ITEM
3. KEY INFORMATION
|
A.
|
Selected Financial
Data
|
The
following selected consolidated financial data should be read in conjunction with “Item 5. Operating and Financial Review
and Prospects” and our consolidated financial statements and notes thereto included elsewhere in this Annual Report. The
selected consolidated statements of operations data for each of the years in the three-year period ended December 31, 2020, and
the consolidated balance sheet data as of December 31, 2019 and 2020, are derived from our audited consolidated financial
statements and notes which have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP.
In
2018, the Company decided to sell its mobile virtual network operator business unit (“MVNO”, “MVNO BU”,
“MVNO Business Unit” or “MVNO business unit”) which included the sale of voice and data services provided
by the incumbent mobile operator China Unicom and certain traditional telephony business activities. As of December 31, 2018,
the Company owned a 75% interest in the MVNO BU via a variable interest entity (“VIE”) contractual structure of Yuantel
(Beijing) Telecommunications Technology Co., Ltd. (“Yuantel” or “Yuantel Telecom”) which operated the
MVNO BU. The Company executed agreements, and amendments thereof, to sell all of its interest in the MVNO BU for RMB 108.70 million,
equivalent to $15.58 million, the sale was originally scheduled to be completed by the end of 2019. Due to an on-going investigation
by the Yunnan Public Securities Bureau, as described in “Item 4. Information on the Company” below, the Company received
only $5.98 million from the buyers within the year ended December 31, 2019, the Company, then amended the agreement with the another
third-party buyers (the “New Buyers”) of Yuantel as of September 1, 2020 to sell the remaining percentage of Yuantel
owned by the Company for $4.54 million, of which approximately $0.4 million were received and the balance of $4.14 million was
to be received by September 30, 2020, which was later postponed to October 2020 by both parties. The Company received the last
payment of $1.2 million on October 27, 2020, and completed the disposition of Yuantel on October 29, 2020. The New Buyers also
purchased the ownership of Yuantel that was first sold to other purchasers in 2019. Due to this transaction, the Company’s
financial statements for the year ended December 31, 2020 and prior years for comparison purposes, are presented with the MVNO
BU as discontinued operations. The Company opted for the rule that only three years of operating results are required to be presented
in accordance with the applicable regulations of the British Virgin Islands.
|
|
Fiscal
Years Ended December 31,
|
|
Consolidated
Statements of Income and Comprehensive Income Data:
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
($’000)
|
|
Net
revenues
|
|
|
128,420
|
|
|
|
98,958
|
|
|
|
26,751
|
|
Gross
profit (loss)*
|
|
|
(6,023
|
)
|
|
|
569
|
|
|
|
1,596
|
|
Operating
expenses**
|
|
|
(60,825
|
)
|
|
|
(31,578
|
)
|
|
|
(42,216
|
)
|
Other
operating income
|
|
|
180
|
|
|
|
1,854
|
|
|
|
-
|
|
Operating
income (loss)
|
|
|
(66,668
|
)
|
|
|
(29,155
|
)
|
|
|
(40,620
|
)
|
Income
(loss) from continuing operations, before income taxes
|
|
|
(68,727
|
)
|
|
|
(32,532
|
)
|
|
|
(35,683
|
)
|
Income
tax (expense) benefit
|
|
|
(331
|
)
|
|
|
949
|
|
|
|
(406
|
)
|
Net
income (loss) from continuing operations
|
|
|
(69,058
|
)
|
|
|
(31,583
|
)
|
|
|
(36,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from discontinued operations, before income taxes
|
|
|
(1,300
|
)
|
|
|
(4,151
|
)
|
|
|
1,302
|
|
Income
tax benefit (expense)
|
|
|
(1,640
|
)
|
|
|
-
|
|
|
|
-
|
|
(Loss)
income from operations of discontinued entities
|
|
|
(2,941
|
)
|
|
|
(4,151
|
)
|
|
|
1,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
(71,999
|
)
|
|
|
(35,734
|
)
|
|
|
(34,787
|
)
|
(*
|
Gross
profit for 2018 included $6.2 million in cost of goods for one transaction in which the related revenue was not recognized
in 2018, due to uncertainty in collectability and resulted in a negative gross margin. Such unusual treatment for the hardware
cost of goods did not happen for 2019. For the year 2020, cost of goods included $3.2 million of hardware costs from projects
that were cancelled due to the COVID-19 pandemic.)
|
(**
|
Operating expenses
for 2018 included non-recurring charges of $4.3 million in arbitration loss, write-off and provision for doubtful accounts
and current assets of $22.2 million, write-down of historical inventory due to loss & obsolescence of $0.9 million, impairment
of long-term investment of $13.0 million.)
|
(**
|
Operating
expenses for 2019 included provision for doubtful accounts of $13.6 million, non-recurring
penalties of $3.4 million and reversal of historical inventory of $0.3 million.)
|
(**
|
Operating expenses for 2020 included stock based compensation of $20.0
million and non-recurring penalties of $1.1 million, and a contingency loss of $3.1 million from the disposal of a business
unit.)
|
|
|
Fiscal
Years Ended December 31,
|
|
Consolidated
Balance Sheets Data:
|
|
2019
|
|
|
2020
|
|
|
|
($’000)
|
|
Cash
and cash equivalents
|
|
|
1,001
|
|
|
|
3,044
|
|
Restricted
cash
|
|
|
5,011
|
|
|
|
37
|
|
Accounts
receivable, net
|
|
|
1,699
|
|
|
|
944
|
|
Inventories
|
|
|
4,543
|
|
|
|
2,675
|
|
Property,
plant and equipment, net
|
|
|
241
|
|
|
|
152
|
|
Total
assets
|
|
|
56,798
|
|
|
|
29,352
|
|
Total
liabilities
|
|
|
105,503
|
|
|
|
91,593
|
|
Total
shareholders’ equity (deficit)
|
|
|
(48,705
|
)
|
|
|
(62,241
|
)
|
Held
for sale assets and liabilities
The
Company decided to sell Yuantel, our MVNO BU, or the Consolidated VIEs, which operations were classified as discontinued operations,
and the assets and liabilities were classified as held for sale for the years 2018 and 2019. The sale was finally completed as
of October 29, 2020.
|
|
As
of December 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
|
($’000)
|
|
Carrying
amounts of major classes of assets included as part of the assets held for sale
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
1,528
|
|
|
|
-
|
|
Restricted
cash
|
|
|
768
|
|
|
|
-
|
|
Accounts
receivable
|
|
|
1,614
|
|
|
|
-
|
|
Receivable
from MVNO franchisees
|
|
|
374
|
|
|
|
-
|
|
Inventories
|
|
|
210
|
|
|
|
-
|
|
Prepaid
expenses and other current assets
|
|
|
1,503
|
|
|
|
-
|
|
|
|
|
|
|
|
|
-
|
|
Current
assets held for sale
|
|
|
5,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
719
|
|
|
|
-
|
|
Intangible
assets, net
|
|
|
7,786
|
|
|
|
-
|
|
Goodwill
|
|
|
689
|
|
|
|
-
|
|
Deferred
tax assets
|
|
|
-
|
|
|
|
-
|
|
Other
non-current assets
|
|
|
1,111
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-current
assets held for sale
|
|
|
10,305
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
assets of the Consolidated VIEs classified as held for sale in the Consolidated Balance Sheets
|
|
|
16,302
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Carrying
amounts of major classes of liabilities included as part of liabilities held for sale
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
6,317
|
|
|
|
-
|
|
Accrued
expenses and other payables
|
|
|
9,715
|
|
|
|
-
|
|
Amounts
due to continuing operations
|
|
|
933
|
|
|
|
-
|
|
Advances
from customers
|
|
|
4,018
|
|
|
|
-
|
|
Deferred
revenues
|
|
|
-
|
|
|
|
-
|
|
Short-term
bank borrowings
|
|
|
-
|
|
|
|
-
|
|
Current
liabilities held for sale
|
|
|
20,983
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities
|
|
|
1,750
|
|
|
|
-
|
|
Deferred
revenues non-current
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-current
liabilities held for sale
|
|
|
1,750
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities of the Consolidated VIEs classified as held for sale in the Consolidated Balance Sheets
|
|
|
22,733
|
|
|
|
-
|
|
|
B.
|
Capitalization
and Indebtedness
|
Not
applicable.
|
C.
|
Reasons for the
Offer and Use of Proceeds
|
Not
applicable.
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 report, 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.
Ricks
due to the COVID-19 pandemic.
We
have experienced and expect to continue to experience unpredictable reductions in demand for certain of our products and services,
and adverse effects on our operations, supply chains and financing possibilities.
Since
February 2020, we have experienced reductions and cancellations of orders due to effects of the COVID-19 pandemic on the demand
from certain of our customers. We expect this negative effect on global business activities will continue to have pressure on
the Company’s sales as the pandemic environment persists and perhaps even post the pandemic. In addition, since our operations
span the United States, India, China and South Korea, international and intra-country travel restrictions will continue to hamper
our operations and have negative effects including delays and uncertainties on our supply chain delivery schedules and our abilities
to secure financing for our working capital needs. We expect the impacts of COVID-19 to have an adverse effect on our business,
financial condition and results of operations. Our revenue for the year 2020 was negatively impacted by the pandemic by as much
as a reduction of 73.0% as compared to 2019; and our ability to obtain debt financing or raise equity-based capital may not be
adequate for the Company’s current operations. As the assessable risks due to COVID-19 change in India and China, our operations
can be affected, including due to the restrictions from accessing office facilities and limitations on domestic travels which
can hamper our ability to efficiently manage the manufacturing of products since our contracted factories are located over various
cities in China.
As
our sales were negatively impacted by the pandemic in 2020, we cut back our operational costs by reduction of approximately 20%
of our workforce in India and 40% of our headcount in China. We constantly evaluate our financial position according to changes
in the international business environment and depending on forecast of orders from our customers in the near future, we may further
reduce staffing as necessary.
Also
as a result of stringent cash flows as of the date of filing of this annual report and given that the pandemic situation is foreseeable
to last through a substantial part of the year of 2021, we will postpone further investment into the acquisition target of KADI
and we are in negotiation with the owners of KADI to decrease our potential ownership percentage in their company.
Risks
Related to our Business and Industry
We
incurred loss and total cash outflows from operations, and we had a deteriorated net current assets position. There is substantial
doubt about our ability to continue as a going concern.
As
of December 31, 2020, we had cash and cash equivalents of approximately $3.08 million and generated a net loss from continuing
operations of approximately $36.09 million and cash outflows for continuing operations of approximately $5.23 million for the
year then ended. We cannot anticipate when, if ever, we will become profitable. Although we have improved the efficiency of our
networks and operations and adopted related cost reduction measures, we cannot assure you that we will continue to achieve
such efficiency or sustain such cost reductions. If we are unable to generate revenues that significantly exceed our costs and
expenses, we will continue to incur losses in the future.
Our
ability to continue as a going concern is dependent upon our continued operations, which in turn is dependent upon our ability
to meet our financial requirements. Our ability to meet the working capital requirements is subject to the risks relating to the
demand for and prices of our services in the market, the economic conditions in our target markets, the successful operation of
our connected solution, timely collection of payment from our customers and the availability of additional funding. In the next
12 months, we will use the cash inflows including short-term supply chain financing, advances from customers and financing possibilities
from financial institutions, and cash from the sale of our MVNO business unit. However, there is no guarantee such financing mechanism
will be available at terms acceptable to us.
The
audited consolidated financial statements included in this annual report on Form 20-F were prepared on the basis of our continuing
as a going concern. Facts and circumstances including recurring losses, net cash outflows and deteriorated net current assets
position raise substantial doubt about our ability to continue as a going concern. If we become unable to continue as a going
concern, we may have to liquidate our assets, and the value we receive for our assets in liquidation or dissolution
could be significantly lower than the values reflected in our audited consolidated financial statements. Our lack of cash resources
and our potential inability to continue as a going concern may materially and adversely affect the price of our shares and our
ability to raise new capital or to continue our operations.
We
were in default of the agreements governing outstanding loan facilities as of December 31, 2020 and although these defaulted loans
were completely paid off as of February 17, 2021, we may become in default with loans in the future and the following risks will
reappear.
Covenants
governing our loan facilities 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. Any defaults under our future loan agreements
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
|
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 reduction of operations and deliveries
of products to our customers. 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.
The
Company entered into agreements on December 14, 2020 with PFG and LMFA Financing LLC (“LMFA”), a Florida limited liability
company and wholly owned subsidiary of LM Funding America, Inc. (Nasdaq: LMFA), in which LMFA will purchase approximately $18
million of debt in tranches. As of February 10, 2021, LMFA completed the purchase of $17.87 million of principal, accrued interest
and applicable fees (the “Debt”), converted into and sold all 22.73 million shares of the Company’s ordinary
shares by February 10, 2021. With the Company settling another $1.27 million of Debt directly with the senior lender by the issuance
of 1.51 million shares on February 17, 2021 which the senior lender subsequently sold, the Company’s defaulted Debts with
the senior lender totaling $19.14 million have been eliminated since then.
We
have more current liabilities than current assets as of December 31, 2020.
Our
balance sheet as of December 31, 2020 showed current assets of $23.87 million and current liabilities of $86.81 million. Although
profit margin improvements coupled with better financing facilities in future periods may reverse this situation, there is no
assurance of how long this situation may remain or if we can ever achieve healthier liquidity ratios. If this situation persists
for too long, it will hamper the Company’s ability to operate effectively and will likely create pressure on the market
price of our ordinary shares.
If
alternative mobile operating system platforms become more widely used or accepted, or mobile chipset manufacturers, mobile device
Original Equipment Manufacturers (“OEMs” and each an “OEM”) 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 accounted for 74.8%, 87.2% and 88.2% of our net
revenues in 2018, 2019 and 2020, respectively.
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 sell our products to customers, could materially
adversely affect our financial condition and results of operations.
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, we entered into the MVNO business. However, the success of these
businesses depends 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. In November 2018, our board of directors approved the sale of the MVNO
business unit, and we entered into agreements with buyers in February 2019 to sell all of the Consolidated VIEs that hold the
MVNO operation. Due to an investigation into several individuals employed by the MVNO business unit as described in “Item
4. Information of the Company” below, only partial sales proceeds were received in 2019. The Company executed a new agreement
with the buyers of the MVNO business unit as of September 1, 2020 and the balance of the sales proceeds was received by October
29, 2020 and the sale was deemed completed on the same date.
For
our MVNO business unit that we classified as discontinued operation due to the sale of this unit which was finalized by October
29, 2020, prior to its sale we provided mobile communication services as a mobile virtual network operator in China. The current
license to operate such services is based on an MVNO license issued to us in July 2018 by the Ministry of Industry and Information
Technology of China (“MIIT”) which is valid until July 12, 2023.
The
ability of our MVNO to provide mobile communication services in China was based on the license granted by MIIT. 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, for which
we did in 2014, 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 submitted our application
for the official MVNO license, and in July 2018, the MIIT issued the MVNO license to us which will expire on July 12, 2023.
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, we 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 report, we are not aware of any
significant independent competitor that provides a full range of Android platform software and service solutions as we do to the
range of customers it has, although we have a number of competitors that provide one or several Android platform software and/or
service solutions to one or more of our range of customers. See “Business — Competition.”
In
addition, we face competition from companies seeking to compete with the Android platform by developing their own operating systems,
such as Baidu and Alibaba in China, and major mobile device OEMs, such as Foxconn Technology Group and BYD Electronic (International)
Company Limited, which are able to develop low-level software for mobile chipsets, as well as Huawei, GTE and Xiaomi.
We
believe that we presently compete favorably with respect to each segment identified above. However, the market for Android platform
software and service solutions is still rapidly evolving, and we may not be able to compete successfully against current and potential
competitors in the future. In addition, some of our independent competitors are more focused on one or several particular segments
of the value chain and may deliver better services in those segments than we do. Furthermore, some of our competitors may have
significantly greater financial, technical, marketing, sales and other resources and significantly greater name recognition than
we have. If we are unable to compete successfully on the principal competitive factors described above or otherwise, our business
could be harmed.
The
investigation into Yuantel.
As
described in “Item 4. Information on the Company” below, there is an on-going investigation by the Yunnan Public Security
Bureau in connection with the former president, the operating officer, and one former employee of Yuantel, our MVNO Business Unit
(accordingly, the “Investigation”). It is still not known as of the date of filing of this report, whether results
from this investigation may or not have any significant adverse effects over the Company as a result of events which occurred
prior to our sale of the MVNO BU, which may include fines and certain limitation of its activities. We completed the sale on October
29, 2020. However, at this point, it is not entirely clear whether or not, the Company may have any liabilities arising from events
which occurred prior to our sale. The on-going investigation by the Yunnan Public Security Bureau has been focused on the individual
level only and has not named the Company or Yuantel as accused in any way as of the filing of this annual report. Management assessed
that the investigation may not have any impact on Yuantel’s abilities to operate under the MVNO license.
In
September 2019, the Bureau issued official orders and detained three individuals, including the president of Yuantel at that time,
who was placed under arrest at the Panlong District First Detention Center, under suspicion of failure to administer information
network security, this individual has not been formally charged as of the date of this report; the operating officer of Yuantel
who was released on bail but may be summoned in the future for further investigations; and one former employee. Neither, the Company
nor any of its subsidiaries were named in the case, and no official notice has been received by the Company as of the date of
filing of this annual report in connection with this investigation. There was approximately $0.3 million retained by the buyer
regarding disposal of Yuantel. It was due to the possibility of Yuantel being charged with penalties in the Yunnan Public Securities
Bureau’s investigation on the previous executives. If Yuantel is fined, the penalties up to $0.3 million will be paid out
from this retained amount. If there are no penalties assessed by the authorities onto Yuantel by April 30, 2021, the buyer will
release the amount to the Group. The Company dismissed both employees undergoing the investigation in October 2020. For further
details regarding this investigation, please see Section 4 Information on the Company, page 40-41 “Investigation into
the MVNO Business Unit.”
Potential
dispute on the ownership of Big Cloud Network
In
order to comply with PRC laws and regulations that prohibit direct foreign ownership in certain telecommunication related businesses,
the Group conducted its businesses of the MVNO BU in the PRC through the use of VIE contractual agreements (the “VIE Agreements”).
The
Group funds Beijing Big Cloud Network Technology Co., Ltd. (“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 the Consolidated VIE of the Group. Through the contractual agreements, the Group receives substantially all of
the economic benefits of Big Cloud Network.
One
of the nominee shareholders of Big Cloud Network denied his entrustment relationship with the Group and claimed his rights and
interests proceeds of the disposal of Yuantel. Although there were agreements between the Group and the nominee shareholder, there
was no direct evidence to show the entrustment relationship between both parties, which may not be supported by the existing PRC
laws and regulation. As a result, the Group assessed it was probable a loss would be incurred. The Group estimated a loss ranged
from $3.2 million to $3.6 million based on the best estimate of the information available. Because of there was no amount within
the range would be a better estimate than any other amount, the minimum amount in the range of $3.2 million recorded as a contingent
liability as of December 31, 2020. Even though the minimum amount in the range is not necessarily the amount of loss that will
be ultimately determined, it is not likely that the ultimate loss will be less than the minimum amount. The ultimate amount could
result in a loss of up to $0.4 million in excess of the amount accrued.
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. As discussed above in this report,
due to stringent cash flows as of the filing of this annual report and the pandemic situation foreseeably lasting through a substantial
part of year 2021, we will postpone further investment into the acquisition target of KADI and we are in negotiation with the
owners of KADI to decrease our ownership percentage in KADI. For the acquisition of Colmei and Crave, since both of these companies
are insolvent, we have ceased to make additional payments for ownership and have written off the value of the equity we paid to
the owners previously.
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.
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
yearly results may fluctuate significantly and may not fully reflect the underlying performance of our business.
Our
yearly 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 year should not be relied upon as an indication of future performance. Our yearly 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 yearly results may negatively impact the value of our ordinary shares.
Factors that may cause fluctuations in our yearly 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.
|
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 a 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 2018, 2019 and 2020, our net revenues from software fees
were $9.5 million, $14.7 million and $10.6 million, respectively, representing 7.4%, 15.0% and 39.5% of total net revenues, respectively.
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.
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
unit), 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.
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;
|
|
●
|
for 2019, our revenues
were 63.9% concentrated with one customer in India, and the financial status of this customer together with the state of the
Indian economy can greatly affect our business;
|
|
●
|
for
2020, our revenues were 41.9% concentrated with one customer in the U.S., and the financial
status of this customer together with the state of the U.S. economy can greatly affect
our business;
|
|
●
|
unexpected changes
in political environment and regulatory requirements; and
|
|
●
|
terrorist attacks
and other acts of violence or war.
|
The
occurrence of any of these events could have a material adverse effect on our results of operations and financial condition.
Furthermore,
we are in the process of implementing policies and procedures designed to facilitate compliance with laws and regulations in various
jurisdictions applicable to us, but there can be no assurance that our employees, contractors or agents will not violate such
laws and regulations or our policies. Any such violations could, individually or in the aggregate, materially and adversely affect
our financial condition and operating results.
We
may not be able to manage our anticipated growth and our current and planned resources may not be adequate to support our expanding
operations; consequently, our business, results of operations and prospects may be materially and adversely affected.
We
have experienced rapid growth since we commenced operations. Our rapid expansion may expose us to new challenges and risks. To
manage the further expansion of our business and the growth of our operations and personnel, we need to continuously expand and
enhance our infrastructure and technology, and improve our operational and financial systems and procedures and controls, and
enlarge our financing resources. 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. 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.”
We
are subject to various anti-corruption and anti-bribery laws, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery
Act, and PRC and Indian anti-corruption and anti-bribery laws; any determination that we have violated such laws could damage
our business and reputation, limit our ability to bid for certain business opportunities, and subject us to significant criminal
and civil penalties, civil litigation (such as shareholder derivative suits), and commercial liabilities.
We
are subject to anti-corruption and anti-bribery laws in the United States, United Kingdom, China, and India that prohibit certain
improper payments made directly or indirectly to government departments, agencies, and instrumentalities; officials of those government
departments, agencies, and instrumentalities; political parties and their officials; candidates for political office; officials
of public international organizations; persons acting on behalf of the foregoing; and commercial counterparties. These laws include
the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act 2010, the PRC Criminal Law, the PRC Anti-Unfair Competition Law,
the Indian Prevention of Corruption Act 1988, the Indian Penal Code and anti-corruption laws in various Indian states.
We
are engaged in business in a number of countries that are regarded as posing significant risks of corruption. Of particular note,
we conduct operations, have agreements with state-controlled enterprises and other third parties and make sales in the PRC, and
we have research and development activities in India, each of which may be exposed to corruption risk. It is our policy to implement
safeguards and procedures to prohibit these practices by our employees, officers, directors, or by third parties acting on our
behalf. However, we cannot rule out the risk that any of our employees, officers, directors, or third parties acting on our behalf
may engage in breaches of our policies or anti-corruption laws, for which we might be held responsible.
Allegations
of violations of these anti-corruption and anti-bribery laws, and investigation into such allegations, could negatively affect
our reputation, business, operating results, and financial condition. The violation of these laws may result in substantial monetary
and even criminal sanctions, follow-on civil litigation (such as shareholder derivative suits), and monitoring of our compliance
program by the United States or other governments, each of which could negatively affect our reputation, business, operating results,
and financial condition. In addition, the United States or other governments may seek to hold us liable for violations of these
laws committed by companies in which we invest or acquire.
There
can be no assurance that our 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 are 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 to 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.
On
May 17, 2019, we received a notification from the Listing Qualifications Department of Nasdaq indicating our non-compliance with
Nasdaq Listing Rule 5250(c)(1) due to our failure to timely file our Annual Report on Form 20-F for fiscal year 2018.
On
January 9, 2020, the Nasdaq Hearings Panel issued its decision (“Decision”) to grant our request for continued listing
on Nasdaq, subject to the conditions that: (i) on or before January 23, 2020, we had informed the Panel that the Company’s
independent auditor had completed its audit of our financial statements for fiscal year 2018; and (ii) on or before March 1, 2020,
we had filed with the Securities and Exchange Commission (the “SEC”) the annual report for fiscal year 2018 in order
to regain compliance with Nasdaq Listing Rule 5250(c)(1). As a result of the Decision, during this period our ordinary shares
continued to trade on Nasdaq under symbol “BRQS”.
On
January 17, 2020, we received a letter from the Nasdaq Listing Qualifications Staff (the “Staff”) in which the Staff
intended to delist the Company’s securities from The Nasdaq Capital Market based upon our failure to hold our annual general
meeting of shareholders in 2019 as a result of our inability to file the annual report for fiscal year 2018.
Pursuant
to Nasdaq Listing Rule 5250(d)(1), a listed company is required to distribute its annual report to its shareholders, either by
mailing, posting to the company’s website, or by other internet posting consistent with Rule 14a-16 of the Securities and
Exchange Act of 1934. Consistent with past practice, promptly after the filing of the annual report with the SEC, we mailed a
copy of the annual report together with our proxy materials for an annual general meeting of shareholders.
On
February 4, 2020, we filed our annual report for the year ended December 31, 2018 and on March 9, 2020, we held our annual general
meeting of shareholders.
On
March 10, 2020, we received a letter from the Nasdaq Office of General Counsel notifying that the Company had regained compliance
with the periodic filing and annual shareholder meeting requirements.
Due
to the COVID-19 pandemic, we were unable to file the annual report for the year ended December 31, 2019 by the deadline of June
30, 2020; and on July 9, 2020 we received a delisting determination letter from the Staff notifying the Company that due to the
non-filing of the annual report, our ordinary shares were subject to delisting from the Nasdaq Capital Market. We filed an appeal
of Nasdaq’s determination to delist, and a hearing was held on August 27, 2020. On September 14, 2020, we received a letter
from Nasdaq informing us that the Panel had decided to grant the Company’s request to remain listed on Nasdaq on the condition
that we had filed the 2019 annual report on form 20-F by September 30, 2020 which we did.
On
October 2, 2020, we received a letter from the Nasdaq Office of General Counsel notifying that the Company had regained compliance
with the Nasdaq Listing Rule 5250(c)(1).
Additionally,
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.
We
may, from time to time, be involved in future litigation in which substantial monetary damages are sought.
We
may from time to time be involved in future litigation in which substantial monetary damages are sought. Litigation claims may
relate to intellectual property, contracts, employment, securities and other matters arising out of the conduct of our current
and past business activities. Any claims, whether with or without merit, could be time consuming, expensive to defend, and could
divert management’s attention and resources. We maintain insurance against some, but not all, of these potential claims,
and the levels of insurance we do maintain may not be adequate to fully cover any and all losses. Nonetheless, the results of
any future litigation or claims are inherently unpredictable, and such outcomes could have a material adverse effect on our results
of operations, cash from operating activities or financial condition.
We
were in arbitration before the International Chamber of Commerce with Samsung Electronics Co., Ltd. (“Samsung”) to
resolve a dispute regarding royalties payable to the Company under a software license agreement the Company had with Samsung.
Samsung alleged that, for the period starting the fourth quarter of 2010 through mid-2012, the Company was overpaid royalties
in the amount of approximately $1.67 million due to a clerical error in Samsung’s accounting department that enabled the
Company to receive royalties on sales of Samsung handsets that did not contain its software. Samsung was seeking repayment of
the $1.67 million plus accrued interest of 12% per annum and as well as reimbursements of reasonable fees including attorney fees
and arbitration costs.
After
arbitration hearings held in May 2018, on November 27, 2018, the International Chamber of Commerce notified the Company of its
decision and issuance of an arbitration award (the “Award”), which the Company received on November 29, 2018. Pursuant
to the Award, the Company was obligated to pay Samsung an aggregate of $2,546,401 plus an interest of 9% per annum starting May
16, 2018 until full payment is paid. Samsung was also awarded its attorney’s fees and expenses in the aggregate amount of
approximately $1.73 million. The Company has reached an agreement with Samsung for settling the payments due to Samsung by making
24 monthly payments beginning in April 2019. The Company has pledged $5 million worth of ordinary shares in escrow as security
for the payments and in the event that the Company is in default of the scheduled payments, Samsung has the right to seize the
escrow shares. If we fail to make timely payments to Samsung, we may be subject to additional potential litigation damages resulting
in a material adverse impact to the Company. Due to cash flow constraints resulting from the COVID-19 pandemic, we have not made
additional payments to Samsung in the year 2020, and are seeking alternative means to pay off this liability including via the
issuance of shares to Samsung.
If
we fail to implement and maintain effective internal control over financial reporting, we may be unable to accurately report our
results of operations, meet our reporting obligations or prevent fraud, and investor confidence and the market price of our ordinary
shares may be adversely impacted.
We
are required to evaluate the effectiveness of disclosure controls and procedures and internal control over financial reporting.
As defined in standards established by the United States Public Company Accounting Oversight Board, or the PCAOB, a “material
weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there
is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not
be prevented or detected on a timely basis; and a “significant deficiency” is less severe than a material weakness
in that it is unlikely to have a material impact on financial statements but is important enough to merit attention by those responsible
for oversight of the company’s financial reporting. Based on that evaluation, our management concluded that these controls
were ineffective as of December 31, 2020. In the years ended December 31, 2020 and 2019, we did not maintain sufficient controls
over financial reporting processes due to 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 to properly address complex
U.S. GAAP accounting issues and to prepare and review our consolidated financial statements and related disclosures to fulfill
U.S. GAAP and SEC financial reporting requirements. This deficiency constitutes as a material weakness of our internal control
over financial reporting.
During
2018, the Company began to seek for professional services for U.S. GAAP and SEC financial reporting related matters. The Company
made efforts in recruitment and hired a financial reporting controller and an accounting manager in 2018. In addition, the Company
identified a qualified external professional consultant for a senior financial and reporting role from its selection process in
2018, and the individual officially joined the Company as a financial director in January 2019. We have taken multiple steps to
implement measures designed to improve our internal control over financial reporting to remediate the material weakness and hence
our management concluded that the material weakness was being mitigated as of December 31, 2019 by multiple factors including:
(a) hiring of a financial director with over 15 years of US GAAP audit experience in 2019 to help set up workflows for the strengthening
of internal controls and preserving accuracy in preparing consolidated financial statements, (b) hiring of a senior manager of
finance who is a licensed accountant from Australia and has US GAAP reporting experience with several firms before joining our
Company; and (c) since December 2018, our Chairperson of the Audit Committee, a member of the Washington State board of Accountancy
since the year 1989, has been regularly providing the Company with advice on procedures and interpretation of US GAAP rules and
regulations. In addition, we plan to take a number of other measures to strengthen our internal control over financial reporting,
including (i) continuing to hire additional qualified professionals with experience in U.S. GAAP accounting and SEC reporting
to lead accounting and financial reporting matters; (ii) organizing regular training for our accounting staffs, especially the
trainings related to U.S. GAAP and SEC reporting requirements; and (iii) establishing effective oversight and clarifying reporting
requirements for non-recurring and complex transactions to ensure consolidated financial statements and related disclosures are
accurate, complete and in compliance with U.S. GAAP and SEC reporting requirements. Due to the COVID-19 pandemic, it was difficult
for the Company to hire additional finance and accounting staff.
As
of December 31, 2020, management had identified two significant deficiencies relating to the information technologies (“IT”)
controls in our MVNO (discontinued) business.
|
1)
|
Large amounts of
customer personal information, account balances and usage details were only provided by MVNO BU’s incumbent operator,
China Unicom, on a six-month basis; and through strenuous efforts MVNO BU were still not able to convince China Unicom to
keep the data longer than a historical rolling 6-month interval; and
|
|
2)
|
Super system administrator
access of key business information systems of MVNO BU can be obtained by out-sourced third-party developers. Such super system
administrator access can be used to add, delete, or modify the business data in the key business information systems.
|
Following
the identification of the significant deficiencies, we planned to take measures to remediate by i) negotiating with the incumbent
operator to allow access to data older than six months, and ii) incorporating control mechanisms within the MVNO management and
out-sourced developers. For more details about remediation, see “Item 15. Controls and Procedures”. Our failure to
correct the significant deficiencies and control the deficiencies or our failure to discover and address any other weakness or
deficiencies could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable
financial reporting requirements. As a result, our business, financial condition, results of operations and prospects, as well
as the market price of our ordinary shares, may be materially and adversely affected. Moreover, ineffective internal control over
financial reporting significantly hinders our ability to prevent fraud.
We
are a public company in the United States subject to the Sarbanes Oxley Act of 2002. Section 404 of the Sarbanes Oxley Act, or
Section 404, requires us to include a report from management on the effectiveness of our internal control over financial reporting
in our annual report on Form 20-F. Our management concluded that our internal control over financial reporting is not effective.
In addition, once we cease to be an “emerging growth company” as such term is defined in the JOBS Act, our independent
registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting.
Even if our management concludes that our internal control over financial reporting is effective, our independent registered public
accounting firm, after conducting its own independent testing, may issue an adverse opinion if it is not satisfied with our internal
controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements
differently from us. In addition, our reporting obligations may place a significant strain on our management, operational and
financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any
required remediation.
During
the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we
may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain
the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time
to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in
accordance with Section 404. Moreover, our internal control over financial reporting may not prevent or detect all errors and
-fraud. A control system, no matter how well it is designed and operated, it cannot provide absolute assurance that misstatements
due to error or fraud will not occur or that all control issues and instances of fraud will be detected.
We
believe that the Company’s financial reporting persons possess significant US GAAP experience to be a valuable resource
for us with respect to financial reporting work. We believe we have adequate personnel with knowledge and experience with US GAAP
for the preparation of our annual report for the year 2020. Since December 2018, our Chairperson of the Audit Committee has been
regularly providing the Company with advice on procedures and interpretation of US GAAP rules and regulations. The Chairperson
of the Audit Committee has been a member of the Washington State Board of Accountancy since the year 1989. However, if we fail
to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements
and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information.
This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the market price
of our ordinary shares. Additionally, ineffective internal control over financial reporting could expose us to increased risk
of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory
investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.
Risks
Related to Doing Business in China
There
are significant legal and other obstacles to obtaining information needed for shareholder investigations or litigation outside
China or otherwise with respect to foreign entities.
We
conduct a significant part of our business operations in China, and a majority of our directors and senior management are based
in China, which is an emerging market. The SEC, U.S. Department of Justice and other authorities often have substantial difficulties
in bringing and enforcing actions against non-U.S. companies and non-U.S. persons, including company directors and officers, in
certain emerging markets, including China. Additionally, our public shareholders may have limited rights and few practical remedies
in emerging markets where we operate, as shareholder claims that are common in the United States, including class action securities
law and fraud claims, generally are difficult to pursue as a matter of law or practicality in many emerging markets, including
China. For example, in China, there are significant legal and other obstacles to obtaining information needed for shareholder
investigations or litigation outside China or otherwise with respect to foreign entities. Although the local authorities in China
may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement
cross-border supervision and administration, the regulatory cooperation with the securities regulatory authorities in the Unities
States has not been efficient in the absence of a mutual and practical cooperation mechanism. According to Article 177 of the
PRC Securities Law which became effective in March 2020, no foreign securities regulator is allowed to directly conduct investigation
or evidence collection activities within the territory of the PRC. Accordingly, without the consent of the competent PRC securities
regulators and relevant authorities, no organization or individual may provide the documents and materials relating to securities
business activities to foreign securities regulators.
As
a result, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by management,
members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated
in the United States.
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 depend, 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 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.
In
the year ended December 31, 2020, we derived about 20.3% of our revenues from customers located in India. In May 2020, skirmishes
occurred over the Sino-Indian border and the relationship between the two countries has been in distress. Although there had been
no official statements from either governments that directly affected commercial activities between the two countries, tension
may escalate in the future to have a negative impact on our businesses.
Due
to social unrest in Hong Kong SAR throughout 2019 which also extended into 2020, China passed a new national security law for
Hong Kong which became effective on June 30, 2020. In reaction, the United States has imposed sanctions against Hong Kong’s
chief executive and ten other senior officials. Although the U.S. sanctions so far do not implicate any commercial activities
involving Hong Kong, it is an area of concern if more sanctions from the U.S. may impact our Company’s ability to maintain
a sound business relationship with our customers in the U.S.
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.
Any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.
Additionally,
some of the PRC laws and regulations governing our business operations in China are vague and their official interpretation and
enforcement may involve substantial uncertainty. These include, but are not limited to, laws and regulations governing our business
and the enforcement and performance of our contractual arrangements in the event of the imposition of statutory liens, death,
bankruptcy and criminal proceedings. Despite their uncertainty, we will be required to comply.
Recent
trade policy initiatives announced by the United States administration against the PRC may adversely affect our business.
On
January 15, 2020, the United States and China executed an enforceable agreement on a Phase One trade deal that requires structural
reforms and other changes to China’s economic and trade regime in the areas of intellectual property, technology transfer,
agriculture, financial services, and currency and foreign exchange. The Phase One agreement also includes a commitment by China
that it will make substantial additional purchases of U.S. goods and services in the coming years. Importantly, the agreement
establishes a strong dispute resolution system that ensures prompt and effective implementation and enforcement. The United States
agreed to modify its Section 301 tariff actions in a significant way. The United States first imposed tariffs on imports from
China based on the findings of the Section 301 investigation on China’s acts, policies, and practices related to technology
transfer, intellectual property, and innovation. The United States will be maintaining 25 percent tariffs on approximately $250
billion of Chinese imports, along with 7.5 percent tariffs on approximately $120 billion of Chinese imports.
Our
subsidiaries in China are subject to restrictions on making dividends and other payments to it or any other affiliated company.
We
are a holding company and may rely on dividends paid by our PRC subsidiaries for our cash needs, including the funds necessary
to pay dividends and other cash distributions to our shareholders to the extent we choose to do so, to service any debt it may
incur and to pay our operating expenses. Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of
their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each
of our PRC subsidiaries are required to set aside at least 10% of our after-tax profits each year, if any, to fund a statutory
reserve until such reserve reaches 50% of our registered capital. Appropriations to the employee welfare funds are at the discretion
of the board of directors of Borqs Beijing. These reserves are not distributable as cash dividends.
In
addition, under the PRC Enterprise Income Tax Law, or the EIT Law, which became effective on January 1, 2008, dividends paid to
us by our PRC subsidiaries are subject to withholding tax. Currently, the withholding tax rate is 10.0% (subject to reductions
by the relevant tax treaties, if applicable).
Furthermore,
if our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability
to pay dividends or make other payments to us.
To
date, our PRC subsidiaries have not paid dividends to us out of their accumulated profits. In the future, we do not expect to
receive dividends from our PRC subsidiaries because the accumulated profits of these PRC subsidiaries are expected to be used
for their own business or expansions. Any limitation on the ability of our PRC subsidiaries to distribute dividends or other payments
to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our
businesses, pay dividends or otherwise fund and conduct our business.
The
discontinuation of any of the preferential tax treatments currently available to our PRC subsidiaries could materially increase
our tax liabilities.
Preferential
tax treatments and incentives granted to our PRC subsidiaries by PRC governmental authorities are subject to review and may be
adjusted or revoked at any time in the future. The discontinuation or revocation of any preferential tax treatments and incentives
currently available to them will cause their effective tax rate to materially increase, which will decrease our net income and
may adversely affect our financial condition and results of operations.
We
face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.
On
February 3, 2015, the State Administration of Taxation (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.
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 the State Administration of Foreign Exchange (“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.
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.
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 report, we are aware that a few of our natural person shareholders who
are not PRC citizens may otherwise be deemed as PRC residents pursuant to the definitions under the SAFE regulations, but we are
not aware that any of them uses assets inside China or equity interest in PRC companies to invest in the Company. Before the issuance
of Circular 37, we had attempted to submit applications to the Beijing branch of SAFE for such individual shareholders in accordance
with Circular 75, but those applications were not accepted by the Beijing branch of SAFE because those individuals are not PRC
citizens. After Circular 37 became effective, we understand these individuals are not required to conduct the registrations since
they do not use assets within China or equity interests in PRC companies to invest in the Company. We cannot assure you, however,
that the SAFE’s opinion will be the same as our opinion and all of these individuals can successfully complete required
filings or updates on a timely manner, or at all in the event these individuals required to conduct the filings. Besides, we have
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.
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 started to process the SAFE application for our employee stock option plan during fiscal
2021.
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 (“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.
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 a 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 a 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. A FIE is prohibited from conducting business in an industry subject to foreign investment “prohibitions”
in the “negative list”. However, a 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 this information reporting obligations may potentially be subject to fines and/or
administrative or criminal liabilities, and the persons directly responsible may be subject to criminal liabilities.
The
enforcement of the labor laws and other labor-related regulations in the PRC may adversely affect our results of operations.
On
June 29, 2007, the Standing Committee of the National People’s Congress of China enacted the Labor Contract Law, which became
effective on January 1, 2008 and was revised on December 28, 2012. The Labor Contract Law introduces specific provisions related
to fixed-term employment contracts, part-time employment, probation, consultation with labor union and employee assemblies, employment
without a written contract, dismissal of employees, severance, and collective bargaining, which together represent enhanced enforcement
of labor laws and regulations. According to the Labor Contract Law, an employer is obliged to sign an unlimited-term labor contract
with any employee who has worked for the employer for ten consecutive years. Further, if an employee requests or agrees to renew
a fixed-term labor contract that has already been entered into twice consecutively, the resulting contract must have an unlimited
term, with certain exceptions. The employer must pay severance to an employee where a labor contract is terminated or expires,
with certain exceptions. In addition, the government has continued to introduce various new labor-related regulations after the
effectiveness of the Labor Contract Law. Among other things, it is required that that annual leave ranging from five to 15 days
be made available to employees and that the employee be compensated for any untaken annual leave days in the amount of three times
of the employee’s daily salary, subject to certain exceptions. As a result of these regulations designed to enhance labor
protection and increasing labor costs in China, our labor costs have increased. In addition, as the interpretation and implementation
of these new regulations are still evolving, we cannot assure you that our employment practice will at all times be deemed in
compliance with the new regulations. If we are subject to severe penalties or incur significant liabilities in connection with
labor disputes or investigations, our business and results of operations may be adversely affected.
Our
failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.
Companies
operating in China are required to participate in various government sponsored employee benefit plans, including certain social
insurance, housing funds and other welfare-oriented payment obligations. Our failure to make contributions to various employee
benefit plans and to comply with applicable PRC labor-related laws may subject us to late payment penalties. If we are subject
to such penalties in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely
affected.
If
the custodians or authorized users of our controlling non-tangible assets, including corporate chops and seals, fail to fulfill
their responsibilities or misappropriate or misuse those assets, our business and operations could be materially and adversely
affected.
In
China, a company chop or seal serves as the legal representation of the company towards third parties even when unaccompanied
by a signature. Under PRC law, legal documents for corporate transactions, including contracts and leases that our business relies
upon, are executed using “corporate chops,” which are instruments that contain either the official seal of the signing
entity or the signature of a legal representative whose designation is registered and filed with the State Administration for
Industry and Commerce, or SAIC.
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.
Although
our MVNO business unit was classified as discontinued operation due to a sale that was completed as of October 29, 2020, prior
to the completion of the sale 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 affect 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.
One
of the nominee shareholders of Big Cloud Network denied his entrustment relationship with the Group and claimed his rights and
interests proceeds of the disposal of Yuantel. Although there were agreements between the Group and the nominee shareholder, there
was no direct evidence to show the entrustment relationship between both parties, which may not be supported by the existing PRC
laws and regulation. As a result, the Group assessed that a probable loss could be incurred.
Although
our MVNO business unit was classified as discontinued operation due to a sale that was completed as of October 29, 2020, prior
to the completion of the sale 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.
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.
One
of the nominee shareholders of Big Cloud Network denied his entrustment relationship with the Group and claimed his rights and
interests proceeds of the disposal of Yuantel. Although there were agreements between the Group and the nominee shareholder, there
was no direct evidence to show the entrustment relationship between both parties, which may not be supported by the existing PRC
laws and regulation. As a result, the Group assessed that a probable loss could be incurred. The Group estimated a loss ranged
from $3.2 million to $3.6 million based on the best estimate of the information available. Because of there was no amount within
the range would be a better estimate than any other amount, the minimum amount in the range of $3.2 million recorded as a contingent
liability as of December 31, 2020. Even though the minimum amount in the range is not necessarily the amount of loss that will
be ultimately determined, it is not likely that the ultimate loss will be less than the minimum amount. The ultimate amount could
result in a loss of up to $0.4 million in excess of the amount accrued.
Although
our MVNO business unit was classified as discontinued operation due to a sale that was completed as of October 29, 2020, prior
to the completion of the sale 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.
Although
our MVNO business unit was classified as discontinued operation due to a sale that was completed as of October 29, 2020, prior
to the completion of the sale 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.
Although
our MVNO business unit was classified as discontinued operation due to a sale that was completed as of October 29, 2020, prior
to the completion of the sale 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. The amount of current income tax liability related
to disposal of Yuantel was approximate $0.7 million. The Group expected to pay the related income tax within year 2021.
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 potential controlling position of 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. As of the filing
of this annual report, the acquisition has not yet been completed due to complication in the change of ownership at the local
jurisdiction. We are working with the owners of KADI and the local authorities, and we may have to resolve to own less than the
original intended target of 60% of KADI. Further, due to the financial impact on the Company by the COVID-19 pandemic and that
our flow of cash was stringent in year 2020, we have determined to postpone further investment into the acquisition target of
KADI and we are in negotiation with the owners of KADI to decrease our ownership percentage in their company.
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.
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 electric vehicle (“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
The
terms of our previously announced KADI acquisition may subject to change or rescission.
Certain
commercial registrations with the local jurisdictions regarding our acquisition of KADI have not been completed as of the date
of the report. If such filings cannot be completed with local government agencies in a reasonable time frame, it may affect our
ability to capture the KADI business. Due to certain changes in the electrical vehicle industry and its technologies, such as
increases in component pricing, both the Company and KADI have an interest in amending the agreement signed as of December 15,
2018. As discussed above in this report, due to stringent cash flows as of the filing of this annual report due for the most part
to the pandemic situation which is foreseeable to last through the remainder of year 2021, we will postpone further investment
into the acquisition target of KADI, our intended acquisition of KADI has not been completed and we are in negotiation with the
owners of KADI to decrease our potential ownership percentage of their company.
Even
if we complete the acquisition of KADI, we may be unsuccessful at integrating the KADI business.
KADI’s
future business 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. Additionally, 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.
We
depend on key personnel of KADI and 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.
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 officer.
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.
Risks
Related to Our Securities
We
have a substantial number of convertible securities outstanding. The exercise of our outstanding options and conversion of our
outstanding convertible notes can have a dilutive effect on our common stock.
We
have a substantial number of convertible securities outstanding. The exercise of our outstanding options and conversion of our
outstanding convertible notes can have a dilutive effect on our common stock. As of April 15, 2021, we had (i) outstanding options
to purchase approximately 3.25 million shares of our common stock at a weighted average exercise price of $1.25 per share, (ii)
outstanding warrants to purchase approximately 0.4 million shares at a weighted average exercise price of $5.36 per share and
(iii) outstanding convertible notes that, upon conversion without regard to any beneficial ownership limitations, would
provide note holders with an aggregate of 19.7 million shares of our common stock; and warrants which upon exercise without regard
to any beneficial ownership limitations or advance conversion notice, would provide the holders with an aggregate of 17.8 million
shares of our common stock. The issuance of shares of common stock upon exercise of outstanding options and or conversion of outstanding
convertible notes could result in substantial dilution to our stockholders, which may have a negative effect on the price of our
common stock.
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.
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 by existing shareholders 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.
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, 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 or warrant, 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.”
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
report 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 report that are not statements of historical fact may be deemed forward-looking statements.
Terms such as “may,” “might,” “would,” “should,” “could,” “project,”
“estimate,” “pro-forma,” “predict,” “potential,” “strategy,” “anticipate,”
“attempt,” “develop,” “plan,” “help,” “believe,” “continue,”
“intend,” “expect,” “future,” and terms of similar import (including the negative of any of
these terms) may identify forward-looking statements. However, not all forward-looking statements may contain one or more of these
identifying terms. Forward-looking statements in this report may include, without limitation, statements regarding the plans and
objectives of management for future operations, 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;
|
|
|
|
|
●
|
The impact of COVID-19
on our business and operations; and
|
|
●
|
Other risks and
uncertainties, including those listed under the section titled “Risk Factors.”
|
Readers
are cautioned not to place undue reliance on forward-looking statements because of the risks and uncertainties related to them
and to the risk factors. We disclaim any obligation to update the forward-looking statements contained in this report to reflect
any new information or future events or circumstances or otherwise, except as required by law. Readers should read this report
in conjunction with the discussion under the caption “Risk Factors,” our financial statements and the related
notes thereto in this report, and other documents which we may file from time to time with the SEC.
ITEM
4. INFORMATION ON THE COMPANY
Overview
Borqs
Technologies, Inc. (formerly known as “Pacific Special Acquisition Corp.”, and hereinafter referred to as the “Company”
“Borqs Technologies”, “Borqs” or “we”) 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% of the 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 merger transaction. Concurrent with the completion of the acquisition of Borqs International, the Company changed
its name from Pacific Special Acquisition Corp.”, to Borqs Technologies, Inc.
Our
principal place of business is located at Suite 309, 3/F, Dongfeng KASO, Dongfengbeiqiao, Chaoyang District, Beijing 100016, People’s
Republic of China. Our telephone number is +86 10 6437 8678. Our agent in the BVI is Kingston Chambers and their address is P.O.
Box 173, Road Town, Tortola, British Virgin Islands.
We
are a global leader in software, development services and products providing customizable, differentiated and scalable Android-based
smart connected devices and cloud service solutions. We are a leading provider of commercial grade Android platform software for
mobile chipset manufacturers, mobile device OEMs and mobile operators, as well as complete product solutions of mobile connected
devices for enterprise and consumer applications.
Our
Connected Solutions business unit (the “Connected Solutions BU”) works closely with chipset partners to develop new
connected devices. Borqs developed the reference Android software platform and hardware platform for Intel and Qualcomm phones
and tablets. We provide Connected Solutions customers with customized, integrated, commercial grade Android platform software
and service solutions to address vertical market segment needs through the targeted BorqsWare software platform solutions. The
BorqsWare software platform consists of BorqsWare Client Software and BorqsWare Server Software. The BorqsWare Client Software
platform has been used in Android phones, tablets, watches and various Internet-of-things (“IoT”) devices. The BorqsWare
Server Software platform consists of back-end server software that allows customers to develop their own mobile end-to-end services
for their devices.
Our
MVNO business unit provides a full range 2G/3G/4G voice and data services for general consumer usage and IoT devices, as well
as traditional telecom services such as voice conferencing. We decided to sell the MVNO BU in order to focus on the growing IoT
industry via our Connected Solutions BU, especially with the coming of 5G.
In
November 2018, the Company’s board of directors approved the plan to dispose all of its tangible and intangibles assets
related to Yuantel, our MVNO BU, the Consolidated VIEs through a series of agreements, signed in November 2018 and February 2019,
with Jinan Yuantel Communication Technology LLP (“Jinan Yuantel”) and Jinggangshan Leiyi Venture Capital LLP (“JGS
Venture”). According to the agreements, all of the Company’s 75% equity interest in Yuantel would be disposed at a
consideration of RMB108.7 million. The Company received only $5.98 million from the buyers within the year ended December 31,
2019, the Company, then amended the agreement with the another third-party buyers (the “New Buyers”) of Yuantel as
of September 1, 2020 to sell the remaining percentage of Yuantel owned by the Company for $4.54 million, of which approximately
$0.4 million were received and the balance of $4.14 million was to be received by September 30, 2020, which was later postponed
to October 2020 by both parties. The Company received the last payment of $1.2 million on October 27, 2020, and completed the
disposition of Yuantel on October 29, 2020. The New Buyers also purchased the ownership of Yuantel that was first sold to other
purchasers in 2019. The disposal of the Consolidated VIEs represents a strategic shift for the Company and has a major effect
on the Company’s results of operations. Accordingly, assets and liabilities related to the Consolidated VIEs were reclassified
as held for sale as the carrying amounts would be recovered principally through the sale and revenues, and expenses related to
the Consolidated VIEs were reclassified in the accompanying consolidated financial statements as discontinued operations for all
periods presented. The consolidated balance sheets as of December 31, 2019 and 2020 and consolidated statements of operations
for the years ended December 31, 2018, 2019 and 2020 were adjusted to reflect this change. There was no gain or loss recognized
on the reclassification of the discontinued operations as held for sale. The sale of the MVNO business unit was finally completed
as of October 29, 2020.
In the years ended December 31, 2018, 2019 and 2020, Borqs generated
96.7%, 98.3% and 98.4% of its Connected Solutions BU revenues from customers headquartered outside of China and 3.3%, 1.7% and 1.6% from
customers headquartered in China. As of December 31, 2020, 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 17 million units worldwide. The discontinued MVNO BU generated all of its revenue
from China.
We
have dedicated significant resources to research and development, and have research and development centers in Beijing, China
and Bangalore, India. As of December 31, 2020, 234 out of the 286 persons under our employ were technical professionals dedicated
to platform research and development and product specific customization.
The
following customers accounted for near 10% or more of our total revenues, not including discontinued operations, for the years
indicated:
2020
|
|
GreatCall, Inc.
|
|
41.9
|
%
|
|
|
ECOM Instruments
|
|
23.1
|
%
|
|
|
Qualcomm India Ltd.
|
|
14.4
|
%
|
|
|
|
|
|
|
2019
|
|
Reliance Retail Limited
|
|
63.9
|
%
|
|
|
GreatCall, Inc.
|
|
7.8
|
%
|
|
|
|
|
|
|
2018
|
|
Reliance Retail Limited
|
|
59.6
|
%
|
|
|
E La Carte, Inc.
|
|
8.0
|
%
|
History
and Development of the Company
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 un-consolidated minority interests in certain entities as of the date of this report. The corporate
organization chart reflects our completed sale of the MVNO BU which removed the VIE structure by which it was held.
Wholly-Owned
Subsidiaries and Consolidated Affiliated Entities
The
following is a summary of our material subsidiaries and affiliated entities:
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
Beijing, a wholly foreign owned enterprise established under the laws of the PRC in 2007, is our primary operating entity for
supply chain management and is 100% owned by Borqs Hong Kong Limited.
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.
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, 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.
Borqs
KK, a company established under the laws of Japan in 2014, engages in business development and is 100% owned by Borqs Hong Kong.
Yuantel
(Beijing) Telecommunications Technology Co., Ltd. (“Yuantel” or “Yuantel Telecom”), a company established
under the laws of the PRC in 2004, engages in MVNO services and is 95% owned by Yuantel (Beijing) Investment Management Co., Ltd.,
which is 79% owned by Beijing Big Cloud Network Technology Co., Ltd. (“BC-NW”) resulting in an ownership of 75% of
Yuantel by the Company as of December 31, 2018. BC-NW is 100% beneficially owned and controlled by Borqs International through
contractual control arrangements. The board of directors approved of the sale of Yuantel which was originally scheduled to be
completed by the end of 2019. The agreement with the one of the buyers was further amended for the closing of the sale to be completed
by October 20, 2020. In the year 2019, the Company received partial payment for the sale, and as of December 31, 2019, the Company
owned 45% of Yuantel. On September 1, 2020, the Company executed a new agreement with the buyers and the sale was completed as
of October 29, 2020. The Company received only $5.98 million from the buyers within the year ended December 31, 2019, the Company,
then amended the agreement with the another third-party buyers (the “New Buyers”) of Yuantel as of September 1, 2020
to sell the remaining percentage of Yuantel owned by the Company for $4.54 million, of which approximately $0.4 million were received
and the balance of $4.14 million was to be received by September 30, 2020, which was later postponed to October 2020 by both parties.
The Company received the last payment of $1.2 million on October 27, 2020, and completed the disposition of Yuantel on October
29, 2020. The New Buyers also purchased the ownership of Yuantel that was first sold to other purchasers in 2019.
One
of the nominee shareholders of Big Cloud Network denied his entrustment relationship with the Group and claimed his rights and
interests proceeds of the disposal of Yuantel. Although there were agreements between the Group and the nominee shareholder, there
was no direct evidence to show the entrustment relationship between both parties, which may not be supported by the existing PRC
laws and regulation. As a result, the Group assessed that a probable loss could be incurred. The Group estimated a loss ranged
from $3.2 million to $3.6 million based on the best estimate of the information available. Because of there was no amount within
the range would be a better estimate than any other amount, the minimum amount in the range of $3.2 million recorded as a contingent
liability as of December 31, 2020. Even though the minimum amount in the range is not necessarily the amount of loss that will
be ultimately determined, it is not likely that the ultimate loss will be less than the minimum amount. The ultimate amount could
result in a loss of up to $0.4 million in excess of the amount accrued.
Borqs
Chongqing Ltd., a wholly foreign owned enterprise established under the laws of the PRC in 2019, engages in supply chain management
and is 100% owned by Borqs Hong Kong Limited.
Borqs
Technology USA, Inc., a corporation formed in the State of Nevada in July 2019, is 100% owned by Borqs International.
For
additional information, see Note 1 in our consolidated financial statements.
Business
Units
We
have two business units (“BU”), Connected Solutions and MVNO. The Connected Solutions BU develops wireless smart connected
devices and cloud solutions. The MVNO BU, which we are in the process of phasing out, 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. In November 2018, the Company’s board of directors approved the plan to dispose all of its tangible and intangibles
assets related to the Consolidated VIEs through a series of agreements, signed in November 2018 and February 2019, with Jinan
Yuantel Communication Technology LLP (“Jinan Yuantel”) and Jinggangshan Leiyi Venture Capital LLP (“JGS Venture”).
The consolidated balance sheets as of December 31, 2019 and 2020 and consolidated statements of operations for the years ended
December 31, 2018, 2019 and 2020 have been adjusted to reflect this change. There was no gain or loss recognized on the reclassification
of the discontinued operations as held for sale. The disposal transaction was completed as of October 29, 2020. The Company received
only $5.98 million from the buyers within the year ended December 31, 2019, the Company, then amended the agreement with the another
third-party buyers (the “New Buyers”) of Yuantel as of September 1, 2020 to sell the remaining percentage of Yuantel
owned by the Company for $4.54 million, of which approximately $0.4 million were received and the balance of $4.14 million was
to be received by September 30, 2020, which was later postponed to October 2020 by both parties. The Company received the last
payment of $1.2 million on October 27, 2020, and completed the disposition of Yuantel on October 29, 2020. The New Buyers also
purchased the ownership of Yuantel that was first sold to other purchasers in 2019.
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 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.
Connected
Solutions
The
Connected Solutions BU helps customers design, develop and realize the commercialization of their connected devices.
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.
Our
Connected Solutions business unit works closely with chipset partners to develop new connected devices. Borqs developed the reference
Android software platform and hardware platform for Intel and Qualcomm phones and tablets. We provide Connected Solutions customers
with customized, integrated, commercial grade Android platform software and service solutions to address vertical market segment
needs through the targeted BorqsWare software platform solutions. The BorqsWare software platform consists of BorqsWare Client
Software and BorqsWare Server Software. The BorqsWare Client Software platform has been used in Android phones, tablets, watches
and various Internet-of-things (“IoT”) devices. The BorqsWare Server Software platform consists of back-end server
software that allows customers to develop their own mobile end-to-end services for their devices.
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 2018, 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 17 million units worldwide.
Our
discontinued MVNO business unit provides a full range 2G/3G/4G voice and data services for general consumer usage and IoT devices,
as well as traditional telecom services such as voice conferencing, and acts as a sales and promotion channel for the products
developed by the Connected Solutions BU.
Prospective
Business Units
On
December 15, 2018, the Company and its indirect wholly owned subsidiaries, Borqs Beijing Ltd. (“Borqs Beijing”) and
Borqs Hong Kong Ltd. (“Borqs HK”), entered into a Share Purchase Agreement (“Purchase Agreement”) with
Shanghai KADI Technologies Co., Ltd (“KADI Shanghai” and, collectively with its subsidiaries and affiliated entities,
“KADI”), KADI Technologies Limited (“KADI HK”) and Lin Hu and Shou Huajun, the sole shareholders of KADI
Shanghai and KADI HK (the “Selling Shareholders”), pursuant to which Borqs Beijing purchased 60% of the issued and
outstanding ordinary shares of KADI Shanghai (“KADI SH Shares”) and Borqs Beijing purchased 60% of the issued and
outstanding ordinary shares of KADI HK (“KADI HK Shares, together with the KADI SH Shares, the “KADI Shares”)
in accordance with and subject to the terms and conditions set forth in the Purchase Agreement (the “KADI Acquisition”).
KADI
is a Chinese company that develops software and hardware solutions for electric vehicle control modules, such as charging, battery
management and vehicle controls. KADI has worked with the leading automotive companies in China, including Chery, Dong Feng Motors,
Geely Auto and Shenzhen Pin Chuan Electric Energy Co. Its founder, Dr. Hu Lin, has nearly 20 years of professional experience
working with companies in the automotive industry, including Volkswagen and Delphi. KADI is not a customer or a supplier of Borqs.
As
of the filing of this annual report, we are still in the process of completing certain commercial registrations in connection
with this acquisition at the local jurisdictions where KADI operates. Due to the inability of KADI to effectively change the ownership
registration at the local government authorities which thereby delayed the closing of the acquisition, we have withheld further
payments of cash and shares accordingly. Because of changes in the electrical vehicle industry and its technologies, such as pricing
of components, both the Company and KADI see the need to amend the agreement signed as of December 15, 2018. The resulting amendments,
if reachable between the parties, may change the percentage of ownership of KADI by Borqs; or if agreeable amendments cannot be
reached, Borqs may enforce the originally signed agreement or decide to terminate the agreement and seek damages, if any, due
to Borqs.
Since
the beginning of 2020, the COVID-19 pandemic has caused constraints on the Company’s cash flows and the pandemic situation
is foreseeable to last through the remainder of 2021. Therefore, we will postpone further investment into KADI. We are in negotiation
with the owners of KADI to decrease our ownership percentage of their company.
Investigation
into the MVNO Business Unit
As
disclosed on Forms 6-K on September 24 and October 24, 2019, there is an on-going investigation by the Yunnan Public Security
Bureau (the “Bureau”) on Yuantel, our MVNO Business Unit (the “Yuantel Investigation”). As of the date
of filing of this report, neither the Company nor the MVNO Business Unit has received any correspondence from any official authority
within the PRC regarding the possible outcome of the investigation.
On
September 11, 2019, the Yunnan Public Security Bureau (the “Bureau”) detained the president, one employee and one
former employee of Yuantel, the MVNO business unit which disposition was completed as of October 29, 2020, for questioning. Under
applicable PRC laws, the Bureau has the authority to detain an individual for investigation for up to the standard procedural
period of 5 weeks without filing charges. Officers of the Bureau also took copies of contracts between Yuantel and Shandong Yafeida
Information Technology Co., Ltd. (“Yafeida”) and a copy of Yuantel’s accounting records.
According
to an article published online in China on June 10, 2019 by the Economic Report, four persons from the management of Yafeida had
been arrested and accused of fraudulent activities, and no further details have been released as of the date hereof. Yafeida purchases
SIM cards from Yuantel and other MVNOs and mobile operators in China.
On
October 18, 2019, the Bureau issued official orders to the immediate families of the detained staff and former staff of Yuantel,
according to which:
|
●
|
The then president
of Yuantel, as approved by the People’s Prosecutor’s Office of Kunming City Panlong District, was placed under
arrest at the Panlong District First Detention Center (“Panlong”), for suspicion on the failure to administer
information network security and the individual has not been formally charged as of the date of this report; and
|
|
●
|
The operating officer
of Yuantel has not been approved for arrest by the People’s Prosecutor’s office but may be summoned for further
investigations, and was released as of October 19, 2019 on bail of RMB 9,000 Yuan (approximately $1,270).
|
The
Company understands from the family of the former Yuantel president that two similar orders were issued to two former employees
of Yuantel who are still currently placed under arrest at the Panlong District First Detention Center. Since the Company or any
of its subsidiaries were named in the case, no official notice has been provided to the Company as of the date of filing of this
annual report.
As
normal procedure in China, the Kunming City Panlong District Branch of the Yunnan Province Public Security Bureau will have up
to 150 days to perform its supplementary investigation of the accused individual. After the supplementary investigation period,
if the Prosecutor considers there is adequate evidence to prosecute, the Prosecutor will initiate a public prosecution in which
the suspect will be charged and the case will be presented to the court. Otherwise, according to PRC criminal law, if the Prosecutor
considers there is inadequate evidence to prosecute, the suspect will be released and the case will be dismissed. As of the date
of this annual report, neither Yuantel or the Company, or anyone else associated with Yuantel or the Company, has received any
notice or received any other information from the Bureau or other PRC authorities regarding the Investigation.
On
November 4, 2019, the Bureau requested another employee of Yuantel to go to Yunnan for questioning. Upon the person’s arrival
at the Bureau in Yunnan, he was detained for cooperation with the investigation.
As
of the date of this report, no charges have been made against the individuals held at Panlong. All of the individuals’ positions
at Yuantel have been replaced by other staff. The Company or any of its subsidiary entities has not been named in connection with
this investigation. The operations of Yuantel and the Company are continuing as in the past. There have been no other details
released by the Bureau as of the date of this report, and neither Yuantel or the Company, or anyone else associated with Yuantel
or the Company, has received any notice or received any other information from the Bureau or other PRC authorities regarding the
Investigation.
The
Company made a whole disposition of Yuantel, which was originally supposed to be completed by the end of year 2019. Due to the
investigation referenced in the preceding paragraphs, the Company received only $6.05 million from the buyers by year end December
31, 2019 and amended the agreement with the buyers of Yuantel on September 1, 2020 to sell the remaining percentage of Yuantel
owned by the Company for $4.54 million, of which approximately $0.4 million was received and the balance of $4.14 million was
supposed to be received by September 30, 2020, which was later postponed to October 2020 by both parties. The transaction was
completed on October 29, 2020. Due to probable ownership dispute at the VIE level discussed in the risk factors, the Company reserved
the amount of $3.2 million in contingency loss due to such dispute. There was approximately $0.3 million is retained by the buyer
regarding disposal of Yuantel. It was due to the possibility of Yuantel being charged with penalties in the Yunnan Public Securities
Bureau’s investigation on the executives. If Yuantel is fined, the penalties up to $0.3 million will be paid out from this
retained amount. If there are no penalties assessed by the authorities onto Yuantel by April 30, 2021, the buyer will release
the amount to the Group.
Customers
The
Company’s primary customers are mobile chipset manufacturers, mobile device OEMs and mobile operators. For the year ended
December 31, 2020, GreatCall, Inc., ECOM Instruments and Qualcomm India Ltd accounted for 41.9%, 23.1% and 14.4% of our net revenues,
respectively. For the year ended December 31, 2019, Reliance Retail Limited and GreatCall, Inc. accounted for 63.9% and 7.8% of
our net revenues, respectively. For the year ended December 31, 2018, Reliance Retail Limited and E La Carte, Inc. accounted for
59.6% and 8.0% of our net revenues, respectively.
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. 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. We renewed
the operating agreement with China Unicom as of January 16, 2019, which was for a two-year period until December 31, 2020.
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.
The
MVNO BU was sold as of October 29, 2020.
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, 2020, 234 of our 286 employees & contractors were technical professionals dedicated
to platform research and development and product specific customization. Technical professionals have diverse backgrounds and
experience gained through employment with leading mobile chipset designers and manufacturers, mobile device OEMs, internet content
providers and other software and hardware enterprises.
The
Company’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.
Our
current research and development efforts are focused on developing the BorqsWare software and service platform solutions to improve
and enhance the following aspects of the Android platform:
|
●
|
stability and reliability;
|
|
●
|
performance and
power management;
|
|
●
|
Android platform
integration with various kinds of chipsets;
|
|
●
|
usability, input
mechanism and display mechanism;
|
|
●
|
security and anti-hacking
of applications;
|
|
●
|
in-country localization;
|
|
●
|
automated cross
applications software testing;
|
|
●
|
4G radio network
specific functionality, such as FDD-LTE and TD-LTE; and
|
|
●
|
mobile operator
end-to-end services; and integration of mobile Internet services with traditional telecommunication services, such as integration
of instant messaging with short messaging.
|
A
typical research and development project is staffed with members of the sales team, a research and development team comprised
of a project manager, a platform development team, a customer development team and a system testing team, as well as finance personnel.
At the beginning of a project, a member of the sales team will work with a project manager to simultaneously track research and
development and commercial milestones. The project manager is responsible for ensuring the research and development milestones
are achieved in a timely manner, including system testing, and a member of the sales team is responsible for tracking sales milestones.
Finance personnel review each invoice and determine the appropriate accounting treatment under U.S. Generally Accepted Accounting
Principles (“U.S. GAAP”). A typical research and development project takes between six to nine months to complete.
In general, a significant portion of each research and development project consists of existing Android platform software and
service solutions, while incorporating necessary customizations for a particular customer.
Intellectual
Property
The
Company regards patents, copyrights, trademarks, software registrations, trade secrets and similar intellectual property as critical
to its success. The Company relies on a combination of trademark, copyright, patent, software registration and trade secret laws,
and enters into confidentiality agreements with employees and relevant third parties to protect our intellectual property rights.
All employees enter into agreements requiring them to keep confidential all proprietary and other information relating to customers,
methods, technologies, business practices and trade secrets.
The
Company has been granted 130 patents in China and six patents in the United States, and as of December 31, 2020 it had 18 pending
patent applications in China and three pending patent applications in the United States. The Company also has 91 software copyrights
and 47 trademarks registered and 17 pending trademarks in China. In addition, the Company has registered its domain name with
various domain name registration services.
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). In 2018 we intended to sell the MVNO BU, and in February 2019 we signed agreements with
buyers to sell all of our interest in the MVNO BU. The sale was finally completed as of October 29, 2020.
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.
|
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, 2020, including some of the world’s leading companies in the mobile
industry. Its diversified customer base includes mobile chipset manufacturers, mobile device original equipment manufacturers
(“OEMs”) and mobile operators. Through 2020, 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 17 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.
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 discontinued operations of the MVNO business in China through BC-NW, its variable
interest entity and the subsidiaries of BC-NW. As all the registered shareholders of BC-NW are PRC citizens and all other shareholders
of the subsidiaries of BC-NW are also PRC citizens or PRC domestic enterprises, BC-NW and its subsidiaries are therefore considered
as PRC domestic enterprises under PRC law. The “registered shareholders” of BC-NW refer to those shareholders who
have pledged their equity interest in BC-NW to Borqs Beijing Ltd., or WFOE, and entered into exclusive option agreements with
WFOE as part of the contractual arrangements. The Company’s contractual arrangements with BC-NW and the registered shareholders
of BC-NW allow it to have the power to direct the activities of BC-NW and its subsidiaries that most significantly impact their
economic performance.
The
Company’s operations are also subject to trial licenses granted by the Ministry of Industry & Information Technology
of China (“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, continued 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
submitted our application for the official MVNO license. In July 2018, the MIIT has issued the MVNO license to us which will expire
on July 12, 2023.
The
MVNO Business Unit as sold as of October 29, 2020.
Employees
As
of December 31, 2020, we had 286 employees and contractors. None of our employees are represented by a labor union. Out of our
total staff, 211 are located in Bangalore, India engaged in research and development activities, 75 are located in Beijing and
other cities in China engaged in our Connected Solutions BU activities.
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.
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.
Description
of Properties
The
Company’s principal executive offices are located in Beijing, China. The Company leased approximately 3,600 square meters
of office space pursuant to a lease that expired on August 31, 2020. The Company has signed a new lease for a smaller space beginning
on September 1, 2020. The Company also occupies leased facilities of 4,400 square meters for other offices and research and development
facilities in India. In addition, the company leased an existing plant of 5,500 square meters in Huzhou, and plans to gradually
put it into production line for the R&D investment of 5G technology. 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,
2020. 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
|
|
August 31, 2020
|
|
Beijing, China
|
|
738 sq. meters
|
|
Principal executive
office
|
|
Begins Sep 1,
2020 & expires Aug 31, 2022
|
|
Bangalore,
India
|
|
4400 sq. meters
|
|
Research and development
|
|
May 31, 2023
|
|
Huzhou
Zhejiang, China
|
|
5348 sq. meters
|
|
Research
and development
|
|
Feb 18, 2024
|
|
Total
|
|
10486 sq. meters
|
|
(from September
1, 2020 onwards)
|
|
|
|
Segments
We
operate in two reportable segments, one is the mobile virtual network operator services (“MVNO” or “Yuantel”),
and the other one is 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.
|
|
For
the years ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
($’000)
|
|
United
States
|
|
|
15,663
|
|
|
|
12.2
|
%
|
|
|
21,746
|
|
|
|
22.0
|
%
|
|
|
13,495
|
|
|
|
50.5
|
%
|
India
|
|
|
96,550
|
|
|
|
75.2
|
%
|
|
|
69,645
|
|
|
|
70.4
|
%
|
|
|
5,437
|
|
|
|
20.3
|
%
|
China
|
|
|
4,282
|
|
|
|
3.3
|
%
|
|
|
1,701
|
|
|
|
1.7
|
%
|
|
|
428
|
|
|
|
1.6
|
%
|
Rest
of the World
|
|
|
11,925
|
|
|
|
9.3
|
%
|
|
|
5,866
|
|
|
|
5.9
|
%
|
|
|
7,391
|
|
|
|
27.6
|
%
|
Net
Revenues
|
|
|
128,420
|
|
|
|
100.0
|
%
|
|
|
98,958
|
|
|
|
100.0
|
%
|
|
|
26,751
|
|
|
|
100.0
|
%
|
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 2018 to 2020, we engaged with one significant
customer in India who continued to place significant orders with us in all three years.
Recent
Developments
Cooperation
with AWP
On
December 6, 2019, the Company entered into a letter of engagement (the “Original LOE”) with American West Pacific
International Investment Corp. (“AWP”). The Original LOE had a term of one (1) year, renewing automatically each year
for another one (1)-year term unless terminated by one party with notice to the other. The Original LOE provides that AWP will
serve as a non-exclusive representative to identify, review and advise the Company with respect to strategic alliances, including
identifying strategic business and governmental contacts, partners, customers and entities which may assist or are synergistic
to the Company’s business. In addition, AWP will assist the Company to identify and negotiate with sources of financing
including debt and/or equity during the term of this agreement. It will be the Company’s sole decision whether it will acquire
or invest in the businesses or products identified by AWP, or to proceed with any financing transaction provided for consideration
to the Company through the efforts of AWP.
On
January 17, 2020, the Company and AWP entered into an amended letter of engagement (the “Amended LOE”), which amends
the fees to be paid to AWP. The fees to be paid to AWP include:
|
●
|
An initial cash
retainer of $25,000 upon engagement.
|
|
●
|
A second cash payment
(the “Second Cash Payment”) of $25,000 to be paid upon the delivery to and acceptance by the Company of the supporting
document from an institutional party and/or bank, which such payment is to be credited against any success cash fee payable
by the Company.
|
|
●
|
For the successful arrangement of debt financing for replacement loans the Company would pay (a) a cash success fee of 4% of the cash raised, plus (b) 4% of the value of funds raised in shares (collectively, (the “Loan Replacement Fees,” and, together with the Working Capital Financing Fees, the “Financing Fees). The fees were related to financing to be arranged by China National Technical Import & Export Corp (“CNTIC”). As of the filing of the 2020 annual report, the financing has not yet happened.
|
|
●
|
Ordinary shares
issuable for the Financing Fees will be calculated with a per share price of $1.50.
|
|
●
|
Upon the execution
of a Strategic Cooperation Agreement (“SCA”), (a) a cash fee equal to $25,000 plus (b) the issuance of 1,250,000
ordinary shares of the Company plus (the “Retainer Shares”) warrants (the “Retainer Warrants” and
together with the Retainer Shares, the “Retainer Securities”) to purchase 1,250,000 ordinary shares of the Company,
with each Retainer Warrant exercisable into one ordinary share at $2.25 per share. Each Retainer Warrant will have an expiration
of 36 months, and will have a cashless exercise feature payable in ordinary shares.
|
|
●
|
The ordinary shares
to be issued and the ordinary shares issuable upon the exercise of the warrants pursuant to the Amended LOE must be registered
on a registration statement within 90 days from the execution of the SCA. Any other ordinary shares issued in connection with
Amended LOE have piggy-back registration rights.
|
|
●
|
The Financing Fees
earned in accordance with the foregoing will be credited against the Second Cash Payment.
|
On
January 17, 2020, the SCA was executed by the Company, China National Technical Import & Export Corp. (“CNTIC”), and
Genertec America Inc. The SCA provides for a strategic partnership including, without, limitation (i) CNTIC will arrange finance from
Chinese financial institutions for the Company’s current purchase orders; and (ii) CNTIC will arrange financing for the Company
for all of its purchase orders if they are in line with regulation of Chinese financial institutions. As of the filing of this annual
report, financing from CNTIC has not occurred.
On
December 30, 2020, the Company entered into a loan agreement with AWP as lender for $1 million due and payable in 6 months and has a
12% interest rate per annum. This loan is guaranteed by the Company which caused 4,000,000 ordinary shares to be issued immediately after
the Company received the loan, and such shares were held in escrow at Continental Stock Transfer & Trust Company as collateral for
the loan.
Account
payables Settlement
In
May 2020, we issued ordinary shares to settle debt due to Coming Technologies Ltd valued per agreement at a total amount of $2.0 million
which comprised of:
a. $0.9
million in payables for products Borqs ordered from TianFu in the amount of $0.7 million and EPIC in the amount of $0.2 million. TianFu
and EPIC in turn ordered the manufacturing of components and parts from Coming Tech. Coming Tech had delivered such products, via TianFu
and EPIC, to Borqs which delivered them to Borqs’ customer in the year 2018. Borqs had recorded these amounts as accounts payable
to TianFu and EPIC; and by settling the amount of $0.9 million directly with Coming Tech, we reduced our payables with TianFu and EPIC
for their respective amounts.
b. $0.9
million with purchase orders placed with EPIC in January of 2020 which EPIC in turn placed with Coming Tech to manufacture the products.
We determined that the project was cancelled by April 2020 most significantly due to the fact that the COVID-19 virus was spreading worldwide
and turning into a pandemic, and the cancellation came prior to the delivery of our products to the customer. However Coming Tech had
already manufactured the products and Borqs became liable for the total of amount of $0.9 million.
c. $0.2
million in an extra compensation to Coming Tech because the ordinary shares issued to Coming Tech were not registered and not sellable
until a minimum of a 6-month holding period was satisfied.
For
the year ended December 31, 2020, the Group issued ordinary shares to settle the payables of $2.0 million.
Loan
Agreement with Run He
On
November 27, 2020, the Company entered into a loan agreement with Run He, as lender for $1.25 million due and payable within 15 months
and with a 6% interest rate per annum. The debt is convertible at borrower’s discretion into shares of the borrower valued at a
30% discount from the market price of the borrower’s ordinary shares as traded on the Nasdaq stock market. The market price is
defined as the average of each of the high and low averages for the five preceding trading days prior to the date of payment.
Senior
Debt Purchased by LMFA Financing LLC
The
Company entered into Agreements dated December 14, 2020 with Partners For Growth which was its senior lender and LMFA Financing LLC (“LMFA”),
a Florida limited liability company and wholly owned subsidiary of LM Funding America, Inc. (Nasdaq: LMFA), in which LMFA was committed
to purchase up to be approximately $18 million of debt in tranches, which when completed would eliminate substantially all of the debt
with the Company’s senior lender. LMFA would convert the purchased debt into common shares of the Company, pursuant to a court
order that allows the conversion shares to be issued as unrestricted securities in a transaction that is exempt from registration under
Section 3(a)(10) of the Securities Act of 1933, as amended.
As
of February 10, 2021, LMFA has completed the purchase of $17.87 million of principal, accrued interest and applicable fees, converted
into and sold all 22.73 million shares of the Company’s ordinary shares. With the Company settling another $1.27 million of debt,
accrued interest and applicable fees directly with the senior lender by the issuance of 1.51 million shares on February 17, 2021 which
the senior lender subsequently sold, the Company’s defaulted Debts with the senior lender totaling $19.14 million have been eliminated
since.
Convertible
Notes Sold
The
Company signed agreements with institutional and individual investors for sale of convertible notes on February 25, 2021 for $20
million (the “Feb 25 Notes”) and on April 14, 2021 for $3 million (the “April 14 Notes”). The notes are
due in two years, have an annual interest rate of 8%, convertible into ordinary shares of Borqs at 10% discount from the market
price and has 90% warrant coverage with the warrants exercisable cashless or for cash at $2.222 per share for the Feb 25 Notes
and $1.540 for the Apr 14 Notes. The conversion price is at $1.539 per share for the Feb 25 Notes and $1.071 per share for the
Apr 14 Notes, or at a one-time reset at 90% of the market price at the time of effectiveness of the required registration statement,
whichever is lower. One-third of the notes are sold at the execution of definitive agreements and two-thirds of the notes will
be sold upon the effectiveness of a registration statement to be filed by the Company. Proceeds will be used for the procurement of orders the Company expects to receive from its customers this year
and also for development of the next generation 5G products.
Available
Information
Our
annual reports on Form 20-F, current reports on Form 6-K, and other forms and periodic reports as a foreign private
issuer, are available free of charge on our website (www.borqs.com) as soon as reasonably practicable after we have electronically
filed such materials with, or furnished such materials to the Securities and Exchange Commission. They are also available at www.sec.gov.
ITEM
5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The
following discussion of the results of our operations and our financial condition should be read in conjunction with the financial
statements and the notes to those statements included in “Item 18. Financial Statements”. This discussion contains
forward-looking statements that involve risks, uncertainties, and assumptions. Actual results may differ materially from those
anticipated in these forward-looking statements as a result of many factors, including those set forth in “Item 3. Key Information–D.
Risk Factors”.
References
in this Annual Report to “we,” “us” or the “Company” refer to Borqs Technologies, Inc. References
to our “management” or our “management team” refers to our officers and directors. The following discussion
and analysis of the Company’s financial condition and results of operations should be read in conjunction with the financial
statements and the notes thereto contained elsewhere in this Annual Report. Certain information contained in the discussion and
analysis set forth below includes forward-looking statements that involve risks and uncertainties.
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
Special
Note Regarding Forward-Looking Statements
This
Annual Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934 that are not historical facts, and involve risks and uncertainties that
could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical
fact included in this Annual Report including, without limitation, statements in this “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business strategy
and the plans and objectives of management for future operations, are forward-looking statements. Words such as “expect,”
“believe,” “anticipate,” “intend,” “estimate,” “seek” and variations
and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate
to future events or future performance, but reflect management’s current beliefs, based on information currently available.
A number of factors could cause actual events, performance or results to differ materially from the events, performance and results
discussed in the forward-looking statements. For information identifying important factors that could cause actual results to
differ materially from those anticipated in the forward-looking statements, please refer to the Risk Factors section of this Annual
Report. The Company’s securities filings can be accessed on the EDGAR section of the SEC’s website at www.sec.gov.
Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise
any forward-looking statements whether as a result of new information, future events or otherwise.
Overview
Borqs
Technologies, Inc. (“we”, “the Company” or “Borqs”) is a company focused on software, development
services and products providing customizable, differentiated and scalable Android-based smart connected devices and cloud service
solutions. We are a leading provider of commercial grade Android platform software for mobile chipset manufacturers, mobile device
OEMs and mobile operators, as well as complete product solutions of mobile connected devices for enterprise and consumer applications.
In recent years, we have been awarded significant business contracts from Intel and Qualcomm, leading global chipset manufacturers.
Particularly, significant contracts from Qualcomm were awarded to us in 2018, 2019 and also in 2020.
Pursuant
to the Company’s acquisition of Borqs International Holding Corp (“Borqs International”) by way of merger, which
completed on August 18, 2017, Borqs International became a wholly-owned subsidiary of the Company, with the Company adopting the
business of Borqs International and its consolidated subsidiaries going forward and reporting the historical consolidated financial
statements of Borqs International on future SEC filings as those of the Company, which was renamed Borqs Technologies, Inc.
Our
Connected Solutions business unit works closely with chipset partners to develop new connected devices. Borqs developed the reference
Android software platform and hardware platform for Intel and Qualcomm phones and tablets. We provide Connected Solutions customers
with customized, integrated, commercial grade Android platform software and service solutions to address vertical market segment
needs through the targeted BorqsWare software platform solutions. The BorqsWare software platform consists of BorqsWare Client
Software and BorqsWare Server Software. The BorqsWare Client Software platform has been used in Android phones, tablets, watches
and various Internet-of-things (“IoT”) devices. The BorqsWare Server Software platform consists of back-end server
software that allows customers to develop their own mobile end-to-end services for their devices.
Our
MVNO business unit provides a full range 2G/3G/4G voice and data services for general consumer usage and IoT devices, as well
as traditional telecom services such as voice conferencing. The MVNO business unit was sold as of October 29, 2020.
In the year ended December 31, 2018, 2019 and 2020, Borqs generated
96.7%, 98.3% and 98.4% of its connected solutions net revenues from customers headquartered outside of China and 3.3%, 1.7% and 1.6%
of its net revenues from customers headquartered within China. As of December 31, 2020, 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 17 million units worldwide.
We
have dedicated significant resources to research and development, and have research and development centers in Beijing, China
and Bangalore, India. As of December 31, 2020, 234 of our 286 employees and contractors were technical professionals dedicated
to platform research and development and product specific customization.
We have achieved significant growth since inception in 2007. Not including
our MVNO BU activities which are now represented as discontinued operations due to our intended sale of the MVNO BU, net revenues from
continuing operations of the Connected Solutions BU increased for the years ended December 31, from $75.1 million in 2015 to $85.4 million
in 2016, to $122.2 million in 2017, to $128.4 million in 2018, but scaled back to $98.9 million in 2019. Our operations were significantly
affected by the COVID-19 pandemic in 2020, and recorded only $26.8 million in revenues for the year 2020. We recorded a net loss of $12.8
million in 2017 which included non-cash merger related costs of $14.5 million. In the year 2018 we incurred a net loss of $72.0 million
which included $6.2 million in cost of goods for one transaction in which the related revenue was not recognized in 2018 due to uncertainty
in collectability, non-recurring charges of $5.3 million in arbitration loss, write-off and provision for doubtful accounts and current
assets of $30.1 million, write-down of historical inventory due to loss & obsolescence of $11.8 million, impairment of long-term investment
of $13.0 million, deferred income tax benefits of $1.7 million, impairment of intangible assets due to the pending sale of the MVNO business
unit of $0.8 million, share based compensation of $1 million, and $3.0 million in stock offering expenses. In the year 2019, we incurred
a net loss of $35.7 million which included a provision for doubtful accounts of $13.6 million, non-recurring penalties of $3.4 million
and reversal of historical inventory of $0.3 million. In the year 2020, we incurred a net loss of $34.8 million which included professional
fees of $3.6 million, salaries and welfare of $2.6 million, non-recurring penalties of $1.1 million, share-based compensation expense
of $20.0 million and contingency loss of $3.1 million and allowance for doubtful accounts of $4.4 million, offset by gain
on disposal of Yuantel of $10.1 million.
Key
Factors Affecting Results of Operations
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 lower than that for hardware
products 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 also 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 obtained from the incumbent operator, as well as the competition
in the market.
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. Competitive factors in voice/data pricing could affect the demand for our MVNO services and affect our mobile subscriber
growth, which could materially and adversely affect our revenues and result of operations. MVNO BU revenues and gross profit are
also directly affected by Company-specific factors, including:
|
●
|
The bulk wholesale
rates for voice and data service. We rely on China Unicom, the incumbent operator, to provide us with attractive and competitive
bulk wholesale rates of voice-per-minute and MB-of-data to compete with our competitors.
|
|
●
|
The Chinese government
policy on MVNO services. We rely on China’s government to continue to grant us a license to operate the MVNO services.
|
The
aggregate amount of cash and cash equivalent and restricted cash are not materially affected by currency fluctuations because
the majority of our revenues are denominated in U.S. Dollars based on contracts made in Hong Kong. Financings from sales of equity
and working capital loans are denominated in U.S. Dollars and executed in Hong Kong and the Cayman Islands, and repayments have
been made in U.S. Dollars outside of China, thus not requiring approval from the PRC State Administration of Foreign Exchange.
The MVNO business, and small amounts of Connected Solutions BU activities within China, generate revenue in Renminbi. Personnel
and personnel-related expenses are primarily paid in Renminbi, and costs of components used in Connected Solutions BU hardware
revenues are primarily paid in U.S. Dollars. As of December 31, 2020, we held cash and cash equivalents totaling $3.08 million
on a consolidated basis.
Results
of Operations
The
following table sets forth a summary of the Company’s consolidated results of operations for the periods indicated. The
activities indicated herewith were from our Connected Solutions BU, our continuing operations; they did not include activities
from our MVNO BU which were classified as discontinued operations. This information should be read in conjunction with our consolidated
financial statements and related notes included elsewhere or incorporated by reference in this Annual Report. The operating results
in any period are not necessarily indicative of results that may be expected for any future period.
Comparisons
of Fiscal Years Ended December 31, 2018, 2019 and 2020
Consolidated
Statement of Operations Data:
|
|
Fiscal
Years Ended December 31,
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
($’000)
|
|
Net
revenues
|
|
|
128,420
|
|
|
|
98,958
|
|
|
|
26,751
|
|
Cost
of revenues
|
|
|
(134,443
|
)
|
|
|
(98,389
|
)
|
|
|
(25,155
|
)
|
Gross
profit (loss)
|
|
|
(6,023
|
)
|
|
|
569
|
|
|
|
1,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
(60,825
|
)
|
|
|
(31,578
|
)
|
|
|
(42,216
|
)
|
Other
operating income
|
|
|
180
|
|
|
|
1,854
|
|
|
|
-
|
|
Operating
income (loss)
|
|
|
(66,668
|
)
|
|
|
(29,155
|
)
|
|
|
(40,620
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
(2,059
|
)
|
|
|
(3,377
|
)
|
|
|
4,937
|
|
Income
(loss) from continuing operations, before income taxes
|
|
|
(68,727
|
)
|
|
|
(32,532
|
)
|
|
|
(35,683
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (expense) benefit
|
|
|
(331
|
)
|
|
|
949
|
|
|
|
(409
|
)
|
Net
income (loss) from continuing operations
|
|
|
(69,058
|
)
|
|
|
(31,583
|
)
|
|
|
(36,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from operations of discontinued operations
|
|
|
(1,300
|
)
|
|
|
(4,151
|
)
|
|
|
1,302
|
|
Income
tax benefit (expense)
|
|
|
(1,641
|
)
|
|
|
-
|
|
|
|
-
|
|
(Loss)
income on discontinued operations
|
|
|
(2,941
|
)
|
|
|
(4,151
|
)
|
|
|
1,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
(71,999
|
)
|
|
|
(35,734
|
)
|
|
|
(34,787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
net (loss) income attributable to noncontrolling interests
|
|
|
(235
|
)
|
|
|
(1,325
|
)
|
|
|
715
|
|
Net
income (loss) attributable to Borqs Technologies, Inc.
|
|
|
(71,764
|
)
|
|
|
(34,409
|
)
|
|
|
(35,502
|
)
|
For year ended December 31, 2018 we incurred a net loss of $72.0 million
which included $6.2 million in cost of goods for one transaction in which the related revenue was not recognized in 2018 due to uncertainty
in collectability, non-recurring charges of $5.3 million in arbitration loss, write-off and provision for doubtful accounts and current
assets of $30.1 million, write-down of historical inventory due to loss & obsolescence of $11.8 million, impairment of long-term investment
of $13.0 million, deferred income tax benefits of $1.7 million, impairment of intangible assets due to the pending sale of the MVNO business
unit of $0.8 million, share based compensation of $1 million, and $3.0 million in stock offering expenses. For year ended December 31,
2019, we incurred a net loss of $35.7 million which included a provision for doubtful accounts of $13.6 million, non-recurring penalties
of $3.4 million and reversal of historical inventory of $0.3 million. The write-offs and provisions recorded in 2019 were still high for
the level of business activities in the year, although comparatively less than those recorded in 2018. We have taken this approach as
we realized that the COVID-19 pandemic, in the first half of the year 2020, has significant negative effects on our industry and particularly
on certain of our customers and business partners; and it is prudent to write down some of our assets as of December 31, 2019. For year
ended December 31, 2020 we incurred a net loss of $34.8 million which included professional fees of $3.6 million, salaries and welfare
of $2.6 million, non-recurring penalties of $1.1 million, share-based compensation expense of $20.0 million, impairment of
intangible assets of $0.7 million and contingency loss of $3.1 million and allowance for doubtful accounts of $4.4 million,
offset by gain on disposal of a subsidiary of $10.1 million.
Net
Revenue
Our
net revenues represent our gross revenues, less PRC value added taxes and other deductions. Connected Solutions BU net revenues
consist of engineering design fees, software royalties and product sales. MVNO BU net revenues, which were classified as discontinued
operations, consist primarily of monthly recurring revenue.
For
the year ended December 31, 2018, net revenues from Connected Solutions BU, or our continuing operations, was $128.4 million and
net revenues from MVNO BU, presented here as discontinued operations, was $27.4 million, as compared to $98.9 million and $39.8
million in the year ended December 31, 2019, respectively. This represented a 23.0% decrease for Connected Solutions BU revenues
and a 45.3% increase for the discontinued MVNO BU from 2018 to 2019. For the year ended December 31, 2020, net revenues from Connected
Solutions BU was $26.8 million representing a 73.0% decrease from the previous year. Our MVNO BU has sold as of October 29, 2020
and brought in $1.3 million as net income from discontinued operations prior to the completion of the sale. The decline in business
activities in 2020 was mainly attributable to the effects of the COVID-19 pandemic.
As
our Connected Solutions BU did not engage in any retail activities in the countries where our customers were located and also
not within China; and we concluded the fluctuations in our revenues between the years were not indicative of market conditions.
Instead, our hardware sales of our Connected Solution BU comprised of all made-to-order products with quantities as stipulated
by our customers, and also included consumer and industrial use devices as well. As such, the orders we receive from our customers
may not adhere to seasonality and therefore fluctuations in our business activity levels may not conform to any particular trend.
Net
Revenues — Connected Solutions BU
Connected
Solutions BU net revenues consist of engineering design fees, software royalties and product sales. MVNO BU net revenues consist
primarily of monthly recurring revenue.
BorqsWare
software platform solutions are based on the Company’s core proprietary software and include base chipset software supporting
various radio network chipsets and application processors, commercial grade software to differentiate the Android platform for
our customers and mobile operator required services. BorqsWare software platform solutions are embedded directly into connected
devices. We generate revenues from our BorqsWare software platform solutions by charging our customers a product fee for project-based
design contracts and/or a service fee for research and development services on a time and material basis, depending upon the nature
of the contracts we entered into with our customers. In addition, we charge usage-based royalties in a majority of our project-based
software contracts, which royalties are determined based on the customer’s volume of sales of products in which a mobile
chipset or connected device with BorqsWare software platform solutions embedded.
As
discussed more fully under “— Critical Accounting Policies and Estimates — Revenue Recognition — Project-Based
Software Contracts,” the Company’s project-based software contracts include post-contract support, or PCS, where the
customer has the right to receive unspecified upgrades/enhancements on a when-and-if available basis. Since we are unable to establish
vendor-specific objective evidence of fair value of post contract services, or PCS, revenues from project-based software contracts
are recognized on a straight-line basis over the longest expected delivery period of undelivered elements of the arrangement,
which is typically the PCS period. Project-based software contracts that include PCS, which have a typical PCS period of 12 months.
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 years ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
($’000)
|
|
Software
|
|
|
9,503
|
|
|
|
7.4
|
%
|
|
|
14,975
|
|
|
|
15.1
|
%
|
|
|
10,570
|
|
|
|
39.5
|
%
|
Hardware
|
|
|
118,917
|
|
|
|
92.6
|
%
|
|
|
83,983
|
|
|
|
84.9
|
%
|
|
|
16,181
|
|
|
|
60.5
|
%
|
Connected
Solutions BU net revenues
|
|
|
128,420
|
|
|
|
100.0
|
%
|
|
|
98,958
|
|
|
|
100.0
|
%
|
|
|
26,751
|
|
|
|
100.0
|
%
|
Software
Software
net revenues were $9.5, $15.0 and $10.6 million in the years ended December 31, 2018, 2019 and 2020, respectively, representing
7.4%, 15.1% and 39.5%of our continuing operations Connected Solutions BU net revenues. The $5.5 million increase in the year ended
December 31, 2019 compared to the year ended December 31, 2018 mainly reflected increases in software engineering activities completed
for customers in 2019 as well as the recognition of PCS delivered during 2019 for projects completed in 2018. We captured more
software engineering activities in the year ended December 31, 2019 and recorded $15.0 million in software revenues in the year
ended December 31, 2019, representing a 57.6% increase over the previous year. For the year ended December 31, 2020, our software
net revenues were $10.6 million which represented 39.5% of total net revenues, as our software activities were not affected as
severely as our hardware activities by the COVID-19 pandemic.
Hardware
Hardware
net revenues were $$118.9 million, $84.0 million and $16.2 million in the years ended December 31, 2018, 2019 and 2020, respectively,
representing 92.6%, 84.9% and 60.5% of our continuing operations Connected Solutions BU net revenues. Again, as discussed above,
these fluctuations may not be attributed to any particular market trend since our sales were all made to order for our industrial
customers. The significant decrease in hardware sales for 2020 was mainly attributable to the COVID-19 pandemic. Types of products
include wearables such as trackers and smart watches, ruggedized handsets, tablets and smart phones and mobile connectivity modules.
As described above, hardware sales comprised of all made-to-order products with quantities as stipulated by our customers and
included consumer and industrial use devices as well. As such, the orders we receive from our customers may not adhere to seasonality
and therefore fluctuations in our business activity levels may not conform to any particular trend.
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 ownership of products is transferred to the customers. 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. 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 years ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
($’000)
|
|
Mobile
device OEMs
|
|
|
118,667
|
|
|
|
92.4
|
%
|
|
|
94,313
|
|
|
|
95.3
|
%
|
|
|
22,905
|
|
|
|
85.6
|
%
|
Mobile
Chipset Vendors
|
|
|
9,753
|
|
|
|
7.6
|
%
|
|
|
4,645
|
|
|
|
4.7
|
%
|
|
|
3,846
|
|
|
|
14.4
|
%
|
Connected
Solutions BU Net Revenues
|
|
|
128,420
|
|
|
|
100
|
%
|
|
|
98,958
|
|
|
|
100
|
%
|
|
|
26,751
|
|
|
|
100
|
%
|
We
expect our net revenues from mobile device OEMs to continue to grow as we develop more connected devices, especially IoT products.
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 years ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
($’000)
|
|
United
States
|
|
|
15,663
|
|
|
|
12.2
|
%
|
|
|
21,746
|
|
|
|
22.0
|
%
|
|
|
13,495
|
|
|
|
50.5
|
%
|
India
|
|
|
96,550
|
|
|
|
75.2
|
%
|
|
|
69,645
|
|
|
|
70.4
|
%
|
|
|
5,437
|
|
|
|
20.3
|
%
|
China
|
|
|
4,282
|
|
|
|
3.3
|
%
|
|
|
1,701
|
|
|
|
1.7
|
%
|
|
|
428
|
|
|
|
1.6
|
%
|
Rest
of the world
|
|
|
11,925
|
|
|
|
9.3
|
%
|
|
|
5,866
|
|
|
|
5.9
|
%
|
|
|
7,391
|
|
|
|
27.6
|
%
|
Net
revenues
|
|
|
128,420
|
|
|
|
100.0
|
%
|
|
|
98,958
|
|
|
|
100.0
|
%
|
|
|
26,751
|
|
|
|
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 2018 to 2020, revenues from customers with headquarters in
China declined, while our main customer in India, Reliance Retail Limited, continued to place significant orders with us through
2020. Our main customer in the United States for the year 2020 was GreatCall, Inc.
Net
Revenues from discontinued operations — 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. We intended to sell the MVNO BU in 2018 and as of February 2019, we signed agreements with buyers for all of our
interests in the MVNO BU. The sale was originally scheduled to be completed by the end of 2019. Due to the on-going investigation
by the Yunnan Public Security Bureau, we received only partial payment from the sale in 2019. A new agreement was executed with
the buyers as of September 1, 2020 and the sale was finally completed as of October 29, 2020.
|
|
For
the years ended December 31,
|
|
|
January
1 to October 29
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
($’000)
|
|
MVNO
|
|
|
25,468
|
|
|
|
93.1
|
%
|
|
|
37,495
|
|
|
|
94.1
|
%
|
|
|
29,023
|
|
|
|
100.0
|
%
|
Other
|
|
|
1,891
|
|
|
|
6.9
|
%
|
|
|
2,340
|
|
|
|
5.9
|
%
|
|
|
-
|
|
|
|
-
|
%
|
MVNO
BU net revenues
|
|
|
27,359
|
|
|
|
100.0
|
%
|
|
|
39,835
|
|
|
|
100.0
|
%
|
|
|
29,023
|
|
|
|
100.0
|
%
|
Cost
of Revenues
Cost
of our continuing operations 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 our discontinued
operations 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. Activities for the MVNO BU only included those from January 1 through October 29, 2020.
|
|
For
the years ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
($’000)
|
|
Continuing operation:
|
|
|
|
Connected
Solutions BU
|
|
|
134,443
|
|
|
|
88.0
|
%
|
|
|
98,389
|
|
|
|
79.9
|
%
|
|
|
25,155
|
|
|
|
53.8
|
%
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MVNO
BU
|
|
|
18,587
|
|
|
|
12.0
|
%
|
|
|
24,748
|
|
|
|
20.1
|
%
|
|
|
21,637
|
|
|
|
46.2
|
%
|
Total
cost of revenues
|
|
|
153,030
|
|
|
|
100.0
|
%
|
|
|
123,137
|
|
|
|
100.0
|
%
|
|
|
46,792
|
|
|
|
100.0
|
%
|
Connected
Solutions BU cost of revenues varied from 2018 to 2020 in attribution to similar changes in our volume of hardware products sales
during these years. The cost of revenues in the year ended December 31, 2018 included $6.2 million in costs for one transaction
in which the corresponding revenue was not yet recognized in the year ended December 31, 2018 due to uncertainty in collectability.
Cost
of MVNO BU revenues increased from $18.6 million in the year ended December 31, 2018 to $24.7 million in the year ended December
31, 2019, generally in line with the sales volume of the MVNO BU over that period. MVNO BU cost decreased since 2018 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 of China. The cost of MVNO revenues was $21.6 million from the beginning of 2020 through October 29, 2020 when the
business unit was sold.
Gross
Profit and Gross Margin
Gross
profit represents net revenues less cost of revenues. Gross margin represents gross profit as a percentage of revenues.
Gross
profits for our continuing operations Connected Solutions BU in the years ended December 31, 2018, 2019 and 2020 were a gross
loss of $6.1 million, a gross profit of $0.6 million and a gross profit of $1.6 million, respectively. The gross loss in the year
ended December 31, 2018 included $6.1 million in costs where the corresponding revenues were not yet recognized in the year ended
December 31, 2018 and thereby causing a negative gross margin for 2018.
|
|
For
the years ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(Gross
Profit in $’000, Gross Margin in %)
|
|
Continuing
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Connected
Solutions BU
|
|
|
(6,023
|
)
|
|
|
(4.7
|
)%
|
|
|
569
|
|
|
|
0.6
|
%
|
|
|
1,596
|
|
|
|
6.0
|
%
|
In
the last quarter of the year ended December 31, 2018, there were deliveries of hardware products to India and other Asian countries,
where the products were shipped but sales were not yet recognized due to (i) long lead time in payment terms from customers and
(ii) further assembly of the parts we supplied needed to take place outside of China and then delivered to the final customer.
The costs of such goods were recognized in the year ended December 31, 2018 but the related sales were not yet recognized. This
accounting procedure resulted in lowered gross margin for the Connected Solutions BU in the year ended December 31, 2018.
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 margins decrease from 8.2% in the year ended December 31, 2018 to -19.0% in the year ended
December 31, 2019. In the year ended December 31, 2020, gross margin returned to a healthy 8.3% although the level of business
activities decrease significantly due to the COVID-19 pandemic.
Hardware
gross margins were held with a small increase to 4.4% in 2020 from 4.1% in 2019. We experience an overall price tightening of
this industry of micro-electronics manufacturing and are seeking means to reduce manufacturing costs.
In
the year ended December 31, 2018, included in hardware cost of goods were $6.2 million in costs for one transaction in which
the corresponding revenue was not yet recognized in the year ended December 31, 2018 due to uncertainty in collectability. Since
the corresponding sales was not recorded but the COGs was included, the gross margin in the year ended December 31, 2018 became
negative.
|
|
|
For
the years ended December 31,
|
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
(Gross
Profit in $’000, Gross Margin in %)
|
|
Software
|
|
|
|
783
|
|
|
|
8.2
|
%
|
|
|
(2,847
|
)
|
|
|
(19.0
|
)%
|
|
|
879
|
|
|
|
8.3
|
%
|
Hardware
|
|
|
|
(6,806
|
)
|
|
|
(5.7
|
)%
|
|
|
3,416
|
|
|
|
4.1
|
%
|
|
|
717
|
|
|
|
4.4
|
%
|
Total
|
|
|
|
(6,023
|
)
|
|
|
(4.7
|
)%
|
|
|
569
|
|
|
|
0.6
|
%
|
|
|
1,596
|
|
|
|
6.0
|
%
|
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.
|
For
our discontinued operations MVNO BU gross profits were $8.8 million in the year ended December 31, 2018, $15.1 million in the
year ended December 31, 2019 and $7.4 million from January 1 through October 29, 2020 when the MVNO BU was sold. Gross margin
as a percentage of sales is presented in the following table.
|
|
For
the years ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
(up to Oct 29)
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(Gross
Profit in $’000, Gross Margin in %)
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MVNO
BU
|
|
|
8,772
|
|
|
|
32.1
|
%
|
|
|
15,088
|
|
|
|
37.9
|
%
|
|
|
7,387
|
|
|
|
25.5
|
%
|
Operating
Expenses
For
our continuing operations Connected Solutions BU, the operating expenses principally consist of sales and marketing expenses,
general and administrative expenses, and research and development 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 years ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
$
|
|
|
As
% of Revenue
|
|
|
$
|
|
|
As
% of Revenue
|
|
|
$
|
|
|
As
% of Revenue
|
|
|
|
($’000)
|
|
Sales
and marketing expenses
|
|
|
(2,456
|
)
|
|
|
1.9
|
%
|
|
|
(1,524
|
)
|
|
|
1.5
|
%
|
|
|
(750
|
)
|
|
|
2.8
|
%
|
General
and administrative expenses
|
|
|
(52,031
|
)
|
|
|
40.5
|
%
|
|
|
(24,776
|
)
|
|
|
25.0
|
%
|
|
|
(33,304
|
)
|
|
|
124.5
|
%
|
Research
and development expenses
|
|
|
(6,338
|
)
|
|
|
4.9
|
%
|
|
|
(5,277
|
)
|
|
|
5.3
|
%
|
|
|
(8,162
|
)
|
|
|
30.5
|
%
|
Changes
in fair value of warrant
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-%
|
|
Total
|
|
|
(60,825
|
)
|
|
|
47.4
|
%
|
|
|
(31,578
|
)
|
|
|
31.8
|
%
|
|
|
(42,216
|
)
|
|
|
157.8
|
%
|
General and administrative expenses in the year ended December 31,
2018 included non-recurring charges of $5.3 million in arbitration loss, write-off and provision for doubtful accounts and current assets
of $30.1 million, write-down of historical inventory due to loss & obsolescence of $11.8 million, impairment of long-term investment
of $13.0 million, deferred income tax benefits of $1.7 million, impairment of intangible assets due to the pending sale of the MVNO business
unit of $0.8 million, share based compensation of $1 million, and $3.0 million in stock offering expenses. General and administrative
expenses in the year ended December 31, 2019 included a provision for doubtful accounts of $13.6 million, non-recurring penalties of $3.4
million and reversal of historical inventory of $0.3 million. As previously discussed, the write-offs and provisions recorded in
2019 were still high for the level of business activities in the year, although comparatively less than those recorded in 2018. We have
taken this approach as we realized that the COVID-19 pandemic, in the first half of the year 2020, has significant negative effects on
our industry and particularly on certain of our customers and business partners; and it is prudent to write down some of our assets as
of December 31, 2019. For the year ended December 31, 2020, G&A expenses were $33.3 million which included professional fees of $3.6
million, salaries and welfare of $2.6 million, impairment of intangible assets of $0.7 million, non-recurring penalties of $1.1 million,
share-based compensation expense of $18.1 million and allowance for doubtful accounts of $4.4 million.
For
our discontinued operations MVNO BU, the operating expenses which consisted of selling, administrative and research expenses were
$10.1 million or 36.9% of revenues in the year ended December 31, 2018, and $19.3 million or 48.4% of revenues in the year ended.
December 31, 2019. For the year 2020 up to October 29, 2020 when the MVNO BU was sold, the operating expenses was $6.1 million
or 20.9% of revenues.
Research
and Development Expenses
Research
and development expenses include payroll, employee benefits, share-based compensation and other headcount-related expenses associated
with the development of the BorqsWare software platform, as well as outsourcing and third party service expenses. Research and
development expenses also include rent, depreciation and other expenses for platform development and other projects that are not
customer-specific.
Selling
and Marketing Expenses
Selling
and marketing expenses include payroll, employee benefits and other expenses relating to our sales and marketing personnel, travel,
rent and other expenses relating to our marketing activities, including entertainment and advertising. For the discontinued operations
MVNO BU, we paid our franchisees commission to sell products, which are recognized as selling and marketing expenses.
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 comprised 40.5%, 25.0% and 124.5% of net revenues for the years ended December 31, 2018, 2019 and
2020, respectively. The significantly higher percentage in the year ended December 31, 2018 was attributed to non-recurring and
one-time charges of which some were non-cash. 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 become relatively stable over time as a percentage of net
revenues as net revenues increase. For our continuing operations Connected Solutions BU, the G&A expense in the year ended
December 31, 2018 was $42.0 million which included non-recurring charge of $4.3 million in loss expense from our arbitration case
with Samsung, write-off and provision for doubtful accounts and current assets of $22.2 million, write-down of historical inventory
due to loss & obsolescence of $0.9 million, and impairment of long-term investment of $13.0 million. G&A expenses in the
year ended December 31, 2019 included a provision for doubtful accounts of $13.6 million, non-recurring penalties of $3.4 million
and reversal of historical inventory of $0.3 million. For the year ended December 31, 2020, G&A expenses included professional
fees of $3.6 million, salaries and welfare of $2.6 million, non-recurring penalties of $1.1 million, share-based compensation
expense of $18.1 million and allowance for doubtful accounts of $4.4 million included a rebate receivable of $1.4 million written
off due to the circumstance changed and lack of collectability for the year ended December 31, 2020.
Other
Operating Income – or expenses
We
received subsidies from local government authorities in China as financial support for certain technology development projects.
These subsidies are classified as “Other operating income”. We recognized $0.18 million, $1.9 million and nil of other
operating income in the years ended December 31, 2018, 2019 and 2020, 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.
Income
Tax Expense
Our
effective tax rate was -1.0% and 0.7% for years ended December 31, 2019 and 2020, respectively. The fluctuation through these
years was primarily due to the fact that the loss experienced by certain of our subsidiaries could not be used to offset gains
in other subsidiaries. The Group recorded valuation allowance for the entities, which were considered more likely than not that
a portion of the deferred tax assets will not be realized through sufficient future earnings.
Liquidity
and Capital Resources
Cash
used in operating activities for the year ended December 31, 2020 was $8.1 million, primarily consisted of net loss of $34.8 million,
provisions on accounts receivable and other current assets of $4.4 million, impairment of inventory of $0.8 million but adding
back non-cash items including share-based compensation expenses to employees of $3.0 million and to non-employees of $17.0 million,
amortization of intangible assets of $5.4 million, depreciation of property and equipment of $0.1 million, impairment of intangible
assets of $0.7 million, gain on disposal of a subsidiary of $10.1 million and contingency loss of $3.1 million. Cash used in operating
assets and liabilities included decrease in accounts payable of $3.0 million, increase in prepaid expenses and other current assets
of $7.7 million and decrease in long term payable of $0.4 million, while cash generated from changes in operating assets and liabilities
included decrease in inventories of $2.2 million, increase in accounts receivable of $1.6 million, increase in accrued expenses
of $13.0 million, increase in income tax payables of $1.0 million and increase in advance from customers and contract liabilities
of $0.5 million.
Cash
generated by investing activities for the year ended December 31, 2020 was $4.0 million, which mainly included $4.2 million generated
related to the disposal of the MVNO subsidiary, offset by purchase of property and equipment of $0.1 million and purchase of intangible
assets of $0.1 million.
Cash
used in financing activities for the year ended December 31, 2020 was $1.4 million which included the repayment of short-term
borrowings of $7.9 million, and generated $5.3 million from short-term loans and $1.25 million from long-term loans.
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”
and, together with PFG5, “PFG”), 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 included
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 during 2017 and the year ended December 31, 2018. No liabilities were generated by the breaches. Such breach could result
in acceleration of the repayment according to the contract term. For the year ended December 31, 2018, certain covenants were
not met; but we had not been notified by lenders that they intend to seek to accelerate the loan payments because of such breaches
and neither lender had expressly waived such breaches and any resulting defaults. As of April 18, 2019, all of the SSVB loans
were replaced by PFG, which became our sole commercial lender. Although all of the covenants obligated to SSVB no longer existed
since the SSVB loans were paid off, the Company did not meet certain financial covenants according to the loan agreements with
PFG.
On
June 28, 2019, PFG executed an agreement with the Company effective in July 2019, which waived our covenant defaults up through
the end of June 2019, and allowed the Company to begin testing of newly agreed upon revenue and EBITDA covenants which are more
reflective of the operations of the Company without the MVNO BU, starting with the month of August 2019. Specifically, (i) quarterly
revenue requirements were reduced to $27,500,000 commencing with the quarter ending September 30, 2019; provided that any failure
to meet such requirement may be cured by evidencing at least $120,000,000 in trailing 12-month revenue; and (ii) the three-month
trailing EBITDA target was reduced to $1,350,000, commencing with the month ended August 31, 2019. In connection with the execution
of such waiver agreement, the Company paid a waiver and modification fee of $30,000, subject to an additional $20,000 fee in the
event that the above-referenced financial covenants are not met in future periods.
On
March 8, 2019, the Group entered into a new revolving line of credit facility (the “RLOC”) with PFG5 for $12,500,000.
Under the agreement: (i) $9,500,000 may be drawn upon request at any time on or after the closing date and (ii) so long as there
is no uncured default at the time of drawdown and if the Company has received at least US$10,000 in cash proceeds from the sale
of its equity securities to investors, then an additional $3,000,000 may be drawn. Any outstanding amounts under the RLOC will
accrue interest at a rate of 11% per annum with a maturity date of March 8, 2021 (the “Maturity Date”). The Group
shall pay interest only on principal outstanding on the RLOC until the Maturity Date, on which date the entire unpaid principal
balance on the RLOC plus any and all accrued and unpaid interest shall be repaid. In March 2019, the Company drew down $9,500,000
from the RLOC.
As
of October 2019, due to geographic changes in our business activities, significant amounts of our accounts receivable shifted
from our Hong Kong subsidiary to our Indian subsidiary. This reduction of accounts receivable from our Hong Kong entity has caused
a covenant breach according to the PFG loan agreements and caused the interest rate of the PFG loans to be increased to 18%.
Senior
Debt Purchased by LMFA Financing LLC
The
Company entered into Agreements dated December 14, 2020 with PFG and LMFA Financing LLC (“LMFA”), a Florida limited
liability company and wholly owned subsidiary of LM Funding America, Inc. (Nasdaq: LMFA), in which LMFA was committed to purchase
up to be approximately $18 million of debt in tranches, which when completed would eliminate substantially all of the debt with
the Company’s senior lender. LMFA would convert the purchased debt into common shares of the Company, pursuant to a court
order that allows the conversion shares to be issued as unrestricted securities in a transaction that is exempt from registration
under Section 3(a)(10) of the Securities Act of 1933, as amended.
As
of February 10, 2021, LMFA completed the purchase of $17.87 million of principal, accrued interest and applicable fees, converted
and sold all 22.73 million shares of the Company’s ordinary shares. With the Company settling another $1.27 million of debt,
accrued interest and applicable fees directly with the senior lender by the issuance of 1.51 million shares on February 17, 2021
which the senior lender subsequently sold, the Company’s defaulted Debts with the senior lender totaling $19.14 million
have been eliminated since.
Convertible
Notes Sold
The
Company signed agreements with institutional and individual investors for sale of convertible notes on February 25, 2021 for $20
million (the “Feb 25 Notes”) and on April 14, 2021 for $3 million (the “Apr 14 Notes”). The notes are
due in two years, have an annual interest rate of 8%, convertible into ordinary shares of Borqs at 10% discount from the market
price and has 90% warrant coverage with the warrants exercisable cashless or for cash at $2.222 per share for the Feb 25 Notes
and $1.540 for the Apr 14 Notes. The conversion price is at $1.539 per share for the Feb 25 Notes and $1.071 per share for the
Apr 14 Notes, or at a one-time reset at 90% of the market price at the time of effectiveness of the required registration statement,
whichever is lower. One-third of the notes are sold at the execution of definitive agreements and two-thirds of the notes will
be sold upon the effectiveness of a registration statement to be filed by the Company. Proceeds will be used for the procurement of orders the Company expects to receive from its customers this year
and also for development of the next generation 5G products. As of the filing of this Form 20-F, the Company has received $7.67
million from the selling of one-third of the notes to institutional and individual investors.
We
were operating at a loss for the years ended December 31, 2019 and 2020. Our ability to meet the working capital requirements is
subject to the risks relating to the demand for and prices of our services in the market, the economic conditions in our target
markets, the successful operation of our connected solution, timely collection of payment from our customers and the availability of
additional funding. In the next 12 months, we will rely on the sale of convertible notes of which one-third has been completed and
the other two-third to be completed upon the effectiveness of a registration statement to be filed by the Company.
The
sale of equity and convertible debt securities may result in dilution to our shareholders and certain of those securities may
have rights senior to those of our shares of capital stock. If we raise additional funds through the issuance of preferred stock,
convertible debt securities or other debt financing, these securities or other debt could contain covenants that would restrict
our operations. Any other third-party funding arrangement could require us to relinquish valuable rights. Economic conditions
may affect the availability of funds and activity in equity markets. We do not know whether additional funding will be available
on acceptable terms, or at all. If we are not able to secure additional funding when needed, we may have to delay, reduce the
scope of, or eliminate certain of our programs, or make changes to our operating plans.
Impact
of the COVID-19 pandemic
As
discussed earlier in the Rick Factors section of this report, we have experienced since February 2020 reductions and cancellations
of orders due to effects of the COVID-19 pandemic has on the demand from certain of our customers. We expect this negative effect
on global business activities will continue to have pressure on the Company’s sales as the pandemic environment persists
and perhaps even post the pandemic. In addition, since our operations span over the countries of the United States, India, China
and South Korea, international and intra-country travel restrictions will continue to hamper our operations and have negative
effects including delays and uncertainties on our supply chain delivery schedules and our abilities to secure financing for our
working capital needs. We expect the impacts of COVID-19 to have an adverse effect on our business, financial condition and results
of operations. Our revenue for the year 2020 was negatively impacted by the pandemic by a reduction of 73.0% as compared to 2019.
As the assessable risks due to COVID-19 change in the countries of India and China, our operations can be affected, including
the restrictions from accessing office facilities and limitations on domestic travels which can hamper our ability to efficiently
manage the manufacturing of products since our contracted factories are located over various cities in China.
As
our sales have been negatively impacted by the pandemic in 2020, we cut back our operational costs by reduction of approximately
20% of our workforce in India and 40% of our headcount in China. We constantly evaluate our financial position according to changes
in the international business environment and depending on forecast of orders from our customers in the near future, we may further
reduce staffing as necessary.
Also
as a result of stringent cash flows from operations and the pandemic situation is foreseeable to continue through the remainder
of the year 2021, we will postpone further investment into the acquisition target of KADI and we are in negotiation with the owners
of KADI to decrease our potential ownership percentage of their company. For the acquisition of Colmei and Crave, since both of
these companies are insolvent, we have ceased to make additional payments for ownership and have written off the value of the
equity we have paid to the owners previously.
Cash
transfers from our subsidiaries inside China to our subsidiaries outside of China are subject to PRC government control of foreign
exchange. Restrictions on the availability of foreign currency may affect the ability of our subsidiaries inside China to remit
sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their obligations. See “Item
1A. Risk Factors — Risks Related to Doing Business in China — Our subsidiaries in China are subject to restrictions
on making dividends and other payments to it or any other affiliated company” and “Item 1A. Risk Factors — Risks
Related to Doing Business in China —Restrictions on foreign currency may limit our ability to receive and use our revenue
effectively.”
Critical
Accounting Policies
The
Company prepares its financial statements in accordance with U.S. GAAP, which requires it to make judgments, estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the end
of each fiscal period and the reported amounts of revenues and expenses during each fiscal period. The Company continually evaluates
these judgments and estimates based on its own historical experience, knowledge and assessment of current business and other conditions,
and expectations regarding the future based on available information and assumptions that it believes to be reasonable, which
together form the basis for making judgments that are not readily apparent from other sources. Since the use of estimates is an
integral component of the financial reporting process, actual results could differ from those estimates. Some of the Company’s
accounting policies require a higher degree of judgment than others in their application.
The
selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the
sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing
the Company’s financial statements. The Company believes the following accounting policies involve the most significant
judgments and estimates used in the preparation of its financial statements.
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.
The
Company 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 Company 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.
As
of January 1, 2019, the Company adopted ASC 606 for revenue recognition from contracts with customers. For the sales derived from
software development project in which the customer’s contract specifies the technical requirements of the software product,
the Company recognizes revenue upon the customers sign off the final acceptance and it is probable that the Company will collect
the payments. For the sales derived from this type of software development project with a post-contract-service period (“PCS
Period”), the Company recognizes revenue upon the PCS period ends and it is probable that the Company will collect the payments.
The Company recognizes non-recurring engineering fees upon the customers sign off the final acceptance and it is probable that
the Company will collect the payments (start of hardware product delivery schedule).
Additional
discussions on ASC 606 are provided in below Note 2 of the Accompanying Notes to Financial Statements, under the heading (q) Revenue
recognition.
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. Our MVNO business unit was sold as of October 29,
2020.
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. This activity also ended with
the sale of the MVNO business unit.
Discontinued
operations
A
component of a reporting entity or a group of components of a reporting entity that are disposed or meet the criteria to be classified
as held for sale, such as the management, having the authority to approve the action, commits to a plan to sell the disposal group,
should be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect
on an entity’s operations and financial results. Discontinued operations are reported when a component of an entity comprising
operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest
of the entity is classified as held for disposal or has been disposed of, if the component either (1) represents a strategic shift
or (2) have a major impact on an entity’s financial results and operations. In the consolidated statement of operations,
result from discontinued operations is reported separately from the income and expenses from continuing operations and prior periods
are presented on a comparative basis. Cash flows for discontinued operations are presented separately. Assets and liabilities
of the discontinued operations are classified as held for sale when the carrying amounts will be recovered principally through
a sale transaction.
Income
Taxes
In
preparing its consolidated financial statements, the Company must estimate its income taxes in each of the jurisdictions in which
it operates. The Company estimates actual tax exposure and assess temporary differences resulting from different treatment of
items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which is included in the
consolidated balance sheet. The Company must then assess the likelihood that it will recover its deferred tax assets from future
taxable income. If the Company believes that recovery is not likely, it must establish a valuation allowance. To the extent it
establishes a valuation allowance or increases this allowance, the Company must include an expense within the tax provision in
its consolidated statement of operations. If actual results differ from these estimates or the Company adjusts these estimates
in future periods, it may need to establish an additional valuation allowance, which could materially impact its financial position
and results of operations.
U.S.
GAAP requires that an entity recognize the impact of an uncertain income tax position on the income tax return at the largest
amount that is more likely than not to be sustained upon audit by the relevant tax authority. If the Company ultimately determines
that payment of these liabilities will be unnecessary, it will reverse the liability and recognize a tax benefit during that period.
Conversely, the Company records additional tax charges in a period in which it determines that a recorded tax liability is less
than the expected ultimate assessment. The Company did not recognize any significant unrecognized tax benefits during the periods
presented in this Annual Report.
Uncertainties
exist with respect to the application of the EIT Law and its implementation rules to the Company’s operations, specifically
with respect to tax residency status. The EIT Law specifies that legal entities organized outside of the PRC will be considered
residents for PRC income tax purposes if their “de facto management bodies” are located within the PRC. The EIT Law’s
implementation rules define the term “de facto management bodies” as establishments that carry out substantial and
overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.
On April 22, 2009, the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident
Enterprises on the Basis of De Facto Management Bodies, or Circular 82, was issued. Circular 82 provides certain specific criteria
for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is
located in China. Further the Administrative Measures of Enterprise Income Tax of Chinese controlled Offshore Incorporated Resident
Enterprises (Trial), or Bulletin No. 45, took effect on September 1, 2011, and provides more guidance on the implementation of
Circular 82.
According
to Circular 82, a Chinese-controlled offshore-incorporated enterprise will be regarded as a PRC tax resident by virtue of having
a “de facto management body” in China and will be subject to PRC enterprise income tax on its worldwide income only
if all of the following conditions set forth in Circular 82 are met: (i) the primary location of the day-to-day operational management
is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject
to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records,
company seals and board and shareholder resolutions are located or maintained in the PRC; and (iv) at least 50.0% of voting board
members or senior executives habitually reside in the PRC. In addition, Bulletin No. 45 provides clarification in resident status
determination, post-determination administration and competent tax authorities. It also specifies that when provided with a copy
of Chinese tax resident determination certificate from a resident Chinese-controlled offshore- incorporated enterprise, the payer
should not withhold 10% income tax when paying certain Chinese-sourced income, such as dividends, interest and royalties to the
Chinese-controlled offshore-incorporated enterprise.
Although
both the circular and the bulletin only apply to offshore enterprises controlled by PRC enterprises and not those by PRC or foreign
individuals, the determination criteria set forth in the circular and administration clarification made in the bulletin may reflect
the SAT’s general position on how the “de facto management body” test should be applied in determining the tax
residency status of offshore enterprises and the administration measures should be implemented, regardless of whether they are
controlled by PRC enterprises or PRC individuals.
Despite
the uncertainties resulting from limited PRC tax guidance on the issue, the Company does not believe that its legal entities organized
outside of the PRC are tax residents under the EIT Law. If one or more of its legal entities organized outside of the PRC were
characterized as PRC tax residents, the Company’s results of operations would be materially and adversely affected.
Recent
Accounting Pronouncements
Refer
to Note 2, Summary of Significant Accounting Policies - Recent accounting pronouncements, of the notes to our consolidated
financial statements included in this Annual Report for information regarding the effect of newly adopted accounting pronouncements
on our financial statements.
Off-Balance
Sheet Arrangements
With
the exception of items discussed under “Contractual Obligations” below 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.
Contractual
Obligations
As
of December 31, 2020, payment obligations under long-term debt, operating leases, and other long-term liabilities were as following:
|
|
Amount
($’000)
|
|
Obligations less than one year
|
|
|
|
Current
portion of long-term borrowings
|
|
$
|
12,975
|
|
Operating
facilities leases
|
|
$
|
409
|
|
Arbitration
loss to Samsung Electronics Co., Ltd.
|
|
$
|
3,749
|
|
Contingent
liability in relation to disposal of a subsidiary
|
|
|
3,240
|
|
|
|
|
|
|
Obligations
from 1 to 3 years
|
|
|
|
|
Operating
facilities leases
|
|
$
|
-
|
|
Long
term borrowings
|
|
$
|
1,250
|
|
Operating
facilities leases
|
|
|
421
|
|
Arbitration
loss to Samsung Electronics Co., Ltd.
|
|
$
|
-
|
|
|
|
|
|
|
Obligations
from 3 to 5 years
|
|
|
|
|
Operating
facilities leases
|
|
$
|
-
|
|
Related
Party Transactions
(a)
Related parties
Names
of related parties
|
|
Relationship
|
Bluecap
|
|
A company controlled
by a key management of the Group
|
Cloudminds
(Hong Kong) Ltd. (“Cloudminds”)
|
|
A company controlled
by a director of the Company*
|
Hareesh
Ramanna
|
|
Executive Vice President
and Co-General Manager of Connected Solutions Business Unit
|
|
(*
|
On
December 18, 2018, the entity ceased to be a related party of the Company due to the
resignation of this director.)
|
(b)
Other than disclosed elsewhere, The Group had the following significant related party transactions for the years ended December
31, 2018, 2019 and 2020:
|
|
For
the years ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
($’000)
|
|
|
($’000)
|
|
|
($’000)
|
|
Software
services provided to Cloudminds
|
|
|
1,373
|
|
|
|
N.A.
|
|
|
|
N.A.
|
|
Software
services provided to Bluecap
|
|
|
N.A
|
|
|
|
N.A
|
|
|
|
507
|
|
Loan
from Hareesh Ramanna
|
|
|
22
|
|
|
|
-
|
|
|
|
-
|
|
(c)
Other than disclosed elsewhere, the Group had the following significant related party balances for the years ended December 31,
2018, 2019 and 2020:
|
|
For
the years ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
($’000)
|
|
|
($’000)
|
|
|
($’000)
|
|
Loan
from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bluecap
|
|
|
1,059
|
|
|
|
3,273
|
|
|
|
2,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense on loan from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bluecap
|
|
|
12
|
|
|
|
211
|
|
|
|
438
|
|
All
balances with related parties as of December 31, 2020 were unsecured, interest-free (except as indicated) and had no fixed terms
of repayment.
On
July 31, 2018, the Group entered into a $1,325 short-term loan agreement with Bluecap Mobile Private Limited (“Bluecap”),
a company controlled by a key management of the Group (see Note 18 in our consolidated financial statements), bearing an interest
rate of 8% per annum to fund the Company’s working capital (the “Bluecap Loan”). The loan does not carry a maturity
date and the outstanding principal balance as of December 31, 2019 and 2020 were $3,273 and $2,695, respectively, which were payable
on demand. The accrued interests of $199 and $228 in 2019 and 2020, respectively, were recorded in amount due to related parties.
ITEM
6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors
and Executive Officers
The
following table provides information regarding our executive officers and directors as of April 15, 2021:
Name
|
|
Age
|
|
Position
|
|
Term
expires
at
annual stockholders
meeting
in year
|
Board
of Directors
|
|
|
|
|
|
|
Pat
Sek Yuen Chan
|
|
56
|
|
Founder,
Chairman of the Board (Class III Director), Chief Executive Officer and President
|
|
2021
|
Wan
Yu (Lawrence) Chow, Ph.D.
|
|
58
|
|
Class
I Director
|
|
2022
|
Yaqi
(Sophie) Feng
|
|
38
|
|
Class
III Director
|
|
2021
|
Heung
Sang Addy (Dexter) Fong
|
|
61
|
|
Class
II Director
|
|
2023
|
Ji
(Richard) Li
|
|
61
|
|
Class
I Director
|
|
2022
|
Shizhu
(Steve) Long
|
|
59
|
|
Class
II Director
|
|
2023
|
Ye
(Eric) Tao, Ph.D.
|
|
43
|
|
Class
III Director
|
|
2021
|
|
|
|
|
|
|
|
Executive
Officers
|
|
|
|
|
|
|
Anthony
K. Chan
|
|
66
|
|
Chief
Financial Officer, Executive Vice President of Corporate Finance
|
|
|
Simon
Sun
|
|
54
|
|
Executive
Vice President and Co-General Manager of Connected Solutions Business Unit
|
|
|
Hareesh
Ramanna
|
|
59
|
|
Executive
Vice President and Co-General Manager of Connected Solutions Business Unit
|
|
|
The
principal occupation and business experience of our directors and executive officers is as follows:
Pat
Sek Yuen Chan, 56, is the Chairman of our board of directors, as well as our Chief Executive Officer and President. He was
the founder and Chairman of the board of directors of Borqs International, and since 2007 he served as Borqs International’s
Chief Executive Officer and President. Mr. Chan has over 20 years of experience in the mobile network communications sector. Prior
to founding Borqs, Mr. Chan served as Senior Vice President and General Manager of the infrastructure business unit of UTStarcom
Inc., a telecommunications equipment company, from 2000 to 2007. Earlier, Mr. Chan was an engineering manager in Motorola responsible
for the development of the GPRS switching. Mr. Chan is an established entrepreneur and has received many awards, including the
“High-Caliber Talent from Overseas Award” from the PRC government, and “2012 Beijing Entrepreneur of the Year”
from Silicon Dragon. Mr. Chan received his bachelor’s degree in computer science from the University of Toronto and his
master’s degree in computer science from the University of British Columbia.
Wan
Yu (Lawrence) Chow, Ph.D., 58, was elected as an independent board member by our stockholders in December 2018. Dr. Chow has
almost 30 years of experience in the ICT industry, he has extensive working experience with large and complex global FinTech,
Telco + Network Equipment Provider & Education industries with successful track record of delivering outstanding commercial
and technical results in Fortune 500 organizations to small start-ups. He started his career in 1989 at various Silicon Valley
tech companies including Xerox Corporation, Amdahl Corporation and Sun Microsystems. At Sun Micro, Dr. Chow served as the Chief
Technical Consultant from 1993 to 1999 for the Greater China region. After serving as the Director of Strategic Alliance for PeopleSoft
Inc., North Asia, from 2000 to 2001, he rejoined Sun Micro Greater China as its CTO/NEP Technology Office from 2002 to 2008. He
joined SAP China as Managing Partner from 2012 to 2015. Currently, he is serving as Director and Strategic Partner for QLIK Greater
China since 2017. Dr. Chow received two Bachelor’s Degrees in Computer Science and Information System from Oregon State
University in 1988 and earned a Master’s Degree in Computer Science from Pacific W. University in 1993. He received another
Master’s Degree in Education Management from Tarlac State University in 2011. Dr. Chow received his PhD in Education Management
from HKMA/Tarlac State University in 2015.
Yaqi
(Sophie) Feng, 38, served as one of our directors since July 2015, and was our Chief Operating Officer and Secretary from
July 2015 until August 2018. Ms. Feng has been working as the Executive Director of the Global Business Department in Pacific
Securities Co., Ltd. since 2013, where she is responsible for Chinese companies’ overseas IPOs, cross border M&A transactions,
and global investment management. From 2012 to 2013, she worked as the Managing Director of Regeneration Capital Group LLC in
New York, where she was responsible for IPOs and listing projects for emerging market companies, business development, project
due diligence as well as transaction management. From 2010 to 2012, Ms. Feng worked as a VP for Griffin Financial Group, a mid-sized
investment bank; in this capacity she was responsible for public offerings, private placements, deal structuring, financial modeling
as well as institutional sales. She also served as a manager for Asian Legend Asset Management Inc. a private equity firm based
in China and New York that specialized in China related projects, from 2009 to 2010. Ms. Feng worked as an associate in the New
York office of the Jun He law firm from 2007 to 2008. Ms. Feng received an LL.M from Boston University School of Law and an LL.B
from the School of International Law, China University of Political Science and Law in Beijing, China, where she also earned a
B.A. in Business.
Heung
Sang Addy (Dexter) Fong, 61, was elected as an independent board member by our stockholders in March 2020. He was also appointed
as the Chairperson of the Audit Committee, our Audit Committee “financial expert,” as member of the Compensation Committee,
and as a member of the Enterprise Risk Oversight Committee. Mr. Fong has almost 36 years of experiences in cross border financial
investments and business operations. Since 2017, he has served as the chief financial officer of Adlai Nortye Biopharma Ltd. Mr.
Fong also led the B-round fundraising of Adlai Nortye Biopharma Ltd, but funding US$53 million. He was the managing director of
Bonus Eventus Securities Ltd. from 2015 to 2017, and was the chief financial officer of China Harmony Auto Holding Ltd. from 2012
to 2015 where he managed the company’s initial public offering process onto the Hong Kong Stock Exchange (ticker HK: 03826).
From 2009 to 2011, he was the director and chief financial officer of China Electric Motor, Inc. (NASDAQ: CELM) and Apollo Solar,
Inc. (OTC: ASOE). Mr. Fong has held various financial executive positions for companies with businesses between China and the
U.S. and his experience as an independent board member includes: Universal Technology (HK: 1026) from 2006 to 2013; China Housing
and Land Development Inc. (NASDAQ: CHLN) from 2010 to 2014; independent director and audit committee chair for Sisram Med (HK:
01696) since 2017; and Kandi Technologies Corp (NASDAQ: KNDI) from 2007 to 2011. He also worked as a manager for KPMG from 1996
to 1997, and for Deloitte & Touché and Ernst & Young in the U.S. from 1993 to 1995. He was an auditor for Deloitte
& Touché from 1989 to 1992. Mr. Fong received his Bachelor’s degree in History from the Hong Kong Baptist University
in 1982, an MBA in Accounting from the University of Nevada in 1988; he also earned a Master’s Degree in Accounting from
the University of Illinois in 1993. Mr. Fong is a member of AICPA & HKICPA.
Ji
(Richard) Li, 61, was elected as an independent board member by our stockholders in December 2018. Mr. Li has 23 years of
experience in the telecom industry and he worked in various multinational companies. He started his career in 1982 as a lecturer
in Huazhong University of Science and Technology in China. He was the General Manager of UTStarcom Inc. Shenzhen Office from 1995
to 2001, where he led a team to develop telecom switches based on soft switch technology, and the product was launched in China
with more than 50 million subscribers. Mr. Li was the Founder of Fiberxon, Inc. from 2001 to 2004, where he led a team to develop
fiber optics equipment, and this company was successful sold to MRV Communication. He was the founder and served as the Chief
Executive Officer of AngleCare Inc. from 2005 to 2006, and led a team to develop mobile health care applications. Mr. Li was the
CEO and General Manager of Wuhan HSC Technology Inc. from 2006 to 2007, he led a team to develop advertisement systems used for
public transit systems and were successfully used in the Wuhan Taxi network. He has been serving as General Manager of Vinko Technology
Inc. from 2010 to 2014, he led a team to develop telecom payment systems in China. He is currently an Angel Investor since 2014.
Mr. Li received his Master’s Degree in Information Engineering from Huazhong University of Science and Technology.
Shizhu
(Steve) Long, 59, was elected as an independent board member by our stockholders in March 2020. Mr. Long is an experienced
telecommunication executive who has been working in the telecom industry for the last 25 years. Currently, he is the chief technology
officer of Shenzhen Skyworth Digital Technology Corporation, which focuses on research and development, manufacture and sale of
STB and broadband devices. He has comprehensive knowledge of the current telecommunications systems and equipment platforms. He
recently had key research and development roles in the development of carrier class IPTV systems working with China Mobile Communications
Corporations (“CMCC”) to develop mobile phone backend service and information aggregation services. His latest research
areas are broadband intellectual property-based advanced content delivery services and pertinent terminals. His other major research
and development achievements include the development of the core network of personal handy-phone system (“PHS”), which
was deployed in more than 150 systems all over China. Prior to joining UTStarcom Corp to start his telecommunication industry
career in 1998, Mr. Long was a professor at the HuaZhong University of Science and Technology. He is also a rapporteur of the
International Telecommunication Union (“ITU”) of Geneva, Switzerland, particularly for Study Group 9 – Broadband
cable and TV. Mr. Long received his Bachelor and Master degrees in Engineering from the HuaZhong University of Science and Technology.
Ye
(Eric) Tao, Ph.D., 43, 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.
Anthony
Chan, 66, 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, 54, is the Executive Vice President, Co-General Manager of Borqs’s Connected Solutions Business Unit and has served
the company since November 2013. Mr. Sun has over 20 years of experience in research and development and product engineering in
the mobile industry. He served as the Co-Founder and Chief Executive Officer of Nollec Wireless, Ltd., a mobile handset design
house, from July 2007 to October 2013. He was the VP of engineering for CEC Wireless, another mobile handset design house in China
from September 2006 to June 2007. Mr. Sun received his bachelor’s degree in Industrial Engineering from Tianjin University
of China.
Hareesh
Ramanna, 59, is our Executive Vice President, Co-General Manager of Connected Solutions Business Unit, Managing Director of
India Operations and Head of Software Development, and has served our company since July 2009. Mr. Ramanna has over 20 years of
experience in the mobile industry. Prior to joining us, he served as a Senior Director and Head of Mobile Devices Software in
Global Software Group, Motorola India Electronic Limited from May 1992 to November 2008. Mr. Ramanna received his bachelor’s
degree in Electronics and Communication from National Institute of Engineering in 1983, Post-Graduation Certification from Indian
Institute of Science and an advanced leadership Certification from McGill University in collaboration with Lancaster University
of UK and Indian Institute of Management in Bangalore.
Executive
Officers
Our
executive officers are designated by, and serve at the discretion of, our board of directors. There are no family relationships
among any of our directors or executive officers.
Board
of Directors and Corporate Governance
In
accordance with our memorandum and articles of association, our Board is divided into three classes, with the number of directors
in each class to be as nearly equal as possible. The Company held its last annual general meeting (“AGM”) in March
2020. Our existing Class III directors will serve until our 2021 AGM, our existing Class I directors will serve until our 2022
AGM, and our existing Class II directors will serve until our 2023 AGM. At each annual general meeting, directors elected to succeed
those directors whose terms expire shall be elected for a term of office to expire at the third annual general meeting following
their election.
Our
board of directors, which is elected by our shareholders, is responsible for directing and overseeing our business and affairs.
In carrying out its responsibilities, the board selects and monitors our top management, provides oversight of our financial reporting
processes, and determines and implements our corporate governance policies.
Our
board of directors and management are committed to good corporate governance to ensure that we are managed for the long-term benefit
of our stockholders, and we have a variety of policies and procedures to promote such goals. To that end, during the past year,
our board and management periodically reviewed our corporate governance policies and practices to ensure that they remain consistent
with the requirements of the U.S. securities laws, SEC rules, and the listing standards of The Nasdaq Stock Market (“Nasdaq”).
Meetings
of the Board of Directors
Our
board of directors and committees of the board held 9 regular meetings plus executed on 9 unanimous written consents for the review
and decision making on Company matters during the year 2020.
Stockholder
Communications with the Board of Directors
Stockholders
and other parties interested in communicating directly with the board of directors may do so by writing to: Board of Directors,
c/o Borqs Technologies, Inc., Suite 309, 3/F, Dongfeng KASO, Dongfengbeiqiao, Chaoyang District, Beijing 100016, China, or by
e-mail to sandra.dou@borqs.net. Stockholders and others may direct their correspondence to our Secretary.
Independence
of the Board of Directors
Nasdaq
listing standards require that a majority of our Board be independent directors. An “independent director” is a person,
other than an officer or employee of the Company or its subsidiaries, who has no relationship which in the opinion of the Company’s
board of directors would interfere with the director’s exercise of independent judgment in carrying out the responsibilities
of a director. Our Board has determined that Mr. Chow, Mr. Fong, Mr. Li and Mr. Long are “independent directors” as
defined in the Nasdaq listing standards and applicable SEC rules. Our independent directors will hold regularly scheduled meetings
at which only independent directors are present.
Board
Leadership Structure and Role in Risk Oversight
The
Board does not have a lead independent director. Pat Chan is our Chief Executive Officer and Chairman of the Board.
Committees
of the Board of Directors
Audit
Committee
The
members of our Audit Committee are Mr. Fong (chairman of the committee), Mr. Chow and Mr. Li, each of whom is an independent director.
Each member of the Audit Committee is financially literate and our Board determined Mr. Fong 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.
|
Compensation
Committee
The
members of our Compensation Committee are Mr. Fong (chairman of the committee), Mr. Chow and Mr. Long, 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.
Nominating
and Corporate Governance Committee
The
members of our Nominating and Corporate Governance Committee are Mr. Chow (chairman of the committee) and Mr. Fong, each of whom
is an independent director. Our Nominating and Corporate Governance Committee charter details the principal functions of the committee,
including:
|
●
|
developing the criteria
and qualifications for membership on the Board;
|
|
●
|
recruiting, reviewing,
nominating and recommending candidates for election or –re-election to the Board or to fill vacancies on the Board;
|
|
●
|
reviewing candidates
proposed by shareholders, and conducting appropriate inquiries into the background and qualifications of any such candidates;
|
|
●
|
establishing subcommittees
for the purpose of evaluating special or unique matters;
|
|
●
|
monitoring and making
recommendations regarding committee functions, contributions and composition;
|
|
●
|
evaluating, on an
annual basis, the Board’s and management’s performance;
|
|
●
|
evaluating, on an
annual basis, the Committee’s performance and report to the Board on such performance;
|
|
●
|
developing and making
recommendations to the Board regarding corporate governance guidelines for the Company;
|
|
●
|
monitoring compliance
with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure
proper compliance; and
|
|
●
|
retaining and terminating
any advisors, including search firms to identify director candidates, compensation consultants as to director compensation
and legal counsel, including sole authority to approve all such advisors’ or search firms’ fees and other retention
terms, as the case may be.
|
Enterprise
Risk Oversight Committee
The
members of our Enterprise Risk Oversight Committee are Mr. Fong (chairman of the committee), Mr. Chow and Mr. Li, each of whom
is an independent director. Our Enterprise Risk Oversight Committee charter details the principal functions of the committee,
including, carrying out the responsibility of overseeing the effectiveness of risk management policies, procedures and practices
implemented by management of the Company with respect to strategic, operational, environmental, health and safety, human resources,
legal and compliance and other risks faced by the Company.
Risk
and Information Security Committee
The
members of our Risk and Security Committee are Mr. Chow (chairman of the committee) and Mr. Fong, each of whom is an independent
director. Our Risk and Security Committee charter details the principal functions of the committee, including, overseeing and
reviewing the Company’s internal controls to protect the Company’s information and proprietary assets. Mr. Pat Chan,
CEO of the Company, also serves as the Chief Information Officer for the committee; and Mr. Anthony Chan, CFO of the Company,
also serves as the Chief Risk Office for the committee.
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
Summary
Compensation Table
Pat
Chan, and Anthony Chan are referred to in this Annual Report as our named executive officers.
The
following table provides information regarding the compensation awarded to, or earned by, the named executive officers for the
past two fiscal years.
Summary
Compensation Table
Name
and principal position
|
|
Fiscal
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
awards
($)
|
|
|
Option
awards
($)
|
|
|
Non-equity
incentive plan compensation ($)
|
|
|
Nonqualified
deferred compensation earnings
($)
|
|
|
All
other compensation ($)
|
|
|
Total
($)
|
|
Pat
Sek Yuen Chan,
|
|
2020
|
|
|
|
303,143
|
|
|
|
-
|
|
|
|
196,344
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
499,487
|
|
Chief Executive Officer
|
|
2019
|
|
|
|
303,143
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
303,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anthony
K. Chan,
|
|
2020
|
|
|
|
252,000
|
|
|
|
-
|
|
|
|
100,952
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
352,952
|
|
Chief
Financial Officer
|
|
2019
|
|
|
|
252,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
252,000
|
|
On
December 14, 2020, the Company’s board of directors approved of the issuance of restricted ordinary shares to all staff
with a number equal to 50% of the vested options in exchange for the cancellation of the vested options previously awarded to
the recipients. As a result, 185,230 shares and 95,238 shares were awarded to the CEO and the CFO, respectively. Issued from the
Company’s 2017 Equity Incentive Plan, such shares were valued at $1.05 per share which was the closing price on the trading
day immediately preceded the day of the approval by the board.
Due to stringent operational
cash flows caused by the COVID-19 pandemic, the CFO voluntarily forfeited his salary for the period from April 1 to December 31 of the
year 2020 in the amount of $189,000.
Outstanding
Equity Awards at 2020 Year-End
Due
to the issuance of restricted ordinary shares in exchange for all vested stock options as described in the previous section, there
was no outstanding vested or unvested stock options held by the two chief executives as of December 31, 2020.
Borqs
Technologies, Inc. Equity Incentive Plan
In
connection with our acquisition of Borqs International by way of merger, we assumed the obligations under outstanding stock options
issued under the Borqs International 2007 Global Share Plan, as adjusted to give effect to the merger. Those outstanding options
to purchase shares of Borqs International were converted into options to purchase 2,825,273 of our ordinary shares, with exercise
prices ranging from $2.12 to $9.10 per share.
Effective
August 18, 2017, we adopted the Borqs Technologies, Inc. 2017 Equity Incentive Plan (“Equity Incentive Plan”), with
five million ordinary shares issuable pursuant to equity awards under the plan. The number of ordinary shares reserved for issuance
under the Equity Incentive Plan will increase automatically on January 1 of each of 2018 through 2027 by a number of shares that
is equal to 5% of the aggregate number of outstanding ordinary shares as of the immediately preceding December 31. Our Board may
reduce the size of this increase in any particular year. Outstanding awards under the 2007 Global Share Plan were assumed under
the Equity Incentive Plan as of our acquisition of Borqs International by way of merger on August 18, 2017. Due to the issuance
of restricted ordinary shares to our staff in exchange for all vested stock options as described in the previous section, there
was no outstanding vested held by our staff as of December 31, 2020.
In
addition, the following shares will be available for grant and issuance under our Equity Incentive Plan:
|
●
|
shares subject to
options or share appreciation rights granted under our Equity Incentive Plan that cease to be subject to the option or stock
appreciation right for any reason other than exercise of the option or share appreciation right;
|
|
|
|
|
●
|
shares subject to
awards granted under our Equity Incentive Plan that are subsequently forfeited or repurchased by us at the original issue
price;
|
|
|
|
|
●
|
shares subject to
awards granted under our Equity Incentive Plan that otherwise terminate without shares being issued;
|
|
|
|
|
●
|
shares surrendered,
cancelled or exchanged for cash or a different award (or combination thereof).
|
Shares
that otherwise become available for grant and issuance because of the provisions above will not include shares subject to awards
that initially became available due to our substitution of outstanding awards granted by another company in an acquisition of
that company or otherwise.
Eligibility.
The Equity Incentive Plan provides for the grant of incentive stock options to our employees and any parent and subsidiary
corporations’ employees and for the grant of nonqualified share options, restricted shares, restricted share units, share
appreciation rights, share bonuses and performance awards to our employees, directors and consultants and our parent and subsidiary
corporations employees and consultants. No more than 5,000,000 shares may be issued as incentive stock options under the Equity
Incentive Plan. In addition, no participant in the plan may receive awards for more than 2,000,000 shares in any calendar year,
except that new employees are eligible to be granted up to a maximum of award of 4,000,000 shares. Authorized number of shares
under the Plan automatically increases at the end of each year by 5% of the then outstanding ordinary shares.
Administration.
The Equity Incentive Plan is administered by the Board or by our Compensation Committee; in this plan description we refer
to the Board or Compensation Committee as the plan administrator. The plan administrator determines the terms of all awards.
Types
of Awards. The Equity Incentive Plan allows for the grant of options, restricted shares, restricted share units, share appreciation
rights, share bonuses and performance awards.
Award
Agreements. All awards under the Equity Incentive Plan are evidenced by an award agreement which shall set forth the number
of shares subject to the award and the terms and conditions of the award, which shall be consistent with the Equity Incentive
Plan.
Term
of Awards. The term of awards granted under the Equity Incentive Plan is ten years.
Vesting
Schedule and Price. The plan administrator has the sole discretion in setting the vesting period and, if applicable, exercise
schedule of an award, determining that an award may not vest for a specified period after it is granted and accelerating the vesting
period of an award. The plan administrator determines the exercise or purchase price of each award, to the extent applicable.
Transferability.
Unless the plan administrator provides otherwise, the Equity Incentive Plan does not allow for the transfer of awards other
than by will or the laws of descent and distribution. Unless otherwise permitted by the plan administrator, options may be exercised
during the lifetime of the optionee only by the optionee or the optionee’s guardian or legal representative.
Changes
in Capitalization. In the event there is a specified type of change in our capital structure without our receipt of consideration,
such as a share split, or if required by applicable law, appropriate adjustments will be made to the share maximums and exercise
prices, as applicable, of outstanding awards under the Equity Incentive Plan.
Change
in Control Transactions. In the event of specified types of mergers or consolidations, a sale, lease, or other disposition
of all or substantially all of our assets or a corporate transaction, outstanding awards under our Equity Incentive Plan may be
assumed or replaced by any surviving or acquiring corporation; the surviving or acquiring corporation may substitute similar awards
for those outstanding under our Equity Incentive Plan; outstanding awards may be settled for the full value of such outstanding
award (whether or not then vested or exercisable) in cash, cash equivalents, or securities (or a combination thereof) of the successor
entity with payment deferred until the date or dates the award would have become exercisable or vested; or outstanding awards
may be terminated for no consideration. The plan administrator, may, on a discretionary basis, accelerate, in full or in part,
the vesting and exercisability of the awards.
Governing
Law and Compliance with Law. The Equity Incentive Plan and awards granted under it are governed by and construed in accordance
with the laws of the British Virgin Islands. Shares will not be issued under an award unless the issuance is permitted by applicable
law.
Amendment
and Termination. The Equity Incentive Plan terminates ten years from the date it was approved by our shareholders, unless
it is terminated earlier by our Board. Our Board may amend or terminate our Equity Incentive Plan at any time. Our Board generally
may amend the plan without shareholder approval unless required by applicable law.
Employment
Agreements and Other Arrangements with Named Executive Officers
Under
our employment agreement with Pat Sek Yuen Chan, Mr. Chan serves as our President and Chief Executive Officer at a base salary
of $303,143, In the event Mr. Chan’s employment would be terminated upon the occurrence of a merger with another company
that has been in a loss position for three years or declared in 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.
Director
Compensation
During
the year ended December 31, 2020, our non-employee 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 $5,000 per year. Directors
are entitled to be reimbursed for their reasonable expenses incurred in attending meetings of the Board and committees of the
Board. The following table sets forth the compensation paid to each person who served as a member of our Board in 2020. Pat Chan,
our Chief Executive Officer and Chairman of the Board, did not receive any additional compensation for his service as a director,
and his compensation is detailed in the Summary Compensation Table and related disclosures.
Director
Compensation Table
The
table below shows the compensation received by each of our non-employee directors for their services during 2020. Our non-employee
directors do not receive fringe or other benefits.
Name
|
|
Fees
earned or
paid in
cash
($)
|
|
|
Stock
awards
($)
|
|
|
Option
awards
($)
|
|
|
Non-equity
incentive
plan
compensation
($)
|
|
|
Nonqualified
deferred
compensation
earnings
($)
|
|
|
All
other
compensation
($)
|
|
|
Total
($)
|
|
Wan
Yu (Lawrence) Chow
|
|
|
30,000
|
|
|
|
31,800
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
61,800
|
|
Yaqi
(Sophie) Feng
|
|
|
30,000
|
|
|
|
63,600
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
93,600
|
|
Heung
Sang Addy (Dexter) Fong
|
|
|
48,000
|
|
|
|
31,800
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
79,800
|
|
Ji
(Richard) Li
|
|
|
30,000
|
|
|
|
31,800
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
61,800
|
|
Shizhu
(Steve) Long
|
|
|
30,000
|
|
|
|
31,800
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
61,800
|
|
Ye
(Eric) Tao
|
|
|
30,000
|
|
|
|
63,600
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
93,600
|
|
On
December 14, 2020, the Company’s board of directors approved of the issuance of restricted ordinary shares to directors
of the board in exchange for the cancellation of all options previously awarded to the directors. For directors Feng and Tao,
60,000 shares were awarded to each; and for directors Chow, Fong, Li and Long, 30,000 shares were awarded to each. Issued from
the Company’s 2017 Equity Incentive Plan, such shares were valued at $1.06 per share which was the closing price on the
trading day immediately preceded the day of the approval by the board.
Equity
Awards for Directors
Due
to the issuance of restricted ordinary shares in exchange for all options as described in the previous section, there was no outstanding
vested or unvested stock options held by the directors as of December 31, 2020.
Compensation
Committee Interlocks and Insider Participation
As
of the date of this Annual Report, no officer or employee serves as a member of the Compensation Committee. None of our executive
officers serves as a member of the Board or Compensation Committee of any entity that has one or more executive officers serving
on our Board or Compensation Committee.
Limitation
of Liability and Indemnification of Directors and Officers
Our
memorandum and articles of association, the BVI Business Companies Act, (as amended), and the common law of the British Virgin
Islands allow us to indemnify our officers and directors from certain liabilities. Our memorandum and articles of association
provides that we may indemnify, hold harmless and exonerate against all direct and indirect costs, fees and expenses of any type
or nature whatsoever, any person who (a) is or was a party or is threatened to be made a party to any proceeding by reason of
the fact that such person is or was a director, officer, key employee, adviser of our company; or (b) is or was, at the request
of our company, serving as a director of, or in any other capacity is or was acting for, another Enterprise.
We
will only indemnify the individual in question if the relevant indemnitee acted honestly and in good faith with a view to the
best interests of our company and, in the case of criminal proceedings, the indemnitee had no reasonable cause to believe that
his conduct was unlawful. The decision of our directors as to whether an indemnitee acted honestly and in good faith and with
a view to the best interests of our company and as to whether such indemnitee had no reasonable cause to believe that his conduct
was unlawful is, in the absence of fraud, sufficient for the purposes of our charter, unless a question of law is involved.
The
termination of any proceedings by any judgment, order, settlement, conviction or the entering of a nolle prosequi does not, by
itself, create a presumption that the relevant indemnitee did not act honestly and in good faith and with a view to the best interests
of our company or that such indemnitee had reasonable cause to believe that his conduct was unlawful.
We
may purchase and maintain insurance, purchase or furnish similar protection or make other arrangements including, but not limited
to, providing a trust fund, letter of credit, or surety bond in relation to any indemnitee or who at our request is or was serving
as a Director, officer or liquidator of, or in any other capacity is or was acting for, another Enterprise, against any liability
asserted against the person and incurred by him in that capacity, whether or not we have or would have had the power to indemnify
him against the liability as provided in our memorandum and articles of association.
We
have insurance policies under which, subject to the limitations of the policies, coverage is provided to our directors and officers
against loss arising from claims made by reason of breach of fiduciary duty or other wrongful acts as a director or officer, including
claims relating to public securities matters, and to us with respect to payments that may be made by us to these officers and
directors pursuant to our indemnification obligations or otherwise as a matter of law.
We
have entered into indemnification agreements with each of our directors and executive officers that may be broader than the specific
indemnification provisions contained in the BVI Companies Act, 2004 or our charter. These indemnification agreements require us,
among other things, to indemnify our directors and executive officers against liabilities that may arise by reason of their status
or service. These indemnification agreements also require us to advance all expenses incurred by the directors and executive officers
in investigating or defending any such action, suit or proceeding. We believe that these agreements are necessary to attract and
retain qualified individuals to serve as directors and executive officers.
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.