Karbon-X Corp. 10-Q

Item 1. Financial Statements CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) Karbon-X Corp. February 28, 2025 May 31, 2024 Assets Current assets: Cash $ 930,873 $ 2,675,400 Accounts receivable, net 4,658 120,284 Inventories, net 93,960 316,738 Prepaid expenses 713,564 1,000 Deposits 606,998 - Investments in equity securities 211,446 - Securities receivables 3,689,467 - Other current assets 57,484 - Total current assets 6,308,450 3,113,422 Long-term assets: Property, plant and equipment, net 5,000 6,918 Right-of-use Asset, net 482,667 316,519 Other assets 20,564 12,351 Capitalized App Development Costs, Net 492,966 521,372 Total assets $ 7,309,647 $ 3,970,582 Liabilities and stockholders' equity Current liabilities: Accounts payable $ 687,848 $ 127,219 Deferred Revenue 3,684,616 - Lease liabilities - Current 39,666 21,945 Short-term loan payable - 36,500 Stock payable - 630,000 Payroll payable 19,480 24,103 Convertible notes payable, net of discounts 1,207,635 - Convertible notes - interest payable 44,116 - Embedded Derivative 93,814 - Other current liabilities - - Total current liabilities 5,777,175 839,768 Long-term liabilities: Long-term debt - - Lease liabilities 451,729 302,557 Other liabilities 15,966 - Total liabilities 6,244,870 1,142,325 Commitments and contingencies - - Stockholders' equity: Common stock Common stock $ 0.001 par value, 200,000,000 shares authorized, 84,061,489 and 82,174,750 shares issued and outstanding as of February 28, 2025 and May 31, 2024, respectively. 84,063 82,176 Additional paid-in capital 9,729,022 7,675,826 Accumulated deficit ( 8,590,179 ) ( 4,937,342 ) Accumulated other comprehensive gain (loss) ( 158,129 ) 7,597 Total stockholders' equity 1,064,777 2,828,257 Total liabilities and stockholders' equity $ 7,309,647 $ 3,970,582 See notes to condensed consolidated financial statements. 4 Table of Contents CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Karbon-X Corp. Three Months Ended Nine Months Ended February 28, 2025 February 29, 2024 February 28, 2025 February 29, 2024 Sales $ 238,528 $ 247,222 $ 1,530,349 $ 287,062 Cost of sales 97,852 223,758 828,263 237,959 Gross profit 140,676 23,464 702,086 49,103 Operating expenses Marketing expenses 528,150 66,629 915,494 95,468 Salaries and wages 841,890 149,533 2,176,431 464,274 Professional fees 184,068 51,188 688,634 201,650 Other operating expenses 267,664 127,513 631,807 262,302 Total operating expenses 1,821,772 394,863 4,412,366 1,023,694 Operating income (loss) ( 1,681,096 ) ( 371,399 ) ( 3,710,280 ) ( 974,591 ) Other (expense) income: Interest income (expense) 6,046 - 31,496 - Other, net ( 11,466 ) ( 99,872 ) 25,947 ( 1,188,775 ) Income before income taxes ( 1,686,516 ) ( 471,271 ) ( 3,652,837 ) ( 2,163,366 ) Income tax expense - - - - Net income (loss) ( 1,686,516 ) ( 471,271 ) ( 3,652,837 ) ( 2,163,366 ) Other comprehensive income (loss) Foreign currency translation gain (loss) ( 73,768 ) ( 20,561 ) ( 165,726 ) ( 30,941 ) Total comprehensive income (loss) $ ( 1,760,284 ) $ ( 491,832 ) $ ( 3,818,563 ) $ ( 2,194,307 ) Earnings per share Weighted average shares outstanding, basic and diluted. 79,207,432 77,617,191 80,580,044 77,017,953 Basic and diluted loss per share. and diluted ( 0.02 ) ( 0.01 ) ( 0.05 ) ( 0.03 ) See notes to condensed consolidated financial statements. 5 Table of Contents CONDENSED CONSOLIDATED STATEMENTS OF CHAGES IN SHAREHOLDERS’ EQUITY (UNAUDITED) For the Three Months and Nine Months Ended February 28, 2025 and February 29, 2024 Karbon-X Corp. Common stock Additional paid-in Shares to Retained earnings Accumulated other comprehensive profit Total Stockholders' Shares Amount capital be issued (deficit) (loss) Equity Balance at May 31, 2024 82,174,750 $ 82,176 $ 7,675,826 - $ ( 4,937,342 ) $ 7,597 $ 2,828,257 Issuance of shares for cash, net of issuance cost 1,238,887 1,239 1,091,261 - - - 1,092,500 Net income (loss) - - - - ( 804,766 ) - ( 804,766 ) Foreign currency translation - - - - - 33,381 33,381 Balance at August 31, 2024 83,413,637 83,415 8,767,087 ( 5,742,108 ) 40,978 3,149,372 Issuance of shares for cash, net of issuance cost 155,771 156 138,313 - - - 138,469 Issuance of shares as compensation - - 290,263 - - - 290,263 Net income (loss) - - - - ( 1,161,555 ) - ( 1,161,555 ) Foreign currency translation - - - - - ( 125,339 ) ( 125,339 ) Balance at November 30, 2024 83,569,408 83,571 9,195,663 - ( 6,903,663 ) ( 84,361 ) 2,291,210 Issuance of shares for cash, net of issuance cost 492,081 492 442,381 - - - 442,873 Issuance of shares as compensation - - 90,978 - - - 90,978 Net income (loss) - - - - ( 1,686,516 ) - ( 1,686,516 ) Foreign currency translation - - - - ( 73,768 ) ( 73,768 ) Balance at February 28, 2025 84,061,489 $ 84,063 $ 9,729,022 - $ ( 8,590,179 ) $ ( 158,129 ) $ 1,064,777 Common stock Additional paid-in Shares to Retained earnings Accumulated other comprehensive profit Total Stockholders' Shares Amount capital be issued (deficit) (loss) Equity Balance at May 31, 2023 72,579,000 $ 72,579 $ 2,638,532 $ 1,750,000 $ ( 2,192,106 ) $ ( 3,786 ) $ 2,265,219 Issuance of shares for cash 3,274,858 3,275 1,552,396 375,000 - - 1,930,671 Issuance of shares as compensation 2,500,000 2,500 622,500 ( 625,000 ) - - - Issuance if share upon convertible loan 200,000 200 99,800 - - - 100,000 Net income (loss) - - - - ( 350,032 ) - ( 350,032 ) Foreign currency translation - - - - - ( 3,223 ) ( 3,223 ) Balance at August 31, 2023 78,553,858 78,554 4,913,228 1,500,000 ( 2,542,138 ) ( 7,009 ) 3,942,635 Issuance of shares for cash 50,000 50 99,950 - - - 100,000 Investment write-off in silviculture - - - ( 1,500,000 ) - - ( 1,500,000 ) Net income (loss) - - - - ( 1,342,063 ) - ( 1,342,063 ) Foreign currency translation - - - - - ( 7,157 ) ( 7,157 ) Balance at November 30, 2023 78,603,858 78,604 5,013,178 - ( 3,884,201 ) ( 14,166 ) 1,193,415 Issuance of shares for cash 61,111 61 ( 61 ) - - - - Issuance of shares as compensation - - - 74,998 - - 74,998 Offering expense - - ( 3,832 ) - - - ( 3,832 ) Net income (loss) - - - - ( 471,271 ) - ( 471,271 ) Foreign currency translation - ( 1 ) - - ( 652 ) ( 20,561 ) ( 21,214 ) Balance at February 29, 2024 78,664,969 $ 78,664 $ 5,009,285 $ 74,998 $ ( 4,356,124 ) $ ( 34,727 ) $ 772,096 See notes to condensed consolidated financial statements. 6 Table of Contents CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Karbon-X Corp. Nine Months Ended February 28, 2025 February 29, 2024 Operating activities Net income (loss) $ ( 3,652,837 ) $ ( 2,163,366 ) Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 1,918 1,099 Amortization of ROU 6,689 12,265 Loss on investment - 1,191,890 Equity-based compensation expense 439,117 - Changes in operating assets and liabilities: Accounts receivable 115,626 ( 24,782 ) Inventories 222,778 ( 142,899 ) Prepaid expenses ( 1,319,562 ) ( 34,708 ) Marketable securities ( 211,446 ) - Securities receivable ( 3,689,467 ) - ROU Asset ( 172,837 ) - Other current assets ( 37,291 ) 19,042 Accounts payable ( 69,372 ) 64,363 Deferred Revenue 3,684,617 - Lease Liability 166,893 ( 9,073 ) Convertible Note 44,116 Other current liabilities ( 25,157 ) 48,021 Cash used in operating activities ( 4,496,214 ) ( 1,038,148 ) Investing activities Purchases of property, plant and equipment - ( 727,409 ) Other investing activities - - Net cash used in investing activities - ( 727,409 ) Financing activities Proceeds from convertible notes payable 1,207,634 - Debt discount on convertible notes payable 93,814 - Proceeds from sales of common stock, net of issuance costs 1,615,966 1,803,482 Net cash from financing activities 2,917,414 1,803,482 Change in cash and cash equivalents ( 1,578,801 ) 37,925 Effect of foreign exchange rate on cash ( 165,726 ) ( 32,605 ) Cash -- beginning of period 2,675,400 206,820 Cash -- end of period $ 930,873 $ 212,140 Supplemental disclosures of cash flow information: Cash paid for interest - - Cash paid for income taxes - - See notes to condensed consolidated financial statements. 7 Table of Contents NOTE 1 – BACKGROUND, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES Business Operations Karbon-X Corp. ("Karbon-X" or the "Company") was incorporated in the State of Nevada 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 acquisition (the "Reverse Acquisition"). Pursuant to the Reverse Acquisition, all of the issued and outstanding shares of Karbon-X common stock were converted, at an exchange ratio of 20,000-for-1 , into an aggregate of 20,000,000 shares of the Company's common stock, resulting in Karbon-X becoming a wholly owned subsidiary of the Company and all debt owed to the related party of Cocoluv, Inc. was forgiven. The accompanying financial statements' share information has been retroactively adjusted to reflect the exchange ratio in the Reverse Acquisition. As part of the Reverse Acquisition, on April 14, 2022 the Company changed its name to Karbon-X Corp. Under generally accepted accounting principles in the United States ("US GAAP") because the combined entity will be dependent on Karbon-X's senior management, the Reverse Acquisition was accounted for as a recapitalization effected by a share exchange, wherein Karbon-X is considered the acquirer for accounting and financial reporting purposes. On the date of the reorganization, the assets and liabilities of Karbon-X have been brought forward at their book value and consolidated with Cocoluv, Inc.’s assets, which comprised of cash and cash equivalents of $ 134 and liabilities which comprises due to related party of $ 99,902 (see Note 1 Basis of Presentation below). No goodwill has been recognized. Accordingly, the assets and liabilities and the historical operations that are reflected in the consolidated financial statements are those of Karbon-X and are recorded at the historical cost basis of Karbon-X. The Company provides customized transactional options, tailored insights, and scalable access to the Verified Emissions Reduction markets. Karbon-X engages the public with technology-based greenhouse gas reduction projects, allowing the purchase of carbon offsets through a subscription-based app. Basis of Presentation The consolidated financial statements include the accounts of the Company and its subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. The financial statements are presented in United States dollars and prepared in accordance with accounting principles generally accepted in the United States (US GAAP). Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as related disclosures of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include highly liquid investments with an original maturity of three months or less at the date of purchase. 8 Table of Contents Accounts Receivable Accounts receivable represent amounts due from customers for goods or services provided by the Company. Accounts receivable are recorded at the invoiced amount. In accordance with Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326), also known as the Current Expected Credit Loss (CECL) model, the Company now utilizes a forward-looking approach to estimate expected credit losses over the lifetime of the receivables. This model considers historical loss experience, current conditions, and reasonable and supportable forecasts to assess credit risk. Property and Equipment Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets which are all five years. Costs of major additions and improvements are capitalized while expenditures for maintenance and repairs, which do not extend the life of the asset, are expensed. Upon sale or disposition of property and equipment, the cost and related accumulated depreciation and amortization are eliminated from the accounts and any resulting gain or loss is credited or charged to income. Long-lived assets held and used by us are reviewed based on market factors and operational considerations for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Investments The Company accounts for investments with a 20 % to 50 % ownership and a significant, but not controlling influence as equity method investments. Investments with a greater than 50% ownership and a controlling influence are accounted for using the consolidation method. The Company assesses the potential impairment of equity method investments when indicators such as a history of operating losses, negative earnings and cash flow outlook, and the financial condition and prospects for the investee's business segment might indicate a loss in value. The Company previously accounted for its investment in Silviculture Systems using the equity method and its investment in its subsidiary Karbon-X Project, Inc using the consolidation method. During November 2023, the Company has abandoned the silviculture investment deal and decided to write off the carrying value of the Equity Investment in Silviculture. Accordingly, amidst ongoing disputes which we are currently discussing, the Company has written off the carrying value of Investment of USD $ 2,564,203 , accumulated value of shares to be issued $ 1,500,000 and recognized loss on write off $ 1,064,203 in its statement of operations for the year ended May 31, 2024. Foreign Currency Translation The functional currency of the Company is the Canadian Dollar (“CAD”). For financial statement purposes, the reporting currency is the United States Dollar (“USD”). For financial reporting purposes, the consolidated financial statements are translated into the Company’s reporting currency, USD. Asset, liability and equity accounts are translated using the closing exchange rate in effect at the balance sheet date and income and expense accounts are translated using the average exchange rate prevailing during the reporting period. 9 Table of Contents Adjustments resulting from the translation, if any, are included in accumulated other comprehensive loss in stockholder’s equity (deficit). Warrants There is estimation uncertainty with respect to selecting inputs to the Black-Sholes model used to determine the fair value of a single outstanding warrant issuance (Note 10). These inputs include the stock price of $ 0.90 , exercise price of $ 0.75 , time to maturity of two years , annual risk-free interest rate ranging from 4.33 % - 4.74 %, and annualized volatility ranging from 1294.9 % - 1279.3 %. The above estimates and assumptions are reviewed regularly. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Significant Estimates Significant estimates applied in the preparation of these financial statements include the estimated useful lives of property and equipment, share volatility and estimated life of options and warrants in determining their fair value as well as the expected potential for the realization of deferred tax assets in determining the amount of the valuation allowance thereto. Earnings per Common Share The 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 during the year. The diluted loss per share is calculated by dividing the Company’s net loss available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity. As of February 28, 2025, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per share. Reclassifications Certain amounts in the comparative periods presented have been reclassified to conform to the current period's presentation. These reclassifications had no effect on the previously reported net income, comprehensive income, total assets, or shareholders' equity. Recently Issued Accounting Standards The Financial Accounting Standards Board (FASB) has issued several updates relevant to the Company: · Update 2025-01: Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Clarifying the Effective Date Effective for annual reporting periods beginning after December 15, 2026, and interim periods within annual reporting periods beginning after December 15, 2027. Early adoption is permitted. · Update 2024-04 : Debt—Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments. Effective for annual reporting periods beginning after December 15, 2025, and interim periods within those annual periods. Early adoption is permitted. · Update 2024-03 : Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. Effective for annual reporting periods beginning after December 15, 2026, and interim periods beginning after December 15, 2027. Early adoption is permitted. 10 Table of Contents · Update 2024-02 : Codification Improvements—Amendments to Remove References to the Concepts Statements. Effective for public business entities for fiscal years beginning after December 15, 2024. For all other entities, effective for fiscal years beginning after December 15, 2025. Early application is permitted. · Update 2024-01 : Compensation—Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards. Effective for public business entities for annual periods beginning after December 15, 2024, and interim periods within those annual periods. For all other entities, effective for annual periods beginning after December 15, 2025, and interim periods within those annual periods. Early adoption is permitted. · Update 2023-07 :Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. As public entity to disclose information about operating segments, to help our investors and other stakeholders understand the financial performance of different parts of a business The Company is currently evaluating the impact of these provisions on its consolidated financial statements Going Concern To date, the Company has generated minimal revenues from its business operations and has incurred operating losses since inception of $( 8,590,179 ). 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 initial 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 Company intends to continue to fund its business by way of private placements and advances from related parties as may be required. 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. 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: · Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets; · Level 2—Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and · Level 3—Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions. The carrying amount of the Company’s financial assets and liabilities approximate their fair values due to their short-term maturities. 11 Table of Contents NOTE 2 - REVENUE RECOGNITION The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606, "Revenue from Contracts with Customers." Under ASC 606, revenue is recognized when control of the promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company follows a five-step process to recognize revenue: 1. Identify the contract with a customer : A contract is defined as an agreement between two or more parties that creates enforceable rights and obligations. 2. Identify the performance obligations in the contract : Performance obligations are promises in a contract to transfer distinct goods or services to the customer. 3. Determine the transaction price : The transaction price is the amount of consideration the Company expects to receive in exchange for transferring goods or services to the customer. 4. Allocate the transaction price to the performance obligations in the contract : The transaction price is allocated to each performance obligation based on the relative standalone selling prices of the goods or services being provided. 5. Recognize revenue when (or as) the Company satisfies a performance obligation : Revenue is recognized when control of the goods or services is transferred to the customer, which can occur over time or at a point in time. Revenue Streams The Company generates revenue from the following sources: 1. Carbon Credit Sales : Revenue from the sale of carbon credits is recognized at a point in time when control of the carbon credits transfers to the customer, which typically occurs upon delivery. 2. Subscription Services : Revenue from subscription services, which provide customers access to the Company's platform and related services, is recognized over time on a straight-line basis over the subscription period. 3. Consulting Services : Revenue from consulting services is recognized over time as the services are performed. The Company measures progress toward completion using an input method based on hours incurred. Accounts Receivable and Deferred Revenue · Accounts Receivable: Accounts receivable represent amounts due from customers for goods or services provided by the Company. Accounts receivable are recorded at the invoiced amount. As of February 28, 2025, accounts receivable were $ 4,658 . · Deferred Revenue: Deferred revenue consists of advance payments received from customers for services to be provided in future periods. As of February 28, 2025, deferred revenue was $ 3,684,616 . The deferred revenue related to the delivery of carbon credits is expected to be recognized in revenue over the contract period as the credits are delivered according to the schedule. Specifically, recognition will occur quarterly from Q2 2025 through Q1 2029, based on the quantities delivered in each period at the rate of $120 per credit . 12 Table of Contents NOTE 3 - INVENTORIES Inventories are stated at the lower of cost or net realizable value. Cost is determined using the weighted average method. Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. The Company periodically reviews inventories for obsolescence and any inventories identified as obsolete are written down or written off. As of February 28, 2025, inventories consisted of the following: Description February 28, 2025 May 31, 2024 Carbon Credit Inventory USD $ 93,960 USD $ 316,738 Total USD $ 93,960 USD $ 316,738 Carbon Credit Inventory Carbon credit inventory represents carbon credits currently held for sale. The Company engages in the purchase and sale of carbon credits as part of its business operations. These credits are acquired from various projects and are sold to customers seeking to offset their carbon emissions. Inventory Valuation The Company evaluates its inventory to ensure it is stated at the lower of cost or net realizable value. This evaluation includes an analysis of the current market conditions, the estimated selling prices of the carbon credits, and any potential obsolescence. Adjustments to the carrying value of inventory are made as necessary to reflect any declines in net realizable value below cost. 13 Table of Contents NOTE 4 - PREPAID EXPENSES Prepaid expenses consist of payments made in advance for goods or services to be received in future periods. These expenses are recognized as assets until the related goods or services are consumed or the benefits are realized. As of February 28, 2025, the majority of the Company's prepaid expenses are related to the advertising and promotional agreement with Oilers Entertainment Group Canada Corp. ("OEG"). On December 1, 2024, the Company received invoices from OEG for the advertising and promotional agreement signed on July 1, 2024. The agreement includes various promotional rights and advertising services to be provided over the term of the contract, which ends on June 30, 2027. The total amount invoiced for the period ending February 28, 2025, has been recorded as a prepaid expense. The table below summarizes the prepaid expenses related to the OEG agreement as of February 28, 2025: Description Amount (USD $) Advertising & Promotional Agreement $ 697,544 Other Prepayments $ 16,020 Total Prepaid Expenses $ 713,564 Advertising & Promotional Agreement The advertising and promotional agreement with OEG includes various marketing rights, logo usage rights, digital signage, in-bowl signage, digital broadcast signage, and other promotional activities. The agreement specifies that the Company will receive these promotional rights in exchange for a fee. The second installment of CAD 750,000 was invoiced on December 1, 2024, and has been recorded as a prepaid expense. This amount will be amortized over the period in which the related promotional rights and advertising services are received. Amortization of Prepaid Expenses The prepaid expenses related to the OEG agreement will be amortized on a straight-line basis over the term of the contract. The amortization expense for the period ending February 28, 2025, will be recognized in the Company's statement of operations. 14 Table of Contents NOTE 5 – CONVERTIBLE PROMISSORY NOTES As of February 28, 2025, Karbon-X Corp. issued convertible promissory notes totaling USD $ 1,207,635 to four investors as part of its capital-raising efforts. The notes bear simple interest at a rate of 10 % per annum, and mature on October 15, 2026 , for two investors, October 16, 2026 , for one investor and January 31, 2027 for one investor. One investors note was issued for CAD $ 500,000 , which was equivalent to USD $ 359,803 on the date of issuance. The principal amount of the investor’s note is fixed in Canadian dollars and requires repayment in U.S. dollars, exposing the Company to foreign currency risk. The notes include a conversion feature, allowing the holders to convert the principal and accrued interest into the Company's common stock. Conversion is permitted at the option of the lender at any time after the earlier of: 1. Twenty-four months from the date of issuance, or 2. The Company’s listing on OTCQX, Nasdaq, or NYSE. The conversion price is the lesser of: 1. 80% of the twenty-day weighted average closing price of the Company’s common stock preceding the conversion (but not less than the average of the four notes $0.56 per share), and of the trading day immediately preceding such conversion (but not less than $0.75 per share) or (ii) $0.90 per share . 2. Average of the four notes $ 0.78 per share. Conversion is further restricted to ensure that no lender converts an amount of the note that would result in owning more than 9.9 % of the outstanding common stock at any time. The Borrower may prepay the principal amount and any unpaid interest or any portion thereof at any time without notice, further interest, bonus, or penalty, provided that a minimum of six months’ interest shall be payable regardless of the prepayment date. The issuance of these convertible promissory notes provided the Company with necessary capital to support its operations and strategic initiatives while offering investors the potential for equity participation in the Company's future growth. As of February 28, 2025, the principal amount of the convertible promissory notes totaled USD $ 1,207,635 , For the quarter ended February 28, 2025, the Company recognized interest expense of USD $ 46,315 , calculated based on the stated 10 % simple interest rate. Prepayment Option The Company may prepay the notes at any time without penalty, provided that a minimum of six months’ interest is payable. This provision ensures lenders are compensated regardless of the prepayment date. 15 Table of Contents NOTE 6 - INVESTMENTS IN EQUITY SECURITIES AND CARBON CREDIT FORWARD PURCHASE AGREEMENT On October 24, 2024, Karbon-X Corp. entered into a Carbon Credit Purchase Agreement with DevvStream Holdings Inc. As part of this agreement, Karbon-X Corp. received 174,953 common shares of New Pubco, a company formed from the merger of DevvStream Holdings Inc. and Focus Impact Acquisition Corp., a special purpose acquisition company (SPAC) listed on the Nasdaq Stock Exchange. The shares were issued at a deemed price of $ 6.50 per share, resulting in an initial valuation of USD $ 1,137,197 . On October 28, 2024, Karbon-X Corp. entered into a Carbon Credit Forward Purchase Agreement with DevvStream Holdings Inc., under which Karbon-X Corp. will sell verified greenhouse gas offset or carbon credits, specifically C-Sink Credits, to DevvStream Holdings Inc. The purchase price for these credits is USD $ 2,892,000 , payable in 444,923 common shares of New Pubco at a deemed price of $ 6.50 per share. This agreement is classified as a futures contract under relevant U.S. GAAP guidance. Initial Recognition and Measurement At initial recognition, the common shares of New Pubco received under the agreements are classified as equity securities and measured at fair value upon initial recognition in accordance with ASC 321, "Investments—Equity Securities". The Company recorded an initial fair value of the securities based on observable market prices at the time of execution, consistent with a Level 1 fair value measurement, as the shares were actively traded on the Nasdaq Stock Exchange. · For the Carbon Credit Purchase Agreement, the fair value of the 174,953 shares was recognized as $ 68,232 . · For the Carbon Credit Forward Purchase Agreement, the 444,923 shares were valued at $ 173,520 , representing the purchase price of the C-Sink Credits to be delivered in the future. Upon entering into the forward purchase agreement, Karbon-X Corp. also recognized a deferred revenue liability of $ 2,892,000 , as the performance obligation to deliver the carbon credits had not yet been satisfied. This deferred revenue will be recognized as income upon delivery of the carbon credits. Refer to Note 7 for further details on deferred revenue. Subsequent Measurement and True-Up Provision Subsequent to initial recognition, the equity securities are measured at fair value in accordance with ASC 321, "Investments—Equity Securities". Additionally, as the securities are denominated in a foreign currency, a currency translation adjustment (CTA) is recorded to reflect the impact of exchange rate fluctuations. The CTA is included in other comprehensive income (OCI) in accordance with ASC 830, "Foreign Currency Matters". As of February 28, 2025, the fair market value (FMV) of New Pubco shares was USD $ 0.39 per share. In compliance with ASC 321, the Company marked the investment to fair value, resulting in the following adjustments: · The fair value of investments was at the current market price of $ 0.39 per share. · To address the difference between the contractual price and the current market price, Karbon-X recorded a securities receivable for the true-up portion guaranteed under the agreements. The true-up provision ensures that the Company will be made whole if the market value of the shares remains below the contracted value during the adjustment period. As of February 28, 2025, no additional shares have been issued under these provisions. As of February 28, 2025, the balances were as follows: Description Balance (USD) Investments in Equity Securities $ 211,446 Securities Receivable $ 3,689,467 Total Value $ 3,900,913 Fair Value Hierarchy The equity securities of New Pubco are measured using Level 1 inputs, as the shares are actively traded on the Nasdaq Stock Exchange. The Company's exposure to impairment is mitigated by the true-up provision, which ensures no loss is ultimately recognized. While the securities are remeasured to fair market value quarterly, the receivable reflects the guaranteed recovery under the agreement. 16 Table of Contents NOTE 7 - DEFERRED REVENUE Initial Recognition and Deferred Revenue On October 28, 2024, Karbon-X Corp. entered into a Carbon Credit Forward Purchase Agreement with DevvStream Holdings Inc. Under this agreement, Karbon-X Corp. will sell verified greenhouse gas offset or carbon credits, specifically C-Sink Credits, to DevvStream Holdings Inc. The purchase price for these credits is USD $ 2,892,000 , payable in 444,923 common shares of New Pubco at a deemed price of $ 6.50 per share. This transaction is classified as a futures contract, and the accounting treatment follows the relevant FASB Codification and Accounting Standards Updates (ASUs). Upon entering into the futures contract, Karbon-X Corp. recognized a deferred revenue liability of USD $ 2,892,000 , as the performance obligation (delivery of carbon credits) had not yet been satisfied. This deferred revenue represents the obligation to deliver the carbon credits in the future. Additionally, as of February 28, 2025, the Company has recorded deferred revenue of $ 884,940 related to a sales contract with Heidelberg for the sale of carbon credits. Under the terms of the agreement, the Company received cash in advance of the sale, with delivery of the carbon credits scheduled for July 2025. Recognition of Marketable Securities Upon the execution of the agreement and the issuance of the common shares of New Pubco, Karbon-X Corp. recognized the marketable securities at their fair value of USD $ 2,892,000 . These securities are classified as equity securities with readily determinable fair values and are measured at fair value, with changes in fair value recognized in net income. Revenue Recognition As Karbon-X Corp. delivers the carbon credits according to the schedule specified in the agreement, it recognizes revenue and reduces the deferred revenue liability. Revenue is recognized when control of the promised goods or services is transferred to the customer, in accordance with ASC 606. Purchase Price Adjustment for Devvstream Holdings Inc. The agreement includes a provision for a purchase price adjustment 18 months after the closing date . If the gross proceeds from the sale of the initial shares are less than USD $ 2,882,096 , additional shares will be issued to Karbon-X Corp. to cover the shortfall. As of February 28, 2025, no additional shares have been issued under this provision. 17 Table of Contents NOTE 8 - CAPITAL WORK IN PROGRESS (INTERNALLY DEVELOPED SOFTWARE) In accordance with ASC 350-40, the Company has capitalized internally developed software for its development of a mobile application. The software is currently in its application development stage, and all related costs are being capitalized as incurred. Once the software is ready for implementation, the Company will begin amortizing the software over its estimated useful life. As of February 28, 2025, and May 31, 2024, the Company has capitalized internally developed software with a value of USD $ 492,966 and USD $ 521,372 , respectively. The decrease in value is primarily attributed to the impact of cumulative translation adjustments (CTA) resulting from the remeasurement of foreign currency values to USD. 18 Table of Contents NOTE 9 - STOCK OPTION PLAN Description of the Plan The Company has adopted the 2024 Employees', Directors', Officers', and Consultants' Stock Option Plan (the "Plan") on May 16, 2024, which authorizes the issuance of options to purchase up to 5,000,000 shares of common stock. The Plan is designed to attract, retain, and motivate employees, directors, officers, and consultants by providing them with an opportunity to acquire a proprietary interest in the Company. Types of Options The Plan provides for the issuance of both Incentive Stock Options (ISOs) and Nonstatutory Stock Options (NSOs). ISOs are intended to qualify under Section 422 of the Internal Revenue Code, while NSOs do not qualify under Section 422. Eligibility Options may be granted to employees, directors, officers, and consultants of the Company. Special provisions apply to individuals owning more than 10 % of the Company's stock. Administration The Plan is administered by the Compensation Committee of the Board of Directors, which has the authority to determine the terms and conditions of each option grant. Shares Available The maximum number of shares that may be issued under the Plan is 5,000,000 shares of common stock. Option Terms: · Exercise Price : The exercise price of options granted under the Plan must be at least 100% of the fair market value of the stock on the date of grant. · Term : Options granted under the Plan have a maximum term of ten years from the date of grant. · Vesting : The vesting schedule for options is determined by the Compensation Committee at the time of grant. Payment for Shares Upon exercise of an option, the optionee may pay the exercise price in cash or cashless exercise, with the consent of the Compensation Committee, by tendering shares of common stock. Adjustments In the event of a stock split, merger, or other corporate event, the number of shares subject to the Plan and the exercise price of outstanding options will be adjusted as determined by the Compensation Committee. Transferability Options granted under the Plan are generally non-transferable, except under specific conditions as outlined in the Plan. 19 Table of Contents Termination of Employment The Plan provides specific rules for the exercise of options upon termination of employment, including termination for cause, disability, or death. Legal Compliance The issuance of shares under the Plan is subject to compliance with federal and state securities laws. Plan Duration The Plan became effective upon adoption by the Board of Directors and options may not be granted after December 31, 2026. Activity Under the Plan As of February 28, 2025, the following activity has occurred under the Plan started in second quarter of this fiscal year : Description Number of Shares Weighted Average Exercise Price Weighted average remaining life (in years) Options Authorized 5,000,000 Options Granted 4,185,000 $ 0.79 3.80 Options Exercised 0 $ 0.79 3.80 Options Forfeited ( 25,125 ) $ 0.75 3.80 Options Outstanding 4,159,875 $ 0.79 3.80 Options Vested 1,289,200 $ 0.79 3.80 Options Unvested 2,870,675 $ 0.79 3.80 As of February 28, 2028, the intrinsic value of the 4,159,875 outstanding options was $ 0 . Fair Value of Options The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: · Expected Volatility : 35 % ○ The Company determined expected volatility based on an analysis of comparable publicly traded companies in the same or similar industry. As a startup in a new industry, Karbon-X lacks sufficient historical trading data. The analysis considered market trends and the high-growth, high-risk nature of the carbon management and sustainability sector. The selected volatility reflects industry patterns of startups in comparable markets, ensuring reasonability and alignment with peer data. · Expected Life : 5 Years ○ Based on the vesting schedule and anticipated exercise behavior of option holders. · Risk-Free Interest Rate : 5 % ○ The rate reflects the yield on U.S. Treasury securities with a term consistent with the expected life of the options. Given the current interest rate environment, a 5% rate is appropriate for options granted during Q3 FY2025. This aligns with the Federal Reserve’s policy rates and prevailing market conditions. · Expected Dividends : 0 % ○ The Company does not currently pay dividends, consistent with its growth-oriented business strategy. Stock-Based Compensation Expense For the nine months ended February 28, 2025, the Company recognized stock-based compensation expense of USD $ 381,241 . 20 Table of Contents NOTE 10 – WARRANTS A detail of warrant activity for the nine months ended February 28, 2025 is as follows: Description Number Weighted average exercise price Weighted average remaining contractual life (in years) Outstanding May 31, 2024 330,400 $ 0.63 0.63 Exercised - - - Granted - - - Expired ( 320,000 ) 0.75 - Cancelled - - - Outstanding February 28, 2025 10,400 $ 0.50 0.88 21 Table of Contents NOTE 11 – LEASES The Company has entered into a operating lease for office space commencing on July 1, 2025, with an early occupancy period beginning on February 1, 2025. The lease has a term of 5 years, expiring on June 30, 2030. During the early occupancy period (February 1, 2025 – June 30, 2025), no rent payments are required. Lease Liability and Right-of-Use (ROU) Asset The Company recognized a lease liability and ROU asset at the lease commencement date, calculated as the present value of future lease payments discounted at the Company’s incremental borrowing rate (IBR) of 5 %. The following table summarizes the lease liability and ROU asset balances as of February 28, 2025: Description Amount Lease Liability $ 491,395 ROU Asset $ 482,667 Lease Expense Lease expense is recognized on a straight-line basis over the lease term and is included in operating expenses in the consolidated statements of operations. For the quarter ended February 28, 2025, the Company recognized total lease expense of $ 8,850 , consisting of: · Amortization of ROU Asset: $ 6,689 . · Interest on Lease Liability: $ 2,039 . Maturity of Lease Liabilities The following table summarizes the undiscounted cash flows for the lease liability as of February 28, 2025: Year Lease Payments 2025 $ 53,043 2026 108,395 2027 113,007 2028 115,313 2029 117,620 Thereafter 59,963 Total $ 567,341 22 Table of Contents NOTE 12 – DEPOSIT As of February 28, 2025, the Company has made advance payments for inventory totaling $ 606,998 , which is included in Deposit on the condensed consolidated balance sheet. These payments relate to inventory purchases that have not yet been received as of the reporting date. The Company expects to take delivery of the inventory by July of 2025, at which point the amounts will be reclassified to inventory. Management evaluates these prepayments regularly to ensure recoverability and alignment with the Company’s operational needs. NOTE 13 – EMBEDDED DERIVATIVE On February 7, 2025, the Company issued a $ 250,000 unsecured promissory note (the “Note”) to a Lender with a maturity date of February 7, 2026 . The Note bears interest at a rate of 40 % per annum, payable monthly, and is convertible at the election of the Lender into common shares of the Company at a conversion price of lesser of (i) 80% of the twenty day weighted average closing price of Lender’s common stock as of the trading day immediately preceding such conversion (but not less than $0.75 per share) or (ii) $0.90 per share. The Note includes a minimum interest clause and contains no prepayment restrictions . In accordance with ASC 815, the Company assessed the terms of the Note and identified an embedded conversion feature that qualifies for separate accounting as a derivative liability. The fair value of the embedded derivative at issuance was determined to be $ 56,500 , which was recorded as a derivative liability with a corresponding debt discount. As of the reporting period ended February 28, 2025, the unamortized discount on the Note was $ 52,168 . The Company recognized interest expense of $ 10,087 for the three months ended February 28, 2025, of which $ 5,753 related to contractual interest and $ 4,334 related to amortization of the debt discount. The fair value of the embedded derivative is remeasured at each reporting date, with changes in fair value recognized in the consolidated statement of operations. As of February 28, 2025, the fair value of the embedded derivative liability is $ 93,814 . 23 Table of Contents NOTE 14 – SUBSEQUENT EVENTS On March 25, 2025, the Company entered into a Definitive Agreement with an investor, pursuant to which the investor agreed to provide $ 1,095,000 in funding to the Company. The funds are intended to be used in support of the Company’s carbon trading activities, including trading in EU compliance-related products. Under the terms of the agreement, the investment will accrue interest at a rate of 20% per annum, payable quarterly in either cash or common stock, at the investor’s discretion. The conversion price for stock payments is capped at USD $0.90 per share or 80% of the 20-day volume-weighted average price ("VWAP") if below $0.90 . Additionally, the investor is entitled to a royalty equal to 5% of trading profits, with the total royalty amount dependent on the timing of the investment’s full repayment. If repaid within six months, the royalty is equal to 50% of the investment amount. If repaid after six months, the royalty increases to 100% of the investment amount . Royalty payments commence upon full repayment of the investment and continue every 30 days thereafter until the full royalty obligation is satisfied. The Company evaluated this agreement and determined that it represents a Type II subsequent event, as it relates to conditions that arose after the end of the reporting period (February 28, 2025). Accordingly, no adjustments have been made to the financial statements included in this Form 10-Q. On April 7, 2025, the holder of the $ 250,000 convertible promissory note exercised its conversion option, resulting in the issuance of 295,873 shares of common stock. The shares were issued at a conversion price of $ 0.90 per share and represent the full principal amount of the note plus accrued interest. 24 Table of Contents