SkyAI, Inc. 10-Q

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risks in the ordinary course of our business. These risks include, but are not limited to, interest-rate risk, inflation risk and risks associated with our digital-asset treasury strategy. Inflation Risk Inflation generally affects our business by increasing the cost of labor, research and development contracts and other overhead expenses. To date, we do not believe inflation has had a material effect on our results of operations for the periods presented; however, we monitor inflation trends as part of our ongoing risk assessment. Digital Asset Treasury Risk As part of our capital-allocation strategy for assets not required to provide immediate working capital for our ongoing operations, we have adopted a treasury policy focused primarily on accumulation of the SOL. 10 The price of SOL has historically been subject to dramatic fluctuations and is highly volatile. Moreover, digital assets such as SOL are relatively novel and the regulatory and accounting treatments applicable to them remain uncertain. It is possible that regulators may interpret existing laws or issue new regulations in a manner that adversely affects the liquidity or value of SOL. Any decline in the fair value of our SOL holdings below our carrying value could require us to recognize an unrealized loss, which could be material to our financial results for the applicable reporting period and cause significant volatility in our reported earnings. Any such volatility or decline in reported earnings could materially adversely affect the market price of our common stock. In addition, changes in accounting standards or interpretations relating to digital-asset holdings could have a material adverse effect on our financial results and the market price of our common stock. Because our treasury policy is highly concentrated in a single digital asset (SOL), adverse developments specific to the Solana protocol, validator network, ecosystem, or regulatory environment could disproportionately impact our financial condition and results of operations. Historically, cryptocurrency markets (including SOL) have been characterized by significant price volatility, relatively limited liquidity compared to traditional currency/commodity markets, evolving regulatory oversight, susceptibility to exchange or custody failures, cyber-security risks, protocol or network disruptions, and other risks inherent in decentralized, electronic systems. During times of market or network instability, we may not be able to liquidate our SOL holdings at favorable prices or at all or we may be unable to use our SOL holdings to raise capital (e.g., via collateralized term loans) or meet working-capital needs. If we are unable to sell our SOL or otherwise monetize our SOL holdings in a timely manner, or if we are forced to sell at a significant loss, our business and financial condition could suffer materially. Further, unlike cash or securities deposited with institutions subject to Federal Deposit Insurance Corporation (FDIC) or Securities Investor Protection Corporation (SIPC) protections, digital assets held through custodians and trading counterparties do not generally enjoy the same regulatory protections. We depend on third-party qualified custodians for our SOL holdings and expect them to employ industry-standard controls (such as cold-storage, multi-person approvals, insurance coverage, etc.). Nonetheless, the frameworks for custody of digital assets are less mature and the failure of a custodian or validator partner or protocol disruption could adversely impact our holdings. We also stake a portion of our SOL holdings through selected validators to earn staking rewards. Such staking involves a “cool-down” or un-staking period (under normal conditions we expect to regain control of unstaked SOL within approximately 48 hours, though network conditions could extend this period) which may limit our liquidity. In addition, our use of derivatives such as call and put options and total-return swaps in connection with our SOL holdings may require margin or collateral posting and could reduce available liquidity or introduce additional volatility in our cash flows. In summary, our exposure to SOL as part of our treasury strategy introduces a number of risks — market risk (price volatility), liquidity risk, operational risk (custody, staking, validator interruptions), regulatory risk, accounting risk and concentration risk — any of which could have a material adverse effect on our business, financial condition, results of operations and the market price of our common stock.