BSAI 10-K & 10-Q changes, risk factors and insider trading

We rely on the existing U.S. energy gridgrid.

We operate in a highly competitive and growing marketmarket.

Since our inception in 2007 and until the Merger in 2015,2007, we had nominal operations andhave incurred operating losses. As of December 31, 2024,2025, our accumulated deficit since inception was $29,863,364. $34,378,880. We have substantial current obligations and at December 31, 2024,2025, we had $3,346,850$3,416,051 of current liabilities as compared to $0 $1,122,661 of current assets. SinceDuring inception,the year ending December 31, 2025, we have been able to raise only minimal additional capital, and we have minimal cash on hand. Accordingly, the Company does not have sufficient cash resources or current assets to pay its current obligations, and we have been meeting many of our obligations through the issuance of our common stock to our employees, consultants, and advisors as payment for the goods and services.

These circumstances raise substantial doubt about our ability to continue as a going concernconcern, aswhich is further described in an explanatory paragraph to our independent registered public accounting firm’s report on our audited financial statements as of and for the year ended December 31, 2024.2025. If we are unable to continue as a going concern, investors will likely lose all of their investment in our company.

BluSky AI’s reliance on cutting‐edgecutting-edge AI compute technology, including quantum encryption and advanced GPU chip technology, exposes the company to the risk of rapid technological obsolescence. New developments by competitors or unforeseen technical challenges may render current solutions less competitive or require significant reinvestment.

We face advanced security requirements and risks due to cybersecurity and data protection regulations.:

Our common stock is quoted on the OTCOTCID PinkBasic Market tier of the OTC Link ATS (alternative trading system), the over-the-counter markets administered by OTC Markets Group, Inc.Inc., under the symbol “BSAIBSAI,”. but the common stock is currently not eligible for proprietary broker-dealer quotations. Trading in stock quoted on over-the-counter markets is often thin, volatile, and characterized by wide fluctuations in trading prices due to many factors that may have little to do with our operations or business prospects. This volatility could depress the market price of our common stock for reasons unrelated to operating performance. Moreover, the Over-the-Counter markets are not a stock exchange, and trading of securities on the over the counterover-the-counter markets is often more sporadic than the trading of securities listed on other stock exchanges such as the NASDAQ Stock Market, New York Stock Exchange orNYSE American Stockstock Exchange.exchange. Accordingly, our shareholders may have difficulty reselling any of their shares.

Our shares arehave recently been classified as penny stocks and are covered by Section 15(g) of the Securities Exchange Act of 1934 (the “Exchange Act”) which imposes additional sales practice requirements on broker-dealers who sell our securities in this offering or in the aftermarket. For sales of our securities, broker-dealers must make a special suitability determination and receive a written agreement prior from you to making a sale on your behalf. Because of the imposition of the foregoing additional sales practices, it is possible that broker-dealers will not want to make a market in our common stock. This could prevent you from reselling your shares and may cause the value of your investment to decline.

Recent federal Federal legislation, including the Sarbanes-Oxley Act of 2002 and the Jumpstart our Business Startups Act of 2012, among others, has resulted in the adoption of various corporate governance measures designed to promote the integrity of the corporate management and the securities markets. Some of these measures have been adopted in response to legal requirements. Others have been adopted by companies in response to the requirements of national securities exchanges, such as the NYSE or The NASDAQ Stock Market, on which their securities are listed. Among the corporate governance measures that are required under the rules of national securities exchanges and NASDAQ are those that address board of directors’ independence, audit committee oversight and the adoption of a code of ethics. While our Board of Directors has adopted a Code of Ethics and Business Conduct, weWe have not yet adopted any of these corporate governance measures and, since our securities are not listed on a national securities exchange or NASDAQ, we are not required to do so. It is possible that if we were to adopt some or all of these corporate governance measures, shareholders would benefit from somewhat greater assurances that internal corporate decisions were being made by disinterested directors and that policies had been implemented to define responsible conduct. For example, in the absence of audit, nominating and compensation committees comprised of at least a majority of independent directors, decisions concerning matters such as compensation packages to our senior officers and recommendations for director nominees may be made by a majority of directors who have an interest in the outcome of the matters being decided. Prospective investors should bear in mind our current lack of corporate governance measures in formulating their investment decisions.

Except for historical information, the following Management’s Discussion and Analysis contains forward-looking statements based upon current expectations that involve certain risks and uncertainties. Such forward-looking statements include statements regarding, among other things, (a) discussions about mineral resources and mineralized material, (b) our projected sales and profitability, (cb) our growth strategies, (dc) anticipated trends in our industry, (ed) our future financing plans, (fe) our anticipated needs for working capital, (gf) our lack of operational experience and (hg) the benefits related to ownership of our common stock. Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Business,” as well as in this Report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” and matters described in this Report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Report will in fact occur as projected.

BluSky AI Inc.plans isto revolutionizingrevolutionize the AIartificial intelligence compute landscape by addressing the immediate global supply shortage with a cutting-edge, turnkey solution.solution called SkyMods. Our strategy centers on deploying rapidly deployable, plug-and-play, pre-fabricated modular compute centers on powered land assets—sites that already possess permitted energy infrastructure. This approach not only accelerates time to market but also positions BluSky AI as thea premier AI compute infrastructure provider dedicated to meeting the surging demand for advanced AI services.

Year ended December 31, 20242025 compared to the year ended December 31, 20232024 We had a net loss of $4,515,516 for the year ended December 31, 2025, which was $3,565,734 more than the net loss of $949,782 for the year ended December 31, 2024, which was $13,705,441 more than the net income of $12,755,659 for the year ended December 31, 2023.2024. This change in our results over the two periods is primarily the result of an increase in general and administrative expenses of $2,145,511, decrease in interest expense of $138,191,$344,059 theand changean of derivative liabilities of ($3,132,140), a decreaseincrease in gainloss on extinguishment of debt of ($6,326,145) and income from discontinued operations of ($6,732,872).$1,962,881. The following table summarizes key items of comparison and their related increase (decrease) for the years ended December 31, 20242025 and 2023.2024.

Operating expenses for the years ended December 31, 20242025 and 20232024 were $521,105$2,665,889 and $1,066,618,$521,105, respectively. The decreaseincrease in operating expenses for 20242025 compared to 20232024 were comprised primarily of an decreaseincrease in consulting fees.fees and investor relations expenses.

Other income (expenses) for the years ended December 31, 20242025 and 20232024 were ($428,677$1,849,627) and $7,089,405,($428,677), respectively. For the year ended December 31, 2025, other income (expenses) was comprised primarily of $182,394 for change in derivative liability, ($1,975,924) for loss on extinguishment of debt and ($71,783) for interest expense. For the year ended December 31, 2024, other income (expenses) was comprised primarily of $196,321 for change in derivative liability, ($193,582) in initial derivative expenses, ($13,043) for loss on extinguishment of debt and ($415,842) for interest expense. For the year ended December 31, 2023, other income (expenses) was comprised of $3,328,461 for change in derivative liability, ($55,065) in initial derivative expense, ($2,219,442) for bad debt expense on note receivable, $6,313,102 for gain on extinguishment of debt and ($277,651) for interest expense.

Net cash flow used in operating activities during the year ended December 31, 2024,2025, was $127,139,$1,156,258, aan decreaseincrease of $1,369,814$1,029,119 from the $1,242,675 $127,139 net cash providedused byin operating activities during the year ended December 31, 2023.2024. This decrease is mostly due to the net loss in 20242025 versus the net incomeloss in 2023.2024.

Cash used in investing activities during the year ended December 31, 2024,2025, was $0, a decreasechange of $652$0 from the $652$0 net cash used during the year ended December 31, 2023.2024. This decreasechange was due to discontinued operations and no new investments.

Financing activities during the year ended December 31, 2024,2025, provided $127,137,$2,116,694, an increase of $1,370,263$1,989,557 from the $1,243,126$127,137 usedprovided inby financing activities during the year ended December 31, 2023.2024. During the year ended December 31, 2025, the company received $362,906 in notes payable from related parties, $1,885,000 in convertible notes payable and made payments of $131,212 in cash on notes payable – related parties. During the year ended December 31, 2024, the company received $174,396 in notes payable from related parties, $150,000 in convertible notes payable, made payments of $98,475 in cash on notes payable – related parties, and payments of $98,784 in cash on convertible notes. During the year ended December 31, 2023, the company received $39,303 in notes payable from related parties, $100,000 in convertible notes payable, made payments of $39,000 in cash on notes payable – related parties, and $1,343,429 in cash on convertible notes.

At December 31, 2024,2025, the Company marked to market the fair value of the debt derivatives and determined a fair value of $186,542.$14,516. The Company recorded a gain from change in fair value of debt derivatives of $196,321$182,394 for the year ended December 31, 2024.2025. The fair value of the embedded derivatives was determined using the Monte Carlo Valuation Model. The Monte Carlo Valuation Model was based on the following assumptions: (1) expected volatility of 155.5%,100.0%, (2) weighted average risk-free interest rate of 4.30%3.47% and (3) expected life of 0.130.80 – 1.00 years.

These forward-looking statements, which reflect our management’s beliefs, objectives, and expectations as of the date hereof, are based on the best judgement of our management. All forward-looking statements speak only as of the date on which they are made. Such forward-looking statements are subject to certain risks, uncertainties and assumptions relating to factors that could cause actual results to differ materially from those anticipated in such statements, including, without limitation, the following: economic, social and political conditions, global economic downturns resulting from extraordinary events such as the COVID-19 pandemic and other securities industry risks; interest rate risks; liquidity risks; credit risk with clients and counterparties; risk of liability for errors in clearing functions; systemic risk; systems failures, delays and capacity constraints; network security risks; competition; reliance on external service providers; new laws and regulations affecting our business; net capital requirements; extensive regulation, regulatory uncertainties and legal matters; failure to maintain relationships with employees, customers, business partners or governmental entities; the inability to achieve synergies or to implement integration plans and other consequences associated with risks and uncertainties detailed in our filings with the SEC, including our most recent filings on Forms 10-K and 10-Q.10-Q, as well as our Offering Circular on Form 1-A.

This discussion should be read in conjunction with our financial statements onin our 2025Annual Report on Form 10-K,10-K for the most recent fiscal year, and our financial statements and the notes thereto contained elsewhere in this Quarterly Report on Form 10-Q.

In the opinion of management, all adjustments have been made consisting of normal recurring adjustments necessary to present fairly the financial position of the Company and subsidiaries as of MarchJune 31,30, 2026, the results of its statements of operations for the three-monththree and six-month periods ended MarchJune 31,30, 2026 and 2025, and its cash flows for the three-monthsix-month periodsperiod ended MarchJune 31,30, 2026 and 2025. The results of operations for the interim periods are not necessarily indicative of the results for the full year.

Three months ended MarchJune 31,30, 2026 compared to the three months ended MarchJune 31,30, 2025 We had a net loss of $429,539$478,109 for the three-month period ended MarchJune 31,30, 2026, and a net incomeloss of $175,389$1,556,920 for the three-month period ended MarchJune 31,30, 2025. This change in our results over the two periods is primarily the result of a decrease in consulting expense, the change in the derivative liabilities and the increase in the loss on extinguishment of debt.expense. The following table summarizes key items of comparison and their related increase (decrease) for the three-month periods ended MarchJune 31,30, 2026 and 2025:

General and administrative expenses increaseddecreased for the three-month period ended MarchJune 31,30, 2026 because of ana increasedecrease in consulting, legal and investor investor relations expenses, compared to the three-month period ended MarchJune 31,30, 2025.

Changes in derivative liabilities was due to there being nothe derivative liabilities being eliminated in the priorcurrent year.

Interest expense decreased for the three-month period ended MarchJune 31,30, 2026 because of the amendments removing the interest accruals on notes from related parties.

Our balance sheet as of MarchJune 31,30, 2026 reflects assets of $2,251,361.$2,270,937. We had cash in the amount of $562,950$507,547 and working capital deficit in the amount of $2,650,009$3,231,379 as of MarchJune 31,30, 2026. Thus, we do not have sufficient working capital to enable us to carry out our stated plan of operation for the next twelve months.

As reflected in the accompanying unaudited condensed financial statements, the Company has an accumulated deficit of $34,808,419.$35,286,528. In addition, addition, there is a working capital deficit of $2,650,009$3,231,379 as of MarchJune 31,30, 2026. This raises substantial doubt about its ability to continue as as a going concern. The ability of the Company to continue as a going concern is dependent on the Company’s ability to raise additional capital and implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Net cash flow used in operating activities during the threesix months ended MarchJune 31,30, 2026 was $322,486,$655,495, an increase of $285,215$554,478 from the $37,271$101,017 net cash used during the threesix months ended MarchJune 31,30, 2025. This increase in the cash used in operating activities was primarily due to to the increase in netother assets, change in accounts payable and accrued liabilities and the decrease in loss foron 2026extinguishment thatof useddebt more cash from operations for in the current period.

Investing activities during the threesix months ended MarchJune 31,30, 2026 providedused $0,$165,000, aan decreaseincrease of $0$165,000 from the $0 provided by investing activities during during the threesix months ended MarchJune 31,30, 2025.

Financing activities during the threesix months ended MarchJune 31,30, 2026 usedprovided cash of $75,000,$367,606, aan decreaseincrease of $112,271$265,700 from the $37,271$101,906 provided by financing financing activities during the threesix months ended MarchJune 31,30, 2025. During the threesix months ended MarchJune 31,30, 2026, the Company made $75,000 $112,000 in payments on notes payable – related parties.parties, received $75,000 from notes payable, received $150,000 from notes payable – related parties and $254,606 from the sale of common stock.

Basic net income (loss) per common share is computed by dividing net income (loss), less the preferred stock dividends, by the weighted average number of common shares outstanding. Dilutive income (loss) per share includes any additional dilution from common stock equivalents, such as stock options and warrants, and convertible instruments, if the impact is not antidilutive. 14,69638,373 and 0 common share equivalents have been excluded from the diluted loss per share calculation for the three-monthsix-month periods ended MarchJune 31,30, 2026 and 2025, respectively, because it would be anti-dilutive.