences and all rights, benefits and advantages arising in respect of or incidental to the same;

 

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(iv) all present and future real property and all rights and interests in or affecting land (or the proceeds of sale of land or the documents of title to land) of the Chargor and all buildings, structures, fixtures (including trade fixtures), owned by the Chargor, including the full benefit of all Encumbrances, options, agreements, rights and interests of the Chargor over or affecting land of the Chargor and all fixed plant, other plant, machinery, fittings and equipment and all other chattels now or at any time after the date of this Deed belonging to the Chargor and its interest in any plant, machinery, equipment or chattels in its possession, including the benefit of all contracts and warranties relating to the same (excluding any of the same for the time being forming part of its stock in trade or work in progress);

 

(v) all present and future rights under any sale or purchase agreements and distributorship or any similar agreements entered into by it, any letters of credit issued in its favour and all bills of exchange and other negotiable instruments held by it;

 

(vi) all present and future benefits of all licences, quota, consents and authorities (statutory or otherwise) held in connection with its business or the use of any asset charged by any other sub-paragraph in this Clause 2.2 and the right to recover and receive all proceeds and/or compensation which may be payable to it in respect of them; and

 

(vii) all present and future benefits in respect of all contracts and policies of insurance of whatever nature which are from time to time taken out by or on behalf of the Chargor or (to the extent of such interest) in which the Chargor has an interest and all claims and returns of premiums in respect of them; and

 

(b) by way of first floating charge, the undertaking and all present and future property, assets and rights of the Chargor, whatsoever and wheresoever not otherwise effectively charged by way of first fixed charge by Clause 2.2(a),

 

in each case, excluding any Excluded Property, and provided that if any asset cannot be secured without consent of a third party, this Agreement will constitute security over all proceeds and other amount receivable from such asset.

 

2.3. Crystallisation

 

The Lender may, by notice in writing to the Chargor, convert the floating charge referred to in Clause 2.2(b) into a specific fixed charge as regards all or part of the Charged Assets described therein, if an Event of Default has occurred and is continuing, or the Lender considers those assets to be in danger of being seized or sold under any distress, execution or sequestration or to be otherwise in jeopardy.

 

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The floating charge referred to in Clause 2.2(b) shall (in addition to the circumstances in which the same shall occur under general law) automatically be converted into a specific fixed charge:

 

(a) if the Chargor takes steps to create any subsequent Encumbrance (other than Permitted Liens) on any of the Charged Assets without the prior approval of the Lender;

 

(b) on the convening of any meeting of the members of the Chargor to consider a resolution to wind up the Chargor (or not to wind up the Chargor);

 

(c) immediately prior to the presentation of a petition (other than a frivolous or vexatious petition) to wind up the Chargor; or

 

(d) if any person levies or attempts to levy distress, execution or sequestration against any of the Charged Assets.

 

2.4. Documents Supporting Security

 

In furtherance of the Security created under this Deed, the Chargor shall at its own cost, deliver or procure that there shall be delivered to the Lender the following (in each case, in form and substance satisfactory to the Lender):

 

(a) any documents necessary or conducive to enable the Lender to register such Charged Assets in its name or in the name of its nominee(s); and

 

(b) all documents necessary and satisfactory to the Lender in order to effect a valid transfer of any Charged Assets following an Event of Default.

 

2.5. Registration

 

The Chargor shall at its own cost:

 

(a) immediately after the execution of this Deed:

 

(i) register the Security with the Hong Kong Companies Registry in accordance with Section 335 of the Companies Ordinance (Chapter 622 of the Laws of Hong Kong);

 

(ii) notify each Company in which the Chargor has Shares of the Security;

 

(b) promptly and in any event within three (3) Business Days from and including the date of execution of this Deed, deliver or procure that there shall be delivered to the Lender:

 

(i) evidence of the registration of the Security with the Hong Kong Companies Registry;

 

(ii) a copy of the acknowledgement of the Security by each company in which the Chargor holds Shares; and

 

(iii) a copy of the written notice of charge to each bank where Bank Accounts are held substantially in the form as set out in Schedule 2 hereto; and

 

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(c) use its best efforts to obtain written acknowledgement of the notice(s) sent in accordance with Clause 2.5(b)(iii) by each relevant bank as soon as practical after the date of execution of this Deed.

 

3. Continuing Security

 

(a) The Security is continuing and shall extend to the ultimate balance of all the Secured Obligations regardless of any intermediate payment or discharge in whole or in part. This Deed shall remain in full force and effect as a continuing security for the duration of the Security Period.

 

(b) This Deed is in addition to, without prejudice to, and shall not merge with, any other right, remedy, guarantee or Encumbrance which the Lender may at any time hold for any Secured Obligation.

 

(c) This Deed may be enforced against the Chargor without the Lender first having to take recourse to any other right, remedy, guarantee or Encumbrance held by or available to it.

 

4. Covenants

 

4.1. General Covenants

 

The Chargor covenants that it will observe and perform each of the following covenants and undertakings in relation to its business, property and assets or (as the case may be) the Charged Assets, except as expressly permitted under the Loan Documents:

 

(a) conduct and carry on its business in a proper and efficient manner and not make any substantial alteration in the nature or mode of conduct of its business;

 

(b) keep or cause to be kept proper books of accounts relating to its business and from time to time within a reasonable time after being requested by the Lender, furnish the Lender with such information about the assets, business and financial condition of the Chargor as the Lender may require;

 

(c) use commercially reasonable endeavours to duly and punctually pay and discharge all debts, obligations and liabilities, and all rents, rates, taxes, outgoings and impositions payable in respect of any premises now or from time to time after the date of this Deed owned, tenanted, occupied or used by the Chargor and, when required, produce to the Lender receipts or other evidence satisfactory to the Lender that such payments have been made, or (as the case may be) such obligations and liabilities have been discharged;

 

(d) (i) use commercially reasonable endeavours to take all steps to maintain, preserve and protect its revenues and assets (tangible and intangible) and maintain and (where applicable) take out insurances in respect of its business, undertaking, property and assets and against such risks and contingencies as is prudent (given the industry practice in relation to the business, undertaking, property or asset concerned) with the interest of the Lender noted on the policies and with the policies containing such provisions for the benefit of the Lender as the Lender may require; (ii) on demand produce to the Lender the policies of such insurances and proof of payment of all premiums and other monies necessary for effecting and keeping such insurances; and (iii) immediately upon receipt pay to the Lender and pending such payment hold on trust for the Lender all monies received by the Chargor by virtue of any insurances maintained or effected by it (whether or not effected pursuant to the above) for application in making good the loss or damage in respect of which such monies are received or, at the option of the Lender, for payment to such account(s) as the Lender may specify;

 

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(e) if so required by the Lender, give notice (in such form as the Lender may require) to any person requiring payment into such account(s) as the Lender may specify of all monies due or to become due to the Chargor from that person;

 

(f) deposit with the Lender all certificates and documents of title, duly executed transfers and any other documents relating to the Charged Assets as the Lender may from time to time require;

 

(g) use its commercially reasonable endeavours to observe and perform all covenants and stipulations (under any agreement, law, regulation or otherwise) from time to time affecting any of the Charged Assets, take such action as may from time to time be necessary or desirable to preserve and maintain the Charged Assets or any registration thereof, and not do or omit to be done any act, matter or thing whereby any provision of any applicable law, decree, order or regulation from time to time affecting any of the Charged Assets is infringed;

 

(h) if requested to do so by the Lender, make entries in any public register or give such notices as the Lender may consider appropriate to record the existence of this Deed, any security created by it or the restrictions contained in it;

 

(i) not declare any dividends or pay any similar distribution to shareholders or redeem or purchase its own shares unless explicitly permitted under the Loan Agreement or with the prior written consent of the Lender;

 

(j) inform the Lender immediately on contracting to purchase any estate or interest in real property and provide to the Lender such information in relation to the same as the Lender may from time to time require;

 

(k) keep all its buildings and erections and all the plant, machinery, equipment, accessories, fixtures, fittings, vehicles and other effects and every part of them in good and substantial repair and in good working order and condition, and not to pull down or remove any of the same without the prior written consent of the Lender;

 

(l) not make any application under the Buildings Ordinance (Cap. 123 of the Laws of Hong Kong) to carry out any development of any of the immovable property for the time being owned by the Chargor;

 

(m) not call up or receive in advance of calls any of the uncalled capital for the time being of the Chargor;

 

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(n) not continue its existence in a jurisdiction outside of the Cayman Islands or attempt or resolve to do so; and

 

(o) generally not to do or cause or permit to be done anything which may in any way jeopardise or otherwise prejudice the value of the Charged Assets as a whole or the Security and not (without the prior written consent of the Lender) incur any expenditure or liabilities of an exceptional or unusual nature.

 

4.2. Negative pledge and Disposals

 

The Chargor shall not do or agree to do any of the following without the prior written consent of the Lender, except as expressly permitted under the Loan Documents:

 

(a) create or permit to subsist any Encumbrance on any Charged Asset other than Permitted Liens;

 

(b) sell, transfer, lease, lend or otherwise dispose of (whether by a single transaction or a number of transactions and whether related or not) the whole or any part of its interest in any Charged Asset (other than the Charged Assets subject to the floating charge under Clause 2.2(b)); or

 

(c) take or permit the taking of any action which may result in the rights attaching to any Charged Asset being altered.

 

4.3. Subsequent Encumbrances

 

If the Lender receives notice (actual or otherwise) of any subsequent Encumbrance, assignment or other disposition affecting the Charged Assets or any interest in the Charged Assets or the proceeds of sale thereof, the Lender shall be deemed to have opened a new account when such notice was received and as from that time all payments in respect of or on account of the Secured Obligations shall be deemed to have been credited to the new account and shall not, as between the Chargor and the Lender, operate to reduce the amount of the Secured Obligations outstanding when such notice was received.

 

4.4. Lien

 

The Lender shall have and shall be authorised to exercise a lien over all property of the Chargor (excluding any Excluded Property) coming into the possession or control of the Lender, for custody or any other reason and whether or not in the ordinary course of banking business, with power for the Lender to sell such property to satisfy the Secured Obligations if an Event of Default has occurred and is continuing.

 

4.5. Voting Rights and Dividends

 

(a) Until an Event of Default occurs, the Chargor shall be entitled to:

 

(i) receive and retain all dividends, distributions and other monies paid on or derived from the Shares; and

 

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(ii) exercise all voting and other rights and powers attaching to the Shares, provided that it must not do so in a manner which has the effect of changing the terms of the Shares (or any class of them) or of any related rights or is prejudicial to the interests of the Lender.

 

(b) At any time following the occurrence of an Event of Default, the Lender may effectuate the transfer for all or any Shares on behalf of the Chargor in favour of itself or such other person as it may select and all dividends, interest payments, distributions of an income nature or other monies which may be paid on or in respect of the Shares, if received by the Chargor or its nominee(s), shall be paid over to (and pending such payment shall be held on trust for) the Lender and may be applied, at the discretion of the Lender, in or towards discharging the Secured Obligations.

 

5. Further Assurances

 

5.1. Further action

 

The Chargor shall, at its own expense, promptly on request do all acts and execute all documents as the Lender or a Receiver may reasonably specify (and in such form as the Lender or a Receiver may reasonably require) for:

 

(a) creating, perfecting or protecting the Security intended to be created by this Deed or any other Loan Document;

 

(b) facilitating the realisation of any Charged Asset;

 

(c) facilitating the exercise of any rights, powers and remedies exercisable by the Lender, or any Receiver or any delegate in respect of any Charged Asset or provided by or pursuant to the Loan Documents or by law; or

 

(d) creating and perfecting Security in favour of the Lender over any Charged Asset located in any jurisdiction outside Hong Kong equivalent or similar to the Security intended to be created by or pursuant to this Deed or any other Loan Document.

 

This includes:

 

i. the re-execution of this Deed or such Loan Document;

 

ii. the execution of any legal mortgage, charge, transfer, conveyance, assignment, assignation or assurance of any property, whether to the Lender or to its nominee; and

 

iii. the giving of any notice, order or direction and the making of any filing or registration,

 

which, in any such case, the Lender may think expedient.

 

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5.2. Loan Documents

 

The Chargor shall take all such action as is available to it (including making all filings and registrations) as may be necessary for the purpose of the creation, perfection, protection or maintenance of any Security conferred or intended to be conferred on the Lender by or pursuant to the Loan Documents.

 

6. Power to remedy

 

6.1. Power to remedy

 

If at any time the Chargor does not comply with any of its obligations under this Deed, the Lender (without prejudice to any other rights arising as a consequence of such non-compliance) shall be entitled (but not bound) to rectify that default. The Chargor irrevocably authorises the Lender and its employees and agents by way of security to do all things which are necessary or desirable to rectify that default.

 

6.2. Mortgagee in possession

 

The exercise of the powers of the Lender under this Clause 6 shall not render it liable as a mortgagee in possession.

 

6.3. Monies expended

 

The Chargor shall pay to the Lender on demand any monies which are expended by the Lender in exercising its powers under this Clause 6 together with interest at the Default Rate from the date on which those monies were expended by the Lender (both before and after judgment).

 

7. Representations and Warranties

 

7.1. Representations and Warranties

 

The Chargor represents and warrants to the Lender in addition to any warranties implicit under any applicable law that:

 

(a) it is duly incorporated and validly existing under its place of incorporation as a limited liability company with power to carry on its business as it is now being conducted and to own its assets and is in good standing;

 

(b) it has the power and authority to enter into and perform this Deed and no limitation on its powers will be exceeded by doing so;

 

(c) this Deed constitutes its legal, valid and binding obligations, enforceable in accordance with its terms (except as enforcement may be limited by equitable principles and by bankruptcy, insolvency, reorganization, moratorium or similar Legal Requirements relating to creditors’ rights generally);

 

(d) neither the execution of this Deed nor the creation of any of the charges contained in this Deed contravenes, or is inconsistent or in conflict with, any provision of its constitutional documents or any applicable enactment, law, decree, order, regulation, authorisation, franchise, consent, permit, security, instrument, agreement or document binding upon or affecting the Chargor or any of its undertaking, property, assets or rights;

 

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(e) this Deed creates those Encumbrances it purports to create and is not liable to be avoided or otherwise set aside on the liquidation of the Chargor in whole or in part;

 

(f) the Chargor is now and will during the subsistence of this Deed be the sole legal and beneficial owner of the Charged Assets and has good title to (and has full right and authority to charge and assign under this Deed) the Charged Assets and the Charged Assets are free from any Encumbrance or other rights or interests in favour of third parties (other than the Security and Permitted Liens);

 

(g) as at the date of this Deed, the contents of Schedule 1 hereto, and the other information and reports furnished by the Chargor to the Lender in connection with the negotiation and preparation of this Deed and/or in connection with the advance or continuance of any facilities are true and accurate in all material respects, and not misleading and do not omit material facts and all reasonable enquiries have been made to verify the facts and statements contained in them; and

 

(h) no litigation, arbitration or administrative proceedings are current or, to its knowledge, pending or threatened, which might, if adversely determined, have a material adverse effect on the business or financial condition of the Chargor and its Subsidiaries (or any of them) or the ability of the Chargor to perform or discharge any of the Secured Obligations.

 

7.2. Times when Representations and Warranties are made

 

The representations and warranties set out in this Clause 7 are:

 

(a) made on the date of this Deed; and

 

(b) except for Clause 7.1(g), deemed to be repeated by the Chargor every day with reference to the facts and circumstances then existing until this Deed is discharged.

 

7.3. Acknowledgement of Reliance

 

The Chargor acknowledges that the Lender has entered into this Deed in reliance upon the representations and warranties set out in Clause 7.1.

 

8. Enforcement of Security

 

8.1. When Security becomes enforceable

 

The Security (and any powers implied by statute) shall become immediately enforceable upon the occurrence of an Event of Default and shall remain so for so long as such Event of Default is continuing.

 

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8.2. Statutory powers

 

The power of sale and other powers conferred to the Lender pursuant to the CPO (as amended or extended by this Deed) shall be immediately exercisable upon and at any time after the occurrence of any Event of Default and for so long as such Event of Default is continuing.

   

8.3. Enforcement

 

After the Security has become enforceable, the Lender may in its absolute discretion enforce all or any part of the Charged Assets in such manner as it sees fit.

 

8.4. Powers on Enforcement

 

At the same time as or at any time after this Deed has become enforceable, the Lender may, without prejudice to any other rights available to the Lender in respect of the Secured Obligations or to any other security held for or in respect of the Secured Obligations:

 

(a) dispose of the Charged Assets or any part thereof in such manner and for such consideration (whether payable or deliverable immediately or by instalments) as the Lender considers appropriate; and/or

 

(b) effect the transfer of any and all of the Charged Assets into its name or the name(s) of its nominee(s) and/or without liability on the part of the Lender in the event of loss, act in all respects as the legal or beneficial owner of the Charged Assets and assume the management and control of any subsidiary companies; and/or

 

(c) apply all payments, dividends, interest payments, distributions or other monies accruing on the Charged Assets in or towards satisfaction of the Secured Obligations; and/or

 

(d) dispose of all or any of the Lender’s other rights under this Deed for such consideration (whether payable or deliverable immediately or by instalments) and in such manner as the Lender considers appropriate.

 

8.5. Statutory Restrictions

 

No restrictions imposed by any applicable law on any immediate or other power of sale, application of proceeds or on any other right or on the consolidation of mortgages or other Encumbrance shall apply to this Deed, the Lender or any Receiver or to any Encumbrance given to the Lender pursuant to this Deed.

 

8.6. Valid Receipt

 

Upon any such sale or other disposition and upon any other dealing or transaction under the provisions of this Deed, the receipt of the Lender or any Receiver for the purchase money of the property or asset sold or for any other monies paid to or other consideration received by the Lender or any Receiver shall effectually discharge the purchaser or person paying or giving the same therefrom and from being concerned to see to the application or being answerable for the loss, non-application or mis-application thereof.

 

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8.7. Protection of Third Party

 

No person (including a purchaser) dealing with the Lender, any Receiver, their respective delegate or sub-delegate or any of their respective agents will be concerned to enquire:

 

(a) whether the Secured Obligations have become payable;

 

(b) whether any power which the Lender or the Receiver is purporting to exercise has become exercisable;

 

(c) whether any money remains due under any Loan Document; or

 

(d) how any money paid to the Lender or to the Receiver is to be applied.

 

8.8. Exercise of Rights not Foreclosure

 

If the Lender exercises the rights conferred on it by Clause 8.4, the same shall not be treated as an absolute appropriation of or foreclosure on the Charged Assets to the exclusion of the Chargor and in extinguishment of its interests therein, unless the Lender otherwise notifies the Chargor (whether before or after the relevant appropriation or foreclosure has been effected), in which latter event any such appropriation or foreclosure shall be treated as a sale of the Charged Assets at a fair market value and the Secured Obligations shall be reduced by an equivalent amount.

 

8.9. Lender may purchase Charged Assets

 

In the event of any disposal pursuant to Clause 8.4, the Lender may itself purchase the whole or any part of the Charged Assets free from any rights of redemption on the part of the Chargor which are hereby waived and released.

 

8.10. No Claims against the Lender

 

(a) The Chargor shall not have any right or claim against the Lender and the Lender shall not have any liability of any nature whatsoever to the Chargor or any other person in respect of any loss arising out of any disposal of the Secured Obligations or the disposal or exercise of any other rights under this Deed or any part thereof, however such loss may have been caused, and whether or not a better price could or might have been obtained on such disposal, by either deferring or advancing the date of such disposal or otherwise howsoever, except for any loss caused by the gross negligence or wilful misconduct of the Lender.

 

(b) Neither the Lender nor any Receiver shall be liable to account as a mortgagee in possession in respect of all or any part of the Charged Assets or be liable for any loss upon realisation or for any neglect, default or omission in connection with the Charged Assets to which a mortgagee or a mortgagee in possession might otherwise be liable.

 

9. Receivership

 

9.1. Appointment of Receiver

 

On or at any time after the occurrence of an Event of Default or, if the Chargor so requests the Lender in writing, the Lender may, without further notice, legal process or any other action with respect to the Chargor appoint any one or more persons to be a Receiver under this Deed of all or any part of the Charged Assets and may from time to time fix his remuneration (which shall be of such amount as may be agreed from time to time between the Lender and the Receiver) and may remove any Receiver so appointed and/or appoint another in his place or in place of any Receiver whose appointment may for any reason have terminated.

 

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9.2. Receiver Agent of the Chargor

 

Each Receiver shall be the agent of the Chargor, and the Chargor shall be solely responsible for his acts or defaults and for his remuneration.

 

9.3. Rights of the Receiver

 

Each Receiver shall have all the rights conferred on any mortgagee and/or receiver under the CPO as well as the following rights:

 

(a) to take possession of, collect and get in the Charged Assets, exercise all voting or other powers or rights available to a registered and/or beneficial (as appropriate) owner of the Charged Assets in such manner as such Receiver may think fit and to take, defend or abandon any proceedings in the name of the Chargor or otherwise as may seem expedient;

 

(b) to carry on or authorise or concur in carrying on the business or any part of the business of the Chargor and to manage, conduct, reconstruct, amalgamate or diversify the business of the Chargor or any part of it (including power to acquire, develop or improve properties or other assets) without being responsible for loss or damage;

 

(c) to raise or borrow money from or incur any other liability to the Lender or others on such terms with or without security as such Receiver may think fit and so that any such security may be or include a charge on the Charged Assets ranking in priority to this security or otherwise;

 

(d) to sell by public auction or private contract, let, surrender or accept surrenders, grant leases, options, rights of pre-emption, tenancies or licences or otherwise dispose of or deal with the Charged Assets in such manner, for such consideration and generally on such terms and conditions as such Receiver may think fit, with full power to convey or otherwise transfer such Charged Assets in the name of the Chargor or other estate owner. Any such consideration may be cash, debentures or other obligations, shares, stock or other consideration and may be payable immediately or by instalments spread over such period or periods as he shall think fit and so that any consideration received or receivable shall immediately be and become charged with the payment and discharge of the Secured Obligations. Plant, machinery, equipment, accessories and other fixtures and fittings may be severed and sold separately from any premises of the Chargor containing them and such Receiver may apportion any rent and the performance of any obligations affecting the premises sold without the consent of the Chargor;

 

(e) to promote the formation of companies with a view to such companies purchasing the Charged Assets or otherwise;

 

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(f) to make any arrangement, settlement or compromise or enter into or complete, cancel, abandon or disregard any contracts which such Receiver shall think expedient in the interests of the Lender;

 

(g) to make and effect all repairs, renewals and improvements and to maintain, renew, take out or increase insurances in relation to the Charged Assets;

 

(h) to appoint and remunerate any person for any of the purposes of this Deed and/or to guard or protect the Charged Assets for such periods as such Receiver may determine and to dismiss the same or any other person appointed by the Chargor;

 

(i) to make calls, conditionally or unconditionally on the members of the Chargor, in respect of uncalled capital, with the same powers of enforcing payment of any calls so made as are, by the constitutional documents of the Chargor, conferred upon its directors and to the exclusion of the directors’ powers in that regard;

 

(j) to do anything which such Receiver shall think necessary or expedient to preserve, protect, maintain or manage the Charged Assets; and

 

(k) to sign any document, execute any deed (with authorisation to use the common seal of the Chargor for such purposes) and generally, on behalf and at the cost of the Chargor (notwithstanding liquidation of the Chargor or any similar event), to do or omit to do anything incidental to the matters referred to in this Clause 8.3 or to the realisation of this security or which the Chargor could do or omit to do in relation to the Charged Assets and to use the name of the Chargor for all the above purposes.

 

9.4. More Than One Receiver

 

If more than one person is appointed as a Receiver under this Deed, such persons shall throughout the duration of their office (unless the documents appointing them state otherwise) be entitled to exercise all or any of the powers conferred on a Receiver under this Deed individually.

 

10. Sale of Charged Assets

 

10.1. Statutory Restrictions

 

No restrictions imposed by any applicable law on any immediate or other power of sale, application of proceeds or on any other right or on the consolidation of mortgages or other Encumbrances shall apply to this Deed, the Lender or any Receiver or to any Encumbrance given to the Lender pursuant to this Deed.

 

10.2. Indemnity

 

Any sale or other disposition by or on behalf of the Lender or any of its nominees or any Receiver under the provisions of this Deed may be made upon such terms for the safety and protection of the purchaser or upon such terms as to indemnity as the Lender or such Receiver may think fit.

 

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10.3. Valid Receipt

 

Upon any such sale or other disposition referred to in Clause 10.2 and upon any other dealing or transaction under the provisions of this Deed, the receipt of the Lender or any Receiver for the purchase money of the property or asset sold or for any other moneys paid to or other consideration received by the Lender or any Receiver shall effectually discharge the purchaser or person paying or giving the same therefrom and from being concerned to see to the application or being answerable for the loss, non-application or mis-application thereof.

 

10.4. Enquiries by Purchaser

 

No purchaser or other person shall be bound or concerned to see or enquire whether the right of the Lender or any of its nominees or agents or any Receiver to exercise any of the rights conferred by this Deed has arisen or not, or be concerned with notice to the contrary, or with the propriety of the exercise or purported exercise of such rights.

 

10.5. Limitation of Liability

 

Neither the Lender nor any Receiver shall be liable for any losses which may arise:

 

(a) in the exercise or non-exercise of any of their rights;

 

(b) by reason of any entry into possession of the Charged Assets to account as mortgagee in possession;

 

(c) on realisation of the Charged Assets; or

 

(d) as a result of any default or omission for which a mortgagee in possession may be liable,

 

except for any loss caused by the gross negligence or wilful misconduct of the Lender or Receiver.

 

11. Power of Attorney

 

11.1. Appointment

 

For the purpose of securing the interest of the Lender in the Charged Assets and the performance of its obligations to the Lender, the Chargor, irrevocably, by way of security, appoints the Lender and separately each Receiver and any of their delegates or sub-delegates severally to be its attorney (with full power to appoint substitutes and to sub-delegate including power to authorise the person so appointed to make further appointments, in both cases, with regard to the Charged Assets) on behalf of and in the name of the Chargor or otherwise, to execute, seal and deliver and otherwise perfect and do all such deeds, agreements, acts and things which:

 

(l) (before the Security becomes enforceable) the Chargor is obliged to do under this Deed, but has not done;

 

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(m) (after the Security becomes enforceable) the Chargor is or may become obliged to do under this Deed; and/or

 

(n) (after the Security becomes enforceable) otherwise may be required for or deemed proper on or in connection with the full exercise of all or any of the rights conferred by this Deed on the Lender or on any Receiver and its rights to give full force and effect to the terms and conditions contained in this Deed.

 

This power of attorney is coupled with an interest and is irrevocable and shall remain irrevocable as long as this Deed remains outstanding.

 

11.2. Ratification

 

The Chargor ratifies and confirms and agrees to ratify and confirm any deed, agreement, act or thing which any attorney appointed under this Deed may lawfully execute, seal, deliver or do.

 

12. Expenses and Indemnity

 

12.1. Expenses

 

The Chargor will pay the Lender, on demand, all the Lender’s and Receiver’s expenses (including legal and out-of-pocket expenses) incurred:

 

(a) in connection with the negotiation, preparation and execution of this Deed and any amendment to, or waiver or consent or release of or under, this Deed; and/or

 

(b) in contemplation of, or in connection with, the preservation, enforcement or exercise of any rights under this Deed.

 

12.2. Indemnity

 

The Chargor will indemnify the Lender and the Receiver, on demand, against all losses, actions, claims, expenses, demands and liabilities whether in contract, tort or otherwise now or after the date of this Deed incurred by the Lender or the Receiver (except for any losses, actions, claims, expenses, demands and liabilities caused by the gross negligence or wilful misconduct of the Lender or the Receiver):

 

(a) for anything done or omitted in the exercise or purported exercise or non-exercise of the rights contained in this Deed;

 

(b) as a result of any breach by the Chargor of any of its covenants or other obligations to the Lender or any other person;

 

(c) in consequence of any payment in respect of the Secured Obligations (whether made by the Chargor or any other person) being impeached or declared void for any reason whatsoever; and/or

 

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(d) as a result of any taxes, duties, rates or outgoings assessed upon or payable in respect of the Charged Assets or in connection with the entry into preservation, enforcement or exercise of any rights under this Deed.

 

12.3. Documentary Duties and Taxes

 

The Chargor will pay all documentary stamp, registration and other duties or similar taxes, including any payable by the Lender, which are imposed on or are payable in connection with this Deed.

 

12.4. Default Interest

 

The amounts payable under this Clause 12 shall carry interest at the Default Rate after as well as before judgment from the date on which they were incurred by the Lender or any Receiver (as the case may be) and such amounts and interest shall form part of the Secured Obligations.

 

13. Application of Proceeds

 

13.1. Order of Application

 

All monies received or recovered by any Receiver and/or by the Lender from the Chargor pursuant to this Deed shall, subject to any claims ranking in priority to the Secured Obligations to the extent of such priority, be applied, in or towards discharging, in the following order of priority:

 
(a) the amount of all fees and remuneration of, and all other costs, charges, expenses and liabilities incurred by the Lender and/or each Receiver in connection with or as a result of the exercise of their respective rights, including the remuneration of each Receiver, or otherwise in relation to this Deed or any other agreement entered into between the Chargor and the Lender in such order as the Lender or any Receiver may from time to time determine;

 

(b) all other Secured Obligations in such order as the Lender may from time to time determine; and

 

(c) the Chargor and/or the claims of those entitled to any surplus.

 

13.2. Currency Conversion

 

The Lender and/or each Receiver may convert any monies received, recovered or realised under this Deed (including the proceeds of any previous conversion under this Clause 13.2) from their existing currency of denomination into such other currency of denomination as the Lender and/or any Receiver may think fit and any such conversion shall be effected at the Exchange Rate. If and to the extent that the Chargor fails to pay any amount due on demand, the Lender and/or each Receiver may in its absolute discretion without notice to the Chargor purchase at any time after the demand has been made so much of any currency as the Lender and/or any Receiver considers necessary or desirable to cover the Secured Obligations at the Exchange Rate and the Chargor agrees to indemnify the Lender and each Receiver against the full cost (including all costs, charges and expenses) paid.

 

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13.3. Currency Indemnity

 

If the currency of a sum due from the Chargor under this Deed (the “ contractual currency ”) or a sum due from the Chargor under any judgment or order relating to this Deed in the contractual currency is converted from the contractual currency into another currency for the purpose of:

 

(a) making or filing a claim or proof;

 

(b) obtaining a judgment or order; or

 

(c) enforcing a judgment or order,

 

the Chargor will indemnify the Lender against any loss or liability incurred as a result of any difference between (i) the rate of exchange used to convert the sum in question from the contractual currency into the other currency and (ii) the rate or rates of exchange at which the Lender, in the ordinary course of business, can purchase the contractual currency with the other currency on receipt of a sum paid to it in full or part satisfaction of that claim, proof, judgment or order.

 

Any amount due from the Chargor under this Clause 13.3 will be a separate and independent debt and will not be affected by judgment being obtained for any other sum due under or in respect of this Deed. The term “ rate of exchange ” in this Clause 13.3 includes any premium and exchange costs payable in connection with the purchase of the contractual currency with the other currency.

 

14. Protection of Lender

 

14.1. Suspense Account

 

Any moneys paid to or received by the Lender in respect of the Secured Obligations or under this Deed may be applied in or towards satisfaction of the Secured Obligations or placed to the credit of such account as the Lender may determine with a view to preserving its rights to prove for the whole of the Secured Obligations.

 

14.2. No Withholding

 

Payments by the Chargor shall be made to the Lender as specified by the Lender without any set-off, counterclaim, withholding or condition of any kind except that, if the Chargor is compelled by law to make such withholding, the sum payable by the Chargor shall be increased so that the amount actually received by the Lender is the amount it would have received if there had been no withholding.

 

14.3. Claw Back

 

If the Lender considers that an amount paid by the Chargor or any other person is capable of being avoided or otherwise set aside (on the liquidation of the Chargor or otherwise) then that amount shall not be considered to have been paid for the purposes of this Deed. Furthermore, the Lender may in its absolute discretion concede or compromise any claim that any payment, security or other disposition is liable to be avoided, reduced or repaid.

 

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14.4. Conditional Discharge

 

Any release, discharge or settlement under this Deed shall be conditional upon no payment or discharge in respect of the Secured Obligations by the Chargor or any other person being avoided, reduced or repaid for any reason and the Lender shall be entitled to enforce this Deed if such condition is not fulfilled as if such release, discharge or settlement had not occurred.

 

14.5. Set-Off

 

The Lender may at any time without notice:

 

(a) combine or consolidate all or any of the Chargor’s accounts with the Lender;

 

(b) apply any credit balance to which the Chargor is entitled on any account with the Lender or any other moneys owing to the Chargor in or towards satisfaction of the Secured Obligations; or

 

(c) in the absolute discretion of the Lender, refuse to permit the withdrawal or utilisation of any deposit or moneys for such period as the Lender may consider appropriate (notwithstanding the terms of the deposit or moneys and whether or not any Secured Obligation has become due).

 

For these purposes, the Lender is authorised to purchase, at the Exchange Rate, such other currencies as may be necessary to effect such application with the monies standing to the credit of such account.

 

15. Trusteeship

 

The Chargor declares that:

 

(a) as and when the security created by this Deed shall become enforceable, it will hold all the Charged Assets (subject to the Chargor’s right of redemption) upon trust to convey, assign, transfer or otherwise dispose of or deal with the same in such manner and to such person as the Lender shall direct; and

 

(b) it shall be lawful for the Lender to appoint new trustees of the Charged Assets from time to time in place of the Chargor or in place of any trustee appointed under this power.

 

16. Redemption of Prior Encumbrances

 

On or at any time after the Security has become enforceable, the Lender may:

 

(a) redeem any prior Encumbrance against the Charged Assets;

 

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  (b) procure the transfer of that Encumbrance to itself; and/or

 

(c) settle and pass the accounts of the prior mortgagee, chargee or encumbrancer; any accounts so settled and passed shall be conclusive and binding on the Chargor;

 

and all principal moneys, interest, costs, charges and expenses of and incidental to any such redemption and/or transfer shall be paid by the Chargor to the Lender on demand.

 

17. Delegation

 

The Lender and any Receiver may:

 

(a) delegate by power of attorney or in any other manner to any person any right exercisable by them under this Deed on such terms (including power to sub-delegate) as the Lender or any Receiver (as the case may be) sees fit; and/or

 

(b) employ agents, managers, employees, advisers and others on such terms as the Lender or any Receiver (as the case may be) sees fit for the purposes of this Deed.

 

Neither the Lender nor any Receiver will in any way be liable or responsible to the Chargor for any loss or liability arising from any act, default, omission or misconduct on the part of any such delegate or sub-delegate.

 

18. No Waiver

 

No failure or delay by the Lender or any Receiver to exercise any right under this Deed or otherwise will operate as a waiver of that right or any other right, nor will any single or partial exercise of any such right preclude any other or further exercise of that right or the exercise of any other right.

 

19. Remedies Cumulative

 

The rights of the parties or any Receiver under this Deed are cumulative and do not exclude or restrict any other rights.

 

20. Assignment

 

20.1. Successors and Permitted Assigns

 

This Deed shall be binding upon and enure to the benefit of each party to this Deed and its successors in title and permitted assigns.

 

20.2. Assignment by the Chargor

 

The Chargor shall not be entitled to assign or transfer any of its rights, benefits or obligations under this Deed without the prior written consent of the Lender.

 

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20.3. Assignment by the Lender

 

The Lender may assign all or any of its rights under this Deed to any person in accordance with the terms of Section 8.14 (Benefit of Agreement) of the Loan Agreement.

 

21. Notices

 

21.1. In Writing and Methods of Delivery

 

Any notice, demand or other communication under this Deed shall be sent in accordance with Section 8.5 (Notices) of the Loan Agreement.

 

21.1. Deemed Giving of Notice and Receipt

 

Any such notice, demand or other communication shall be deemed effective in such manner and at such time specified under Section 8.5 (Notices) of the Loan Agreement.

 

22. Severance

 

If any provision of this Deed is not or ceases to be legal, valid, binding and enforceable under the law of any jurisdiction, neither the legality, validity, binding effect or enforceability of the remaining provisions under that law nor the legality, validity, binding effect or enforceability of that provision under the law of any other jurisdiction shall be affected.

 

23. Counterparts

 

This Deed may be executed in any number of counterparts and by different parties on separate counterparts, each of which is an original but, together, they constitute one and the same agreement.

 

24. Amendments

 

No amendment to this Deed will be effective unless in writing and executed by all the Parties.

 

25. Governing Law and Jurisdiction

 

25.1. Governing Law

 

This Deed is governed by and will be construed in accordance with Hong Kong Law.

 

25.2. Hong Kong Jurisdiction

 

The parties submit to the non-exclusive jurisdiction of the Hong Kong courts and each party waives any objection to proceedings in Hong Kong on the grounds of venue or inconvenient forum.

 

25.3. Waiver of Sovereign Immunity

 

To the extent that the Chargor may, in any jurisdiction, be entitled to claim for itself or its assets immunity from suit, execution, attachment (whether in aid of execution, before judgement or otherwise) or other legal process and to the extent that in any such jurisdiction there may be attributed to itself or its assets such immunity (whether or not claimed), the Chargor irrevocably agrees not to claim and irrevocably waives such immunity to the full extent permitted by the laws of such jurisdiction.

 

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SCHEDULE 1

 

Asset Information

 

(a) Offices / locations where movable assets are held

 

Borqs Hong Kong Limited

Office B, 21/F., Legend Tower, 7 Shing Yip Street

Kwun Tong, Kowloon, Hong Kong

 

Borqs Beijing Ltd.

Tower A, Building B23, Universal Business Park

No. 10 Jiuxianqiao Road, Chaoyang District

Beijing 100015, China

 

Borqs Software Solutions Private Limited

Prestige Al-Kareem, NO.3 Edward Road, Civil Station

Corporation Division NO.72

Bangalore, Karnataka, INDIA 560052

 

(b) Intellectual Property Rights

 

As listed on Schedules A, B, C and D attached to the

Borqs HK – Intellectual Property Security Agreement

 

(c) Shares

 

Direct ownership:

i) 1 out of 10,000 shares of Borqs Software Solutions Private Limited
ii) 100% of Borqs Beijing Ltd.
iii) 55% of Bozz Solutions, Inc.
iv) 60% of Borqs KK
v) 100% of Borqs Korea Branch Office

 

Indirect ownership:

i) 100% of Beijing Big Cloud Century Technology Limited
ii) 100% of Borqs Wireless Ltd.
iii) 100% of Beijing Borqs Software Technology Co., Limited
iv) 100% of Borqs Beijing Ltd. Shenzhen Branch Office
v) 49.9% of Br. Droid Desenvolvimento De Software S.A.
vi) 100% of Beijing Big Cloud Network Technology Co., Ltd.
vii) 79% of Yuantel (Beijing) Investment Management Co., Ltd.
viii) 75.05% of Yuantel (Beijing) Telecommunications Technology Co. Ltd.

 

(d) Bank Accounts

 

Silicon Valley Bank - Account number 3300710367

SPD Silicon Valley Bank - Account number NRA 10010020000000602

HSBC - Account numbers 168-316727-838 multi-currency

 

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SCHEDULE 2

 

Form of Notice

 

To: [ insert account bank ]

 

Date:

 

Dear Sirs,

 

NOTICE OF CHARGE

 

We hereby give you notice that we have charged to Partners For Growth V, L.P. (the “ Lender ”) all our rights, title and interest in our bank account[s] held with you with account number[s] [●] (including any renewal or redesignation thereof) (the “Accounts[s] ”) and all monies standing to the credit of the Account from time to time under a deed of debenture dated [●] 2016 (the “ Debenture ”).

 

We hereby irrevocably and unconditionally instruct you that, with effect from the service of a notice by or on behalf of the Lender on you notifying you that an event of default has occurred under the Debenture: (i) any then existing payment instructions affecting the Account[s] shall immediately and automatically be terminated and payments and communications in respect of the Account[s] should be made to the Lender and (ii) all rights, title and interest in the Account[s] shall vest in the Lender.

 

This letter is governed by the laws of Hong Kong.

 

Please acknowledge receipt of this notice by signing the acknowledgement enclosed and returning it to us with a copy to the Lender:

 

PARTNERS FOR GROWTH V, L.P.

1660 Tiburon Blvd., Suite D

Tiburon, CA 94920 USA

Yours faithfully,

 

__________________

For and on behalf of [●]

   

Form of Acknowledgement

 

To: [Chargor]

Copy to: PARTNERS FOR GROWTH V, L.P.

 

We acknowledge receipt of the Notice of Charge dated April __ 2018 and confirm that we will comply with the terms set out in the Notice of Charge. We further confirm that, following receipt of the notice of an event of default as set out in the Notice of Charge we will not act in relation to the Account[s] except as instructed by the Lender or any persons authorised by the Lender and we shall send all statements and other notices in relation to the Account[s] to the Lender.

 

 

__________________

For and on behalf of [ insert account bank ]

 

 

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IN WITNESS of which this Deed has been duly executed by the Chargor as a deed and duly executed by the Lender.

 

EXECUTED and DELIVERED )
as a DEED by BORQS HONG KONG LIMITED )

 

Acting by: /s/ Pat Sek Yuen Chan   

 

Name: Pat Sek Yuen Chan 

Title:  CEO

 

in the presence of :

 

/s/ Anthony K. Chan

 

Witness name: Anthony K. Chan

Witness occupation: CFO

  

EXECUTED and DELIVERED )
as a DEED by PARTNERS FOR GROWTH V, L.P. )

 

 

Acting by: /s/ Geoffrey Allan  

 

Name: Geoffrey Allan

Title: Manager, Partners for Growth V, LLC, its General Partner

  

Witnessed by: /s/ Amy Spencer  

 

Name: Amy Spencer

Title: Exhibition Director

 

________________

Witness name:

Witness occupation:

 

 

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EXHIBIT 10.27

 

INTELLECTUAL PROPERTY SECURITY AGREEMENT

 

This Intellectual Property Security Agreement (this “Agreement”) is entered into as of April 30, 2018 (the “Effective Date”), by and between PARTNERS FOR GROWTH V, L.P., a Delaware limited partnership (“PFG”) and BORQS Hong Kong Limited, a private company limited by shares under Hong Kong law, registered with the Companies Registry under number 1151010 and with its principal address at Office B, 21/F, Legend Tower, 7 Shing Yip Street, Kwun Tong, Kowloon, Hong Kong (“Grantor”), with reference to the following facts:

 

A. PFG and Grantor (as Borrower), are parties to that certain Loan and Security Agreement of even date with this Agreement (as amended from time to time, the “Loan Agreement”). (Capitalized terms used herein have the meaning assigned in the Loan Agreement.)

B. Grantor has guaranteed the Obligations of each Borrower under the Loan Agreement pursuant to a Debenture of even date with the Loan Agreement, pursuant to which Grantor has granted to PFG a security interest in all Charged Assets. Charged Assets include without limitation certain Intellectual Property (including without limitation the Intellectual Property described herein) owned by Grantor.

 

Grantor agrees as follows:

 

1. To secure performance of all of its “Obligations” as defined in the Loan Agreement, Grantor grants to PFG a security interest in all of Grantor’s right, title and interest in Grantor’s “Intellectual Property”, including without limitation (i) the trademarks and servicemarks listed or required to be listed from time to time on Schedule A hereto, whether registered or not, and all applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by such trademarks, and (ii) the patents and patent applications listed or required to be listed from time to time on Schedule B hereto and all like protections including, without limitation, all improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same, (iii) all copyrights, maskworks, software, computer programs and other works of authorship listed or required to be listed from time to time on Schedule C hereto, and all extensions and renewals thereof, (iv) all domain names and domain name rights owned by it and used in connection with its business and that of its Subsidiaries, all legal and equitable rights in domain names and ownership thereof, domain registry, domain servers, web hosting and related contracts, services and facilities (collectively, “Domain Rights”) listed or required to be listed from time to time on Schedule D hereto, and all extensions and renewals thereof, and (iv) all rights to recover for past or future infringement of any of the foregoing, and (v) all right, title and interest in and to any and all present and future license agreements with respect to any of the foregoing, and (vi) all present and future accounts, accounts receivable and other rights to payment arising from, in connection with or relating to any of the foregoing and provided that if any asset cannot be secured without consent of a third party (and such consent is not given), this Agreement will constitute security over all proceeds and other amounts receivable from such asset.

 

 

 

 

2. Grantor represents and warrants that (i) listed on Schedule A hereto are all trademark registrations and pending registrations owned or controlled by Grantor, (ii) listed on Schedule B are all patents and patent applications owned or controlled by Grantor, (iii) listed on Schedule C are all copyrights, software, computer programs, mask works, and other works of authorship owned or controlled by Grantor which are registered with the United States Copyright Office and the copyright registry of each other applicable jurisdiction, wherever located, and (iv) listed on Schedule D are all Domain Rights in which Grantor has any legal, contractual or equitable right. Grantor shall: (a) protect, defend and maintain the validity and enforceability of its intellectual property, other than intellectual property of immaterial business and monetary value that Grantor’s executive management has made a determination not to maintain; (b) promptly advise PFG in writing of material infringements of its intellectual property; and (c) not allow any intellectual property material to Grantor’s business to be abandoned, forfeited or dedicated to the public without PFG’s written consent. If, before the Obligations have been paid and/or performed in full, Grantor shall (i) adopt, use, acquire or apply for registration of any trademark, service mark or trade name, (ii) apply for registration of any patent or obtain any patent or patent application; (iii) create or acquire any published or material unpublished works of authorship material to the business that is or is to be registered with the U.S. Copyright Office or any non-U.S. equivalent or other Governmental Body; or (iv) register or acquire any domain name or domain name rights, then the provisions of Section 1 shall automatically apply thereto, and Grantor shall provide PFG written notice thereof concurrently with delivery of Borrower’s monthly compliance certificate. Grantor shall further provide PFG with all information and details relating to the foregoing and shall take such further actions as PFG may reasonably request from time to time to perfect or continue the perfection of PFG’s interest in such intellectual property.

 

3. This Agreement is being executed and delivered pursuant to the Loan Agreement; nothing herein limits any of the terms or provisions of the Loan Agreement, and PFG’s rights hereunder and under the Loan Agreement are cumulative. This Agreement, the Loan Agreement and the other Loan Documents set forth in full all of the representations and agreements of the parties with respect to the subject matter hereof and supersede all prior discussions, oral representations, oral agreements and oral understandings between the parties. This Agreement may not be modified or amended, nor may any rights hereunder be waived, except in a writing signed by the parties hereto; provided, however, and notwithstanding the foregoing, PFG may amend the Schedules hereto from time to time when it becomes aware of new Intellectual Property subject to this Agreement. In the event of any litigation between the parties based upon, arising out of, or in any way relating to this Agreement, the prevailing party shall be entitled to recover all of its costs and expenses (including without limitation attorneys’ fees) from the non-prevailing party. This Agreement and all acts, transactions, disputes and controversies arising hereunder or relating hereto, and all rights and obligations of PFG and Grantor shall be governed by, and construed in accordance with the internal laws (and not the conflict of laws rules) of the State of California.

 

4. Grantor agrees that simultaneously with the execution of this Agreement, and thereafter upon any amendment of Schedule A , Schedule B, Schedule C or Schedule D , the appropriate entities constituting Grantor shall execute notices in the forms appended hereto (each, a “ Notice ”), as appropriate, with respect to all of the pledged Intellectual Property, now owned or hereafter acquired, and shall deliver each Notice to PFG for the purpose of recordation at the U.S. Patent and Trademark Office or the U.S. Copyright Office, with any patent or trademark registry outside of the United States or otherwise, as appropriate. Whether or not Grantor executes such a Notice reflecting new Intellectual Property, Grantor hereby irrevocably appoints PFG as its lawful attorney-in-fact without any further authorization to file such notices, liens or other instruments as may be customary from time to time for PFG to perfect security interests in Grantor’s Intellectual Property. With respect to the power of attorney granted in the attached Domain Rights Collateral Agreement and Notice, so long as no default has occurred and is continuing under the Loan Documents, PFG shall not take any action referenced therein in the name of Grantor.

 

[Signature Page Follows]

  

 

 

 

Address of Grantor: BORQS Hong Kong Limited

Office B, 21/F, Legend Tower

7 Shing Yip Street, Kwun Tong

Kowloon, Hong Kong

  

  By: /s/ Pat Sek Yuen Chan
   
  Name: Pat Sek Yuen Chan
     
  Title: Sole Director
     
  By:    
     
  Name:  
     
  Title: Director

 

Address of PFG: PARTNERS FOR GROWTH V, L.P.
Partners for Growth V, L.P.  
1660 Tiburon Blvd., Suite D  
Tiburon, California 94920  

  

  By:   /s/ Geoffrey Allan
     
  Name:

Geoffrey Allan

     
  Title:

Manager, Partners for Growth V, LLC

  Its:

General Partner

 

Intellectual Property Security Agreement Signature Page

 

 

 

 

SCHEDULE A

 
BORQS Hong Kong Limited

 

Trademark Schedule

 

Serial Number -

Registration Number

  Date   Mark   Owner
             
None at Effective Date            
             
             
             
             
             
             
             
             
             
             
             
             

 

 

 

 

SCHEDULE B

 

BORQS Hong Kong Limited

 

Patent Schedule

 

Patent/Application Number   Title   Owner
         
None at Effective Date        
         
         
         
         
         
         
         
         
         
         
         

 

 

 

 

SCHEDULE C

 

BORQS Hong Kong Limited

 

COPYRIGHTS

 

Copyright Number   Date   Title / Work   Owner
             
None at Effective Date            
             
             
             
             

 

 

 

 

SCHEDULE D

 

BORQS Hong Kong Limited

 

Domain Name   Domain Host   Admin Contact   Owner   Expiry

borqs.com

 

www.verio.com

 

Steve Lee

+86-139-0139-5984

  Borqs Hong Kong Ltd. (by assignment from Pat Chan)  

July 5, 2020

                 
                 
                 
                 
                 
                 
                 
                 

 

 

 

 

TRADEMARK COLLATERAL AGREEMENT AND NOTICE

 

This Trademark Collateral Agreement and Notice dated as of April 30, 2018 (“Trademark Agreement”), is between BORQS Hong Kong Limited, a private company limited by shares under Hong Kong law, registered with the Companies Registry under number 1151010 and with its principal address at Office B, 21/F, Legend Tower, 7 Shing Yip Street, Kwun Tong, Kowloon, Hong Kong (“ Assignor ”) and Partners for Growth V, L.P., 1660 Tiburon Blvd., Suite D, Tiburon, California 94920 (“ Assignee ”) pursuant to a Loan and Security Agreement, an Intellectual Property Security Agreement of even date herewith by and among Assignor and Assignee (the “ IP Security Agreement ”) and pursuant to certain other loan documents referenced therein (collectively, the “ Loan Documents ”).

 

WHEREAS, Assignor is the owner of certain trademarks, including all federal applications and/or registrations therefor, together with the goodwill of the business connected with the use of and symbolized thereby, as listed on Exhibit 1 hereto (the “ Marks ”); and

 

WHEREAS, Assignee has agreed to extend certain credit to Assignor on condition that the Assignor pledge and grant to Assignee as collateral for the Obligations (as defined in the Loan Documents) a security interest and lien in and to the Marks and all proceeds thereof and all other related claims and rights as more fully described in the IP Security Agreement in favor of the Assignee, by and among Assignor and Assignee;

 

NOW THEREFORE, for good and valuable consideration, as security for the due and timely payment and performance of the Obligations, Assignor hereby pledges and grants to Assignee a security interest and lien in and to the Marks and all proceeds thereof and gives notice of such security interest and the existence of such Security Agreement providing therefor.

 

Executed as of the date first above written.

 

Assignor: Assignee:
BORQS Hong Kong Limited PARTNERS FOR GROWTH V, L.P.

 

         
         
By

/s/ Pat Sek Yuen Chan

     
    By

/s/ Geoffrey Allan

Name: Pat Sek Yuen Chan      
    Name:   Geoffrey Allan
Title: Sole Director    
      Title: Manager, Partners for Growth V, LLC
        Its General Partner
By      
       
Name:        
       
Title: Director      

 

 

 

 

EXHIBIT 1

 

BORQS Hong Kong Limited

 

Trademark Schedule

 

Serial Number - Registration Number   Date   Mark   Owner
             
             
             
             
             
             
             
             
             
             
             
             
             
             

 

 

 

 

PATENT COLLATERAL AGREEMENT AND NOTICE

 

This Patent Collateral Agreement and Notice dated as of April 30, 2018 (“Patent Agreement”), is between BORQS Hong Kong Limited, a private company limited by shares under Hong Kong law, registered with the Companies Registry under number 1151010 and with its principal address at Office B, 21/F, Legend Tower, 7 Shing Yip Street, Kwun Tong, Kowloon, Hong Kong (“ Assignor ”) and Partners for Growth V, L.P., 1660 Tiburon Blvd., Suite D, Tiburon, California 94920 (“ Assignee ”) pursuant to a Loan and Security Agreement, an Intellectual Property Security Agreement of even date herewith by and among Assignor and Assignee (the “ IP Security Agreement ”) and pursuant to certain other loan documents referenced therein (collectively, the “ Loan Documents ”).

 

WHEREAS, Assignor is the owner of certain United States patents and/or patent applications as listed on Exhibit 1 hereto (the “Patents”); and

 

WHEREAS, Assignee has agreed to extend certain credit to Assignor on condition that the Assignor pledge and grant to Assignee as collateral for the Obligations (as defined in the Loan Documents) a security interest and lien in and to the Patents and all proceeds thereof and all other related claims and rights as more fully described in the IP Security Agreement in favor of the Assignee, by and among Assignor and Assignee;

 

NOW THEREFORE, for good and valuable consideration, as security for the due and timely payment and performance of the Obligations, Assignor hereby pledges and grants to Assignee a security interest and lien in and to the Patents and all proceeds thereof and gives notice of such security interest and the existence of the IP Security Agreement providing therefor.

 

Executed as of the date first above written.

 

Assignor: Assignee:
BORQS Hong Kong Limited PARTNERS FOR GROWTH V, L.P.

 

By /s/ Pat Sek Yuen Chan    By /s/ Geoffrey Allan
       
Name: Pat Sek Yuen Chan   Name:   Geoffrey Allan 
       
Title: Sole Director   Title: Manager, Partners for Growth V, LLC
      Its General Partner
         
By        
       
Name:        
       
Title: Director      

  

 

 

 

EXHIBIT 1

 

BORQS Hong Kong Limited

 

Patent Schedule

 

Patent/Application Number   Title   Owner
         
         
         
         
         
         

 

 

 

 

COPYRIGHT COLLATERAL AGREEMENT AND NOTICE

 

This Copyright Collateral Agreement and Notice dated as of April 30, 2018 (“Copyright Agreement”), is between BORQS Hong Kong Limited, a private company limited by shares under Hong Kong law, registered with the Companies Registry under number 1151010 and with its principal address at Office B, 21/F, Legend Tower, 7 Shing Yip Street, Kwun Tong, Kowloon, Hong Kong (“ Assignor ”) and Partners for Growth V, L.P., 1660 Tiburon Blvd., Suite D, Tiburon, California 94920 (“ Assignee ”) pursuant to a Loan and Security Agreement, an Intellectual Property Security Agreement of even date herewith by and among Assignor and Assignee (the “ IP Security Agreement ”) and pursuant to certain other loan documents referenced therein (collectively, the “ Loan Documents ”).

 

WHEREAS, Assignor is the owner of certain copyrightable works which are the subject of United States copyright registrations and/or copyright applications as listed on Exhibit 1 hereto (the “ Copyrights ”); and

 

WHEREAS, Assignee has agreed to extend certain credit to Assignor on condition that the Assignor pledge and grant to Assignee as collateral for the Obligations (as defined in the Loan Documents) a security interest and lien in and to the Copyrights and all proceeds thereof and all other related claims and rights as more fully described in the IP Security Agreement in favor of the Assignee, by and among Assignor and Assignee;

 

NOW THEREFORE, for good and valuable consideration, as security for the due and timely payment and performance of the Obligations, Assignor hereby pledges and grants to Assignee a security interest and lien in and to the Copyrights and all proceeds thereof and gives notice of such security interest and the existence of the IP Security Agreement providing therefor.

 

Executed as of the date first above written.

 

Assignor:   Assignee:
BORQS Hong Kong Limited   PARTNERS FOR GROWTH V, L.P.
         
By /s/ Pat Sek Yuen Chan    By /s/ Geoffrey Allan
       
Name: Pat Sek Yuen Chan    Name:   Geoffrey Allan 
       
Title: Sole Director   Title: Manager, Partners for Growth V, LLC
      Its General Partner
By        
       
Name:        
       
Title: Director      

 

 

 

 

EXHIBIT 1

 

BORQS Hong Kong Limited


COPYRIGHT SCHEDULE

 

Copyright Number   Date   Title / Work   Owner
             
             
             
             
             
             

 

 

 

 

DOMAIN RIGHTS COLLATERAL AGREEMENT AND NOTICE

 

This Domain Rights Collateral Agreement and Notice dated as of April 30, 2018 (“Domain Agreement”), is between BORQS Hong Kong Limited, a private company limited by shares under Hong Kong law, registered with the Companies Registry under number 1151010 and with its principal address at Office B, 21/F, Legend Tower, 7 Shing Yip Street, Kwun Tong, Kowloon, Hong Kong (“ Assignor ”) and Partners for Growth V, L.P., 1660 Tiburon Blvd., Suite D, Tiburon, California 94920 (“ Assignee ”) pursuant to a Loan and Security Agreement, an Intellectual Property Security Agreement of even date herewith by and among Assignor and Assignee (the “ IP Security Agreement ”) and pursuant to certain other loan documents referenced therein (collectively, the “ Loan Documents ”).

 

WHEREAS, Assignor is the owner of certain Domain Rights as defined in the Loan Documents which are, as of the date hereof, as listed on Exhibit 1 hereto (the “ Domain Rights ”); and

 

WHEREAS, Assignee has agreed to extend certain credit to Assignor on condition that the Assignor pledge and grant to Assignee as collateral for the Obligations (as defined in the Loan Documents) a security interest and lien in and to the Domain Rights and all proceeds thereof and all other related claims and rights as more fully described in the IP Security Agreement in favor of the Assignee, by and among Assignor and Assignee;

 

NOW THEREFORE, for good and valuable consideration, as security for the due and timely payment and performance of the Obligations: (1) Assignor hereby pledges and grants to Assignee a security interest and lien in and to the Domain Rights and all proceeds thereof and gives notice of such security interest and the existence of the IP Security Agreement providing therefor; and (2) Assignor hereby irrevocably appoints PFG as its lawful attorney-in-fact without any further authorization to take any action and file any notice on behalf of Assignor that Assignor itself could file in respect of its Domain Rights, including without limitation, to transfer Domain Rights, change administrative contacts in respect of Domain Rights, maintain Domain Rights, and provide instructions to domain hosting services and any domain name registrars.

 

Executed as of the date first above written.

 

Assignor: Assignee:
BORQS Hong Kong Limited PARTNERS FOR GROWTH V, L.P.

 

By /s/ Pat Sek Yuen Chan   By /s/ Geoffrey Allan 
       
Name: Pat Sek Yuen Chan   Name:   Geoffrey Allan 
       
Title: Sole Director   Title: Manager, Partners for Growth V, LLC
      Its General Partner
By        
       
Name:        
       
Title: Director      

  

 

 

 

EXHIBIT 1

 

BORQS Hong Kong Limited

 

 

Domain Name   Domain Host   Admin Contact   Owner   Expiry

borqs.com

 

www.verio.com

 

Steve Lee

+86-139-0139-5984

  Borqs Hong Kong Ltd. (by assignment from Pat Chan)  

July 5, 2020

                 
                 
                 
                 
                 
                 
                 
                 

 

 

 

 

EXHIBIT 10.28

 

INTELLECTUAL PROPERTY SECURITY AGREEMENT

 

This Intellectual Property Security Agreement (this “Agreement”) is entered into as of April 30, 2018 (the “Effective Date”), by and between PARTNERS FOR GROWTH V, L.P. (“PFG”) and BORQS International Holding Corp, a company duly incorporated and validly existing under and by virtue of the Laws of The Cayman Islands, registered under company number 192127 and with its registered office at P.O. Box 309, Ugland House, Grand Cayman KY1-1104, Cayman Islands (“Grantor”), with reference to the following facts:

 

A.  PFG and a Subsidiary of Grantor (as Borrower), are parties to that certain Loan and Security Agreement of even date with this Agreement (as amended from time to time, the “Loan Agreement”). (Capitalized terms used herein have the meaning assigned in the Loan Agreement.)

 

B.  Grantor has guaranteed the Obligations of each Borrower under the Loan Agreement pursuant to a Debenture of even date with the Loan Agreement, pursuant to which Grantor has granted to PFG a security interest in all Charged Assets. Charged Assets include without limitation certain Intellectual Property (including without limitation the Intellectual Property described herein) owned by Grantor.

 

Grantor agrees as follows:

 

1.  To secure performance of all of its “Obligations” as defined in the Loan Agreement, Grantor grants to PFG a security interest in all of Grantor’s right, title and interest in Grantor’s “Intellectual Property”, including without limitation (i) the trademarks and servicemarks listed or required to be listed from time to time on Schedule A hereto, whether registered or not, and all applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by such trademarks, and (ii) the patents and patent applications listed or required to be listed from time to time on Schedule B hereto and all like protections including, without limitation, all improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same, (iii) all copyrights, maskworks, software, computer programs and other works of authorship listed or required to be listed from time to time on Schedule C hereto, and all extensions and renewals thereof, (iv) all domain names and domain name rights owned by it and used in connection with its business and that of its Subsidiaries, all legal and equitable rights in domain names and ownership thereof, domain registry, domain servers, web hosting and related contracts, services and facilities (collectively, “Domain Rights”) listed or required to be listed from time to time on Schedule D hereto, and all extensions and renewals thereof, and (iv) all rights to recover for past or future infringement of any of the foregoing, and (v) all right, title and interest in and to any and all present and future license agreements with respect to any of the foregoing, and (vi) all present and future accounts, accounts receivable and other rights to payment arising from, in connection with or relating to any of the foregoing and provided that if any asset cannot be secured without consent of a third party (and such consent is not given), this Agreement will constitute security over all proceeds and other amounts receivable from such asset.

 

 

 

 

2.  Grantor represents and warrants that (i) listed on Schedule A hereto are all trademark registrations and pending registrations owned or controlled by Grantor, (ii) listed on Schedule B are all patents and patent applications owned or controlled by Grantor, (iii) listed on Schedule C are all copyrights, software, computer programs, mask works, and other works of authorship owned or controlled by Grantor which are registered with the United States Copyright Office and the copyright registry of each other applicable jurisdiction, wherever located, and (iv) listed on Schedule D are all Domain Rights in which Grantor has any legal, contractual or equitable right. Grantor shall: (a) protect, defend and maintain the validity and enforceability of its intellectual property, other than intellectual property of immaterial business and monetary value that Grantor’s executive management has made a determination not to maintain; (b) promptly advise PFG in writing of material infringements of its intellectual property; and (c) not allow any intellectual property material to Grantor’s business to be abandoned, forfeited or dedicated to the public without PFG’s written consent. If, before the Obligations have been paid and/or performed in full, Grantor shall (i) adopt, use, acquire or apply for registration of any trademark, service mark or trade name, (ii) apply for registration of any patent or obtain any patent or patent application; (iii) create or acquire any published or material unpublished works of authorship material to the business that is or is to be registered with the U.S. Copyright Office or any non-U.S. equivalent or other Governmental Body; or (iv) register or acquire any domain name or domain name rights, then the provisions of Section 1 shall automatically apply thereto, and Grantor shall provide PFG written notice thereof concurrently with delivery of Borrower’s monthly compliance certificate. Grantor shall further provide PFG with all information and details relating to the foregoing and shall take such further actions as PFG may reasonably request from time to time to perfect or continue the perfection of PFG’s interest in such intellectual property.

 

3.  This Agreement is being executed and delivered pursuant to the Loan Agreement; nothing herein limits any of the terms or provisions of the Loan Agreement, and PFG’s rights hereunder and under the Loan Agreement are cumulative. This Agreement, the Loan Agreement and the other Loan Documents set forth in full all of the representations and agreements of the parties with respect to the subject matter hereof and supersede all prior discussions, oral representations, oral agreements and oral understandings between the parties. This Agreement may not be modified or amended, nor may any rights hereunder be waived, except in a writing signed by the parties hereto; provided, however, and notwithstanding the foregoing, PFG may amend the Schedules hereto from time to time when it becomes aware of new Intellectual Property subject to this Agreement. In the event of any litigation between the parties based upon, arising out of, or in any way relating to this Agreement, the prevailing party shall be entitled to recover all of its costs and expenses (including without limitation attorneys’ fees) from the non-prevailing party. This Agreement and all acts, transactions, disputes and controversies arising hereunder or relating hereto, and all rights and obligations of PFG and Grantor shall be governed by, and construed in accordance with the internal laws (and not the conflict of laws rules) of the State of California.

 

4. Grantor agrees that simultaneously with the execution of this Agreement, and thereafter upon any amendment of Schedule A , Schedule B, Schedule C or Schedule D , the appropriate entities constituting Grantor shall execute notices in the forms appended hereto (each, a “ Notice ”), as appropriate, with respect to all of the pledged Intellectual Property, now owned or hereafter acquired, and shall deliver each Notice to PFG for the purpose of recordation at the U.S. Patent and Trademark Office or the U.S. Copyright Office, with any patent or trademark registry outside of the United States or otherwise, as appropriate. Whether or not Grantor executes such a Notice reflecting new Intellectual Property, Grantor hereby irrevocably appoints PFG as its lawful attorney-in-fact without any further authorization to file such notices, liens or other instruments as may be customary from time to time for PFG to perfect security interests in Grantor’s Intellectual Property. With respect to the power of attorney granted in the attached Domain Rights Collateral Agreement and Notice, so long as no default has occurred and is continuing under the Loan Documents, PFG shall not take any action referenced therein in the name of Grantor.

 

[Signature Page Follows]

 

  2  

 

   

Address of Grantor: BORQS International Holding Corp
     

P.O. Box 309

Ugland House

Grand Cayman KY1-1104

Cayman Islands

By: /s/ Pat Sek Yuen Chan
  Name: Pat Sek Yuen Chan
  Title: Sole Director
     
  By:  
  Name:  
  Title: Director
     
Address of PFG: PARTNERS FOR GROWTH V, L.P.
     

Partners for Growth V, L.P.

1660 Tiburon Blvd., Suite D

Tiburon, California 94920

By:    /s/ Geoffrey Allan
  Name: Geoffrey Allan
  Title: Manager, Partners for Growth V, LLC
    Its: General Partner

 

 Intellectual Property Security Agreement Signature Page

 

  3  

 

 

SCHEDULE A

 
BORQS International Holding Corp

 

Trademark Schedule

 

 

 

None at Effective Date

 

  4  

 

 

SCHEDULE B

 

BORQS International Holding Corp

 

Patent Schedule

 

 

 

None at Effective Date

 

  5  

 

 

SCHEDULE C

 

BORQS International Holding Corp

 

COPYRIGHTS

 

 

 

None at Effective Date

 

  6  

 

 

SCHEDULE D

 

BORQS International Holding Corp

 

DOMAIN RIGHTS

 

Domain Name   Service Provider Contact Detail and Account number (if any)   Owner and Registrar or Administrative Contact of Record   Expiry Date of Domain
None at Effective Date            
             
             
             
             
             
             
             

 

  7  

 

 

TRADEMARK COLLATERAL AGREEMENT AND NOTICE

 

This Trademark Collateral Agreement and Notice dated as of April 30, 2018 (“Trademark Agreement”), is between BORQS International Holding Corp, a company duly incorporated and validly existing under and by virtue of the Laws of The Cayman Islands, registered under company number 192127 and with registered office address at P.O. Box 309, Ugland House, Grand Cayman KY1-1104 (“ Assignor ”) and Partners for Growth V, L.P., 1660 Tiburon Blvd., Suite D, Tiburon, California 94920 (“ Assignee ”) pursuant to a Loan and Security Agreement, an Intellectual Property Security Agreement of even date herewith by and among Assignor and Assignee (the “ IP Security Agreement ”) and pursuant to certain other loan documents referenced therein (collectively, the “ Loan Documents ”).

 

WHEREAS, Assignor is the owner of certain trademarks, including all federal applications and/or registrations therefor, together with the goodwill of the business connected with the use of and symbolized thereby, as listed on Exhibit 1 hereto (the “ Marks ”); and

 

WHEREAS, Assignee has agreed to extend certain credit to Assignor on condition that the Assignor pledge and grant to Assignee as collateral for the Obligations (as defined in the Loan Documents) a security interest and lien in and to the Marks and all proceeds thereof and all other related claims and rights as more fully described in the IP Security Agreement in favor of the Assignee, by and among Assignor and Assignee;

 

NOW THEREFORE, for good and valuable consideration, as security for the due and timely payment and performance of the Obligations, Assignor hereby pledges and grants to Assignee a security interest and lien in and to the Marks and all proceeds thereof and gives notice of such security interest and the existence of such Security Agreement providing therefor.

 

Executed as of the date first above written.

 

Assignor:     Assignee:
         
BORQS International Holding Corp   PARTNERS FOR GROWTH V, L.P.
         
By /s/ Pat Sek Yuen Chan   By /s/ Geoffrey Allan
Name: Pat Sek Yuen Chan   Name: Geoffrey Allan
Title: Sole Director   Title:

Manager, Partners for Growth V, LLC

Its General Partner

                      
By              
Name:        
Title: Director      

  

  8  

 

 

EXHIBIT 1

 

BORQS International Holding Corp

 

Trademark Schedule

 

 

 

 

 

 

  9  

 

 

PATENT COLLATERAL AGREEMENT AND NOTICE

 

This Patent Collateral Agreement and Notice dated as of April 30, 2018 (“Patent Agreement”), is between BORQS International Holding Corp, a company duly incorporated and validly existing under and by virtue of the Laws of The Cayman Islands, registered under company number 192127 and with registered office address at P.O. Box 309, Ugland House, Grand Cayman KY1-1104 (“ Assignor ”) and Partners for Growth V, L.P., 1660 Tiburon Blvd., Suite D, Tiburon, California 94920 (“ Assignee ”) pursuant to a Loan and Security Agreement, an Intellectual Property Security Agreement of even date herewith by and among Assignor and Assignee (the “ IP Security Agreement ”) and pursuant to certain other loan documents referenced therein (collectively, the “ Loan Documents ”).

 

WHEREAS, Assignor is the owner of certain United States patents and/or patent applications as listed on Exhibit 1 hereto (the “Patents”); and

 

WHEREAS, Assignee has agreed to extend certain credit to Assignor on condition that the Assignor pledge and grant to Assignee as collateral for the Obligations (as defined in the Loan Documents) a security interest and lien in and to the Patents and all proceeds thereof and all other related claims and rights as more fully described in the IP Security Agreement in favor of the Assignee, by and among Assignor and Assignee;

 

NOW THEREFORE, for good and valuable consideration, as security for the due and timely payment and performance of the Obligations, Assignor hereby pledges and grants to Assignee a security interest and lien in and to the Patents and all proceeds thereof and gives notice of such security interest and the existence of the IP Security Agreement providing therefor.

 

Executed as of the date first above written.

 

Assignor:     Assignee:
         
BORQS International Holding Corp   PARTNERS FOR GROWTH V, L.P.
         
By /s/ Pat Sek Yuen Chan   By /s/ Geoffrey Allan
Name: Pat Sek Yuen Chan   Name: Geoffrey Allan
Title: Sole Director   Title:

Manager, Partners for Growth V, LLC

Its General Partner

         
By              
Name:        
Title: Director      

  

  10  

 

 

EXHIBIT 1

 

BORQS International Holding Corp

 

Patent Schedule

 

 

 

 

 

  11  

 

  

COPYRIGHT COLLATERAL AGREEMENT AND NOTICE

 

This Copyright Collateral Agreement and Notice dated as of April 30, 2018 (“Copyright Agreement”), is between BORQS International Holding Corp, a company duly incorporated and validly existing under and by virtue of the Laws of The Cayman Islands, registered under company number 192127 and with registered office address at P.O. Box 309, Ugland House, Grand Cayman KY1-1104 (“ Assignor ”) and Partners for Growth V, L.P., 1660 Tiburon Blvd., Suite D, Tiburon, California 94920 (“ Assignee ”) pursuant to a Loan and Security Agreement, an Intellectual Property Security Agreement of even date herewith by and among Assignor and Assignee (the “ IP Security Agreement ”) and pursuant to certain other loan documents referenced therein (collectively, the “ Loan Documents ”).

 

WHEREAS, Assignor is the owner of certain copyrightable works which are the subject of United States copyright registrations and/or copyright applications as listed on Exhibit 1 hereto (the “ Copyrights ”); and

 

WHEREAS, Assignee has agreed to extend certain credit to Assignor on condition that the Assignor pledge and grant to Assignee as collateral for the Obligations (as defined in the Loan Documents) a security interest and lien in and to the Copyrights and all proceeds thereof and all other related claims and rights as more fully described in the IP Security Agreement in favor of the Assignee, by and among Assignor and Assignee;

 

NOW THEREFORE, for good and valuable consideration, as security for the due and timely payment and performance of the Obligations, Assignor hereby pledges and grants to Assignee a security interest and lien in and to the Copyrights and all proceeds thereof and gives notice of such security interest and the existence of the IP Security Agreement providing therefor.

 

Executed as of the date first above written.

 

Assignor:     Assignee:
         
BORQS International Holding Corp   PARTNERS FOR GROWTH V, L.P.
         
By /s/ Pat Sek Yuen Chan   By /s/ Geoffrey Allan
Name: Pat Sek Yuen Chan   Name: Geoffrey Allan
Title: Sole Director   Title:

Manager, Partners for Growth V, LLC

Its General Partner

         
By              
Name:        
Title: Director      

 

  12  

 

 

EXHIBIT 1

BORQS International Holding Corp

 
COPYRIGHT SCHEDULE

 

 

 

 

 

  13  

 

 

DOMAIN RIGHTS COLLATERAL AGREEMENT AND NOTICE

 

This Domain Rights Collateral Agreement and Notice dated as of April 30, 2018 (“Domain Agreement”), is between BORQS International Holding Corp, a company duly incorporated and validly existing under and by virtue of the Laws of The Cayman Islands, registered under company number 192127 and with registered office address at P.O. Box 309, Ugland House, Grand Cayman KY1-1104 (“ Assignor ”) and Partners for Growth V, L.P., 1660 Tiburon Blvd., Suite D, Tiburon, California 94920 (“ Assignee ”) pursuant to a Loan and Security Agreement, an Intellectual Property Security Agreement of even date herewith by and among Assignor and Assignee (the “ IP Security Agreement ”) and pursuant to certain other loan documents referenced therein (collectively, the “ Loan Documents ”).

 

WHEREAS, Assignor is the owner of certain Domain Rights as defined in the Loan Documents which are, as of the date hereof, as listed on Exhibit 1 hereto (the “ Domain Rights ”); and

 

WHEREAS, Assignee has agreed to extend certain credit to Assignor on condition that the Assignor pledge and grant to Assignee as collateral for the Obligations (as defined in the Loan Documents) a security interest and lien in and to the Domain Rights and all proceeds thereof and all other related claims and rights as more fully described in the IP Security Agreement in favor of the Assignee, by and among Assignor and Assignee;

 

NOW THEREFORE, for good and valuable consideration, as security for the due and timely payment and performance of the Obligations: (1) Assignor hereby pledges and grants to Assignee a security interest and lien in and to the Domain Rights and all proceeds thereof and gives notice of such security interest and the existence of the IP Security Agreement providing therefor; and (2) Assignor hereby irrevocably appoints PFG as its lawful attorney-in-fact without any further authorization to take any action and file any notice on behalf of Assignor that Assignor itself could file in respect of its Domain Rights, including without limitation, to transfer Domain Rights, change administrative contacts in respect of Domain Rights, maintain Domain Rights, and provide instructions to domain hosting services and any domain name registrars.

 

Executed as of the date first above written.

   

Assignor:     Assignee:
         
BORQS International Holding Corp   PARTNERS FOR GROWTH V, L.P.
         
By /s/ Pat Sek Yuen Chan   By /s/ Geoffrey Allan
Name: Pat Sek Yuen Chan   Name: Geoffrey Allan
Title: Sole Director   Title:

Manager, Partners for Growth V, LLC

Its General Partner

         
By              
Name:        
Title: Director      

 

  14  

 

 

EXHIBIT 1

 

BORQS International Holding Corp

 

DOMAIN RIGHTS

 

 

 

 

 

 

15

 

EXHIBIT 10.29

 

Borqs Technologies, Inc.

(as the Chargor )

 

BOrqs International HOlding Corp

(as the Company )

 

and

 

Partners for growth v, L.P.

(as the Agent )

 

 
 

 

EQUITABLE MORTGAGE  

over registered shares in a Cayman Islands exempted company

 

 
 

WARNING

 

THE TAKING OR SENDING BY ANY PERSON OF AN ORIGINAL OF THIS DOCUMENT INTO THE CAYMAN ISLANDS MAY GIVE RISE TO THE IMPOSITION OF CAYMAN ISLANDS STAMP DUTY

 

 

www.harneys.com

  

 

 

 

Content

 

Interpretation 3
Principal payment obligation 6
3   Creation of security 6
4   Representations 7
Covenants 9
6 Shares 10
When security becomes enforceable 13
Enforcement of security 13
9 Receiver 14
10 Powers of receiver 15
11 Application of proceeds 16
12 Expenses and indemnity 17
13 Delegation 17
14  Further assurances 17
15   Power of attorney 18
16   Preservation 18
17   Miscellaneous 20
18    Notices 21
19  Release 22
20    Set off 22
21  Third Party Rights 22
22   Jurisdiction 22
23   Governing law 23
SCHEDULE 1 24
SCHEDULE 2 26

 

  2  

 

 

THIS MORTGAGE is dated 30 April 2018 and is made as a deed

 

BETWEEN

 

1 Borqs Technologies, Inc. , a BVI business company incorporated under the laws of the British Virgin Islands with registered number 1880410 and whose registered office is at the offices of Ritter House, Wickhams Cay II, Road Town, Tortola, British Virgin Islands (the Chargor );

 

2 BORQS International Holding Corp , an exempted company limited by shares incorporated under the laws of the Cayman Islands with registered number 192127 whose registered office is at the offices of Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands (the Company ); and

 

3 Partners for Growth V, L.P. , acting in its capacity as security agent for the Lenders (the Agent ).

 

BACKGROUND

 

A The Chargor and the Company enter into this Mortgage to provide security for the continuing provision of credit facilities to the Borrower under the Loan Documents.

 

B It is intended that this document takes effect as a deed notwithstanding the fact that a party may only execute this document under hand.

 

IT IS AGREED as follows:

 

1 Interpretation

 

1.1 Definitions

 

In this Mortgage:

 

Borrower means BORQS Hong Kong Limited and any other borrower under a Loan Document.

 

Business Day means a day, other than a Saturday or a Sunday, on which banks are open for general business in the Cayman Islands, the British Virgin Islands and the United States of America.

 

BVI Act means the BVI Business Companies Act, 2004.

 

Companies Law means the Companies Law (Revised) of the Cayman Islands.

 

Event of Default means any event of default under any Loan Document.

 

Initial Shares means the 1 ordinary share of US$0.001 par value each issued by the Company and owned by the Chargor on the date of this Mortgage.

 

Lender means each lender under a Loan Document, including, at the date of this Agreement, Partners for Growth IV, L.P. and Partners for Growth V, L.P.

 

  3  

 

 

Loan Document means each of:

 

(a) the loan and security agreement dated August 15, 2016 between Partners for Growth IV, L.P. as lender and BORQS Hong Kong Limited as borrower; and

 

(b) the loan and security agreement dated April 30, 2018 between Partners for Growth V, L.P. as lender and BORQS Hong Kong Limited as borrower; and

 

(c) any other loan and security agreement designated as such by the Agent.

 

Mortgage means this equitable share mortgage.

 

Obligations means all present and future obligations and liabilities of any kind (whether actual or contingent and whether owed jointly or severally as principal or surety or in any other capacity whatsoever) of any Obligor to any Lender under a Loan Document.

 

Obligor means the Chargor, the Company, each Borrower and each other person providing security in connection with a Loan Document.

 

Receiver means a receiver and manager or a receiver, in each case, appointed under this Mortgage.

 

Register of Charges means the register of charges of the Chargor maintained by the Chargor in accordance with the BVI Act.

 

Register of Members means the register of members of the Company maintained by the Company in accordance with the Companies Law.

 

Related Rights means the rights attached to the Shares described in Clause 3.2(b).

 

Security Assets means all the Shares and the Related Rights.

 

Security Interest means any mortgage, pledge, lien, charge, assignment, hypothecation or other security interest, any pre-emption rights or options, hold back or flawed asset arrangements or any other agreement or arrangement having a similar effect.

 

Security Period means the period beginning on the date of this Mortgage and ending on the date on which all the Obligations have been unconditionally and irrevocably paid and discharged in full.

 

Shares means the Initial Shares and any other shares issued by the Company owned by the Chargor or its nominee(s) from time to time.

 

SSVB Share Mortgage means the equitable mortgage over registered shares in the Company granted by the Chargor to SPD Silicon Valley Bank Co., Ltd. on 15 October 2017.

 

Subordination Agreement means, collectively, the subordination agreement dated August 15, 2016 between Partners for Growth IV, L.P. and SPD Silicon Valley Bank Co., Ltd. and the subordination agreement dated on or about the date of this Mortgage between the Agent and SPD Silicon Valley Bank Co., Ltd.

 

Third Parties Law means The Contracts (Rights of Third Parties) Law (Revised).

 

  4  

 

 

1.2 Construction

 

(a) Capitalised terms defined in the Loan Documents have, unless expressly defined in this Mortgage, the same meaning in this Mortgage.

 

(b) In this Mortgage, unless the contrary intention appears, a reference to:

 

(i) a reference to any asset , unless the context otherwise requires, includes any present, future or contingent asset (including properties, revenues and rights of every description) whether tangible or intangible;

 

(ii) an authorisation includes an authorisation, consent, approval, resolution, licence, exemption, filing and registration;

 

(iii) a regulation includes any regulation, rule, official directive, request or guideline (whether or not having the force of law) of any governmental body, agency, department or regulatory, self-regulatory or other authority or organisation;

 

(iv) Security means the security constituted by this Mortgage;

 

(v) tax shall be construed so as to include any tax, fund, levy, impost, duty or other charge of a similar nature (including, without limitation, any penalty or interest payable in connection with any failure to pay or any delay in paying of the same);

 

(vi) a provision of law is a reference to that provision as amended or re-enacted;

 

(vii) a Clause or a Schedule is a reference to a clause of or a schedule to this Mortgage;

 

(viii) a person includes its successors and assigns; and

 

(ix) a time of day is a reference to time in the Cayman Islands.

 

(c) If the Agent considers in its sole discretion that an amount paid to it under the Loan Documents is capable of being avoided or otherwise set aside on the liquidation or administration of the payer or otherwise, then that amount shall not be considered to have been irrevocably paid for the purposes of this Mortgage.

 

(d) References to the singular include the plural, and vice versa.

 

(e) The index to and headings in this Mortgage are for convenience only and are to be ignored in construing this Mortgage.

 

1.3 Statutes

 

In this Mortgage a reference to a statute or statutory instrument is, unless otherwise specified, a reference to the most recent revision of the relevant statute or statutory instrument of the Cayman Islands and includes any statutory modification or re-enactment thereof for the time being in force.

 

  5  

 

 

2 Principal payment obligation

 

In consideration for the provision of credit to each Borrower under the Loan Documents and for other good and valuable consideration the receipt of which is hereby acknowledged by each party hereto, the Chargor hereby covenants with and undertakes to the Agent to pay and discharge as principal obligor and not merely as surety all of the Obligations as and when the same are due on the first written demand of the Agent.

 

3 Creation of security

 

3.1 General

 

The security created under this Mortgage:

 

(a) is created in favour of the Agent;

 

(b) is created over the Security Assets;

 

(c) is security for the irrevocable payment and satisfaction in full of all the Obligations; and

 

(d) is created by the Chargor as legal and beneficial owner.

 

The Agent holds the benefit of this Mortgage on trust for the Lenders.

 

3.2 Securities

 

(a) The Chargor charges by way of first equitable mortgage all of its interest in all the Shares.

 

(b) The Chargor charges by way of first fixed charge all of its rights, title and interest including all benefits, present and future, actual and contingent accruing in respect of:

 

(i) any dividend or interest paid or payable in relation to the Shares; and

 

(ii) any right, money or property accruing or offered at any time in relation to the Shares by way of redemption, repurchase, substitution, exchange, bonus or preference, under option rights or otherwise,

 

(the Related Rights ).

 

3.3 Second Ranking Security

 

(a) Notwithstanding any other provision of this Mortgage, the security created under this Mortgage shall, until such time as the Obligations under the SSVB Share Mortgage have been unconditionally and irrevocably paid and discharged in full, be second-ranking to the security created under the SSVB Share Mortgage in accordance with the terms of the Subordination Agreement.

 

  6  

 

 

4 Representations

 

4.1 Representations

 

Each of the Chargor and the Company makes the following representations to each Lender.

 

4.2 Status

 

(a) The Company is an exempted company, duly incorporated and validly existing under the laws of the Cayman Islands.

 

(b) The Chargor is a BVI business company, duly incorporated and validly existing under the laws of the British Virgin Islands.

 

(c) It has the power to own its assets and carry on its business as it is being conducted and it is in good standing.

 

4.3 Binding obligations

 

The obligations expressed to be assumed by it in this Mortgage are its legal, valid, binding and enforceable obligations.

 

4.4 Non-conflict with other obligations

 

The entry into and performance by it of, and the transactions contemplated by, this Mortgage do not and will not conflict with:

 

(a) any law or regulation applicable to it;

 

(b) its constitutional documents; or

 

(c) any agreement or instrument binding upon it or any of its assets.

 

4.5 Power and authority

 

It has the power to enter into, perform and deliver, and has taken all necessary action to authorise its entry into, performance and delivery of, this Mortgage and the transactions contemplated by this Mortgage.

 

4.6 Validity and admissibility in evidence

 

Subject to the payment of stamp duty in accordance with Clause 5.4 (Taxes), all authorisations or consents required or desirable:

 

(a) to enable it lawfully to enter into and exercise its rights and comply with its obligations under this Mortgage; and

 

(b) to make this Mortgage admissible in evidence in the Cayman Islands and in the British Virgin Islands,

 

have been obtained or effected and are in full force and effect.

 

  7  

 

 

4.7 Registration

 

Subject to Clause 5.4 (Taxes) and Clause 5.5 (Filings and Registrations), it is not necessary or advisable that this Mortgage be filed, registered, recorded or enrolled with any court, public office or other authority in any jurisdiction or that any stamp, documentary, registration or similar tax or duty be paid on or in relation to this Mortgage.

 

4.8 Litigation

 

No litigation, arbitration or administrative proceeding is current, pending or, to its knowledge, threatened which might, if adversely determined, have a material adverse effect on the business, assets, financial condition or results of operations of it, on its ability to perform its obligations under this Mortgage or which purport to effect the legality, validity or enforceability of this Mortgage. There has been no failure by it to make any payment resulting from a court order or judgment.

 

4.9 Liquidation

 

It has not taken any corporate action and no other steps been taken or legal proceedings been started or are (to the best of its knowledge and belief) threatened against it for its winding-up (whether voluntary or by the courts of the Cayman Islands or the British Virgin Islands), liquidation, dissolution, strike off, administration, reorganisation (by way of voluntary arrangement, creditors' arrangement, scheme of arrangement or otherwise), composition, compromise, assignment or arrangement with any creditor or for the appointment of a liquidator, provisional liquidator, receiver, administrator, administrative receiver or other similar officer of it or any or all of its assets or revenues.

 

4.10 Chargor Representations

 

The Chargor makes the following representations to the Agent.

 

4.11 Legal and beneficial ownership

 

The Chargor is the sole absolute legal and beneficial owner of the Security Assets, free and clear of any rights or interests in favour of third parties except for the SSVB Share Mortgage and this Mortgage.

 

4.12 Security

 

This Mortgage creates:

 

(a) until such time as the Obligations under the SSVB Share Mortgage have been unconditionally and irrevocably paid and discharged in full, a second ranking equitable mortgage over all of the Shares and a second fixed charge over the Related Rights; and

 

(b) after such time as the Obligations under the SSVB Share Mortgage have been unconditionally and irrevocably paid and discharged in full, a first ranking equitable mortgage over all of the Shares and a first fixed charge over the Related Rights,

 

and is not liable to be avoided or otherwise set aside on the liquidation or administration of the Chargor or otherwise.

 

  8  

 

 

4.13 Shares

 

(a) The Shares are fully paid and non-assessable.

 

(b) The Shares represent 100% of the shares issued by the Company.

 

(c) The Company has not granted any warrants, options or other analogous rights to any person relating to shares issued by the Company.

 

(d) The Shares are freely transferable and no consents or approvals (including rights of pre-emption) are required in order to register a transfer of the Shares.

 

(e) The directors of the Company are not entitled (other than pursuant to the Company’s memorandum or articles of association, which entitlement is waived by the Company pursuant to Clause 6.9), to refuse to register any transfer of Shares comprising Security Assets into the name of the Agent or its nominee.

 

(f) It has not received any notice of any adverse claim by any person in respect of the ownership of any Security Asset or any interest in it, nor has any acknowledgement been given to any person in respect of any Security Asset.

 

4.14 Times for making representations

 

(a) The representations set out in this Mortgage (including in this Clause 4) are made on the date of this Mortgage and are deemed to be repeated on each day of the Security Period.

 

(b) When a representation is repeated, it is applied to the circumstances existing at the time of repetition.

 

4.15 Estoppel

 

Each of the Chargor and the Company acknowledges and agrees that the representations in this Mortgage are made by way of deed, and that they shall be estopped from subsequently arguing that any representation was untrue when made or repeated.

 

5 Covenants

 

5.1 Security

 

The Chargor shall not create or permit to subsist any Security Interest on any Security Asset (except for this Security).

 

5.2 Disposals

 

The Chargor shall not sell, transfer, licence, lease or otherwise dispose of any Security Asset.

 

5.3 No Amendment of Articles

 

Save with the prior written consent of the Agent, the Chargor shall not exercise its voting rights as sole shareholder of the Company to amend the memorandum or articles of association of the Company.

 

  9  

 

 

5.4 Taxes

 

(a) The Chargor will pay or procure for the stamping of an executed original of this Mortgage under the Stamp Duty (Revised) and deliver the same to the Agent within 20 Business Days after the date that this Mortgage is first brought into the Cayman Islands.

 

(b) The Chargor will pay or procure the payment when due of all present and future registration fees, other stamp duties and other similar tax which is or becomes payable in relation to this Mortgage and keep the Agent indemnified against any failure or delay in paying them.

 

5.5 Filings and Registrations

 

Without limiting the provisions of Clause 14 (Further assurances) or any other provisions of this Mortgage, the Chargor shall, immediately within 10 Business Days after the date of this Mortgage provide a copy of its updated Register of Charges recording the particulars of this Security therein pursuant to section 162 of the BVI Act

 

6 Shares

 

6.1 Deposit

 

(a) The Chargor shall, on the date of this Mortgage:

 

(i) deliver to the Agent an executed by undated share transfer instrument in the form set out in SCHEDULE 2 and other documents which may be requested by the Agent in order to enable the Agent or its nominees to be registered as the owner or otherwise obtain legal title to the Initial Shares; and

 

(ii) deliver to the Agent copies of the corporate authorisations of the Chargor and the Company required to authorise the execution of this Mortgage.

 

(b) The Chargor shall, immediately after the issue of any Shares other than the Initial Shares, comply with sub-paragraphs (a)(ii) above in respect of such Shares.

 

6.2 Removal of directors

 

The Chargor shall procure that the Company delivers:

 

(a) signed but undated letters of resignation from the sole director of the Company in the form set out in SCHEDULE 1, Part I; and

 

(b) signed and dated letters of authorisation from the sole director of the Company in the form set out in SCHEDULE 1, Part II,

 

to the Agent on the date of this Mortgage and, where any person is appointed as a director of the Company after the date of this Mortgage, immediately after such appointment.

 

6.3 Changes to rights

 

Neither the Chargor nor the Company shall take or allow the taking of any action on their behalf which may result in the rights attaching to any of the Security Assets being altered or, save with the prior written consent of the Agent, further shares in the Company in excess of the Initial Shares being issued (including by creating any instrument convertible into shares in the Company).

 

  10  

 

 

6.4 Payments on Shares

 

(a) The Chargor shall pay all calls or other payments due and payable in respect of any Shares.

 

(b) If the Chargor fails to do so, the Agent may pay the calls or other payments in respect of any Shares on behalf of the Chargor. The Chargor shall immediately on request reimburse the Agent for any payment made by the Agent under this Subclause.

 

6.5 Other obligations in respect of Security Assets

 

(a) The Chargor shall comply with all conditions and obligations assumed by it in respect of the Security Assets.

 

(b) The Agent is not obliged to:

 

(i) perform any obligation of the Chargor;

 

(ii) make any payment;

 

(iii) make any enquiry as to the nature or sufficiency of any payment received by it or the Chargor; or

 

(iv) present or file any claim or take any other action to collect or enforce the payment of any amount to which it may be entitled under this Mortgage,

 

in respect of any Security Asset.

 

6.6 Voting rights

 

(a) Before this Security becomes enforceable, the voting rights, powers and other rights in respect of the Security Assets may be exercised by the Chargor and shall, if exercisable by the Agent, be exercised in any manner which the Chargor may direct in writing.

 

(b) The Chargor shall indemnify the Agent against any loss or liability incurred by the Agent as a consequence of the Agent acting in respect of the Security Assets as permitted by this Mortgage or on the direction of the Chargor.

 

(c) After this Security has become enforceable, the Agent may exercise (in the name of the Chargor and without any further consent or authority on the part of the Chargor) any voting rights and any powers or rights which may be exercised by the legal or beneficial owner of any Security Asset.

 

  11  

 

 

6.7 Dividends

 

(a) Before this Security becomes enforceable, the Chargor shall be entitled to receive and retain all cash dividends, interest and any other monies paid to it in respect of any Security Assets.

 

(b) Upon or at any time after this Security has become enforceable, all dividends, interest and other monies arising from the Security Assets shall be paid to the Agent or to such account as it shall direct for application at its discretion.

 

6.8 Turnover

 

(a) If the Chargor or the Company receives or recovers any amount which, under the terms of this Mortgage, should have been paid to the Agent, it will:

 

(i) hold an amount of that receipt or recovery equal to the Obligations (or if less, the amount received or recovered) on trust for the Agent and promptly pay that amount to the Agent for application in accordance with the terms of this Mortgage; and

 

(ii) promptly pay an amount equal to the amount (if any) by which the receipt or recovery exceeds the Obligations to the Agent for application in accordance with the terms of this Mortgage.

 

(b) If, for any reason, any of the trusts expressed to be created in this Clause should fail or be unenforceable, the Chargor or the Company, as the case may be, will promptly pay or distribute an amount equal to that receipt or recovery to the Agent to be held on trust by the Agent for application in accordance with the terms of this Mortgage.

 

6.9 Company obligations

 

The Company:

 

(a) irrevocably waives:

 

(i) any first and paramount lien; and

 

(ii) any rights of forfeiture,

 

which it may have, now or in the future, under its constitutional documents (including but not limited to under articles 4 and 5 of its articles of association), in relation to the Security Assets;

 

(b) irrevocably consents to the transfer of the Shares pursuant to the enforcement by the Agent of any of its rights under this Mortgage and undertakes not to exercise its discretion to refuse to register the transfer of any Share pursuant to article 6.2 of its articles of association or to suspend registration under article 6.4 of its articles of association; and

 

(c) shall not register the transfer of any Share to any other person without the prior written consent of the Agent.

 

  12  

 

 

6.10 Register of Members

 

The Company shall:

 

(a) Within 10 Business Days after the date of this Mortgage, provide the Agent with a certified copy of the Register of Members containing the following annotation:

 

“All the ordinary shares issued as fully paid up and registered in the name of Borqs Technologies, Inc. are mortgaged and charged in favour of Partners for Growth V, L.P. pursuant to a share mortgage dated April __, 2018, as amended from time to time”.

 

(b) promptly register any transfer of title to the Shares pursuant to any enforcement by the Agent of its rights under this Mortgage.

 

6.11 Legal Mortgage

 

At the request of the Agent at any time prior to or after the occurrence of an Event of Default the Chargor shall promptly cause the Security Assets or any part of them to be registered in the name of the Agent (or its nominee) thereupon to be held, as so registered, subject to the terms of this Mortgage.

 

7 When security becomes enforceable

 

7.1 Event of Default

 

Subject to the terms of the Subordination Agreement, this Security will become immediately enforceable if an Event of Default occurs and is continuing.

 

7.2 Discretion

 

After this Security has become enforceable, the Agent may in its absolute discretion enforce all or any part of this Security in any manner it sees fit including, without limitation, dating and presenting to the Company or any other person any undated documents provided to it pursuant to Clauses 6.1 (Deposit) and 6.2 (Removal of directors) or any other provision of this Mortgage, including to remove the then existing directors and officers (with or without cause) by dating and presenting the undated, signed letters of resignation delivered pursuant to this Mortgage to appoint such persons as directors of the Company as it shall deem appropriate.

 

8 Enforcement of security

 

8.1 No liability as mortgagee in possession

 

Neither the Agent nor any Receiver will be liable, by reason of entering into possession of a Security Asset, to account as mortgagee in possession or for any loss on realisation or for any default or omission for which a mortgagee in possession might be liable.

 

  13  

 

 

8.2 Protection of third parties

 

No person (including a purchaser) dealing with the Agent or a Receiver or its or his agents will be concerned to enquire:

 

(a) whether the Obligations have become payable;

 

(b) whether any power which the Agent or a Receiver is purporting to exercise has become exercisable or is being properly exercised;

 

(c) whether any money remains due under the Loan Documents; or

 

(d) how any money paid to the Agent or to that Receiver is to be applied.

 

8.3 Redemption of prior mortgages

 

(a) At any time after this Security has become enforceable, the Agent may:

 

(i) redeem any prior Security Interest against any Security Asset; and/or

 

(ii) procure the transfer of that Security Interest to itself; and/or

 

(iii) settle and pass the accounts of the prior mortgagee, chargee or encumbrancer; any accounts so settled and passed will be, in the absence of manifest error, conclusive and binding on the Chargor.

 

(b) The Chargor shall pay to the Agent, immediately on demand, the costs and expenses incurred by the Agent in connection with any such redemption and/or transfer, including the payment of any principal or interest.

 

8.4 Contingencies

 

If this Security is enforced at a time when no amount is due under the Loan Documents but at a time when amounts may or will become due, the Agent may pay the proceeds of any recoveries effected by it into a suspense account or other account selected by it.

 

9 Receiver

 

9.1 Appointment of Receiver

 

(a) The Agent may appoint any one or more persons to be a Receiver of all or any part of the Security Assets if this Security has become enforceable.

 

(b) Any appointment under paragraph (a) above may be by deed, under seal or in writing under its hand.

 

9.2 Removal

 

The Agent may remove any Receiver appointed by it and may, whenever it thinks fit, appoint a new Receiver in the place of any Receiver whose appointment may for any reason have terminated.

 

9.3 Remuneration

 

The Agent may fix the remuneration of any Receiver appointed by it.

 

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9.4 Agent of the Chargor

 

(a) A Receiver will be deemed to be the agent of the Chargor for all purposes. The Chargor alone is responsible for the contracts, engagements, acts, omissions, defaults and losses of a Receiver and for liabilities incurred by a Receiver.

 

(b) No Lender will incur any liability (either to the Chargor or to any other person) by reason of the appointment of a Receiver or for any other reason.

 

9.5 Exercise of Receiver powers by the Agent

 

To the fullest extent allowed by law, any right, power or discretion conferred by this Mortgage (either expressly or impliedly) or by law on a Receiver may after this Security becomes enforceable be exercised by the Agent in relation to any Security Asset without first appointing a Receiver and notwithstanding the appointment of a Receiver.

 

10 Powers of receiver

 

10.1 General

 

(a) A Receiver has all of the rights, powers and discretions set out below in this Clause.

 

(b) If there is more than one Receiver holding office at the same time, each Receiver may (unless the document appointing him states otherwise) exercise all of the powers conferred on a Receiver under this Mortgage individually and to the exclusion of any other Receiver.

 

10.2 Possession

 

A Receiver may take immediate possession of, get in and collect any Security Asset.

 

10.3 Employees

 

(a) A Receiver may appoint and discharge managers, officers, agents, accountants, servants, workmen and others for the purposes of this Mortgage upon such terms as to remuneration or otherwise as he thinks fit.

 

(b) A Receiver may discharge any person appointed by the Chargor.

 

10.4 Borrow money

 

A Receiver may raise and borrow money either unsecured or on the security of any Security Asset either in priority to this Security or otherwise and generally on any terms and for whatever purpose which he thinks fit.

 

10.5 Sale of assets

 

(a) A Receiver may sell, exchange, convert into money and realise any Security Asset by public auction or private contract and generally in any manner and on any terms which he thinks fit.

 

(b) The consideration for any such transaction may consist of cash, debentures or other obligations, shares, stock or other valuable consideration and any such consideration may be payable in a lump sum or by instalments spread over any period which he thinks fit.

 

  15  

 

 

10.6 Compromise

 

A Receiver may settle, adjust, refer to arbitration, compromise and arrange any claim, account, dispute, question or demand with or by any person who is or claims to be a creditor of the Chargor or relating in any way to any Security Asset.

 

10.7 Legal actions

 

A Receiver may bring, prosecute, enforce, defend and abandon any action, suit or proceedings in relation to any Security Asset which he thinks fit.

 

10.8 Receipts

 

A Receiver may give a valid receipt for any moneys and execute any assurance or thing which may be proper or desirable for realising any Security Asset.

 

10.9 Delegation

 

A Receiver may delegate his powers in accordance with this Mortgage.

 

10.10 Other powers

 

A Receiver may:

 

(a) do all other acts and things which he may consider desirable or necessary for realising any Security Asset or incidental or conducive to any of the rights, powers or discretions conferred on a Receiver under or by virtue of this Mortgage or law;

 

(b) exercise in relation to any Security Asset all the powers, authorities and things which he would be capable of exercising if he were the absolute beneficial owner of that Security Asset; and

 

(c) use the name of the Chargor for any of the above purposes.

 

11 Application of proceeds

 

Any moneys received by the Agent or any Receiver after this Security has become enforceable shall be applied in or towards payment of or provision for all costs and expenses incurred by the Agent or any Receiver under or in connection with this Mortgage and of all remuneration due to any Receiver under or in connection with this Mortgage and thereafter at the discretion of the Agent. Following the payment and discharge of the Obligations in full the surplus (if any) will be paid to the Chargor. This Clause is subject to the payment of any claims having priority over this Security. This Clause does not prejudice the right of any Lender to recover any shortfall from the Chargor.

 

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12 Expenses and indemnity

 

The Chargor shall:

 

(a) immediately on demand pay all costs and expenses (including legal fees) incurred in connection with this Mortgage by any Lender or any Receiver, attorney, manager, agent or other person appointed by the Agent under this Mortgage including any arising from any actual or alleged breach by any person of any law or regulation, whether relating to the environment or otherwise; and

 

(b) keep each of them indemnified against any failure or delay in paying those costs or expenses.

 

13 Delegation

 

13.1 Power of Attorney

 

The Agent or any Receiver may delegate by power of attorney or in any other manner to any person any right, power or discretion exercisable by it under this Mortgage.

 

13.2 Terms

 

Any such delegation may be made upon any terms (including power to sub-delegate) which the Agent or any Receiver may think fit.

 

13.3 Liability

 

Neither the Agent nor any Receiver will be in any way liable or responsible to the Chargor or the Company for any loss or liability arising from any act, default, omission or misconduct on the part of any delegate or sub-delegate.

 

14 Further assurances

 

The Chargor shall, at its own expense, take whatever action the Agent or a Receiver may require for:

 

(a) creating, perfecting or protecting any security intended to be created by this Mortgage; or

 

(b) facilitating the realisation of any Security Asset, or the exercise of any right, power or discretion exercisable, by the Agent or any Receiver or any of its delegates or sub delegates in respect of any Security Asset.

 

This includes:

 

(i) the execution of any transfer, conveyance, assignment or assurance of any property, whether to the Agent or to its nominee; or

 

(ii) the giving of any notice, order or direction and the making of any registration,

 

which, in any such case, the Agent may think expedient.

 

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15 Power of attorney

 

15.1 Appointment

 

The Chargor hereby irrevocably appoints the Agent and any Receiver appointed hereunder (in each case with full power to appoint substitutes and to sub-delegate) jointly and also severally to be the attorney or attorneys of the Chargor and in its name and otherwise on its behalf to sign, seal, execute, deliver, perfect and do all deeds, instruments, acts and things which may be required (or which the Agent or any Receiver appointed hereunder shall consider desirable) for carrying out any obligation imposed on the Chargor by or pursuant to this Mortgage, for getting in the Security Assets, and generally for enabling the Agent and the Receiver to exercise the respective powers conferred on them by or pursuant to this Mortgage or by law.

 

15.2 Ratification

 

The Chargor shall ratify and confirm all transactions and documents entered into by the Agent or such Receiver or delegate of the Agent or such Receiver acting under the power of attorney granted under Clause 15.1.

 

15.3 Irrevocable

 

The power of attorney granted under Clause 15.1 is granted irrevocably and for value as part of the security constituted by this Mortgage to secure proprietary interests of, and the performance of obligations owed to, the Agent.

 

16 Preservation

 

16.1 Continuing security

 

(a) This Security is continuing and will extend to the ultimate balance of all the Obligations, regardless of any intermediate payment or discharge in whole or in part.

 

(b) This Security is in addition to and is not in any way prejudiced by any other security now or subsequently held by the Agent for any of the Obligations.

 

16.2 Tacking

 

This Mortgage is made to secure any further advances or other facilities made available by the Lenders under the Loan Documents.

 

16.3 New Accounts

 

(a) If any subsequent charge or other interest affects any Security Asset, the Agent may open a new account for the Chargor.

 

(b) If the Agent does not open a new account, it will nevertheless be treated as if it had done so at the time when it received or was deemed to have received notice of that charge or other account.

 

(c) As from that time all payments made to the Agent will be credited or be treated as having been credited to the new account and will not operate to reduce any Secured Liability.

 

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16.4 Waiver of defences

 

The obligations of the Chargor and the Company under this Mortgage will not be affected by any circumstance, act, omission, matter or thing which, but for this Clause, would reduce, release or prejudice any of their obligations under this Mortgage and this Security and whether or not known to the Chargor, the Company or a Lender including:

 

(a) any time, waiver or consent granted to, or composition with, an Obligor or other person;

 

(b) the release of an Obligor or any other person under the terms of any composition or arrangement with any creditor or an Obligor;

 

(c) the taking, variation, compromise, exchange, renewal or release of, refusal or neglect to perfect, take up or enforce, any rights against, or Security Interest or other rights over or relating to assets of, an Obligor or other person or any non-presentment or non-observance of any formality or other requirement in respect of any instruments or any failure to realise the full value of any Security Interest;

 

(d) any incapacity or lack of powers, authority or legal personality of or dissolution or change in the members or status of, an Obligor or other person;

 

(e) any amendment (however fundamental) or replacement of any Loan Document or other document;

 

(f) any change in the identity of the Agent;

 

(g) any right of set-off that the Chargor or the Company may have against the Agent;

 

(h) any unenforceability, illegality or invalidity or any obligation of any person under any Loan Document or other document; or

 

(i) any insolvency or similar proceedings.

 

16.5 Immediate recourse

 

The Chargor waives any right it may have of first requiring a Lender to proceed against or enforce any other rights or Security Interest or claim payment from or file any proof or claim in any insolvency, administration, winding up or liquidation proceedings relating to any Obligor or any other person before claiming from the Chargor under this Mortgage.

 

16.6 Non-competition

 

Until the end of the Security Period, neither the Chargor nor the Company will exercise any rights which they may have by reason of performance of their obligations under this Mortgage:

 

(a) to be indemnified by an Obligor;

 

(b) to claim any contribution from any guarantor of an Obligor’s obligations; and/or

 

(c) to take the benefit of (in whole or in part and whether by subrogation or otherwise) of any right of a Lender under this Mortgage or of any other guarantee or Security Interest taken pursuant to, or in connection with, the Loan Document by the any Lender.

 

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16.7 Reinstatement

 

(a) Where any discharge (whether in respect of the obligations of any Obligor, any security for such obligations or otherwise) is made in whole or in part or any arrangement is made on the faith of any payment, security or other disposition which is avoided or must be repaid on insolvency, administration, liquidation or otherwise without limitation, the liability of the Chargor or the Compny under this Mortgage shall continue as if there had been no such discharge or arrangement.

 

(b) The Agent shall be entitled to concede or compromise any claim that any such payment, security or other disposition is liable to avoidance or repayment.

 

17 Miscellaneous

 

17.1 Waivers and remedies cumulative

 

(a) The rights of the Agent under this Mortgage:

 

(i) may be exercised as often as necessary;

 

(ii) are cumulative and not exclusive of its rights under general law; and

 

(iii) may be waived only in writing and specifically.

 

(b) Delay in exercising or non-exercise of any such right is not a waiver of that right.

 

17.2 Transfers

 

(a) Neither the Chargor nor the Company may assign or otherwise transfer any of their rights and/or obligations under this Mortgage.

 

(b) The Agent may assign, transfer, novate or dispose of all or any part of its rights and/or obligations under this Mortgage.

 

17.3 Severability

 

If a provision of this Mortgage is or becomes illegal, invalid or unenforceable in any jurisdiction, that shall not affect:

 

(a) the validity or enforceability in that jurisdiction of any other provision of this Mortgage; or

 

(b) the validity or enforceability in any other jurisdiction of that or any other provision of this Mortgage.

 

17.4 Amendments

 

This Mortgage may only be amended by an instrument in writing signed by each party to this Mortgage.

 

17.5 Waiver

 

(a) No waiver of any right or rights arising under this Mortgage shall be effective unless such waiver is in writing and signed by the party whose rights are being waived.

 

(b) No waiver by a party of a failure by the other party to perform any provision of this Mortgage shall operate or be construed as a waiver in respect of any other failure whether of a like or different character.

 

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17.6 Counterparts

 

This Mortgage may be executed in any number of counterparts, and this has the same effect as if the signatures on the counterparts were on a single copy of this Mortgage.

 

17.7 Certificate

 

A certificate of the Agent as to any amount due from an Obligor in respect of the Obligations or any of them shall, in the absence of manifest error, be prima facie evidence of such amount as against the Chargor or the Company.

 

17.8 Language

 

All documents and notices provided or given in connection with this Mortgage shall be:

 

(a) in English; or

 

(b) if not in English, accompanied by a certified English translation and, in this case, the English translation shall prevail unless the document is a statutory or other official document.

 

17.9 Payments

 

All payments made by the Chargor and the Company under this Mortgage shall be made free of any deductions or withholding (whether in respect of tax or otherwise). If the Chargor or the Company is compelled by law to make such deductions, it shall pay such additional amounts as to ensure that the net amount received by the Agent would be the same as if no such deductions had been made.

 

18 Notices

 

Each party’s address for notices is as set out below: 1

 

Chargor

 

Borqs Technologies, Inc.

Tower A, Building B23

Universal Business Park

No. 10 Jiuxiangqiao Road

Chaoyang District, Beijing 100015, China

Attn: Pat Chan, CEO

Facsimile No.: 86-10-5975-6363

Telephone No: 86-10-5975-6336

Email: pat.chan@borqs.com

 

Company

 

Borqs International Holding Corp.

Tower A, Building B23

Universal Business Park

No. 10 Jiuxiangqiao Road

Chaoyang District, Beijing 100015, China

Attn: Pat Chan, CEO

Facsimile No.: 86-10-5975-6363

Telephone No: 86-10-5975-6336

Email: pat.chan@borqs.com

 

 

1 Parties to provide notice details.

 

  21  

 

 

Agent

 

Partners for Growth V, L.P.

Address: 1660 Tiburon Blvd., Suite D, Tiburon, CA 94920

Facsimile no: +1-415-781-0510

Electronic mail address: notices@pfgrowth.com

For the attention of: Geoff Allen / Tracy Pappas

 

With a copy (not constituting notice) to:

 

Greenspan Law Office

620 Laguna Rd, Mill Valley, CA 94941

Email: ben@greenspan-law.com

 

 

19 Release

 

At the end of the Security Period, the Agent shall, at the request and cost of the Chargor, take whatever action is necessary to release the Security Assets from this Security.

 

20 Set off

 

A Lender may set off any matured obligation due from the Chargor or the Company under this Mortgage (to the extent beneficially owned by that Lender) against any matured obligation owed by that Lender to the Chargor or the Company, regardless of the place of payment, booking branch or currency of either obligation. If the obligations are in different currencies, the Lender may convert either obligation at a market rate of exchange in its usual course of business for the purpose of the set-off.

 

21 Third Party Rights

 

(a) Subject to paragraph (b), a person who is not a party to this Mortgage has no right under the Third Parties Law to enforce any provision of this Mortgage in its own right.

 

(b) A Receiver may enforce any provision of this Mortgage conferring a right on it.

 

22 Jurisdiction

 

22.1 Submission

 

For the benefit of the Lenders, the Chargor and the Company each agree that the courts of the Cayman Islands have jurisdiction to hear and determine any action, suit or proceeding, and settle any disputes, in connection with this Mortgage and accordingly submit to the jurisdiction of the Cayman Islands courts.

 

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22.2 Forum convenience and enforcement abroad

 

Each of the Chargor and the Company:

 

(a) waive any objection which they may have to the Cayman Islands courts on the grounds of inconvenient forum or otherwise as regards proceedings in connection with this Mortgage, and agree not to argue before any court or tribunal that such courts are an inappropriate or inconvenient forum; and

 

(b) agree that a judgment or order of such courts in connection with this is conclusive and binding on each of them and may be enforced in the courts of any other jurisdiction.

 

22.3 Non-exclusivity

 

Nothing in this Clause 21 limits the right of the Agent to bring proceedings against the the Chargor or the Company in connection with this Mortgage or the Obligations:

 

(a) in any other court of competent jurisdiction; or

 

(b) concurrently in more than one jurisdiction, to the extent permitted by law.

 

22.4 Agent for Service of Process

 

Without prejudice to the Agent’s rights to serve notice in any other manner permitted by law, the Chargor hereby irrevocably appoints the Company as its agent for service of process in relation to any proceedings before the Cayman Islands courts in connection with this Mortgage and agrees that failure by the Company to notify the Chargor shall not invalidate any proceedings concerned.

 

22.5 Security for costs

 

To the extent that the Chargor or the Company may, in any suit, action or proceeding brought in a court in any jurisdiction arising out of or in connection with this Mortgage or the Obligations be entitled to the benefit of any provision of law requiring any Lender in such suit, action or proceeding to post security for the costs of the Chargor or the Company, or to post a bond or take similar action, the Chargor or the Company hereby irrevocably waive any such benefit, in each case to the fullest extent now or hereafter permitted under the laws of such jurisdiction.

 

23 Governing law

 

This Mortgage is governed by Cayman Islands law.

 

This Mortgage has been entered into on the date stated on the first page of this Mortgage.

 

  23  

 

 

SCHEDULE 1 

 

Part I - Form of Directors’ Letter of Resignation

 

Date: [●]

 

P.O. Box 309, Ugland House, Grand Cayman, KY1-1104

 

For the attention of the Board of Directors of the Company / Maples Corporate Services Limited

 

Dear Sirs

 

Resignation as a director of BORQS International Holding Corp (the Company )

 

I hereby resign with immediate effect as a director of the Company.

 

I confirm that I have no claims against the Company for compensation in relation to my loss of office or otherwise, but to the extent that I may have any such claim, I hereby irrevocably waive the same.

 

Yours faithfully

 

/s/ Pat Sek Yuen Chan  
Pat Sek Yuen Chan  

 

  24  

 

 

Part II - Form of Directors’ Letter of Authority

 

Date: [●]

 

Partners for Growth V, L.P. (the Agent )

1660 Tiburon Blvd., Suite D

Tiburon, CA 94920

For the attention of: Geoff Allen / Tracy Pappas

Dear Sir

 

Resignation letter - directorship of Borqs International Holdings Corp (the Company )

 

Please find enclosed a signed but undated letter from me resigning my position as a director of the Company.

 

I hereby irrevocably authorise you, whenever an Event of Default has occurred and is continuing for the purpose of the equitable share mortgage dated April __, 2018 made between the Chargor, the Company and the Agent (the Mortgage ), to date the letter and send it to the Company’s registered office thereby terminating my directorship of the Company without compensation for loss of office. I acknowledge and agree that your discretion to act in this regard is to be exercised solely in your interests as Agent under the Mortgage.

 

I confirm that you may delegate the authority conferred by this letter to any of your successors and assigns as Agent in relation to the Mortgage.

 

Yours faithfully

 

/s/ Pat Sek Yuen Chan  
Pat Sek Yuen Chan  

 

  25  

 

 

SCHEDULE 2 

 

Form of Share Transfer

 

BORQS International Holding Corp

(the Company )

 

SHARE TRANSFER

 

We, Borqs Technologies, Inc. (the Transferor ), for good and valuable consideration received by us from _______________________ (the Transferee ), do hereby:

 

(1) transfer to the Transferee _________ shares of US$0.001 par value each standing in our name in the Register of Members of the Company, free of any liens, encumbrances or other restrictions thereon; and

 

(2) consent that our name remains on the Register of Members of the Company until such time as the Company enters the Transferee's name in the Register of Members of the Company.

 

This Share Transfer is governed by Cayman Islands law.

 

/s/ Pat Sek Yuen Chan  
SIGNED BY  

 

Name: Pat Sek Yuen Chan

A duly authorised director acting for and on behalf of

Borqs Technologies, Inc.

 

  26  

 

 

EXECUTION PAGE

 

The parties have executed this agreement on the day and year first above written

 

Chargor

 

Executed and delivered as a deed by )  
Borqs Technologies, Inc. ) /s/ Pat Sek Yuen Chan
acting by its duly authorised director ) (Director)

 

 

Executed and delivered as a deed by )  
Borqs Technologies, Inc. )
acting by its duly authorised director ) (Director)

 

Company

 

Executed and delivered as a deed by )  
BORQS International Holding Corp )  
acting by its duly authorised director )  
    (Director)

 

Agent

 

Executed and delivered as a deed by )  
Partners for Growth V, L.P. )  
acting by its duly authorised signatory )  /s/ Geoffrey Allan
    Authorised Signatory
    Geoffrey Allan
   

Manager, Partners for Growth, LLC

Its General Partner

 

 

27

 

 

EXHIBIT 10.30

 

WAIVER AND MODIFICATION NO. 2 TO

LOAN AND SECURITY AGREEMENT

 

This Waiver and Modification No. 2 to Loan and Security Agreement (this “ Modification ”) is entered into as of April 30, 2018 (the “ Modification Effective Date ”), by and between Partners for Growth IV, L.P., a Delaware limited partnership with its principal place of business at 1660 Tiburon Blvd., Suite D, Tiburon, California 94920 (“ PFG ”) and Borqs Hong Kong Limited, a Hong Kong company with its principal place of business at Office B, 21/F, Legend Tower, 7 Shing Yip Street, Kwun Tong, Kowloon, Hong Kong (“ Borrower ”). This Modification amends that certain Loan and Security Agreement between PFG and Borrower dated as of August 26, 2016, as amended by that certain Modification No. 1 to Loan and Security Agreement dated as of October 4, 2017 (the “ First Modification ” and the Loan and Security Agreement as amended, the “ Loan Agreement ”). The Loan Agreement is modified herein inter alia for the purposes of amending the financial covenants under the Loan Agreement and accommodating an extension of credit by Partners for Growth V, L.P., a related party of PFG (“ PFG5 ”), to Borrower.

 

NOW THEREFORE, the parties hereby agree as follows:

 

1.  DESCRIPTION OF EXISTING INDEBTEDNESS : As of the Modification Effective Date, Borrower is indebted to PFG for the Obligations pursuant to the Existing Loan Documents (as defined below) in the aggregate principal amount of $4,750,000.

 

2.  DESCRIPTION OF COLLATERAL . Repayment of the Obligations is secured by the Collateral, as described in the Loan Agreement, in that certain Intellectual Property Security Agreement and related Collateral Agreements and Notices of even date with the Loan Agreement, Deed of Guaranty, Debentures, Hong Kong Security Documents, Cayman Security Documents and such documents, agreements and instruments as were entered into in contemplation of the Loan Agreement. The above-described security documents, together with all other documents securing and/or perfecting security interests in the repayment of the Obligations, shall be referred to herein as the “ Security Documents ”. Hereinafter, the Security Documents, together with all other documents evidencing or securing the Obligations are referred to as the “ Existing Loan Documents ”.

 

3.  DESCRIPTION OF CHANGES IN TERMS . As from the Modification Effective Date:

 

3.1  Amendment of Section 5 of Schedule . Section 5 of the Schedule is amended and restated in its entirety as follows:

 

“5. Financial Covenants

  (Section 4.1): The Group shall meet or exceed (i) Revenues of $32,500,000 on a calendar quarterly basis and (ii) three (3) month trailing EBITDA, tested monthly, of $2,000,000, with compliance determined as of the last day each calendar quarter (Revenues) and each calendar month (EBITDA).

 

 

 

 

Definitions : For purposes of the foregoing financial covenants, the following term shall have the following meaning:

 

EBITDA ” means (a) Net Income, plus (b) Interest Expense, plus (c) to the extent deducted in the calculation of Net Income, depreciation expense and amortization expense, plus (d) income tax expense.

 

Revenue(s) ” means revenues required to be classified as such under U.S. GAAP.

 

  Future Periods : For future periods not covered by the above requirements, the thresholds shall be set by PFG in consultation with Borrower based on its then-current Plan, but in no event (for each measurement period) less than the immediately prior measurement period. For instance, the minimum EBITDA threshold for January 2019 would be as set, but in no event less than $32,500,000, and for March 2019 (for Revenues) would be as set but in no event less than $2,000,000.”

 

3.2  Restated Compliance Certificate . The Compliance Certificate is amended and restated in the form appended as Exhibit I hereto.

 

3.3  Definitions . Section 7 of the Loan Agreement is amended as follows:

 

(a) A new definition is added as follows:

 

“ “ BVI Security Documents ” means that certain Share Mortgage given by Borqs Technologies, Inc., a BVI company, in favor of PFG in respect of its ownership in Parent, together with such other documents and instruments as may be executed and delivered in connection therewith.”

 

(b) A new definition is added as follows:

 

“ “ Group Parent ” means Borqs Technologies, Inc., a BVI company (NASDAQ:BRQS), the parent company of Parent and the top tier entity in the Group.”

 

(c) A new clause (x) is added to the definition of “Permitted Indebtedness” as follows:

 

“(x) Indebtedness owing to Partners for Growth V, L.P.”

 

(d) A new clause (xiii) is added to the definition of “Permitted Liens” as follows:

 

“(xiii) Liens securing Indebtedness described in Clause (x) of the definition of Permitted Indebtedness.”

 

  2  

 

 

4.  Borrowers’ Representations And Warranties . Borrower represents and warrants that:

 

(a)    immediately upon giving effect to this Modification (i) the representations and warranties contained in the Existing Loan Documents are true, accurate and complete in all material respects as of the date hereof (except to the extent qualified in the updated Representations deliverable to PFG on or before the Modification Effective Date), and (ii) no Event of Default has occurred and is continuing;

 

(b)    Borrower has the corporate power and authority to execute and deliver this Modification and to perform its obligations under the Existing Loan Documents, as amended by this Modification;

 

(c)    the certificate of incorporation, bylaws and other organizational documents of Borrower delivered to PFG remain true, accurate and complete and have not been amended, supplemented or restated and are and continue to be in full force and effect;

 

(d)    the execution and delivery by Borrower of this Modification and the performance by Borrower of its obligations under the Existing Loan Documents, as amended by this Modification, have been duly authorized by all necessary corporate action on the part of Borrower;

 

(e)    this Modification has been duly executed and delivered by Borrower and is the binding obligation of Borrower, enforceable against it in accordance with the terms of this Modification, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, liquidation, moratorium or other similar laws of general application and equitable principles relating to or affecting creditors’ rights;

 

(f)     as of the date hereof, Borrower has no defenses against its obligation to repay the Obligations and it has no claims of any kind against PFG. Borrower acknowledges that PFG has acted in good faith and has conducted in a commercially reasonable manner its relationship with such Borrower in connection with this Modification and in connection with the Existing Loan Documents;

 

(g)    the Security Documents relating to Intellectual Property either disclose an accurate, complete and current listing of all Collateral that consists of Intellectual Property; and

 

(h)    Borrower hereby ratifies, confirms and reaffirms, all and singular, the terms and disclosures contained in the Representations previously delivered to PFG by Borrower, and acknowledges, confirms and agrees that, subject to the update to the Representations to be provided under Section 6 hereof, the disclosures and information Borrower provided to PFG therein remain true, correct, accurate and complete in all material respects as of the Modification Effective Date.

 

Borrower understands and acknowledges that PFG is entering into this Modification in reliance upon, and in partial consideration for, the above representations and warranties, and agrees that such reliance is reasonable and appropriate.

 

  3  

 

 

5.  CONTINUING VALIDITY . Borrower understands and agrees that in modifying the existing Obligations, PFG is relying upon Borrower's representations, warranties, and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Modification, the terms of the Existing Loan Documents remain unchanged and in full force and effect. PFG's agreement to modifications to the existing Obligations in no way shall obligate PFG to make any future consents, waivers or modifications to the Obligations. Nothing in this Modification shall constitute a satisfaction of the Obligations or a waiver of any default under the Existing Loan Documents. It is the intention of PFG and Borrower to retain as liable parties all makers and endorsers, if any, of the Existing Loan Documents, unless the party is expressly released by PFG in writing. Unless expressly released herein, no maker, endorser, or guarantor will be released by virtue of this Modification. The terms of this paragraph apply not only to this Modification, but also to all subsequent loan modifications.

 

6.   CONDITIONS . The effectiveness of this Modification is conditioned upon each of:

 

6 . 1 Execution and Delivery . Borrower and Guarantor shall have duly executed and delivered a counterpart of this Modification to PFG.

 

6.2  Lender Expenses . Borrower shall have promptly paid upon invoice all Lender Expenses noticed by PFG in connection with this Modification.

 

6.3  PFG5 Loan Transaction . Borrower shall have consummated a borrowing from PFG5.

 

6.4  Updated Representations . Borrower shall have provided an update to the Representations.

 

6.5  BVI Security Documents . Group Parent shall have executed and delivered the BVI Security Documents.

The failure of any of the conditions set forth in this Section 6 shall constitute an immediate Event of Default.

 

7.  CONSISTENT CHANGES . The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above.

 

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8.  RATIFICATION OF EXISTING LOAN DOCUMENTS; FURTHER ASSURANCES . Borrower (a) acknowledges and agrees that (i) each of the Existing Loan Documents remains in full force and effect in accordance with the original terms, except as expressly modified hereby, (ii) the Liens granted by the Borrower to PFG under the Existing Loan Documents shall remain in place, unimpaired by the transactions contemplated by this Agreement, and PFG’s priority with respect thereto shall not be affected hereby or thereby, and (iii) the Loan Agreement and the other Existing Loan Documents shall continue to secure all Obligations as stated therein except as expressly amended and modified by this Modification; (b) Borrower ratifies, reaffirms, restates and incorporates by reference all of its representations, warranties, covenants, and agreements made under the Existing Loan Documents; (c) Borrower hereby ratifies, confirms, and reaffirms that the Obligations include, without limitation, the Loans, and any future modifications, amendments, substitutions or renewals thereof; (d) Borrower has no defenses, affirmative or otherwise, rights of setoff, rights of recoupment, claims, counterclaims, actions or causes of action of any kind or nature whatsoever against PFG or any past, present or future agent, attorney, legal representative, predecessor-in-interest, affiliate, successor, assign, employee, director or officer of PFG, directly or indirectly, arising out of, based upon, or in any manner connected with, any transaction, event, circumstance, action, failure to act, or occurrence of any sort or type, whether known or unknown, which occurred, existed, was taken, permitted, or began prior to the execution of this Agreement and accrued, existed, was taken, permitted or begun in accordance with, pursuant to, or by virtue of the terms or conditions of the Existing Loan Documents, or which directly or indirectly relate to or arise out of or in any manner are connected with any of the Existing Loan Documents; (e) Borrower and PFG confirm that neither party has heretofore waived or modified, and has not agreed to waive or modify, any term of the Existing Loan Documents, and any actions that Borrower takes or fails to take (including the expenditure of any funds) is voluntary, informed and taken at its own risk; and (g) Borrower shall, from and after the execution of this Agreement, execute and deliver to PFG whatever additional documents, instruments, and agreements that PFG may reasonably require in order to perfect the Collateral granted in the Loan Agreement more securely in PFG and to otherwise give effect to the terms and conditions of this Modification. Nothing in this Modification shall constitute a satisfaction of the Obligations or a waiver of any default under the Existing Loan Documents, except of the Specified Defaults to the extent waived herein. It is the intention of PFG and Borrower to retain as liable parties all makers and endorsers, if any, of the Existing Loan Documents, unless the party is expressly released by PFG in writing. Unless expressly released herein, no maker, endorser, or guarantor will be released by virtue of this Modification. The terms of this paragraph apply not only to this Modification, but also to all subsequent loan modification agreements.

 

9.  INTEGRATION; CONSTRUCTION . This Modification, the Loan Agreement and the Existing Loan Documents (as modified) and any documents executed in connection herewith or pursuant hereto contain the entire agreement between the parties with respect to the subject matter hereof and supersede all prior agreements, understandings, offers and negotiations, oral or written, with respect thereto and no extrinsic evidence whatsoever may be introduced in any judicial or arbitration proceeding, if any, involving this Modification; provided, however, that any financing statements or other agreements or instruments filed by PFG with respect to Borrower shall remain in full force and effect. The Existing Loan Documents are hereby amended wherever necessary to reflect the modifications set forth in this Modification. The quotation marks around modified clauses set forth herein and any differing font styles in which such clauses are presented herein are for ease of reading only and shall be ignored for purposes of construing and interpreting this Modification. This Modification is subject to the General Provisions of Section 8 of the Loan Agreement, each of which are incorporated herein as if set forth in this Modification.

 

10.  ADVICE OF COUNSEL . PFG and Borrower have prepared this Modification and all documents, instruments, and agreements incidental hereto with the aid and assistance of their respective counsel. Accordingly, all of them shall be deemed to have been drafted by PFG and Borrower and shall not be construed against the PFG or Borrower.

 

11.  ILLEGALITY OR UNENFORCEABILITY . Any determination that any provision or application of this Modification or the Loan Agreement is invalid, illegal, or unenforceable in any respect, or in any instance, shall not affect the validity, legality, or enforceability of any such provision in any other instance, or the validity, legality, or enforceability of any other provision of this Agreement.

 

12.  Governing Law; Venue . THIS MODIFICATION SHALL BE GOVERNED BY AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. Borrower and PFG submit to the exclusive jurisdiction of the State and Federal courts in Santa Clara County, California, in connection with any proceeding or dispute arising in connection herewith.

 

[Signature Page Follows]

 

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This Modification is executed as of the date first written above.

 

Borrower:

 

BORQS HONG KONG LIMITED

  

By /s/ Pat Sek Yuen Chan                

Name: Pat Sek Yuen Chan

 

Title: Chief Executive Officer

 

PFG:

 

PARTNERS FOR GROWTH IV, L.P.

  

By /s/ Geoffrey Allan                  

Name: Geoffrey Allan

 

Title: Manager, Partners for Growth IV, LLC,
its General Partner

 

  

 

Signature Page - PFG IV -Borqs Hong Kong Limited

Modification No. 2 to Loan and Security Agreement

 

 

 

 

Exhibit I – Restated Compliance Certificate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 23.02

 

Consent of Independent Registered Public Accounting Firm

 

We consent to the reference to our firm under the caption "Experts" and to the use of our report dated April 2, 2018, included in the Amendment No. 2 to the Registration Statement on Form S-1 (Form S-1 No. 333-223034) and related Prospectus of Borqs Technologies, Inc..

 

/s/ Ernst & Young Hua Ming LLP

Shanghai, People’s Republic of China

July 2, 2018