Annual Report for Fiscal Year Ending June 30, 2026 (Form 10-K)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our results of operations and financial condition should be read together with our consolidated financial statements and the notes thereto and other financial information, which are included elsewhere in this Report. This discussion contains forward-looking statements that involve risks and uncertainties. Factors that could cause or contribute to such differences include those identified below and those discussed in other sections of this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Our financial statements have been prepared in accordance with U.S. GAAP. In addition, our financial statements and the financial information included in this Report reflect our organizational transactions and have been prepared as if our current corporate structure had been in place throughout the relevant periods.

Overview

Foxx Development Holdings Inc. ("we," "our", "us", or the "Company") was incorporated on November 13, 2023 under the name "Acri Capital Merger Sub I Inc." On September 26, 2024 (the "Closing"), Acri Capital Acquisition Corporation, a Delaware corporation and our parent company at the time, ("ACAC") consummated a previously announced business combination pursuant to the terms of the business combination agreement, dated February 18, 2024 (as amended on May 31, 2024, collectively, the "Business Combination Agreement"), by and among us, ACAC, Acri Capital Merger Sub II Inc., a Delaware corporation and our wholly-owned subsidiary at the time ("Merger Sub"), and Foxx Development Inc., a Texas corporation incorporated on May 17, 2017 ("Old Foxx"), pursuant to which (i) ACAC merged with and into us (the "Reincorporation Merger"), with us surviving the Reincorporation Merger, and (ii) Old Foxx merged with and into Merger Sub, with Merger Sub surviving as our wholly-owned Delaware subsidiary (the "Acquisition Merger"). The Reincorporation Merger, the Acquisition Merger, and the transactions contemplated under the Business Combination Agreement, are collectively referred to as the "Business Combination".

Upon Closing, we were renamed as "Foxx Development Holdings Inc.", and the Merger Sub was renamed as "Foxx Development Inc." (the "Subsidiary").

The ACAC securities previously traded on the Nasdaq Capital Market ("Nasdaq") were delisted and ceased trading following the Closing. On September 27, 2024, one business day after the Closing, our Common Stock and Warrants became listed on the Nasdaq under trading symbols "FOXX" and "FOXXW," respectively.

Together with our Subsidiary, we are a technology innovation firm specializing in the communications sector. Since our establishment in 2017, we have expanded our presence to include various locations throughout the United States, such as San Francisco, CA, Dallas, TX, Atlanta, GA, Los Angeles, CA, Miami, FL, and New York, NY. This expansion enables us to provide sales, retail, distribution, and after-sales support services while simultaneously driving innovation through active research and development efforts aimed at pioneering new customization standards and services.

Our business model involves providing comprehensive hardware and software specifications to original design manufacturers. Once the products are developed, we engage with third-party agencies to secure necessary testing and certifications, including Equipment Authorizations from the FCC and certifications from the Global Mobile Suppliers Association. We currently offer a range of Foxx-branded products, including tablets, smartphones, wearables, and expects to launch other high-quality communication terminals. Our products are generally priced competitively after considering various factors such as product costs, research and development investments, regulatory compliance, testing expenses, and shipping costs. Our customers are primarily distributors who sell Foxx-branded products in the U.S. public channels and to major carriers in the United States such as T-Mobile, AT&T, and Verizon. Our customers also included individual e-commerce customers from TikTok Shop, which we began our e-commerce operations in March 2024.

We manage inventory and meet market demand through our build-to-order business model. After customers place purchase orders in bulk with us, we place purchase orders with suppliers to manufacture the products that meet customers' products specifications and budget requirements. Prior to 2023, we relied on limited suppliers for the manufacturing of mobile phone and tablet products and on limited customers for the distribution of these products. We selectively concentrated our resources on our tablet and mobile phone products because such products held the strongest market potential and revenue generation capability at the time when remote work and online classes became more prevalent.

Beginning in 2023, we adjusted our business strategy to avoid reliance on limited suppliers and customers and to diversify suppliers and customers to mitigate the concentration and reliance risk. We have added new product models across each product line to target a broader range of customers. As of the date hereof, we have reached out to a total of twenty-three wholesale customers to expand our operations in the market and expect to secure purchase orders from these new customers. At the same time, to meet the various product demands of current and prospective customers, we have connected with suppliers who can provide manufacturing support when we secure purchase orders from our customers. In addition, we expanded our product range further and launched Internet of Things (IoT) products such as water leak sensors. Because of our strategic shifts to diversify our product offerings, we expanded our sales channels to target end-users who are interested in mobile devices, tablets, wearables, and IoT products. We began launching our products through TikTok Shop in March 2024 and stepped up our sales efforts through our Amazon store and other online platforms. We expect to keep growing our sales through multiple e-commerce channels.

In January 2026, we began engaging in dropship arrangement to reduce additional freight cost and usage of our warehouse spaces. This change of business strategy helped us to reduce our freight costs and promoted better gross margin with our wholesales business.

Sales for the fiscal year ended June 30, 2026 were $52,584,432, a decrease of $13,334,734, or 20.2%, compared to $65,919,166 for the fiscal year ended June 30, 2025. The decrease was primarily attributable to two factors. First, tariffs imposed on imported goods, together with uncertainty as to their scope and duration, caused significant volatility in our landed costs and selling prices during the period; in response, certain customers deferred or reduced purchase commitments pending greater pricing clarity, which lowered order volumes. Second, a sharp increase in memory chip prices raised our product costs, and we increased selling prices in an effort to preserve gross margin. Our two major customers, which accounted for 77.9% of our total sales, did not accept the higher prices to the extent we anticipated, and the resulting reduction in order volumes further reduced sales. These factors were compounded by broader macroeconomic conditions, including sustained inflation that weakened consumer purchasing power and lengthened the mobile phone replacement cycle, which we believe has extended from approximately one to two years to more than two years.

Accounting Treatment

While the legal acquirer in the Business Combination was ACAC, for financial accounting and reporting purposes under U.S. GAAP, Old Foxx was the accounting acquirer, and the Business Combination was accounted for as a "reverse recapitalization." A reverse recapitalization (i.e., a capital transaction involving the issuance of stock by ACAC for the stock of Old Foxx) does not result in a new basis of accounting, and the consolidated financial statements of the combined company represent the continuation of the consolidated financial statements of Old Foxx in many respects. Accordingly, the assets, liabilities and results of operations of Old Foxx became the historical financial statements of the combined company, and ACAC's assets, liabilities, and results of operations were consolidated with Old Foxx beginning from the Closing on September 26, 2024. Operations prior to the Business Combination are presented as those of Old Foxx. The net assets of ACAC are recognized at historical cost (which is expected to be consistent with carrying value), with no goodwill or other intangible assets recorded upon execution of the Business Combination.

Nasdaq Listing Update

On July 22, 2026, we received a deficiency letter from the Nasdaq Listing Qualifications Department of the Nasdaq notifying us that, for a period of 30 consecutive business days, our MVLS closed below the $35,000,000 MVLS threshold required for continued listing on the Nasdaq Capital Market under Nasdaq Listing Rule 5550(b)(2) (the "MVLS Requirement"). In accordance with Nasdaq Listing Rule 5810(c)(3)(C), we have until January 19, 2027 to regain compliance with the MVLS Requirement (the "MVLS Compliance Period"). To regain compliance, our MVLS must close at $35 million or more for a minimum of ten consecutive business days during the MVLS Compliance Period. If we do not regain compliance by the end of the MVLS Compliance Period, Nasdaq staff will provide written notice to us that our securities are subject to delisting. At that time, we may appeal any such delisting determination to a hearings panel. We intend to actively monitor the market value of our listed securities and may, if appropriate, consider implementing available options to regain compliance with the MVLS Requirement. There can be no assurance that we will be able to regain compliance with Nasdaq Listing Rule 5550(b)(2), or maintain compliance with any other listing requirements.

Key Factors that Affect Operating Results

We believe the key factors affecting our financial condition and results of operations include the following:

Tariff and Customer Demand

Our sales decrease was primarily driven by lower order volumes. During the year ended June 30, 2026, tariffs imposed on imported goods, together with uncertainty regarding their scope and duration, resulted in significant volatility in our landed costs and selling prices. In response, certain customers deferred or reduced purchase commitments pending greater pricing clarity, which negatively affected order volumes and sales.

Product Costs and Pricing

A significant increase in memory chip prices increased our product costs during the year ended June 30, 2026. In response, we increased our selling prices in an effort to preserve gross margins. However, our customers did not accept the higher prices to the extent we anticipated, which contributed to lower order volumes and further reduced sales. Changes in product costs and our ability to adjust selling prices accordingly may continue to affect our gross margins and operating results.

Macroeconomic Conditions and Consumer Demand

Our operating results are also affected by broader macroeconomic conditions, including sustained inflation and its impact on consumer purchasing power. Inflation and reduced consumer purchasing power contributed to a longer mobile phone replacement cycle, which we believe has extended from approximately one to two years to more than two years. A longer replacement cycle may reduce consumer demand for mobile phones and related products and, consequently, adversely affect our sales and operating results.

Retention of Key Management Team Members

One of the key differentiating factors of ours is the rich blended nature of our management team. Our management team comprises executives with extensive sales, marketing, and R&D experience in telecommunication industry and consumer electronics industry. The wide array of industry experience captured by our management team allows us to deliver advanced technology and superior products to our customers. Losing any member of our key executive team could significantly impact on the quality of services and products that we currently offer. Such departures may prompt customers to explore alternative products or IoT cloud platforms offered by different vendors or service providers.

Investment in technology and talent

We invest significant resources in outsourcing partnerships and dedicate efforts to research and develop new products, solutions, agent platforms, and related services. This commitment is essential to uphold our competitiveness in the industry, especially in the realm of IoT services. Advancing technology and enhancing capabilities are pivotal for enterprise growth, necessitating continual progress in electronic product technologies, novel services, and expanded capabilities.

To maintain and expand our customer base, we must sustain a culture of innovation that aligns with the industry's evolution. This entails continuously introducing cutting-edge technologies to the market. Our current focus in research and development revolves around bolstering comprehensive communication, storage, and energy solutions, as well as advancing 5G technology. This includes areas such as baseband development, Radio Frequency (RF) layout optimization, Session Initiation Protocol (SIP) integration, and rigorous system testing.

In addition, in January 2026, we entered into a research and development agreement with a third-party service provider, pursuant to which the provider will render technical development services for the operating system used in our mobile phone products. Under the agreement, the provider will: (i) develop a customized cross-platform inheritance framework for the operating system to enable compatibility and adaptation across multiple platforms and operating systems; (ii) establish a unified compatibility and integration framework for system modules and applications in order to support overall system stability and interoperability; (iii) optimize core applications for multi-platform adaptation to improve system performance, operating smoothness, and user experience; (iv) develop proprietary applications, including a mobile manager, home screen, and browser, and integrate them into the operating system; (v) integrate and validate advertising and paid-service business modules to confirm their functionality, regulatory compliance, and security; and (vi) perform system and UX/UI design and implementation to improve visual design and user interaction and to maintain a consistent overall style. All intellectual property developed under the agreement will be owned by the Company.

Our ability to expand our products and services and diversify customer base

Currently, our main revenue stream originates from the sale of tablets and mobile phones. As brand recognition and acceptance grow, we anticipate a surge in user adoption of our wireless services and intelligent products. Our capacity to broaden our products portfolio, offer new services and attract a more diversified customer base could significantly influence our future operating results.

Results of Operations

Comparison for the years ended June 30, 2026 and 2025

		For the Years Ended June 30,
		2026				2025				Change ($)				Change (%)
Revenues, net		$	52,584,432			$	65,919,166			$	(13,334,734	)			(20.2	)%
Cost of goods sold			50,893,464				61,144,561				(10,251,097	)			(16.8	)%
Gross profit			1,690,968				4,774,605				(3,083,637	)			(64.6	)%
Operating expenses
Selling expense			3,963,221				5,183,464				(1,220,243	)			(23.5	)%
General, and administrative expense			11,031,238				6,155,236				4,876,002				79.2	%
Research and development - related party			-				136,752				(136,752	)			(100.0	)%
Research and development			2,926,060				2,083,897				842,163				40.4	%
Provision of credit losses			1,811,876				913,190				898,686				98.4	%
Impairments of right-of-use assets			25,855,427				-				25,855,427				100.0	%
Loss from operations			(43,896,854	)			(9,697,934	)			(34,198,920	)			352.6	%
Other (expense) income, net			(8,782,782	)			754,541				(9,537,323	)			(1,264.0	)%
Provision for income tax			10,302				76,743				(66,441	)			(86.6	)%
Net loss			(52,689,938	)			(9,020,136	)			(43,669,802	)			484.1	%
Foreign currency translation adjustment			(11,675	)			(5,002	)			(6,673	)			133.4	%
Comprehensive loss		$	(52,701,613	)		$	(9,025,138	)		$	(43,676,475	)			483.9	%

Revenues

Our revenue is primarily derived from sales of electronic products. The total revenues decreased by approximately $13.3 million, or 20.2%, to approximately $52.6 million for the year ended June 30, 2026 as compared to $65.9 million for the year ended June 30, 2025. The decrease of the total revenue was mainly attributable to the decreases in revenue across nearly all categories, which collectively accounted for 98% of our sales, with the exception of tablet products. The decrease was more pronounced in the second half of the year ended June 30, 2026, with approximately $9.7 million decrease occurring during the second half. The decline was primarily driven by the declined consumer demand and lower order value due to our intention of increasing selling prices in response to higher costs driven by rising chip prices, tariffs and related pricing uncertainty. The significant decline in sales in the second half of the year ended June 30, 2026 may continue to pressure our sales and gross margins in the near term if these conditions persist. We will continue to monitor customer demand, product costs, tariffs, and pricing conditions and adjust our strategies accordingly.

Our revenues from our revenue categories are summarized as follows:

		For the Years Ended June 30,
										Change				Change
		2026				2025				($)				(%)
Tablet products		$	930,845			$	509,843			$	421,002				82.6	%
Mobile phone products			47,016,135				59,696,955				(12,680,820	)			(21.2	)%
Wearable products and others			3,048,655				3,444,077				(395,422	)			(11.5	)%
Subtotal product revenues			50,995,635				63,650,875				(12,655,240	)			(19.9	)%
App service commission revenue			1,578,328				2,166,477				(588,149	)			(27.1	)%
Other services			10,469				101,814				(91,345	)			(89.7	)%
Subtotal service revenues			1,588,797				2,268,291				(679,494	)			(30.0	)%
Total revenues, net		$	52,584,432			$	65,919,166			$	(13,334,734	)			(20.2	)%

Tablet product sales were insignificant in our operations for the year ended June 30, 2026. Revenue from the sales of tablets increased by approximately $0.4 million, or 82.6%, to approximately $0.9 million for the year ended June 30, 2026 from $0.5 million for the same period in 2025. Revenue from sales of phones decreased by approximately $12.7 million, or 21.2%, to approximately $47.0 million for the year ended June 30, 2026 from $59.7 million for the same period in 2025 as the consumers' spending power was weakened and the mobile phone replacement rate was lowered. Previously, consumers tended to replace their phones every more often between 1 to 2 years, whereas now many keep the same device for over 2 years. This decrease was also attributed to lower order volumes, resulting from our intention of increasing selling prices in response to higher costs driven by rising chip prices. Revenue from sales of wearable products and others decreased by approximately $0.4 million, or 11.5%, to approximately $3.0 million for the year ended June 30, 2026 from $3.4 million for the year ended June 30, 2025, as the consumers' spending power was weakened and the demands of the wearable products were lowered during the year ended June 30, 2026. Revenue from App service commission decreased by approximately $0.6 million, or 27.1%, to approximately $1.6 million for the year ended June 30, 2026 from $2.2 million for the year ended June 30, 2025, as the sales of phones decreased and the consumers' spending power was weakened. Revenue from other services was income generated by our other logistic and warehouse management and MVNO services and it was insignificant in our operations for the year ended June 30, 2026 and 2025.

Cost of Goods Sold

Our cost of goods sold mainly consists of cost of merchandise and freight. Total cost of goods sold decreased by approximately $11.4 million, or 18.7%, to approximately $49.71 million for the year ended June 30, 2026 as compared to $61.1 million for the year ended June 30, 2025. The decrease in cost of goods sold is a direct result of a decrease in our revenue, consistent with the decrease in mobile phone production costs, which accounted for 92% of our cost of goods sold.

Our cost of goods sold from their revenue categories are summarized as follows:

		For the Years Ended June 30,
										Change				Change
		2026				2025				($)				(%)
Tablet products		$	759,573			$	437,903			$	321,670				73.5	%
Mobile phone products			46,532,660				57,618,133				(11,085,473	)			(19.2	)%
Wearable products and others			3,585,378				3,040,588				544,790				17.9	%
Other services cost			15,853				47,937				(32,084	)			(66.9	)%
Total cost of goods sold		$	50,893,464			$	61,144,561			$	(10,251,097	)			(16.8	)%

Our cost of goods sold for tablets increased by approximately $0.4 million, or 73.5%, to approximately $0.8 million for the year ended June 30, 2026 from approximately $0.4 million for the same period in 2025, consistent with the increase in sales of tablets. Cost of goods sold for mobile phone products decreased by approximately $11.1 million, or 19.2%, to approximately $46.5 million for the year ended June 30, 2026 from approximately $57.6 million for the same period in 2025, which is consistent with the direct result of a decrease in our revenue. The decrease is also attributable to the decrease in unit cost as we negotiated with our vendor to cover shipping and tariff costs beginning in July 2025 offset by the increase of inventory impairment related to slow-moving inventory of approximately $5.8 million. Cost of goods sold for wearable products and others increased by approximately $0.6 million, or 17.9%, to approximately $3.6 million for the year ended June 30, 2026 from $3.0 million for the same period in 2025, which is primarily due to inventory impairment related to slow-moving inventory of approximately $1.0 million. Cost of other services was insignificant in our operations for the years ended June 30, 2026 and 2025.

Gross Profit

Our gross profit decreased by approximately $3.1 million, or 64.6%, to approximately $1.7 million for the year ended June 30, 2026, from $4.8 million for the year ended June 30, 2025.

Our gross profit from their major revenue categories is summarized as follows:

		For the Years Ended June 30,
		2026				2025				Change				Change (%)
Tablet products
Gross (loss) profit		$	171,272			$	71,940			$	99,332				138.1	%
Gross (loss) profit percentage			18.4	%			14.1	%			4.3	%
Mobile phone products
Gross profit		$	483,475			$	2,078,822			$	(1,595,347	)			(76.7	)%
Gross profit percentage			1.0	%			3.5	%			(2.5	)%
Wearable products and others
Gross (loss) profit		$	(536,723	)		$	403,489			$	(940,212	)			(233.0	)%
Gross(loss) profit percentage			(17.6	)%			11.7	%			(29.3	)%
App service commission revenue
Gross profit		$	1,578,328			$	2,166,477			$	(588,149	)			(27.1	)%
Gross profit percentage			100.0	%			100.0	%			0.0	%
Other services
Gross profit		$	(5,384	)		$	53,877			$	(59,261	)			(110.0	)%
Gross profit percentage			(51.4	)%			52.9	%			(104.3	)%
Total
Gross profit		$	1,690,968			$	4,774,605			$	(3,083,637	)			(64.6	)%
Gross profit percentage			3.2	%			7.2	%			(4.0	)%

For the years ended June 30, 2026 and 2025, our overall gross profit percentage was 3.2% and 7.2%, respectively. The decrease in gross profit percentage of 4.0% was primarily due to the decrease in gross profit percentage across nearly all categories, which collectively accounted for 90% of our gross profit, with the exception of tablet, attributable to inventory impairment, tariffs and related pricing uncertainty, and product costs. In addition, approximately 96.4% of the Company's purchases were made from one major supplier, and changes in the supplier's pricing and supply conditions may significantly affect the Company's product costs and gross profit margin. The Company sought to increase selling prices to mitigate higher costs, but the customers did not accept the higher prices, limiting the Company's ability to offset these cost increases.

Gross profit percentage of tablets increased from 14.1% for the year ended June 30, 2025 to 18.4 % for the same period in 2026. This was primarily due to the decrease in sales of those with higher unit selling prices and lower unit purchase prices, and the reduction of shipping and tariff costs as we negotiated with our vendor to cover such costs.

Gross profit percentage for mobile phones decreased from 3.5% for the year ended June 30, 2025 to 1.0% for the same period in 2026. This was primarily due to the inventory impairment related to slow-moving inventory of approximately $5.8 million.

Gross (loss) profit percentage for wearable products and others decreased from 11.7% for the year ended Juen 30, 2025 to (17.6) % for the same period in 2026. This was primarily due to the increasing sales of products with lower gross profit margins and the inventory impairment related to slow-moving inventory of approximately $1.0 million.

For the years ended June 30, 2026 and 2025, our gross profit percentage of App service commission was 100.0%. This high margin was primarily attributable to the nature of App service commission revenue, which was commission based revenue that was earned at a point in time when the revenue is generated from the App, that is when clicks and/or impressions, activation of Apps, and installation of additional Apps occur at a point in time when the end users of the mobile devices interact with those Apps. We earned the App revenue share (service commission) from our partners without incurring any direct cost, as the pre-installation expenses were included in the research and development expenses prior to installation, and any labor costs with minimal time spent were immaterial to be allocated to cost of revenue.

Gross (loss) profit percentage for other services decreased from 52.9% for the year ended June 30, 2025 to (51.4) % for the same period in 2026. Gross profit percentage for other services was insignificant in our operations for the years ended June 30, 2026 and 2025.

Operating Expenses

Total operating expenses increased by approximately $31.1 million, or 215.0%, to approximately $45.6 million for the year ended June 30, 2026, from approximately $14.5 million for the year ended June 30, 2025.

Our operating expenses are summarized as follows:

		For the Years ended June 30,
		2026				2025				Change ($)				Change (%)
Operating expenses
Selling expenses		$	3,963,221			$	5,183,464			$	(1,220,243	)			(23.5	)%
General and administrative expense			11,031,238				6,155,236				4,876,002				79.2	%
Research and development - related party			-				136,752				(136,752	)			(100.0	)%
Research and development			2,926,060				2,083,897				842,163				40.4	%
Provision of credit losses			1,811,876				913,190				898,686				98.4	%
Impairments of right-of-use assets			25,855,427				-				25,855,427				100.0	%
Total operating expense		$	45,587,822			$	14,472,539			$	31,115,283				215.0	%

The increase in operating expenses was mainly attributed to the following:

Selling Expenses

Selling expenses decreased approximately $1.2 million, or 23.5%, to approximately $4.0 million for the year ended June 30, 2026, from approximately $5.2 million for the year ended June 30, 2025. The decreased selling expenses was mainly attributable to approximately $1.1 million decrease in commission, payroll and payroll related expenses and approximately $0.7 million decrease in consulting fees during the year ended June 30, 2026, as we reduced salespersons and consultants to reduce expenses and streamline sales department. The decrease was offset by approximately $0.6 million increased in advertising and marketing expenses primarily due to the increased marketing investment in e-commerce channels.

General and Administrative Expenses

General and administrative expenses increased approximately $4.8 million, or 79.2%, to approximately $11.0 million for the year ended June 30, 2026 from approximately $6.2 million for the year ended June 30, 2025. The increased general and administrative expense were mainly attributable to the approximately $0.4 million increase in professional expense as we became a public company and incurred additional capital market and legal consulting fees, approximately $0.7 million increase in salary and wages as a result of allocating certain personnel compensation from selling expenses to general and administrative expenses, reflecting a change in the personnel's primary responsibilities, approximately $3.6 million increase in rent due to the new warehouse leases that commenced in July 2025 and January 2026, and approximately $0.2 million increase in stock-based compensation expenses as we granted restricted stock units in November 2024 to our general and administrative team members under employee incentive plan.

Research and Development - related party

Research and development ("R&D") expenses from a related party decreased by approximately $137,000, or 100.0%, where the decrease was primarily due to an R&D project which commenced in 2024 and was completed in June 2025. During the year ended June 30, 2025, a related party completed the remaining 5G development project pursuant to a R&D agreement between us and the related party, and we recognized a R&D expense approximately of $137,000 accordingly based on the progression of the R&D project. We did not have this expense for the same period in 2026.

Research and Development

R&D expenses increased by approximately $0.8 million, or 40.4%, from $2.1 million for the year ended June 30, 2025 to $2.9 million for the same period in 2026. The increase was primarily due to the R&D agreement entered into in January 2026 with a third party, under which the third party will provide technical development services for our operating system across three phases. During the year ended June 30, 2026, approximately 60% of the project has been completed and the Company recognized approximately $1.9 million of R&D expenses under this agreement, reflecting progress in development phase.

Provision of credit losses

Provision of credit losses increased by approximately $0.9 million, or 98.4%, from $0.9 million for the year ended June 30, 2025 to approximately $1.8 million for the same period in 2026. The increase was primarily due to continued aging of receivables, as well as our assessment of historical collection experience and probability of recovery from customers and customer groups.

Impairments of right-of-use assets

Impairments of right-of-use assets increased by approximately $25.9 million, or 100.0%, from $0 for the year ended June 30, 2025 to approximately $25.9 million for the same period in 2026. The increase was primarily attributable to impairment charges recognized following the change in our logistics management practice - the increase in dropship arrangements reduces the needs for warehousing space. As a result, our management decided to sublease our warehouse with lesser value as compared to our current lease payments, which indicated that the carrying amount of the right-of-use assets was not recoverable and exceeded their estimated fair value by approximately $25.9 million.

Other (expense) income, net

Our other expense, net is summarized as follows:

		For the Years ended June 30,
		2026				2025				Change				Change (%)
Other (expense) income
Interest expense		$	(8,758,798	)		$	(4,959,055	)		$	(3,799,743	)			76.6	%
Other (expense) income, net			(23,984	)			25,589				(49,573	)			(193.7	)%
Change in fair value of earnout liabilities			-				5,688,007				(5,688,007	)			(100.0	)%
Total other (expense) income, net		$	(8,782,782	)		$	754,541			$	(9,537,323	)			(1,264.0	)%

Total other (expense) income, net decreased by approximately $9.6 million, or 1,264.0%, to approximately $8.8 million of other expense, net for the year ended June 30, 2026, from approximately $0.8 million of other income, net for the year ended June 30, 2025. The decrease was primarily due to the increase of approximately $3.8 million interest expenses incurred related to the financing offered by our vendors based upon the timing of our payment to their accounts payable and the decrease of approximately $5.7 million of change in fair value of earnout liabilities as we no longer had earnout liabilities after June 30, 2025.

Provision for income taxes

The provision for income taxes was approximately $10,000 and $77,000 for the years ended June 30, 2026 and 2025, respectively, representing a decreased of approximately $66,000 or 86.6%. The decrease was primarily attributed to the increase in net loss during the year ended June 30, 2026 and the absence of non-taxable gain of change in fair value of earnout liabilities of approximately 5.7 million recognized during the year ended June 30, 2025.

Net Loss

Net loss increased by approximately $43.7 million, or 483.9%, to approximately $52.7 million for year ended June 30, 2026, from approximately $9.0 million for the year ended June 30, 2025. Such change was mainly due to the reasons discussed above.

Foreign Currency Translation Adjustment

Changes in foreign currency translation adjustment of approximately $7,000 are mainly due to the fluctuation of foreign exchange rates between SGD and MXN (the functional currencies of two of our subsidiaries) and the USD dollar (reporting currency) for the year ended June 30, 2026.

Liquidity and Capital Resources

In assessing liquidity, we monitor and analyses cash on-hand and operating and capital expenditure commitments. Our liquidity needs are to meet working capital requirements, operating expenses, and capital expenditure obligations. Debt financing in the form of convertible promissory note and cash generated from operations have been utilized to finance working capital requirements.

As of June 30, 2026, we had cash and restricted cash of approximately $1.5 million, while we had working capital deficit of approximately $34.1 million and accumulated deficit of approximately $72.7 million. During the year ended June 30, 2026, we had net loss of approximately $52.7 million and net operating cash outflow of approximately $0.4 million.

If we are unable to generate sufficient funds to finance the working capital requirements within the normal operating cycle of a twelve-month period from the date of the consolidated financial statements are issued, we may have to consider supplementing our available sources of funds through the following sources:

●

Other available sources of financing from banks, other financial institutions or private lenders;

●

Financial support and credit guarantee commitments from our related parties; and

●

Equity financing.

Our management has determined that the factors discussed above have raised substantial doubt about our ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. The consolidated financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include any adjustments that might result from the outcome of this uncertainty.

The following summarizes the key components of cash flows for the years ended June 30, 2026 and 2025.

		For the Years Ended June 30,
		2026				2025
Net cash used in operating activities		$	(357,994	)		$	(6,560,121	)
Net cash provided by (used in) investing activities			8,826				(40,236	)
Net cash (used in) provided by financing activities			(36,964	)			7,890,820
Effect of exchange rate changes			(12,597	)			(2,458	)
Net change in cash and cash equivalents		$	(398,729	)		$	1,288,005

Operating activities

Net cash used in operating activities was approximately $0.4 million for the year ended June 30, 2026 and was primarily attributable to (i) approximately $52.7 million net loss, (ii) approximately $1.7 million payment in operating lease liabilities as we commenced our warehouse leases in July 2025 and January 2026, (iii) approximately $0.6 million increase in accounts receivable due to the increase of credit sales during the year, and (iv) approximately $0.3 million decrease in other payable - related parties primarily due to the repayment of unconverted working capital loan balance. The cash outflow was offset by (v) non-cash expenses of approximately $37.9 million, which includes depreciation, amortization of operating right-of-use assets, stock-based compensation, impairment of inventories, impairments of right-of-use assets, and provision of credit losses, net, (vi) approximately $7.3 million increase in accounts payable due to increased purchases for dropship orders, (vii) approximately $4.3 million increase in other payables and accrued liabilities as we committed to repaying supply chain finance interests and the recognition of obligations to pay R&D expenses under milestone-based installments pursuant to the R&D agreement entered into in January 2026, (viii) approximately $2.4 million decrease in inventories as we engaged in dropship arrangement beginning in July 2025 where products were shipped directly to our customers rather than stored in our warehouse as inventory, (ix) approximately $1.0 million decrease in prepaid expenses and other current assets due to the collection of prepayment refund from canceled purchase orders and the utilization of prepaid rent following the commencement of warehouse leases in July 2025 and January 2026, and (x) approximately $1.9 million increase in contract liabilities.

Net cash used in operating activities was approximately $6.6 million for the year ended June 30, 2025 and was primarily attributable to (i) approximately $9.0 million in net loss, (ii) approximately $10.9 million increase in inventories because we stored more inventories to meet the demand of our anticipated sales orders, (iii) approximately $7.1 million increase in accounts receivable due to the increase of credit sales during the period, (iv) non-cash expenses of approximately $5.7 million, which primarily attributed to the change in fair value of earnout liabilities, (v) approximately $2.0 million increase in prepaid expenses and other current assets due to our prepaid rent payment in connection with our factory and warehouse leases to be commenced in July 2025, (vi) approximately $1.1 million increase in security deposit because we rented more office, factory and warehouse space which were commenced in July 2025, (vii) approximately $0.2 million decrease in tax payable of ACAC due to the payment of income tax carried from ACAC after the Business Combination, and (viii) approximately $0.6 million decrease in contract liabilities due to purchase of more inventories with vendors to meet customer demand. The cash outflow was offset by (i) approximately $24.8 million increase in accounts payable due to purchase of more inventories with vendors to meet customer demand, (ii) approximately $2.4 million increase in other payables and accrued liabilities mainly due to accrued professional fees that associated with business expansion, such as consulting fees, testing fees and legal fees, (iii) approximately $1.2 million decrease in advance to suppliers due to purchase of more inventories with vendors to meet customer demand, (iv) approximately $0.8 million increase in non-cash stock compensation due to restricted stock units granted to our employees, consultants and independent director under the Incentive Plan, and (v) approximately $0.9 million provision for credit losses due to the increasing risk of uncollectable accounts from a few of our customers.

Investing activities

Net cash provided by investing activities was approximately $9,000 for the year ended June 30, 2026, attributable to the proceeds from sale of equipment.

Net cash used in investing activities was approximately $40,000 for the year ended June 30, 2025, attributable to approximately $68,000 purchase of some equipment for our warehouse uses and an automobile for our business uses, and offset by approximately $28,000 proceeds from sale of the automobile.

Financing activities

Net cash used in financing activities was approximately $37,000 for the year ended June 30, 2026, mainly attributable to the principal payments of long-term loan of approximately $24,000 and the payments for employee taxes related to stock compensation of approximately $13,000.

Net cash provided by financing activities was approximately $7.9 million for the year ended June 30, 2025, mainly attributable to (i) approximately $19.7 million of proceeds from the reverse recapitalization, (ii) $9.0 million of proceeds from issuance of convertible promissory notes, and (iii) approximately $0.1 million of proceeds from issuance of common stock through exercise of warrant, offset by the payment of redeeming shareholders in connection with the Business Combination of approximately $20.5 million, the repayment of short-term loans of approximately $0.3 million and approximately $0.1 million in payments of deferred transaction costs.

Off-Balance Sheet Arrangements

As of June 30, 2026, we have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our members.

Critical Accounting Estimates

The consolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements and accompanying notes requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We have identified certain accounting estimates that are critical to the preparation of the consolidated financial statements. Certain accounting estimates are particularly sensitive because of their significance to the consolidated financial statements and because of the possibility that future events affecting the estimate may differ significantly from management's current judgments. We believe that the critical accounting estimates, assumptions, and judgments that have the most significant impact on our consolidated financial statements are described below.

Allowance for Credit Losses

In establishing the required allowance for credit loss accounts, we consider historical collection experience, aging of the receivables, the economic environment, industry trend analysis, and the credit history and financial condition of the customers. Management reviews its receivables on a regular basis to determine if the allowance for credit loss accounts is adequate and adjusts the allowance when necessary. Delinquent account balances are written off against allowance for credit loss accounts after management has determined that the likelihood of collection is not probable. The allowance for credit losses is based on a review of specifically identified customer accounts in addition to an overall aging analysis which is applied to accounts pooled on the basis of similar risk characteristics. Judgments are made with respect to the collectability of accounts receivable within each pool based on historical experience, current payment practices and current economic trends based on our expectations over the expected life of the receivable, which is generally ninety days or less. With our accounts receivable balances, management would estimate its expected credit losses using an aging method with a baseline reserve percentage with the additional consideration of current industry and economic trend. Although actual losses have not differed materially from our previous estimates, future losses could differ from our current estimates. As of June 30, 2026 and 2025, $1,888,104 and $595,907, respectively, of allowance for credit losses of accounts receivable was recorded, and the Company had net accounts receivable of $6,099,537 and $6,786,792, respectively.

Income Taxes

We record deferred tax assets and liabilities based on the net tax effects of tax credits, operating loss carryforwards, and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes compared to the amounts used for income tax purposes. We regularly review our deferred tax assets for recoverability with consideration for such factors as historical losses, projected future taxable income, and the expected timing of the reversals of existing temporary differences. A valuation allowance is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management believes the deferred tax assets, based largely on the history of tax losses, warrant a full valuation allowance based on the weight of available negative evidence. Currently, the key factor in our assumption of providing 100% valuation allowance was purely based on our historical operating losses. Once we begin generating profit, we will re-evaluate whether providing 100% valuation allowance is appropriate or if we can reassess such number.

Inventory Impairment

Inventory impairment is recognized to state our inventories at the lower cost or net realizable value. At least a quarterly basis, inventories are reviewed for potential write-downs for estimated obsolescence or unmarketable inventories which equals the difference between the costs of inventories and the estimated net realizable value. Net realizable value is determined based on management's estimates of selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. These estimates require significant judgement and are based upon past sales experience, forecasts for future demand, market conditions, and other relevant factors. During the years ended June 30, 2026 and 2025, inventory write-downs of $6,981,771 and $0, respectively, were recorded based on management's estimates.

When inventories are written down to net realizable value, they are not marked up subsequently based on changes in underlying facts and circumstances.

Impairment of long-lived assets

The impairment of long-lived assets is reviewed on an annual basis and whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be fully recoverable. During the period, management identified certain impairment indicators for right-of-use assets, including a current period loss, a history of losses, and management's decision to sublease our warehouse. These factors required management to assess whether the carrying value of the asset group was recoverable. Recoverability is assessed by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to result from the use and eventual disposition of the assets. The right-of-use assets were determined to be impaired and the impairment recognized was the excess of the carrying amount over the fair value of the assets. Fair value was determined by the discounted cash flow method. The approach for determining and measuring impairment in long-lived asset groups is to exclude operating lease liabilities from the asset group. The discount rate used in the estimate of discounted cash flows is 8.70%, consistent with our incremental borrowing rate as of January 1, 2026, because from market participant and sublease standpoint as the interest rate in the market, our credit environment and market spreads have held steady with no change since January 1, 2026. These estimates are subject to significant uncertainty, particularly with respect to assumptions used in forecasting future cash flows. Changes in these assumptions could materially affect the estimated fair value and the amount of impairment recognized. For example, a decrease in projected sublease income or occupancy rates could result in additional impairment charges. Management believes the assumptions and methodology used are reasonable and consistent; however, these estimates may change in the near term as market conditions, sublease arrangements, and the Company's business strategy evolve. During the years ended June 30, 2026 and 2025, the Company recognized approximately $25.9 million and $0 impairment of long-lived assets, respectively.