Note 1 – Basis of Presentation and Significant Accounting Policies

Karbon-X Corp. was incorporated in the State of Nevada under the name Cocoluv, Inc. on September 13, 2017 and established a fiscal year end of May 31. On February 21, 2022, pursuant to the terms of a Share Exchange Agreement, the Company acquired all of the issued and outstanding shares of common stock of Karbon-X Project Inc. (“Karbon-X”), and Karbon-X became the wholly owned subsidiary of the Company in a reverse merger (the “Reverse Acquisition”), which was accounted for as a recapitalization effected by a share exchange with Karbon-X as the accounting acquirer. As part of the Reverse Acquisition, on April 14, 2022 the Company changed its name to Karbon-X Corp.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended August 31, 2026 are not necessarily indicative of the results that may be expected for the fiscal year ending May 31, 2027. The condensed consolidated balance sheet at May 31, 2026 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by US GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2026, filed with the Securities and Exchange Commission on September 15, 2026 (the “2026 Form 10-K”).

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: Karbon-X Project, Inc. (Canada), Karbon-X USA Corp. (Nevada), Karbon-X Trading Limited (Cyprus), Allcot Limited (Ireland), Karbon-X Iberia SL (Spain) and Allcot X Colombia S.A.S. (Colombia). All significant intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements are presented in United States dollars.

Going Concern

The Company has generated significant revenue from its business operations but has incurred an accumulated deficit of $29,535,418 since inception. At August 31, 2026 the Company had negative working capital of $(7,297,897) and cash of $335,445. The Company will require additional funding to meet its ongoing obligations and to fund anticipated operating losses. The ability of the Company to continue as a going concern is dependent on raising capital to fund its business plan and ultimately to attain profitable operations. Accordingly, these factors raise substantial doubt as to the Company’s ability to continue as a going concern within one year after the date that these financial statements are issued. The Company intends to continue to fund its business by way of private placements, note issuances and other financing arrangements as may be required, including the financings completed after the quarter end described in Note 24. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from this uncertainty.

Use of Estimates and Assumptions

Preparation of the condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Significant estimates include the inputs used to value embedded derivatives, warrants and options, the expected credit losses on the loan receivable, the variable consideration under the Maintenance Agreement, the useful lives of long-lived assets and the realizability of deferred tax assets. Accordingly, actual results could differ from those estimates.

Significant Accounting Policies

There have been no material changes to the Company’s significant accounting policies from those described in Note 1 to the consolidated financial statements included in the 2026 Form 10-K, other than the adoption of the accounting standards described under Recently Issued Accounting Standards below. The policies applied to carbon credit inventory (accounted for by analogy to ASC 330 in the absence of then-effective authoritative guidance specific to environmental credits), receivables financing arrangements (secured borrowings under ASC 860, carried at net proceeds and accreted under ASC 835-30), costs to fulfill a contract (ASC 340-40), the acquired project pipeline (ASC 350-30), capitalized application development costs (ASC 350-40), the loan receivable (ASC 310-10 and ASC 326-20), consideration payable to a customer (ASC 606-10-32-25) and compensated absences (ASC 710) are unchanged.

Fair Value of Financial Instruments

The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value. The three tiers are defined as follows:

Other than the derivative liabilities presented below, the carrying amount of the Company’s financial assets and liabilities approximate their fair values. The securities receivable carried at May 31, 2026 was settled in shares of DevvStream Holdings Inc. (“DEVS”) during the quarter (Note 16) and no securities receivable remains at August 31, 2026.

The Company measures certain financial instruments at fair value on a recurring basis in accordance with ASC 820, Fair Value Measurement. The conversion features embedded in certain of the Company’s convertible promissory notes require bifurcation and measurement at fair value as derivative liabilities under ASC 815-15. The valuation techniques applied at August 31, 2026 are those applied in the audited consolidated financial statements at May 31, 2026, with only the inputs updated to the measurement date: a conversion feature whose conversion price floats and whose 4.99% beneficial ownership limitation binds at the measurement date is measured by a path-dependent Monte Carlo simulation, and every other conversion feature is measured by a Cox-Ross-Rubinstein binomial lattice. At August 31, 2026 the beneficial ownership limitation binds only on the note issued under the Maintenance Agreement (Note 7), which is therefore measured by simulation; the Master Note tranches and the five notes issued during the quarter (Note 11) convert in full within the limitation and are measured on the lattice. The six-month conversion lockout and, for one note, the $0.15 minimum market price in the notes issued during the quarter are instrument terms entered as inputs and do not alter the technique. There was no change in valuation technique during the three months ended August 31, 2026.

The models incorporate significant unobservable inputs, including expected stock price volatility, risk-free interest rates, estimated time to maturity, the conversion price at the measurement date and, for the simulation, the assumed rate at which the holder can dispose of conversion shares. Because these inputs are unobservable and require significant management judgment, the Company has classified the derivative liabilities as Level 3 in the fair value hierarchy. The derivative liabilities also include the common stock purchase warrants described in Note 15, measured using the Black-Scholes model with the same volatility and risk-free inputs; because the exercise price is $0.001 per share, their fair value approximates the market value of the underlying shares. The significant inputs at August 31, 2026 were: expected volatility of 59.15% to 65.8%, determined from a basket of guideline companies term-matched to the remaining life of each note because trading in the Company’s common stock is limited and sporadic; risk-free interest rates of 3.94% to 4.16% (United States Treasury constant maturity yields term-matched to the remaining life of each note); conversion prices at the measurement date of $0.07806 to $0.12121 per share, determined from the contractual formula of each note (for the notes whose conversion price is set by reference to the lowest trading price of the common stock, the lowest intraday trading price over the contractual look-back period); shares outstanding of 98,707,757 per the share count used in the valuation models; and, for the simulation, a disposal rate of 27,550 shares per trading day, being the median daily trading volume of the Company’s common stock over the term of the note to the measurement date (May 31, 2026: 15,000 shares per day, measured on the same basis). The simulation measured the derivative embedded in the note issued under the Maintenance Agreement at $224,580 at August 31, 2026; the measurement is sensitive to the disposal rate, which produces a value of approximately $187,340 at 15,000 shares per day and $246,503 at 35,000 shares per day, and approximately $706,628 if the beneficial ownership limitation were treated as a timing constraint only.

The following table summarizes the fair value hierarchy of the Company’s financial assets and financial liabilities measured at fair value on a recurring basis as of August 31, 2026 and May 31, 2026:

The following table summarizes the changes in Level 3 derivative liabilities measured at fair value on a recurring basis for the three months ended August 31, 2026 and the year ended May 31, 2026.

The gain of $207,733 presented in the condensed consolidated statement of operations for the three months ended August 31, 2026 comprises the $251,619 change in fair value shown above (including the $125,200 decrease in the fair value of the warrants from their issuance-date fair value of $200,225, reclassified from equity during the quarter as described in Note 15), net of $43,886 recognized on the initial measurement of the derivatives embedded in two of the notes issued during the quarter, for which the fair value of the conversion feature at issuance exceeded the proceeds remaining after original issue discount and issuance costs (Note 11). Of the $612,901 recognized on issuance, $569,014 was recorded as a debt discount. On each conversion during the quarter the embedded derivative was remeasured to fair value at the conversion date, with the change recognized in earnings, and the fair value attributable to the principal converted was reclassified to additional paid-in capital. At August 31, 2026 the derivative liabilities comprised $224,580 for the note issued under the Maintenance Agreement, $23,644 and $168,712 for Master Note Tranches 1 and 2, $656,006 in aggregate for the five notes issued during the quarter (Note 11) and $75,025 for the warrants (Note 15).

Revenue Recognition

The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers, as described in Note 1 to the 2026 Form 10-K. Revenue for the three months ended August 31, 2026 consisted substantially of carbon credit sales, subscription revenue from the mobile application and consulting and service revenue; the Company acted as principal for substantially all of its revenue. Consideration payable to a customer under the Maintenance Agreement is recognized as a reduction of the transaction price (Note 7). Technical advisory engagements whose deliverables are accepted by the customer on completion represent a single performance obligation that is satisfied at a point in time on delivery and acceptance of the deliverables; amounts invoiced in advance of delivery are recorded as contract liabilities within deferred revenue (Note 9). The following table disaggregates revenue by the jurisdiction of the contracting subsidiary:

Revenue above is disaggregated by the jurisdiction of the contracting subsidiary, which is not necessarily the location of the customer.

Foreign Currency Translation

The reporting currency of the Company is the United States dollar. The functional currency of each entity is the currency of the primary economic environment in which it operates: the Canadian dollar for Karbon-X Project, Inc.; the United States dollar for Karbon-X Corp., Karbon-X USA Corp. and Allcot Limited; the euro for Karbon-X Trading Limited and Karbon-X Iberia SL; and the Colombian peso for Allcot X Colombia S.A.S. Assets and liabilities are translated at the closing exchange rate at the balance sheet date, income and expenses at the average rate for the period, and the resulting translation adjustments are included in accumulated other comprehensive income (loss). Realized and unrealized gains and losses on monetary balances denominated in currencies other than an entity’s functional currency are recognized in other income (expense).

Loss per Common Share

Basic loss per share is calculated by dividing the Company’s net loss available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted loss per share is calculated using the treasury stock and if-converted methods. For the three months ended August 31, 2026 and 2025 the Company reported a net loss and all potentially dilutive securities were therefore antidilutive and excluded from the calculation of diluted loss per share. As of August 31, 2026, potential dilutive securities of approximately 33,525,680 shares (May 31, 2026: 28,038,971 shares) had an anti-dilutive effect and were not included in the calculation of diluted net loss per share (Note 20).

Segment Reporting

The Company’s Chief Executive Officer is the chief operating decision maker. He reviews financial information on a consolidated basis to allocate resources and assess performance, and does not review discrete measures of profit or loss or assets for any subsidiary, jurisdiction, product or activity. The Company therefore operates as a single operating and reportable segment, being the sourcing, development and sale of environmental credits. The chief operating decision maker reviews gross profit, EBITDA and net loss, each on a consolidated basis, together with the consolidated cash forecast. The measure of segment profit or loss reported below is consolidated net loss. Segment revenue, profit or loss and assets equal the corresponding consolidated amounts, so no reconciling items arise. The significant expense categories regularly provided to the chief operating decision maker, and the amount of other segment items, are set out in the table below.

Stock compensation is option expense presented within salaries and wages; a further $153,707 of shares issued as compensation for services is recognized in other captions, and total share-based compensation of $243,292 is presented in the condensed consolidated statement of cash flows. Other segment items comprise interest income and expense, the loss on investment, the change in fair value of derivative liabilities and other non-operating items; income tax expense was nil in both periods. Segment assets equal consolidated total assets.

Reclassifications

Certain amounts in the comparative condensed consolidated statement of cash flows for the three months ended August 31, 2025 have been reclassified to conform to the presentation adopted in the 2026 Form 10-K: the changes in marketable securities and in the securities receivable previously presented separately are combined in “Unrealized loss on equity securities and the related securities receivable, net”; proceeds from and payments on receivables financing obligations are presented net; and the acquisition of the project pipeline is presented as an investing activity under its current caption. These reclassifications had no effect on the previously reported net loss, comprehensive loss, total assets, shareholders’ equity or the totals of cash flows from operating, investing and financing activities.

Recently Issued Accounting Standards

In July 2025 the FASB issued ASU 2025-05, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets, which permits an entity to apply a practical expedient under which current conditions as of the balance sheet date are assumed to remain unchanged for the remaining life of current accounts receivable and current contract assets arising from transactions accounted for under Topic 606. The Company adopted the amendments prospectively on June 1, 2026. The adoption did not have a material effect on the condensed consolidated financial statements, as no allowance for credit losses is recognized on trade accounts receivable and those receivables are short-dated.

ASU 2024-04, Debt—Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments, became effective for the Company on June 1, 2026. Conversions of convertible notes during the quarter were made under the original terms of the notes and no induced conversion occurred; adoption had no effect on the condensed consolidated financial statements.

In May 2026 the FASB issued ASU 2026-02, Environmental Credits and Environmental Credit Obligations (Topic 818), which establishes recognition, measurement, presentation and disclosure requirements for entities that generate, purchase or receive environmental credits. The standard is effective for public business entities for annual periods beginning after December 15, 2027, including interim periods within those periods, which for the Company is the fiscal year beginning June 1, 2028, with early adoption permitted. Because the Company generates, purchases and holds carbon credits, ASU 2026-02 is expected to be significant to the Company and management is assessing its effect on the consolidated financial statements.

ASU 2024-03 and ASU 2025-01, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40), are effective for the Company for the annual period beginning June 1, 2027 and interim periods beginning June 1, 2028. The updates affect disclosure only and are not expected to have a material effect. No other recently issued accounting standards are expected to have a material effect on the Company’s condensed consolidated financial statements.