NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
Borqs
Technologies, Inc. (formerly known as “Pacific Special Acquisition Corp.”, the “Company” or “Borqs
Technologies”) was incorporated in the British Virgin Islands on July 1, 2015. The Company was formed for the purpose of
acquiring, engaging in a share exchange, share reconstruction and amalgamation, purchasing all or substantially all of the assets
of, entering into contractual arrangements, or engaging in any other similar business combination with one or more businesses
or entities.
On
August 18, 2017, the Company acquired 100% equity interest of BORQS International Holding Corp. (“Borqs International”)
and its subsidiaries, variable interest entities (the “VIE”) and the VIE’s subsidiaries (collectively referred
to as “Borqs Group” hereinafter) (the Company and Borqs Group collectively referred to as the “Group”)
in an all-stock transaction (the “Merger”) as described in Note 4. Concurrent with the completion of the acquisition
of Borqs International, the Company changed its name from Pacific Special Acquisition Corp.”, to Borqs Technologies, Inc.
Borqs
Group are principally engaged in the provision of commercial grade Android+ platform solutions, hardware product sales and MVNO
services in the People’s Republic of China (the “PRC”).
(a)
As of the date of report, the details of the Company’s major subsidiaries, consolidated VIEs and the subsidiaries of the
VIEs are as follows:
|
Entity
|
|
Date
of incorporation/
Acquisition
|
|
Place
of
incorporation
|
|
Percentage
of direct or indirect ownership by the Company Direct
|
|
Principal
activities
|
|
|
|
|
|
|
|
|
|
Subsidiaries:
|
|
|
|
|
|
|
|
Borqs
International
|
|
July
27, 2007
|
|
Cayman
|
|
100%
|
|
Holding
company
|
|
BORQS
Hong Kong Limited
(“Borqs HK”)
|
|
July
19, 2007
|
|
Hong
Kong
|
|
100%
|
|
Provision
of software and service solutions and hardware products sales
|
|
BORQS
Beijing Ltd.
(“Borqs Beijing”)
(1)
|
|
September
4, 2007
|
|
PRC
|
|
100%
|
|
Provision
of software and service solutions and hardware products sales
|
|
BORQS
Software Solutions Private Limited (“Borqs India”)
|
|
July
17, 2009
|
|
India
|
|
100%
|
|
Provision
of software and service solutions
|
|
|
|
|
|
|
|
|
|
|
|
VIE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing
Big Cloud Network Technology Co., Ltd. (“Big Cloud Network”)
(1)/(2)
|
|
April
18, 2014
|
|
PRC
|
|
Nil
|
|
Holding
company
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiaries
of the VIE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yuantel
(Beijing) Investment Management Co., Ltd. (“Yuantel Investment”)
(2)/(3)
|
|
July
11, 2014
|
|
PRC
|
|
79%
|
|
Holding
company
|
|
Yuantel
(Beijing) Telecommunications Technology Co., Ltd.
(“Yuantel
Telecom”)
(2)/(3)
|
|
July
11, 2014
|
|
PRC
|
|
75.05%
|
|
Provision
of MVNO and other services
|
|
(1)
|
Collectively,
the “PRC Subsidiaries”.
|
|
(2)
|
Collectively,
the “Consolidated VIEs”.
|
|
(3)
|
On
July 11, 2014, Borqs International through Big Cloud Network acquired controlling interest
in Yuantel Investment and its subsidiary.
|
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
1.
|
ORGANIZATION (CONTINUED)
|
(b)
PRC laws and regulations prohibit foreign ownership in certain telecommunication related businesses. To comply with these foreign
ownership restrictions, the Group conducts its businesses in the PRC through the VIE using contractual agreements (the “VIE
Agreements”).
The
Group funds Big Cloud Network through loans to the two Big Cloud Network’s shareholders, (collectively the “Nominee
Shareholders”). The effective control of Big Cloud Network is held by the Group, through a series of contractual agreements
between Borqs Beijing and Big Cloud Network whereby Big Cloud Network became a consolidated VIE of the Group. Through the contractual
agreements, the Group receives substantially all of the economic benefits of Big Cloud Network.
Big
Cloud Network provides MVNO services in China through its 79% owned entity of Yuantel Investment which owns 95% of Yuantel Telecom;
therefore Big Cloud Network effectively owns 75.05% of Yuantel Telecom which is the entity that operates the business and holds
the MVNO license from the Chinese Ministry of Industry and Information Technology.
The
following is a summary of the key terms of the latest VIE Agreements:
Loan
agreements
Borqs
Beijing and the Nominee Shareholders entered into loan agreements for Borqs Beijing to provide interest free loans of RMB50,000
to the Nominee Shareholders, respectively, for the purpose of providing capital to Big Cloud Network to develop its MVNO business.
There is no fixed term for the loans.
Power
of attorney agreement
The
Nominee Shareholders of Big Cloud Network entered into the power of attorney agreement whereby they authorized Borqs Beijing or
its designated party to act on behalf of the Nominee Shareholders as exclusive agent and attorney with all respect to all matters
concerning the shareholding including but not limited to (1) attend shareholders’ meetings of Big Cloud Network; (2) exercise
all the shareholders’ rights, including voting rights; and (3) designate and appoint on behalf of each shareholder the senior
management members of Big Cloud Network. The power of attorney remains irrevocable and continuously valid from the date of execution
so long as each Nominee Shareholder remains as a shareholder of Big Cloud Network. The power of attorney agreement was subsequently
reassigned to Borqs International.
Exclusive
option agreement
Pursuant
to the exclusive option agreement entered into between the Nominee Shareholders and Borqs Beijing or its designated party, the
Nominee Shareholders granted Borqs Beijing or its designated party, an irrevocable and exclusive right to purchase all or part
of the equity interests held by the Nominee Shareholders in Big Cloud Network, to the extent permitted under the PRC laws, at
an amount equal to RMB10 or the minimum consideration permitted under the applicable PRC law. The purchase consideration in excess
of RMB10 shall be refunded by the Nominee Shareholders to Borqs Beijing or Borqs Beijing may deduct the excess amount upon payment
of consideration. The Nominee Shareholders shall not declare dividend or any form of distribution or grant loans in any form without
the prior consent of Borqs Beijing or its designated party. The term of the agreement is 10 years, expiring on June 22, 2024 which
will be automatically renewed every three-year thereafter if Borqs Beijing or its designated party does not provide notice of
termination to the Nominee Shareholders fifteen days prior to expiration.
Exclusive
technical & support agreement
Pursuant
to the agreement entered into between Borqs Beijing and Big Cloud Network, Big Cloud Network engaged Borqs Beijing or its designated
party as its exclusive provider of technical, consulting and other services in relation to its major business during the contractual
period in return for service fees which will be determined at the sole discretion of Borqs Beijing or its designated party. The
term of the agreement is 10 years, expiring on June 22, 2024, which will be automatically renewed every three-year thereafter
if Borqs Beijing or its designated party does not provide notice of termination to the Nominee Shareholders fifteen days prior
to expiration.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
1.
|
ORGANIZATION (CONTINUED)
|
Business
cooperation agreement
Pursuant
to the business cooperation agreement entered into between Borqs Beijing and Big Cloud Network, Borqs Beijing or its designated
party agreed to provide unlimited financial support for the VIE’s daily operating activities through entrusted loans and
agree to forgo the right to seek repayment.
Share
pledge agreement
Pursuant
to the agreement, the Nominee Shareholders pledged all of their equity interests in Big Cloud Network to Borqs Beijing as collateral
to guarantee the repayment of the loans and to secure their obligations under the above agreements. The Nominee Shareholders agreed
not to transfer or otherwise create any encumbrance on their equity interests in Big Cloud Network without prior consent of Borqs
Beijing. The share pledge agreements will remain effective until all the obligations under above agreements have been satisfied
in full or all of the guarantee liabilities have been repaid.
Despite
the lack of technical majority ownership, there exists a parent-subsidiary relationship between Borqs Beijing’s designee,
Borqs International, and Big Cloud Network through the irrevocable power of attorney agreement, whereby the Nominee Shareholders
effectively assigned all of the voting rights underlying their equity interest in Big Cloud Network to Borqs International.
Furthermore, pursuant to the exclusive option agreement and share pledge agreement, Borqs International, via Borqs Beijing, obtained
effective control over Big Cloud Network through the ability to exercise all the rights of Nominee Shareholders and therefore
the power to govern the activities that most significantly impact the economic performance of Big Cloud Network. In addition,
through the VIE agreements, Borqs International demonstrates its ability and intention to continue the ability to absorb substantially
all the expected losses and the majority of the profit of the VIE, and therefore have the rights to the economic benefits of the
VIE. Thus, Borqs International consolidates Big Cloud Network and its subsidiaries under ASC 810-10
Consolidation Overall.
In
the opinion of the Group’s management and PRC counsel, (i) the ownership structure of the Consolidated VIEs is in compliance
with all existing PRC laws and regulations in any material respect, (ii) each of the VIE agreements is valid, legally binding
and enforceable to each party of such agreements and will not result in any violation of PRC laws or regulations currently in
effect; and (iii) each of the Group’s PRC subsidiaries, VIE and VIE’s subsidiaries have the necessary corporate power
and authority to conduct its business as described in its business scope under its business license, which is in full force and
effect, and the Group’s business operation in PRC are in compliance with existing PRC laws and regulations.
However,
uncertainties in the PRC legal system could cause the relevant regulatory authorities to find the current VIE agreements and businesses
to be in violation of any existing or future PRC laws or regulations. If Borqs International, the primary beneficiary or any of
its current or future VIEs are found in violation of any existing or future laws or regulations, or fail to obtain or maintain
any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with
such violations, including levying fines, confiscating the income of the primary beneficiary, and the VIE, revoking the business
licenses or operating licenses of the primary beneficiary, and VIE, shutting down the Group’s servers, discontinuing or
placing restrictions or onerous conditions on the Group’s operations, requiring the Group to undergo a costly and disruptive
restructuring or enforcing actions that could be harmful to the Group’s business. Any of these actions could cause significant
disruption to the Group’s business operations and severely damage the Group’s reputation, which would in turn materially
and adversely affect the Group’s business and results of operations. In addition, if the imposition of any of these penalties
causes the primary beneficiary to lose the rights to direct the activities of VIE or the right to receive its economic benefits,
Borqs International would no longer be able to consolidate the VIE.
In
addition, if the VIE or the Nominee Shareholders fail to perform their obligations under the VIE Agreements, the Group may have
to incur substantial costs and expend resources to enforce the primary beneficiary’ rights under the contracts. The Group
may have to rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief and claiming damages,
which may not be effective. All of these VIE Agreements are governed by PRC laws and provide for the resolution of disputes through
arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be
resolved in accordance with PRC legal procedures. The legal system in PRC is not as developed as in other jurisdictions, such
as the United States. As a result, uncertainties in the PRC legal system could limit the Group’s ability to enforce these
contractual arrangements. Under PRC laws, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts,
and prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings,
which would incur additional expenses and delay. In the event the Group is unable to enforce these VIE Agreements, the primary
beneficiary may not be able to exert effective control over its VIE, and the Group’s ability to conduct its business may
be negatively affected.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
1.
|
ORGANIZATION (CONTINUED)
|
The
consolidated VIEs contributed 27%, 29% and 21% of the Group’s consolidated revenues for the years ended December 31, 2015, 2016
and 2017. As of December 31, 2016 and 2017, the Consolidated VIEs accounted for an aggregate of 23% and 17%, respectively, of
the consolidated total assets, and 41% and 37%, respectively, of the consolidated total liabilities.
The
Consolidated VIEs mainly operate the MVNO services. The VIE also holds the MVNO license, which is a revenue-producing asset recorded
on the Group’s consolidated balance sheets. The Group expects increases in revenue generated from the Consolidated VIEs
compared to the whole Group for the foreseeable future as the Group focuses on strengthening telecommunication platforms to strategically
grow the Group’s MVNO business.
The
Group believes that there are no assets held in the Consolidated VIEs that can be used only to settle obligations of the Consolidated
VIEs, except for registered capital and the PRC statutory reserves. Relevant PRC laws and regulations restrict the Consolidated
VIEs from transferring a portion of their net assets, equivalent to the balance of its statutory reserve and its share capital,
to the Group in the form of loans and advances or cash dividends. Please refer to Note 18 for disclosure of restricted net assets.
As the Consolidated VIEs are incorporated as limited liability companies under the PRC Company Law, creditors of the Consolidated
VIEs do not have recourse to the general credit of the Group for any of the liabilities of the Consolidated VIEs. There were no
pledges or collateralization of the Consolidated VIEs’ assets.
The
following tables represent the financial information of the Consolidated VIEs as of December 31, 2016 and 2017 and for the years
ended December 31, 2015, 2016 and 2017 before eliminating the intercompany balances and transactions between the Consolidated
VIEs and other entities within the Group:
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
1.
|
ORGANIZATION (CONTINUED)
|
|
(c)
|
VIE
disclosures (Continued)
|
|
|
|
As
of December 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
414
|
|
|
|
51
|
|
|
Restricted cash
|
|
|
1,153
|
|
|
|
3,459
|
|
|
Accounts receivable
|
|
|
129
|
|
|
|
2,565
|
|
|
Receivable from MVNO franchisees
|
|
|
4,319
|
|
|
|
3,514
|
|
|
Inventories
|
|
|
67
|
|
|
|
221
|
|
|
Prepaid expenses and other current assets
|
|
|
926
|
|
|
|
423
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
7,008
|
|
|
|
10,233
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
987
|
|
|
|
897
|
|
|
Intangible assets, net
|
|
|
8,609
|
|
|
|
8,393
|
|
|
Goodwill
|
|
|
693
|
|
|
|
736
|
|
|
Deferred tax assets
|
|
|
1,054
|
|
|
|
940
|
|
|
Other non-current assets
|
|
|
58
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
11,401
|
|
|
|
11,047
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
18,409
|
|
|
|
21,280
|
|
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
1.
|
ORGANIZATION (CONTINUED)
|
|
(c)
|
VIE
disclosures (Continued)
|
|
|
|
As
of December 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
US$
|
|
|
US$
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
4,598
|
|
|
|
4,143
|
|
|
Accrued expenses and other payables
|
|
|
2,778
|
|
|
|
4,038
|
|
|
Deferred revenue
|
|
|
9,134
|
|
|
|
5,904
|
|
|
Short-term bank borrowings
|
|
|
721
|
|
|
|
-
|
|
|
Intercompany payables
|
|
|
7,923
|
|
|
|
14,279
|
|
|
Total current liabilities
|
|
|
25,154
|
|
|
|
28,364
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
1,539
|
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
1,539
|
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
26,693
|
|
|
|
29,864
|
|
|
|
|
For
the Years Ended December 31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
Net revenues
|
|
|
19,957
|
|
|
|
35,138
|
|
|
|
32,074
|
|
|
Net (loss) income
|
|
|
(5,029
|
)
|
|
|
(3,381
|
)
|
|
|
347
|
|
|
|
|
For
the Years Ended December 31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
Net cash provided by (used in) operating
activities
|
|
|
2,413
|
|
|
|
(2,128
|
)
|
|
|
683
|
|
|
Net cash used in investing activities
|
|
|
(1,622
|
)
|
|
|
(634
|
)
|
|
|
(281
|
)
|
|
Net cash (used in) provided
by financing activities
|
|
|
(770
|
)
|
|
|
721
|
|
|
|
(765
|
)
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
21
|
|
|
|
(2,041
|
)
|
|
|
(363
|
)
|
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
|
(a)
|
Basis
of presentation
|
The
accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles
(“U.S. GAAP”).
As
of December 31, 2017, the company has accumulated deficit of US$74,231 and has suffered net loss of US$12,359 and negative cash
flow from operating of US$14,939 for the year then ended. These condition raises substantial doubt about the Group’s ability
to continue as a going concern.
When preparing the consolidated financial statements
as of December 31, 2017 and for the year then ended, the Group’s management concluded that a going concern basis of preparation
was appropriate after analyzing the forecasted cash flows for the next twelve months, which indicates that the Group will have
sufficient liquidity through March 2019. In preparing the forecasted cash flow analysis, management took into account of the expected
net cash inflows to be funded by the public offering and short term debt of approximately US$32,000. As a result, management prepared
the consolidated financial statements assuming the Group will continue as a going concern. However, there is no assurance that
the public offering can be completed in a timely manner or at all, and there is no assurance that any short term debt is available
at acceptable terms. The consolidated financial statements do not include any adjustments that might result from the outcome of
this uncertainty.
|
(c)
|
Principles
of consolidation
|
The
consolidated financial statements include the financial statements of the Group, its subsidiaries and Consolidated VIEs, for which,
the Group is the primary beneficiary. All significant inter-company transactions and balances between the Group, its subsidiaries
and the Consolidated VIEs are eliminated upon consolidation. Results of acquired subsidiaries and its Consolidated VIEs are consolidated
from the date on which control is transferred to the Group.
The
preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and expenses during the year. Areas where management
uses subjective judgment include, but are not limited to, estimating the useful lives of long-lived assets and intangible assets,
assessing the initial valuation of the assets acquired and liabilities assumed in a business combination and the subsequent impairment
assessment of long-lived assets, intangible assets and goodwill, determining the provisions for accounts receivable and inventories,
accounting for deferred income taxes and uncertain tax benefits, valuation for share-based compensation arrangements, warrants
for Series D convertible redeemable preferred shares, beneficiary conversion feature for Series E Preferred Shares. Changes in
facts and circumstances may result in revised estimates. Actual results could differ from those estimates, and as such, differences
may be material to the consolidated financial statements.
The
functional currency of the Group and its non-PRC subsidiaries, excluding Borqs India, is the United States dollar. The functional
currency of Borqs India is Rupee, whereas the functional currency of the Group’s PRC subsidiaries and its Consolidated VIEs
is the Chinese Renminbi (“RMB”) as determined based on the criteria of ASC 830,
Foreign Currency Matters
. The
Group uses the US$ as its reporting currency. Transactions denominated in foreign currencies are re-measured into the functional
currency at the exchange rates prevailing on the transaction dates. Foreign currency denominated financial assets and liabilities
are re-measured at the balance sheet date exchange rate. Exchange gains and losses are included in foreign exchange gains and
losses in the consolidated statements of operations.
Assets
and liabilities of the Group’s PRC subsidiaries are translated into US$ at fiscal year-end exchange rates. Equity amounts
are translated at historical exchange rates. Income and expense items are translated at average exchange rates prevailing during
the fiscal year. Translation adjustments arising from translation of foreign currency financial statements are reported as cumulative
translation adjustments and are shown as a separate component of other comprehensive (loss) income in the consolidated statements
of comprehensive income (loss).
|
(f)
|
Cash
and cash equivalents
|
Cash
and cash equivalents consist of cash on hand and bank deposits which are unrestricted as to withdrawal and use. All highly liquid
investments with a stated maturity of 90 days or less from the date of purchase are classified as cash equivalents.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Restricted
cash mainly represents short-term deposits with China United Network Communications Group Co., Ltd. (“China Unicom”)
as guarantee for minimum purchase requirements, and therefore are not available for the Group’s use until the end of contract
period with China Unicom.
Accounts
receivable are carried at net realizable value. An allowance of doubtful accounts is recorded in the period when the collection
of full amount is no longer probable. The Group reviews the accounts receivable on a periodic basis and makes general and specific
allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual
receivable balances, the Group considers many factors, including the age of the balance, the customer’s payment history,
its current credit-worthiness and current economic trends. As of December 31, 2016 and 2017, the Group evaluated and wrote off
the doubtful accounts as they were determined to be uncollectible. Thus, there was no allowance for doubtful accounts outstanding.
Inventories
are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Adjustments to reduce the
cost of inventories to its net market value are made, if required, for decreases in sales prices, obsolescence or similar reductions
in the estimated net realizable value. Inventories provision of US$1,038 and US$918 was recorded as of December 31, 2016 and 2017,
respectively.
|
(j)
|
Property
and equipment
|
Property
and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets,
as follows:
|
Category
|
|
Estimated
useful life
|
|
|
|
|
|
Computer and network equipment
|
|
3-5 years
|
|
Office equipment
|
|
5 years
|
|
Motor vehicles
|
|
5 years
|
|
Leasehold improvements
|
|
Over the shorter of lease term or the estimated
useful lives of the assets
|
Repair
and maintenance costs are charged to expense as incurred, whereas the costs of betterments that extend the useful life of property
and equipment are capitalized as additions to the related assets. Retirements, sale and disposals of assets are recorded by removing
the cost and accumulated depreciation with any resulting gain or loss reflected in the consolidated statements of operations.
Property
and equipment that are purchased or constructed which require a period of time before the assets are ready for their intended
use are accounted for as construction-in-progress. Construction-in-progress is recorded at acquisition cost, including installation
costs. Construction-in-progress is transferred to specific property and equipment accounts and commences depreciation when these
assets are ready for their intended use.
Intangible
assets are carried at cost less accumulated amortization and any recorded impairment. Intangible assets acquired in a business
combination are recognized initially at fair value at the date of acquisition. Intangible assets with finite useful lives are
amortized using the straight-line method. These amortization methods reflect the estimated pattern in which the economic benefits
of the respective intangible assets are to be consumed.
Development
costs of software to be sold, leased, or otherwise marketed are subject to capitalization beginning when technological feasibility
is reached, in accordance with ASC 985-20,
Costs of Software to be Sold, Leased, or Marketed
.
Intangible
assets have weighted average useful lives from the date of purchase as follows:
|
Purchased software
|
|
5.8 years
|
|
MVNO license
|
|
10 years
|
|
Capitalized software development costs
|
|
3 years
|
|
Internal-use software
|
|
5 years
|
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Goodwill
represents the excess of the purchase price over the amounts assigned to the fair value of the assets acquired and the liabilities
assumed of an acquired business. The Group’s goodwill as of December 31, 2016 and 2017 was related to its acquisition of
Yuantel Investment. In accordance with ASC 350,
Goodwill and Other Intangible Assets (
“ASC 350”
)
, recorded
goodwill amounts are not amortized, but rather are tested for impairment annually or more frequently if there are indicators of
impairment present.
The
performance of the impairment test in accordance to ASC 350 involves a two-step process. The first step of the impairment test
involves comparing the fair value of the reporting unit with its carrying amount, including goodwill. Fair value is primarily
determined by computing the future discounted cash flows expected to be generated by the reporting unit. If the reporting unit’s
carrying value exceeds its fair value, goodwill may be impaired. If this occurs, the Group performs the second step of the goodwill
impairment test to determine the amount of impairment loss.
The
fair value of the reporting unit is allocated to its assets and liabilities in a manner similar to a purchase price allocation
in order to determine the implied fair value of the reporting unit’s goodwill. If the implied goodwill fair value is less
than its carrying value, the difference is recognized an impairment loss.
In
accordance with ASC 350, the Group assigned and assessed goodwill for impairment at the reporting unit level. A reporting unit
is an operating segment or one level below the operating segment. The Group has determined that it has two operating segments
as its reporting units, namely Yuantel and Connected Solution. Goodwill is recorded at the Yuantel reporting unit.
|
(m)
|
Impairment
of long-lived assets
|
The
Group evaluates its long-lived assets or asset group, including intangible assets with indefinite and finite lives, for impairment.
Intangible assets with indefinite lives that are not subject to amortization are tested for impairment at least annually or more
frequently if events or changes in circumstances indicate that the assets might be impaired in accordance with ASC 350. Such impairment
test compares the fair values of assets with their carrying values with an impairment loss recognized when the carrying values
exceed fair values.
For
long-lived assets and intangible assets with finite lives that are subject to depreciation and amortization are tested for impairment
whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future
use of the assets) indicate that the carrying amount of an asset or a Group of long-lived assets may not be recoverable. When
these events occur, the Group evaluates impairment by comparing the carrying amount of the assets to future undiscounted net cash
flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash
flows is less than the carrying amount of the assets, the Group would recognize an impairment loss based on the excess of the
carrying amount of the asset group over its fair value.
|
(n)
|
Fair
value of financial instruments
|
The
Group’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable and payable, accounts
receivable from related parties, receivable from MVNO franchisees, short-term and long-term bank borrowings, warrants for Series
D convertible redeemable preferred shares and Convertible Redeemable Preferred Shares. Other than the long-term bank borrowings,
warrants for Series D convertible redeemable preferred shares, the carrying values of these financial instruments approximate
their fair values due to their short-term maturities.
The
Group applies ASC 820,
Fair Value Measurements and Disclosures
, (“ASC 820”). ASC 820 defines fair value, establishes
a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820 requires disclosures to be
provided on fair value measurement.
ASC
820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level
1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level
2 — Other inputs that are directly or indirectly observable in the marketplace.
Level
3 — Unobservable inputs which are supported by little or no market activity.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
|
(n)
|
Fair value of financial instruments (continued)
|
ASC
820 describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach;
and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving
identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single
present value amount. The measurement is based on the value indicated by current market expectations about those future amounts.
The cost approach is based on the amount that would currently be required to replace an asset.
During
the years ended December 31, 2016 and 2017, there was no financial instrument measured at fair value. The warrants for Series
D convertible redeemable preferred shares were classified as level 3 and fair valued using the binomial option pricing model
as of December 31, 2016. The carrying amounts of long-term bank borrowings approximated their fair values since they bear
interest rates which approximate market interest rates. The Convertible Redeemable Preferred Shares are initially recognized
at its fair value on the closing date, at the issuance price, net of issuance cost.
The
Group is mainly engaged in the business of providing 1) Android+ platform solutions and services, 2) hardware product sales, and
3) MVNO services. The Group recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales
price is fixed and determinable, and collectability is reasonably assured.
|
1.
|
Android+
platform solutions and services
|
Android+
platform solutions
The
Group provides customized Android+ software platform solutions that are developed to maximize the commercial grade quality or
performance of open source Android+ software for integration with particular chipsets. The Group also provides customized Android+
service platform solutions that are end to end software developed for mobile operators to allow data synchronization between their
platform and mobile devices. The Group charges its customers, mainly including mobile device manufacturers and mobile operators,
fixed fees for project-based software contracts, as well as per chip or per mobile device royalty fees.
The
project-based software contracts are generally considered multiple element arrangements as they consist of perpetual software
licenses, software development services such as customization, modification, implementation and integration, and post-contract
customer support (“PCS”) where customers have the right to receive bug fixes, telephone support and unspecified upgrades
on a when-and-if available basis. Pursuant to ASC 985-605,
Revenue Recognition: Software
(“ASC 985-605”), given
the project-based software contracts require significant customization that are generally completed within one year from the contract
dates, the Group accounts for the entire software contracts in conformity with the relevant guidance in ASC 605-35,
Revenue
Recognition: Contract Accounting
, applying the completed contract method.
As
the Group was unable to establish vendor specific objective evidence of the fair value of PCS and PCS is the only undelivered
element upon completion of software projects, the entire software project fixed fees are recognized ratably over the PCS service
period. PCS service periods are generally 12 months, with ranges from six months to three years, and commences upon completion
of customer acceptance of the completed software projects. Costs incurred to complete the software projects are deferred to match
revenue recognition.
Where
the Group is entitled to receive on going usage based royalties determined based on the chip or mobile device sales, the usage-based
royalties are recognized according to the customers’ usage reports, generally on a quarterly basis.
Service
contracts
The
Group provides research and development services to certain customers for their mobile-computing related development projects
where fees are charged on a time and material basis and the Group is not responsible for the outcome of such development projects.
The revenue is recognized proportionately as the services are delivered and is included as software revenues on the consolidated
statement of operations.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
|
(o)
|
Revenue recognition (Continued)
|
|
2.
|
Hardware
product sales
|
The
Group provides total solutions on original design manufacturer (“ODM”) basis to customers of mobile devices. Revenue
is recognized when sale of each final hardware product to the customers are delivered. Warranty is provided to all customers,
which is not considered an additional service; rather, an integral part of the product sales. ASC 450,
Contingencies,
specifically
addresses the accounting for standard warranties. The Group believes that accounting for its standard warranty pursuant to ASC
450 does not impact revenue recognition because the cost of honoring the warranty can be reliably estimated. The Group has determined
the likelihood of claims arising from warranties to be remote based on strong quality control procedures in the production process
and historical experience with regard to claims being made by customers. The basis for the warranty accrual will be reviewed periodically
based on actual experience. The Group does not sell extended warranty coverage.
On
July 11, 2014, the Group, through the VIE, acquired and obtained control of Yuantel Investment, which mainly operates the MVNO
business. The license to operate such MVNO business is issued by the Chinese Ministry of Industry and Information Technology and
the core mobile network is provided by the PRC government owned China Unicom. Yuantel Investment receives wholesale rates for
mobile voice and data services from China Unicom and repackages the voice and data services into competitive bundles for Chinese
consumers.
In
accordance with ASC 605-45,
Revenue Recognition; Principal agent consideration,
the Group is the principal in providing
the bundled voice and data services to Chinese consumers, thus revenue is recognized on a gross basis. As sales of bundled services
are mostly pre-paid by the consumers, cash received in advance of voice and data consumption are recognized as deferred revenue.
Revenue is recognized when the services are actually used. Pre-paid bundled services do not expire.
Sales
of the bundles are mostly made through agents and franchisees. Bundled services sold to agents are discounted and not refundable
to the Group. The Group accounts for such discounts as reductions of revenue in accordance with ASC 605-50 (“ASC 605-50”)
Customer Payments and Incentives
.
The
Group enters into profit sharing arrangements with franchisees under which bundled services may be returned to the Group if not
sold to the consumers. The franchisees receive certain percentages of profits made by the Group on the sales of the bundled services
as they are used by the consumers. The Group accounts for profit sharing with franchisees as selling expenses in the consolidated
statements of operations. Pursuant to the Group’s policy, the amount of discounts that may be provided by the franchisees
to consumers is capped at 5%, based on which, the Group recognized the maximum amount of discounts that may be provided by the
franchisees as reductions of revenue in accordance with ASC 605-50.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
Cost
of revenues consists primarily of telecommunication costs, depreciation of long-lived assets, amortization of acquired intangible
asset, payroll and other related costs of operations. Deferred cost of revenues was US$1,658 and US$3,149 for the years ended
December 31, 2016 and 2017.
|
(q)
|
Advertising
expenditures
|
Advertising
expenditures are expensed as incurred and are included in sales and marketing expenses, which amounted to US$46, US$78 and US$45
for the years ended December 31, 2015, 2016 and 2017, respectively.
|
(r)
|
Research
and development expenses
|
Research
and development expenses include payroll, employee benefits, and other headcount-related expenses associated with research and
platform development. Research and development expenses also include rent, depreciation and other related expenses. Research and
development expenses are expensed as incurred.
Government
grants are provided by the relevant PRC municipal government authorities to subsidize the cost of certain technology development
projects. The amount of such government grants are determined solely at the discretion of the relevant government authorities
and there is no assurance that the Group will continue to receive these government grants in the future. Government grants are
recognized when it is probable that the Group will comply with the conditions attached to them, and the grants are received. When
the grant relates to an expense item, it is recognized in the consolidated statement of operations over the period necessary to
match the grant on a systematic basis to the costs that it is intended to compensate, as a reduction of the related operating
expense. When the grant relates to an asset, it is recognized as deferred government grants and released to the consolidated statement
of operations in equal amounts over the expected useful life of the related asset, when operational, as a reduction of the related
depreciation expense.
Leases
are classified at the inception date as either a capital lease or an operating lease. The Group did not enter into any leases
whereby it is the lessor for any of the periods presented. As the lessee, a lease is a capital lease if any of the following conditions
exists: a) ownership is transferred to the lessee by the end of the lease term, b) there is a bargain purchase option, c) the
lease term is at least 75% of the property’s estimated remaining economic life, or d) the present value of the minimum lease
payments at the beginning of the lease term is 90% or more of the fair value of the leased property to the lessor at the inception
date. A capital lease is accounted for as if there was an acquisition of an asset and an incurrence of an obligation at the inception
of the lease. The Group did not enter into any capital leases for the years ended December 31, 2015, 2016 and 2017.
All
other leases are accounted for as operating leases wherein rental payments are expensed on a straight-line basis over the periods
of their respective lease terms. The Group leases office space under operating lease agreements. Certain lease agreements contain
rent holidays and escalating rent. Rent holidays and escalating rent are considered in determining the straight-line rent expense
to be recorded over the lease term. The lease term begins on the date of initial possession of the lease property for purposes
of recognizing lease expense on a straight-line basis over the term of the lease.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
The
Group accounts for income taxes using the liability method. Current income taxes are provided for in accordance with the laws
of the relevant tax authorities. Under this method, deferred tax assets and liabilities are determined based on the difference
between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the
period in which the differences are expected to reverse. The Group records a valuation allowance against deferred tax assets if,
based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will
not be realized. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the
enactment date.
The
Group applies ASC 740,
Accounting for Income Taxes,
(“ASC 740”)
,
to account for uncertainty in income
taxes. ASC 740 prescribes a recognition threshold a tax position is required to meet before being recognized in the financial
statements.
The
Group has elected to classify interest related to unrecognized tax benefits, if and when required, as part of “income tax
expense” in the consolidated statements of operations.
The
Group elected to early adopt ASU No. 2016-16,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.
Thus, all the deferred income tax assets and liabilities are classified as noncurrent in the consolidated balance sheet statement
of financial position.
|
(v)
|
Share-based
compensation
|
The
Group accounts for share-based compensation in accordance with ASC 718,
Compensation-Stock Compensation: Overall
, (“ASC
718”).
In
accordance with ASC 718, the Group determines whether an award should be classified and accounted for as a liability award or
equity award. All grants of share-based awards to employees classified as equity awards are measured based on their grant date
fair values and recognized as compensation expense over the requisite service period and/or performance period in the consolidated
statements of operations.
The
Group recognizes compensation expense using the accelerated method for share-based awards granted with service and performance
conditions. According to ASC 718, the amount of compensation cost recognized (or attributed) when achievement of a performance
condition is probable depends on the relative satisfaction of the performance condition based on performance to date. According
to ASC 718, probable means the future event or events are likely to occur and the Group interprets “probable” to be
generally in excess of a 70% likelihood of occurrence.
The
Group elected to account for forfeitures as they occur.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
|
(w)
|
Comprehensive
income (loss)
|
Comprehensive
income (loss) is defined as the (decrease) increase in equity of the Group during a period from transactions and other events
and circumstances excluding transactions resulting from investments by owners and distributions to owners. Accumulated other comprehensive
income (loss) of the Group includes foreign currency translation adjustments related to the Group and its PRC subsidiaries, whose
functional currency is RMB.
In
accordance with ASC 280 “
Segment Reporting
” (“ASC 280”), the Group has two operating segments,
namely Yuantel and Connected Solution as the Group’s chief executive officer, who has been identified as the Group’s
chief operating decision maker (“CODM”) reviews the operating results of the two difference service lines in order
to allocate resources and assess performance for the Group.
The
full-time employees of the Group’s PRC subsidiaries are entitled to staff welfare benefits including medical care, housing
fund, pension benefits and unemployment insurance, which are governmental mandated defined contribution plans. These entities
are required to accrue for these benefits based on certain percentages of the employees’ respective salaries, subject to
certain ceilings, in accordance with the relevant PRC regulations, and make cash contributions to the state-sponsored plans out
of the amounts accrued.
Certain
items reported in the prior year’s consolidated financial statements have been reclassified to conform to the current year’s
presentation.
|
(aa)
|
(Loss)
earnings per share
|
(Loss)
earnings per share is computed by dividing net (loss)/income attributable to ordinary shareholders by the weighted average number
of ordinary shares outstanding during the period using the two-class method. Under the two-class method, net income (loss) is
allocated between ordinary shares and other participating securities based on their participating rights. The Group’s Convertible
Redeemable Preferred Shares (Note 19) were participating securities. As the participating securities do not share the losses of
the Group, the computation of basic earnings per share using two-class method is not applicable when the Group is at a net loss
position. Diluted (loss) earnings per share is calculated by dividing net (loss) income attributable to ordinary shareholders
by the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the period. Ordinary equivalent
shares consist of shares issuable upon the exercise of share options using the treasury stock method and shares issuable upon
the conversion of the Group’s Convertible Redeemable Preferred Shares using the if-converted method. Ordinary equivalent
shares are not included in the denominator of the diluted loss per share calculation when inclusion of such shares would be anti-dilutive.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
|
(bb)
|
Recent
accounting pronouncements
|
In
August 2015, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2015-14 (“ASU 2015-14”),
Revenue from Contracts with Customers-Deferral of the effective date
. The amendments
in ASU 2015-14 defer the effective date of ASU No. 2014-09 (“ASU 2014-09”),
Revenue from Contracts with Customers
,
issued in May 2014. As a result, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including
interim periods within that reporting period for public entities; and, annual reporting periods beginning after December 15, 2018,
and interim periods within annual periods beginning after December 15, 2019 for all other entities. Early adoption is permitted
to the original effective date. In March 2016, the FASB issued ASU No. 2016-08 (“ASU 2016-08”),
Revenue from Contracts
with Customers—Principal versus Agent Considerations
, which clarifies the implementation guidance on principal versus
agent considerations. In April 2016, the FASB issued ASU No. 2016-10 (“ASU 2016-10”),
Revenue from Contracts with
Customers—Identifying Performance Obligations and Licensing
, which clarify guidance related to identifying performance
obligations and licensing implementation guidance contained in ASU 2014-09. In May 2016, the FASB issued ASU No. 2016-12 (“ASU
2016-12”),
Revenue from Contracts with Customers— Narrow-Scope Improvements and Practical Expedients
, which
addresses narrow-scope improvements to the guidance on collectability, non-cash consideration, and completed contracts at transition
and provides practical expedients for contract modifications at transition and an accounting policy election related to the presentation
of sales taxes and other similar taxes collected from customers. The effective date for the amendment in ASU 2016-08, ASU 2016-10
and ASU 2016-12 are the same as the effective date of ASU No 2014-09. The Group is in the process of developing a plan for evaluating
the impact of adoption of this guidance on its consolidated financial statement including the selection of the adoption method,
the identification of differences, if any, from the application of the standard and the impact of such differences, if any, on
its consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases,
(“ASU 2016-02”)
.
ASU 2016-02 specifies the accounting
for leases. For operating leases, ASU 2016-02 requires a lessee to recognize a right-of-use asset and a lease liability, initially
measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a
single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis.
ASU 2016-02 is effective for public companies for annual reporting periods and interim periods within those years beginning after
December 15, 2018, and, annual reporting periods beginning after December 15, 2019, and interim periods within annual periods
beginning after December 15, 2020 for all other entities. Early adoption is permitted. The Group is currently evaluating the impact
of adopting ASU 2016-02 on its consolidated financial statements.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
|
(cc)
|
Recent
accounting pronouncements(Continued)
|
In
June 2016, the FASB issued ASU No. 2016-13 (“ASU 2016-13”),
Financial Instruments — Credit Losses
(Topic
326), Measurement of Credit Losses on Financial Instruments. ASU 2016-13 changes the impairment model for most financial assets
and certain other instruments. The standard will replace “incurred loss” approach with an “expected loss”
model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record
allowances rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. The standard
is effective for public business entities for annual periods beginning after December 15, 2019, and interim periods therein, and
annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after December
15, 2021 for all other entities. Early adoption is permitted. The Group is evaluating the effect that this guidance will have
on its consolidated financial statements.
In
August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments
which addresses eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement
of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the
effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the
settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned
life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization
transactions; and separately identifiable cash flows and application of the predominance principle. The standard is effective
for public business entities for annual periods beginning after December 15, 2017, and interim periods therein, and annual reporting
periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019 for all
other entities, and early adoption is permitted. The Group is evaluating the effect that this guidance will have on its consolidated
financial statements.
In
November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
which requires that
the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally
described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted
cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period
total amounts shown on the statement of cash flows. The standard is effective for public business entities for annual periods
beginning after December 15, 2017, and interim periods therein, and annual reporting periods beginning after December 15, 2018,
and interim periods within annual periods beginning after December 15, 2019 for all other entities, and early adoption is permitted.
The Group is evaluating the effect that this guidance will have on its consolidated financial statements.
In
January 2017, FASB has issued ASU No. 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
.
The ASU affects all companies and other reporting organizations that must determine whether they have acquired or sold a business.
The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation.
The ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods for
public entities; and, annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning
after December 15, 2019 for all other entities. The Group is evaluating the effect that this guidance will have on its consolidated
financial statements.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
|
(cc)
|
Recent
accounting pronouncements(Continued)
|
In
January 2017, the FASB issued Accounting Standards Update No. 2017-04 (“ASU 2017-04”),
Intangibles — Goodwill
and Other (Topic 350): Simplifying the Test for Goodwill Impairment.
ASU 2017-04 eliminates the requirement to calculate the
implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based
on the excess of a reporting unit’s carrying amount over its fair value. This standard is effective for public business
entities for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020 and for all
other entities for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. Early
adoption is permitted. The Group is currently evaluating the impact of adopting this standard on its consolidated financial statements.
In
February 2017, the FASB issued ASU 2017-05 (“ASU 2017-05”),
Other Income-Gains and Losses from the Derecognition
of Nonfinancial Assets
. ASU 2017-05 defines an in-substance nonfinancial asset and clarifies guidance related to partial sales
of nonfinancial assets. The update is effective for public business entities for annual reporting periods beginning after December
15, 2017, including interim reporting periods within that reporting period; and, annual reporting periods beginning after December
15, 2018, and interim periods within annual periods beginning after December 15, 2019 for all other entities with early adoption
permitted. The Group is evaluating the effect that this guidance will have on its consolidated financial statements.
In
May 2017, the FASB issued ASU 2017-09 (“ASU 2017-09”),
Compensation—Stock Compensation (Topic 718): Scope
of Modification Accounting.
This standard provides clarity and reduces both (1) diversity in practice and (2) cost and complexity
when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based
payment award. The updated guidance is effective for interim and annual periods beginning after December 15, 2017 for all entities,
and early adoption is permitted. The Group is evaluating the effect that this guidance will have on its consolidated financial
statements.
|
3.
|
CONCENTRATION
OF RISKS
|
Financial
instruments that potentially subject the Group to significant concentrations of credit risk consist primarily of cash and cash
equivalents, restricted cash, accounts receivable, accounts receivable from related parties and receivable from MVNO franchisees.
As of December 31, 2016 and 2017, the aggregate amount of cash and cash equivalents and restricted cash of US$2,563 and US$4,545,
respectively, were held at major financial institutions located in the PRC, and US$2,200 and US$11,974, respectively, were deposited
with major financial institutions located outside the PRC. Management believes that these financial institutions are of high credit
quality and continually monitors the credit worthiness of these financial institutions. Historically, deposits in Chinese banks
are secure due to the state policy on protecting depositors’ interests. However, China promulgated a new Bankruptcy Law
in August 2006 that came into effect on June 1, 2007, which contains a separate article expressly stating that the State Council
may promulgate implementation measures for the bankruptcy of Chinese banks based on the Bankruptcy Law. Under the new Bankruptcy
Law, a Chinese bank may go into bankruptcy. In addition, since China’s concession to the World Trade Organization, foreign
banks have been gradually permitted to operate in China and have been significant competitors against Chinese banks in many aspects,
especially since the opening of the Renminbi business to foreign banks in late 2006. Therefore, the risk of bankruptcy of those
Chinese banks in which the Group has deposits has increased. In the event of bankruptcy of one of the banks which holds the Group’s
deposits, it is unlikely to claim its deposits back in full since it is unlikely to be classified as a secured creditor based
on PRC laws.
Accounts
receivable, accounts receivable from related parties and receivable from MVNO franchisees are both typically unsecured, and are
derived from revenues earned from customers. The risk is mitigated by credit evaluations the Group performs on its ongoing credit
evaluations of its customers’ financial conditions and ongoing monitoring process of outstanding balances. The Group maintains
reserves for estimated credit losses and these losses have generally been within expectations.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
|
3.
|
CONCENTRATION
OF RISKS (CONTINUED)
|
|
(b)
|
Business
supplier, customer, and economic risk
|
The
Group participates in a dynamic and competitive high technology industry and believes that changes in any of the following areas
could have a material adverse effect on the Group’s future financial position, results of operations or cash flows: changes
in the overall demand for services; competitive pressures due to new entrants; advances and new trends in new technology; control
of telecommunication infrastructures by local regulators and industry standards; strategic relationships or customer relationships;
regulatory considerations; and risks associated with the Group’s ability to attract and retain employees necessary to support
its growth.
(i)
Business supplier risk – the Group’s MVNO operations are dependent upon telecommunication resources provided by China
Unicom. There is no guarantee that the supply of telecommunication resources provided by China Unicom will be renewed annually.
Further, there is no guarantee around the continuance of the MVNO license granted by the PRC government Ministry of Industry and
Information Technology which may be amended or discontinued in light of changes to political, economic and social reforms.
(ii)
Customer risk – The success of the Group’s business going forward will rely in part on Group’s ability to continue
to obtain and expand business from existing customers while also attracting new customers. The Group has a diversified base of
customers covering its services and the revenue from the largest single customer A accounted for 9%, customer B accounted for
23% and customer C accounted for 41% of the Group’s total net revenues for the three years ended December 31, 2015, 2016
and 2017, respectively, and the accounts receivable from the largest single customer B accounted for 25% and customer C accounted
for 47% of the Group’s total accounts receivable and accounts receivable from related parties for the years ended December
31, 2016 and 2017, respectively.
(iii)
Economic risk – the Group’s operations could be adversely affected by significant political, economic and social uncertainties
in the PRC. Although the PRC government has been pursuing economic reform policies for more than 20 years, no assurance can be
given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially
in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC political,
economic and social conditions. There is also no guarantee that the PRC government’s pursuit of economic reforms will be
consistent or effective.
(c)
Foreign currency exchange rate risk
From
July 21, 2005, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies.
The appreciation / (depreciation) of the US$ against RMB was approximately 6.1%, 6.8% and (5.8%) in the years ended December 31,
2015, 2016 and 2017, respectively. The appreciation / (depreciation) of the US$ against Rupee was approximately 4.7%, 3.3% and
(5.9%) in the years ended December 31, 2015, 2016 and 2017, respectively.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
Reverse
Acquisition
The
Company was a NASDAQ listed special purpose acquisition company formed for the purpose of
effecting a merger, acquisition, or similar business combination. On August 18, 2017, the
Company completed the acquisition of Borqs International in an all-stock transaction (the “Merger”). The Company
issued 25,913,950 of its ordinary shares (“Merger Consideration Shares”) to Borqs
International’s shareholders in exchange for the transfer of 100% equity interest in Borqs International to the Company
and Borqs International became the Company’s wholly own subsidiary.
Of
the Merger Consideration Shares, a total of 25,913,950 ordinary shares were issued to Borqs International’s shareholders
at closing, with 942,467 of such shares deposited into escrow for indemnification obligations (“Indemnity shares”),
2,352,285 of such shares deposited in escrow subject to Borqs Technologies meeting certain earn-out requirements, (“Earnout
Shares” and together with the Indemnity Shares, the “Escrow Shares”) in the event certain net income earnout
conditions are met during the period from July 1, 2017 to June 30, 2018 (“Earnout Period”) and 1,178,084 ordinary
shares were issued to a financial advisor engaged by Borqs International in connection with the Merger. As transfers between the
shareholders of the Company, the Escrow Shares did not have any impact on the Company’s financial statements.
Additionally
at the effective time of the Merger, the holders of Borqs International issued and outstanding warrants (Note 10) received replacement
warrants to acquire an aggregate of 417,166 Borqs Technologies’ ordinary shares (“Replacement Warrants”), and
the holders of Borqs International issued and outstanding options (Note 15) had their options assumed by Borqs Technologies to
hold options to acquire Borqs Technologies’ ordinary shares upon the exercise of those options (“Assumed Options”).
Equity
classified instruments including (i) an option to purchase up to 400,000 units at $10.00 per unit (“Unit Purchase Option”),
(ii) 5,750,000 public warrants and (iii) 531,875 private warrants issued by the Company prior to the Merger remain outstanding.
Each unit consists of one ordinary share of the Company, one right (convertible into one tenth of an ordinary share) and one warrant
to purchase one half of one ordinary share at $12. Each public and private warrant also entitles the holder to purchase one half
of one ordinary share at $12.00 per whole share.
Borqs
International was determined as the accounting acquirer in the Merger in accordance with ASC 805,
Business Combinations
.
This determination was primarily based on the Group comprising the ongoing operations, with its senior management operating the
business going forward, and Borqs International’s shareholders having the majority voting power of the combined entity.
Consequently, in the transaction with a special purpose acquisition company whereby the operating company, Borqs International
was identified as the accounting acquirer, the Merger was treated as a capital transaction involving the issuance of the Company’s
ordinary shares. The historical consolidated financial statements for all periods prior to the consummation of the Merger only
reflect the historical consolidated financial statements of Borqs International. Subsequent to the Merger, the consolidated financial
statements reflect the results of the combined entity. The historically issued and outstanding Borqs International’s ordinary
shares have been recasted to retrospectively reflect the number of ordinary shares issued in the Merger in all periods presented.
As
the Merger occurred between public accounting acquiree and a private accounting acquirer, the determination of consideration is
based on the fair value of the legal acquirer’s stock. Difference between purchase consideration of US$45,734 transferred
and net assets of US$18,059 acquired, which was predominately cash, was recorded in additional paid-in capital.
Transaction
Expenses
Advisory,
financing, integration and other transaction costs directly related to the Merger totaled US$15.3 million for the year ended December
31, 2017, including US$8.8 million in share-based compensation expense recorded for the ordinary shares issued to the financial
advisors.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
Inventories
consisted of the following as of December 31, 2016 and 2017:
|
|
|
As of December 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
|
5,406
|
|
|
|
11,588
|
|
|
Goods in transit
|
|
|
7,164
|
|
|
|
4,643
|
|
|
Work in process
|
|
|
1,023
|
|
|
|
977
|
|
|
Finished goods
|
|
|
127
|
|
|
|
741
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Provision
|
|
|
(1,038
|
)
|
|
|
(918
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
|
12,682
|
|
|
|
17,031
|
|
6.
|
PREPAID EXPENSES AND OTHER CURRENT ASSETS
|
Prepaid
expenses and other current assets consist of the following:
|
|
|
As of December 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
Staff advances
|
|
|
293
|
|
|
|
312
|
|
|
Prepayment for products
|
|
|
-
|
|
|
|
1,008
|
|
|
Advance to OEM
|
|
|
3,739
|
|
|
|
3,662
|
|
|
Rental and other deposits
|
|
|
1,048
|
|
|
|
1,203
|
|
|
VAT recoverable
|
|
|
963
|
|
|
|
2,189
|
|
|
Loan to third parties
|
|
|
519
|
|
|
|
1,469
|
|
|
Receivable from an agent
|
|
|
-
|
|
|
|
6,318
|
|
|
Others
|
|
|
37
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,599
|
|
|
|
16,240
|
|
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
7.
|
PROPERTY AND EQUIPMENT, NET
|
Property
and equipment consist of the following:
|
|
|
As of December 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
US$
|
|
|
US$
|
|
|
At cost:
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
|
837
|
|
|
|
933
|
|
|
Computer and network equipment
|
|
|
5,801
|
|
|
|
6,458
|
|
|
Office equipment
|
|
|
763
|
|
|
|
918
|
|
|
Motor vehicles
|
|
|
220
|
|
|
|
233
|
|
|
|
|
|
7,621
|
|
|
|
8,542
|
|
|
Less: accumulated depreciation
|
|
|
(6,133
|
)
|
|
|
(7,180
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,488
|
|
|
|
1,362
|
|
Depreciation
expense was US$1,371, US$1,011 and US$501 for the years ended December 31, 2015, 2016 and 2017, respectively, and were included
in the following captions:
|
|
|
For the years ended December 31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
472
|
|
|
|
347
|
|
|
|
140
|
|
|
Sales and marketing expenses
|
|
|
54
|
|
|
|
15
|
|
|
|
13
|
|
|
General and administrative expenses
|
|
|
144
|
|
|
|
277
|
|
|
|
190
|
|
|
Research and development expenses
|
|
|
701
|
|
|
|
372
|
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,371
|
|
|
|
1,011
|
|
|
|
501
|
|
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
8.
|
INTANGIBLE ASSETS, NET
|
The
following table presents the Group’s intangible assets as of the respective balance sheet dates:
|
|
|
Software
|
|
|
Capitalized software development costs
|
|
|
License
|
|
|
Total
|
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2016
|
|
|
2,337
|
|
|
|
3,266
|
|
|
|
7,659
|
|
|
|
13,262
|
|
|
Additions
|
|
|
315
|
|
|
|
4,915
|
|
|
|
-
|
|
|
|
5,230
|
|
|
Amortization expense
|
|
|
(205
|
)
|
|
|
(1,098
|
)
|
|
|
(843
|
)
|
|
|
(2,146
|
)
|
|
Foreign currency translation difference
|
|
|
(153
|
)
|
|
|
(209
|
)
|
|
|
(486
|
)
|
|
|
(848
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
|
2,294
|
|
|
|
6,874
|
|
|
|
6,330
|
|
|
|
15,498
|
|
|
Additions
|
|
|
348
|
|
|
|
7,248
|
|
|
|
54
|
|
|
|
7,650
|
|
|
Amortization expense
|
|
|
(253
|
)
|
|
|
(2,784
|
)
|
|
|
(898
|
)
|
|
|
(3,935
|
)
|
|
Foreign currency translation difference
|
|
|
140
|
|
|
|
262
|
|
|
|
389
|
|
|
|
791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2017
|
|
|
2,529
|
|
|
|
11,600
|
|
|
|
5,875
|
|
|
|
20,004
|
|
The
intangible assets are amortized using the straight-line method, which is the Group’s best estimate of how these assets will
be economically consumed over their respective estimated useful lives of 3-10 years.
Amortization
expense was US$1,109, US$2,146 and US$3,935 for the years ended December 31, 2015, 2016 and 2017, respectively.
The
annual estimated amortization expenses for the intangible assets for each of the next five years are as follows:
|
|
|
US$
|
|
|
|
|
|
|
|
2018
|
|
|
6,407
|
|
|
2019
|
|
|
5,272
|
|
|
2020
|
|
|
3,322
|
|
|
2021
|
|
|
1,114
|
|
|
2022
|
|
|
1,090
|
|
|
|
|
|
|
|
|
|
|
|
17,205
|
|
The
changes in the carrying amount of goodwill were as follows:
|
|
|
As of December 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1
|
|
|
741
|
|
|
|
693
|
|
|
Foreign currency translation difference
|
|
|
(48
|
)
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31
|
|
|
693
|
|
|
|
736
|
|
No
impairment charge was recorded in any of the three years ended December 31, 2016 and 2017.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
10.
|
BANK AND OTHER BORROWINGS
|
Bank
and other borrowings are as follows as of the respective balance sheet dates:
|
|
|
As of December 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
Short-term bank and other borrowings
|
|
|
6,306
|
|
|
|
12,648
|
|
|
Long-term bank borrowings, current portion
|
|
|
1,381
|
|
|
|
5,432
|
|
|
|
|
|
7,687
|
|
|
|
18,080
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term bank borrowings, non-current portion
|
|
|
4,491
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
|
12,178
|
|
|
|
18,080
|
|
The
short-term bank borrowings outstanding as of December 31, 2016 and 2017 bore a weighted average interest rate of 6.89% and 6.73%
per annum, respectively, and were denominated in RMB and US$. These borrowings were obtained from financial institutions and have
term of one year.
The
long-term bank borrowings, current portion outstanding as of December 31, 2017 bore a weighted average interest rate of 7.97%,
and were denominated in US$. These borrowings were obtained from financial institutions located in USA, and have terms of three
years.
On
November 28, 2017, the Company entered into short-term loan agreements with HHMC Microelectronic Co., Limited of US$5,000,000
with an interest rate of 14.6% per annum and a maturity term of three months, for working capital.
Bank
borrowings as of December 31, 2017 were pledged by the account receivable amounted to US$43,135.
As
of December 31, 2017, the Company was in breach of two of the financial covenants under a long-term bank borrowing with an outstanding
balance of US$1,515. The breach would result in acceleration of the repayment according to the contract term. Therefore, the outstanding
balance was reclassified as current liability as of December 31, 2017.
In
August 2016, the Group issued 2,515,123 and 1,900,800 warrants (“2016 Warrants”) to two banks in connection with a
short term loan facility of $2,000,000 and a long term loan facility of $6,000,000 respectively, for working capital purpose.
The 2016 Warrants entitled the banks to subscribe for Series D convertible redeemable preferred shares at the exercise price of
$0.5059. The 2016 Warrants shall lapse and expire after 5 and 7 years from their issuance dates, respectively. The 2016 Warrants
were replaced by Replacement Warrants to acquire an aggregate of 417,166 the Group’s ordinary shares at the consummation
date of the Merger.
As
the 2016 Warrants were granted to the banks for loan facilities, their fair value on the issuance date were recognized as deferred
borrowing costs presented as deductions of the carrying value of the term loans. The deferred borrowing costs were recognized
over the lives of the term loans as financing cost, using the effective interest rate method. Given the 2016 Warrants were convertible
into Series D convertible redeemable preferred shares classified as mezzanine equity, the 2016 Warrants were financial liabilities
in accordance with ASC 480,
Distinguishing Liabilities from Equity
that are re-measured at the end of each reporting period
with an adjustment for fair value through earnings.
As
part of the Merger, the 2016 Warrants were replaced by Replacement Warrants to acquire an aggregate of 417,166 the Group’s
ordinary shares classified as permanent equity. As the modification of the 2016 Warrants term resulted in the reclassification
of the 2016 Warrants from liability to equity, the 2016 Warrants amounted to US$1,544 were re-measured at fair value upon Merger
and reclassified to additional paid in capital as of December 31, 2017.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
11.
|
ACCRUED EXPENSES AND OTHER PAYABLES
|
The
components of accrued expenses and other payables are as follows:
|
|
|
As of December 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
Payroll and welfare payable
|
|
|
3,235
|
|
|
|
2,030
|
|
|
Accrued liability
|
|
|
50
|
|
|
|
-
|
|
|
VAT, and other taxes payable
|
|
|
831
|
|
|
|
2,473
|
|
|
Payables for office supply and utilities
|
|
|
743
|
|
|
|
711
|
|
|
Payables for purchase of property and equipment
|
|
|
432
|
|
|
|
52
|
|
|
Professional service fees
|
|
|
-
|
|
|
|
3,161
|
|
|
Deposits from agents
|
|
|
2,315
|
|
|
|
3,509
|
|
|
Others
|
|
|
28
|
|
|
|
227
|
|
|
|
|
|
7,634
|
|
|
|
12,163
|
|
12.
|
DEFERRED GOVERNMENT GRANTS
|
The
government grants received are required to be used in construction of property and equipment. These grants are initially deferred
and subsequently recognized in the statement of operations over the life of the related assets as other operating income.
|
|
|
For the years ended December 31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of the year
|
|
|
7,316
|
|
|
|
4,014
|
|
|
|
2,108
|
|
|
Recognized as other operating income
|
|
|
(2,880
|
)
|
|
|
(1,650
|
)
|
|
|
(281
|
)
|
|
Foreign currency translation difference
|
|
|
(422
|
)
|
|
|
(256
|
)
|
|
|
130
|
|
|
Balance at ending of the year
|
|
|
4,014
|
|
|
|
2,108
|
|
|
|
1,957
|
|
13.
|
ACCUMULATED OTHER COMPREHENSIVE LOSS
|
The
changes in accumulated other comprehensive loss, net of tax of nil, are as follows:
|
|
|
Foreign currency translation
|
|
|
Total
|
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2015
|
|
|
139
|
|
|
|
139
|
|
|
Current year other comprehensive loss
|
|
|
(1,288
|
)
|
|
|
(1,288
|
)
|
|
Balance as of December 31, 2015
|
|
|
(1,149
|
)
|
|
|
(1,149
|
)
|
|
Current year other comprehensive loss
|
|
|
(1,477
|
)
|
|
|
(1,477
|
)
|
|
Balance as of December 31, 2016
|
|
|
(2,626
|
)
|
|
|
(2,626
|
)
|
|
Current year other comprehensive income
|
|
|
2,119
|
|
|
|
2,119
|
|
|
Balance as of December 31, 2017
|
|
|
(507
|
)
|
|
|
(507
|
)
|
14.
|
MAINLAND CHINA EMPLOYEE CONTRIBUTION PLAN
|
As
stipulated by the regulations of the PRC, full-time employees of the Group in the PRC participate in a government-mandated multiemployer
defined contribution plan organized by municipal and provincial governments. Under the plan, certain pension benefits, medical
care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. The Group is required
to make contributions to the plan based on certain percentages of employees’ salaries. The total expenses the Group incurred
for the plan were US$2,238, US$2,362 and US$2,527, respectively, for the years ended December 31, 2015, 2016 and 2017.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
15.
|
SHARE BASED COMPENSATION
|
Share-based
awards under the 2007 Plan
In
order to provide additional incentives to employees and to promote the success of the Group’s business, the Group adopted
a share incentive plan in (the “2007 Plan”) December 2007, which was last amended in February 2011. The 2007 Plan
allows the Group to grant options to employees, directors, consultants or members of the board of directors of the Group. Under
the 2007 Plan, the maximum aggregate number of shares that may be issued shall not exceed 38,700,000. The terms of the options
shall not exceed ten years from the date of grant. 25% of the shares subject to the options shall vest on the first anniversary
of the vesting commencement date, and 1/48 of the shares subject to the options shall vest each month thereafter over the next
three years, provided the optionee continues to be a service provider to the Group. Thus, there is an explicit service condition
of 4 years. In addition, the options contain a performance condition whereby vesting will commence upon the earlier to occur of
an initial public offering or a change in control as defined in the 2007 Plan, provided there is continued employment of the optionees
on such date.
During
the years ended December 31, 2015, December 31, 2016 and the period ended August 18, 2017, the Group granted 6,525,190, 610,000
and 9,085,000 shares of options, respectively, to purchase ordinary shares to employees, officers, and directors with the exercise
price of $0.459, $0.56 and $0.678 ~ $0.859 per share, respectively.
The
following table summarizes the Group’s option activities under the 2007 Plan:
|
|
|
Number of options
|
|
|
Weighted average
exercise
price
|
|
Weighted average remaining contractual term
|
|
Aggregate intrinsic value
|
|
|
|
|
|
|
(US$)
|
|
(Years)
|
|
(US$)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 1, 2015
|
|
|
29,554,630
|
|
|
0.27
|
|
6.88
|
|
308
|
|
Granted
|
|
|
6,525,190
|
|
|
0.46
|
|
|
|
|
|
Forfeited
|
|
|
(4,042,580
|
)
|
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2015
|
|
|
32,037,240
|
|
|
0.30
|
|
4.97
|
|
308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expect to vest at December 31, 2015
|
|
|
32,037,240
|
|
|
0.30
|
|
4.97
|
|
308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 1, 2016
|
|
|
32,037,240
|
|
|
0.30
|
|
4.97
|
|
308
|
|
Granted
|
|
|
610,000
|
|
|
0.56
|
|
|
|
|
|
Forfeited
|
|
|
(5,190,297
|
)
|
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2016
|
|
|
27,456,943
|
|
|
0.30
|
|
5.26
|
|
308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2016
|
|
|
27,456,943
|
|
|
0.30
|
|
5.26
|
|
308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 1, 2017
|
|
|
27,456,943
|
|
|
0.30
|
|
5.26
|
|
308
|
|
Granted
|
|
|
9,085,000
|
|
|
0.70
|
|
|
|
|
|
Forfeited
|
|
|
(8,007,606
|
)
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, August 18, 2017
|
|
|
28,534,337
|
|
|
0.48
|
|
6.99
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at August 18, 2017
|
|
|
28,534,337
|
|
|
0.48
|
|
6.99
|
|
-
|
As
of August 18, 2017, no options were vested and exercisable given the performance condition in place described above. Historically,
compensation cost related to performance options that only vest upon the consummation of an initial public offering or change
in control event was recognized when the offering or change in control event was consummated. Accordingly, the Group did not recognized
any compensation cost under the 2007 Plan.
The
aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the fair value
of the underlying stock at each reporting date, for those awards that have an exercise price below the estimated fair value of
the Group’s shares.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
15.
|
SHARE BASED COMPENSATION (CONTINUED)
|
As
of December 31, 2015, 2016 and August 18, 2017, the Group had options outstanding to purchase an aggregate of 5,500,000 shares,
5,500,000 shares and nil with an exercise price below the fair value of the Group’s shares, resulting in an aggregate intrinsic
value of US$308, US$308 and nil, respectively.
Consummation
of reverse acquisition in 2017
Upon
the consummation of the Merger, the holders of Borqs International issued and outstanding options had their options assumed by
the Company and now hold options to acquire a total of 2,695,194 of the Company’s ordinary shares upon exercise of those
options. In addition, the performance condition whereby vesting will commence upon the earlier to occur of an initial public offering
or a change in control (collectively, “IPO condition”) as defined in the 2007 Plan was removed.
Pursuant
to ASC 718, the cancellation of the terms or conditions of an equity award under original award in exchange for a new award should
be treated as modification. As the IPO condition was not expected to be satisfied as of the modification date, the original grant-date
fair value is no longer used to measure compensation cost for the awards. As a result, the compensation cost recognized for the
replacement awards would be based on the modification date fair value of the awards. For those awards that were fully vested at
the time of the modification, the Group recognized a one-time catch up of US$5,658 in share-based compensation expense upon the
Merger.
On
November 18, 2017, the Group granted 180,000 share of options to purchase ordinary shares to directors with the exercise price
of $5.30 share.
|
|
|
Number of options
|
|
|
Weighted average
exercise
price
|
|
|
Weighted average remaining contractual term
|
|
|
Aggregate intrinsic value
|
|
|
|
|
|
|
|
(US$)
|
|
|
(Years)
|
|
|
(US$)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Converted under Assumed Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, August 18, 2017
|
|
|
2,695,194
|
|
|
|
5.08
|
|
|
|
6.99
|
|
|
|
6,561
|
|
|
Granted
|
|
|
180,000
|
|
|
|
5.30
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(49,804
|
)
|
|
|
6.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
|
2,825,390
|
|
|
|
5.38
|
|
|
|
6.43
|
|
|
|
6,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2017
|
|
|
2,825,390
|
|
|
|
5.38
|
|
|
|
6.43
|
|
|
|
6,860
|
|
As
of August 18, 2017 and December 31, 2017, the Group had options outstanding to purchase an aggregate of 2,583,250 and 2,735,174
shares with an exercise price below the fair value of the Group’s shares, resulting in an aggregate intrinsic value of US$6,561
and US$6,860, respectively.
The
Group calculated the estimated fair value of the options on the respective grant dates using the binomial-lattice option valuation
model with the following assumptions for each applicable period which takes into account variables such as volatility, dividend
yield, and risk-free interest rate, contractual term of the option, the probability that the option will be exercised prior to
the end of its contractual life, and the probability of termination or retirement of the option holder in computing the value
of the option:
|
|
|
Year 2015
|
|
|
Year 2016
|
|
|
Year 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rates
|
|
|
1.95%-2.28
|
%
|
|
|
1.58%-2.60
|
%
|
|
|
1.06%-2.32
|
%
|
|
Expected life (years)
|
|
|
10 years
|
|
|
|
10 years
|
|
|
|
10 years
|
|
|
Expected volatility
|
|
|
40%-45
|
%
|
|
|
45%-46
|
%
|
|
|
31.9%-43.9
|
%
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Exercise multiple
|
|
|
2.20
|
|
|
|
2.20
|
|
|
|
2.20
|
|
|
Post-vesting forfeit rate
|
|
|
10
|
%
|
|
|
10
|
%
|
|
|
10
|
%
|
|
Fair value of underlying ordinary shares
|
|
|
US$0.158-US$0.231
|
|
|
|
US$0.615-US$0.697
|
|
|
|
US$7.45
|
|
|
Fair value of share option
|
|
|
US$0.026-US$0.096
|
|
|
|
US$0.309-US$0.315
|
|
|
|
US$2.34-US$7.45
|
|
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
15.
|
SHARE BASED COMPENSATION (CONTINUED)
|
Total
compensation expense relating to share options granted to employees recognized for the year ended December 31, 2017 is as follows:
|
|
|
For
the year ended December 31, 2017
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
-
|
|
|
Sales and marketing expenses
|
|
|
1,470
|
|
|
General and administrative expenses
|
|
|
1,277
|
|
|
Research and development expenses
|
|
|
3,143
|
|
|
|
|
|
|
|
|
|
|
|
5,890
|
|
Ordinary
shares issued in 2017
On
March 17, 2017, the Group issued 450,000 ordinary shares to certain employees and a non-employee for a total proceeds of US$62.
The fair value of the ordinary shares in excess of the proceeds received by the Group was immediately recognized as compensation
expense which amounted to US$324. The 450,000 ordinary shares were fully vested as of December 31, 2017.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
Enterprise
income tax (“EIT”)
British
Virgin Islands
The
Company is incorporated in the British Virgin Islands and conducts its primary business operations through the subsidiaries and
VIEs in the PRC, India and Hong Kong. Under the current laws of the British Virgin Islands, the Company is not subject to tax
on income or capital gains.
Cayman
Islands
Borqs
International is incorporated in the Cayman Islands and conducts its primary business operations through the subsidiaries and
VIEs in the PRC, India and Hong Kong. Under the current laws of the Cayman Islands, Borqs International is not subject to tax
on income or capital gains.
Hong
Kong
Borqs
HK is subject to Hong Kong profits tax rate of 16.5% for the years ended December 31, 2015, 2016 and 2017. No provision for Borqs
HK profits tax has been made in the consolidated financial statements as the entity had losses in the years ended December 31,
2015, 2016 and 2017.
India
Borqs
India is subject to income tax rate of 32.45% for the years ended December 31, 2015, 2016 and 2017. Amounts of US$1,158, US$1,684
and US$2,024 are included as income tax expense for the years ended December 31, 2015, 2016 and 2017, respectively.
The
PRC
The
Group’s PRC subsidiaries are incorporated in the PRC and subject to PRC EIT on the taxable income in accordance with the
relevant PRC income tax laws.
Effective
January 1, 2008, the statutory corporate income tax rate is 25%, except for certain entities eligible for preferential tax rates.
BORQS
Beijing was qualified for a High and New Technology Enterprises (“HNTE”) since 2012 and is eligible for a 15% preferential
tax rate from 2012 to 2014. In July 2015, BORQS Beijing obtained a new HNTE certificate, which will expire in July 2018. For the
years ended December 31, 2015, 2016 and 2017, BORQS Beijing enjoyed a preferential tax rate of 15%.
Yuantel
Telecom was qualified for a High and New Technology Enterprises (“HNTE”) since 2011 and is eligible for a 15% preferential
tax rate from 2011 to 2013. In October 2014, Yuantel Telecom obtained a new HNTE certificate, which expired in October 2017. Yuantel
Telecom has successfully renewed the HNTE certificate in December 2017 with effective term of three years. In accordance with
the PRC Income Tax Laws, an enterprise awarded with the HNTE status may enjoy a reduced EIT rate of 15%. For the years ended December
31, 2015, 2016 and 2017, Yuantel Telecom enjoyed a preferential tax rate of 15%.
The
Group’s other PRC subsidiaries were subject to EIT at a rate of 25% for the years ended December 31, 2015, 2016 and 2017.
The
New EIT Law also provides that enterprises established under the laws of foreign countries or regions and whose “place of
effective management” is located within the PRC are considered PRC tax resident enterprises and subject to PRC income tax
at the rate of 25% on worldwide income. The definition of “place of effective management” refers to an establishment
that exercises, in substance, overall management and control over the production and business, personnel, accounting, properties,
etc. of an enterprise. As of December 31, 2017, no detailed interpretation or guidance has been issued to define “place
of effective management”. Furthermore, as of December 31, 2017, the administrative practice associated with interpreting
and applying the concept of “place of effective management” is unclear. If the Group is deemed as a PRC tax resident,
it would be subject to PRC tax under the New CIT Law. The Group will continue to monitor changes in the interpretation or guidance
of this law.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
Profit
(loss) before income taxes consists of:
|
|
|
For the years ended December 31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-PRC
|
|
|
3,241
|
|
|
|
2,777
|
|
|
|
(7,138
|
)
|
|
PRC
|
|
|
(1,595
|
)
|
|
|
2,478
|
|
|
|
(2,902
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,646
|
|
|
|
5,255
|
|
|
|
(10,040
|
)
|
Income
tax expense comprises of:
|
|
|
For the years ended December 31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(1,895
|
)
|
|
|
(2,257
|
)
|
|
|
(1,382
|
)
|
|
Deferred
|
|
|
1,044
|
|
|
|
(402
|
)
|
|
|
(937
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(851
|
)
|
|
|
(2,659
|
)
|
|
|
(2,319
|
)
|
The
reconciliation of tax computed by applying the statutory income tax rate of 25% for the years ended December 31, 2015, 2016 and
2017 applicable to the PRC operations to income tax expense is as follows:
|
|
|
For the years ended December 31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before income taxes
|
|
|
1,646
|
|
|
|
5,255
|
|
|
|
(10,040
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense) income computed at the statutory income tax rate at 25%
|
|
|
(412
|
)
|
|
|
(1,314
|
)
|
|
|
2,510
|
|
|
Non-deductible expenses
|
|
|
(166
|
)
|
|
|
(491
|
)
|
|
|
(2,698
|
)
|
|
Non-taxation income
|
|
|
1,300
|
|
|
|
414
|
|
|
|
68
|
|
|
Preferential rate
|
|
|
(423
|
)
|
|
|
400
|
|
|
|
(324
|
)
|
|
Current and deferred tax rate differences
|
|
|
790
|
|
|
|
310
|
|
|
|
55
|
|
|
Foreign rate differences
|
|
|
(292
|
)
|
|
|
560
|
|
|
|
(426
|
)
|
|
Change of valuation allowance
|
|
|
(1,643
|
)
|
|
|
(2,529
|
)
|
|
|
(1,039
|
)
|
|
Taxable income
|
|
|
-
|
|
|
|
-
|
|
|
|
(215
|
)
|
|
Deferred tax
|
|
|
-
|
|
|
|
74
|
|
|
|
-
|
|
|
Interest expense
|
|
|
(5
|
)
|
|
|
(83
|
)
|
|
|
(250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
(851
|
)
|
|
|
(2,659
|
)
|
|
|
(2,319
|
)
|
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
Deferred
Taxes
The
significant components of deferred taxes are as follows:
|
|
|
As of December 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
US$
|
|
|
US$
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
Inventories provision
|
|
|
156
|
|
|
|
229
|
|
|
Accrued salary and welfare payable
|
|
|
274
|
|
|
|
165
|
|
|
Property and equipment
|
|
|
20
|
|
|
|
14
|
|
|
Tax losses
|
|
|
13,279
|
|
|
|
14,769
|
|
|
Valuation allowance
|
|
|
(12,675
|
)
|
|
|
(13,714
|
)
|
|
Total deferred tax assets
|
|
|
1,054
|
|
|
|
1,463
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
2,146
|
|
|
|
2,004
|
|
|
Deferred cost of revenue
|
|
|
24
|
|
|
|
1,551
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
2,170
|
|
|
|
3,555
|
|
As of December 31, 2017, the Group had net tax operating
losses from its PRC subsidiaries and its Consolidated VIEs, as per filed tax returns, of US$38,503, which will expire from 2018
to 2022. The Group has net tax operating loss from its HK subsidiary of US$15,500, which will not expire.
As
of December 31, 2017, the Group intends to permanently reinvest the undistributed earnings from its foreign subsidiaries and the
Consolidated VIEs to fund future operations. The amount of unrecognized deferred tax liabilities for temporary differences related
to investments in foreign subsidiaries and the Consolidated VIEs is not determined because such a determination is not practicable.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
Unrecognized
Tax Benefits
As of December 31, 2016 and 2017, the Group recorded
an unrecognized tax benefits of US$4,053 and US$4,547, respectively, of which, US$2,381 and US$2,764, respectively, are presented
on a net basis against the deferred tax assets related to tax loss carry forwards on the consolidated balance sheets. The unrecognized
tax benefits and its related interest are primarily related to under-reported intercompany profit. The amount of unrecognized
tax benefits will change in the next 12 months, pending clarification of current tax law or audit by the tax authorities, however,
an estimate of the range of the possible change cannot be made at this time. As of December 31, 2016 and 2017, unrecognized tax
benefits of US$1,681 and US$2,043, if ultimately recognized, will impact the effective tax rate.
A
roll-forward of unrecognized tax benefits is as follows:
|
|
|
For the years ended December 31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
620
|
|
|
|
2,177
|
|
|
|
4,053
|
|
|
Additions based on tax positions related to the current year
|
|
|
1,557
|
|
|
|
1,876
|
|
|
|
217
|
|
|
Foreign currency translation difference
|
|
|
-
|
|
|
|
-
|
|
|
|
277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
2,177
|
|
|
|
4,053
|
|
|
|
4,547
|
|
In
the years ended December 31, 2016 and 2017, the Group recorded interest expense accrued in relation to the unrecognized tax benefit
of US$83 and US$250 in income tax expense, respectively. Accumulated interest expense recorded by the Group was US$88 and US$338
as of December 31, 2016 and 2017, respectively. As of December 31, 2017, the tax years ended December 31, 2012 through 2017 for
the PRC subsidiaries and the VIE remain open for statutory examination by the PRC tax authorities.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
17.
|
RELATED PARTY TRANSACTIONS
|
|
Names of related parties
|
|
Relationship with the Group
|
|
Intel Capital Corporation (“Intel”) and its affiliates
|
|
Intel was a shareholder *
|
|
Qualcomm Global Trading PTE. Ltd (“Qualcomm”) and its affiliates
|
|
Qualcomm was a shareholder *
|
|
(b)
|
Other
than disclosed elsewhere, the Group had the following significant related party transactions
for the years ended December 31, 2015, 2016 and 2017:
|
|
|
|
For the years ended December 31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
Software services provided to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intel Corporation
|
|
|
6,204
|
|
|
|
271
|
|
|
|
*
|
|
|
Intel (China) Co., Ltd.
|
|
|
5
|
|
|
|
9
|
|
|
|
*
|
|
|
Intel Asia-Pacific Research and Development Ltd.
|
|
|
328
|
|
|
|
119
|
|
|
|
*
|
|
|
Intel (China) Research Center Co., Ltd.
|
|
|
-
|
|
|
|
57
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware sold to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intel Corporation
|
|
|
55
|
|
|
|
-
|
|
|
|
*
|
|
|
(c)
|
The
Group had the following related party balances as of December 31, 2016 and 2017:
|
|
|
|
As of December 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
US$
|
|
|
US$
|
|
|
Accounts receivable from related parties:
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Intel Corporation
|
|
|
481
|
|
|
|
*
|
|
|
Intel (China) Co., Ltd.
|
|
|
-
|
|
|
|
*
|
|
|
Intel Asia-Pacific Research and Development Ltd.
|
|
|
9
|
|
|
|
*
|
|
All
balances with the related parties as of December 31, 2016 were unsecured, interest-free and have no fixed terms of repayment.
*
Upon the consummation of the Merger, both entities ceased to be shareholders of the Group.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
18.
|
RESTRICTED NET ASSETS
|
The
Group’s ability to pay dividends is primarily dependent on the Group receiving distributions of funds from its subsidiaries.
Relevant PRC statutory laws and regulations permit payments of dividends by the VIE and subsidiaries of the VIE incorporated in
PRC only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The
consolidated results of operations reflected in the consolidated financial statements prepared in accordance with U.S. GAAP differ
from those reflected in the statutory financial statements of the Group’s subsidiaries.
Under
PRC law, the Group’s subsidiaries, VIE and the subsidiaries of the VIE located in the PRC (collectively referred as the
“PRC subsidiaries”) are required to provide for certain statutory reserves, namely a general reserve, an enterprise
expansion fund and a staff welfare and bonus fund. The PRC subsidiaries are required to allocate at least 10% of their after tax
profits on an individual company basis as determined under PRC accounting standards to the statutory reserve and has the right
to discontinue allocations to the statutory reserve if such reserve has reached 50% of registered capital on an individual company
basis. In addition, the registered capital of the PRC subsidiaries is also restricted.
Appropriations
to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the Board of Directors of the subsidiary.
The PRC subsidiaries are also subject to similar statutory reserve requirements. These reserves can only be used for specific
purposes and are not transferable to the Group in the form of loans, advances or cash dividends. As of December 31, 2016 and December
31, 2017, the Group’s PRC subsidiaries had appropriated US$1,898 and US$1,898, respectively, in its statutory reserves.
As
a result of these PRC laws and regulations subject to the limit discussed above that require annual appropriations of 10% of after-tax
income to be set aside, prior to payment of dividends as general reserve fund, the Group’s PRC subsidiaries are restricted
in their ability to transfer a portion of their net assets to the Group. Amounts restricted include paid-in capital and statutory
reserve funds of the Group’s PRC subsidiaries and the equity of the Consolidated VIEs, as determined pursuant to PRC generally
accepted accounting principles, totaling an aggregate of US$1,898 as of December 31, 2017.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
19.
|
CONVERTIBLE REDEEMABLE PREFERRED SHARES
|
On
December 27, 2007, March 17, 2008, September 26, 2008 and October 8, 2008, the Group issued 19,800,000, 3,100,000, 12,000,000
and 5,000,000 Series A convertible redeemable preferred shares (the “Series A Preferred Shares”), respectively, to
certain external investors at a price of $0.20 per share for a total cash consideration of $7,980. The cash proceeds received
was $7,889, net of issuance costs of $91.
On
June 26, 2009, August 19, 2009 and October 12, 2009, the Group issued 64,285,715,15,000,000 and 3,571,428 Series B convertible
redeemable preferred shares (the “Series B Preferred Shares”), respectively, to certain external investors at a price
of $0.21 per share for a total consideration of $17,400 (includes cash proceeds of $14,400 and $3,000 upon conversion of convertible
notes). The cash proceeds received was $14,242, net of issuance costs of $158.
On
February 14, 2011 and May 24, 2012, the Group issued 38,181,817 and 5,454,545 Series C convertible redeemable preferred shares
(the “Series C Preferred Shares”), to certain external investors at the price of $0.275 per share for a total cash
consideration of $12,000. The cash proceeds received was $11,817, net of issuance costs of $183.
On
August 20, 2014 the Group issued 23,721,443 Series D convertible redeemable preferred shares (the “Series D Preferred Shares”),
to certain external investors at the price of $0.33725 per share for a total cash consideration of $8,000. The cash proceeds received
was $7,874, net of issuance costs of $126.
On
February 8, 2017 and March 2, 2017, the Group closed the issuances of 10,325,126 and 2,950,036 Series E convertible redeemable
preferred shares (the “Series E Preferred Shares”), respectively, for a purchase price of $0.678 per share. Concurrently,
Series E-1 Warrants to purchase up to an aggregate of 7,094,164 Series E-1 convertible preferred shares (the “Series E-1
Preferred Shares”) were issued and immediately exercised, at $0.001 per share. The total cash proceeds received was US$9,008,
net of issuance costs of US$312. Net proceeds were allocated to the Series E Preferred Shares and Series E-1 Preferred Shares
based on their relative fair value on closing dates.
Series
E-1 Preferred Shares shall vote with Series E Preferred Shares as a single class. Series E-1 Preferred Shares have neither redemption
rights nor any other rights preferential to the ordinary shares and therefore Series E-1 Preferred Shares are classified as permanent
equity.
The
significant terms of the Series A, Series B, Series C, Series D, and Series E convertible redeemable preferred shares (together
“Convertible Redeemable Preferred Shares”) are summarized as follows.
Conversion
Convertible
Redeemable Preferred Shares can be converted into ordinary shares at the option of the holder at any time by dividing the applicable
original purchase price by the applicable conversion price which is initially equal to the original purchase price and as such,
the initial conversion ratio for each Convertible Redeemable Preferred Shares into each ordinary share shall be one-for-one.
Convertible
Redeemable Preferred Shares shall automatically be converted into ordinary shares at the then-effective conversion rate applicable
to the relevant series of Preferred Shares: (a) in the event of the closing of a Qualified IPO; or (b) in relation only to Series
A and Series B Preferred Shares, upon the approval and written consent of a majority of the outstanding Series A and Series B
Preferred Shares holders to convert their respective Preferred Shares into ordinary shares.
The
conversion price is subject to additional adjustments if the Group makes certain dilutive issuances of shares.
Dividends
Series
D and Series E Preferred Shares shall receive dividends at an annual rate of six percent (6%) of the original purchase price in
preference and priority to any dividends on the Series A, Series B, Series C Preferred Shares and ordinary shares. Dividends on
Series D and Series E Preferred Shares shall be cumulative whether declared by the Board of Directors or not.
Each
holder of Series A, Series B and Series C Preferred Shares is entitled to receive non-cumulative dividends when and if declared
by the Board of Directors of the Group in preference and priority to any dividends on ordinary shares, after all accumulated dividends
on the Series D and Series E Preferred shares have been paid or set aside for payment to the holders of Series D and Series E
Preferred Shares in a calendar year.
Any additional dividends declared, after all accumulated dividends and declared dividends
on the Preferred Shares have been paid or set aside for payment to the holders of Preferred Shares in a calendar year, shall be
distributed among all holders of ordinary shares and Preferred Shares.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
19.
|
CONVERTIBLE REDEEMABLE PREFERRED SHARES (CONTINUED)
|
Redemption
All
outstanding Convertible Redeemable Preferred Shares can be redeemed at the election of the majority holders at any time after
the fifth anniversary of the first issuance date of Series E Preferred Shares.
Prior
to the fifth anniversary of the first issuance date of Series E Preferred Shares, all outstanding Series C Preferred Shares held
by Intel can be redeemed at any time of the holder’s election to redeem for investigation or for breach as defined in the
Memorandum of Association and Articles of Association.
Prior
to the fifth anniversary of the first issuance date of Series E Preferred Shares, all outstanding Series D and Series E Preferred
Shares can be redeemed at any time of a holder of Series D and a holder of Series E Preferred Shares’ election to redeem
for breach event or to redeem for investigation and failure to obtain MVNO license event as defined in the Memorandum of Association
and Articles of Association.
Convertible
Redeemable Preferred Shares are redeemed at a price equal to 150% the original purchase price plus any unpaid declared dividends.
The redemption price for Preferred Shares under the event of the election of Intel, a holder of Series D Preferred Shares or a
holder of Series E Preferred Shares to redeem for investigation is set to be 100% of the original purchase price.
The
redemption price for Convertible Redeemable Preferred Shares under the event of the election of Intel, a holder of Series D Preferred
Shares or a holder of Series E Preferred Shares to redeem for breach is set to be 150% of the original purchase price.
Winding
up / Liquidation
In
the event of any liquidation, dissolution, or winding up of the Group, either voluntary or involuntary, distributions to the shareholders
of the Group shall be made as stated below.
The
holders of Series E Preferred Shares then outstanding are entitled to be paid first out of the assets of the Group available for
distribution a liquidation preference in an amount per Preferred Share equal to the sum of (i) 150% of the original purchase price
as adjusted and (ii) all unpaid accumulated dividends, in priority to any other holders of Preferred Shares or ordinary shares.
Upon
full payment of the Series E Preferred Shares liquidation preference, the holders of Series D Preferred Shares are entitled to
be paid first out of the assets of the Group available for distribution a liquidation preference in an amount per Preferred Share
equal to the sum of (i) 150% of the original purchase price as adjusted and (ii) all unpaid accumulated dividends, in priority
to any other holders of Preferred Shares or ordinary shares.
Upon
full payment of the Series D and Series E Preferred Shares liquidation preference Series A, Series B and Series C Preferred Shares
then outstanding shall be entitled to be paid first out of the assets of the Group available for distribution (and prior and in
preference to any payment on the ordinary shares) a liquidation preference in an amount per Series A, Series B and Series C Preferred
Shares equal to the sum of (i) the original purchase price applicable to such Preferred Share as adjusted and (ii) all unpaid
declared dividends. The holders of Series C Preferred Shares shall receive their liquidation preference amount in preference to
holders of Series A and Series B Preferred Shares. Subject to the prior payment of all amounts due to the holders of Preferred
Shares, the balance of all remaining assets available for distribution are made with equal priority and pro rata amongst the holders
of ordinary shares and the holders of Preferred Shares on an as–converted basis.
Voting
Each
share of Convertible Redeemable Preferred Shares has voting rights equal to an equivalent number of shares of ordinary shares
into which it is convertible and votes together as one class with the ordinary shares. All directors of the Group’s board
of directors are elected by the holders of the outstanding ordinary shares and the Preferred Shares, voting together as a single
class on an as-converted basis.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
19.
|
CONVERTIBLE REDEEMABLE PREFERRED SHARES (CONTINUED)
|
Accounting
for Convertible Redeemable Preferred Shares
The
Convertible Redeemable Preferred Shares have been classified as mezzanine equity as they can be redeemed at the option of the
holders. The initial carrying values of the Preferred Shares are the total consideration received at their respective dates of
issuance net of issuance costs. There were no embedded features except for Series E Preferred Shares that qualified for bifurcation
and separate accounting in accordance with ASC 815-10
Derivatives and Hedging
.
At
the respective closing dates of the Series E Preferred Shares, beneficiary conversion feature was identified and recorded as a
reduction of Series E Preferred Shares with an offsetting credit to additional paid-in capital.
As
of December 31, 2016 and August 18, 2017, no dividend was declared by the Group. US$1,120 and US$1,709 of dividend was accumulated
to the holders of the Series D and Series E Preferred Shares as of December 31, 2016 and August 18, 2017.
Convertible
Redeemable Preferred Shares were accreted to redemption value based on the terms stipulated in the Memorandum of Association (“MOA”).
Changes in the redemption value are recorded against retained earnings. Upon the consummation of the Merger, all Convertible Redeemable
Preferred Shares and Series E-1 Preferred Shares were converted to ordinary shares. Upon conversion, all unamortized discounts,
including any original issue discounts and discounts from allocation of proceeds for beneficiary conversion feature, are recognized
immediately as deemed dividend and deducted from income available to ordinary shareholders.
The
following is the roll-forward of the carrying amounts of Convertible Redeemable Preferred Shares for the years ended
December 31, 2015, 2016 and 2017:
|
|
|
For the years ended December 31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
US$
|
|
|
|
US$
|
|
|
|
US$
|
|
|
Balance at beginning of the year
|
|
|
65,469
|
|
|
|
67,886
|
|
|
|
68,862
|
|
|
Issuance of Series E Preferred Shares
|
|
|
-
|
|
|
|
-
|
|
|
|
6,300
|
|
|
Beneficiary conversion feature of Series E Preferred Shares
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,258
|
)
|
|
Change in redemption value
|
|
|
2,417
|
|
|
|
976
|
|
|
|
6,956
|
|
|
Conversion to ordinary shares
|
|
|
-
|
|
|
|
-
|
|
|
|
(78,860
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of the year
|
|
|
67,886
|
|
|
|
68,862
|
|
|
|
-
|
|
Series
E-1 Preferred Shares of US$2,708 were converted to ordinary shares as of December 31, 2017.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
Basic
and diluted loss per share for each of the years presented are calculated as follows:
|
|
|
For the years ended December 31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
795
|
|
|
|
2,596
|
|
|
|
(12,359
|
)
|
|
Less: net (loss) income attributable to noncontrolling interests
|
|
|
(1,316
|
)
|
|
|
(632
|
)
|
|
|
210
|
|
|
Net income (loss) attributable to Borqs Technologies, Inc.
|
|
|
2,111
|
|
|
|
3,228
|
|
|
|
(12,569
|
)
|
|
Accretion to redemption value of Convertible Redeemable Preferred Shares
|
|
|
(2,417
|
)
|
|
|
(976
|
)
|
|
|
(6,956
|
)
|
|
Allocation to holders of Convertible Redeemable Preferred Shares
|
|
|
-
|
|
|
|
(2,252
|
)
|
|
|
-
|
|
|
Net loss attributable to Borqs Technologies, Inc.’s ordinary shareholders
|
|
|
(306
|
)
|
|
|
-
|
|
|
|
(19,525
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of ordinary shares outstanding—basic
|
|
|
4,224,090
|
|
|
|
4,224,725
|
|
|
|
12,842,671
|
|
|
Weighted-average number of ordinary shares outstanding—diluted
|
|
|
4,224,090
|
|
|
|
4,224,725
|
|
|
|
12,842,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share—Basic:
|
|
|
(0.07
|
)
|
|
|
0.00
|
|
|
|
(1.52
|
)
|
|
Loss per share—Diluted:
|
|
|
(0.07
|
)
|
|
|
0.00
|
|
|
|
(1.52
|
)
|
For
the year ended December 31, 2017, share options and Replacement Warrants to purchase ordinary shares, Unit Purchase Option, public
warrants and private warrants were anti-dilutive and excluded from the calculation of diluted net loss per share.
21.
|
FAIR VALUE MEASUREMENTS
|
The
Group applies ASC 820,
Fair Value Measurements and Disclosures
. ASC 820 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements. ASC 820 requires disclosures to be provided on fair
value measurement.
ASC
820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level
1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active
markets.
Level
2 — Include other inputs that are directly or indirectly observable in the marketplace.
Level
3 — Unobservable inputs which are supported by little or no market activity.
ASC
820 describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach;
and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving
identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single
present value amount. The measurement is based on the value indicated by current market expectations about those future amounts.
The cost approach is based on the amount that would currently be required to replace an asset.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
21.
|
FAIR VALUE MEASUREMENTS (CONTINUED)
|
2016
Warrants are classified within Level 3. We estimated the fair value of these warrants as of December 31, 2016 and August 18, 2017
using the binomial-lattice option valuation model, based on the remaining contractual term of the warrants, risk-free interest
rates and expected volatility of the price of the underlying Series D convertible redeemable preferred shares. The 2016 Warrants
are then reclassified to equity following the Merger (Note 4). The assumptions used, including the market value of the underlying
Series D convertible redeemable preferred shares and the expected volatility, were subjective unobservable inputs.
Liabilities
measured at fair value on a recurring basis are summarized below:
|
|
|
Fair value measurement using:
|
|
|
|
|
|
|
|
Quoted
prices in active markets for identical assets
(Level 1)
|
|
|
Significant
other observable inputs
(Level 2)
|
|
|
Unobservable
inputs
(Level 3)
|
|
|
Fair
value at December 31, 2016
|
|
|
|
|
|
US$
|
|
|
|
US$
|
|
|
|
US$
|
|
|
|
US$
|
|
|
Warrant liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
1,344
|
|
|
|
1,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
1,344
|
|
|
|
1,344
|
|
There
are no assets and liabilities measured at fair value on a recurring basis as of December 31, 2017.
|
|
|
Warrant
liabilities
|
|
|
|
|
US$
|
|
|
|
|
|
|
|
|
Fair value at January 1, 2016
|
|
|
-
|
|
|
Increase in liability
|
|
|
1,332
|
|
|
Changes in the fair value
|
|
|
12
|
|
|
Fair value at December 31, 2016
|
|
|
1,344
|
|
|
Changes in the fair value
|
|
|
200
|
|
|
Fair value at August 18, 2017
|
|
|
1,544
|
|
|
Transfer to permanent equity
|
|
|
(1,544
|
)
|
|
Fair value at December 31, 2017
|
|
|
-
|
|
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
22.
|
COMMITMENTS AND CONTINGENCIES
|
Operating
lease commitments
The
Group leases buildings in the PRC and India under non-cancelable operating leases expiring on different dates. For the years ended
December 31, 2015, 2016 and 2017, total rental expenses for all operating leases amounted to US$1,368, US$1,340 and US$1,418,
respectively.
As
of December 31, 2017, the Group has future minimum lease payments under non-cancelable operating leases with initial terms in
excess of one year in relation to office buildings consisting of the following:
|
|
|
US$
|
|
|
|
|
|
|
|
2018
|
|
|
1,138
|
|
|
2019
|
|
|
721
|
|
|
2020
|
|
|
654
|
|
|
2021
|
|
|
1,171
|
|
|
2022 and thereafter
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
3,684
|
|
Payments
under operating leases are expensed on a straight-line basis over the periods of their respective leases.
Income
Taxes
As
of December 31, 2017, the Group recognized an accrual of US$2,121 for unrecognized tax benefits and its interest (Note 16). The
final outcome of the tax uncertainty is dependent upon various matters including tax examinations, interpretation of tax laws
or expiration of statutes of limitation. However, due to the uncertainties associated with the status of examinations, including
the protocols of finalizing audits by the relevant tax authorities, there is a high degree of uncertainty regarding the future
cash outflows associated with these tax uncertainties. As of December 31, 2017, the Group classified the accrual for unrecognized
tax benefits as a non-current liability.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
The
operations of the Group are organized into two segments, consisting of Yuantel and Connected Solution.
The
CODM measures the performance of each segment based on metrics of revenue and earnings from operations and uses these results
to evaluate the performance of, and to allocate resources to each of the segments. CODM does not evaluate operating segments using
asset information.
The
CODM evaluates performance based on each reporting segment’s net revenue and operating profit (loss). The table below provides
a summary of the Group’s operating segment results for the years ended December 31, 2015, 2016 and 2017:
|
FY2017
|
|
Yuantel
|
|
|
Connected Solution
|
|
|
Total segments
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-External customers
|
|
|
32,074
|
|
|
|
122,233
|
|
|
|
154,307
|
|
|
|
-
|
|
|
|
154,307
|
|
|
-Inter-segment
|
|
|
-
|
|
|
|
1,879
|
|
|
|
1,879
|
|
|
|
(1,879
|
)
|
|
|
-
|
|
|
Total net revenue
|
|
|
32,074
|
|
|
|
124,112
|
|
|
|
156,186
|
|
|
|
(1,879
|
)
|
|
|
154,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
331
|
|
|
|
(8,241
|
)
|
|
|
(7,910
|
)
|
|
|
-
|
|
|
|
(7,910
|
)
|
|
FY2016
|
|
Yuantel
|
|
|
Connected Solution
|
|
|
Total segments
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-External customers
|
|
|
35,138
|
|
|
|
85,448
|
|
|
|
120,586
|
|
|
|
-
|
|
|
|
120,586
|
|
|
-Inter-segment
|
|
|
-
|
|
|
|
2,016
|
|
|
|
2,016
|
|
|
|
(2,016
|
)
|
|
|
-
|
|
|
Total net revenue
|
|
|
35,138
|
|
|
|
87,464
|
|
|
|
122,602
|
|
|
|
(2,016
|
)
|
|
|
120,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
(3,589
|
)
|
|
|
8,829
|
|
|
|
5,240
|
|
|
|
-
|
|
|
|
5,240
|
|
|
FY2015
|
|
Yuantel
|
|
|
Connected Solution
|
|
|
Total segments
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-External customers
|
|
|
19,957
|
|
|
|
55,115
|
|
|
|
75,072
|
|
|
|
-
|
|
|
|
75,072
|
|
|
-Inter-segment
|
|
|
-
|
|
|
|
3,615
|
|
|
|
3,615
|
|
|
|
(3,615
|
)
|
|
|
-
|
|
|
Total net revenue
|
|
|
19,957
|
|
|
|
58,730
|
|
|
|
78,687
|
|
|
|
(3,615
|
)
|
|
|
75,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
(5,968
|
)
|
|
|
6,789
|
|
|
|
821
|
|
|
|
(108
|
)
|
|
|
713
|
|
|
|
|
For the years ended December 31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
|
28,442
|
|
|
|
41,214
|
|
|
|
49,761
|
|
|
Outside PRC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
14,978
|
|
|
|
34,526
|
|
|
|
23,312
|
|
|
India
|
|
|
7,949
|
|
|
|
25,126
|
|
|
|
70,421
|
|
|
Rest of the world
|
|
|
23,703
|
|
|
|
19,720
|
|
|
|
10,813
|
|
|
Total net revenue
|
|
|
75,072
|
|
|
|
120,586
|
|
|
|
154,307
|
|
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
|
(a)
|
Repurchase
of Shares from Zhengqi International Holding Ltd.
|
On
January 10, 2018, we entered into a stock repurchase agreement (“Stock Repurchase Agreement”) with Zhengqi International
Holding Limited (“Zhengqi”), pursuant to which we agreed to repurchase 966,136 of our ordinary shares that were originally
issued and sold to Zhengqi on August 18, 2017, at an aggregate purchase price of approximately US$10 million, or US$10.40 per
share. In addition, Zhengqi agreed to forfeit all of its rights to 1,278,776 shares that had been held in escrow and which will
instead be treated as part of the merger consideration shares under the merger agreement pursuant to which the Company acquired
Borqs International. The Stock Repurchase Agreement provides that those shares will be treated in the following manner: 51,151
shares (4% of the total) became additional shares placed in an indemnity escrow account; and 1,227,625 shares were distributed
to the former Borqs International shareholders based on their respective proportionate interests in the merger consideration.
The funds used in the repurchase were the same amount of funds provided by Zhengqi when the shares were sold to Zhengqi on August
18, 2017 under the Backstop and Subscription Agreement between the Company, Zhengqi and EarlyBirdCapital. The Company and Zhengqi
are currently making arrangements for the completion of this transaction.
|
(b)
|
Investment
into Crave and Colmei.
|
On January 18, 2018, the Company entered into an agreement
with Colmei Technology International Ltd (“Colmei”) and its affiliate Shenzhen Crave Communication Co., Ltd (“Crave”),
along with the shareholders of Crave and Colmei (“Selling Shareholders”), pursuant to which the Selling Shareholders
agreed to sell to the Company and the Company agreed to acquire 13.8% of the outstanding shares of Crave and 13.8% of the outstanding
shares of Colmei from the Selling Shareholders, which will not result in the Company’s significant influence in either Colmei
or Crave. Under the agreement, the Company will pay purchase consideration consisting of Company shares and cash. The Company
shares will consist of 473,717 ordinary shares to be issued to the Selling Shareholders at closing and cash in the amount of US$10.0
million to be paid to the Selling Shareholders over a period of 36 months. If approved by the Company’s board of directors,
the Company will also issue additional shares to the Selling Shareholders if the aggregate value of the Company shares initially
issued to the Selling Shareholders under this agreement is less than US$3.0 million on August 18, 2018. This transaction was completed
on March 22, 2018.
|
(c)
|
Share
Purchase by Employees of our Subsidiary in India.
|
In
effort to gain compliance with Nasdaq’s requirement for the Company to have at least 300 round lot shareholders by April
10, 2018, the Company initiated a restricted ordinary shares purchase program through which eligible employees of our wholly owned
subsidiary in India, Borqs Software Solutions Private Ltd, were allowed to voluntarily participate in the purchase of between
100 to 250 restricted ordinary shares of the Company pursuant to the terms and conditions of the Company’s 2017 Equity Incentive
Plan. The purchase price was set at $9.40 per share which was the closing price of the Company’s ordinary shares as traded
on Nasdaq on March 19, 2018, the day immediately prior to the date of the transaction. The participants of the program paid for
the shares by having the purchase amount deducted from their payroll on March 23, 2018. A total of 222 employees participated
and purchased a total of 29,170 ordinary shares.
|
(d)
|
Public
Offering of Ordinary Shares
|
For financing of the Company’s working capital
needs and intended acquisitions, the Company is contemplating a public offering of its ordinary shares to be underwritten by the
Maxim Group. A registration statement on form S-1 was filed on February 14, 2018 and the Company received a round of comments
from the SEC on March 13, 2018. After the filing of this annual report, the Company will immediately respond to those SEC comments
and file an amended S-1 incorporating the Company’s 2017 audited financial statements.
|
(e)
|
Acquisition
of Shanghai KADI Machinery Technology Co., Ltd. (“KADI”)
|
On
January 8, 2018, the Company entered into a letter of intent to acquire a 60% equity interest in KADI, a Chinese company that
develops software and hardware solutions for electric vehicle control modules, such as charging, battery management and vehicle
controls. We are currently negotiating a definitive agreement to acquire such equity interest for an aggregate of $11.7 million
in cash to be paid to KADI and ordinary shares with an agreed-upon value of $3.3 million to be issued to selling shareholders
of KADI. KADI is not a customer or a supplier of Borqs.
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
25.
|
PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
|
Condensed
balance sheets
|
|
|
|
|
As of December 31,
|
|
|
|
|
Note
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
US$
|
|
|
US$
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
15
|
|
|
|
2
|
|
|
Prepaid expenses and other current assets
|
|
|
|
|
2
|
|
|
|
164
|
|
|
Amount due from subsidiaries
|
|
(b)
|
|
|
50,107
|
|
|
|
68,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
50,124
|
|
|
|
68,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
|
|
|
|
|
|
|
|
|
|
Investments in subsidiaries
|
|
|
|
|
(35,247
|
)
|
|
|
(13,197
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
|
|
(35,247
|
)
|
|
|
(13,197
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
14,877
|
|
|
|
55,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other payables
|
|
|
|
|
271
|
|
|
|
2,810
|
|
|
Short-term bank and other borrowings
|
|
|
|
|
-
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
|
271
|
|
|
|
7,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
|
271
|
|
|
|
7,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mezzanine equity
|
|
|
|
|
68,862
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mezzanine equity
|
|
|
|
|
68,862
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ (deficit) equity
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
1,178
|
|
|
|
120,642
|
|
|
Accumulated deficit
|
|
|
|
|
(52,808
|
)
|
|
|
(72,333
|
)
|
|
Accumulated other comprehensive loss
|
|
|
|
|
(2,626
|
)
|
|
|
(507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ (deficit) equity
|
|
|
|
|
(54,256
|
)
|
|
|
47,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, mezzanine equity and shareholders’ equity
|
|
|
|
|
14,877
|
|
|
|
55,612
|
|
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
25.
|
PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(CONTINUED)
|
Condensed
statements of operations
|
|
|
For the years ended December 31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
US$
|
|
|
|
US$
|
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
(123
|
)
|
|
|
(383
|
)
|
|
|
(856
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(123
|
)
|
|
|
(383
|
)
|
|
|
(856
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment (loss) income
|
|
|
(183
|
)
|
|
|
383
|
|
|
|
(18,669
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(306
|
)
|
|
|
-
|
|
|
|
(19,525
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(306
|
)
|
|
|
-
|
|
|
|
(19,525
|
)
|
Condensed
statements of comprehensive loss
|
|
|
For the years ended December 31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
US$
|
|
|
|
US$
|
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profit (loss)
|
|
|
2,111
|
|
|
|
3,228
|
|
|
|
(12,569
|
)
|
|
Other comprehensive income (loss), net of tax of nil:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net of tax of nil
|
|
|
(1,288
|
)
|
|
|
(1,477
|
)
|
|
|
2,119
|
|
|
Other comprehensive loss, net of tax of nil:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
823
|
|
|
|
1,751
|
|
|
|
(10,450
|
)
|
|
Comprehensive income (loss) attributable to the Company’s ordinary shareholders
|
|
|
823
|
|
|
|
1,751
|
|
|
|
(10,450
|
)
|
Condensed
statements of cash flows
|
|
|
For the years ended December 31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash generated from operating activities
|
|
|
156
|
|
|
|
5
|
|
|
|
4,118
|
|
|
Net cash used in investing activities
|
|
|
(3,466
|
)
|
|
|
-
|
|
|
|
(17,117
|
)
|
|
Net cash generated from financing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
12,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
(3,310
|
)
|
|
|
5
|
|
|
|
(13
|
)
|
|
Cash at beginning of the year
|
|
|
3,320
|
|
|
|
10
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of the year
|
|
|
10
|
|
|
|
15
|
|
|
|
2
|
|
BORQS
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts
in thousands of US dollars (“US$”), unless otherwise stated)
25.
|
PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(CONTINUED)
|
|
(a)
|
Basis of presentation
|
In
the Company-only financial statements, the Company’s investment in subsidiaries is stated at cost plus equity in undistributed
earnings of subsidiaries since inception.
The
Company records its investment in its subsidiary under the equity method of accounting as prescribed in ASC 323-10,
Investment-Equity
Method and Joint Ventures
, and such investment is presented on the balance sheet as “Investment in subsidiaries”
and the share of the subsidiaries’ profit or loss is presented as “Share of profits (losses) of subsidiaries and Consolidated
VIEs” on the statements of operations.
The
subsidiaries did not pay any dividends to the Company for the years presented.
Certain
information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been
condensed or omitted and as such, these Company-only financial statements should be read in conjunction with the Group’s
consolidated financial statements.
|
(b)
|
Intercompany transactions
|
The
Company had the following related party balances as of December 31, 2016 and 2017:
|
|
|
As of December 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
US$
|
|
|
US$
|
|
|
Amount due from subsidiaries
|
|
|
|
|
|
|
|
|
|
- Borqs HK
|
|
|
50,107
|
|
|
|
68,643
|
|