0001213900-18-006375.txt : 20180515 0001213900-18-006375.hdr.sgml : 20180515 20180515171951 ACCESSION NUMBER: 0001213900-18-006375 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 87 CONFORMED PERIOD OF REPORT: 20180331 FILED AS OF DATE: 20180515 DATE AS OF CHANGE: 20180515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Borqs Technologies, Inc. CENTRAL INDEX KEY: 0001650575 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 000000000 STATE OF INCORPORATION: D8 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-37593 FILM NUMBER: 18837834 BUSINESS ADDRESS: STREET 1: TOWER A, BLDG B23 UNIVERSAL BUSINESS PRK STREET 2: NO. 10 JIUXIANGQIAO ROAD CITY: CHAOYANG DISTRICT, BEIJING STATE: F4 ZIP: 100015 BUSINESS PHONE: 86 10-5975-6336 MAIL ADDRESS: STREET 1: TOWER A, BLDG B23 UNIVERSAL BUSINESS PRK STREET 2: NO. 10 JIUXIANGQIAO ROAD CITY: CHAOYANG DISTRICT, BEIJING STATE: F4 ZIP: 100015 FORMER COMPANY: FORMER CONFORMED NAME: Pacific Special Acquisition Corp. DATE OF NAME CHANGE: 20150810 10-Q 1 f10q0318_borqstechnologies.htm QUARTERLY REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2018

 

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

 

For the transition period from __________ to __________

 

Commission File Number: 001-37593

 

BORQS TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

British Virgin Islands   N/A

(State or other jurisdiction of

incorporation or organization)

  (I.R.S. Employer
Identification Number)

 

Building B23-A,

Universal Business Park

No. 10 Jiuxianqiao Road

Chaoyang District, Beijing, China

   100015
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (86) 10-5975-6336

 

N/A

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

 

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

 

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

 

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

 

Large accelerated filer Accelerated filer
Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller reporting company
Emerging Growth Company ☒     

  

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

 

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

 

As of May 11, 2018, there were 31,307,522 shares issued and 31,303,350 shares outstanding, no par value, of the Company’s ordinary shares.

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
     
PART I. FINANCIAL INFORMATION 1
     
ITEM 1. FINANCIAL STATEMENTS 1
     
  Condensed Consolidated Balance Sheets as of December 31, 2017 and March 31, 2018 2
     
  Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2017 and 2018 6
     
  Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2017 and 2018 7
     
  Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2018 8
     
  Notes to Condensed Financial Statements 9
     
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 21
     
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 31
     
ITEM 4. CONTROLS AND PROCEDURES 33
     
PART II. OTHER INFORMATION 34
     
ITEM 1. LEGAL PROCEEDINGS 34
     
ITEM 1A. RISK FACTORS 34
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 66
     
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 66
     
ITEM 4. MINE SAFETY DISCLOSURES 66
     
ITEM 5. OTHER INFORMATION 66
     
ITEM 6. EXHIBITS 66
     
SIGNATURES 67

 

i

 

   

PART I - FINANCIAL INFORMATION

 

BORQS TECHNOLOGIES, INC.

 

INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

    Page
     
Unaudited Condensed Consolidated Financial Statements for the Three Months Ended March 31, 2017 and 2018    
     
Condensed Consolidated Balance Sheets as of December 31, 2017 and March 31, 2018   2 – 5
     
Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2017 and 2018   6
     
Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2017 and 2018   7
     
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2018   8
     
Notes to the Unaudited Condensed Consolidated Financial Statements   9

 

 1 

 

BORQS TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

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

 

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

   

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

 

 2 

 

BORQS TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(Amounts in thousands of US$)

 

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

 

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

 

 3 

 

BORQS TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(Amounts in thousands of US$)

 

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

 

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

 

 4 

 

BORQS TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

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

 

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

  

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

 

 5 

 

BORQS TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

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

 

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

 

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

 

 6 

 

BORQS TECHNOLOGIES, INC.

UNAUDITED CONSOLIDATED CONDENSED INTERIM STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands of US$)

 

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

 

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

 

 7 

 

BORQS TECHNOLOGIES, INC.

UNAUDITED CONSOLIDATED CONDENSED INTERIM STATEMENTS OF CASH FLOWS

(Amounts in thousands of US$)

 

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

 

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

 

 8 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

1.ORGANIZATION

 

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

 

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

  

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

(a)Basis of presentation

 

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

 

(b)Liquidity

 

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

 

When preparing the unaudited condensed consolidated financial statements as of March 31, 2018 and for the three months then ended, the Group’s management concluded that a going concern basis of preparation was appropriate after analyzing the forecasted cash flows for the next twelve months, which indicates that the Group will have sufficient liquidity. In preparing the forecasted cash flow analysis, management took into account of the expected net cash inflows to be funded by public offering of approximately US$20,000. As a result, management prepared the unaudited condensed consolidated financial statements assuming the Group will continue as a going concern. However, there is no assurance that the public offering can be completed in a timely manner or at all, and there is no assurance that any short term debt is available at acceptable terms. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. 

 

 9 

  

BORQS TECHNOLOGIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(c)Long-term investment

 

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

 

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

     

(d)Recent accounting pronouncements

 

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

 

In May 2014, the Financial Accounting Standards Board (“FASB’’) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenue recognition requirements in ASC 605, and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU 2014-09 by one year. As a result, ASU 2014-09 is effective for the Group for annual reporting periods beginning January 1, 2019 and interim periods within annual periods beginning January 1, 2020. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers—Principal versus Agent Considerations, which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers—Identifying Performance Obligations and Licensing, which clarify guidance related to identifying performance obligations and licensing implementation guidance contained in ASU 2014-09. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers— Narrow-Scope Improvements and Practical Expedients, which addresses narrow-scope improvements to the guidance on collectability, non-cash consideration, and completed contracts at transition and provides practical expedients for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. The effective dates for these amendments are the same as the effective date of ASU No 2014-09. Early adoption is permitted, and the standard permits the use of either the retrospective or cumulative effect transition method. The Group does not plan to early adopt the standard and amendments and it is in the process of developing a plan for evaluating the impact of adoption of these guidance on its unaudited consolidated financial statements, including the selection of the adoption method, the identification of differences, if any, from the application of the guidance, and the impact of such differences, if any, on its consolidated unaudited financial statements.

 

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

 

In February 2016, the FASB issued ASU 2016-02, Leases, which specifies the accounting for leases. For operating leases, ASU 2016-02 requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. ASU 2016-02 is effective for the Group for annual reporting periods beginning January 1, 2020 and interim periods within annual periods beginning January 1, 2021. Early adoption is permitted. The Group does not plan to early adopt ASU 2016-02 and it is currently evaluating the impact of adopting the standard on its unaudited consolidated financial statements.

 

 10 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

(d)Recent accounting pronouncements (Continued)

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. ASU 2016-13 changes the impairment model for most financial assets and certain other instruments. The standard will replace “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. The standard is effective for public business entities for annual periods beginning after December 15, 2019, and interim periods therein, and annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021 for all other entities. Early adoption is permitted. The Group does not plan to early adopt ASU No. 2016-13 and it is evaluating the effect that this guidance will have on its unaudited consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. In November 2016, the FASB issued ASU 2016-18, Statements of Cash Flow (Topic 230): Restricted Cash, which requires that a statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amount shown on the statement of cash flows. ASU 2016-15 and ASU 2016-18 are effective for the Group for annual reporting periods beginning January 1, 2019 and interim periods within annual periods beginning January 1, 2020. Early adoption is permitted. The Group does not plan to early adopt ASU 2016-15 and ASU 2016-18 and it is evaluating the impacts that these standards will have on its unaudited consolidated financial statements.

 

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

  

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. This standard is effective for public business entities for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. Early adoption is permitted. The Group does not plan to early adopt ASU 2017-04 and it is currently evaluating the impact of adopting this standard on its unaudited consolidated financial statements.

  

 11 

  

BORQS TECHNOLOGIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

3.PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following:

 

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

 

(i)

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

  

4.PROPERTY AND EQUIPMENT, NET

 

Property and equipment consist of the following:

 

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

 

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

 

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

 

 12 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

5.INTANGIBLE ASSETS, NET

 

The following table presents the Group’s intangible assets as of the respective balance sheet dates:

 

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

 

The intangible assets are amortized using the straight-line method, which is the Group’s best estimate of how these assets will be economically consumed over their respective estimated useful lives of 3-10 years.

 

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

 

6.GOODWILL

 

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

 

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

 

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

 

 13 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

7.LONG-TERM INVESTMENT

 

On January 18, 2018, the Company entered into an agreement with Colmei Technology International Ltd (“Colmei”) and its affiliate Shenzhen Crave Communication Co., Ltd (“Crave”), along with the shareholders of Crave and Colmei (“Selling Shareholders”), pursuant to which the Selling Shareholders sold to the Company 13.8% of the outstanding shares of Crave and 13.8% of the outstanding shares of Colmei. Under the agreement, the Company paid purchase consideration consisting of the Company’s 473,717 ordinary shares issued and cash in the amount of US$10,000 to be paid to the Selling Shareholders over a period of 36 months from the date of agreement. If approved by the Company’s board of directors, the Company will also issue additional shares to the Selling Shareholders if the aggregate value of the Company shares initially issued to the Selling Shareholders under this agreement is less than US$3,000 on August 18, 2018. This transaction was completed on March 22, 2018.

 

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

 

8.BANK AND OTHER BORROWINGS

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 14 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

9.ACCRUED EXPENSES AND OTHER PAYABLES

 

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

 

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

 

10.DEFERRED GOVERNMENT GRANTS

 

The government grants received are required to be used in construction of property and equipment. These grants are initially deferred and subsequently recognized in the statement of operations over the life of the related assets as other operating income.

 

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

 

11.ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

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

 

   Foreign currency translation   Total 
   US$   US$ 
         
Balance as of December 31, 2016   (2,626)   (2,626)
Current year other comprehensive income   2,119    2,119 
Balance as of December 31, 2017   (507)   (507)
Current year other comprehensive income   1,332    1,332 
Balance as of March 31, 2018   825    825 

 

12.MAINLAND CHINA EMPLOYEE CONTRIBUTION PLAN

 

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

 

 15 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

13.TAXATION

 

Profit before income taxes consists of:

 

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

 

Income tax expenses comprise of:

 

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

 

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

 

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

 

 16 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

13.TAXATION (CONTINUED)

 

Deferred Taxes

 

The significant components of deferred taxes are as follows:

 

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

 

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

 

As of March 31, 2018, the Group intends to permanently reinvest the undistributed earnings from its foreign subsidiaries and the Consolidated VIEs to fund future operations. The amount of unrecognized deferred tax liabilities for temporary differences related to investments in foreign subsidiaries and the Consolidated VIEs is not determined because such a determination is not practicable.

 

Unrecognized Tax Benefits

 

As of December 31, 2017 and March 31, 2018, the Group recorded an unrecognized tax benefits of US$4,047 and US$5,334, respectively, of which, US$2,764 and US$3,654, respectively, are presented on a net basis against the deferred tax assets related to tax loss carry forwards on the consolidated balance sheets. The unrecognized tax benefits and its related interests are primarily related to under-reported intercompany profit. The amount of unrecognized tax benefits will change in the next 12 months, pending clarification of current tax law or audit by the tax authorities, however, an estimate of the range of the possible change cannot be made at this time. As of December 31, 2017 and March 31, 2018, unrecognized tax benefits of US$2,043 and US$2,983, if ultimately recognized, will impact the effective tax rate.

 

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

 

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

 

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

 

 17 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

14.RELATED PARTY TRANSACTIONS

 

(a)Related parties

 

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

 

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

 

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

   

 18 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

15.(LOSS) EARNINGS PER SHARE

 

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

 

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

  

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

 

16.COMMITMENTS AND CONTINGENCIES

 

Operating lease commitments

 

The Group leases buildings in the PRC and India under non-cancelable operating leases expiring on different dates. For the three months ended March 2017 and 2018, total rental expenses for all operating leases amounted to US$354 and US$421, respectively.

 

As of March 31, 2018, the Group has future minimum lease payments under non-cancelable operating leases with initial terms in excess of one year in relation to office buildings consisting of the following:

 

      US$  
         
  2018     1,369  
  2019     2,070  
  2020     1,184  
  2021     526  
  2022 and thereafter     424  
           
        5,573  

 

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

 

Income Taxes

 

As of March 31, 2018, the Group recognized an accrual of US$3,091 for unrecognized tax benefits and its interest (Note 13). The final outcome of the tax uncertainty is dependent upon various matters including tax examinations, interpretation of tax laws or expiration of statutes of limitation. However, due to the uncertainties associated with the status of examinations, including the protocols of finalizing audits by the relevant tax authorities, there is a high degree of uncertainty regarding the future cash outflows associated with these tax uncertainties. As of March 31, 2018, the Group classified the accrual for unrecognized tax benefits as a non-current liability.

 

 19 

 

BORQS TECHNOLOGIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

 

17.SEGMENT REPORTING

 

The operations of the Group are organized into two segments, consisting of Yuantel and Connected Solution.

 

The CODM measures the performance of each segment based on metrics of revenue and earnings from operations and uses these results to evaluate the performance of, and to allocate resources to each of the segments. CODM does not evaluate operating segments using asset information.

 

The CODM evaluates performance based on each reporting segment’s net revenue and operating profit (loss). The table below provides a summary of the Group’s operating segment results for the three months ended March 31, 2017 and 2018:

 

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

 

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

 

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

 

18.SUBSEQUENT EVENTS

 

Acquisition of KADI

 

On January 8, 2018, the Company entered into a letter of intent to acquire a 60% equity interest in Shanghai KADI Machinery Technology Co., Ltd (“KADI”), a Chinese company that develops software and hardware solutions for electric vehicle control modules, for an aggregate consideration of $15 million consisting of $11.7 million in cash and an agreed-upon value of $3.3 million in the Company’s ordinary shares with the selling shareholders of KADI. KADI is not a customer or a supplier of Borqs. In accordance with the letter of intent, the Company have made three of four scheduled cash advances to KADI amounted to $450,000, which is recorded as other non-current assets. The remaining fourth payment of $150,000 will be paid in May 2018. These advances will be deducted from the cash consideration to KADI under the definitive agreement to be negotiated.  If this transaction fails to be consummated within nine months after signing of the letter of intent, the advance payments will be exchanged into equity interest representing 5% of the outstanding capital stock of KADI on such date. There are no termination fees or penalties under the letter of intent.

 

 20 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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

 

Special Note Regarding Forward-Looking Statements

 

This Quarterly 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, as amended (the” Exchange Act”) 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 Form 10-Q 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 the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission (the “SEC”). 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

 

Pursuant to the business combination between the Company (formerly Pacific Special Acquisition Corp.) and Borqs International Holding Corp (the “Business Combination”) completed on August 18, 2017, Borqs International Holding Corp (“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 continuing company, which was renamed Borqs Technologies, Inc. We refer to Borqs Technologies, Inc. and its consolidated subsidiaries and consolidated affiliates collectively as “we”, “us”, “our”, and “the Company.”

 

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

 

The Company has two business units (“BUs”), the Connected Solutions BU and the mobile virtual network operator (“MVNO”) BU. The Connected Solutions BU develops wireless smart connected devices and cloud solutions; revenue from the Connected Solutions BU consists of software revenue and hardware revenue. The MVNO BU operates a mobile virtual network in China that provides a full range of 2G/3G/4G mobile communication services at the consumer level.

 

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

 

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

 

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

 

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

 

The Connected Solutions BU has a global customer base covering core parts of the Android platform value chain, including mobile chipset manufacturers, mobile device OEMs and mobile operators. This BU represented 86.5% of the Company’s net revenues in the three months ended March 31, 2018, while the MVNO BU represented 13.5% of net revenues for the same periods. As of April 2018, the Company has collaborated with six mobile chipset manufacturers and 29 mobile device OEMs to commercially launch Android based connected devices in 11 countries, and sales of connected devices with the BorqsWare software platform solutions are embedded in more than 10 million units worldwide.

 

The Company has dedicated significant resources to research and development, and it has research and development centers in Beijing, China and Bangalore, India. As of March 31, 2018, 350 of 502 full-time employees and contractors were technical professionals dedicated to platform research and development and product specific customization. Technical professionals have diverse backgrounds and experience gained through employment with leading mobile chipset designers and manufacturers, mobile device OEMs, internet content providers and other software and hardware enterprises.

 

The Company has achieved significant growth since inception. Net revenues increased from $31.2 million in March 31, 2017 to $58.3 million for the three months ended March 31, 2018, representing a 86.7% increase. The Company recorded a net income of $1.4 million in March 31, 2018, compared with net income of approximately $18,000 for the three months ended March 31, 2017.

 

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Key Factors Affecting Results of Operations

 

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

 

  Connected Solutions BU.  Revenue from product sales is the largest component of Connected Solutions BU revenue. Product sales gross margin is primarily affected by competition cost of components, and intellectual property royalties that the Company pays to patent licensors. Gross margin for engineering design fees and software royalties tends to be higher because the associated cost of revenues is less and pricing is less subject to competitive pressure. In addition, because product sales and software royalties are generally calculated on a per-unit basis, our revenue will vary depending upon the volume of product sales. Engineering design fees are generally not related to volume of product sales.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The aggregate amount of cash and cash equivalent and restricted cash are not materially affected by currency fluctuations because the majority of our revenues are denominated in U.S. Dollars based on contracts made in Hong Kong and the Cayman Islands. Financings from sales of equity and working capital loans are denominated in U.S. Dollars and executed in Hong Kong and the Cayman Islands, and repayments have been made in U.S. Dollars outside of China, thus not requiring approval from the PRC State Administration of Foreign Exchange. The MVNO business, and small amounts of Connected Solutions BU activities within China, generate revenue in Renminbi. Personnel and personnel-related expenses are primarily paid in Renminbi, and costs of components used in Connected Solutions BU hardware revenues are primarily paid in U.S. Dollars. As of March 31, 2018, we held a total of $3.0 million cash on a consolidated basis.

 

Results of Operations

 

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

 

Comparisons for the Three Months Ended March 31, 2017 to the Three Months Ended March 31, 2018.

 

GAAP Presentation

 

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

   

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

 

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

 

Net Revenues

 

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

 

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

 

Within the MVNO BU, the net revenues for the MVNO operation itself, excluding traditional telephony activities, increased to $7.9 million in the first quarter of 2018 from $6.4 million for the same period in 2017. The Company designed a new security check and activation system that simplified the sales procedure. Using this new activation system within our MVNO services, we were able to overcome the effect from tightened security measures for SIM card activation.

 

 25 

 

Net Revenues — Connected Solutions BU

 

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

 

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

 

Software

 

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

 

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

 

Hardware

 

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

 

The 55.9% increase in hardware net revenues (8% increase as a percentage of overall Connected Solutions BU net revenues) primarily reflects an increase in hardware product orders from the emerging markets in Asia.

 

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

 

Net Revenues — MVNO BU

 

  

For Three Months Ended
March 31,

 
   2017   2018 
   US$   US$ 
   (US$ in thousands) 
MVNO   5,932    7,509 
Other   515    373 
MVNO BU net revenues   6,447    7,882 

 

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

 

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Cost of Revenues

 

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

 

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

 

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

 

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

 

Gross Profit and Gross Margin

 

Our gross profits were $4.1 million and $9.0 million for the three months ended March 31, 2017 and 2018, respectively. The breakdown between the Connected Solutions BU and MVNO BU gross profit and gross margin was as follows:

 

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

 

 

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

 

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

 

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

 

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Operating Expenses

 

The following table sets forth operating expenses for the periods indicated:

 

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

 

Research and Development Expenses

 

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

 

Selling and Marketing Expenses

 

Selling and marketing expenses increased by $0.34 million to $1.68 million for the three months ended March 31, 2018, from $1.34 million from the same period in 2017. The increase was primarily due to our MVNO’s commission sharing structure.

 

General and Administrative Expenses

 

General and administrative expenses increased by $1.54 million to $3.10 million for the three months ended March 31, 2018, from $1.56 million for the three months ended March 31, 2017. This increase was primarily due to a result of added head-count.

 

Other Operating Income

 

Other operating income consists of financial support from local government authorities for certain technology development projects. We recognized $266,000 and nil for the three months ended March 31, 2017 and 2018, respectively.

 

Income tax expenses

 

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

 

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Liquidity and Capital Resources

 

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

 

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

 

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

 

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

 

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

 

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

 

Critical Accounting Policies

 

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

 

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

 

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Revenue recognition

 

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

 

Project-based Contracts

 

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

 

Service Contracts

 

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

 

Connected Devices Sales Contracts

 

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

 

MVNO Subscriber Usage Payment

 

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

 

Traditional Telecom Services

 

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

 

Income Taxes

 

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

 

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

 

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

 

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

 

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

 

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

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Credit Risk

 

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

 

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

 

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Liquidity Risk

 

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

 

Interest Rate Risk

 

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

 

Foreign Currency Risk

 

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

 

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

 

Internal Control over Financial Reporting

 

Prior to the Business Combination, the Company was a private company with limited accounting personnel and other resources with which to address its internal control and procedures over financial reporting. Our independent registered public accounting firm has not concluded an audit of our internal control over financial reporting. In connection with the preparation and external audit of our consolidated financial statements for the two years ended December 31, 2016, we and Ernst and Young Hua Ming LLP, an independent registered public accounting firm, identified two material weaknesses in our internal control over financial reporting. Since then, the Company has undertaken or is in the process of undertaking certain remedial steps to improve its internal control over financial reporting. As of December 31, 2017, the Company determined that one material weakness, the lack of sufficient controls to ensure that appropriate accruals are made for expenses had been remediated. However, one material weakness, the lack of a sufficient 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, had not yet been fully remediated. The Company plans to take additional measures to improve our internal control over financial reporting, including: (i) hiring additional qualified professionals with U.S. GAAP accounting experience in the year 2018; (ii) providing U.S. GAAP and SEC reporting training to our accounting personnel; and (iii) preparing a comprehensive written accounting policies and procedures manual that can effectively and efficiently guide our finance and accounting personnel in addressing significant accounting issues and preparing financial statements that are in compliance with U.S. GAAP and SEC requirements. In addition, we intend to engage an external service provider by the end of 2018 to assist management in evaluating our current internal control over financial reporting and implementing necessary controls and measures to assist it in preparing for compliance with internal control reporting.

 

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

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms promulgated by the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

Evaluation of Disclosure Controls and Procedures

 

As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2018. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, in light of the material weakness in our internal controls over financial reporting identified above, our disclosure controls and procedures were ineffective as March 31, 2018 based on our evaluation of the controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

 

Changes in Internal Control Over Financial Reporting

 

During the most recently completed fiscal quarter, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

None.

 

ITEM 1A. RISK FACTORS

 

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

 

Risks Related to our Business and Industry

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

  pay dividends or distributions, repurchase or redeem equity;

 

  incur or permit to exist any additional indebtedness or liens;

 

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

 

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

 

  sell all or substantially all of our assets.

 

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

 

  seek additional financing in the debt or equity markets;

 

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

 

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

 

  sell selected assets.

 

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

 

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

 

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

 

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

 

We have in the past breached certain financial covenants under our loan agreements with SSVB and PFG. Specifically, we failed to meet a monthly cash ratio threshold, under U.S. GAAP basis, for several months in the second, third and fourth quarters of 2017 under the SVB loan agreement and a minimum 3-month trailing EBITDA target under the PFG loan agreement as of the third quarter of 2017.  Such breach would result in acceleration of the repayment according to the contract term. Therefore, the outstanding balance of $1.515 million was reclassified as current liability as of December 31, 2017. We have not been notified by either lender that they seek to accelerate the loan payments because of such breaches and neither lender has expressly waived such breaches and any resulting defaults.  We are currently negotiating with both lenders to make adjustments to the specific financial covenants to more appropriately reflect the business nature of the Company in 2018 and going forward, particularly allowing for the inclusion of inventories while removing certain non-cash stock based compensation in deriving the covenant ratios.  In the event the lenders choose not to make adjustments to the covenant ratios and consider the occurrence of these breaches as events of default under our current loan agreements, the lenders may elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit to us.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

In 2014, after acquiring Yuantel Investment, we entered into the MVNO business. Our MVNO BU contributed 26.6%, 29.1% and 20.8% of our net revenues in 2015, 2016 and 2017, respectively.

 

The ability of our MVNO to provide mobile communication services in China is based on trial licenses granted by the Ministry of Industry & Information Technology of China (the “MIIT”), under the mobile virtual network trial program initiated by the MIIT in 2013 to implement the Chinese State Council’s encouragement of private investments in various industries, including telecommunication industry. The trial program and all trial licenses issued thereunder, including our own, were originally set to expire as of December 31, 2015. According to the trial program policies issued by the MIIT, the MIIT will work on formalizing commercial policies regarding the operation of MVNO based on the development of the trial program. On December 28, 2015, the MIIT issued a notice stating that while the government is “diligently researching and determining the formal commercial policies regarding the operation of MVNO, the temporary licenses issued continue to allow MVNO enterprises to operate, and the base telecommunication enterprises shall continue to provide cooperation, support and maintenance services”, as translated from the MIIT’s notice. All MVNOs in China, including us, will continue to operate and provide mobile communication services for subscribers based on the trial licenses.

 

The MIIT issued a Notice on the Official Commercial Use of Mobile Communication Resale Business (the “Official Notice”) on April 28, 2018, which took effect on May 1, 2018. The Official Notice requires an enterprise that has obtained a trial license, or the Pilot Enterprise to execute commercial contracts with a basic telecommunications company and apply for the telecommunications business license to replace the trial license. The Pilot Enterprise is allowed to continue to carry out its MVNO business during such application period. According to the Official Notice, the Pilot Enterprise will be ordered to terminate its MVNO business under certain circumstances, including (1) termination of cooperation between the Pilot Enterprise and the basic telecommunications enterprise resulting in Pilot Enterprise’s failure to operate its business; (2) failure to obtain the telecommunications business license within 2 years of the date of promulgation of the Official Notice; (3) occurrence of serious telecommunication fraud cases or malignant group accidents due to the Pilot Enterprise’s malpractice. In addition, the Official Notice requires the MVNO enterprise to establish network security management systems, deploy corresponding management personnel, implement the real-name registration for telephone users, protect users’ personal information, effectively implement the prevention and crackdown of communication information fraud, and standardize its user service agreements and financial management systems. We are preparing for application of the official MVNO license. However, uncertainties exist with respect to the interpretation and implementation of the newly issued Official Notice, and thus we cannot assure you that we will be able to obtain the official MVNO license or maintain such license once it is received.

 

If we cannot obtain the official MVNO license by May 1, 2020 or maintain such license after it is received, we will be forced to cease this operation, and our total revenues will be significantly reduced and our investment into this business will be completely lost. We rely on China United Network Communications Group Co., Ltd (“China Unicom”), the incumbent operator, to provide us with attractive and competitive bulk wholesale rates of voice-per-minute and MB-of-data to compete with our competitors. If we are not provided competitive bulk wholesale rates from China Unicom, we will not be able to maintain our gross margin and will not be able to operate profitably, which may lead to shutting down the MVNO BU entirely.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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.

 

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

 

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

 

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

 

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

 

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

 

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

 

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.

 

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

 

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

 

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

 

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

 

  our ability to attract new customers;

 

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

 

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

 

  our customer retention rate;

 

  the timing of recognition of revenue;

 

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

 

  network outages or security breaches;

 

  general economic, industry and market conditions;

 

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

 

  changes in our pricing policies or those of our competitors;

 

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

 

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

 

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

 

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

 

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

 

Our customers generally retain us on project-by-project basis in connection with specific projects rather than on a recurring basis under long-term contracts. Historically, a significant portion of our net revenues has been comprised of software fees, relating to one-time research and engineering work performed for customers. For 2015, 2016 and 2017, our net revenues from software fees were $22.5 million, $14.9 million and $11.2 million, respectively, representing 29.9%, 12.4% and 7.3% of total net revenues. Although a significant amount of our net revenues are generated from repeat business, which we define as revenues from a customer who also contributed to our revenues during the prior fiscal year, our engagements with our customers are typically for individual projects that are often on a non-exclusive, project-by-project basis. In addition, a majority of our customer contracts from which we generate product fees can be terminated by customers with or without cause. There are many factors outside of our control that might lead customers to terminate a contract or project with us, including, among others:

 

  financial difficulties for our customers;

 

  business going to our competitors or remaining in-house;

 

  unsuccessful launch of a product;

 

  disclosure of core technology by a third party; and

 

  mergers and acquisitions or significant corporate restructurings by our customers.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

  adverse effect of inflation and increase in labor costs;

 

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

 

  general global economic downturn;

 

  unexpected changes in political environment and regulatory requirements; and

 

  terrorist attacks and other acts of violence or war.

 

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

 

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

 

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

 

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

 

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

 

The mobile industry relies on the talents and efforts of highly skilled personnel, and our success depends to a significant extent on our ability to recruit, train, develop, retain and motivate qualified personnel for all areas of our organization. The mobile industry in China has experienced significant levels of employee attrition. Our attrition rates were 19% in 2014, 18% in 2015, 12% in 2016 and 14% in 2017. We may encounter higher attrition rates in the future, particularly if the mobile industry continues to experience strong growth.

 

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

 

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

 

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

 

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

 

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

 

As of March 31, 2018, Zhengqi International Holding Limited, Intel Capital Corporation, Norwest Venture Partners X, L.P., Asset Horizon International Limited, Keytone Ventures L.P., and GSR Ventures II and affiliates, beneficially own approximately 12.6%, 12.5%, 11.0%, 10.8%, 10.0%, and 8.6% respectively, of our outstanding ordinary shares. These major shareholders have significant influence in determining the outcome of any corporate transactions or other matters submitted to our shareholders for approval, including mergers, consolidations and schemes of arrangement, election and removal of directors and other significant corporate actions. They may not act in our best interests or our minority shareholders’ interests. In addition, without the consent of these major shareholders, we could be prevented from entering into transactions that could be beneficial to us. This concentration of ownership may also discourage, delay or prevent a change in control, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our ordinary shares. These actions may be taken even if they are opposed by our other shareholders.

 

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

 

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

 

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

 

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

 

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

 

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

 

We are required to maintain effective disclosure controls and procedures and effective internal control over financial reporting. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. As described elsewhere in this prospectus, we have identified a material weakness in our internal control over financial reporting. If we fail to timely achieve and maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal control over financial reporting. Additionally, such weaknesses and deficiencies in internal controls have adversely affected our disclosure controls and procedures, and as of December 31, 2017, such disclosure controls and procedures were ineffective. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which could have a negative effect on the trading price of our ordinary shares.

 

Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until after we are no longer an emerging growth company. At that time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed, or operating. Failing to maintain effective disclosure controls and internal control over financial reporting could have a material and adverse effect on our business and operating results and could cause a decline in the price of our ordinary shares. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the Nasdaq Stock Market.

 

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

 

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

 

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

 

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

 

There can be no assurance that our securities, including our ordinary shares, will continue to be listed on Nasdaq or, if listed, that we will be able to comply with the continued listing standards of Nasdaq, which could limit investors’ ability to make transactions in our securities and subject us to additional trading restrictions.

 

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

 

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

 

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

 

  less liquid trading market for our securities;

 

  more limited market quotations for our securities;

 

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

 

  more limited research coverage by stock analysts;

 

  loss of reputation; and

 

  more difficult and more expensive equity financings in the future.

 

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

 

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Risks Related to Doing Business in China

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

On March 8, 2018, the President exercised his authority to issue the imposition of significant tariffs on imports of steel and aluminum from a number of countries, including the PRC. Subsequently, the USTR announced an initial proposed list of 1,300 goods imported from the PRC that could be subject to additional tariffs and initiated a dispute with the World Trade Organization against the PRC for alleged unfair trade practices. The President has indicated that his two primary concerns to be addressed by the PRC are (i) a mandatory $100 billion reduction in the PRC/U.S. trade deficit and (ii) limiting the planned $300 billion PRC government support for advanced technology industries including artificial intelligence, semiconductors, electric cars and commercial aircraft.

 

In addition to the proposed retaliatory tariffs, the President has also directed the U.S. Secretary of the Treasury to develop new restrictions on PRC investments in the U.S. aimed at preventing PRC-controlled companies and funds from acquiring U.S. firms with sensitive technologies. The U.S. Treasury Department has until May 21, 2018, to develop these restrictions, which will be in addition to the restrictions already imposed by the Committee on Foreign Investment in the United States.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We face uncertainties with respect to the reporting and consequences of private equity financing transactions, share exchange or other transactions involving the transfer of our ordinary shares by investors that are non-PRC resident enterprises, or sale or purchase of shares in other non-PRC resident companies or other taxable assets by us. We and other non-resident enterprises in our group may be subject to filing obligations or being taxed if we and other non-resident enterprises affiliated with us are transferors in such transactions, and may be subject to withholding obligations if we and other non-resident enterprises affiliated with us are transferees in such transactions, under Public Notice 7 and Announcement 37. For the transfer of shares in us by investors that are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under Public Notice 7 and Announcement 37. As a result, we may be required to expend valuable resources to comply with Public Notice 7 and Announcement 37 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that we and other non-resident enterprises affiliated with us should not be taxed under these circulars. The PRC tax authorities have the discretion under Public Notice 7 and Announcement 37 to make adjustments to the taxable capital gains based on the difference between the fair value of the taxable assets transferred and the cost of investment. If the PRC tax authorities make adjustments to the taxable income of the transactions under Public Notice 7 and Announcement 37, our income tax costs associated with such transactions will be increased in the event that we are a transferee of such transactions, which may have an adverse effect on our financial condition and results of operations. Heightened scrutiny over acquisition transactions by the PRC tax authorities may also have a negative impact on potential acquisitions we may pursue in the future.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Under the EIT Law, dividends generated from retained earnings after January 1, 2008 from a PRC company to a foreign parent company are subject to a withholding tax rate of 10.0% unless the foreign parent’s jurisdiction of incorporation has a tax treaty with China that provides for a preferential withholding arrangement. Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income or the Hong Kong Tax Treaty, which became effective on August 21, 2006, a company incorporated in Hong Kong, such as Borqs Hong Kong, will be subject to withholding income tax at a rate of 5% on dividends it receives from our PRC subsidiary if it holds a 25.0% or more interest in that particular PRC subsidiary at all times within the 12-month period immediately preceding the distribution of dividends and be a “beneficial owner” of the dividends. In February 2018, the SAT issued the Announcement on Issues Relating to Beneficial Owners under Tax Treaties, or the SAT Announcement 9, which became effective from April 1, 2018 and supersedes the Notice on Interpretation and Determination of Beneficial Owners under Tax Treaties issued by the SAT on October 27, 2009 (or the Circular 601) and the Announcement Regarding Recognition of Beneficial Owners under Tax Treaties released by the SAT on June 29, 2012 (or the Announcement 30). Pursuant to Announcement 9, applicants who intend to prove their status of the “beneficial owner” shall submit the relevant documents to the relevant tax bureau according to the Announcement on Issuing the Measures for the Administration of Non-Resident Taxpayers’ Enjoyment of the Treatment under Tax Agreements and the SAT Announcement 9. “Beneficial Owners” are residents who have ownership and the right to dispose of the income or the rights and properties giving rise to the income. These rules also set forth certain adverse factors against the recognition of a “Beneficial Owner”, such as not carrying out substantive business activities. Whether a non-resident enterprise may obtain tax benefits under the relevant tax treaty will be subject to approval of the relevant PRC tax authority and will be determined by the PRC tax authority on a case-by-case basis. SAT Announcement 9 further provides that a comprehensive analysis should be made when determining the beneficial owner status based on various factors that supported by various types of documents including the articles of association, financial statements, records of cash movements, board meeting minutes, board resolutions, staffing and materials, relevant expenditures, functions and risk assumption as well as relevant contracts and other information. In August 2015, the SAT promulgated the Administrative Measures for Non-Resident Taxpayers to Enjoy Treatments under Tax Treaties, or SAT Circular 60, which became effective on November 1, 2015. SAT Circular 60 provides that non-resident enterprises are not required to obtain pre-approval from the relevant tax authority in order to enjoy the reduced withholding tax rate. Instead, non-resident enterprises may, if they determine by self-assessment that the prescribed criteria to enjoy the tax treaty benefits are met, directly apply for the reduced withholding tax rate, and file necessary forms and supporting documents when performing tax filings, which will be subject to post-filing examinations by the relevant tax authorities. 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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We and our PRC resident employees who participate in our employee stock incentive plans are subject to these regulations. If we or our PRC option grantees fail to comply with these regulations, we or our PRC option grantees may be subject to fines and other legal or administrative sanctions. We plan to process the SAFE application for our ESOP within the year 2018.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

On June 29, 2007, the Standing Committee of the National People’s Congress of China enacted the Labor Contract Law, which became effective on January 1, 2008 and revised on December 28, 2012. The Labor Contract Law introduces specific provisions related to fixed-term employment contracts, part-time employment, probation, consultation with labor union and employee assemblies, employment without a written contract, dismissal of employees, severance, and collective bargaining, which together represent enhanced enforcement of labor laws and regulations. According to the Labor Contract Law, an employer is obliged to sign an unlimited-term labor contract with any employee who has worked for the employer for ten consecutive years. Further, if an employee requests or agrees to renew a fixed-term labor contract that has already been entered into twice consecutively, the resulting contract must have an unlimited term, with certain exceptions. The employer must pay severance to an employee where a labor contract is terminated or expires, with certain exceptions. In addition, the government has continued to introduce various new labor-related regulations after the effectiveness of the Labor Contract Law. Among other things, it is required that that annual leave ranging from five to 15 days be made available to employees and that the employee be compensated for any untaken annual leave days in the amount of three times of the employee’s daily salary, subject to certain exceptions. As a result of these regulations designed to enhance labor protection and increasing labor costs in China, our labor costs have increased. In addition, as the interpretation and implementation of these new regulations are still evolving, we cannot assure you that our employment practice will at all times be deemed in compliance with the new regulations. If we are subject to severe penalties or incur significant liabilities in connection with labor disputes or investigations, our business and results of operations may be adversely affected.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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The above risk factors also apply to our pending acquisition of KADI and our investment transaction into Colmei and Crave. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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Risks Related to the Electric Vehicle Industry

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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.

 

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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 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 the total local government subsidy match to be not more than 50% of the total central government subsidies per car. The reduction of subsidies from both the central government and local governments will inevitably increase the costs to the consumers, which may cause temporary pressure for the EV market. The change in subsidy payment methods in 2017 from paid in advance to paid post-sale and any further delay in releasing subsidy payments for the EVs manufactured and sold in the prior years might also cause the adverse effects on the EV market.

 

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

 

Risks Related to Our Recent Transactions

 

Our proposed acquisition of KADI involves transactional and integration risks.

 

We have entered into a letter of intent to acquire a 60% equity interest in KADI, a Chinese company that develops software and hardware solutions for electric vehicle control modules, such as charging, battery management and vehicle controls. We have not yet finalized a definitive agreement to complete this acquisition, but we have made three scheduled cash advances to KADI totaling $450,000 as of April 30, 2018 and the fourth and last $150,000 advance shall be made by mid-May 2018. These advances will be deducted from our initial cash payments to KADI under the definitive agreement being negotiated. We will use a portion of the proceeds from this offering to fund the acquisition of KADI. As a result, if the offering is not consummated, we will not be able to consummate the acquisition of KADI. If the acquisition is not consummated within nine months after signing of the letter of intent, the advance payments will be converted into shares representing five percent of the outstanding capital stock of KADI. There are no termination fees or penalties under the letter of intent.

 

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

 

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

 

Dependency on key personnel of KADI.

 

There is no assurance that the management of KADI will successfully integrate with our management team to realize the intended benefits of the acquisition transaction. The business of KADI is dependent on Mr. Hu Lin, KADI’s chairman and chief executive. In the event that Mr. Lin were unable or unwilling to dedicate his full time to KADI’s business, or if he were to resign or start a competing business, our business and financial results would be adversely affected. KADI has no “key person” insurance on Mr. Lin or any other employee, and no employment agreement with Mr. Lin.

 

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

 

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

 

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

 

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

 

Our agreement to repurchase shares from Zhengqi was not extended to all investors who purchased shares in the August 2017 private placement. Since we are repurchasing those shares at a premium to current market prices, other purchasers may seek similar treatment. In addition, a minority of our shareholders will not benefit from the expected return of 1,227,625 escrowed earnout shares to the former Borqs International shareholders, which will occur when the repurchase from Zhengqi closes. Those minority shareholders will receive no direct benefit of proposed repurchase and return, and there is no assurance that those minority holders will not make claims against us. Further, if the Zhengqi repurchase transaction is not completed, up to 1,278,776 ordinary shares currently in escrow may not be timely released to the former Borqs International shareholders based on their respective proportionate interests in the merger consideration, and they may sue the Company for any damages they suffer as a result. Any such litigation could be time-consuming and costly, and could materially adversely affect our financial condition and results of operations.

 

Dependency on Crave and Colmei and financial risks.

 

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

 

 65 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On March 20, 2018 the Company sold 29,170 shares of unregistered ordinary shares from its 2017 Equity Incentive Plan to its employees in our Indian subsidiary at the price of $9.40 per share.

 

As previously disclosed on a Current Report on Form 8-K filed on August 24, 2017, the Company authorized a share repurchase program (the “Share Repurchase Program”), pursuant to which the Company may, from time to time, purchase its ordinary shares at a price not higher than $10.40 per share, up to an aggregate repurchase price of $6 million. The table below summarizes purchases made by or on behalf of the Company or affiliated purchasers as defined in Regulation S-K under the Share Purchase Program during the three months ended March 31, 2018.

 

Period  Total number of shares purchased   Average price paid per share   Total number of shares purchased as part of publicly announced plans or programs   Maximum dollar value of shares that may yet be purchased under the plans or programs 
 January 1, 2018 ~ January 31, 2018 (1)   4,172   $5.29    4,172    - 
February 1, 2018 ~ February 28, 2018   -   $-    -    - 
March 1, 2018 ~ March 31, 2018   -   $-    -          - 
Total   4,172   $5.29    4,172    - 

 

(1)Represents shares repurchased in December 2017 but which did not settle until January 3, 2018. The Share Repurchase Program has expired as of December 31, 2017 and no shares remain available for purchase under the program.

  

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

The following exhibits are filed as part of this Quarterly Report.

 

Exhibit Number   Description
31.1*   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*   Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*   Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 130, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*   Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 130, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*   XBRL Instance Document
101.SCH*   XBRL Taxonomy Extension Schema Document
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith.

 

 66 

 

SIGNATURES

 

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

 

  BORQS TECHNOLOGIES, INC.
     
Date: May 15, 2018 By: /s/ Anthony K. Chan
  Name: Anthony K. Chan
  Title: Chief Financial Officer

 


 

67

 

 

EX-31.1 2 f10q0318ex31-1_borqs.htm CERTIFICATION

Exhibit 31.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

 

I, Pat Sek Yuen Chan, certify that:

 

  1. I have reviewed this quarterly report of Borqs Technologies, Inc. on Form 10-Q for the period ended March 31, 2018;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

  

Date: May 15, 2018

    /s/ Pat Sek Yuen Chan
    Pat Sek Yuen Chan
    Chief Executive Officer
    (Principal Executive Officer)

 

EX-31.2 3 f10q0318ex31-2_borqs.htm CERTIFICATION

Exhibit 31.2

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

 

I, Anthony K. Chan, certify that:

 

  1. I have reviewed this quarterly report of Borqs Technologies, Inc. on Form 10-Q for the period ended March 31, 2018;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

  

Date: May 15, 2018

  /s/ Anthony K. Chan
  Anthony K. Chan
  Chief Financial Officer
  (Principal Financial Officer and Principal Accounting Officer)


EX-32.1 4 f10q0318ex32-1_borqs.htm CERTIFICATION

Exhibit 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

  

In connection with the Quarterly Report of Borqs Technologies, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacities and on the dates indicated below, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:

 

  1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

 

  2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: May 15, 2018

  

  /s/ Pat Sek Yuen Chan
  Pat Sek Yuen Chan
  Chief Executive Officer
  (Principal Executive Officer)

 

EX-32.2 5 f10q0318ex32-2_borqs.htm CERTIFICATION

Exhibit 32.2

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

  

In connection with the Quarterly Report of Borqs Technologies, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacities and on the dates indicated below, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:

 

  1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

 

  2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: May 15, 2018

  

  /s/ Anthony K. Chan
  Anthony K. Chan
  Chief Financial Officer
  (Principal Financial Officer and Principal Accounting Officer)

 

 

 

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(formerly known as &#8220;Pacific Special Acquisition Corp.&#8221;, the &#8220;Company&#8221; or &#8220;Borqs Technologies&#8221;) 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.</p> <p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 21pt; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;">&#160;</p> <p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 21pt; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;">On August 18, 2017, the Company acquired 100% equity interest of BORQS International Holding Corp. (&#8220;Borqs International&#8221;) and its subsidiaries, variable interest entities (the &#8220;VIE&#8221;) and the VIE&#8217;s subsidiaries (collectively referred to as &#8220;Borqs Group&#8221; hereinafter) (the Company and Borqs Group collectively referred to as the &#8220;Group&#8221;) in an all-stock transaction (the &#8220;Merger&#8221;). Concurrent with the completion of the acquisition of Borqs International, the Company changed its name from Pacific Special Acquisition Corp.&#8221;, to Borqs Technologies, Inc.</p> </div> <div> <table style="font: 10pt/normal 'times new roman', times, serif; width: 1567px; text-transform: none; text-indent: 0px; letter-spacing: normal; margin-top: 0px; margin-bottom: 0pt; word-spacing: 0px; orphans: 2; widows: 2; font-size-adjust: none; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;" cellspacing="0" cellpadding="0"> <tr style="text-align: justify; vertical-align: top;"> <td style="width: 21pt; text-align: left;"><b>2.</b></td> <td style="text-align: justify;"><b>SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES</b></td> </tr> </table> <p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 21pt; text-align: left; color: #000000; text-transform: none; text-indent: 155.5pt; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;">&#160;</p> <table style="font: 10pt/normal 'times new roman', times, serif; width: 1567px; text-transform: none; text-indent: 0px; letter-spacing: normal; margin-top: 0pt; margin-bottom: 0pt; word-spacing: 0px; orphans: 2; widows: 2; font-size-adjust: none; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: top;"> <td style="width: 21pt;"></td> <td style="width: 21pt;"><b><i>(a)</i></b></td> <td style="text-align: left;"><b><i>Basis of presentation</i></b></td> </tr> </table> <p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 21pt; text-align: left; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;">&#160;</p> <p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 21pt; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;">The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (&#8220;US GAAP&#8221;) and applicable rules and regulations of the Securities and Exchange Commission, regarding financial reporting, and include all normal and recurring adjustments that management of the Group considers necessary for a fair presentation of its financial position and operation results. Certain information and footnote disclosures normally included in financial statements prepared in conformity with US GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these statements should be read in conjunction with the Group&#8217;s&#160;<font style="font-family: 'times new roman', times, serif; font-size: 10pt;">unaudited consolidated financial statements as of and for the three years in the periods ended December 31, 2017.</font></p> <p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 21pt; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;">&#160;</p> <table style="font: 10pt/normal 'times new roman', times, serif; width: 1567px; text-transform: none; text-indent: 0px; letter-spacing: normal; margin-top: 0pt; margin-bottom: 0pt; word-spacing: 0px; orphans: 2; widows: 2; font-size-adjust: none; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: top;"> <td style="width: 21pt;"></td> <td style="width: 21pt;"><b><i>(b)</i></b></td> <td style="text-align: left;"><b><i>Liquidity</i></b></td> </tr> </table> <p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 21pt; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;">&#160;</p> <p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 21pt; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;">As of March 31, 2018, the&#160;<font style="font-family: 'times new roman', times, serif; font-size: 10pt;">Group has accumulated deficit of US$73,230 and negative cash flow of US$10,034 for the three months then ended. 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In preparing the forecasted cash flow analysis, management took into account of the expected net cash inflows to be funded by public offering of approximately US$20,000. As a result, management prepared the unaudited condensed consolidated financial statements assuming the Group will continue as a going concern. However, there is no assurance that the public offering can be completed in a timely manner or at all, and there is no assurance that any short term debt is available at acceptable terms. 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Certain information and footnote disclosures normally included in financial statements prepared in conformity with US GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these statements should be read in conjunction with the Group&#8217;s&#160;<font style="font-family: 'times new roman', times, serif; font-size: 10pt;">unaudited consolidated financial statements as of and for the three years in the periods ended December 31, 2017.</font></p> </div> <div> <table style="font: 10pt/normal 'times new roman', times, serif; width: 1567px; text-transform: none; text-indent: 0px; letter-spacing: normal; margin-top: 0pt; margin-bottom: 0pt; word-spacing: 0px; orphans: 2; widows: 2; font-size-adjust: none; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;" cellspacing="0" cellpadding="0"> <tr style="vertical-align: top;"> <td style="width: 21pt;"></td> <td style="width: 21pt;"><b><i>(b)</i></b></td> <td style="text-align: left;"><b><i>Liquidity</i></b></td> </tr> </table> <p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 21pt; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;">&#160;</p> <p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 21pt; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;">As of March 31, 2018, the&#160;<font style="font-family: 'times new roman', times, serif; font-size: 10pt;">Group has accumulated deficit of US$73,230 and negative cash flow of US$10,034 for the three months then ended. These condition raises substantial doubt about the Group&#8217;s ability to continue as a going concern.</font></p> <p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 21pt; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;">&#160;</p> <p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 21pt; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;">When preparing the&#160;<font style="font-family: 'times new roman', times, serif; font-size: 10pt;">unaudited condensed consolidated financial statements as of March 31, 2018 and for the three months then ended, the Group&#8217;s management concluded that a going concern basis of preparation was appropriate after analyzing the forecasted cash flows for the next twelve months, which indicates that the Group will have sufficient liquidity. In preparing the forecasted cash flow analysis, management took into account of the expected net cash inflows to be funded by public offering of approximately US$20,000. As a result, management prepared the unaudited condensed consolidated financial statements assuming the Group will continue as a going concern. However, there is no assurance that the public offering can be completed in a timely manner or at all, and there is no assurance that any short term debt is available at acceptable terms. 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The Group&#8217;s management regularly evaluates the impairment of its cost method investments based on the performance and financial position of the investees as well as other evidence of estimated market values. Such evaluation includes, but is not limited to, reviewing the investees&#8217; cash position, recent financing, projected and historical financial performance, cash flow forecasts and current and future financing needs. An impairment loss is recognized in the consolidated statements of comprehensive loss equal to the excess of the investment&#8217;s cost over its fair value at the balance sheet date of the reporting period for which the assessment is made. 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The JOBS Act provides that an EGC can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an EGC to delay adoption of certain accounting standards until those standards would otherwise apply to private companies. The Group elected to take advantage of the extended transition period. 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The Group does not plan to early adopt the standard and amendments and it is in the process of developing a plan for evaluating the impact of adoption of these guidance on its unaudited consolidated financial statements, including the selection of the adoption method, the identification of differences, if any, from the application of the guidance, and the impact of such differences, if any, on its consolidated unaudited financial statements.</font></p> <p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 21pt; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;">&#160;</p> <p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 21pt; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;"></p> <p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 21pt; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;">In January 2016, the FASB issued ASU 2016-01, Financial Instruments. ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. An entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. ASU 2016-01 also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. ASU 2016-01 is effective for the Group beginning January 1, 2019 with interim periods within annual periods beginning January 1, 2020. 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The Group&#160;<font style="font-family: 'times new roman', times, serif; font-size: 10pt;">does not plan to early adopt ASU No. 2016-13 and it is evaluating the effect that this guidance will have on its unaudited consolidated financial statements.</font></p> <p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 21pt; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;">&#160;</p> <p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 21pt; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;">In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. 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Document and Entity Information - shares
3 Months Ended
Mar. 31, 2018
May 11, 2018
Document and Entity Information [Abstract]    
Entity Registrant Name Borqs Technologies, Inc.  
Entity Central Index Key 0001650575  
Trading Symbol BRQS  
Amendment Flag false  
Document Type 10-Q  
Document Period End Date Mar. 31, 2018  
Document Fiscal Period Focus Q1  
Current Fiscal Year End Date --12-31  
Document Fiscal Year Focus 2018  
Entity Filer Category Smaller Reporting Company  
Entity Common Stock, Shares Outstanding   31,303,350
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Unaudited Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Mar. 31, 2018
Dec. 31, 2017
Current assets:    
Cash and cash equivalents $ 3,026 $ 13,060
Restricted cash 21 3,459
Accounts receivable 39,856 65,720
Receivable from Mobile Virtual Network Operator ("MVNO") franchisees 3,646 3,514
Inventories 20,784 17,031
Deferred cost of revenues 751 507
Prepaid and other current assets 22,846 16,240
Total current assets 90,930 119,531
Non-current assets:    
Property and equipment, net 1,316 1,362
Intangible assets, net 20,588 20,004
Goodwill 765 736
Long-term investment 11,662
Deferred tax assets 1,566 1,463
Deferred cost of revenues 3,666 2,642
Other non-current assets 5,883 2,994
Total non-current assets 45,446 29,201
Total assets 136,376 148,732
Current liabilities:    
Accounts payable (including accounts payable of the Consolidated VIEs without recourse to the primary beneficiaries of US$4,143 and US$3,302 as of December 31, 2017 and March 31, 2018, respectively) 16,671 49,690
Accrued expenses and other payables (including accrued expenses and other payables of the Consolidated VIEs without recourse to the primary beneficiaries of US$4,038 and US$4,339 as of December 31, 2017 and March 31, 2018, respectively) 16,425 12,163
Advances from customers (including advances from customers of the Consolidated VIEs without recourse to the primary beneficiary of nil and nil as of December 31, 2017 and March 31, 2018, respectively) 6,519 3,623
Deferred revenues (including deferred revenues of the Consolidated VIEs without recourse to the primary beneficiaries of US$5,904 and US$4,800 as of December 31, 2017 and March 31, 2018, respectively) 7,307 7,960
Income tax payable (including income tax payable of the Consolidated VIEs without recourse to the primary beneficiary of nil and nil as of December 31, 2017 and March 31, 2018, respectively) 1,860 1,232
Short-term bank borrowings (including short-term bank borrowings of the Consolidated VIEs without recourse to the primary beneficiaries of nil and US$40 as of December 31, 2017 and March 31, 2018, respectively) 12,792 12,648
Long-term bank borrowings - current portion (including long-term bank borrowings - current portion of the Consolidated VIEs without recourse to the primary beneficiary of nil and nil as of December 31, 2017 and March 31, 2018, respectively) 4,479 5,432
Total current liabilities 66,053 92,748
Non-current liabilities:    
Unrecognized tax benefits (including unrecognized tax benefits of the Consolidated VIEs without recourse to the primary beneficiary of nil and nil as of December 31, 2017 and March 31, 2018, respectively) 3,091 2,121
Deferred tax liabilities (including deferred tax liabilities of the Consolidated VIEs without recourse to the primary beneficiaries of US$1,550 and US$1,524 as of December 31, 2017 and March 31, 2018, respectively) 3,796 3,555
Deferred revenues (including deferred revenues of the Consolidated VIEs without recourse to the primary beneficiary of nil and nil as of December 31, 2017 and March 31, 2018, respectively) 2,693 1,346
Long-term bank payable (including long-term payable of the Consolidated VIEs without recourse to the primary beneficiary of nil and nil as of December 31, 2017 and March 31, 2018, respectively) 5,531
Deferred government grants (including deferred government grants of the Consolidated VIEs without recourse to the primary beneficiary of nil and nil as of December 31, 2017 and March 31, 2018, respectively) 2,034 1,957
Total non-current liabilities 17,145 8,979
Total liabilities 83,198 101,727
Commitments and contingencies
Shareholders' equity:    
Ordinary shares (no par value; unlimited shares authorized; 30,804,635 shares issued and outstanding as of December 31, 2017 and 31,307,522 shares issued and 31,303,350 shares outstanding as of March 31, 2018, respectively)
Additional paid-in capital 124,058 120,642
Statutory reserve 2,074 1,898
Accumulated deficit (73,230) (74,231)
Accumulated other comprehensive (loss) income 825 (507)
Total Borqs Technologies, Inc. shareholder's equity 53,727 47,802
Noncontrolling interest (549) (797)
Total shareholders' equity 53,178 47,005
Total liabilities and shareholders' equity $ 136,376 $ 148,732
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Unaudited Condensed Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Thousands
3 Months Ended 12 Months Ended
Mar. 31, 2018
Dec. 31, 2017
Accounts payable, consolidated VIEs without recourse to primary beneficiaries $ 3,302 $ 4,143
Accrued expenses and other payables, consolidated VIEs without recourse to primary beneficiaries 4,339 4,038
Advances from customer ,including advances from customers of the Consolidated VIEs without recourse to the primary beneficiary  
Deferred revenue, consolidated VIEs without recourse to primary beneficiaries 4,800 5,904
Short-term bank borrowings, consolidated VIEs without recourse to primary beneficiaries 40 40
Deferred tax liabilities of the consolidated VIEs $ 1,550 $ 1,524
Common stock, par value  
Common stock, shares authorized Unlimited Unlimited
Common stock, shares issued 31,307,522 30,804,635
Common stock, shares outstanding 31,303,350 30,804,635
Variable Interest Entity [Member]    
Accounts payable, consolidated VIEs without recourse to primary beneficiaries $ 3,302 $ 4,143
Accrued expenses and other payables, consolidated VIEs without recourse to primary beneficiaries 4,339 4,038
Advances from customer ,including advances from customers of the Consolidated VIEs without recourse to the primary beneficiary
Deferred revenue, consolidated VIEs without recourse to primary beneficiaries 4,800 5,904
Short-term bank borrowings, consolidated VIEs without recourse to primary beneficiaries 40
Deferred tax liabilities of the consolidated VIEs $ 1,524 $ 1,550
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Unaudited Condensed Consolidated Statement of Operations - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Net Revenues:    
Software $ 2,256 $ 3,084
Hardware 48,118 21,679
MVNO 7,509 5,932
Others 373 515
Total net revenues 58,256 31,210
Software (769) (2,330)
Hardware (43,399) (19,238)
MVNO (5,061) (5,287)
Others (171) (200)
Total cost of revenues (49,400) (27,055)
Total gross profit 8,856 4,155
Operating expenses:    
Sales and marketing expenses (1,682) (1,339)
General and administrative expenses (3,096) (1,558)
Research and development expenses (889) (292)
Changes in the fair value of warrant liabilities (161)
Total operating expenses (5,667) (3,350)
Other operating income 266
Operating income 3,189 1,071
Interest income 6 2
Interest expense (245) (619)
Other income 39 303
Other expense (45) (118)
Foreign exchange loss (374) (177)
Profit before income taxes 2,570 462
Income tax expenses (1,183) (444)
Net Income 1,387 18
Less: net (loss) income attributable to noncontrolling interests 188 (78)
Net income attributable to Borqs Technologies, Inc. 1,199 96
Add: accretion to redemption value of convertible redeemable preferred shares (298)
Net ( loss) income attributable to ordinary shareholders $ 1,199 $ (202)
(Loss) earnings per share:    
Basic $ 0.05 $ (0.05)
Diluted $ 0.04 $ (0.05)
Number of ordinary shares used in (loss) earnings per share computation:    
Basic 26,384,152 4,224,725
Diluted 27,471,885 4,224,725
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Unaudited Consolidated Condensed Interim Statements of Comprehensive Income - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Statement of Comprehensive Income [Abstract]    
Net Income $ 1,387 $ 18
Other comprehensive income, net of tax of nil:    
Foreign currency translation adjustments, net of tax of nil 1,392 312
Other comprehensive income, net of tax of nil 1,392 312
Comprehensive Income 2,779 330
Less: comprehensive (loss) income attributable to noncontrolling interest 248 (71)
Comprehensive Income attributable to the Borqs Technologies, Inc. $ 2,531 $ 401
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Unaudited Consolidated Condensed Interim Statements of Cash Flows - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
CASH FLOWS FROM OPERATING ACTIVITIES    
Net cash generated from operating activities $ 688 $ 1,183
CASH FLOWS FROM INVESTING ACTIVITIES    
Purchases of property and equipment (115) (76)
Purchases of intangible assets (1,617) (1,889)
Proceeds from disposal of property and equipment 1
Repayments of a loan to a third party 1,469 121
Net cash used in investing activities (262) (1,844)
CASH FLOWS FROM FINANCING ACTIVITIES    
Prepayment for repurchase of ordinary shares (10,070)
Proceeds from issuance of convertible redeemable preferred shares 9,007
Issuance costs (312)
Proceeds from short-term bank borrowings 40
Proceeds from long-term bank borrowings 2,000
Repayments of long-term bank borrowings (1,000) (143)
Net cash generated from (used in) financing activities (11,030) 10,552
Effect of foreign exchange rate changes on cash and cash equivalents 570 53
Net increase (decrease) in cash and cash equivalents (10,034) 9,944
Cash and cash equivalents at beginning of period 13,060 13,060
Cash and cash equivalents at end of period $ 3,026 $ 13,554
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Organization
3 Months Ended
Mar. 31, 2018
Organization [Abstract]  
ORGANIZATION
1. ORGANIZATION

 

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

 

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

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Summary of Significant Accounting Policies
3 Months Ended
Mar. 31, 2018
Summary of Significant Accounting Policies [Abstract]  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

(a) Basis of presentation

 

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

 

(b) Liquidity

 

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

 

When preparing the unaudited condensed consolidated financial statements as of March 31, 2018 and for the three months then ended, the Group’s management concluded that a going concern basis of preparation was appropriate after analyzing the forecasted cash flows for the next twelve months, which indicates that the Group will have sufficient liquidity. In preparing the forecasted cash flow analysis, management took into account of the expected net cash inflows to be funded by public offering of approximately US$20,000. As a result, management prepared the unaudited condensed consolidated financial statements assuming the Group will continue as a going concern. However, there is no assurance that the public offering can be completed in a timely manner or at all, and there is no assurance that any short term debt is available at acceptable terms. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. 

 

(c) Long-term investment

 

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

 

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

     

(d) Recent accounting pronouncements

 

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

 

In May 2014, the Financial Accounting Standards Board (“FASB’’) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenue recognition requirements in ASC 605, and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU 2014-09 by one year. As a result, ASU 2014-09 is effective for the Group for annual reporting periods beginning January 1, 2019 and interim periods within annual periods beginning January 1, 2020. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers—Principal versus Agent Considerations, which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers—Identifying Performance Obligations and Licensing, which clarify guidance related to identifying performance obligations and licensing implementation guidance contained in ASU 2014-09. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers— Narrow-Scope Improvements and Practical Expedients, which addresses narrow-scope improvements to the guidance on collectability, non-cash consideration, and completed contracts at transition and provides practical expedients for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. The effective dates for these amendments are the same as the effective date of ASU No 2014-09. Early adoption is permitted, and the standard permits the use of either the retrospective or cumulative effect transition method. The Group does not plan to early adopt the standard and amendments and it is in the process of developing a plan for evaluating the impact of adoption of these guidance on its unaudited consolidated financial statements, including the selection of the adoption method, the identification of differences, if any, from the application of the guidance, and the impact of such differences, if any, on its consolidated unaudited financial statements.

 

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

 

In February 2016, the FASB issued ASU 2016-02, Leases, which specifies the accounting for leases. For operating leases, ASU 2016-02 requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. ASU 2016-02 is effective for the Group for annual reporting periods beginning January 1, 2020 and interim periods within annual periods beginning January 1, 2021. Early adoption is permitted. The Group does not plan to early adopt ASU 2016-02 and it is currently evaluating the impact of adopting the standard on its unaudited consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. ASU 2016-13 changes the impairment model for most financial assets and certain other instruments. The standard will replace “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. The standard is effective for public business entities for annual periods beginning after December 15, 2019, and interim periods therein, and annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021 for all other entities. Early adoption is permitted. The Group does not plan to early adopt ASU No. 2016-13 and it is evaluating the effect that this guidance will have on its unaudited consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. In November 2016, the FASB issued ASU 2016-18, Statements of Cash Flow (Topic 230): Restricted Cash, which requires that a statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amount shown on the statement of cash flows. ASU 2016-15 and ASU 2016-18 are effective for the Group for annual reporting periods beginning January 1, 2019 and interim periods within annual periods beginning January 1, 2020. Early adoption is permitted. The Group does not plan to early adopt ASU 2016-15 and ASU 2016-18 and it is evaluating the impacts that these standards will have on its unaudited consolidated financial statements.

 

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

  

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. This standard is effective for public business entities for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. Early adoption is permitted. The Group does not plan to early adopt ASU 2017-04 and it is currently evaluating the impact of adopting this standard on its unaudited consolidated financial statements.

XML 20 R9.htm IDEA: XBRL DOCUMENT v3.8.0.1
Prepaid Expenses and Other Current Assets
3 Months Ended
Mar. 31, 2018
Prepaid Expenses and Other Current Assets [Abstract]  
PREPAID EXPENSES AND OTHER CURRENT ASSETS
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following:

 

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

 

(i)

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

XML 21 R10.htm IDEA: XBRL DOCUMENT v3.8.0.1
Property and Equipment, Net
3 Months Ended
Mar. 31, 2018
Property and Equipment, Net [Abstract]  
PROPERTY AND EQUIPMENT, NET
4. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consist of the following:

 

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

 

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

 

      Three Months Ended
March 31,
 
      2017     2018  
      US$     US$  
               
  Cost of revenues     41       48  
  Sales and marketing expenses     2       3  
  General and administrative expenses     72       18  
  Research and development expenses     168       70  
                   
        283       139
XML 22 R11.htm IDEA: XBRL DOCUMENT v3.8.0.1
Intangible Assets, Net
3 Months Ended
Mar. 31, 2018
Intangible Assets, Net/Goodwill [Abstract]  
INTANGIBLE ASSETS, NET
5. INTANGIBLE ASSETS, NET

 

The following table presents the Group’s intangible assets as of the respective balance sheet dates:

 

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

 

The intangible assets are amortized using the straight-line method, which is the Group’s best estimate of how these assets will be economically consumed over their respective estimated useful lives of 3-10 years.

 

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

XML 23 R12.htm IDEA: XBRL DOCUMENT v3.8.0.1
Goodwill
3 Months Ended
Mar. 31, 2018
Intangible Assets, Net/Goodwill [Abstract]  
GOODWILL
6. GOODWILL

 

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

 

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

 

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

XML 24 R13.htm IDEA: XBRL DOCUMENT v3.8.0.1
Long-Term Investment
3 Months Ended
Mar. 31, 2018
Long-Term Investment/Bank and Other Borrowings [Abstract]  
LONG-TERM INVESTMENT
7. LONG-TERM INVESTMENT

 

On January 18, 2018, the Company entered into an agreement with Colmei Technology International Ltd (“Colmei”) and its affiliate Shenzhen Crave Communication Co., Ltd (“Crave”), along with the shareholders of Crave and Colmei (“Selling Shareholders”), pursuant to which the Selling Shareholders sold to the Company 13.8% of the outstanding shares of Crave and 13.8% of the outstanding shares of Colmei. Under the agreement, the Company paid purchase consideration consisting of the Company’s 473,717 ordinary shares issued and cash in the amount of US$10,000 to be paid to the Selling Shareholders over a period of 36 months from the date of agreement. If approved by the Company’s board of directors, the Company will also issue additional shares to the Selling Shareholders if the aggregate value of the Company shares initially issued to the Selling Shareholders under this agreement is less than US$3,000 on August 18, 2018. This transaction was completed on March 22, 2018.

 

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

XML 25 R14.htm IDEA: XBRL DOCUMENT v3.8.0.1
Bank and Other Borrowings
3 Months Ended
Mar. 31, 2018
Long-Term Investment/Bank and Other Borrowings [Abstract]  
BANK AND OTHER BORROWINGS
8. BANK AND OTHER BORROWINGS

 

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

 

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

 

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

 

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

 

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

 

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

 

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

XML 26 R15.htm IDEA: XBRL DOCUMENT v3.8.0.1
Accrued Expenses and Other Payables
3 Months Ended
Mar. 31, 2018
Accrued Expenses and Other Payables [Abstract]  
ACCRUED EXPENSES AND OTHER PAYABLES
9. ACCRUED EXPENSES AND OTHER PAYABLES

 

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

 

      As of
December 31,
    As of
March 31,
 
      2017     2018  
      US$     US$  
               
  Payroll and welfare payable     2,030       2,457  
  Payable for long-term investment (Note 7)     -       3,131  
  VAT, and other taxes payable     2,473       2,827  
  Payables for office supply and utilities     711       958  
  Payables for purchase of property and equipment     52       54  
  Professional service fees     3,161       2,964  
  Deposits from agents     3,509       3,614  
  Others     227       420  
        12,163       16,425  
XML 27 R16.htm IDEA: XBRL DOCUMENT v3.8.0.1
Deferred Government Grants
3 Months Ended
Mar. 31, 2018
Deferred Government Grants [Abstract]  
DEFERRED GOVERNMENT GRANTS
10. DEFERRED GOVERNMENT GRANTS

 

The government grants received are required to be used in construction of property and equipment. These grants are initially deferred and subsequently recognized in the statement of operations over the life of the related assets as other operating income.

 

      Three Months Ended
March 31,
 
      2017     2018  
      US$     US$  
               
  Balance at beginning of the period     2,108       1,957  
  Recognized as other operating income     (266 )     -  
  Foreign currency translation difference     12       77  
  Balance at ending of the period     1,854       2,034  
XML 28 R17.htm IDEA: XBRL DOCUMENT v3.8.0.1
Accumulated Other Comprehensive Income (Loss)
3 Months Ended
Mar. 31, 2018
Accumulated Other Comprehensive Income (Loss) [Abstract]  
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

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

 

    Foreign currency translation     Total  
    US$     US$  
             
Balance as of December 31, 2016     (2,626 )     (2,626 )
Current year other comprehensive income     2,119       2,119  
Balance as of December 31, 2017     (507 )     (507 )
Current year other comprehensive income     1,332       1,332  
Balance as of March 31, 2018     825       825  
XML 29 R18.htm IDEA: XBRL DOCUMENT v3.8.0.1
Mainland China Employee Contribution Plan
3 Months Ended
Mar. 31, 2018
Mainland China Employee Contribution Plan [Abstract]  
MAINLAND CHINA EMPLOYEE CONTRIBUTION PLAN
12. MAINLAND CHINA EMPLOYEE CONTRIBUTION PLAN

 

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

XML 30 R19.htm IDEA: XBRL DOCUMENT v3.8.0.1
Taxation
3 Months Ended
Mar. 31, 2018
Taxation [Abstract]  
TAXATION
13. TAXATION

 

Profit before income taxes consists of:

 

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

 

Income tax expenses comprise of:

 

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

 

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

 

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

 

Deferred Taxes

 

The significant components of deferred taxes are as follows:

 

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

 

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

 

As of March 31, 2018, the Group intends to permanently reinvest the undistributed earnings from its foreign subsidiaries and the Consolidated VIEs to fund future operations. The amount of unrecognized deferred tax liabilities for temporary differences related to investments in foreign subsidiaries and the Consolidated VIEs is not determined because such a determination is not practicable.

 

Unrecognized Tax Benefits

 

As of December 31, 2017 and March 31, 2018, the Group recorded an unrecognized tax benefits of US$4,047 and US$5,334, respectively, of which, US$2,764 and US$3,654, respectively, are presented on a net basis against the deferred tax assets related to tax loss carry forwards on the consolidated balance sheets. The unrecognized tax benefits and its related interests are primarily related to under-reported intercompany profit. The amount of unrecognized tax benefits will change in the next 12 months, pending clarification of current tax law or audit by the tax authorities, however, an estimate of the range of the possible change cannot be made at this time. As of December 31, 2017 and March 31, 2018, unrecognized tax benefits of US$2,043 and US$2,983, if ultimately recognized, will impact the effective tax rate.

 

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

 

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

 

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

XML 31 R20.htm IDEA: XBRL DOCUMENT v3.8.0.1
Related Party Transactions
3 Months Ended
Mar. 31, 2018
Related Party Transactions [Abstract]  
RELATED PARTY TRANSACTIONS
14. RELATED PARTY TRANSACTIONS

 

(a) Related parties

 

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

 

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

 

      Three Months Ended
March 31,
 
      2017     2018  
      US$     US$  
  Software services provided to:            
  Intel Corporation     -       -  
  Intel (China) Co., Ltd.     9       -  
  Intel Asia-Pacific Research and Development Ltd.     19       -  
  Intel (China) Research Center Co., Ltd.     34       -  
XML 32 R21.htm IDEA: XBRL DOCUMENT v3.8.0.1
(Loss) Earnings Per Share
3 Months Ended
Mar. 31, 2018
(Loss) Earnings Per Share [Abstract]  
(LOSS) EARNINGS PER SHARE
15. (LOSS) EARNINGS PER SHARE

 

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

 

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

  

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

XML 33 R22.htm IDEA: XBRL DOCUMENT v3.8.0.1
Commitments and Contingencies
3 Months Ended
Mar. 31, 2018
Commitments and Contingencies [Abstract]  
COMMITMENTS AND CONTINGENCIES
16. COMMITMENTS AND CONTINGENCIES

 

Operating lease commitments

 

The Group leases buildings in the PRC and India under non-cancelable operating leases expiring on different dates. For the three months ended March 2017 and 2018, total rental expenses for all operating leases amounted to US$354 and US$421, respectively.

 

As of March 31, 2018, the Group has future minimum lease payments under non-cancelable operating leases with initial terms in excess of one year in relation to office buildings consisting of the following:

 

      US$  
         
  2018     1,369  
  2019     2,070  
  2020     1,184  
  2021     526  
  2022 and thereafter     424  
           
        5,573  

 

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

 

Income Taxes

 

As of March 31, 2018, the Group recognized an accrual of US$3,091 for unrecognized tax benefits and its interest (Note 13). The final outcome of the tax uncertainty is dependent upon various matters including tax examinations, interpretation of tax laws or expiration of statutes of limitation. However, due to the uncertainties associated with the status of examinations, including the protocols of finalizing audits by the relevant tax authorities, there is a high degree of uncertainty regarding the future cash outflows associated with these tax uncertainties. As of March 31, 2018, the Group classified the accrual for unrecognized tax benefits as a non-current liability.

XML 34 R23.htm IDEA: XBRL DOCUMENT v3.8.0.1
Segment Reporting
3 Months Ended
Mar. 31, 2018
Segment Reporting [Abstract]  
SEGMENT REPORTING
17. SEGMENT REPORTING

 

The operations of the Group are organized into two segments, consisting of Yuantel and Connected Solution.

 

The CODM measures the performance of each segment based on metrics of revenue and earnings from operations and uses these results to evaluate the performance of, and to allocate resources to each of the segments. CODM does not evaluate operating segments using asset information.

 

The CODM evaluates performance based on each reporting segment’s net revenue and operating profit (loss). The table below provides a summary of the Group’s operating segment results for the three months ended March 31, 2017 and 2018:

 

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

 

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

 

      Three Months Ended
March 31,
 
      2017     2018  
      US$     US$  
               
  PRC     12,759       11,179  
  Outside PRC:                
  United States     1,553       4,196  
  India     2,088       42,074  
  Rest of the world     14,810       807  
  Total net revenue     31,210       58,256  
XML 35 R24.htm IDEA: XBRL DOCUMENT v3.8.0.1
Subsequent Events
3 Months Ended
Mar. 31, 2018
Subsequent Events Abstract]  
SUBSEQUENT EVENTS
18. SUBSEQUENT EVENTS

 

Acquisition of KADI

 

On January 8, 2018, the Company entered into a letter of intent to acquire a 60% equity interest in Shanghai KADI Machinery Technology Co., Ltd (“KADI”), a Chinese company that develops software and hardware solutions for electric vehicle control modules, for an aggregate consideration of $15 million consisting of $11.7 million in cash and an agreed-upon value of $3.3 million in the Company’s ordinary shares with the selling shareholders of KADI. KADI is not a customer or a supplier of Borqs. In accordance with the letter of intent, the Company have made three of four scheduled cash advances to KADI amounted to $450,000, which is recorded as other non-current assets. The remaining fourth payment of $150,000 will be paid in May 2018. These advances will be deducted from the cash consideration to KADI under the definitive agreement to be negotiated.  If this transaction fails to be consummated within nine months after signing of the letter of intent, the advance payments will be exchanged into equity interest representing 5% of the outstanding capital stock of KADI on such date. There are no termination fees or penalties under the letter of intent.

XML 36 R25.htm IDEA: XBRL DOCUMENT v3.8.0.1
Summary of Significant Accounting Policies (Policies)
3 Months Ended
Mar. 31, 2018
Summary of Significant Accounting Policies [Abstract]  
Basis of presentation
(a) Basis of presentation

 

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

Liquidity
(b) Liquidity

 

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

 

When preparing the unaudited condensed consolidated financial statements as of March 31, 2018 and for the three months then ended, the Group’s management concluded that a going concern basis of preparation was appropriate after analyzing the forecasted cash flows for the next twelve months, which indicates that the Group will have sufficient liquidity. In preparing the forecasted cash flow analysis, management took into account of the expected net cash inflows to be funded by public offering of approximately US$20,000. As a result, management prepared the unaudited condensed consolidated financial statements assuming the Group will continue as a going concern. However, there is no assurance that the public offering can be completed in a timely manner or at all, and there is no assurance that any short term debt is available at acceptable terms. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Long-term investment
(c) Long-term investment

 

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

 

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

Recent accounting pronouncements
(d) Recent accounting pronouncements

 

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

 

In May 2014, the Financial Accounting Standards Board (“FASB’’) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenue recognition requirements in ASC 605, and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU 2014-09 by one year. As a result, ASU 2014-09 is effective for the Group for annual reporting periods beginning January 1, 2019 and interim periods within annual periods beginning January 1, 2020. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers—Principal versus Agent Considerations, which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers—Identifying Performance Obligations and Licensing, which clarify guidance related to identifying performance obligations and licensing implementation guidance contained in ASU 2014-09. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers— Narrow-Scope Improvements and Practical Expedients, which addresses narrow-scope improvements to the guidance on collectability, non-cash consideration, and completed contracts at transition and provides practical expedients for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. The effective dates for these amendments are the same as the effective date of ASU No 2014-09. Early adoption is permitted, and the standard permits the use of either the retrospective or cumulative effect transition method. The Group does not plan to early adopt the standard and amendments and it is in the process of developing a plan for evaluating the impact of adoption of these guidance on its unaudited consolidated financial statements, including the selection of the adoption method, the identification of differences, if any, from the application of the guidance, and the impact of such differences, if any, on its consolidated unaudited financial statements.

 

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

 

In February 2016, the FASB issued ASU 2016-02, Leases, which specifies the accounting for leases. For operating leases, ASU 2016-02 requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. ASU 2016-02 is effective for the Group for annual reporting periods beginning January 1, 2020 and interim periods within annual periods beginning January 1, 2021. Early adoption is permitted. The Group does not plan to early adopt ASU 2016-02 and it is currently evaluating the impact of adopting the standard on its unaudited consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. ASU 2016-13 changes the impairment model for most financial assets and certain other instruments. The standard will replace “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. The standard is effective for public business entities for annual periods beginning after December 15, 2019, and interim periods therein, and annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021 for all other entities. Early adoption is permitted. The Group does not plan to early adopt ASU No. 2016-13 and it is evaluating the effect that this guidance will have on its unaudited consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. In November 2016, the FASB issued ASU 2016-18, Statements of Cash Flow (Topic 230): Restricted Cash, which requires that a statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amount shown on the statement of cash flows. ASU 2016-15 and ASU 2016-18 are effective for the Group for annual reporting periods beginning January 1, 2019 and interim periods within annual periods beginning January 1, 2020. Early adoption is permitted. The Group does not plan to early adopt ASU 2016-15 and ASU 2016-18 and it is evaluating the impacts that these standards will have on its unaudited consolidated financial statements.

 

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

  

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. This standard is effective for public business entities for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. Early adoption is permitted. The Group does not plan to early adopt ASU 2017-04 and it is currently evaluating the impact of adopting this standard on its unaudited consolidated financial statements.

XML 37 R26.htm IDEA: XBRL DOCUMENT v3.8.0.1
Prepaid Expenses and Other Current Assets (Tables)
3 Months Ended
Mar. 31, 2018
Prepaid Expenses and Other Current Assets [Abstract]  
Schedule of prepaid expenses and other current assets
      As of
December 31,
    As of
March 31,
 
      2017     2018  
      US$     US$  
               
  Staff advances     312       430  
  Prepayment for ordinary share repurchase (i)     -       10,048  
  Prepayment for products     1,008       1,787  
  Advance to OEM     3,662       -  
  Rental and other deposits     1,203       1,103  
  VAT recoverable     2,189       2,898  
  Loan to third parties     1,469       -  
  Receivable from an agent     6,318       6,450  
  Others     79       130  
                   
        16,240       22,846  

 

(i)

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

XML 38 R27.htm IDEA: XBRL DOCUMENT v3.8.0.1
Property and Equipment, Net (Tables)
3 Months Ended
Mar. 31, 2018
Property and Equipment, Net [Abstract]  
Schedule of property and equipment

 

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

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

XML 39 R28.htm IDEA: XBRL DOCUMENT v3.8.0.1
Intangible Assets, Net (Tables)
3 Months Ended
Mar. 31, 2018
Intangible Assets, Net/Goodwill [Abstract]  
Summry of presents the Group's intangible assets as of the respective balance sheet dates

 

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

XML 40 R29.htm IDEA: XBRL DOCUMENT v3.8.0.1
Goodwill (Tables)
3 Months Ended
Mar. 31, 2018
Intangible Assets, Net/Goodwill [Abstract]  
Schedule of changes in carrying amount of goodwill
      As of
December 31,
    As of
March 31,
 
      2017     2018  
      US$     US$  
               
  Balance at beginning of the period     693       736  
  Foreign currency translation difference     43       29  
                   
  Balance at end of the period     736       765
XML 41 R30.htm IDEA: XBRL DOCUMENT v3.8.0.1
Bank and Other Borrowings (Tables)
3 Months Ended
Mar. 31, 2018
Long-Term Investment/Bank and Other Borrowings [Abstract]  
Schedule of bank borrowings of the balance sheet

 

   As of
December 31,
  As of
March 31,
 
   2017  2018 
   US$  US$ 
        
 Short-term bank and other borrowings  12,648   12,792 
 Long-term bank borrowings, current portion  5,432   4,479 
          
 Total borrowings  18,080   17,271
XML 42 R31.htm IDEA: XBRL DOCUMENT v3.8.0.1
Accrued Expenses and Other Payables (Tables)
3 Months Ended
Mar. 31, 2018
Accrued Expenses and Other Payables [Abstract]  
Schedule of accrued expenses and other payables
      As of
December 31,
    As of
March 31,
 
      2017     2018  
      US$     US$  
               
  Payroll and welfare payable     2,030       2,457  
  Payable for long-term investment (Note 7)     -       3,131  
  VAT, and other taxes payable     2,473       2,827  
  Payables for office supply and utilities     711       958  
  Payables for purchase of property and equipment     52       54  
  Professional service fees     3,161       2,964  
  Deposits from agents     3,509       3,614  
  Others     227       420  
        12,163       16,425  
XML 43 R32.htm IDEA: XBRL DOCUMENT v3.8.0.1
Deferred Government Grants (Tables)
3 Months Ended
Mar. 31, 2018
Deferred Government Grants [Abstract]  
Summary of defferred government grants
      Three Months Ended
March 31,
 
      2017     2018  
      US$     US$  
               
  Balance at beginning of the period     2,108       1,957  
  Recognized as other operating income     (266 )     -  
  Foreign currency translation difference     12       77  
  Balance at ending of the period     1,854       2,034  
XML 44 R33.htm IDEA: XBRL DOCUMENT v3.8.0.1
Accumulated Other Comprehensive Income (Loss) (Tables)
3 Months Ended
Mar. 31, 2018
Accumulated Other Comprehensive Income (Loss) [Abstract]  
Schedule of accumulated other comprehensive loss, net of tax
      Foreign currency translation     Total  
      US$     US$  
               
  Balance as of December 31, 2016     (2,626 )     (2,626 )
  Current year other comprehensive income     2,119       2,119  
  Balance as of December 31, 2017     (507 )     (507 )
  Current year other comprehensive income     1,332       1,332  
  Balance as of March 31, 2018     825       825  
XML 45 R34.htm IDEA: XBRL DOCUMENT v3.8.0.1
Taxation (Tables)
3 Months Ended
Mar. 31, 2018
Taxation [Abstract]  
Schedule of profit before income taxes
      Three Months Ended
March 31,
 
      2017     2018  
      US$     US$  
               
  Non-PRC     1,903       590  
  PRC     (1,441 )     1,980  
                   
        462       2,570  
Schedule of income tax expense
      Three Months Ended
March 31,
 
      2017     2018  
      US$     US$  
               
  Current     (473 )     (1,050 )
  Deferred     29       (133 )
                   
        (444 )     (1,183 )
Schedule of reconciliation of tax computed by applying the statutory income tax rate
      Three Months Ended
March 31,
 
      2017     2018  
      US$     US$  
               
  Profit before income taxes     462       2,570  
                   
  Income tax expenses computed at the statutory income tax rate at 25%     (116 )     (642 )
                   
  Non-deductible expenses     (123 )     (105 )
  Non-taxation income     67       -  
  Preferential rate     (99 )     355  
  Current and deferred tax rate differences     6       (834 )
  Foreign rate differences     (132 )     (149 )
  Change of valuation allowance     (16 )     545  
                   
                   
  Interest expenses     (31 )     (353 )
                   
  Income tax expenses     (444 )     (1,183 )
Schedule of significant components of deferred taxes
      As of
December 31,
    As of
March 31,
 
      2017     2018  
      US$     US$  
  Deferred tax assets            
  Inventories provision     229       -  
  AR provision     -       238  
  Accrued salary and welfare payable     165       284  
  Property and equipment     14       15  
  Tax losses     14,769       14,198  
  Valuation allowance     (13,714 )     (13,169 )
  Total deferred tax assets     1,463       1,566  
  Deferred tax liabilities                
  Intangible assets     2,004       1,964  
  Deferred cost of revenues     1,551       1,832  
                   
  Total deferred tax liabilities     3,555       3,796  
Schedule of roll-forward of unrecognized tax benefits
      Three Months Ended
March 31,
 
      2017     2018  
      US$     US$  
               
  Balance at beginning of period     4,053       4,547  
  Additions based on tax positions related to the current year     67       609  
  Foreign currency translation difference     (407 )     178  
                   
  Balance at end of period     3,713       5,334  
XML 46 R35.htm IDEA: XBRL DOCUMENT v3.8.0.1
Related Party Transactions (Tables)
3 Months Ended
Mar. 31, 2018
Related Party Transactions [Abstract]  
Schedule of names of related parties and relationship with group
  Names of related parties   Relationship with the Group
  Intel Capital Corporation (“Intel”) and its affiliates   A substantial shareholder of the company, but exited from the mobile chipset activities.
Schedule of significant related party transactions
      Three Months Ended
March 31,
 
      2017     2018  
      US$     US$  
  Software services provided to:            
  Intel Corporation     -       -  
  Intel (China) Co., Ltd.     9       -  
  Intel Asia-Pacific Research and Development Ltd.     19       -  
  Intel (China) Research Center Co., Ltd.     34       -  
XML 47 R36.htm IDEA: XBRL DOCUMENT v3.8.0.1
(Loss) Earnings Per Share (Tables)
3 Months Ended
Mar. 31, 2018
(Loss) Earnings Per Share [Abstract]  
Schedule of basic and diluted loss per share
      Three Months Ended
March 31,
 
      2017     2018  
      US$     US$  
  Numerator:            
  Net income     18       1,387  
  Less: net (loss) income attributable to noncontrolling interests     (78 )     188  
                   
  Net income attributable to Borqs Technologies, Inc.     96       1,199  
  Accretion to redemption value of Convertible Redeemable Preferred Shares     (298 )     -  
  Net (loss) income attributable to Borqs Technologies, Inc.’s ordinary shareholders     (202 )     1,199  
                   
  Denominator:                
  Weighted-average number of ordinary shares outstanding—basic     4,224,725       26,384,152  
  Weighted-average number of ordinary shares outstanding—diluted     4,224,725       27,471,885  
                   
  (Loss) earnings per share—Basic:     (0.05 )     0.05  
  (Loss) earnings per share—Diluted:     (0.05 )     0.04  
XML 48 R37.htm IDEA: XBRL DOCUMENT v3.8.0.1
Commitments and Contingencies (Tables)
3 Months Ended
Mar. 31, 2018
Commitments and Contingencies [Abstract]  
Schedule of future minimum lease payments under non-cancelable operating leases
      US$  
         
  2018     1,369  
  2019     2,070  
  2020     1,184  
  2021     526  
  2022 and thereafter     424  
           
        5,573  
XML 49 R38.htm IDEA: XBRL DOCUMENT v3.8.0.1
Segment Reporting (Tables)
3 Months Ended
Mar. 31, 2018
Segment Reporting [Abstract]  
Schedule of group's operating segment
        Connected     Total          
  Three months ended March 31, 2018   Yuantel     Solution     Segments     Eliminations     Consolidated  
                                 
  Net revenue                              
  -External customers     7,882       50,374       58,256       -       58,256  
  -Inter-segment     -       304       304       (304 )     -  
  Total net revenue     7,882       50,678       58,560       (304 )     58,256  
                                           
  Operating income     684       2,505       3,189       -       3,189  

 

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

 

      Three Months Ended
March 31,
 
      2017     2018  
      US$     US$  
               
  PRC     12,759       11,179  
  Outside PRC:                
  United States     1,553       4,196  
  India     2,088       42,074  
  Rest of the world     14,810       807  
  Total net revenue     31,210       58,256  
XML 50 R39.htm IDEA: XBRL DOCUMENT v3.8.0.1
Organization (Details Textual)
8 Months Ended
Aug. 18, 2017
BORQS International Holding Corp. [Member]  
Organization (Textual)  
Equity interest, percentage 100.00%
XML 51 R40.htm IDEA: XBRL DOCUMENT v3.8.0.1
Summary of Significant Accounting Policies (Details) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Dec. 31, 2017
Summary of Significant Accounting Policies (Textual)    
Accumulated deficit $ (73,230) $ (74,231)
Negative cash flow 10,034  
Funded by public $ 20,000  
XML 52 R41.htm IDEA: XBRL DOCUMENT v3.8.0.1
Prepaid Expenses and Other Current Assets (Details) - USD ($)
$ in Thousands
Mar. 31, 2018
Dec. 31, 2017
Prepaid Expenses and Other Current Assets [Abstract]    
Staff advances $ 430 $ 312
Prepayment for ordinary share repurchase [1] 10,048
Prepayment for products 1,787 1,008
Advance to OEM 3,662
Rental and other deposits 1,103 1,203
VAT recoverable 2,898 2,189
Loan to third parties 1,469
Receivable from an agent 6,450 6,318
Others 130 79
Prepaid expenses and other current assets $ 22,846 $ 16,240
[1] On January 10, 2018, the Company entered into a stock repurchase agreement ("Stock Repurchase Agreement") with Zhengqi International Holding Limited ("Zhengqi"), pursuant to which the Company agreed to repurchase 966,136 ordinary shares that were originally issued and sold to Zhengqi on August 18, 2017, at an aggregate purchase price of $10 million. The $10 million share repurchases consideration was transferred to Zhengqi, and the Company is working with Zhengqi to complete certain procedures to close the transaction in 2018.
XML 53 R42.htm IDEA: XBRL DOCUMENT v3.8.0.1
Prepaid Expenses and Other Current Assets (Details Textual) - Zhengqi International Holding Limited [Member]
$ in Millions
1 Months Ended
Jan. 10, 2018
USD ($)
shares
Prepaid Expenses And Other Current Assets (Textual)  
Agreed to repurchase of ordinary shares | shares 966,136
Aggregate purchase price | $ $ 10
XML 54 R43.htm IDEA: XBRL DOCUMENT v3.8.0.1
Property and Equipment, Net (Details) - USD ($)
$ in Thousands
Mar. 31, 2018
Dec. 31, 2017
At cost:    
Property and equipment, gross $ 8,931 $ 8,542
Less: accumulated depreciation (7,615) (7,180)
Property and equipment, net 1,316 1,362
Leasehold improvements [Member]    
At cost:    
Property and equipment, gross 1,115 933
Computer and network equipment [Member]    
At cost:    
Property and equipment, gross 6,595 6,458
Office equipment [Member]    
At cost:    
Property and equipment, gross 987 918
Motor vehicles [Member]    
At cost:    
Property and equipment, gross $ 234 $ 233
XML 55 R44.htm IDEA: XBRL DOCUMENT v3.8.0.1
Property and Equipment, Net (Details 1) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Property, Plant and Equipment [Line Items]    
Depreciation expense, Total $ 194 $ 283
Cost of revenues [Member]    
Property, Plant and Equipment [Line Items]    
Depreciation expense, Total 48 41
Sales and marketing expenses [Member]    
Property, Plant and Equipment [Line Items]    
Depreciation expense, Total 3 2
General and administrative expenses [Member]    
Property, Plant and Equipment [Line Items]    
Depreciation expense, Total 18 72
Research and development expenses [Member]    
Property, Plant and Equipment [Line Items]    
Depreciation expense, Total $ 70 $ 168
XML 56 R45.htm IDEA: XBRL DOCUMENT v3.8.0.1
Property and Equipment, Net (Details Textual) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Property and Equipment, Net (Textual)    
Depreciation expense $ 194 $ 283
XML 57 R46.htm IDEA: XBRL DOCUMENT v3.8.0.1
Intangible Assets, Net (Details) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Finite-Lived Intangible Assets [Line Items]    
Beginning Balance $ 20,004 $ 15,498
Additions 1,617 1,889
Amortization expense (1,604) (942)
Foreign currency translation difference 571 69
Ending Balance 20,588 16,514
Software [Member]    
Finite-Lived Intangible Assets [Line Items]    
Beginning Balance 2,529 2,294
Additions 139 31
Amortization expense (29) (60)
Foreign currency translation difference 98 11
Ending Balance 2,737 2,276
Capitalized software development costs [Member]    
Finite-Lived Intangible Assets [Line Items]    
Beginning Balance 11,600 6,874
Additions 1,478 1,858
Amortization expense (1,339) (670)
Foreign currency translation difference 243 23
Ending Balance 11,982 8,085
License [Member]    
Finite-Lived Intangible Assets [Line Items]    
Beginning Balance 5,875 6,330
Additions
Amortization expense (236) (212)
Foreign currency translation difference 230 35
Ending Balance $ 5,869 $ 6,153
XML 58 R47.htm IDEA: XBRL DOCUMENT v3.8.0.1
Intangible Assets, Net (Details Textual) - USD ($)
$ in Thousands
3 Months Ended 12 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Dec. 31, 2017
Finite-Lived Intangible Assets [Line Items]      
Amortization of intangible assets $ 1,604 $ 942  
Estimated useful lives     5 years
Maximum [Member]      
Finite-Lived Intangible Assets [Line Items]      
Estimated useful lives 10 years    
Minimum [Member]      
Finite-Lived Intangible Assets [Line Items]      
Estimated useful lives 3 years    
XML 59 R48.htm IDEA: XBRL DOCUMENT v3.8.0.1
Goodwill (Details) - USD ($)
$ in Thousands
3 Months Ended 12 Months Ended
Mar. 31, 2018
Dec. 31, 2017
Intangible Assets, Net/Goodwill [Abstract]    
Balance as of January 1 $ 736  
Foreign currency translation difference 29 $ 43
Balance as of December 31 $ 765 $ 736
XML 60 R49.htm IDEA: XBRL DOCUMENT v3.8.0.1
Long-Term Investment (Details)
$ in Thousands
1 Months Ended
Jan. 18, 2018
USD ($)
shares
Zhengqi International Holding Limited [Member]  
Long-Term Investment (Textual)  
Agreed to acquire equity percentage 13.80%
Ordinary shares issued to selling shareholders | shares 473,717
Ordinary shares to selling shareholders value | $ $ 10,000
Colmei Technology International Ltd [Member]  
Long-Term Investment (Textual)  
Agreed to acquire equity percentage 13.80%
Ordinary shares issued to selling shareholders | shares 473,717
Ordinary shares to selling shareholders value | $ $ 10,000
XML 61 R50.htm IDEA: XBRL DOCUMENT v3.8.0.1
Bank and Other Borrowings (Details) - USD ($)
$ in Thousands
Mar. 31, 2018
Dec. 31, 2017
Long-Term Investment/Bank and Other Borrowings [Abstract]    
Short-term bank and other borrowings $ 12,792 $ 12,648
Long-term bank borrowings, current portion 4,479 5,432
Bank borrowings, current $ 17,271 $ 18,080
XML 62 R51.htm IDEA: XBRL DOCUMENT v3.8.0.1
Bank and Other Borrowings (Details Textual) - USD ($)
$ in Thousands
1 Months Ended 3 Months Ended
Nov. 28, 2017
Mar. 31, 2018
Mar. 31, 2017
Dec. 31, 2017
Bank Borrowings (Textual)        
Weighted average interest rate   6.44%   6.73%
Short term bank term   These borrowings were obtained from financial institutions and have terms of one year.    
Short term loan   $ 12,792   $ 12,648
Long-term debt, description   These borrowings were obtained from financial institutions located in the United States, and have terms of three years.    
Long term loan       $ 18,080
Warrants re-measured at fair value   $ 161  
Long-term bank borrowing   479    
HHMC Microelectronic Co., Limited [Member]        
Bank Borrowings (Textual)        
Short term bank term Three months      
Short term loan $ 5,000,000      
Interest rate 14.60%      
Warrants [Member]        
Bank Borrowings (Textual)        
Warrants re-measured at fair value   $ 479    
XML 63 R52.htm IDEA: XBRL DOCUMENT v3.8.0.1
Accrued Expenses and Other Payables (Details) - USD ($)
$ in Thousands
Mar. 31, 2018
Dec. 31, 2017
Accrued Expenses and Other Payables [Abstract]    
Payroll and welfare payable $ 2,457 $ 2,030
Payable for long-term investment (Note 7) 3,131
VAT, and other taxes payable 2,827 2,473
Payables for office supply and utilities 958 711
Payables for purchase of property and equipment 54 52
Professional service fees 2,964 3,161
Deposits from agents 3,614 3,509
Others 420 227
Accrued expenses and other payabes $ 16,425 $ 12,163
XML 64 R53.htm IDEA: XBRL DOCUMENT v3.8.0.1
Deferred Government Grants (Details) - USD ($)
$ in Thousands
3 Months Ended 12 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Deferred Government Grants [Abstract]        
Balance at beginning of the period $ 1,957 $ 2,108 $ 4,014 $ 7,316
Recognized as other operating income (266) (1,650) (2,880)
Foreign currency translation difference 77 12 (256) (422)
Balance at ending of the period $ 2,034 $ 1,854 $ 2,108 $ 4,014
XML 65 R54.htm IDEA: XBRL DOCUMENT v3.8.0.1
Accumulated Other Comprehensive Income (Loss) (Details) - USD ($)
$ in Thousands
3 Months Ended 12 Months Ended
Mar. 31, 2018
Dec. 31, 2017
Class of Stock [Line Items]    
Beginning balance $ (507)  
Current year other comprehensive income 1,332 $ 2,119
Ending balance 825 (507)
Foreign currency translation [Member]    
Class of Stock [Line Items]    
Beginning balance 507 2,626
Current year other comprehensive income 1,332 2,119
Ending balance $ 825 $ 507
XML 66 R55.htm IDEA: XBRL DOCUMENT v3.8.0.1
Mainland China Employee Contribution Plan (Details) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Mainland China Employee Contribution Plan (Textual)    
Total expenses for employee contribution plan $ 836 $ 836
XML 67 R56.htm IDEA: XBRL DOCUMENT v3.8.0.1
Taxation (Details) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Components of profit before income taxes    
Non-PRC $ 590 $ 1,903
PRC 1,980 (1,441)
Profit before income taxes $ 2,570 $ 462
XML 68 R57.htm IDEA: XBRL DOCUMENT v3.8.0.1
Taxation (Details 1) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Components of income tax expense    
Current $ (1,050) $ (473)
Deferred (133) 29
Income tax expenses $ (1,183) $ (444)
XML 69 R58.htm IDEA: XBRL DOCUMENT v3.8.0.1
Taxation (Details 2) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Taxation [Abstract]    
Profit before income taxes $ 2,570 $ 462
Income tax expenses computed at the statutory income tax rate at 25% (642) (116)
Non-deductible expenses (105) (123)
Non-taxation income 67
Preferential rate 355 (99)
Current and deferred tax rate differences (834) 6
Foreign rate differences (149) (132)
Change of valuation allowance 545 (16)
Interest expenses (353) (31)
Income tax expenses $ (1,183) $ (444)
XML 70 R59.htm IDEA: XBRL DOCUMENT v3.8.0.1
Taxation (Details 3) - USD ($)
$ in Thousands
Mar. 31, 2018
Dec. 31, 2017
Deferred tax assets    
Inventories provision $ 229
AR provision 238
Accrued salary and welfare payable 165 284
Property and equipment 14 15
Tax losses 14,769 14,198
Valuation allowance (13,714) (13,169)
Total deferred tax assets 1,463 1,566
Deferred tax liabilities    
Intangible assets 2,004 1,964
Deferred cost of revenues 1,551 1,832
Total deferred tax liabilities $ 3,555 $ 3,796
XML 71 R60.htm IDEA: XBRL DOCUMENT v3.8.0.1
Taxation (Details 4) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
A roll-forward of unrecognized tax benefits is as follows:    
Balance at beginning of year $ 2,121  
Balance at end of year 3,091  
Unrecognized tax benefits [Member]    
A roll-forward of unrecognized tax benefits is as follows:    
Balance at beginning of year 4,547 $ 4,053
Additions based on tax positions related to the current year 609 67
Foreign currency translation difference 178 (407)
Balance at end of year $ 5,334 $ 3,713
XML 72 R61.htm IDEA: XBRL DOCUMENT v3.8.0.1
Taxation (Details Textual) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Dec. 31, 2017
Taxation (Textual)      
Unrecognized tax benefits $ 5,223 $ 4,047  
Deferred tax assets related to tax loss carry forwards 3,654   $ 2,764
Unrecognized tax benefits of ultimately recognized, will impact the effective tax rate 2,983   $ 2,043
Interest expenses accrued in relation to the unrecognized tax benefit 353 31  
Accumulated interest expenses 691 119  
Current income tax expense (1,050) $ (473)  
PRC [Member]      
Taxation (Textual)      
Net tax operating loss from subsidiaries $ 28,855    
Net tax operating loss expiration term Expire from 2018 to 2022    
Borqs HK [Member]      
Taxation (Textual)      
Net tax operating loss from subsidiaries $ 14,949    
Net tax operating loss expiration term Will not expire.    
XML 73 R62.htm IDEA: XBRL DOCUMENT v3.8.0.1
Related Party Transactions (Details)
3 Months Ended
Mar. 31, 2018
Intel Capital Corporation (''Intel") and its affiliates [Member]  
Related Party Transaction [Line Items]  
Relationship with the Group A substantial shareholder of the company, but exited from the mobile chipset activities.
XML 74 R63.htm IDEA: XBRL DOCUMENT v3.8.0.1
Related Party Transactions (Details 1) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Intel Corporation [Member]    
Related Party Transaction [Line Items]    
Software services provided to
Intel (China) Co., Ltd. [Member]    
Related Party Transaction [Line Items]    
Software services provided to 9
Intel Asia-Pacific Research and Development Ltd [Member]    
Related Party Transaction [Line Items]    
Software services provided to 19
Intel (China) Research Center Co., Ltd [Member]    
Related Party Transaction [Line Items]    
Software services provided to $ 34
XML 75 R64.htm IDEA: XBRL DOCUMENT v3.8.0.1
Related Party Transactions (Details 2) - USD ($)
$ in Thousands
Dec. 31, 2017
Dec. 31, 2016
Accounts receivable from related parties:    
Accounts receivable from related parties  
Intel Corporation [Member]    
Accounts receivable from related parties:    
Accounts receivable from related parties [1] $ 481
Intel (China) Co., Ltd. [Member]    
Accounts receivable from related parties:    
Accounts receivable from related parties [1] 9
Intel Asia-Pacific Research and Development Ltd [Member]    
Accounts receivable from related parties:    
Accounts receivable from related parties [1]
[1] Upon the consummation of the Merger, both entities ceased to be the shareholders of the Group.
XML 76 R65.htm IDEA: XBRL DOCUMENT v3.8.0.1
(Loss) Earnings Per Share (Details) - USD ($)
$ / shares in Units, $ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Numerator:    
Net income $ 1,387 $ 18
Less: net (loss) income attributable to noncontrolling interests 188 (78)
Net income attributable to Borqs Technologies, Inc. 1,199 96
Accretion to redemption value of Convertible Redeemable Preferred Shares (298)
Net (loss) income attributable to Borqs Technologies, Inc.'s ordinary shareholders $ 1,199 $ (202)
Denominator:    
Weighted-average number of ordinary shares outstanding-basic 26,384,152 4,224,725
Weighted-average number of ordinary shares outstanding-diluted 27,471,885 4,224,725
(Loss) earnings per share-Basic: $ 0.04 $ (0.05)
(Loss) earnings per share-Diluted: $ 0.05 $ (0.05)
XML 77 R66.htm IDEA: XBRL DOCUMENT v3.8.0.1
Fair Value Measurements (Details)
$ in Thousands
12 Months Ended
Dec. 31, 2016
USD ($)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]  
Liabilities $ 1,344
Warrant liabilities 1,344
Level 1 [Member]  
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]  
Liabilities
Warrant liabilities
Level 2 [Member]  
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]  
Liabilities
Warrant liabilities
Level 3 [Member]  
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]  
Liabilities 1,344
Warrant liabilities $ 1,344
XML 78 R67.htm IDEA: XBRL DOCUMENT v3.8.0.1
Commitments and Contingencies (Details)
$ in Thousands
Mar. 31, 2018
USD ($)
Commitments and Contingencies [Abstract]  
2018 $ 1,369
2019 2,070
2020 1,184
2021 526
2022 and thereafter 424
Total $ 5,573
XML 79 R68.htm IDEA: XBRL DOCUMENT v3.8.0.1
Commitments and Contingencies (Details Textual) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Commitments and Contingencies (Textual)    
Total rental expenses for all operating leases $ 354 $ 354
Unrecognized tax benefits and interest $ 3,091  
XML 80 R69.htm IDEA: XBRL DOCUMENT v3.8.0.1
Segment Reporting (Details) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Schedule of group's operating segment    
Total net revenues $ 58,256 $ 31,210
Operating income 3,189 1,071
PRC [Member]    
Schedule of group's operating segment    
Total net revenues 11,179 12,759
United States [Member]    
Schedule of group's operating segment    
Total net revenues 4,196 1,553
India [Member]    
Schedule of group's operating segment    
Total net revenues 42,074 2,088
Rest of the world [Member]    
Schedule of group's operating segment    
Total net revenues 807 14,810
Consolidated [Member]    
Schedule of group's operating segment    
Total net revenues 58,256 31,210
Operating income 2,982  
Consolidated [Member] | External customers [Member]    
Schedule of group's operating segment    
Total net revenues 58,256 31,210
Consolidated [Member] | Inter-segment [Member]    
Schedule of group's operating segment    
Total net revenues
Eliminations [Member]    
Schedule of group's operating segment    
Total net revenues (304) (449)
Operating income
Eliminations [Member] | External customers [Member]    
Schedule of group's operating segment    
Total net revenues
Eliminations [Member] | Inter-segment [Member]    
Schedule of group's operating segment    
Total net revenues (304) (449)
Total segments [Member]    
Schedule of group's operating segment    
Total net revenues 58,560 31,659
Operating income 3,189 1,071
Total segments [Member] | External customers [Member]    
Schedule of group's operating segment    
Total net revenues 58,256 31,210
Total segments [Member] | Inter-segment [Member]    
Schedule of group's operating segment    
Total net revenues 304 449
Yuantel [Member]    
Schedule of group's operating segment    
Total net revenues 7,882 6,447
Operating income 684 (1,122)
Yuantel [Member] | External customers [Member]    
Schedule of group's operating segment    
Total net revenues 7,882 6,447
Yuantel [Member] | Inter-segment [Member]    
Schedule of group's operating segment    
Total net revenues
Connected Solution [Member]    
Schedule of group's operating segment    
Total net revenues 50,678 25,212
Operating income 2,505 2,193
Connected Solution [Member] | External customers [Member]    
Schedule of group's operating segment    
Total net revenues 50,374 24,763
Connected Solution [Member] | Inter-segment [Member]    
Schedule of group's operating segment    
Total net revenues $ 304 $ 449
XML 81 R70.htm IDEA: XBRL DOCUMENT v3.8.0.1
Segment Reporting (Details Textual)
3 Months Ended
Mar. 31, 2018
Segments
Segment Reporting (Textual)  
Number of segments reports 2
XML 82 R71.htm IDEA: XBRL DOCUMENT v3.8.0.1
Subsequent Events (Details) - USD ($)
$ in Millions
1 Months Ended
Jan. 08, 2018
Mar. 31, 2018
Subsequent Events (Textual)    
Agreement to acquire equity interest   79.00%
Shanghai KADI Machinery Technology Co., Ltd. [Member]    
Subsequent Events (Textual)    
Ordinary shares to selling shareholders value $ 3.3  
Agreement to acquire equity interest 60.00%  
Aggregate of cash to paid $ 15.0  
Cash $ 11.7  
Cash advances payment, description In accordance with the letter of intent, the Company have made three of four scheduled cash advances to KADI amounted to $450,000, which is recorded as other non-current assets. The remaining fourth payment of $150,000 will be paid in May 2018.  
Advance payments converted into equity interest percentage 5.00%  
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