Quarterly Report for Quarter Ending August 31, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion pertains to the historical operations and financial statements of Karbon-X Corp. ("Karbon-X" or the "Company") for the three months ended August 31, 2026 and 2025. This discussion should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2026, filed on September 15, 2026 (the "2026 Form 10-K"), which provides additional context and details on the Company's financial condition and results of operations.

Forward-Looking Statements

The following Management's Discussion and Analysis should be read in conjunction with our financial statements and the related notes thereto included elsewhere in this Quarterly Report. The Management's Discussion and Analysis contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations, and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words "believe," "plan," "intend," "anticipate," "target," "estimate," "expect," and the like, and/or future-tense or conditional constructions ("will," "may," "could," "should," etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements in this Quarterly Report. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the heading "Risk Factors" in our various filings with the Securities and Exchange Commission. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report.

The following discussion highlights the Company's results of operations and the principal factors that have affected its consolidated financial condition as well as its liquidity and capital resources for the periods described, and provides information that management believes is relevant for an assessment and understanding of the Company's consolidated financial condition and results of operations presented herein. The following discussion and analysis are based upon Karbon-X Corp.'s unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q, which have been prepared in accordance with generally accepted accounting principles in the United States. You should read the discussion and analysis together with such financial statements and the related notes thereto.

Overview

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., which became the wholly owned subsidiary of the Company in a reverse acquisition, and on April 14, 2022 the Company changed its name to Karbon-X Corp. The Company's subsidiaries are 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), each of which reports quarterly financial information that is consolidated in this Quarterly Report.

Karbon-X provides customized transactional options, tailored insights, and scalable access to the Verified Emissions Reduction markets. Karbon-X changes the marketing framework of traditional carbon marketing by engaging the public versus industry with multiple forms of technology-based greenhouse gas reduction builds. Karbon-X allows the public to purchase carbon offsets from an app that is subscription-based, with multiple levels of investment for every budget. Each subscription supports clean energy projects such as solar or wind power, methane capture, or reforestation and reduces greenhouse gas emissions with provable, verifiable carbon credits. Through the subsidiaries established following the June 2025 acquisition of assets from Allcot AG, the Company also develops carbon-offset projects and trades industrial carbon credits.

Critical Accounting Policies

The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported therein. Our critical accounting policies and estimates - carbon credit inventory, the asset acquisition and acquired intangible assets, the fair value of financial instruments (including the Level 3 valuation of the conversion features embedded in our convertible notes) and revenue recognition - are described in Item 7 and Note 1 of the 2026 Form 10-K. There have been no material changes to those policies or estimates during the three months ended August 31, 2026. The valuation techniques used to measure the embedded conversion derivatives at August 31, 2026 are those applied at May 31, 2026; the inputs, including the disposal-rate assumption used in the path-dependent simulation for the note issued under the Maintenance Agreement, were updated to the measurement date as described in Note 1 to the condensed consolidated financial statements.

Results of Operations

Unaudited Results for the Three Months Ended August 31, 2026 and 2025

Sales and Revenue

For the three months ended August 31, 2026, the Company reported revenue of $343,967, a decrease of $35,314,966 compared to $35,658,933 in the same period of the prior year. Revenue in the prior-year quarter included industrial carbon credit trading conducted through Karbon-X Trading Limited, the Company's Cyprus subsidiary, which accounted for substantially all of the revenue and cost of revenue in that period and did not recur in the current quarter. Revenue for the three months ended August 31, 2026 was earned principally in Canada from sales of carbon credits, consulting services and mobile application subscriptions. Industrial carbon credit trading volume in the quarter was also reduced by delays in the delivery of credits under an Output-Based Pricing System project; the credit transfers for the affected transactions were completed in October 2026 and the transactions will be reflected in the results of the second quarter. See Note 24 regarding the trade financing arranged in October 2026 to fund the purchase of German greenhouse gas reduction quotas for resale. Revenue excludes $105,954 (EUR 91,650) invoiced and collected during the quarter as the signing instalment under a technical advisory agreement, which has been deferred as a contract liability until the related deliverables are delivered and accepted (Note 9). Cost of revenue was $233,930 (2025: $35,365,064), producing gross profit of $110,037 and a gross margin of 32.0%, compared with gross profit of $293,869 and a gross margin of 0.8% in the prior-year quarter. The increase in gross margin reflects the absence of the high-volume, low-margin trading activity that dominated the prior-year revenue mix.

Operating Expenses

Operating expenses for the three months ended August 31, 2026 were $2,742,391, compared to $2,658,934 in the same period of the prior year, an increase of $83,457. The principal components were:

Loss from Operations

The loss from operations for the three months ended August 31, 2026 was $2,632,354, compared to $2,365,065 in the same period of the prior year, an increase of $267,289. Revenue declined substantially with the absence of trading activity and $105,954 of advisory fees collected in the quarter was deferred; the improvement in gross margin, the reduction in salaries and wages and the absence of Edmonton Oilers sponsorship cost were more than offset by the $489,274 provision for credit losses on the loan receivable.

Other Income and Expense

Interest expense, net, was $1,062,285 for the three months ended August 31, 2026, compared to $306,262 in the prior-year quarter. The increase reflects the debt incurred since the prior-year quarter: interest expense includes $472,728 of amortization of debt discounts on the convertible notes, the term note and the term loan drawn in July 2026 (2025: $102,182), $276,770 of finance charges on the receivables financing obligations, interest at 18% per annum on the $5,000,000 term note drawn in November 2025, and the coupon interest and conversion fees on the convertible notes, net of interest income of $52,956 accrued on the loan receivable and the related-party note receivable. The debt discounts arise principally from the bifurcation of the conversion features embedded in the convertible notes and from original issue discounts, commitment shares and issuance costs, and are amortized to interest expense over the terms of the notes.

The Company recognized a gain on the change in fair value of derivative liabilities of $207,733 for the three months ended August 31, 2026 (2025: $95,835). The gain comprises a $126,419 decrease in the fair value of the conversion features embedded in the Company's convertible notes and a $125,200 decrease in the fair value of the warrants reclassified from equity to derivative liabilities during the quarter (Note 15), of which $113,768 relates to fiscal 2026, driven by the lower trading price of the common stock at August 31, 2026 ($0.1485, compared with $0.17 at May 29, 2026) and the shorter remaining terms of the notes, net of the change in fair value of the converted portions measured at each conversion date, and of a $43,886 loss recognized on the initial measurement of the conversion features embedded in two of the five 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. See Notes 1 and 11 to the condensed consolidated financial statements.

The loss on investment of $422,410 represents the unrealized loss on the 4,641,621 shares of DevvStream Holdings Inc. received on June 24, 2026 in settlement of the securities receivable under the Carbon Credit Purchase Agreement, following the delisting of those shares from the Nasdaq Stock Market on the same date and the subsequent decline in their quoted price to USD $0.1530 per share at August 31, 2026 (Note 16). Because the price-floor protection under the agreement was settled by the June 2026 share issuance, changes in the fair value of the shares are now recognized in full in earnings. Other expenses of $45,721 (2025: $20,742) consist principally of a foreign exchange loss of $43,414 on the remeasurement of the Canadian-dollar loan receivable and the Canadian-dollar short-term advance.

Net Loss

Net loss for the three months ended August 31, 2026 was $3,955,038, compared with $2,596,234 in the same period of the prior year. Total comprehensive loss, including a foreign currency translation gain of $53,254 (2025: $148,311), was $3,901,784 (2025: $2,447,923). The increase in net loss is principally attributable to the increase in interest expense, the provision for credit losses on the loan receivable, the loss on investment described above and the lower gross profit, partly offset by the gain on derivative liabilities and lower marketing expenses and salaries and wages.

Liquidity and Capital Resources

The following table sets forth the major components of our condensed consolidated statements of cash flows for the periods presented.

As of August 31, 2026, the Company had $4,086,857 in current assets and $11,384,754 in current liabilities, resulting in negative working capital of $(7,297,897), compared with negative working capital of $(4,040,004) at May 31, 2026. Cash decreased from $1,155,289 at May 31, 2026 to $335,445 at August 31, 2026. Total assets at August 31, 2026 were $7,669,184 (May 31, 2026: $9,617,713) and total liabilities were $16,612,907 (May 31, 2026: $15,601,815), including derivative liabilities of $1,147,967 and convertible notes payable, net of discounts, of $1,959,903.

Cash used in operating activities was $1,198,464 for the three months ended August 31, 2026, compared with $2,679,849 in the prior-year quarter. The net loss of $3,955,038 included non-cash charges of $472,728 for amortization of debt discounts, $489,274 for the provision for credit losses on the loan receivable, $276,770 for finance charges on receivables financing obligations, $422,410 for the unrealized loss on the DevvStream shares and $243,292 for equity-based compensation, and a non-cash gain of $207,733 on derivative liabilities. Changes in operating assets and liabilities provided $1,042,250 of cash, principally from increases in accounts payable and deferred revenue and the reversal of a prepaid equipment deposit and the related payable that were not yet due at August 31, 2026 (Note 2), partly offset by the increase in inventories.

Cash provided by investing activities was $1,804, compared with cash used of $605,093 in the prior-year quarter, which included the $605,093 acquisition of the Allcot project pipeline. Cash provided by financing activities was $390,451, comprising $670,500 of net proceeds from the five convertible notes issued during the quarter, $393,077 of net proceeds from the CAD $600,000 term loan drawn on July 2, 2026 and $125,000 from the issuance of common stock for cash, partly offset by $169,856 of principal repayments on convertible notes, $133,071 of instalments on the term loan and $495,199 of net repayments of receivables financing obligations. The net repayments of receivables financing obligations comprise remittances of approximately CAD $1.18 million during the quarter, including the June 10, 2026 payoff of a merchant cash advance and the weekly remittances on the other arrangements, less approximately CAD $0.50 million of new funding received under the $460,000 merchant cash advance and the $60,063 receivables purchase (Note 13). In the prior-year quarter financing activities provided $3,791,543, principally the $3,500,000 convertible note issued in August 2025.

To date, the Company has financed its operations through equity sales, convertible note issuances, long-term debt and receivables financing arrangements. During the three months ended August 31, 2026, holders of four convertible notes converted principal and accrued interest of $806,517 into 3,231,320 shares of common stock at conversion prices of $0.1106 to $0.75 per share. Subsequent to the quarter end the Company raised further financing through convertible notes, a bridge note and receivables financing arrangements, financed the purchase of carbon credits for resale with a 45-day trade finance loan of EUR 4,570,000, and issued convertible notes with an aggregate principal amount of $5,000,000 as consideration for consulting services, as described in Note 24 to the condensed consolidated financial statements.

Future Financing

In connection with its proposed business plan and possible acquisitions, the Company will be required to complete substantial and significant additional capital formation. Such formation could be through additional equity offerings, debt, bank financings or a combination of any source of financing. There can be no assurance that the Company will be successful in completion of such financings.

Plan of Operations

As noted above, the continuation of our current plan of operations requires us to raise significant additional capital. If we are successful in raising capital through the sale of common shares or the issuance of notes, we believe that we will have sufficient cash resources to fund our plan of operations through fiscal 2027. If we are unable to do so, we may have to curtail and possibly cease some operations. We intend to use the net proceeds of any financing for operations, regulatory compliance, intellectual property, working capital and general corporate purposes.

We continually evaluate our plan of operations to determine the manner in which we can most effectively utilize our limited cash resources. The timing of completion of any aspect of our plan of operations is highly dependent upon the availability of cash to implement that aspect of the plan and other factors beyond our control. There is no assurance that we will successfully obtain the required capital or revenues, or, if obtained, that the amounts will be sufficient to fund our ongoing operations.

Capital Expenditures

During the three months ended August 31, 2026 we had capital expenditures of $576 and no additions to capitalized application development costs.

Commitments and Contractual Obligations

As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Going Concern

The Company has incurred an accumulated deficit of $29,535,418 since inception. As of 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.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.