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Funding fracas rattles effort to modernize old-school flip phones

A Chinese investor is withholding money for startup Acadine Technologies, which means life could get harder for anyone unmoved by the latest smartphones.

Acadine Technologies is adapting Mozilla's Firefox OS​ for use in phones, watches and other devices.

Acadine Technologies is adapting Mozilla's Firefox OS for use in phones, watches and other devices.

Stephen Shankland/CNET

An attempt to breathe new life into old-school flip phones is in trouble because a Chinese investor is withholding funds from a startup whose software is at the core of the effort.

Tsinghua Unigroup International paid only the initial portion in 2015 of its planned $100 million investment in Hong Kong-based Acadine Technologies, leading the startup to warn dozens of employees this week that they might lose their jobs at the end of May, according to two sources familiar with the situation.

Acadine is based in Hong Kong, though about 70 of its 110 employees are in Taipei, Taiwan.

The company is building software called H5OS designed to modernize decidedly unmodern flip phones. These handsets, which reached their peak popularity in the early 2000s with the likes of Motorola's Razr, are named for a hinged design that flips opens to reveal a screen and dialing keypad. Today, they're a throwback to an era before companies like Samsung and Apple began selling flat, sleek, powerful devices with large touchscreens and a wealth of apps.

But flip phones are still used by some consumers -- and even celebrities like Scarlett Johansson and, for a time, Eddie Redmayne. As a result, carriers like Verizon want a company to supply modern software so they can retire old flip models that don't support new network standards. Kids these days may like to swipe and tap and pinch to zoom, but plenty of people want to be able to make a call without spending hundreds of dollars on phones and subscription fees.

The modernized flip phones won't exactly be dumb but won't match today's smartphones. They'll offer calling, texting and photo shooting. How much more advanced they'll get remains unknown.

Acadine's H5OS-powered phones have been scheduled to arrive in the fourth quarter. At the Mobile World Congress conference in February, Acadine also showed off its software powering security cameras, drones and other devices. H5OS-powered smartwatches also are part of the plan, a source said.

But those plans require money.

Acadine CEO Li Gong at Mobile World Congress in Barcelona in 2016.

Stephen Shankland/CNET

It's not clear what's behind the funding troubles, but one source said Tsinghua Unigroup was seeking to change the terms of its initial deal. It wants to assign a lower worth to Acadine, a move that would mean Tsinghua Unigroup's money buys a controlling interest in the startup. The two parties are in discussions about the funding situation, but Acadine also is seeking other investors, sources said.

Tsinghua Unigroup and Acadine representatives didn't respond to requests for comment.

Acadine is among the many tech companies involved with a tangle of Chinese companies. China-based Tsinghua Unigroup has invested in several computing companies and pledged to become the third-largest chipmaker through a five-year, $47 billion spending effort, according to Reuters. Tsinghua Unigroup's parent company, Tsinghua Holdings, is run by the Chinese government and funded by the prestigious Tsinghua University in Beijing.

H5OS is a variant of Firefox OS, Mozilla's aborted attempted to turn its Firefox browser into software to power phones. Several carriers endorsed the plan and sold Firefox OS phones, but Mozilla called the phone project a failure, killed that aspect of the project and now is trying to reshape Firefox OS for Internet-connected devices such as Panasonic TVs.