Liquidity and Capital Resources

The Company’s working capital deficiency was as follows:

Item 7. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Contents

XY Labs, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to condensed consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

See accompanying notes to condensed consolidated financial statements. 

See accompanying notes to condensed consolidated financial statements.

XY Labs, Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Description of Business

XY Labs, Inc. (the “Company”) is a corporation organized under the laws of the State of Delaware. The Company was originally formed as a limited liability company in June 2012. On May 27, 2016, the Company changed its name from Ength Degree, LLC to XY – the Findables Company and converted from a Delaware limited liability company to a Delaware corporation pursuant to applicable conversion statutes of the Delaware General Corporation Law. On November 9, 2018, the Company changed its name to XY – The Persistent Company. The Company changed its name to XY Labs, Inc. on May 4, 2021.

The XYO Foundation is a wholly owned subsidiary of the Company and a California corporation. The primary objectives of XYO Foundation include (i) providing software and technical documentation for the XYO Network, (ii) offering services and support to like-minded software project communities contributing to XYO projects, and (iii) governing the use and licensing of XYO open-source assets. The XYO Foundation had no operational activities, assets or liabilities in the six months ended June 30, 2025 and 2024.

Note 2 – Summary of Significant Accounting Policies

Basis of Accounting

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Basis of Presentation and Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, the XYO Foundation. All material intercompany accounts and transactions have been eliminated during the consolidation process.

Use of Estimates

The preparation of financial statements and related disclosures in conformity with GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in the financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Significant estimates and assumptions reflected in the financial statements include, but are not limited to, useful lives of property and equipment, value of crypto assets, stock options issued, fair value of services received, the Company’s liability for activity in the COIN app, evaluation of intangible assets for impairment and valuation of deferred tax assets. Actual results may differ from these estimates and these differences may be material.

Crypto Accounting Policy

The Company holds various crypto assets as part of its operations. The accounting for these assets is based on their specific nature and is governed by U.S. Generally Accepted Accounting Principles (U.S. GAAP), including the recent Accounting Standards Update (ASU) 2023-08.

Adoption of New Guidance (ASU 2023-08)

On December 13, 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-08, Intangibles—Goodwill and Other—Crypto Assets (Subtopic 350-60), which establishes new guidance for certain crypto assets. The Company adopted this standard effective January 1, 2025.

Upon adoption, the Company reclassified its third-party crypto assets from the cost-less-impairment model to the new fair value model. The cumulative effect of this change was recorded as an adjustment to the opening balance of retained earnings. This adjustment was equal to the difference between the carrying amounts of the in-scope crypto assets under the prior impairment model and their fair values at the adoption date. The adoption had no impact on the accounting for the Company's native XYO Tokens, liquidity pool positions, or crypto loans granted, as these assets remain outside the scope of ASU 2023-08.

XY Labs, Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Accounting for In-Scope Crypto Assets

The new guidance applies to third-party crypto assets held by the Company, such as Bitcoin and Ethereum, that meet the scope criteria of ASU 2023-08. These assets are recorded on the Company’s balance sheet when purchased or otherwise acquired. Initially measured at cost, they are subsequently remeasured at fair value each reporting period in accordance with ASC 820. 

Fair Value Measurement

Changes in fair value are recognized in unrealized gains and unrealized losses. Fair value is determined using quoted prices for the held crypto assets as of the balance sheet date.  

Accounting for Out-of-Scope Crypto Assets and Activities

Certain crypto assets and related activities fall outside the scope of ASU 2023-08 and are accounted for under other U.S. GAAP, primarily as indefinite-lived intangible assets under the cost-less-impairment model.

Transition Impact of ASU 2023-08

The adoption of ASU 2023-08 is applied on a modified retrospective basis, requiring a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the fiscal year of adoption. Accordingly, on January 1, 2025, the Company recorded an adjustment for its in-scope crypto assets to reflect the transition from the historical cost-less-impairment model to the new fair value model. This resulted in a net increase to the opening balance of retained earnings of $41,784, representing the difference between the carrying value of these assets under the prior accounting guidance and their fair market value on the date of adoption. The adoption had no impact on the accounting for the Company's native XYO Tokens, liquidity pool positions, or crypto loans granted, as these assets remain outside the scope of ASU 2023-08.  

XY Labs, Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of cash. The Company may maintain cash balances at what it believes are high credit-quality financial institutions. At times, balances at one financial institution may exceed federally insured limits of $250,000. The Company’s total cash balance was $877,071 as of June 30, 2025, of which $359,880 was uninsured. The Company has not experienced any losses in such accounts, nor does the Company believe it is exposed to any significant credit risk with respect to its cash and cash equivalents.

In addition to cash holdings, the Company holds significant receivables from payment processors. These balances represent amounts collected by third-party processors on behalf of the Company but not yet remitted. While this introduces an additional concentration of credit risk - particularly if any processor were to default or delay payment -the Company monitors these relationships closely. As of the reporting date, the payment processors used have demonstrated timely remittance patterns and no signs of business weakness or financial instability. Nevertheless, the Company recognizes that any disruption in this area could pose a financial risk.

Concentrations of Customers, Vendors and Suppliers

The Company had no vendor concentration during the six months ended June 30, 2025. The Company did not purchase any hardware related to its COIN product business and only purchased packaging materials in immaterial amounts. In addition, the Company purchased COIN redeem items, however those were purchased through various e-commerce platforms, with no vendor concentration that could materially impact the business. Comparatively, two vendors accounted for approximately 100% of the Company’s purchases in the six months ended June 30, 2024, mostly relating to NFC cards.

During the six months ended June 30, 2025 and 2024, the Company used third-party payment service providers, most notably Apple and Google, through which COIN subscription and product payments were processed. Any loss of these providers would have an adverse impact on the Company.

For the six months ended June 30, 2025 and 2024, the Company had no customer concentration. Most of the Company’s sales are made to end customers with immediate payment for purchased goods and services.

Cash and Cash Equivalents

The Company classifies all highly liquid investments with an original maturity date of 90 days or less at the date of purchase as cash and cash equivalents.

Receivables from Payment Processors

Receivables from online payment processors are comprised of cash due from third-party online payment service providers for clearing transactions. The cash was paid or deposited by customers or users through these online payment agencies for services provided by the Company. Receivables from payment processors were $306,653, $357,883 and $489,522 as of June 30, 2025, December 31, 2024 and December 31, 2023, respectively. Receivable balances are written off if deemed uncollectible.

Accounts Receivable

The Company's accounts receivables mainly comprised of Google Play Store and Apple App Store receivables as well as partnership and advertiser receivables. The receivables represented payments due for sales through the App stores after the deduction of processing fees, as well as for user engagements through the COIN App. As of June 30, 2025, December 31, 2024 and December 31, 2023, total receivables were $408,001, $633,499 and $979,310, respectively. Receivable balances are written off if deemed uncollectible.

XY Labs, Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Receivable Allowances and Credit Losses

The allowance for credit losses is established based on management’s judgment regarding the potential write-down of payment processor receivables and accounts receivable. In determining the appropriate allowance, management considers historical write-down patterns, the overall level of receivables, and current sales trends. The Company monitors the creditworthiness of all counterparties and recognizes an allowance for credit losses in any period when a loss is deemed probable. The Company recorded an allowance for credit losses of $62,620 as of June 30, 2025 and $78,405 as of December 31, 2024, respectively.

The Company has also granted crypto asset loans to third parties in 2025 and 2024. While these loans are also subject to third party credit risk, the Company has not experienced any losses in the past and assessed the third parties as solvent. Hence no allowances were set up in 2025, 2024 and 2023, respectively.

Inventory

Inventory is stated at the lower of cost, determined on a weighted average basis, and net realizable value, and consists of purchased finished goods. Reserves are provided for slow moving and obsolete inventory, which are estimated based on a comparison of the quantity and cost of inventory on hand to management's forecast of customer demand. Inventory was $232,273 and $248,606 as of June 30, 2025 and December 31, 2024, respectively. The Company did not set up an inventory reserve as of June 30, 2025 and December 31, 2024.

Property and Equipment

Property and equipment are recorded at cost and depreciate over the estimated useful life of the asset (three to five years) using the straight-line method.

Accrued COIN Liability

COIN users can collect in-app coins, which are redeemable for either crypto assets or physical products. The Company sets an internal price for each in-app coin, which is used to determine the USD value for which customers can redeem such coin. Users must reach a threshold of 10,000 in-app coins before being eligible to redeem their collected coins. In-app coins expire if the user account was inactive for six months. The Company records a liability for accrued coins within customer accounts. The accrued COIN liability was $2,564,749 and $2,714,207 as of June 30, 2025 and December 31, 2024, respectively.

Sales Recognition

Sales are recognized in accordance with Accounting Standards Codification 606 – Revenue from Contracts with Customers (“ASC 606”). In accordance with ASC 606, sales are recognized when the promised goods and services are provided or shipped to customers. The amount of sales recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services. To achieve this core principle, the Company applies the following five steps: (1) identifying the contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to performance obligations in the contract; and (5) recognizing sales when or as the Company satisfies a performance obligation.

XY Labs, Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

During the six months ended June 30, 2025, the Company realized net sales of $3,223,909. During this period, COIN subscription sales accounted for 48.4%, in-app engagement sales for 31.3%, while non-fungible tokens, i.e. digital pickaxes, boots and characters, and services accounted for 18.5% of net sales. COIN App related provisions, which were recorded for anticipated user redemptions in exchange for in-app coins, decreased by $149,458.

Additionally, the Company recognized $56,500 (1.8%) in revenue from its service agreement with the Comprehensive Blockchain Initiative Foundation, under which the Company provides blockchain development services. This revenue was settled in non-cash consideration (XL1 tokens) and measured at fair value at the time of the transaction.

During the six months ended June 30, 2024, the Company generated net sales of $4,420,332. During this period, COIN subscription sales accounted for 43.9%, in-app engagement sales for 43.3%, while other products accounted for 12.6% of net sales.

As of June 30, 2025, December 31, 2024 and December 31, 2023, the Company had recognized deferred revenue on its balance sheet of $79,615, $99,270 and $280,796, respectively.

Reporting Segments

The Company reports one segment. For the six months ended June 30, 2025 and 2024, the Company's primary source of revenue was the COIN App. Associated revenues, including subscriptions, product sales, and engagement partnerships are integrally linked to the COIN App and are not managed or assessed as separate business lines. Consequently, further disaggregation of financial information is neither applicable nor utilized in internal decision-making processes. The Company will continue to monitor its operations and assess the need for segment reporting in future periods, particularly in light of potential new revenue sources that may emerge in the future.

Products

Sales of COIN products (e.g. NFCs) and merchandise products were recognized upon shipment, net of an allowance for estimated and actual returns. Subscriptions sales are mostly charged monthly, and in some cases also on an annual and semi-annual basis. Subscription sales are recorded to sales from deferred revenue on a straight-line basis over the subscription term. The Company allows customers to claim a refund for subscription charges under certain conditions. The allowance for sales returns is based on management’s judgement using historical experience and expectation of future conditions. As of June 30, 2025 and December 31, 2024, the Company provided for $18,074 and $25,195, respectively, as sales returns allowance.

Mobile Application

The Company operates a self-developed mobile application, COIN, that lets users collect in-app coins when they move and collect coins located in map tiles. Users can download the Company’s free-to-use or subscription-based application through digital storefronts such as the Google Play Store and Apple App Store. Sales from subscriptions are recognized over the subscription term as the service is provided, which is mostly monthly and to a lesser amount annually or semi-annually. The Company defers the recognition of sales for the portion of the service period that the customer has already paid for, but that has not yet lapsed.

The Company records sales generated through COIN on a gross basis as the Company acts as the principal in the mobile game arrangements under which the Company controls the specified services before they are provided to the customer. In addition, the Company is primarily responsible for fulfilling the promise to provide the user experience, tracking the accumulation and payout of in-app coins, maintaining services, and has discretion in setting the price for the services to the customer. These revenues are net payment processor fees and platform/app store fees.

The Company also generates sales from advertising on COIN. For a limited number of advertising network arrangements, the transaction price is determined based on a volume-tiered pricing structure, whereby the price per advertising unit in each month is determined by the number of impressions delivered in that month. However, the uncertainty concerning the number of impressions delivered is resolved at the end of each month, therefore eliminating any uncertainty with respect to the price per advertising unit for each reporting period.

XY Labs, Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For in-app display advertisements, in-app offers, engagement advertisements and other advertisements, sales are generated once the users interact with the offering to a predefined step. The Company has no performance obligations that it needs to fulfill. Either the customer uses the in-app services or not.

XYO Name Service

Revenue from sales of xyoNS usernames was recognized at the time of transaction when control of the service was transferred to the user. The service allows users to register human-readable usernames in place of blockchain wallet addresses within the xyOS ecosystem. Sales are processed through a self-service interface, and due to the digital and non-refundable nature of the product, no allowance for returns was recorded. For the six months ended June 30, 2025, the Company recognized $325 in revenue related to xyoNS name registrations compared to $1,325 during the six months ended June 30, 2024.

Cost of Sales

Cost of sales includes the cost of product, packaging, inbound freight, and any other direct costs associated with receipt of goods. Other costs, including purchasing, receiving, quality control, and warehousing are classified as general and administrative expenses. At times, the Company provides free products to its customers. These free products are recognized in cost of sales.

Research and Development Costs

Research and development costs are expensed as incurred. The Company's research and development (R&D) costs are mainly related to salaries and wages for its employees engaged in R&D activities. These activities involve the XYO Network, including the Layer One blockchain, the Company’s data verification network and the COIN App. The R&D team's contributions include development of the XYO Network's architecture, protocols, and blockchain technology, as well as the COIN App's features, user experience, and gamification elements. The team members have various roles and responsibilities, reflecting their focus on different aspects of the projects. R&D expenses also included stock option expenses of $316,104 and $217,159 during the six months ended June 30, 2025 and 2024, respectively.

Online Advertising Costs

The Company mainly uses online advertising to market its products to customers. The main online advertising platforms that the Company used during the six months ended June 30, 2025 and 2024 were Facebook, Google and TikTok. The costs are expensed as incurred. Online advertising costs were $328,280 and $527,225 during the six months ended June 30, 2025 and 2024, respectively.

Stock Based Compensation

The Company accounts for stock-based compensation arrangements through the measurement and recognition of compensation expense for all option-based payment awards to employees, consultants and directors based on estimated fair values. For employees and directors, fair value is measured at the date of grant and remains constant during the vesting period of the grant. For all others, fair value is measured at each date on which vesting of the grant occurs. Forfeitures of stock options are accounted for as they occur.

XY Labs, Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company uses the Black-Scholes option valuation model to estimate the fair value of options and warrants at the date of grant. The Black-Scholes option valuation model requires the input of subjective assumptions, including the risk-free interest rate, the expected volatility in the value of the Company’s common stock, and the expected term of the option. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, the share-based compensation expense could be materially different in the future. These assumptions are estimated as follows:

Risk-free Interest Rate

The risk-free interest rate assumption is based on the zero-coupon U.S. Treasury instruments appropriate for the expected term of the stock option grants.

Expected Volatility

Due to limited historical data, the Company bases its volatility assumption on a combined weighted average derived from a peer group of similar-sized companies in the mobile app and geospatial sectors.

Expected Term

The expected term represents the period that options are expected to be outstanding. As the Company does not have sufficient historical experience for determining the expected term of the stock options awards granted, the expected life is determined using the simplified method, which is an average of the contractual terms of the option and its ordinary vesting period.

Dividend Yield

We have no history or expectation of paying cash dividends on our common stock, hence dividend yield is zero for all periods presented.

Income Taxes

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for the expected future tax benefit to be derived from tax loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the related temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized when the rate change is enacted. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized.

The Company has adopted accounting guidance for uncertainty in income taxes. The Company recognizes tax positions in its financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities. The Company had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. The Company’s tax returns are subject to examination by the Federal taxing authorities for a period of three years from the date they are filed and a period of four years for California taxing authorities. The years open for tax examinations are 2021 through 2024.

Going Concern

For the six months ended June, 2025, the Company recognized a net loss of $371,057. The Company was unable to cover its operational costs through sales of its products and services. Consequently, further investments will likely be necessary to continue the development of the XYO Network Layer One, realizing the commercial opportunities previously outlined, and to enhance the COIN App as well as to develop new services and applications.

XY Labs, Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company expects that such investment will aim to drive user acquisition, stimulate wider adoption of products and services across both B2B and B2C markets, and ultimately increase revenue streams from the COIN App and associated engagement partners, thereby enabling the Company to achieve operational break-even.

As a result, the Company may continue to incur operating losses in the near term while investing in the development and expansion of its Layer One blockchain and associated ecosystem. To support these efforts, the Company may seek to fund its operations through equity and/or debt financing or other sources, as it deems necessary. Additional capital may not be available on terms favourable to the Company, if at all, including due to general macroeconomic conditions or unforeseen factors. If the Company fails to raise capital or generate liquidity through the sale of its products, services, or token-based infrastructure, it will have a negative impact on its financial condition and its ability to pursue its business strategies.

These conditions raise substantial doubt about the Company’s ability to continue as a going concern from the filing date of this Semi-Semi-Annual Report on Form 1-SA. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Recent Accounting Pronouncements

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This standard enhances transparency by requiring more detailed disclosures regarding income tax payments and effective tax rate reconciliations. The amendments aim to provide investors and stakeholders with clearer insights into the tax-related aspects of the entity's operations. The guidance is effective for public business entities for annual periods beginning after December 15, 2024. Early adoption is permitted. Management will apply the new standard with its 2025 annual filing.

In November 2024, the FASB released ASU No. 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40). ASU 2024-03 mandates enhanced disclosure requirements for public business entities, specifically necessitating detailed disaggregation of certain expenses in the financial statement footnotes. The standard aims to enhance financial transparency and comparability among entities. The amendments are effective for Semi-Annual Reporting periods beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027. Early adoption is permitted. Management assesses the standard’s relevance and will consider the potential advantages of early implementation.

Subsequent events

Management has evaluated events occurring after June 30, 2025, through the date on which these financial statements were available for issuance. The relevant subsequent events identified by management are outlined below.

XY Labs, Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

XYO Layer One Public Launch and Listing Event: On September 16, 2025, the Company conducted the public launch of the proprietary Layer-1 blockchain, "XYO Layer One," and the XL1 token was listed on multiple crypto exchanges. In connection with this launch, an additional 18 billion XL1 tokens were generated by XY Labs, Inc. under the existing service agreement, bringing the total generated supply to 38 billion tokens. 

The financial impact of the public listing can be significant, as it established an initial public market value for the XL1 token. Upon listing, the XL1 token began trading on multiple crypto exchanges at an initial price of approximately $0.00079 per token. While this provides a market valuation for the company's holdings, the ultimate financial impact is directly tied to the market price of the XL1 token, which is subject to significant volatility as a newly launched asset. Therefore, while the treasury represents a major potential resource, it is too early to reliably quantify its long-term financial value.

Note 3 – Crypto Assets

The Company utilizes its proprietary utility token, XYO, alongside other third-party crypto assets as an integral part of its business operations. These assets are used to facilitate data verification, secure digital transactions, and maintain liquidity through participation in decentralized finance (DeFi) protocols. The management and accounting of these crypto assets are a key component of the Company’s operational and financial framework.

A significant change in accounting policy affects the comparability of our financial results. Following the adoption of ASU 2023-08 on January 1, 2025, the Company’s crypto asset holdings are accounted for under two different models:

In-Scope Assets at Fair Value:

Third-party crypto assets are measured at fair value, with changes recognized as unrealized gains or losses.

Out-of-Scope Assets at Cost:

The Company's native XYO tokens are accounted for as indefinite-lived intangible assets at cost, less any impairment. Gains are only recognized upon sale or use.

The financial results for the six months ended June 30, 2025 reflect this new policy, while the comparative period for the six months ended June 30, 2024, was accounted for under the previous cost-less-impairment model for all assets.

Summary of Crypto Asset Activities

The following is a summary of the Company's operational and financial activities involving crypto assets for the six months ended June 30, 2025, and June 30, 2024.

Operational Uses of Crypto Assets

User Redemptions: The Company incurs expenses related to COIN user redemptions paid in crypto assets. For the six months ended June 30, 2025, these expenses totalled $45,005, compared to $118,086 for the same period in 2024.

Payments for Services: Crypto assets are used to pay for various services. For all crypto assets, the expense is recognized at fair value. The total expense recorded was $232,567 for the six months ended June 30, 2025, compared to $429,391 in 2024.

Network Transaction Costs: The Company incurred network transaction fees (i.e., "gas fees") related to its crypto asset activities. For the six months ended June 30, 2025, these costs amounted to $1,484, compared to $5,762 for the same period in 2024.

Treasury, Lending, and Investment Activities

Crypto Purchases and Sales: During the six months ended June 30, 2025, the Company purchased crypto assets for $261,720 and sold crypto assets for $91,720. For the same period in 2024, the Company purchased $556,000 in crypto assets. The Company did not sell any crypto assets during the same time.

Crypto Loans: The Company lends crypto assets, including XYO, ETH, USDC, and USDT, to third-party market makers to enhance market liquidity and trading depth. As of June 30, 2025, the book value of outstanding crypto loans was $157,273, compared to $31,888 as of June 30, 2024. These loans are unsecured, and the Company manages credit risk by engaging with credible counterparties. The Company monitors these loans for impairment; no impairments were recorded during the six-month periods ended June 30, 2025, and 2024.

XY Labs, Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

Liquidity Pool Fees: The Company earned $224,641 in crypto asset fees from its participation in decentralized liquidity pools for the six months ended June 30, 2025, compared to $135,543 in 2024. These fees are recognized as income based on the market value of the crypto assets at the time they are withdrawn from the pools.

Strategic Investments: In February 2023, the Company made a strategic investment in Natix GmbH by providing 4,370,629 of its native XYO tokens, which had a zero-dollar cost basis. During the six months ended June 30, 2025, the Company received 108,000,000 Natix tokens with a market value of $71,413 at the time of receipt. This value was recognized as unrealized gains for the period. For comparison, the Company did not receive any Natix tokens during the six months ended June 30, 2024.

Financial Impact of Crypto Asset Holdings

Realized Gains: For the six months ended June 30, 2025, the Company recognized realized gains of $109,450 from the sale or use of its native XYO crypto asset. This compares to realized gains of $402,319 for the same period in 2024, related to the sale and use of various crypto assets recorded as intangible assets in 2024.

Impairment Charges: For the six months ended June 30, 2025, the Company recorded an impairment charge of $107,398 related to its out-of-scope XYO tokens. For the comparative period in 2024, under the prior accounting model, the impairment charge for all crypto assets was $202,409. Impairment is recognized when the fair value of an out-of-scope asset falls below its carrying value, and subsequent reversals are not permitted.

Unrealized Gains and Losses: Following the adoption of ASU 2023-08, for the six months ended June 30, 2025, the Company recorded unrealized gains, net, of $63,105. This amount reflects the change in fair value of its in-scope crypto asset holdings during the period and is not comparable to the 2024 period, as this accounting treatment was not previously applied.

The Company held the following crypto assets

The Company used published data on CoinCodex to determine the daily prices of the crypto assets it held in 2025 and 2024 to determine impairment expenses as well as to calculate book value of its crypto assets. The Company also uses a software solution to track crypto transactions and uses transaction values as determined at the transaction time and date.

Depreciation expense related to property and equipment was $10,814 and $14,034 during the six months ended June 30, 2025 and 2024, respectively.

Note 6 – Stock Based Compensation

In June 2016, the Company adopted the 2016 Equity Incentive Plan (as amended as of the date hereof, the “2016 Equity Incentive Plan”) and authorized the issuance of options for up to 3,025,900 shares of the Company’s Class A Common Stock that may be granted to directors, employees, and key consultants thereunder. In March 2018, the Company approved an amendment to the 2016 Equity Incentive Plan, increasing the aggregate number of shares of Class A Common Stock reserved for issuance thereunder to 25,000,000. In January 2023, the Company approved an amendment to the 2016 Equity Incentive Plan, further increasing the aggregate number of shares of Class A Common Stock reserved for issuance thereunder to 45,000,000, all of which are issuable as stock options. The stock options granted under the 2016 Equity Incentive Plan are exercised at no less than the fair market value of the underlying shares on the date of grant. Generally, one quarter of the stock options vest one year after the vesting commence date with the remainder vesting monthly for three years. Stock options generally have a term of 10 years.

The following table summarizes unvested stock options

Total stock-based compensation related to the issuance of stock options exercisable for shares of Class A Common Stock was $665,652 and $646,449 during the six months ended June 30, 2025 and 2024, respectively.

The following table summarizes the assumptions used by the Company for calculating the fair value of the stock options using the Black-Scholes valuation model

XY Labs, Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

Note 7 - XYO Proxy Token Plan

On July 31, 2018, the Company adopted the 2018 Proxy Token Plan pursuant to which proxy token awards (“Proxy Tokens”) may be authorized and granted to the Company’s executive officers, directors, employees, and key consultants. The value of the Proxy Tokens is tied to the value of the Company’s native XYO Token at the time of vesting, and the Proxy Tokens vest pursuant to a vesting schedule as determined by the Company’s Board of Directors (the “Board”). Payments made in respect of vested Proxy Tokens will be made, as determined by the Board, in either (i) cash equal to the value of such Proxy Tokens, or (ii) a number of XYO Tokens with a value equal to the value of such Proxy Tokens.

The table below shows the Proxy Tokens issued and vested During the six months ended June 30, 2025 and the twelve months ended December 31, 2024

The Proxy Tokens are tied to an internally developed intangible asset, the XYO Token, and therefore no value has been ascribed to them. As of June 30, 2025 and December 31, 2024, respectively, the Company recognized no provisional liability from the Proxy Token Plan.

Note 8 - XYO Warrants

In 2019, the Company issued XYO Token warrants to consultants. The warrants enable the holders thereof to purchase XYO Tokens at a fixed price for up to 10 years. These warrants were deemed to be a form of additional compensation and an obligation, rather than equity, however, as the warrants are tied to an internally developed intangible asset, the XYO Token. Therefore, no value has been ascribed to them. As of June 30, 2025 and December 31, 2024, the Company recognized no provisional liability from the XYO Warrants granted.

The Company had 12 and 9 outstanding warrants for a total of 242,387,376 and 218,387,376 XYO tokens as of June 30, 2025 and December 31, 2024, respectively. The Company did not pay out any XYO Tokens under the XYO warrant plan during the six months ended June 30, 2025. The Company paid out 36,905,433 XYO Tokens under the XYO warrant plan and recorded $24,843 as a related expense during the six months ended June 30, 2024.

Note 9 – XL1 Restricted Token Plan

In March 2025, the Company's Board of Directors adopted the 2025 Token Plan (the "Token Plan"). The Token Plan provides for the grant of Restricted Token Awards from the Company's holdings of XL1 tokens to employees, directors, and key consultants. Participants are made an offer to purchase a specified number of XL1 tokens at a purchase price determined by the Company's Board of Directors.

The plan allows for grants with different vesting conditions. During the period, certain awards were structured to vest immediately upon grant, meaning the employee's right to the tokens was earned on that day. For these immediate-vesting grants, the Company recognized the entire fair value of the award as a compensation expense on the grant date. Other awards are subject to future service conditions, where vesting occurs over a set period. For these grants, the compensation expense is recognized on a straight-line basis over the corresponding service period. 

Regardless of their vesting status, all XL1 tokens granted under this plan are subject to transfer restrictions. Notably, tokens that have vested, including those that vested immediately, are subject to a one-year holding period from the date of grant, primarily to comply with securities regulations such as Rule 144. This restricts the holder's ability to sell or transfer the tokens for that period.

The table below summarizes the activity for Restricted XL1 Token Awards under the 2025 Token Plan for the six months ended June 30, 2025:

The fair value of the XL1 tokens granted was determined using a third-party valuation report, as the token did not have an active market during the six months ended June 30, 2025. For the six months ended June 30, 2025, the Company recognized $18,287 in token-based compensation expense related to this plan. The remaining unrecognized compensation cost will be expensed on a straight-line basis over the remaining vesting period of the awards.

Note 10 – Right of use asset and Lease liability

The Company uses Accounting Standards Codification 842 – Leases (“ASC 842”) effective January 1, 2019. The Company determines if an arrangement is or contains a lease at inception by assessing whether the arrangement contains an identified asset and whether we have the right to control the identified asset.

XY Labs, Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

Right-of-use assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Lease liabilities are recognized at the lease commencement date based on the present value of the future lease payments over the lease term. Right of use assets are based on the measurement of the lease liability and also include any lease payments made prior to or on lease commencement and exclude lease incentives and initial direct costs incurred, as applicable.

In addition, the Company has chosen, as an accounting policy election by class of underlying asset, not to separate non-lease components from the associated lease for all its leased asset classes. The Company determined to treat lease costs with an original maturity of less than one year as short-term lease costs and did not record a right-of-use asset or related lease liability for these leases but rather continued to record rent expense for the six months ended June 30, 2025 and 2024, respectively. The Company was not a party to any lease agreements with a maturity of shorter than one year in the six months ended June 30, 2025 and 2024.

The Company did not extend its lease for its office and warehouse location at 1405 30th St, Suite A, San Diego, California 92154, and the lease ended as of June 30, 2024. Therefore, the Company did not no longer recognize a right to use asset or lease liability in connection to this lease as of June 30, 2024.

Effective July 1, 2024, the Company entered into a new three-year lease agreement expiring June 30, 2027, for office space at 740 13th Street #224, San Diego, California 92101.The lease provides no explicit renewal or extension options.

The lease contains certain variable costs, including common area maintenance (CAM), utilities, insurance, property taxes, and certain capital improvements allocated over the lease term. Variable rent costs were $2,107 and $6,628 in the six months ended June 30, 2025 and 2024, respectively.

As of July 1, 2024, the Company recognized a right-of-use asset and corresponding lease liability of $135,605 in connection with this lease.

Operating lease right of use assets and operating lease liabilities relating to the operating leases reported are as follows

The weighted average discount rate used to calculate the carrying value of the right of use asset and lease liability for the 740 13th Street #224, San Diego, California 92101 lease was 14.4%, consistent with the Company’s current incremental borrowing rate at lease initiation.

The Company recorded amortization expenses for the right of use asset of $22,600 and $40,570 for six months ended June 30, 2025 and 2024, respectively.

The weighted average remaining lease term was approximately 2.5 years as of June 30, 2025.

Note 11 – Stock Issuance and Stocks Payable

In the years ended December 31, 2019 and 2018, the Company received proceeds from the sale of certain shares of its Class A Common Stock. For some of these sales, the Company did not receive the necessary paperwork from the stock purchasers and had in turn not surrendered documentation to its transfer agent nor issued shares as of each respective year end. In connection with the receipt of proceeds from such sales, the Company had recognized $1,391,760 and $1,391,760 in shares of Class A Common Stock payable as an obligation on the consolidated balance sheets as of June 30, 2025 and December 31, 2024, respectively. No additional shares of Class A Common Stock have been converted from stock payable to additional paid in capital during the six months ended June 30, 2025.

Note 12 – Notes Payable

Disaster Loan – In April 2020, the Company received an Economic Injury Disaster Loan (“EIDL”) and an Emergency Grant from the Small Business Administration authorized under the Coronavirus Aid, Relief, and Economic Security Act. The Company received funds in the amount of $498,281 in April 2020. EIDL proceeds may be used to cover a wide array of working capital and normal operating expenses, such as continuation to health care benefits, rent, utilities, and fixed debt payments. As of June 30, 2025 and December 31, 2024, the Company had $468,754 and $475,321 outstanding on the EIDL loan, respectively. The EIDL accrues interest at 3.75% per annum and matures 30 years after the grant date with interest payments starting twelve months after the issuance date of the EIDL. The Company recognized interest expense related to the EIDL of $8,054 and $9,049 for the six months ended June 30, 2025 and 2024, respectively.

The following table shows the maturity for the next five years and thereafter

Note 13 – Litigation

As of June 30, 2025 and December 31, 2024, the Company had not accounted for any litigation provisions.

XY Labs, Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

Note 14 – Stockholders’ Deficit

Stockholders’ Deficit

The Company has authorized the issuance of 160,000,000 shares of capital stock, consisting of 90,000,000 shares of Class A Common Stock, $0.0001 par value per share, 40,000,000 shares of Class B Common Stock, $0.0001 par value per share, and 30,000,000 shares of undesignated preferred stock, $0.0001 par value per share. Holders of Class A Common Stock and Class B Common Stock have identical rights, including liquidation preferences, except that the holders of Class A Common Stock are entitled to one vote per share and holders of Class B Common Stock are entitled to 10 votes per share on all matters submitted for a stockholder vote.

Under GAAP, shares payable represents a liability recorded when a company has received cash proceeds from the sale of equity securities but has not yet issued the corresponding shares due to incomplete documentation or registration requirements from the purchasers. The Company did not convert any shares payable to equity during the six months ended June 30, 2025 and 2024, respectively.

Public Offering

The Company did not sell any shares of Class A Common Stock during the six months ended June 30, 2025 and 2024.

Note 15 – Related Party Transactions

Share Swap

In January 2025, Markus Levin completed a share swap transaction with a third party for a portion of his shares of Class A Common Stock of XY Labs and the Class A Common Stock. In connection with such transaction, XY Labs made certain customary representations to the counterparty regarding XY Labs.

Comprehensive Blockchain Initiative Foundation

The Company has a service agreement with the Comprehensive Blockchain Initiative Foundation (the "Foundation"), a non-profit, Private Interest Foundation established in Panama to support the XYO Layer One ecosystem. Due to the significant operational and strategic importance of this agreement to both the Company's new business line and the Foundation's mission, transactions between the parties are disclosed in this note for transparency.

Under the service agreement, the Company provides blockchain development services. For the six months ended June 30, 2025, the Company recognized $56,500 in revenue from services provided to the Foundation. This revenue was settled entirely through non-cash consideration in the form of XL1 tokens, which was measured at fair value at the time of the transaction. As of June 30, 2025, there were no outstanding balances due from or to the Foundation.

A reconciliation of income tax expense computed at the statutory federal income tax rate to income taxes as reflected in the financial statements is as follows

Deferred taxes are recognized for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. The significant components of the Company’s deferred tax assets are comprised of the following

As of June 30, 2025, the Company had net operating loss carryforwards for income tax purposes of approximately $8.71 Million, which can be carried forward indefinitely. State net operating loss carryforwards of approximately $1.0 million expire between the years 2037-2045.

XY Labs, Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

Under the provisions of the Internal Revenue Code, the net operating loss and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. Net operating loss and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period more than 50%, as defined under Sections 382 and 383 of the Internal Revenue Code, respectively, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. The Company has completed financings since May 2016 which may have resulted in a change in control as defined by Sections 382 and 383 of the Internal Revenue Code or could result in a change in control in the future.

The Company will recognize interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2025 and December 31, 2024, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s consolidated statements of operations.

SIGNATURES

Pursuant to the requirements of Regulation A, the issuer has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of Regulation A, this report has been signed below by the following persons on behalf of the issuer and in the capacities and on the dates indicated.