{"url_path":"/sec/brqsf/10-k/2026/item-3","section_key":"item-3","section_title":"Item 3 KEY INFORMATION**","topic":"sec","document":{"doc_type":"20-F","doc_date":"2026-05-15","source_url":"https://www.sec.gov/Archives/edgar/data/1650575/0001213900-26-057706-index.html","accession_number":"0001213900-26-057706","cik":"0001650575","ticker":"BRQSF","issuer_name":"Borqs Technologies, Inc.","edgar_url":"https://www.sec.gov/Archives/edgar/data/1650575/0001213900-26-057706-index.html","primary_entity_key":"0001650575","primary_entity_name":"Borqs Technologies, Inc."},"word_count":21034,"has_tables":true,"body_markdown":"**ITEM 3. KEY INFORMATION**\n\n \n\n**A.**\n**Selected Financial Data**\n\n \n\nThe following selected consolidated\nfinancial data should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and our consolidated\nfinancial statements and notes included elsewhere in this Annual Report. The selected consolidated statements of operations data for each\nof the years in the three years ended December 31, 2025, and the consolidated balance sheet data as of December 31, 2024 and 2025, are\nderived from our audited consolidated financial statements and notes which have been prepared in accordance with U.S. generally accepted\naccounting principles, or U.S. GAAP. The Company opted for the rule that only three years of operating results are required to be presented\nin accordance with the applicable regulations of the British Virgin Islands.\n\n \n\nHolu Hou Energy LLC (“HHE”),\nwhich identified the innovative clean energy business, a separate segment was reclassified as held for sale as of December 31, 2022, 2023\nand 2024, for the carrying amounts will be recovered principally through a sale, and revenues and expenses related to HHE have been reclassified\nas discontinued operations for the year ended December 31, 2022 until it has been deconsolidated.\n\n \n\nOn November 11, 2024, the\nCompany announced that Sasken Technologies Limited (“Sasken”), a leading global product engineering and digital transformation\nservices company based in India, signed a Letter of Intent with the Company to acquire the Group’s certain hardware and software\nservices business. On April 8, 2025, the Company signed a Share Purchase Agreement (“SPA”) with Sasken Design Solutions Pte.\nLtd, a wholly owned subsidiary of Sasken. The SPA provided for Sasken’s acquisition of the Company’s core business through\nthe purchase of BORQS International Holding Corp, the Company’s wholly owned subsidiary. The transactions contemplated by the SPA\n(the “Sale”) were consummated on April 9, 2025. Included in the Sale are all of the Company’s embedded software design\nand customized hardware manufacturing of products for the Internet of Things (IoT) activities, customer contracts, technology licenses,\nintellectual property, employment agreements with key personnel and assets required for the Company’s operations. Sasken agreed\nto pay the Company an aggregate purchase price of $40 million, subject to adjustments for working capital and certain earnout payments\nlinked to performance in 2025. As such, for the years ended December 31, 2024, the Group classified related assets and liabilities as\nheld for sale and reported in discontinued operation for the years ended December 31, 2024 and 2025.\n\n \n\n1 \n\n \n\n \n\n  \nFiscal Years Ended December 31, \n\nConsolidated Statements of Income and Comprehensive Income Data: \n2023  \n2024  \n2025 \n\n  \n($’000) \n\nNet revenues \n 20,567  \n 27,713  \n 13,602 \n\nGross profit \n 3,870  \n 5,786  \n 500 \n\nOperating expenses* \n (15,236) \n (9,320) \n (17,894)\n\nOther operating income \n 22  \n 396  \n - \n\nOperating loss \n (11,344) \n (3,138) \n (17,394)\n\n(Loss) income from continuing operations, before income taxes \n (30,295) \n 17,470  \n (741)\n\nIncome tax (expense) benefit \n 2,084) \n (8) \n (5)\n\nNet (loss) income from continuing operations \n (28,211) \n 17,462  \n (746)\n\n  \n    \n    \n   \n\nDiscontinued operations \n    \n    \n   \n\n(Loss) income from discontinued operations, before income taxes \n 2,368  \n (4) \n (4,999)\n\nIncome tax benefit (expense) \n (1,078) \n (135) \n 945 \n\n(Loss) income from operations of discontinued entities \n 1,290  \n (139) \n (4,054)\n\n  \n -  \n -  \n - \n\nNet (loss) income \n (26,921) \n 17,323  \n (4,800)\n\n \n\n*\n(Operating expenses for 2023 included stock-based compensation of $7.8 million and reversal of allowance for doubtful accounts of $0.50 million)\n\n \n\n*\n(Operating expenses for 2024 included stock-based compensation of $0.05 million and provision of allowance for doubtful accounts of $0.02 million)\n\n \n\n*\n(Operating expenses for 2025 included stock-based compensation of $2.44 million and provision of allowance for doubtful accounts of $1.12 million)\n\n \n\n  \nFiscal Years Ended December 31, \n\nConsolidated Balance Sheets Data: \n2024  \n2025 \n\n  \n($’000) \n\nCash and cash equivalents \n 2,032  \n 2,615 \n\nRestricted cash \n 26  \n - \n\nTime deposits \n 3,377  \n - \n\nShort term investments \n -  \n 4,888 \n\nAccounts receivable, net \n 116  \n 156 \n\nPrepaid expenses and other current assets, net \n 6,747  \n 847 \n\nTotal assets \n 25,409  \n 8,554 \n\nTotal liabilities \n 29,007  \n 1,608 \n\nTotal shareholders’ (deficit) equity \n (3,598) \n 6,946 \n\n \n\n**B.**\n**Capitalization and Indebtedness**\n\n \n\nNot applicable.\n\n \n\n**C.**\n**Reasons for the Offer and Use of Proceeds**\n\n \n\nNot applicable.\n\n \n\n2 \n\n \n\n \n\n**D.**\n**Risk Factors**\n\n \n\n**Summary Risk Factors**\n\n \n\nThe principal factors and\nuncertainties that make investing in our ordinary shares risky, include, among others:\n\n \n\n**Risks Related to our Business and Industry**\n\n \n\n \n●\nThere is substantial doubt about our ability to continue as a going concern, which could materially and adversely affect our business, results of operations, financial condition, and share price.\n\n \n\n \n●\nWe have sold a substantial portion of our operating business, and we may not be able to successfully execute our future strategy or generate meaningful revenue going forward.\n\n \n\n \n●\nAlthough our previously\ndefaulted loans were completely paid off as of February 17, 2021, we may become in default with loans in the future and the\nfollowing risks will reappear. As of the filing of this Annual Report, the Company has no short-term or long-term loans.\n\n \n\n \n●\nIf alternative mobile\noperating system platforms become more widely used or accepted, or mobile chipset manufacturers, mobile device Original Equipment\nManufacturers (“OEMs” and each an “OEM”) and mobile operators do not continue to make product and service\nofferings compatible with the Android platform, our business could be materially harmed. As of April 9, 2025 we completed the sale of our core businesses to Sasken (the “Sale”); and according to the non-compete\nclauses in the Sale, the Company and its key executives are restricted from participating in similar ODM and IoT business activities for\na period of 5 years after the Sale. Hence, this particular risk was applicable to the Company prior to the completion of the Sale on April\n9, 2025. Thereafter for 5 years, the Company and its key executives will not participate in such activities.\n\n \n\n \n●\nDue to intense competition for highly skilled personnel, we may fail\nto attract and retain qualified personnel to support our operations; as a result, our ability to bid for and obtain new projects may be\nadversely affected.\n\n \n\n \n●\nAs mandated by the Committee on Foreign Investment in the United States (“CFIUS”), we have terminated our ownership in Holu Hou Energy LLC (“HHE”) and completed our divestiture of HHE as of March 6, 2024.\n\n \n\n \n●\nAs of April 9, 2025 we completed the sale of all of our core businesses\nto Sasken. We currently do not have a viable business activity unless we initiate and/or acquire another non-competing activity in the\nfuture. The new business activities, if we are successful in starting or acquiring, will have new and different risk factors in additional\nto the risk factors as described herein.\n\n \n\n \n●\nWe are subject to various anti-corruption and anti-bribery laws, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and PRC and Indian anti-corruption and anti-bribery laws; any determination that we have violated such laws could damage our business and reputation, limit our ability to bid for certain business opportunities, and subject us to significant criminal and civil penalties, civil litigation (such as shareholder derivative suits), and commercial liabilities.\n\n \n\n3 \n\n \n\n \n\n \n●\nTrading on the OTC Markets is volatile and sporadic, which could depress the market price of the Company’s ordinary shares and make it difficult for the Company’s shareholders to resell their shares.\n\n \n\n \n●\nGlobal economic and political conditions may adversely impact our business, operating results and financial condition.\n\n \n\n \n●\nWe may, from time to time, be involved in future litigation in which substantial monetary damages are sought.\n\n \n\n \n●\nIf we fail to implement and maintain effective internal control over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud, and investor confidence and the market price of our ordinary shares may be adversely impacted.\n\n \n\n**Risks Related to Our Business Operations and Doing Business in\nChina**\n\n \n\n \n●\nThe Chinese government exerts substantial influence over the manner in which we may conduct our business activities, and if we are unable to substantially comply with any PRC rules and regulations, our financial condition and results of operations may be materially adversely affected.\n\n \n\n \n●\nThe recent PRC government intervention into business activities by U.S.-listed Chinese companies may indicate an expansion of the PRC’s authority that could negatively impact our existing and future operations in Hong Kong and China.\n\n \n\n \n●\nChanges in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and results of operations.\n\n \n\n \n●\nUncertainties and quick change in the interpretation and enforcement of Chinese laws and regulations with little advance notice could result in a material and negative impact our business operation, decrease the value of our ordinary shares and limit the legal protections available to us.\n\n \n\n \n●\nSubstantial uncertainties exist with respect to the interpretation and implementation of any new PRC laws, rules and regulations relating to foreign investment and how it may impact the viability of our current corporate structure, corporate governance and our business operations.\n\n \n\n \n●\nIf the Chinese government were to impose new requirements for permission or approval from the PRC Authorities including China Securities Regulatory Commission (“CSRC”) or CAC, or any other entity that is required to approve the trading of our shares on the OTCQB Venture Market (“OTCQB”), to issue our ordinary shares to foreign investors or list on a foreign exchange, such action could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless.\n\n \n\n \n●\nRisks related to a future determination that the Public Company Accounting Oversight Board (the “PCAOB”) is unable to inspect or investigate our auditor completely.\n\n \n\n \n●\nThere are significant legal and other obstacles to obtaining information needed for shareholder investigations or litigation outside China or otherwise with respect to foreign entities.\n\n \n\n \n●\nChina’s economic, political and social conditions, as well as changes in any government policies, laws and regulations, could have a material adverse effect on our business.\n\n \n\n \n●\nUncertainties with respect to the PRC legal system could harm us.\n\n \n\n4 \n\n \n\n \n\n \n●\nRecent trade policy initiatives announced by the United States administration against the PRC may adversely affect our business.\n\n \n\n \n●\nOur subsidiaries in China are subject to restrictions on making dividends and other payments to it or any other affiliated company.\n\n \n\n \n●\nThe discontinuation of any of the preferential tax treatments currently available to our PRC subsidiaries could materially increase our tax liabilities.\n\n \n\n \n●\nWe face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.\n\n \n\n \n●\nWe may not be able to obtain certain treaty benefits on dividends paid by our PRC subsidiary to us through our Hong Kong Subsidiary.\n\n \n \n \n\n \n●\nPRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of our securities offering to make loans or additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.\n\n \n\n \n●\nRestrictions on foreign currency may limit our ability to receive and use our revenue effectively.\n\n \n\n \n●\nFluctuations in the value of the RMB may have a material adverse effect on your investment.\n\n \n\n \n●\nPRC regulations relating to the establishment of offshore holding companies by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.\n\n \n\n \n●\nFailure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.\n\n \n\n \n●\nPRC regulations establish complex procedures for some acquisitions conducted by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.\n\n \n\n \n●\nSubstantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.\n\n \n\n \n●\nThe enforcement of the labor laws and other labor-related regulations in the PRC may adversely affect our results of operations.\n\n \n\n \n●\nOur failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.\n\n \n\n \n●\nIf the custodians or authorized users of our controlling non-tangible assets, including corporate chops and seals, fail to fulfill their responsibilities or misappropriate or misuse those assets, our business and operations could be materially and adversely affected.\n\n \n\n**Risks Related to Our Securities**\n\n* *\n\n \n●\nIf equity research analysts publish unfavorable commentary or downgrade our ordinary shares, the price and trading volume of our ordinary shares could decline.\n\n \n\n \n●\nFuture equity issuances could result in dilution, which could cause our ordinary shares price to decline.\n\n \n\n \n●\nFuture sales of our ordinary shares by existing shareholders may cause our ordinary shares price to decline.\n\n \n\n \n●\nWe may be classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. holders of our ordinary shares.\n\n \n\n5 \n\n \n\n \n\n*Investing in our ordinary\nshares involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this\nreport, including our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of\nFinancial Condition and Results of Operations,” before deciding whether to invest in our ordinary shares. The occurrence of any\nof the events or developments described below could materially and adversely affect our business, financial condition, results of operations\nand growth prospects. In such an event, the market price of our ordinary shares could decline, and you may lose all or part of your investment.\nAdditional risks and uncertainties not presently known to us or that we currently believe are not material may also impair our business,\nfinancial condition, results of operations and growth prospects.*\n\n \n\n**Risks Related to our Business and Industry**\n\n \n\n**Summary of Risks Associated with Our Business Due to Changing\nPRC Rules and Regulations**\n\n \n\nOur business is subject to\na number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial\ncondition, results of operations, cash flows and prospects that you should consider before making a decision to invest in our ordinary\nshare and warrants, including risks and uncertainties, among others, the following:\n\n \n\n \n●\nThe Chinese government exerts substantial influence over the manner in which we may conduct our business activities, and if we are unable to substantially comply with any PRC rules and regulations, our financial condition and results of operations may be materially adversely affected. See “*Risk Factors -- Risks Related to Our Business Operations and Doing Business in China”*for additional information*.*\n\n \n\n \n●\nChanges in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and results of operations. See “*Risk Factors -- Risks Related to Our Business Operations and Doing Business in China”*for additional information*.*\n\n \n\n \n●\nUncertainties and quick change in the interpretation and enforcement of Chinese laws and regulations with little advance notice could result in a material and negative impact on our business operation, decrease the value of our ordinary shares and warrants and limit the legal protections available to us. See “*Risk Factors -- Risks Related to Our Business Operations and Doing Business in China”*for additional information*.*\n\n \n\n \n●\nAny change of regulations and rules by Chinese government may intervene or influence our operations at any time and any additional control over offerings conducted overseas and/or foreign investment in China- based issuers could result in a material change in our operations and/or the value of our ordinary shares and could significantly limit or completely hinder our ability to offer our ordinary shares to investors and cause the value of such securities to significantly decline or be worthless. See “*Risk Factors -- Risks Related to Our Business Operations and Doing Business in China” for additional information.*\n\n \n\n \n●\nOur ordinary shares may be delisted or prohibited from being traded under the Holding Foreign Companies Accountable Act (“HFCAA”) if the Public Company Accounting Oversight Board (“PCAOB”) were unable to fully inspect our auditor. The delisting or the cessation of trading of our ordinary shares, or the threat of them being delisted or prohibited from being traded on a national securities exchange or in the over-the-counter market, may materially and adversely affect the value and/or liquidity of your investment. Additionally, if the PCAOB were unable to conduct full inspections of our auditor, it would deprive our investors of the benefits of such inspections. Pursuant to the HFCAA, the PCAOB issued a Determination Report on December 16, 2021 which found that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in: (1) mainland China of the PRC, and (2) Hong Kong. In addition, the PCAOB’s report identified the specific registered public accounting firms which are subject to these determinations. Our auditor, Summit Group CPAs, P.C. (“SG CPA”, formerly known as “Yu Certified Public Accountant, P.C.”), is headquartered in New York, New York, and has been inspected by the PCAOB on a regular basis. Our auditor is not headquartered in mainland China or Hong Kong and was not identified in this report as a firm subject to the PCAOB’s determination. Notwithstanding the foregoing, if the PCAOB is not able to fully conduct inspections of our auditor’s work papers in China, you may be deprived of the benefits of such inspection which could result in limitation or restriction to our access to the U.S. capital markets and trading of our securities may be prohibited under the HFCA Act. See “*Risk Factors -- Risks Related to Our Business Operations and Doing Business in China*” for additional information.\n\n \n\n6 \n\n \n\n \n\n \n●\nAny failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions. See “*Risk Factors -- Risks Related to Our Business Operations and Doing Business in China”*for additional information*.*\n\n \n\n \n●\nIf we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders. See “*Risk Factors -- Risks Related to Our Business Operations and Doing Business in China”*for additional information*.*\n\n \n\n \n●\nRegulatory bodies of the United States may be limited in their ability to conduct investigations or inspections of our operations in China. See “*Risk Factors -- Risks Related to Our Business Operations and Doing Business in China”*for additional information*.*\n\n \n\n \n●\nSubstantial uncertainties exist with respect to the interpretation and implementation of the newly enacted PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance, business operations and financial results. See “*Risk Factors -- Risks Related to Our Business Operations and Doing Business in China”*for additional information*.*\n\n \n\n \n●\nIt will be difficult to acquire jurisdiction and enforce liabilities against our officers, directors and assets based in Hong Kong. See “*Risk Factors -- Risks Related to Our Business Operations and Doing Business in China”*for additional information.\n\n \n\n \n●\nThe Hong Kong legal system embodies uncertainties which could negatively affect our trading on the OTCQB and limit the legal protections available to you and us. See “*Risk Factors -- Risks Related to Our Business Operations and Doing Business in China”*for additional information*.*\n\n \n\n \n●\nSince 2020 and continuing into 2025, the Chinese government has been implementing increasingly stringent rules and regulations on its domestic business activities, particularly for companies whose shares are listed on U.S. exchanges. Such policy changes have caused profound impact on the value of the affected companies’ equities and resulted in significant drop in market valuation for their shareholders. The recent regulatory changes in China have focused on the following industries:\n\n \n\n \n1)\nCryptocurrency mining and coin offerings\n\n \n\n \n2)\nSocial media and cyber security\n\n \n\n \n3)\nOnline gaming\n\n \n\n \n4)\nRide-hailing\n\n \n\n \n5)\nExtra-curriculum education and tutoring\n\n \n\n \n6)\nVariable interest entity structures\n\n \n\nThe Company does not participate in\nany of the above six categories, and particularly our division that operated a MVNO business under a variable interest entity structure\nin China was sold as of October 29, 2020. Also, as indicated in this 2025 Annual Report filed on Form 20-F, our revenues recognized from\nactivities in China represent 50.6%, 50.6% and 31.2% of our total net revenues for the years 2025, 2024 and 2023, respectively. However,\nas the rules and regulations in China continue to evolve, the Company may become affected in future periods causing the public market\nvaluation of our shares to decline.\n\n \n\n7 \n\n \n\n \n\n \n●\nWe are incorporated under the laws of the British Virgin Islands. Our principal executive offices are located in Hong Kong. We are a global leader in software, development services and products providing customizable, differentiated and scalable Android-based smart connected devices and cloud service solutions. We are also a leading provider of commercial grade Android platform software for mobile chipset manufacturers, mobile device OEMs and mobile operators, as well as complete product solutions of mobile connected devices for enterprise and consumer applications We are not a Critical Information Infrastructure Operator (“CIIO”) or a Data Processing Operator (“DPO”) as defined in Cybersecurity Review Measures (Revised Draft for Public Comments) published by Cyberspace Administration of China or the CAC on July 10, 2021. The subsidiary Beijing Big Cloud Century Technology Ltd (“BC-Tech”) used to operate a mobile virtual network operator (“MVNO”) business in China with a VIE structure. The VIE entity was a holding company known as Beijing Big Cloud Network Technology Co. Ltd (“BC-NW”) which owned the operating company known as Yuantel (Beijing) Telecommunications Technology Co., Ltd (“Yuantel”). Yuantel was sold as of October 29, 2020. BC-NW was re-organized with the VIE structure dismantled and became directly owned by BC-Tech, and therefore BC-NW remains on the Company’s organization chart. Therefore, we are not covered by the permission and requirements from the China Securities Regulatory Commission (“CSRC”), CAC or any other entity that is required to approve of the VIE’s operations, and we have received all requisite permissions to operate our business in China and no permission has been denied.\n\n \n\n \n●\nWe do not believe we are required to obtain any permission from any PRC governmental authorities to offer securities to foreign investors. We have been closely monitoring regulatory developments in China regarding any necessary approvals from the CSRC and other PRC governmental authorities required for overseas listings, on the U.S. exchanges or on a foreign exchange other than the U.S., including the trading of our shares on the OTCQB. As of the date of this annual report, we have not received any inquiry, notice, warning, sanctions or regulatory objection to our trading on the OTCQB from the CSRC or other PRC governmental authorities. However, there remains significant uncertainty as to the enactment, interpretation and implementation of regulatory requirements related to overseas securities offerings and other capital markets activities. If we inadvertently conclude that the approvals of the CSRC, or any other regulatory authority are not required for our trading on the OTCQB, or applicable laws, regulations, or interpretations change and we are required to obtain approvals in the future, obtaining such approvals could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of our securities, including the ordinary shares, to significantly decline or be worthless. Any uncertainties and/or negative publicity regarding such an approval requirement could have a material adverse effect on the trading price of our securities. In addition, these regulatory agencies may impose fines and penalties on our operations in China, limit our ability to pay dividends outside of China, limit our operations in China, delay or restrict the repatriation of the proceeds from any overseas securities offering into China or take other actions that could have a material adverse effect on our business, financial condition, results of operations and prospects, as well as the trading price of our securities. The CSRC, or other PRC regulatory agencies also may take actions requiring us, or making it advisable for us, to halt any of our securities offerings before settlement and delivery of our ordinary shares. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that settlement and delivery may not occur. *See “Risk Factors –Risks Related to Our Business Operations and Doing Business in China”.*\n\n \n\n**There is substantial doubt about our ability\nto continue as a going concern, which could materially and adversely affect our business, results of operations, financial condition,\nand share price.**\n\n \n\nAs of December 31, 2025, we\nhad total current assets of $8.5 million including cash and cash equivalents of approximately $2.6 million and generated a net income\nfrom continuing operations of approximately $9.7 million and net decrease in cash of approximately $0.9 million for the year then ended.\nHowever, despite these results, we have a history of significant operating losses, recurring net cash outflows, and a deteriorated net\ncurrent asset position. Our independent auditors issued an unqualified opinion on our consolidated financial statements, but included\nan emphasis of matter paragraph stating that these conditions raise substantial doubt about our ability to continue as a going concern.\n\n  \n\nThe consolidated financial\nstatements included in this annual report have been prepared on a going concern basis and do not reflect any adjustments that might result\nfrom our inability to continue as a going concern. Management’s assessment of our ability to continue as a going concern involved\nmaterial judgment and estimation, particularly with respect to projected cash flows, planned capital expenditures, expected financing\nactivities, and the timing and realization of revenue. If we are unable to execute our plans or if our assumptions prove to be inaccurate,\nour ability to meet our financial obligations may be compromised.\n\n \n\nOur continued operations depend\non our ability to meet working capital requirements and to obtain sufficient funding, including through short-term supply chain financing,\ncustomer advances, and financing from financial institutions. There is no assurance that such funding will be available when needed or\non terms acceptable to us. In addition, on April 9, 2025, we disposed of certain hardware and software services business, which represented\na significant portion of our operations and may adversely affect our financial position and future results.\n\n \n\n8 \n\n \n\n \n\nIf we are unable to continue\nas a going concern, we may be forced to significantly curtail or cease operations, liquidate our assets, or seek protection under applicable\nbankruptcy laws. Any such outcome could materially reduce the value of our assets and harm our shareholders’ interests. In addition,\nour ability to raise additional capital could be significantly impaired, and the market price of our shares may decline.\n\n \n\n**We have sold a substantial portion of our\noperating business, and we may not be able to successfully execute our future strategy or generate meaningful revenue going forward.**\n\n** **\n\nOn April 9, 2025, we completed\nthe sale of our core operating business to Sasken Design Solutions Pte. Ltd., a wholly owned subsidiary of Sasken Technologies Limited,\npursuant to the SPA signed on April 8, 2025. The sale included substantially all of our embedded software design and customized hardware\nmanufacturing activities for IoT products, along with related customer contracts, technology licenses, intellectual property, key personnel\nemployment agreements, and other operating assets.\n\n \n\nFollowing the transaction,\nour future strategy and business model remain uncertain and subject to change. We may seek to redeploy the proceeds of the sale in new\nlines of business, pursue acquisitions, or return capital to shareholders. There can be no assurance that we will be able to identify\nor successfully execute on any such strategy, or that any such strategy will create value for our shareholders. Until and unless we implement\na new business plan, we may have limited operations and no material sources of revenue, which could adversely affect our financial condition\nand market price of our securities. \n\n \n\n**We may undertake acquisitions, investments,\njoint ventures or other strategic alliances in the future, which could expose us to new operational, regulatory and market risks. In addition,\nsuch future and past undertakings may not be successful, which may adversely affect our business, results of operations, financial condition\nand prospects.**\n\n \n\nSince the sale of our core\nbusinesses to Sasken in April 2025 and the completion of our divestiture of HHE in March 2024, we may start or acquire other business\nactivities, participate in investments, joint ventures or other strategic alliances if the appropriate opportunities arise. These potential\nbusiness plans, acquisitions, investments, joint ventures and strategic alliances may expose us to new operational, regulatory and market\nrisks, as well as risks associated with additional capital requirements. In addition, we may not be able to identify suitable future acquisition\nor investment candidates or joint venture or alliance partners. Even if we identify suitable candidates or partners, we may be unable\nto complete an acquisition, investment or alliance on terms commercially acceptable to us.\n\n \n\n9 \n\n \n\n \n\nIn addition, our ability to\nsuccessfully integrate acquired companies and their operations may be adversely affected by a number of factors, including, among others,\nthe ability to capitalize on anticipated synergies, diversion of resources and management’s attention, difficulties in retaining\npersonnel of the acquired companies, unanticipated problems or legal liabilities and tax and accounting issues. If we fail to integrate\nany acquired company efficiently, our earnings, revenues, gross margins, operating margins and business operations could be adversely\naffected. The integration of acquired companies is a complex, time-consuming and expensive process.\n\n \n\n**As mandated by the Committee on Foreign\nInvestment in the United States (“CFIUS”), we have terminated our ownership in Holu Hou Energy LLC.**\n\n \n\nOn December 13, 2022, Borqs\nTechnologies received a letter from the Department of the Treasury on behalf of the Committee on Foreign Investment in the United States\n(CFIUS) stating that the Company is required to fully divest its ownership interests and rights in HHE due to HHE’s solar energy\nstorage system and EnergyShare technology for Multi-Dwelling Residential Units being deemed a potential national security risk.\n\n \n\nOn December 31, 2022, the\nCompany resolved that in order to comply fully with the requirements of the CFIUS Letter which involve multiple steps that the Company\nmust adhere to, including: (i) Entering into a National Security Agreement with various departments of the US government with a plan that\nis effective, monitorable and verifiable to divest Borqs’ investment interests and rights in HHE; (ii) Selection of a trustee and\nentering into a Divestment Trust Agreement, and assigning the Company’s interest in HHE to the trustee; and, (iii) Selection of\na nationally recognized investment bank as the exclusive agent for the divestment of HHE. Besides, the Group also resolved that as of\nDecember 31, 2022, terminates its control of HHE by (i) removal of all of the Group’s representatives from HHE’s Board of\nDirectors, (ii) relinquishment of Class A Membership Unit voting rights, and (iii) reduction of the Group’s ownership of HHE from\n51% down to 49% by assigning 2% of the ownership back to HHE. By taking the above actions, the Company no longer has a controlling interest\nin HHE and resulting in the deconsolidation of HHE as of December 31, 2022.\n\n \n\nOn March 16, 2023, the Company\nand HHE entered into a National Security Agreement (“NSA”) with the Department of Defense and the Department of the Treasury.\nThe NSA provides that the divestment shall occur within six months unless extended by the U.S. Government. The NSA also contains standstill\nprovisions which provide that the Company shall not acquire any additional ownership interest in HHE, merge with or into HHE, effect any\nchanges to the rights held by the Company, except as necessary to effect its obligations under the NSA, or acquire or take possession\nof any assets of HHE. Further, upon the completion of the Divestment, the Company shall terminate or irrevocably waive any information,\nconsent, board appointment, board observer, or other governance rights held by the Company, except for any rights that are determined\nby the U.S. Government to be necessary to effect the provisions of the NSA. The NSA outlines the steps to be taken concerning the Divestment:\nengaging a nationally recognized investment bank with experience in administering competitive sales and auction processes; assigning and\nhiring of security and monitoring personnel to directly communicate with the U.S. Government; removing all of Borqs’ administrative\nand technical influence over HHE; and creating a plan to divest all of Borqs’ investment interests and rights in HHE. Pursuant to\nthe requirement of the NSA, Borqs has assigned its interests in HHE into a Divestment Trust according to a Divestment Trust Agreement\n(“DTA”) dated March 20, 2023 entered into between Borqs, HHE, and a trustee.\n\n \n\nIn May 2023, the Company engaged\nCantor Fitzgerald & Co. (“Cantor Fitzgerald”) as its exclusive financial advisor concerning the divestment of the Company’s\nownership in HHE.\n\n \n\nThe divestment of the Company’s\nownership in Holu Hou Energy LLC has been completed as of March 6, 2024. The Company received a letter dated September 4, 2024, from the\nDepartment of the Treasury and the Department of Defense (the “CFIUS Monitoring Agencies” or “CMAs”) notifying\nthe Company that the CMAs were satisfied that the Divestment required by the NSA had been effectuated and that the NSA was terminated.\n\n \n\n10 \n\n \n\n \n\n**Our success depends substantially on the\ncontinuing efforts of our senior executives and other key personnel, and our business may be severely disrupted if we lose their services.**\n\n \n\nOur future success heavily\ndepends upon the continued services of our senior executives and other key employees. In particular, we rely on the expertise, experience,\ncustomer relationships, and reputation of Pat Chan, our founder, chairman, and chief executive officer. We currently do not maintain key\nman life insurance for any of the senior members of our management team or other key employees. If one or more of our senior executives\nor key employees are unable or unwilling to continue in their present positions, it could disrupt our business operations, and we may\nnot be able to replace them easily or at all. In addition, competition for senior executives and key employees in our industry is intense,\nand we may be unable to retain our senior executives and key employees or attract and retain new senior executive and key employees in\nthe future, in which case our business may be severely disrupted, and our financial condition and results of operations may be materially\nand adversely affected.\n\n \n\nIf any of our senior executives\nor key employees join a competitor or form a competing company, we may lose customers, know-how, and other key employees and staff members\nto them. Also, if any of our business development managers, who generally keep a close relationship with our customers, join a competitor\nor form a competing company, we may lose customers, and our net revenues may be materially and adversely affected. Additionally, there\ncould be unauthorized disclosure or use of our technical knowledge, practices or procedures by such employees. All of our executives and\nkey employees have entered into employment agreements with us that contain non-competition provisions, non-solicitation, and nondisclosure\ncovenants. However, if any dispute arises between our executive officers or key employees and us, such non-competition, non-solicitation,\nand nondisclosure provisions might not provide effective protection to us, especially in China, where most of these executive officers\nand key employees reside, in light of the uncertainties with China’s legal system. See “Risk Factors — Risks Related\nto Doing Business in China — Uncertainties for the PRC legal system could harm us.”\n\n \n\n**We are subject to various anti-corruption\nand anti-bribery laws, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and PRC and Indian anti-corruption and\nanti-bribery laws; any determination that we have violated such laws could damage our business and reputation, limit our ability to bid\nfor certain business opportunities, and subject us to significant criminal and civil penalties, civil litigation (such as shareholder\nderivative suits), and commercial liabilities.**\n\n \n\nWe are subject to anti-corruption\nand anti-bribery laws in the United States, United Kingdom, China, and India that prohibit certain improper payments made directly or\nindirectly to government departments, agencies, and instrumentalities; officials of those government departments, agencies, and instrumentalities;\npolitical parties and their officials; candidates for political office; officials of public international organizations; persons acting\non behalf of the foregoing; and commercial counterparties. These laws include the U.S. Foreign Corrupt Practices Act, the U.K. Bribery\nAct 2010, the PRC Criminal Law, the PRC Anti-Unfair Competition Law, the Indian Prevention of Corruption Act 1988, the Indian Penal Code,\nand anti-corruption laws in various Indian states.\n\n \n\nWe are engaged in business\nin a number of countries that are regarded as posing significant risks of corruption. Of particular note, we conduct operations, have\nagreements with state-controlled enterprises and other third parties, and make sales in the PRC, and we have research and development\nactivities in India, each of which may be exposed to corruption risk. It is our policy to implement safeguards and procedures to prohibit\nthese practices by our employees, officers, directors, or by third parties acting on our behalf. However, we cannot rule out the risk\nthat any of our employees, officers, directors, or third parties acting on our behalf may engage in breaches of our policies or anti-corruption\nlaws, for which we might be held responsible.\n\n \n\nAllegations of violations\nof these anti-corruption and anti-bribery laws, and investigations into such allegations, could negatively affect our reputation, business,\noperating results, and financial condition. The violation of these laws may result in substantial monetary and even criminal sanctions,\nfollow-on civil litigation (such as shareholder derivative suits), and monitoring of our compliance program by the United States or other\ngovernments, each of which could negatively affect our reputation, business, operating results, and financial condition. In addition,\nthe United States or other governments may seek to hold us liable for violations of these laws committed by companies in which we invest\nor acquire.\n\n \n\n11 \n\n \n\n \n\n**Because our ordinary shares are quoted on\nthe OTC, your ability to sell your shares in the secondary trading market may be limited.**\n\n \n\nAs of the date of this filing,\nour ordinary shares are quoted on the OTC Markets Group, Inc.’s OTCQB Venture Market, and such market is currently the only trading\nmarket for BRQSF. We cannot assure that BRQSF will continue to trade on this market, whether broker-dealers will continue to provide public\nquotes of BRQSF on this market, whether the trading volume of BRQSF will be sufficient to provide for respective efficient trading markets\nor whether quotes for BRQSF will continue on this market in the future, which could result in significantly lower trading volumes and\nreduced liquidity for investors seeking to buy or sell BRQSF. As a result, prices for shares of BRQSF may be lower than might otherwise\nprevail if BRQSF were listed on a national securities exchange.\n\n** **\n\n**Global economic and political conditions may adversely impact\nour business, operating results and financial.**\n\n** **\n\nWe are currently operating\nin a period of economic uncertainty and capital markets disruption, which has been significantly impacted by geopolitical instability\ndue to the ongoing military conflict between Russia and Ukraine and conflicts in the Middle East. Our business, financial condition\nand results of operations may be materially adversely affected by any negative impact on the global economy and capital markets resulting\nfrom the conflict in Ukraine or any other geopolitical tensions.\n\n \n\nThe extent and duration of\nany military action, sanctions and resulting market disruptions are impossible to predict, but could be substantial. Any such disruptions\nmay also magnify the impact of other risks described herein.\n\n \n\n**We may, from time to time, be involved in\nfuture litigation in which substantial monetary damages are sought.**\n\n \n\nWe may, from time to time,\nbe involved in future litigation in which substantial monetary damages are sought. Litigation claims may relate to intellectual property,\ncontracts, employment, securities, and other matters arising out of the conduct of our current and past business activities. Any claims,\nwhether with or without merit, could be time-consuming, expensive to defend, and could divert management’s attention and resources.\nWe maintain insurance against some, but not all, of these potential claims, and the levels of insurance we do maintain may not be adequate\nto fully cover any and all losses. Nonetheless, the results of any future litigation or claims are inherently unpredictable, and such\noutcomes could have a material adverse effect on our results of operations, cash from operating activities, or financial condition.\n\n \n\n**If we fail to implement and maintain effective\ninternal control over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations\nor prevent fraud, and investor confidence and the market price of our ordinary shares may be adversely impacted.**  \n\n \n\nWe are required to evaluate\nthe effectiveness of disclosure controls and procedures and internal control over financial reporting. As defined in standards established\nby the United States Public Company Accounting Oversight Board, or the PCAOB, a “material weakness” is a deficiency, or a\ncombination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material\nmisstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis; and a\n“significant deficiency” is less severe than a material weakness in that it is unlikely to have a material impact on financial\nstatements but is important enough to merit attention by those responsible for oversight of the company’s financial reporting. Based\non that evaluation, our management concluded that these controls were ineffective as of December 31, 2025. In the years ended December\n31, 2025 and 2024, we did not maintain sufficient controls over financial reporting processes due to an insufficient number of financial\nreporting personnel with an appropriate level of knowledge and experience in U.S. GAAP and SEC reporting requirements and financial reporting\nprograms to properly address complex U.S. GAAP accounting issues and to prepare and review our consolidated financial statements and related\ndisclosures to fulfill U.S. GAAP and SEC financial reporting requirements. This deficiency constitutes as a material weakness of our internal\ncontrol over financial reporting.\n\n \n\n12 \n\n \n\n \n\nWe are a public company in\nthe United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes Oxley Act, or Section 404, requires us to include\na report from management on the effectiveness of our internal control over financial reporting in our annual report on Form 20-F. Our\nmanagement concluded that our internal control over financial reporting is not effective. In addition, once we cease to be an “emerging\ngrowth company” as such term is defined in the JOBS Act, our independent registered public accounting firm must attest to and report\non the effectiveness of our internal control over financial reporting. Even if our management concludes that our internal control over\nfinancial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may\nissue an adverse opinion if it is not satisfied with our internal controls or the level at which our controls are documented, designed,\noperated or reviewed, or if it interprets the relevant requirements differently from us. In addition, our reporting obligations may place\na significant strain on our management, operational, and financial resources and systems for the foreseeable future. We may be unable\nto timely complete our evaluation testing and any required remediation.\n\n \n\nDuring documenting and testing\nour internal control procedures, in order to satisfy the requirements of Section 404, we may identify other weaknesses and deficiencies\nin our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial\nreporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis\nthat we have effective internal control over financial reporting by Section 404. Moreover, our internal control over financial reporting\nmay not prevent or detect all errors and fraud. A control system, no matter how well it is designed and operated, cannot provide absolute\nassurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.\n\n \n\nWe believe that the Company’s\nfinancial reporting personnel possess significant US GAAP experience to be a valuable resource for us with respect to financial reporting\nwork. We believe we have adequate personnel with knowledge and experience with US GAAP for the preparation of our annual report for the\nyear 2025. However, if we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements\nin our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported\nfinancial information. This could, in turn, limit our access to capital markets, harm our results of operations, and lead to a decline\nin the market price of our ordinary shares. Additionally, ineffective internal control over financial reporting could expose us to increased\nrisk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory\ninvestigations, and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.\n\n \n\n**Risks** **Related to Our Business Operations and Doing Business\nin China**\n\n** **\n\n**The Chinese government exerts substantial\ninfluence over how we may conduct our business activities, and if we are unable to substantially comply with any PRC rules and regulations,\nour financial condition and results of operations may be materially adversely affected.**\n\n \n\nThe Chinese government has\nexercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state\nownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation,\nenvironmental regulations, land use rights, property, and other matters. The central or local governments of these jurisdictions may impose\nnew, stricter regulations or interpretations of existing regulations that would require additional expenditure and efforts on our part\nto ensure our compliance with such regulations or interpretations. Accordingly, government actions in the future, including any decision\nnot to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in\nthe implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof,\nand could require us to divest ourselves of any interest we then hold in Chinese properties.\n\n \n\n13 \n\n \n\n \n\nAs such, our business operations\nand the industries we operate in may be subject to various government and regulatory interference in the provinces in which they operate.\nWe could be subject to regulation by various political and regulatory entities, including various local and municipal agencies and government\nsubdivisions. We may incur increased costs necessary to comply with existing and newly adopted laws and regulations or penalties for any\nfailure to comply. In the event that we are not able to substantially comply with any existing or newly adopted laws and regulations,\nour business operations may be materially adversely affected, and the value of our ordinary shares may significantly decrease.\n\n \n\n**The recent PRC government intervention into\nbusiness activities by U.S.-listed Chinese companies may indicate an expansion of the PRC’s authority that could negatively impact\nour existing and future operations in Hong Kong and China.**\n\n \n\nRecently, the Chinese government\nannounced that it would exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based\nissuers. Under the new measures, China will improve the regulation of cross-border data flows and security, police illegal activity in\nthe securities market and punish fraudulent securities issuances, market manipulation, and insider trading. China will also monitor sources\nof funding for securities investment and control leverage ratios. The Cyberspace Administration of China (“CAC”) has also\nopened a cybersecurity probe into several large U.S.-listed technology companies focusing on anti-monopoly and financial technology regulation\nand, more recently, with the passage of the Data Security Law, how companies collect, store, process, and transfer data. If we are subject\nto such a probe or if we are required to comply with stepped-up supervisory requirements, valuable time from our management and money\nmay be expended in complying and/or responding to the probe and requirements, thus diverting valuable resources and attention away from\nour operations. This may, in turn, negatively impact our operations.\n\n \n\nBorqs is incorporated under\nthe laws of the British Virgin Islands, with our principal headquarters in Hong Kong. We are not a mainland Chinese firm, and we are not\nrequired to obtain permission from the government of the PRC to issue our ordinary shares to foreign investors. However, as a company\nwith limited operations in Hong Kong and the PRC, and given the Chinese government’s significant oversight authority over the conduct\nof business in Hong Kong and the PRC, there is always a risk that the Chinese government may seek to affect operations of any company\nwith any level of operations in mainland China or Hong Kong, including its ability to offer or continue to offer securities to investors,\nlist its securities on a U.S. or other foreign exchange, conduct its business or accept foreign investment. In light of China’s\nrecent expansion of authority in Hong Kong, there are risks and uncertainties that we cannot foresee for the time being, and rules and\nregulations in China can change quickly with little or no advance notice. The Chinese government may intervene or influence our current\nand future operations in Hong Kong and China at any time, or may exert more control over offerings conducted overseas and/or foreign investment\nin issuers like ourselves.\n\n \n\nIf any or all of the foregoing\nwere to occur, this could result in a material change in our Company’s operations and/or the value of our ordinary shares and/or\nsignificantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such\nsecurities to significantly decline or be worthless.\n\n \n\n14 \n\n \n\n \n\n**Changes in China’s economic, political\nor social conditions or government policies could have a material adverse effect on our business and results of operations.**\n\n** **\n\nAll of our manufacturing operations\nare located in China. Accordingly, our business, prospects, financial condition, and results of operations may be influenced to a significant\ndegree by political, economic, and social conditions in China generally and by continued economic growth in China as a whole.\n\n \n\nThe Chinese economy differs\nfrom the economies of most developed countries in many respects, including the amount of government involvement, level of development,\ngrowth rate, control of foreign exchange, and allocation of resources. Although the Chinese government has implemented measures emphasizing\nthe utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of\nimproved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government.\nIn addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies,\nand changes to the enforcement practice of such rules and policies can change quickly with little advance notice. The Chinese government\nalso exercises significant control over China’s economic growth through allocating resources, controlling payment of foreign currency-denominated\nobligations, setting monetary policy, and providing preferential treatment to particular industries or companies.\n\n \n\nWhile the Chinese economy\nhas experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the\neconomy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some\nof these measures may benefit the overall Chinese economy but may have a negative effect on us. For example, our financial condition and\nresults of operations may be adversely affected by government control over capital investments or changes in tax regulations. Any prolonged\nslowdown in the Chinese economy may reduce the demand for our products and materially and adversely affect our business and the results\nof our operations.\n\n \n\n**Uncertainties and quick changes in the interpretation\nand enforcement of Chinese laws and regulations with little advance notice could result in a material and negative impact on our business\noperation, decrease the value of our ordinary shares, and limit the legal protections available to us. **\n\n \n\nThe PRC legal system is based\non written statutes, and prior court decisions have limited value as precedents. Since these laws and regulations are relatively new and\nthe PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations, and rules are not always uniform, and\nthe enforcement of these laws, regulations, and rules involves uncertainties. The enforcement of laws and that rules and regulations in\nChina can change quickly with little advance notice and the risk that the Chinese government may intervene or influence our operations\nat any time, or may exert more control over offerings conducted overseas and/or foreign investment in China-based issuers, could result\nin a material change in our operations and/or the value of our ordinary shares.\n\n \n\nWe cannot rule out the possibility\nthat the PRC government will institute a licensing regime or pre-approval requirement covering our industry at some point in the future.\nIf such a licensing regime or approval requirement were introduced, we cannot assure you that we would be able to obtain any newly required\nlicense promptly, or at all, which could materially and adversely affect our business and impede our ability to continue our operations.\n\n \n\nFrom time to time, we may\nhave to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and court authorities\nhave significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the\noutcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. Furthermore,\nthe PRC legal system is based in part on government policies and internal rules (some of which are not published on time or at all) that\nmay have retroactive effects. As a result, we may not be aware of our violation of these policies and rules until some time after the\nviolation. Such uncertainties, including uncertainty over the scope and effect of our contractual property (including intellectual property),\nand procedural rights, could materially and adversely affect our business and impede our ability to continue our operations.\n\n \n\n15 \n\n \n\n \n\n**Substantial uncertainties exist with respect\nto the interpretation and implementation of any new PRC laws, rules, and regulations relating to foreign investment and how it may impact\nthe viability of our current corporate structure, corporate governance, and our business operations.**  \n\n \n\nOn March 15, 2019, the\nNational People’s Congress promulgated the Foreign Investment Law, which came into effect on January 1, 2020 and replaced the\nthree existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative\nJoint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary\nregulations. The existing foreign-invested enterprises, or FIEs, established prior to the effectiveness of the Foreign Investment\nLaw may keep their corporate forms for five years. The Foreign Investment Law stipulates that China implements the management system of\npre-establishment national treatment plus a negative list to foreign investment, and the government generally will not expropriate\nforeign investment, except under certain special circumstances, in which case it will provide fair and reasonable compensation to foreign\ninvestors. Foreign investors are barred from investing in prohibited industries on the negative list and must comply with the specified\nrequirements when investing in restricted industries on such a list. On December 26, 2019, the State Council promulgated the Implementing\nRegulations of the Foreign Investment Law, which came into effect on January 1, 2020, and further requires that FIEs and domestic\nenterprises be treated equally with respect to policy making and implementation.\n\n \n\nIn addition, the Foreign Investment\nLaw grants national treatment to foreign-invested entities, except for those foreign-invested entities that operate in industries deemed\nto be either “restricted” or “prohibited” in the “negative list.” The current Special Administrative\nMeasures for Market Access of Foreign Investment (Negative List) (2021 Edition) was issued by the National Development and Reform Commission,\nor the NDRC, and the Ministry of Commerce on December 27, 2021, and took effect on January 1, 2022. Furthermore, on December 19, 2020,\nthe NDRC and the Ministry of Commerce jointly issued the Measures for Security Review of Foreign Investment, effective on January 18,\n2021, which provides detailed guidance regarding the security review of foreign investment that has a potential impact on national security.\nHowever, there remain a number of unclear issues under the Measures. Failure to take timely and appropriate measures to comply with any\nof these or similar regulatory compliance requirements could materially and adversely affect our current corporate structure, corporate\ngovernance, and business operations.\n\n \n\nThe PRC Company Law (the “Company\nLaw”), promulgated by the Standing Committee of the National People’s Congress on December 29, 1993, was recently amended\non December 29, 2023, and became effective on July 1, 2024. The Company Law provides new requirements for the time limit for the contribution\nof capital, the company’s organizational structure, corporate governance, and the rights and obligations of shareholders, which\nalso apply to foreign investment enterprises in the PRC. Uncertainties exist with respect to the interpretation and implementation of\nthe Company Law and how it may impact the viability of our current corporate structure, corporate governance, and business operations.\n\n \n\nUnder the Foreign Investment\nLaw, “foreign investment” means any foreign investor’s direct or indirect investment in the PRC, including: (i) establishing\nFIEs in the PRC either individually or jointly with other investors; (ii) obtaining stock shares, stock equity, property shares, other\nsimilar interests in Chinese domestic enterprises; (iii) investing in new project in the PRC either individually or jointly with\nother investors; and (iv) investing other means provided by laws, administrative regulations or State Council provisions. Although the\nForeign Investment Law does not explicitly classify the contractual arrangements, as a form of foreign investment, it contains a catch-all provision\nunder the definition of “foreign investment,” which includes investments made by foreign investors in China through other\nmeans stipulated by laws or administrative regulations or other methods prescribed by the State Council without elaboration on the meaning\nof “other means.” However, the Implementing Regulations of the Foreign Investment Law still do not specify whether foreign\ninvestment includes contractual arrangements.\n\n** **\n\n16 \n\n \n\n** **\n\n**If the Chinese government were to impose\nnew requirements for permission or approval from the PRC Authorities including China Securities Regulatory Commission (“CSRC”)\nor CAC, or any other entity that is required to approve the trading of our shares on the OTCQB, to issue our ordinary shares to foreign\ninvestors or list on a foreign exchange, such action could significantly limit or completely hinder our ability to offer or continue to\noffer securities to investors and cause the value of such securities to significantly decline or be worthless.**\n\n \n\nAs of the date of annual report,\nwe and our PRC subsidiaries, (1) are not required to obtain permissions from any PRC authorities to operate or issue our Ordinary Shares\nto foreign investors, (2) are not subject to permission requirements from the CSRC, CAC or any other entity that is required to approve\nof our PRC subsidiaries’ operations, and (3) have not received or were denied such permissions by any PRC authorities. Nevertheless,\nthe General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued\nthe “Opinions on Severely Cracking Down on Illegal Securities Activities According to Law,” or the Opinions, which were made\navailable to the public on July 6, 2021. The Opinions emphasized the need to strengthen the administration over illegal securities activities\nand the need to strengthen the supervision over overseas listings by Chinese companies. Given the current PRC regulatory environment,\nit is uncertain when and whether we or our PRC subsidiaries will be required to obtain permission from the PRC government to list on U.S.\nexchanges in the future, and even when such permission is obtained, whether it will be denied or rescinded.\n\n \n\nFurther, since these statements\nand regulatory actions are new, it is highly uncertain how soon legislative or administrative regulation making bodies will respond and\nwhat existing or new laws or regulations or detailed implementations and interpretations will be modified or promulgated, if any, and\nthe potential impact such modified or new laws and regulations will have on our daily business operation, the ability to accept foreign\ninvestments and list on an U.S. exchange. If, (i) we inadvertently conclude that such approvals or permissions are not required, or (ii)\napplicable laws, regulations, or interpretations change and we are required to obtain such approvals and permissions in the future, and\nwe are unable to obtain such approvals and permissions, Borqs will not be able to perform R&D and manufacturing in China, our revenues\nwill be adversely affected and we will have to expand our R&D activities in India and relocate our manufacturing activities outside\nChina to India or other Asian countries. Also, if applicable laws, regulations, or interpretations change, and we are required to obtain\npermission or approval from the PRC authority for the offering and listing or trading of our Ordinary Shares in the U.S. in the future,\nand if any of such permission or approval were not received maintained, or subsequently rescinded, it may significantly limit or completely\nhinder our ability to list our shares or cause the value of our Ordinary Shares to significantly decline or become worthless.\n\n \n\n**Risks related to a future determination\nthat the Public Company Accounting Oversight Board (the “PCAOB”) is unable to inspect or investigate our auditor completely.**\n\n \n\nThe Holding Foreign Companies\nAccountable Act, or the HFCA Act, was enacted on December 18, 2020. The HFCA Act states if the SEC determines that a company has filed\naudit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years\nbeginning in 2021, the SEC shall prohibit such ordinary shares from being traded on a national securities exchange or in the over-the-counter\ntrading market in the U.S.\n\n \n\nOn March 24, 2021, the SEC\nadopted interim final rules relating to the implementation of certain disclosure and documentation requirements of the HFCA Act. A company\nwill be required to comply with these rules if the SEC identifies it as having a “non-inspection” year under a process to\nbe subsequently established by the SEC. The SEC is assessing how to implement other requirements of the HFCA Act, including the listing\nand trading prohibition requirements described above. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding\nForeign Companies Accountable Act (“AHFCAA”), which has since been signed into law, amending the HFCA Act and requiring the\nSEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections\nfor two consecutive years instead of three consecutive years.\n\n \n\nOn September 22, 2021, the\nPCAOB adopted a final rule implementing the HFCAA, which provides a framework for the PCAOB to use when determining, as contemplated under\nthe HFCA Act, whether the PCAOB is unable to inspect or investigate completely registered public accounting firms located in a foreign\njurisdiction because of a position taken by one or more authorities in that jurisdiction.\n\n \n\n17 \n\n \n\n \n\nOn December 2, 2021, the SEC\nannounced the adoption of amendments to finalize rules implementing the submission and disclosure requirements in the HFCA Act. The rules\napply to registrants the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting\nfirm that is located in a foreign jurisdiction and that the PCAOB is unable to inspect or investigate (Commission-Identified Issuers).\nThe final amendments require Commission-Identified Issuers to submit documentation to the SEC establishing that, if true, it is not owned\nor controlled by a governmental entity in the public accounting firm’s foreign jurisdiction. The amendments also require that a\nCommission-Identified Issuer that is a “foreign issuer,” as defined in Exchange Act Rule 3b-4, provide certain additional\ndisclosures in its annual report for itself and any of its consolidated foreign operating entities. Further, the adopting release provides\nnotice regarding the procedures the SEC has established to identify issuers and to impose trading prohibitions on the securities of certain\nCommission-Identified Issuers, as required by the HFCAA. A Commission-Identified Issuer will be required to comply with the submission\nand disclosure requirements in the annual report for each year in which it was identified. If a registrant is identified as a Commission-Identified\nIssuer based on its annual report for the fiscal year ended Dec. 31, 2021, the registrant will be required to comply with the submission\nor disclosure requirements in its annual report filing covering the fiscal year ended Dec. 31, 2022. On December 16, 2021, the PCAOB issued\na Determination Report which found that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered\nin: (1) mainland China, and (2) Hong Kong.\n\n \n\nThe audit report included\nin our Form 20-F for the years ended December 31, 2023, 2024 and 2025, were issued by Summit Group CPAs, P.C. (“SG CPA”, formerly\nknown as “Yu Certified Public Accountant, P.C.”), an independent registered public accounting firm with the PCAOB, and as\nan auditor of publicly traded companies in the U.S., is subject to laws in the U.S. pursuant to which the PCAOB conducts regular inspections\nto assess its compliance with the applicable professional standards. Our auditor is headquartered in New York, NY, and has been inspected\nby the PCAOB on a regular basis. The PCAOB currently has access to inspect the working papers of our auditor.\n\n \n\nHowever, the recent developments\nwould add uncertainties to our trading and we cannot assure you whether the OTC Markets or regulatory authorities would apply additional\nand more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures,\nadequacy of personnel and training, or sufficiency of resources, geographic reach or experience as it relates to the audit of our financial\nstatements.\n\n \n\nThe SEC may propose additional\nrules or guidance that could impact us if our auditor is not subject to PCAOB inspection. For example, on August 6, 2020, the President’s\nWorking Group on Financial Markets, or the PWG, issued the Report on Protecting United States Investors from Significant Risks from\nChinese Companies to the then President of the United States. This report recommended that the SEC implement five recommendations\nto address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfill its statutory mandate. Some of\nthe concepts of these recommendations were implemented with the enactment of the HFCA Act. However, some of the recommendations were more\nstringent than the HFCA Act. For example, if a company’s auditor was not subject to PCAOB inspection, the report recommended that\nthe transition period before a company would be delisted would end on January 1, 2022.\n\n \n\nThe SEC has announced that\nthe SEC staff is preparing a consolidated proposal for the rules regarding the implementation of the HFCA Act and to address the recommendations\nin the PWG report. It is unclear when the SEC will complete its rulemaking and when such rules will become effective, and what, if any,\nof the PWG recommendations will be adopted. The implications of this possible regulation, in addition to the requirements of the HFCA\nAct are uncertain. Such uncertainty could cause the market price of our ordinary shares to be materially and adversely affected, and our\nsecurities could be delisted or prohibited from being traded on the national securities exchange earlier than would be required by the\nHFCA Act. If our Ordinary Shares are unable to be listed on another securities exchange by then, such a delisting would substantially\nimpair your ability to sell or purchase our Ordinary Shares when you wish to do so, and the risk and uncertainty associated with a potential\ndelisting would have a negative impact on the price of our Ordinary Shares.\n\n \n\n18 \n\n \n\n \n\n**There are significant legal and other obstacles\nto obtaining information needed for shareholder investigations or litigation outside China or otherwise with respect to foreign entities.**\n\n \n\nWe conduct a significant part\nof our business operations in China, and some of our directors and senior management are based in China, which is an emerging market.\nThe SEC, U.S. Department of Justice and other authorities often have substantial difficulties in bringing and enforcing actions against\nnon-U.S. companies and non-U.S. persons, including company directors and officers, in certain emerging markets, including China. Additionally,\nour public shareholders may have limited rights and few practical remedies in emerging markets where we operate, as shareholder claims\nthat are common in the United States, including class action securities law and fraud claims, generally are difficult to pursue as a matter\nof law or practicality in many emerging markets, including China. For example, in China, there are significant legal and other obstacles\nto obtaining information needed for shareholder investigations or litigation outside China or otherwise with respect to foreign entities.\nAlthough the local authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of\nanother country or region to implement cross-border supervision and administration, the regulatory cooperation with the securities regulatory\nauthorities in the United States has not been efficient in the absence of a mutual and practical cooperation mechanism. According to Article\n177 of the PRC Securities Law, which became effective in March 2020, no foreign securities regulator is allowed to directly conduct investigations\nor evidence collection activities within the territory of the PRC. Accordingly, without the consent of the competent PRC securities regulators\nand relevant authorities, no organization or individual may provide the documents and materials relating to securities business activities\nto foreign securities regulators.\n\n \n\nAs a result, our public shareholders\nmay have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or\ncontrolling shareholders than they would as public shareholders of a company incorporated in the United States.\n\n \n\n**China’s economic, political, and social\nconditions, as well as changes in any government policies, laws, and regulations, could have a material adverse effect on our business.**\n\n \n\nA substantial portion of our\noperations are conducted in China, and a significant portion of our net revenues are derived from customers where the contracting entity\nis located in China. Accordingly, our business, financial condition, results of operations, prospects, and certain transactions we may\nundertake are subject, to a significant extent, to economic, political, and legal developments in China.\n\n \n\nChina’s economy differs\nfrom the economies of most developed countries in many respects, including the amount of government involvement, level of development,\ngrowth rate, control of foreign exchange, and allocation of resources. While the PRC economy has experienced significant growth in the\npast two to three decades, growth has been uneven, both geographically and among various sectors of the economy. Demand for our services\nand products depends, in large part, on economic conditions in China. Any slowdown in China’s economic growth may cause our potential\ncustomers to delay or cancel their plans to purchase our services and products, which in turn could reduce our net revenues.\n\n \n\nAlthough China’s economy\nhas been transitioning from a planned economy to a more market-oriented economy since the late 1970s, the PRC government continues to\nplay a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant\ncontrol over China’s economic growth through allocating resources, controlling the incurrence and payment of foreign currency-denominated\nobligations, setting monetary policy, and providing preferential treatment to particular industries or companies. Changes in any of these\npolicies, laws, and regulations could adversely affect the economy in China and could have a material adverse effect on our business.\n\n \n\nThe PRC government has implemented\nvarious measures to encourage foreign investment and sustainable economic growth and to guide the allocation of financial and other resources,\nwhich have, for the most part, had a positive effect on our business growth. However, we cannot assure you that the PRC government will\nnot repeal or alter these measures or introduce new measures that will have a negative effect on us. China’s social and political\nconditions may also not be as stable as those of the United States and other developed countries. Any sudden changes to China’s\npolitical system or the occurrence of widespread social unrest could have a material adverse effect on our business and results of operations.\n\n \n\nDue to social unrest in Hong\nKong SAR throughout 2019, which also extended into 2020, China passed a new national security law for Hong Kong, which became effective\non June 30, 2020. In reaction, the United States has imposed sanctions against Hong Kong’s chief executive and ten other senior\nofficials. Although the U.S. sanctions so far do not implicate any commercial activities involving Hong Kong, it is an area of concern\nif more sanctions from the U.S. may impact our Company’s ability to maintain a sound business relationship with our customers in\nthe U.S.\n\n \n\n19 \n\n \n\n \n\n**Uncertainties with respect to the PRC legal system could harm\nus.**\n\n \n\nOur operations in China are\ngoverned by PRC government laws and regulations. The PRC legal system is a civil law system based on written statutes. Unlike common law\nsystems, prior court decisions have limited precedential value. Borqs Beijing is generally subject to laws and regulations applicable\nto foreign investments in China and, in particular, laws applicable to wholly foreign-owned enterprises, and our other wholly owned subsidiaries\nin China may be subject to certain laws and regulations in connection with investments made by foreign-invested enterprises.\n\n \n\nSince 1979, PRC legislation\nand regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, China\nhas not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of\neconomic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume\nof published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties.\nIn addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely\nbasis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until\nsome time after the violation. Moreover, some regulatory requirements issued by certain PRC government authorities may not be consistently\napplied by other government authorities, including local government authorities, thus making strict compliance with all regulatory requirements\nimpractical or, in some circumstances, impossible. Any litigation in China may be protracted and result in substantial costs and the diversion\nof resources and management attention.\n\n \n\nAdditionally, some of the\nPRC laws and regulations governing our business operations in China are vague and their official interpretation and enforcement may involve\nsubstantial uncertainty. These include, but are not limited to, laws and regulations governing our business and the enforcement and performance\nof our contractual arrangements in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. Despite\ntheir uncertainty, we will be required to comply.\n\n \n\n**Recent trade policy initiatives announced\nby the United States administration against the PRC may adversely affect our business.**  \n\n \n\nWe are exposed to risks associated\nwith international relations, in particular, the relationship between the United States and China. Any unfavorable government policies,\nincluding those on investment restrictions or international trade, such as capital and data controls, tariffs or international payment\nand settlement system, updated or expanded sanctions and export control regulations, or any new or escalation of geopolitical confrontation\nand conflicts, may affect the demand for our products, impact the competitive position of our products, or prevent us from selling products\nin certain countries, or even our participation in international capital markets or the international payment and settlement system, any\nof which would materially and adversely affect our international operations, results of operations and financial condition.\n\n \n\nOn February 28, 2024, President\nBiden signed Executive Order 14117, which seeks to restrict access to bulk sensitive personal data and U.S. government-related data by\n“countries of concern,” including China. On October 16, 2023, the Commerce Department’s Bureau of Industry and Security,\nor BIS, issued an interim final rule, “Implementation of Additional Export Controls: Certain Advanced Computing Items; Supercomputer\nand Semiconductor End Use; Updates and Corrections”. BIS sought comments in relation to “infrastructure as a service”,\nor IaaS, to address access by Chinese customers to IaaS to develop dual-use AI foundation models with potential capabilities of concern.\n\n \n\nOn January 15, 2020, the United\nStates and China executed an enforceable agreement on a Phase One trade deal that requires structural reforms and other changes to China’s\neconomic and trade regime in the areas of intellectual property, technology transfer, agriculture, financial services, and currency and\nforeign exchange. The Phase One agreement also includes a commitment by China that it will make substantial additional purchases of U.S.\ngoods and services in the coming years. Importantly, the agreement establishes a strong dispute resolution system that ensures prompt\nand effective implementation and enforcement. The United States agreed to modify its Section 301 tariff actions in a significant way.\nThe United States first imposed tariffs on imports from China based on the findings of the Section 301 investigation on China’s\nacts, policies, and practices related to technology transfer, intellectual property, and innovation. The United States will be maintaining\n25 percent tariffs on approximately $250 billion of Chinese imports, along with 7.5 percent tariffs on approximately $120 billion of Chinese\nimports.\n\n \n\nIn addition, political tensions\nbetween the United States and China have escalated due to, among other things, trade disputes, the COVID-19 outbreak, tensions over Taiwan\nsanctions imposed by the U.S. Department of Treasury on certain officials of the Hong Kong Special Administrative Region and the PRC central\ngovernment, the executive orders issued by former U.S. President Donald J. Trump in August 2020 that prohibit certain transactions with\ncertain Chinese companies, and various restrictions related to the Chinese semiconductor industry imposed by the U.S. government. Against\nthis backdrop, China has implemented, and may further implement, measures in response to the changing trade policies, treaties, tariffs\nand sanctions and restrictions against Chinese companies initiated by the U.S. government.\n\n \n\n20 \n\n \n\n \n\n**Our subsidiaries in China are subject to\nrestrictions on making dividends and other payments to it or any other affiliated company.**\n\n \n\nWe are a holding company and\nmay rely on dividends paid by our PRC subsidiaries for our cash needs, including the funds necessary to pay dividends and other cash distributions\nto our shareholders to the extent we choose to do so, to service any debt it may incur and to pay our operating expenses. Current PRC\nregulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance\nwith Chinese accounting standards and regulations. In addition, each of our PRC subsidiaries are required to set aside at least 10% of\nour after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of our registered capital. Appropriations\nto the employee welfare funds are at the discretion of the board of directors of Borqs Beijing. These reserves are not distributable as\ncash dividends.\n\n \n\nIn addition, under the PRC\nEnterprise Income Tax Law, or the EIT Law, which became effective on January 1, 2008, dividends paid to us by our PRC subsidiaries are\nsubject to withholding tax. Currently, the withholding tax rate is 10.0% (subject to reductions by the relevant tax treaties, if applicable).\n\n \n\nFurthermore, if our PRC subsidiaries\nincur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other\npayments to us.\n\n \n\nTo date, our PRC subsidiaries\nhave not paid dividends to us out of their accumulated profits. In the future, we do not expect to receive dividends from our PRC subsidiaries\nbecause the accumulated profits of these PRC subsidiaries are expected to be used for their own business or expansions. Any limitation\non the ability of our PRC subsidiaries to distribute dividends or other payments to us could materially and adversely limit our ability\nto grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our\nbusiness.\n\n \n\n**The discontinuation of any of the preferential\ntax treatments currently available to our PRC subsidiaries could materially increase our tax liabilities.**\n\n \n\nPreferential tax treatments\nand incentives granted to our PRC subsidiaries by PRC governmental authorities are subject to review and may be adjusted or revoked at\nany time in the future. The discontinuation or revocation of any preferential tax treatments and incentives currently available to them\nwill cause their effective tax rate to materially increase, which will decrease our net income and may adversely affect our financial\ncondition and results of operations.\n\n \n\n**We face uncertainty with respect to indirect\ntransfers of equity interests in PRC resident enterprises by their non-PRC holding companies.**\n\n \n\nOn February 3, 2015, the State\nAdministration of Taxation (the “SAT”) issued a Public Notice Regarding Certain Enterprise Income Tax Matters on Indirect\nTransfer of Properties by Non-Tax Resident Enterprises, or Public Notice 7, where a non-resident enterprise transfers taxable assets,\nthrough the offshore transfer of a foreign intermediate holding company, the non-resident enterprise, being the transferor, maybe subject\nto PRC enterprise income tax, if the indirect transfer is considered to be an arrangement which does not have a reasonable commercial\npurpose to circumvent enterprise income tax payment obligations. In addition, Public Notice 7 further provides certain criteria on how\nto assess reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of\nequity through a public securities market. Public Notice 7 also brings challenges to both the foreign transferor and transferee (or other\nperson who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts an “indirect transfer”\nby transferring the taxable assets indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise\nbeing the transferor, or the transferee, or the PRC entity which directly owned the taxable assets may report to the relevant tax authority\nsuch indirect transfer. Using a “substance over form” principle, the PRC tax authority may re-characterize such indirect transfer\nas a direct transfer of the equity interests in the PRC tax resident enterprise and other properties in China. As a result, gains derived\nfrom such indirect transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for\nthe transfer is obligated to withhold the applicable taxes, currently at a rate of up to 10% for the transfer of equity interests in a\nPRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails\nto withhold the taxes and the transferor fails to pay the taxes.\n\n \n\nOn October 17, 2017, the SAT\nissued the Announcement on Issues Relating to Withholding at Source of Income Tax of Non-Resident Enterprises, or Announcement 37, which\nbecame effective on December 1, 2017. Announcement 37 further clarifies the practice and procedure of the withholding of non-resident\nenterprise income tax.\n\n \n\n21 \n\n \n\n \n\nWe face uncertainties concerning\nthe reporting and consequences of private equity financing transactions, share exchange, or other transactions involving the transfer\nof our ordinary shares by investors that are non-PRC resident enterprises or the sale or purchase of shares in other non-PRC resident\ncompanies or other taxable assets by us. We and other non-resident enterprises in our group may be subject to filing obligations or being\ntaxed if we and other non-resident enterprises affiliated with us are transferors in such transactions and may be subject to withholding\nobligations if we and other non-resident enterprises affiliated with us are transferees in such transactions, under Public Notice 7 and\nAnnouncement 37. For the transfer of shares in us by investors that are non-PRC resident enterprises, our PRC subsidiaries may be requested\nto assist in the filing under Public Notice 7 and Announcement 37. As a result, we may be required to expend valuable resources to comply\nwith Public Notice 7 and Announcement 37 or to request the relevant transferors from whom we purchase taxable assets to comply with these\ncirculars or to establish that we and other non-resident enterprises affiliated with us should not be taxed under these circulars. The\nPRC tax authorities have the discretion under Public Notice 7 and Announcement 37 to make adjustments to the taxable capital gains based\non the difference between the fair value of the taxable assets transferred and the cost of investment. If the PRC tax authorities make\nadjustments to the taxable income of the transactions under Public Notice 7 and Announcement 37, our income tax costs associated with\nsuch transactions will be increased if we are a transferee of such transactions, which may hurt our financial condition and results of\noperations. Heightened scrutiny over acquisition transactions by the PRC tax authorities may also hurt potential acquisitions we may pursue\nin the future.\n\n \n\n**We may not be able to obtain certain treaty\nbenefits on dividends paid by our PRC subsidiary to us through our Hong Kong Subsidiary.**\n\n \n\nUnder the EIT Law, dividends\ngenerated from retained earnings after January 1, 2008 from a PRC company to a foreign parent company are subject to a withholding tax\nrate of 10.0% unless the foreign parent’s jurisdiction of incorporation has a tax treaty with China that provides for a preferential\nwithholding arrangement. Under the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance\nof Double Taxation and Prevention of Fiscal Evasion concerning Taxes on Income or the Hong Kong Tax Treaty, which became effective on\nAugust 21, 2006, a company incorporated in Hong Kong, such as Borqs Hong Kong, will be subject to withholding income tax at a rate of\n5% on dividends it receives from our PRC subsidiary if it holds a 25.0% or more interest in that particular PRC subsidiary at all times\nwithin the 12 months immediately preceding the distribution of dividends and be a “beneficial owner” of the dividends. In\nFebruary 2018, the SAT issued the *Announcement on Issues Relating to Beneficial Owners under Tax Treaties*, or the SAT Announcement\n9, which became effective from April 1, 2018 and supersedes the *Notice on Interpretation and Determination of Beneficial Owners under\nTax Treaties* issued by the SAT on October 27, 2009 (or the Circular 601) and the *Announcement Regarding Recognition of Beneficial\nOwners under Tax Treaties*released by the SAT on June 29, 2012 (or the Announcement 30). Under Announcement 9, applicants who intend\nto prove their status of the “beneficial owner” shall submit the relevant documents to the relevant tax bureau according to\nthe *Announcement on Issuing the Measures for the Administration of Non-Resident Taxpayers’ Enjoyment of the Treatment under Tax\nAgreements* and the SAT Announcement 9. “Beneficial Owners” are residents who have ownership and the right to dispose of\nthe income or the rights and properties giving rise to the income. These rules also set forth certain adverse factors against the recognition\nof a “Beneficial Owner”, such as not carrying out substantive business activities. Whether a non-resident enterprise may obtain\ntax benefits under the relevant tax treaty will be subject to the approval of the relevant PRC tax authority and will be determined by\nthe PRC tax authority on a case-by-case basis. SAT Announcement 9 further provides that a comprehensive analysis should be made when determining\nthe beneficial owner status based on various factors that supported by various types of documents including the articles of association,\nfinancial statements, records of cash movements, board meeting minutes, board resolutions, staffing and materials, relevant expenditures,\nfunctions and risk assumption as well as relevant contracts and other information.\n\n \n\nIn August 2015, the SAT promulgated\nthe Administrative Measures for Non-Resident Taxpayers to Enjoy Treatments under Tax Treaties, or SAT Circular 60, which became effective\non November 1, 2015. SAT Circular 60 provides that non-resident enterprises are not required to obtain pre-approval from the relevant\ntax authority in order to enjoy the reduced withholding tax rate. Instead, non-resident enterprises may, if they determine by self-assessment\nthat the prescribed criteria to enjoy the tax treaty benefits are met, directly apply for the reduced withholding tax rate and file necessary\nforms and supporting documents when performing tax filings, which will be subject to post-filing examinations by the relevant tax authorities.\n\n \n\nAs a result, although our\nPRC subsidiary, Borqs Beijing, is currently wholly owned by Borqs Hong Kong, we cannot assure you that we would be entitled to the tax\ntreaty benefits and enjoy the favorable 5.0% rate applicable under the Hong Kong Tax on dividends. If Borqs Hong Kong cannot be recognized\nas the beneficial owner of the dividends to be paid by our PRC subsidiaries to us, such dividends will be subject to a normal withholding\ntax of 10% as provided by the EIT Law.\n\n \n\n22 \n\n \n\n \n\n**PRC regulation of loans to and direct investment\nin PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds\nof our securities offering to make loans or additional capital contributions to our PRC subsidiaries, which could materially and adversely\naffect our liquidity and our ability to fund and expand our business.**\n\n \n\nWe are an offshore holding\ncompany with operations in China through our PRC subsidiaries. We may make loans to our PRC subsidiaries subject to the approval from\nor registration with governmental authorities and limitation on amount, or we may make additional capital contributions to our subsidiaries\nin China. Any loans to our subsidiaries in China, which are treated as foreign-invested enterprises under PRC laws, are subject to foreign\nexchange loan registrations. In addition, a foreign-invested enterprise shall use its capital pursuant to the principle of authenticity\nand self-use within its business scope. According to the PRC regulations on foreign-invested enterprises in China, capital contributions\nto the PRC subsidiaries are subject to the requirement of making necessary filings or reports in the Foreign Investment Comprehensive\nManagement Information System and registration with a local bank authorized by SAFE. Any medium or long-term loan to be provided by us\nto our consolidated affiliated entities must be filed with the National Development and Reform Commission and recorded by SAFE or its\nlocal branches through the online filing system of SAFE pursuant to applicable PRC regulations.\n\n \n\nThe Circular on Reforming\nthe Administration Measures on Conversion of Foreign Exchange Registered Capital of Foreign-invested Enterprises, which was issued by\nthe SAFE and was most recently amended on March 23, 2023, allows for the use of RMB converted from the foreign currency-denominated capital\nfor equity investments in the PRC, provided that such usage shall fall into the scope of business of the foreign-invested enterprise,\nwhich will be regarded as the reinvestment of foreign-invested enterprise. In addition, the Circular Regarding Further Promotion of the\nFacilitation of Cross-Border Trade and Investment, which was promulgated by the SAFE and was most recently amended on December 4, 2023,\nallows foreign-invested enterprises whose business scope does not include investment, or non-investment foreign-invested enterprises,\nto use their capital funds to make equity investments in China, subject to certain conditions. As of the date of this annual report, its\ninterpretation and implementation in practice remained subject to further explanations and elaborations. As the government authorities\nhave discretion in interpreting the regulation, it is unclear whether SAFE will permit such capital funds to be used for equity investments\nin the PRC in practice.\n\n \n\nIn light of the various requirements\nimposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, we cannot assure you that\nwe will be able to complete the necessary government registrations or filings or obtain the necessary government approvals on a timely\nbasis, if at all, for future loans by us to our PRC subsidiaries or concerning future capital contributions by us to our PRC subsidiaries.\nIf we fail to complete such registrations or obtain such approvals, our ability to use the proceeds from our securities offering and to\ncapitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity\nand our ability to fund and expand our business.\n\n \n\n**Restrictions on foreign currency may limit\nour ability to receive and use our revenue effectively.**\n\n \n\nThe PRC government imposes\ncontrols on the conversion of the Renminbi into foreign currencies and, in certain cases, the remittance of foreign currency out of China.\nWe receive part of our revenue in Renminbi. Under our current corporate structure, our British Virgin Islands holding company primarily\nrelies on dividend payments from our PRC and Hong Kong subsidiaries to fund any cash and financing requirements we may have. Under existing\nPRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments, and trade and\nservice-related foreign exchange transactions, can be made in foreign currencies without prior approval of the State Administration of\nForeign Exchange (“SAFE”), by complying with certain procedural requirements. Specifically, under the existing exchange restrictions,\nwithout prior approval of SAFE, accumulated after-tax profits generated from the operations of Borqs Beijing in China may be used to pay\ndividends to us. However, approval from or registration with appropriate government authorities is required where Renminbi is to be converted\ninto foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies.\nAs a result, we need to obtain approval from SAFE to use cash generated from the operations of our PRC subsidiaries to pay off any debt\nin a currency other than Renminbi owed to entities outside China or to make other capital expenditure payments outside China in a currency\nother than Renminbi. The PRC government may, at our discretion, restrict access to foreign currencies for current account transactions\nin the future. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign\ncurrency demands, we may not be able to pay dividends in foreign currencies to our shareholders.\n\n \n\n23 \n\n \n\n \n\n**Fluctuations in the value of the RMB may\nhave a material adverse effect on your investment.**\n\n \n\nThe value of the RMB against\nthe U.S. Dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and\nChina’s foreign exchange policies. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi\nto the U.S. Dollar, and the RMB appreciated more than 20.0% against the U.S. Dollar over the following three years. However, the People’s\nBank of China regularly intervenes in the foreign exchange market to limit fluctuations in Renminbi exchange rates and achieve policy\ngoals. During the period between July 2008 and June 2010, the exchange rate between the RMB and the U.S. Dollar had been stable and traded\nwithin a narrow band. However, the Renminbi fluctuated significantly during that period against other freely traded currencies, in tandem\nwith the U.S. Dollar. Since June 2010, the Renminbi has fluctuated against the U.S. Dollar, at times significantly and unpredictably,\nand in recent months, the RMB has depreciated significantly against the U.S. Dollar. It is difficult to predict how market forces or PRC\nor U.S. government policy may impact the exchange rate between the RMB and the U.S. Dollar in the future.\n\n \n\nApproximately half of our\nrevenues and costs are denominated in RMB. Any significant revaluation of RMB may materially and adversely affect our cash flows, revenues,\nearnings, financial position, and the value of, and any dividends payable on, our ordinary shares in U.S. dollars. For example, an appreciation\nof RMB against the U.S. dollar would make any new RMB-denominated investments or expenditures more costly to us, to the extent that\nit needs to convert U.S. dollars into RMB for such purposes. An appreciation of RMB against the U.S. dollar would also result in foreign\ncurrency translation losses for financial reporting purposes when we translate our U.S. dollar-denominated financial assets into RMB,\nas RMB is our reporting currency. Conversely, a significant depreciation of the RMB against the U.S. dollar may significantly reduce the\nU.S. dollar equivalent of our earnings, which in turn could adversely affect the price of our ordinary shares. Furthermore, a significant\ndepreciation of the RMB against the U.S. dollar may have a material adverse impact on our cash flow in the event we need to convert our\nRMB into U.S. dollars to repay our U.S. dollar-denominated payment obligations.\n\n \n\n**PRC regulations relating to the establishment\nof offshore holding companies by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiaries to liability or\npenalties, limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to increase their\nregistered capital or distribute profits to us, or may otherwise adversely affect us.**\n\n \n\nThe SAFE issued the Notice\non Issues Relating to the Administration of Foreign Exchange in Fund-Raising and Round-Trip Investment Activities of Domestic Residents\nConducted via Offshore Special Purpose Companies on October 26, 2005, or Circular 75, requiring PRC residents, including PRC resident\nindividuals and PRC companies, to register with the local SAFE branch before establishing or controlling any company outside of China\nfor capital financing with assets or equities of PRC companies owned by such PRC residents, referred to in the notice as an “offshore\nspecial purpose vehicle.” The PRC resident individuals include not only PRC citizens but also foreign natural persons who habitually\nreside in China due to economic interests. SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic\nResidents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or Circular 37, on July\n4, 2014, which replaced the Circular 75. Circular 37 requires PRC residents to register with local branches of SAFE in connection with\ntheir direct establishment or indirect control of an offshore entity, for overseas investment and financing, with such PRC residents’\nlegally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in Circular 37 as a “special\npurpose vehicle.” Under Circular 37, a PRC resident who is a foreign nature person is not required to complete the registration\nif he/she uses assets outside China or equity interests in offshore entities to special purpose vehicles. The term “control”\nunder Circular 37 is broadly defined as the operation rights, beneficiary rights, or decision-making rights acquired by the PRC residents\nin the offshore special purpose vehicles or PRC companies by such means as acquisition, trust, proxy, voting rights, repurchase, convertible\nbonds or other arrangements. Circular 37 further requires amendment to the registration in the event of any changes concerning the basic\ninformation of the special purpose vehicle, such as changes in a PRC resident individual shareholder, name or operation period; or any\nsignificant changes concerning the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share\ntransfer or exchange, merger, division or other material event. If the shareholders of the offshore holding company who are PRC residents\ndo not complete their registration with the local SAFE branches, the PRC subsidiaries may be prohibited from distributing their profits\nand proceeds from any reduction in capital, share transfer or liquidation to the offshore company, and the offshore company may be restricted\nin our ability to contribute additional capital to our PRC subsidiaries. Moreover, failure to comply with SAFE registration and amendment\nrequirements described above could result in liability under PRC law for evasion of applicable foreign exchange restrictions. On February\n28, 2015, SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment,\nor Circular 13, which became effective on June 1, 2015. Per Circular 13, entities and individuals are required to apply for foreign exchange\nregistration of foreign direct investment and overseas direct investment, including those required under Circular 37, with qualified banks\ninstead of SAFE. The qualified banks, under the supervision of SAFE, directly examine the applications and conduct the registration.\n\n \n\n24 \n\n \n\n \n\nWe requested all of our current\nshareholders and/or beneficial owners to disclose whether they or their shareholders or beneficial owners fall within the ambit of Circular\n37 and Circular 13 and to register with the local SAFE branch as required under Circular 37 and Circular 13 as applicable. As of the date\nof this report, we are aware that a few of our natural person shareholders who are not PRC citizens may otherwise be deemed as PRC residents\nunder the definitions under the SAFE regulations, but we are not aware that any of them uses assets inside China or equity interest in\nPRC companies to invest in the Company. Before the issuance of Circular 37, we had attempted to submit applications to the Beijing branch\nof SAFE for such individual shareholders under Circular 75, but those applications were not accepted by the Beijing branch of SAFE because\nthose individuals are not PRC citizens. After Circular 37 became effective, we understand these individuals are not required to conduct\nthe registrations since they do not use assets within China or equity interests in PRC companies to invest in the Company. We cannot assure\nyou, however, that the SAFE’s opinion will be the same as our opinion and that all of these individuals can complete required filings\nor updates promptly or at all in the event that these individuals are required to conduct the filings. Besides, we have issued and may\nin the future issue shares to certain PRC citizens for the acquisition of other companies, and we have or will request them to register\nwith the local SAFE branch as required under Circular 37 and Circular 13.\n\n \n\nWe cannot assure, however,\nthat all of these individuals can complete required filings or updates in a timely manner, or at all. Furthermore, as there is uncertainty\nconcerning the reconciliation of the new regulations with other approval requirements, it is unclear how these regulations, and any further\nregulations concerning offshore or cross-border transactions, will be interpreted, amended, and implemented by the relevant government\nauthorities. We cannot assure that we currently are, and we will in the future continue to be, fully informed of identities of all our\nshareholders or beneficial owners who are PRC residents, and we cannot provide any assurance that all of our shareholders and beneficial\nowners who are PRC residents will comply with our request to make, obtain or update any applicable registrations or comply with other\nrequirements required by Circular 37 and Circular 13 or other related rules on time. Any failure or inability by any of our shareholders\nor beneficial owners who are PRC residents to comply with SAFE regulations may subject them to fines or other legal sanctions, such as\npotential liability for our PRC subsidiaries and, in some instances, for their legal representatives and other liable individuals, as\nwell as restrictions on our ability to contribute additional capital into our PRC subsidiaries or our PRC subsidiaries’ ability\nto distribute dividends to, or obtain foreign-exchange-denominated loans from our offshore holding companies. As a result, our business\noperations and our ability to make distributions to you could be materially and adversely affected.\n\n \n\n**Failure to comply with PRC regulations regarding\nthe registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal\nor administrative sanctions.**\n\n \n\nIn December 2006, the People’s\nBank of China promulgated the Administrative Measures of Foreign Exchange Matters for Individuals, which set forth the respective requirements\nfor foreign exchange transactions by individuals (both PRC or non-PRC citizens) under either the current account or the capital account.\nIn January 2007, SAFE issued implementing rules for the Administrative Measures of Foreign Exchange Matters for Individuals, which, among\nother things, specified approval requirements for certain capital account transactions such as a PRC citizen’s participation in\nthe employee stock ownership plans or stock option plans of an overseas publicly-listed company. In February 2012, SAFE promulgated the\nNotices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plans of Overseas\nPublicly-Listed Companies, or the Stock Option Rules, which replaced the Application Procedures of Foreign Exchange Administration for\nDomestic Individuals Participating in Employee Stock Ownership Plans or Stock Option Plans of Overseas Publicly Listed Companies issued\nby SAFE in March 2007. Under these rules, PRC residents who participate in stock incentive plans in an overseas publicly listed company\nare required to register with SAFE or our local branches and complete certain other procedures. Participants of a stock incentive plan\nwho are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of such overseas publicly-listed company or another\nqualified institution selected by such PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the stock\nincentive plan on behalf of our participants. Such participants must also retain an overseas entrusted institution to handle matters in\nconnection with their exercise of stock options, the purchase and sale of corresponding stocks or interests, and fund transfers. In addition,\nthe PRC agent is required to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the\nstock incentive plan, the PRC agent, or the overseas entrusted institution, or other material changes.\n\n \n\nIn February 2012, SAFE promulgated\nthe Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in the Stock Incentive Plan\nof Overseas Publicly Listed Company, replacing earlier rules promulgated in 2007. According to these rules, PRC citizens and non-PRC citizens\nwho reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly\nlisted company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the\nPRC subsidiaries of such overseas-listed company, and complete certain other procedures. In addition, an overseas-entrusted institution\nmust be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests.\nIn addition, SAFE Circular 37 stipulates that PRC residents who participate in a share incentive plan of an overseas non-publicly listed\nspecial purpose company may register with SAFE or its local branches before they obtain the incentive shares or exercise the share options.\nWe and our executive officers and other employees who are PRC citizens or who reside in the PRC for a continuous period of not less than\none year and who have been or will be granted incentive shares or options are or will be subject to these regulations. Failure to complete\nthe SAFE registrations may subject them to fines and legal sanctions, and there may be additional restrictions on their ability to exercise\ntheir share options or remit proceeds gained from the sale of their shares into the PRC. We also face regulatory uncertainties that could\nrestrict our ability to adopt additional incentive plans for our directors, executive officers, and employees under PRC law.\n\n \n\n25 \n\n \n\n \n\n**PRC regulations establish complex procedures\nfor some acquisitions conducted by foreign investors, which could make it more difficult for us to pursue growth through acquisitions\nin China.**\n\n \n\nThe Regulations on Mergers\nand Acquisitions of Domestic Enterprises by Foreign Investors, adopted by six PRC regulatory agencies in August 2006 and amended in June\n2009, among other things, established additional procedures and requirements that could make merger and acquisition activities by foreign\ninvestors more time-consuming and complex. In addition, the Implementing Rules Concerning Security Review on the Mergers and Acquisitions\nby Foreign Investors of Domestic Enterprises, issued by the Ministry of Commerce in August 2011, specify that mergers and acquisitions\nby foreign investors involved in “an industry related to national security” are subject to strict review by the Ministry of\nCommerce, and prohibit any activities attempting to bypass such security review, including by structuring the transaction through a proxy\nor contractual control arrangement. We believe that our business is not in an industry related to national security, but it cannot preclude\nthe possibility that the Ministry of Commerce or other government agencies may publish explanations contrary to our understanding or broaden\nthe scope of such security reviews in the future, in which case our future acquisitions in the PRC, including those by way of entering\ninto contractual control arrangements with target entities, may be closely scrutinized or prohibited. Moreover, the Anti-Monopoly Law\nrequires that the Ministry of Commerce be notified in advance of any concentration of undertakings if certain filing thresholds are triggered.\nWe may grow our business in part by directly acquiring complementary businesses in China. Complying with the requirements of the laws\nand regulations mentioned above and other PRC regulations to complete such transactions could be time-consuming, and any required approval\nprocesses, including obtaining approval from the Ministry of Commerce, may delay or inhibit our ability to complete such transactions,\nwhich could affect our ability to expand our business or maintain our market share. Our ability to expand our business or maintain or\nexpand our market share through future acquisitions would, as such, be materially and adversely affected.\n\n \n\n**Substantial uncertainties exist with respect\nto the enactment timetable, interpretation, and implementation of the draft PRC Foreign Investment Law and how it may impact the viability\nof our current corporate structure, corporate governance, and business operations.**\n\n \n\nThe Ministry of Commerce (“MOFCOM”)\npublished a discussion draft of the proposed Foreign Investment Law in January 2015 aiming to, upon its enactment, replace the trio of\nexisting laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative\nJoint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations.\nThe draft Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in\nline with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and\ndomestic investments. A draft Foreign Investment Law drafted by the MOFCOM and the National Development and Reform Commission, or the\nNDRC, has been included in the list of draft laws submitted to the Standing Committee of the National People’s Congress for deliberation\nunder the 2018 Legislation Plan of the State Council. However, it is uncertain when the draft would be signed into law and whether the\ndraft version submitted for deliberation or the final version would have any substantial changes from the draft version published by the\nMOFCOM. The draft Foreign Investment Law, if enacted as proposed, may materially impact the viability of our current corporate structure,\ncorporate governance, and business operations in many aspects.\n\n \n\nAmong other things, the draft\nForeign Investment Law expands the definition of foreign investment and introduces the principle of “actual control” in determining\nwhether a company should be treated as a foreign-invested enterprise or a FIE. According to the definition outlined in the draft Foreign\nInvestment Law, FIEs refer to enterprises established in China under PRC law that are solely or partially invested by foreign investors.\nThe draft Foreign Investment Law specifically provides those entities established in China (without direct foreign equity ownership) but\n“controlled” by foreign investors, through contract or trust, for example, will be treated as FIEs. Once an entity falls within\nthe definition of FIE, it may be subject to foreign investment “restrictions” or “prohibitions” outlined in a\n“negative list” to be separately issued by the State Council later. If a FIE proposes to conduct business in an industry subject\nto foreign investment “restrictions” in the “negative list,” the FIE must go through a market entry clearance\nby the Ministry of Commerce before being established. A FIE is prohibited from conducting business in an industry subject to foreign investment\n“prohibitions” in the “negative list”. However, a FIE, during the market entry clearance process, may apply in\nwriting to be treated as a PRC domestic enterprise if its foreign investor(s) is/are ultimately “controlled” by PRC government\nauthorities and its affiliates and/or PRC citizens. In this connection, “control” is broadly defined in the draft law to cover\nthe following summarized categories: (i) holding 50% or more of the voting rights of the subject entity; (ii) holding less than 50%\nof the voting rights of the subject entity but having the power to secure at least 50% of the seats on the board or other equivalent decision\nmaking bodies, or having the voting power to exert material influence on the board, the shareholders’ meeting or other equivalent\ndecision making bodies; or (iii) having the power to exert decisive influence, via contractual or trust arrangements, over the subject\nentity’s operations, financial matters or other key aspects of business operations.\n\n \n\n26 \n\n \n\n \n\nThe “variable interest\nentity” structure, or VIE structure, has been adopted by many PRC-based companies to obtain necessary licenses and permits in the\nindustries that are currently subject to foreign investment restrictions in China. Under the draft Foreign Investment Law, variable interest\nentities that are controlled via contractual arrangement would also be deemed as FIEs if they are ultimately “controlled”\nby foreign investors. Therefore, for any companies with a VIE structure in an industry category that is included in the “negative\nlist” as restricted industry, the VIE structure may be deemed legitimate only if the ultimate controlling person(s) is/are of PRC\nnationality (either PRC government authorities and its affiliates or PRC citizens). Conversely, if the actual controlling person(s) is/are\nof foreign nationalities, then the variable interest entities will be treated as FIEs, and any operation in the industry category on the\n“negative list” without market entry clearance may be considered illegal.\n\n \n\nThe draft Foreign Investment\nLaw has not taken a position on what actions shall be taken for the existing companies with a VIE structure, whether or not these companies\nare controlled by Chinese parties, while it is soliciting comments from the public on this point. Moreover, it is uncertain whether the\ntelecommunication business, in which our variable interest entity operates, will be subject to the foreign investment restrictions or\nprohibitions set forth in the “negative list” to be issued. If the enacted version of the Foreign Investment Law and the final\n“negative list” mandate further actions, such as the Ministry of Commerce market entry clearance, to be completed by companies\nwith existing VIE structure like us, we face uncertainties as to whether such clearance can be timely obtained, or at all.\n\n \n\nThe draft Foreign Investment\nLaw, if enacted as proposed, may also materially impact on our corporate governance practice and increase our compliance costs. For instance,\nthe draft Foreign Investment Law imposes stringent ad hoc and periodic information reporting requirements on foreign investors and the\napplicable FIEs.\n\n \n\nAside from the investment\nimplementation report and investment amendment report that are required at each investment and alteration of investment specifics, an\nannual report is mandatory, and large foreign investors meeting certain criteria are required to report quarterly. Any company found to\nbe non-compliant with this information reporting obligations may potentially be subject to fines and/or administrative or criminal liabilities,\nand the persons directly responsible may be subject to criminal liabilities.\n\n \n\n**The enforcement of the labor laws and other\nlabor-related regulations in the PRC may adversely affect our results of operations.**\n\n \n\nOn June 29, 2007, the Standing\nCommittee of the National People’s Congress of China enacted the Labor Contract Law, which became effective on January 1, 2008,\nand was revised on December 28, 2012, and became effective on July 1, 2013. The Labor Contract Law introduces specific provisions related\nto fixed-term employment contracts, part-time employment, probation, consultation with labor unions and employee assemblies, employment\nwithout a written contract, dismissal of employees, severance, and collective bargaining, which together represent enhanced enforcement\nof labor laws and regulations. According to the Labor Contract Law, an employer is obliged to sign an unlimited-term labor contract with\nany employee who has worked for the employer for ten consecutive years. Further, if an employee requests or agrees to renew a fixed-term\nlabor contract that has already been entered into twice consecutively, the resulting contract must have an unlimited term, with certain\nexceptions. The employer must pay severance to an employee where a labor contract is terminated or expires, with certain exceptions. In\naddition, the government has continued to introduce various new labor-related regulations after the effectiveness of the Labor Contract\nLaw. Among other things, it is required that annual leave ranging from five to 15 days be made available to employees and that the employee\nbe compensated for any untaken annual leave days in the amount of three times the employee’s daily salary, subject to certain exceptions.\nAs a result of these regulations designed to enhance labor protection and increase labor costs in China, our labor costs have increased.\nIn addition, as the interpretation and implementation of these new regulations are still evolving, we cannot assure you that our employment\npractice will at all times be deemed in compliance with the new regulations. If we are subject to severe penalties or incur significant\nliabilities in connection with labor disputes or investigations, our business and the results of our operations may be adversely affected.\n\n \n\n**Our failure to make adequate contributions\nto various employee benefit plans as required by PRC regulations may subject us to penalties.**\n\n \n\nCompanies operating in China\nare required to participate in various government-sponsored employee benefit plans, including certain social insurance, housing funds,\nand other welfare-oriented payment obligations. Our failure to make contributions to various employee benefit plans and to comply with\napplicable PRC labor-related laws may subject us to late payment penalties. If we are subject to such penalties about the underpaid employee\nbenefits, our financial condition and results of operations may be adversely affected.\n\n \n\n27 \n\n \n\n \n\n**If the custodians or authorized users of\nour controlling non-tangible assets, including corporate chops and seals, fail to fulfill their responsibilities or misappropriate or\nmisuse those assets, our business and operations could be materially and adversely affected.**\n\n \n\nIn China, a company chop or\nseal serves as the legal representation of the company towards third parties even when unaccompanied by a signature. Under PRC law, legal\ndocuments for corporate transactions, including contracts and leases that our business relies upon, are executed using “corporate\nchops,” which are instruments that contain either the official seal of the signing entity or the signature of a legal representative\nwhose designation is registered and filed with the State Administration for Industry and Commerce, or SAIC.\n\n \n\nOur PRC subsidiaries generally\nexecute legal documents with corporate chops. One or more of our corporate chops may be used to, among other things, execute commercial\nsales or purchase contracts, procurement contracts and office leases, open bank accounts, issue checks, and to issue invoices. We believe\nthat it has sufficient controls in place over access to and use of the chops. Our chops, or chops, including the chops at headquarters\nlevel and of each PRC subsidiary, are kept securely at our legal department under the direction of the executive officers at the vice\npresident level or higher. Use of chops requires proper approval in accordance with our internal control procedures. The custodian at\nour legal department also maintains a log to keep a detailed record or each use of the chops.\n\n \n\nHowever, we cannot assure\nyou that unauthorized access to or use of those chops can be prevented. Our designated employees who hold the corporate chops could abuse\ntheir authority by, for example, binding us to contracts against our interests or intentions, which could result in economic harm, disruption\nor our operations, or other damage to them as a result of any contractual obligations or resulting disputes that might arise. If the party\ncontracting with us asserted that we did not act in good faith under such circumstances, then we could incur costs to nullify such contracts.\nSuch corporate or legal action could involve significant time and resources while distracting management from our operations. In addition,\nwe may not be able to recover corporate assets that are sold or transferred out of our control in the event of such a misappropriation\nif a transferee relies on the apparent authority of the representative and acts in good faith.\n\n \n\nIf a designated employee uses\na chop in an effort to obtain control over one or more of our PRC subsidiaries, we would need to take legal action to seek the return\nof the applicable chop(s), apply for a new chop(s) with the relevant authorities or otherwise seek legal redress for the violation of\ntheir duties. During any period where we lose effective control of the corporate activities of one or more of our PRC subsidiaries as\na result of such misuse or misappropriation, the business activities of the affected entity could be disrupted, and we could lose the\neconomic benefits of that aspect of our business. To the extent those chops are stolen or are used by unauthorized persons or for unauthorized\npurposes, the corporate governance of these entities could be severely and adversely compromised, and the operations of those entities\ncould be significantly and adversely impacted.\n\n \n\n**Risks Related to Our Securities**\n\n \n\n**If equity research analysts publish unfavorable\ncommentary or downgrade our ordinary shares, the price and trading volume of our ordinary shares could decline.**\n\n \n\nThe trading market for our\nordinary shares could be affected by whether equity research analysts publish research or reports about us and our business. We cannot\npredict at this time whether any research analysts will publish research and reports on us and our ordinary shares. If one or more equity\nanalysts do cover us and our ordinary shares and publish research reports about us, the price of our stock could decline if one or more\nsecurities analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or\nour business.\n\n \n\nIf any of the analysts who\nelect to cover us downgrade our stock, our stock price could decline rapidly. If any of these analysts ceases coverage of us, we could\nlose visibility in the market, which in turn could cause our ordinary shares’ price or trading volume to decline and our ordinary\nshares to be less liquid.\n\n \n\n28 \n\n \n\n \n\n**Future equity issuances could result in\ndilution, which could cause our ordinary shares price to decline.**\n\n \n\nWe are generally not restricted\nfrom issuing additional ordinary shares, and there is no limit to the number of ordinary shares that we are authorized to issue by our\nmemorandum and articles of association. We may issue additional ordinary shares in the future under current or future equity compensation\nplans, upon conversions of preferred shares or debt, upon exercise of warrants, or in connection with future acquisitions or financing.\nIf we choose to raise capital by selling our ordinary shares for any reason, the issuance would have a dilutive effect on the holders\nof our ordinary shares and could have a material negative effect on the market price of our ordinary shares.\n\n \n\n**Future sales of our ordinary shares by existing\nshareholders may cause our ordinary shares price to decline.**\n\n \n\nIf our existing shareholders\nsell, or indicate an intent to sell, amounts of our ordinary shares in the public market after the contractual lock-up and other legal\nrestrictions on resale lapse, the trading price of our ordinary shares could decline.\n\n \n\nWe may issue additional preferred\nshares in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our\nordinary shares, which could depress the price of our ordinary shares.\n\n \n\nOur board also has the power,\nwithout shareholder approval, to set the terms of any series of preferred shares that may be issued, including voting rights, dividend\nrights, and preferences over our ordinary shares concerning dividends or in the event of dissolution, liquidation, or winding up, and\nother terms. If we issue preferred shares in the future that have preference over our ordinary shares with respect to payment of dividends\nor upon our liquidation, dissolution or winding up, or if we issue preferred shares with voting rights that dilute the voting power of\nour ordinary shares, the rights of the holders of our ordinary shares or the market price of our ordinary shares could be adversely affected.\nIn addition, the ability of our Board to issue preferred shares without any action on the part of our shareholders may impede a takeover\nof us and prevent a transaction perceived to be favorable to our shareholders.\n\n \n\n**We may be classified as a passive foreign\ninvestment company, which could result in adverse U.S. federal income tax consequences to U.S. holders of our ordinary shares.**\n\n \n\nWe have not decided as to\nwhether we would be classified as a “passive foreign investment company,” or PFIC, for U.S. federal income tax purposes for\nour preceding taxable year, nor can we assure you that we will not be a PFIC for our current taxable year or any future taxable year.\nA foreign (non-U.S) corporation will be considered a PFIC for any taxable year if either (1) at least 75% of its gross income is\npassive income or (2) or least 50% of the value of its assets (generally based on an average of the quarterly values of the assets\nduring a taxable year) is attributable to assets that produce or are held for the production of passive income. PFIC status depends on\nthe composition of our assets and income and the value of our assets (including, among others, a pro rata portion of the income and assets\nof each subsidiary in which we own, directly or indirectly, at least 25% (by value) of the equity interest) from time to time. Depending\non the amount of cash or cash equivalents we currently hold, which are generally treated as passive assets, and because the calculation\nof the value of our assets may be based in part on the value of our ordinary shares, which is likely to fluctuate, we may be a PFIC for\nany taxable year. If we were treated as a PFIC for any taxable year during which a U.S. Holder (as defined in the section entitled “Taxation\n– U.S. Federal Income Taxation – General”) held an ordinary share or warrant, certain adverse U.S. federal income tax\nconsequences could apply to such U.S. Holder. For more information, see “Taxation – U.S. Federal Income Taxation – U.S.\nHolders – Passive Foreign Investment Company Rules.”\n\n \n\n29"}