FOXX

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended June 30, 2024, for Foxx Development Holdings Inc. (formerly Foxx Development Inc.). The company is a technology innovation firm specializing in the communications sector, primarily selling tablets and smartphones through third-party distributors and e-commerce channels. On September 26, 2024, the company consummated a business combination with Acri Capital Acquisition Corporation (ACAC), a Special Purpose Acquisition Company (SPAC), and began trading on Nasdaq under the symbol "FOXX."

Key Financial Metrics

Note: Convertible debt of $6.0 million outstanding as of June 30, 2024, was converted into equity immediately prior to the September 2024 business combination closing.

Material Changes vs. Prior Period

• Revenue Decline: Net revenue decreased by 85.1% to approximately $3.2 million. This was primarily due to a strategic shift to diversify the customer base away from a single dominant customer (which accounted for 100% of revenue in 2023) to multiple smaller distributors. Additionally, the cessation of the Affordable Connectivity Program (ACP) in early 2024 reduced demand.
• Operating Expenses: Total operating expenses increased by 217.3% to $3.2 million. This increase was driven by a 325.8% rise in General and Administrative expenses (due to IPO-related costs and new hires) and a 309.8% increase in Selling expenses (due to new sales consultants and marketing efforts).
• Profitability: The company transitioned from a net income of $58,191 in 2023 to a net loss of $3.4 million in 2024. Gross profit margins compressed, and mobile phone products generated a negative gross profit of $(39,012) due to discounted pricing to retain new customers during vendor delivery delays.
• Debt Financing: The company issued $4.0 million in new convertible promissory notes during the fiscal year to fund working capital, increasing total convertible debt from $2.0 million to $6.0 million before conversion at closing.

Guidance, Outlook, and Risks

Outlook and Strategy: Management plans to expand into the Internet-of-Things (IoT) market, wearables, and health/wellness products. The company is developing an IoT cloud platform and expects to launch new product lines, including smartwatches and health monitors, in the fourth quarter of 2024. Revenue growth is expected to be gradual as the company builds relationships with new, smaller customers.

Material Risks and Contingencies:

• Going Concern: The company has a significant working capital deficit and accumulated deficit of approximately $11.0 million. Management has raised substantial doubt about the company's ability to continue as a going concern without additional financing.
• Internal Controls: The company identified six material weaknesses in internal control over financial reporting, including lack of segregation of duties, inadequate documentation, and inability to prepare accurate financial statements in a timely manner.
• Regulatory Dependence: Revenue is heavily influenced by government programs like the ACP and Lifeline Program. The wind-down of ACP funding and ongoing legal challenges to the Lifeline Program's funding mechanism pose significant risks to future sales.
• Customer Concentration: While diversifying, the company still relies on a limited number of distributors. In 2024, three customers accounted for 86% of total revenue.
• Supply Chain: The company relies on a limited number of suppliers for manufacturing. Disruptions or inability to secure components could delay product launches.

Key Facts for Investor Verification

• Business Combination Status: Verify the final share count and capitalization following the September 26, 2024, merger with ACAC, including the conversion of $6 million in debt and the issuance of earn-out shares.
• Earn-Out Conditions: Confirm the revenue thresholds required to trigger the issuance of up to 4.2 million earn-out shares for fiscal years 2024 and 2025 (e.g., $67M - $100M revenue targets).
• Escrow Arrangement: Verify the status of the 500,000 shares held in escrow, which are contingent on the reauthorization of the Affordable Connectivity Program (ACP) with at least $4 billion in funding.
• Internal Control Remediation: Monitor the company's progress in hiring qualified accounting personnel and implementing controls to address the six identified material weaknesses.
• Liquidity Position: Assess the company's ability to secure additional equity or debt financing given the $4.6 million working capital deficit and the auditor's "going concern" qualification.