Quarterly Report for Quarter Ending June 30, 2026 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

The statements contained in the following MD&A and elsewhere throughout this Quarterly Report on Form 10-Q, including any documents incorporated by reference, that are not historical facts, including statements about our beliefs and expectations, are "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements preceded by, followed by or that include the words "may," "could," "would," "should," "believe," "expect," "anticipate," "plan," "estimate," "target," "project," "intend" and similar words or expressions. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances are forward-looking statements.

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, as well as our Offering Circular on Form 1-A.

We caution that the foregoing list of factors is not exclusive, and new factors may emerge, or changes to the foregoing factors may occur, that could impact our business. We undertake no obligation to publicly update or revise these statements, whether as a result of new information, future events or otherwise, except to the extent required by the federal securities laws.

This discussion should be read in conjunction with our financial statements in our Annual Report on Form 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.

Introduction to Interim Financial Statements.

The interim financial statements included herein have been prepared by BluSky AI Inc. ("BluSky AI" or the "Company") without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "Commission"). Certain information and footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP") have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These interim financial statements should be read in conjunction with the financial statements and notes thereto included in this filing.

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 June 30, 2026, the results of its statements of operations for the three and six-month periods ended June 30, 2026 and 2025, and its cash flows for the six-month period ended June 30, 2026 and 2025. The results of operations for the interim periods are not necessarily indicative of the results for the full year.

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

Overview and Plan of Operation

Overview

BluSky AI Inc., is a pioneering company in AI-driven data center solutions, combining innovation with regulatory compliance and sustainability. The Company is a modular data center provider focused on high-performance computing infrastructure, strategic site selection, and operational risk management and specializing in artificial intelligence (AI) and as a Neocloud Provider. The company is dedicated to delivering state-of-the-art infrastructure and solutions tailored to meet the demands of modern AI applications and computational workloads. The Company operates with a focus on innovation, scalability, and environmental sustainability.

Previously known as Inception Mining Inc., the company underwent a significant transformation and rebranding in March 2025 to align with its new strategic direction. This change reflects BluSky AI Inc.'s commitment to advancing technology and providing unparalleled services in the data center industry. The Company is headquartered in Salt Lake City, Utah, BluSky AI Inc.

Historically, we have operated within the mining industry, serving as a consultant to mining companies and as an operator of a mine engaged in the production of precious metals. On January 12, 2023, the Company entered into an agreement through which the Company divested its ownership interest in the Clavo Rico mine, resulting in the transfer of operations to Mother Lode Mining and full control of the Clavo Rico mine asset.

Current Operations

BluSky AI Operations

Since March 1, 2025, the Company has focused its operations on artificial intelligence compute infrastructure and participating in the dynamic and expanding AI industry. The Company has plans to grow its AI operations organically within the Company. BluSky AI was established by drawing on extensive industry expertise, insights from outside experts, and a careful evaluation of current conditions in the data center markets. The innovative concept is built around a modular design that leverages existing power infrastructure. BluSky AI plans to develop multiple data center sites across various U.S. jurisdictions, with artificial intelligence (AI) focus, specifically targeting facilities with the ability to develop power capacity or utilize existing power capacities. This strategy enables a faster time to market, scalable deployment, and a cost-effective approach that meets the evolving needs of the data center market.

BluSky AI is revolutionizing the artificial intelligence compute landscape by addressing the immediate global supply shortage with a cutting-edge, turnkey solution. Our strategy centers on rapidly deployable, plug-and-play, modular compute centers on powered land assets-sites that already possess permitted energy infrastructure. This approach not only accelerates time to market but also intends to positions BluSky AI as a premier AI compute infrastructure provider dedicated to meeting the surging demand for advanced AI services.

Results of Operations

Three months ended June 30, 2026 compared to the three months ended June 30, 2025

We had a net loss of $478,109 for the three-month period ended June 30, 2026, and a net loss of $1,556,920 for the three-month period ended June 30, 2025. This change in our results over the two periods is primarily the result of a decrease in consulting expense. The following table summarizes key items of comparison and their related increase (decrease) for the three-month periods ended June 30, 2026 and 2025:

		Three Months Ended June 30,								Increase/
		2026				2025				(Decrease)
General and Administrative		$	482,102			$	1,541,189			$	(1,059,087	)
Total Operating Expenses			482,102				1,541,189				(1,059,087	)
Loss from Operations			(482,102	)			(1,541,189	)			1,059,087
Interest Income			2,173				-				2,173
Change in Derivative Liabilities			7,600				-				7,600
Change in Fair Value of Liabilities			200				-				200
Interest Expense			(5,980	)			(15,731	)			9,751
Loss before Taxes			(478,109	)			(1,556,920	)			1,078,811
Provision for Income Taxes			-				-				-
Net Loss		$	(478,109	)		$	(1,556,920	)		$	1,078,811

General and administrative expenses decreased for the three-month period ended June 30, 2026 because of a decrease in consulting, legal and investor relations expenses, compared to the three-month period ended June 30, 2025.

Changes in derivative liabilities was due to the derivative liabilities being eliminated in the current year.

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

Six months ended June 30, 2026 compared to the six months ended June 30, 2025

We had a net loss of $907,648 for the six-month period ended June 30, 2026, and a net loss of $1,381,531 for the six-month period ended June 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 decrease in the loss on extinguishment of debt. The following table summarizes key items of comparison and their related increase (decrease) for the six-month periods ended June 30, 2026 and 2025:

		Six Months Ended June 30,								Increase/
		2026				2025				(Decrease)
General and Administrative		$	896,843			$	1,687,294			$	(790,451	)
Total Operating Expenses			896,843				1,687,294				(790,451	)
Loss from Operations			(896,843	)			(1,687,294	)			790,451
Other Income (expense)			9,512				96				9,416
Interest Income			8,344				-				8,344
Change in Derivative Liabilities			14,516				186,542				(172,026	)
Change in Fair Value of Liabilities			200				-				200
Gain (Loss) on Extinguishment of Debt			(22,920	)			152,131				(175,052	)
Interest Expense			(20,457	)			(33,006	)			12,549
Loss before Taxes			(907,648	)			(1,381,531	)			473,883
Provision for Income Taxes			-				-				-
Net Loss		$	(907,648	)		$	(1,381,531	)		$	473,883

General and administrative expenses decreased for the six-month period ended June 30, 2026 because of a decrease in consulting, legal and investor relations expenses, compared to the six-month period ended June 30, 2025.

Changes in derivative liabilities was due to the derivative liabilities being eliminated in the current year.

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

Liquidity and Capital Resources

Our balance sheet as of June 30, 2026 reflects assets of $2,270,937. We had cash in the amount of $507,547 and working capital deficit in the amount of $3,231,379 as of June 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.

Working Capital

		June 30, 2026				December 31, 2025
Current assets		$	513,810			$	1,122,661
Current liabilities			3,745,189				3,416,051
Working capital deficit		$	(3,231,379	)		$	(2,293,390	)

We anticipate generating losses and, therefore, may be unable to continue operations in the future, if we don't acquire additional capital and issue debt or equity or enter into a strategic arrangement with a third party.

Going Concern Consideration

As reflected in the accompanying unaudited condensed financial statements, the Company has an accumulated deficit of $35,286,528. In addition, there is a working capital deficit of $3,231,379 as of June 30, 2026. This raises substantial doubt about its ability to continue 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.

		Six Months Ended June 30,
		2026				2025
Net Cash Provided by (Used in) Operating Activities		$	(655,495	)		$	(101,017	)
Net Cash Provided by (Used in) Investing Activities			(165,000	)			-
Net Cash Provided by (Used in) Financing Activities			367,606				101,906
Net Increase (Decrease) in Cash		$	(452,889	)		$	889

Operating Activities

Net cash flow used in operating activities during the six months ended June 30, 2026 was $655,495, an increase of $554,478 from the $101,017 net cash used during the six months ended June 30, 2025. This increase in the cash used in operating activities was primarily due to the increase in other assets, change in accounts payable and accrued liabilities and the decrease in loss on extinguishment of debt in the current period.

Investing Activities

Investing activities during the six months ended June 30, 2026 used $165,000, an increase of $165,000 from the $0 provided by investing activities during the six months ended June 30, 2025.

Financing Activities

Financing activities during the six months ended June 30, 2026 provided cash of $367,606, an increase of $265,700 from the $101,906 provided by financing activities during the six months ended June 30, 2025. During the six months ended June 30, 2026, the Company made $112,000 in payments on notes payable - related parties, received $75,000 from notes payable, received $150,000 from notes payable - related parties and $254,606 from the sale of common stock.

Critical Accounting Policies

Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles used in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management's application of accounting policies. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our financial statements is critical to an understanding of our financials.

BluSky AI Inc. ("the Company") is a publicly traded, development-stage enterprise specializing in the design, deployment, and operation of prefabricated modular data centers that deliver GPU-as-a-Service ("GPUaaS") infrastructure. Operating within the emerging NeoCloud sector, the Company is focused on scalable, energy-optimized compute solutions for AI-native and enterprise customers. As of the reporting date, the Company is pre-revenue and actively evaluating multiple development sites across diverse regulatory and utility jurisdictions.

The preparation of the Company's condensed financial statements in accordance with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses, and related disclosures. These estimates are based on historical experience, current conditions, and various other factors that management believes to be reasonable under the circumstances. Actual results may differ materially from these estimates. The Company considers the following accounting policies and estimates to be critical to the understanding of its financial statements:

Income (Loss) per Common Share

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. 38,373 and 0 common share equivalents have been excluded from the diluted loss per share calculation for the six-month periods ended June 30, 2026 and 2025, respectively, because it would be anti-dilutive.

Convertible Instruments and Embedded Features

The Company has issued convertible notes with features such as mandatory conversion triggers and variable conversion prices. These instruments are assessed, Debt with Conversion and Other Options, and, Derivatives and Hedging, to determine whether embedded features require bifurcation and separate accounting. Fair value estimates of such features, when applicable, are based on inputs and require significant judgment regarding volatility, discount rates, and probability-weighted outcomes.

Fair Value Measurements

The Company applies, Fair Value Measurement, in the valuation of non-cash transactions, including equity issuances and debt conversions. Given the Company's pre-revenue status and limited trading history, observable market inputs may be supplemented with internal valuation models to estimate the fair value of common stock and other instruments. These estimates impact the recognition of stock-based compensation, extinguishment of debt, and other equity-linked transactions.

Stock-Based Compensation

The Company will account for stock-based compensation in accordance with ASC 718, Compensation-Stock Compensation. The fair value of equity awards granted to employees, directors, and consultants is estimated on the grant date using the Black-Scholes option pricing model or other appropriate valuation techniques. Key assumptions include expected volatility, risk-free interest rate, expected term, and forfeiture rates. As a public company, the Company uses its own trading history to estimate volatility, supplemented by peer data where appropriate.

Going Concern Assessment

In accordance with ASC 205, Presentation of Financial Statements-Going Concern, the Company evaluates whether there are conditions or events that raise substantial doubt about its ability to continue as a going concern within one year from the issuance of the financial statements. This assessment includes consideration of available cash, committed financing, anticipated capital raises, and the timing of potential revenue-generating deployments. Management has concluded that, while the Company is pre-revenue, its current capital structure and financing plans indicate that the Company has substantial doubt of being able to continue as a going concern for a period of one year from the issuance of these financial statements.

Recent Accounting Pronouncements

For recent accounting pronouncements, please refer to the notes to financial statements in Part I, Item 1 of this Quarterly Report.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.