Company: FOXX
Filing Date: 2025-02-14
Form Type: 10-Q
Source: 0001213900-25-014221
Chunk: 171

Company: Foxx Development Holdings Inc.
Filing Date: 2025-02-14
Form: 10-Q
Item: Item 8
Chunk 171
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ited condensed consolidated financial statements are described below.

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 on our assumption of providing 100% valuation allowance was purely based on our historical operating losses. Once we began generating
profit, we will re-evaluate whether providing 100% valuation allowance is appropriate or if we can reassess such number.

Earnout Liabilities 

At the closing of the Business
Combination, pursuant to the Business Combination Agreement, the shareholders of Old Foxx were entitled to receive up to a total of 4,200,000 contingent
earnout shares (“Earnout Shares”) in the form of our common stock. The Earnout Shares will be issued upon certain vesting
schedules based on our financial performance for the fiscal year ended June 30, 2024 and 2025. The Earnout Shares are classified as a
liability at the closing of the Business Combination on September 26, 2024 and measured at fair value at each reporting period, with changes
in fair value included in the consolidated statements of operations.

When determining the fair
value measurements for earnout liabilities which are required to be recorded at fair value, the Company considers the principal or most
advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants
would use in pricing the earnout liabilities arising from the Business Combination.

The Company developed a Monte
Carlo Model that values the earnout subject revenue milestones. The Monte Carlo Model technique applied generates many possible (but random)
price paths for the underlying(s) via simulation, and then calculates the associated payment value of the security features. The price
of the underlying common stock is modeled such that it follows a geometric Brownian motion with constant drift, and constant volatility.
The