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

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

The following discussion and analysis of our financial condition and results of our operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements. The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and related notes included in this report and those in our Form 10-K for the year ended December 31, 2025 filed with the Securities and Exchange Commission on March 31, 2026.

OVERVIEW

Spectral Capital Corporation is a Nevada corporation focused on the identification, acquisition, and development of technology and telecommunications businesses. The three and six months ended June 30, 2026 represent a continuation of the transformational period for the Company, marking the second full quarter of consolidated operations across both of our telecommunications subsidiaries - 42 Telecom Ltd. ("42 Telecom"), acquired on August 1, 2025, and Telvantis Voice Services, Inc. ("TVS"), acquired on December 31, 2025.

TVS operates as an international voice over internet protocol ("VoIP") carrier providing voice termination services to telecommunications carriers and service providers globally through its subsidiaries Phonetime, Inc. and Matchcom Telecommunications, Inc. TVS contributed approximately 99% of consolidated revenues of $318,278 for the three months ended June 30, 2026 and approximately 99% of consolidated revenues of $646,790 for the six months ended June 30, 2026. 42 Telecom, operating through its subsidiaries in Malta, Sweden, and the United Kingdom, contributed the remaining approximately 1% of revenues through its messaging and platform services operations.

Our financial results for the three and six months ended June 30, 2026 reflect both the scale of the consolidated telecommunications business and the impact of non-cash accounting charges associated with our acquisition structure. Our financial results for the three months ended June 30, 2026 reflect net income of $7,387, driven primarily by a non-cash gain of $9,886 from the remeasurement of contingent consideration liabilities at fair value, which is reported within other income (expense) and is not reflected in operating results. Loss from operations was $1,857 for the three months ended June 30, 2026, which includes $2,004 in depreciation and amortization, $1,097 in amortization of prepaid stock-based compensation, and $227 in stock option expense, reflecting integration costs and corporate overhead associated with our consolidated operations.

For the six months ended June 30, 2026, we reported a net loss of $2,018, reflecting a net non-cash gain of $3,972 from the remeasurement of contingent consideration liabilities at fair value - comprising a $5,914 charge recognized during the three months ended March 31, 2026 and a $9,886 gain recognized during the three months ended June 30, 2026 - which is reported within other income (expense) and is not reflected in operating results. Loss from operations was $4,836 for the six months ended June 30, 2026, which included $3,991 in depreciation and amortization, $2,194 in amortization of prepaid stock-based compensation, and $502 in stock option expense, reflecting integration costs and corporate overhead associated with our consolidated operations.

Key Developments in Q2 2026

Proposed Acquisition of Intermatica S.p.A

On January 4, 2026, the Company entered into a binding term sheet with Intermatica S.p.A. ("Intermatica"), an Italy-based telecommunications and enterprise messaging company, for a proposed strategic transaction pursuant to which Spectral would contribute selected proprietary intellectual property and advanced software technologies in exchange for equity participation, commercial collaboration rights, and potential future consideration tied to performance milestones. As of the date of this report, no definitive agreement has been executed, the proposed transaction remains subject to completion of financial, legal and operational due diligence (including, unless waived, an audit of Intermatica's financial statements under PCAOB standards), approval by the boards of directors of both parties, and the execution of definitive agreements, and there can be no assurance that the proposed transaction will be consummated on the terms described or at all.

Nasdaq Uplisting Initiative and Private Placement

The Company continues to actively pursue a listing on the Nasdaq Stock Market as a strategic priority. On March 16, 2026, the Board of Directors approved a private placement offering of up to $1,000 in restricted shares of common stock at a price below market value, to remain open until the Company achieves a listing on the Nasdaq Stock Market. During the three months ended June 30, 2026, the Company raised $20 under this offering through the issuance of 12,500 shares at $1.60 per share on June 1, 2026, bringing the aggregate amount raised under the offering to $220 through the issuance of 112,500 shares during the six months ended June 30, 2026.

On July 17, 2026, the Company publicly filed a Registration Statement on Form S-1 with the Securities and Exchange Commission covering a proposed underwritten public offering of its common stock, with Sentinel Brokers Company, Inc. acting as representative of the underwriters. The Company has applied to list its common stock on The Nasdaq Capital Market under the symbol "FCCN." If the listing application is approved, the Company expects its common stock to be listed on Nasdaq upon consummation of the offering, at which point it will cease to be quoted on the OTCQB. There can be no assurance that the listing application will be approved or that the offering will be completed.

Issuance of Telvantis Earn-Out Shares. On May 22, 2026, based on the Acquired Company's results and accruals for the portion of fiscal year 2026 then elapsed, the Board of Directors determined that the Earn-Out Milestones under the Stock Purchase Agreement for Telvantis Voice Services, Inc., tied to the Acquired Company's revenue and operating profit during fiscal year 2026 (which will not be complete until December 31, 2026), had been achieved or duly accrued for issuance, and that the Earn-Out Shares were presently issuable in accordance with the terms of the Stock Purchase Agreement. Pursuant to that determination, the Company issued an aggregate of 6,924,700 shares of common stock to the designated recipients on May 22, 2026, as reported on the Company's Current Report on Form 8-K filed May 27, 2026. The shares were issued in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended, and are subject to lock-up, trickle-out and beneficial ownership limitation agreements. Included in that issuance were 1,041,000 shares issued on May 22, 2026 to an entity controlled by Daniel Gilcher, the Company's Chief Financial Officer, in settlement of certain obligations of Telvantis, Inc.; those shares were not compensation for services to the Company. The issuance constitutes a partial settlement of the contingent consideration liability recognized in connection with the Telvantis acquisition; the fair value of the shares issued was approximately $14,474, based on the closing price of the Company's common stock of $2.09 per share on May 22, 2026.

Termination of Snack Prompt Binding Term Sheet. Effective May 5, 2026, the binding term sheet relating to the proposed acquisition of the Snack Prompt business was terminated for failure to satisfy closing conditions, including the non-completion of due diligence. Neither party has any continuing obligations under the term sheet.

Amendment to Annual Report for the Year Ended December 31, 2024. On June 5, 2026, the Company filed Amendment No. 1 on Form 10-K/A to its Annual Report on Form 10-K for the fiscal year ended December 31, 2024 to correct management's conclusion regarding the effectiveness of internal control over financial reporting as of December 31, 2024. Because material weaknesses existed as of that date, internal control over financial reporting was not effective, and investors should not rely on the conclusion set forth in the original filing.

RESULTS OF OPERATIONS

Results of Operations for the Three and Six Months Ended June 30, 2026 and 2025

Net Revenues and Cost of Revenues

Net revenues were $318,278 for the three months ended June 30, 2026, compared to $0 for the three months ended June 30, 2025. The Company generated no revenues in the second quarter of 2025 as neither 42 Telecom nor TVS had been acquired as of that date. For the three months ended June 30, 2026 revenues consisted of voice termination revenues from TVS of $313,904, messaging and platform revenues from 42 Telecom Ltd. of $4,157, and platform revenues from 42 Telecom AB of $216, with de minimis revenue from Arcus Technologies Ltd. The revenue growth between periods reflects the continued impact of the Company's acquisition strategy executed during 2025 and the second full quarter of consolidated operations across both subsidiaries.

Net revenues were $646,790 for the six months ended June 30, 2026, compared to $0 for the six months ended June 30, 2025, for the same reason as discussed above. For the six months ended June 30, 2026 revenues consisted of voice termination revenues from TVS of $638,403, messaging and platform revenues from 42 Telecom Ltd. of $7,917, platform revenues from 42 Telecom AB of $454, and $15 related to Arcus Technologies Ltd.

Cost of revenues was $314,998 for the three months ended June 30, 2026 and $641,320 for the six months ended June 30, 2026, compared to $0 for both the three and six months ended June 30, 2025. Cost of revenues consists primarily of voice termination costs, interconnection charges, and network costs associated with TVS's VoIP carrier operations, together with messaging termination costs incurred by 42 Telecom. For the three months ended June 30, 2026, cost of revenues consisted of $311,768 from TVS, $2,370 from 42 Telecom Ltd., and $860 from 42 Telecom AB, with de minimis cost of revenue from Arcus Technologies Ltd. and 42 Telecom UK Ltd. For the six months ended June 30, 2026, cost of revenues consisted of $635,146 from TVS, $4,410 from 42 Telecom Ltd., $1,749 from 42 Telecom AB, and $14 from Arcus Technologies Ltd., with de minimis cost of revenue from 42 Telecom UK Ltd.

Gross profit was $3,280 for the three months ended June 30, 2026, representing a gross profit margin of approximately 1.0%. Gross profit was $5,470 for the six months ended June 30, 2026, representing a gross profit margin of approximately 0.8%. The gross margin reflects the nature of the international voice termination business, which is characterized by high revenue volumes and narrow per-minute margins driven by competitive market pricing. Management is focused on optimizing routing economics, customer mix, and operational efficiencies to improve gross margins over time.

Operating Expenses

Total operating expenses were $5,137 for the three months ended June 30, 2026, compared to $487 for the three months ended June 30, 2025, an increase of $4,650. Total operating expenses were $10,306 for the six months ended June 30, 2026, compared to $1,147 for the six months ended June 30, 2025, an increase of $9,159. The increase in both periods reflects the consolidation of 42 Telecom and TVS, as well as the associated corporate overhead of operating a significantly larger and more complex organization.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $2,402 for the three months ended June 30, 2026, compared to $451 for the three months ended June 30, 2025, an increase of $1,951. Selling, general and administrative expenses were $4,842 for the six months ended June 30, 2026, compared to $1,075 for the six months ended June 30, 2025, an increase of $3,767. The increase is primarily attributable to the consolidation of both 42 Telecom's and Telvantis's operating overhead, increased professional fees associated with SEC filings, the Company's Registration Statement on Form S-1 and expanded corporate activities in connection with the Company's planned Nasdaq Stock Market uplisting.

Wages and benefits were $731 for the three months ended June 30, 2026, compared to $36 for the three months ended June 30, 2025, an increase of $695. Wages and benefits were $1,472 for the six months ended June 30, 2026, compared to $72 for the six months ended June 30, 2025, an increase of $1,400. The increase reflects the consolidation of employee compensation costs at 42 Telecom and TVS following their respective acquisitions, which added staff across operations, technology, finance, and management functions. Wages and benefits expenses include gross wages and salaries, bonuses, performance-related pay, employer social insurance contributions, pensions, insurance costs, and other staff-related expenditures across the Company's operations in the United States, Malta, Sweden, and the United Kingdom.

Depreciation and amortization was $2,004 for the three months ended June 30, 2026, compared to $0 for the three months ended June 30, 2025. Depreciation and amortization was $3,992 for the six months ended June 30, 2026, compared to $0 for the six months ended June 30, 2025. The increase in both periods reflects amortization of identifiable intangible assets recognized in connection with the acquisitions of 42 Telecom and Telvantis Voice Services, Inc. and the Eliznikcomp OÜ asset purchase, as well as depreciation of property, plant and equipment acquired through the 42 Telecom acquisition. Amortization of intangible assets was $1,991 and depreciation of property, plant and equipment was $13 for the three months ended June 30, 2026; amortization of intangible assets was $3,964 and depreciation of property, plant and equipment was $28 for the six months ended June 30, 2026. The absence of depreciation and amortization in the corresponding 2025 periods reflects the fact that neither the 42 Telecom nor the Telvantis acquisition had been completed as of that date.

Other Income (expense)

Total other income was $9,417 for the three months ended June 30, 2026, compared to $0 for the three months ended June 30, 2025. The other income for the three months ended June 30, 2026 includes a non-cash gain of $9,886 from the change in fair value of contingent consideration related to the 42 Telecom and Telvantis acquisitions, $470 in net interest expense related to the accounts receivable financing facilities and other obligations, and other income of $1.

Total other income was $3,091 for the six months ended June 30, 2026, compared to $0 for the six months ended June 30, 2025. The other income for the six months ended June 30, 2026 includes a net non-cash gain of $3,972 from the change in fair value of contingent consideration, comprised of a $5,914 non-cash loss recognized during the three months ended March 31, 2026 and a $9,886 non-cash gain recognized during the three months ended June 30, 2026, $885 in net interest expense related to the accounts receivable financing facilities and other obligations, and other income of $4.

The change in fair value of contingent consideration during the three months ended June 30, 2026 arose primarily from the increase in the Company's stock price from $2.56 at March 31, 2026 to $4.60 at June 30, 2026, which decreased the estimated number of additional shares required under the minimum valuation guarantee provisions of the 42 Telecom acquisition agreement, together with the partial settlement of the Telvantis contingent consideration liability through the issuance of 6,924,700 shares of common stock on May 21, 2026. See Note 3 - Business Combinations and Note 4 - Fair Value Measurements for further details.

Income Taxes

The Company recorded income tax expense of $173 for the three months ended June 30, 2026 and $273 for the six months ended June 30, 2026, compared to $0 for both the three and six months ended June 30, 2025. The tax expense for the three and six months ended June 30, 2026 reflects current tax obligations arising from the foreign operations of 42 Telecom in Malta and Sweden.

Net Income (Loss)

Net income was $7,387 for the three months ended June 30, 2026, compared to a net loss of $487 for the three months ended June 30, 2025, representing an improvement of $7,874. The improvement was driven primarily by the non-cash gain from the change in fair value of contingent consideration of $9,886, partially offset by increased operating expenses associated with the Company's expanded operations. Total comprehensive income was $7,379 for the three months ended June 30, 2026, which includes $8 of foreign currency translation losses.

Net loss was $2,018 for the six months ended June 30, 2026, compared to $1,147 for the six months ended June 30, 2025, representing a increase in net loss of $871. The increase was driven primarily by higher operating expenses associated with the Company's expanded operations following the consolidation of both 42 Telecom and Telvantis, which more than offset the net non-cash gain from the change in fair value of contingent consideration of $3,972 and gross profit of $5,470 generated by the telecommunications subsidiaries. Total comprehensive loss was $2,113 for the six months ended June 30, 2026, which includes $95 of foreign currency translation losses.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2026, we had cash and cash equivalents of $5,267 and restricted cash of $21, compared to cash and cash equivalents of $2,087 and restricted cash of $21 as of December 31, 2025. We intend to fund our operations through cash flows generated from our telecommunications subsidiaries, proceeds from our private placement offering approved in March 2026, the proposed underwritten public offering registered on our Registration Statement on Form S-1, and additional debt or equity financings as needed.

The following table summarizes our cash flows for the six months ended June 30, 2026 and 2025 (in thousands):

		Six Months Ended
		June 30,
		2026				2025
Net cash used in operating activities		$	(1,555	)		$	(481	)
Net cash used in investing activities		$	(174	)		$	-
Net cash provided by financing activities		$	5,004			$	380

Cash Used in Operating Activities

Net cash used in operating activities was $1,555 for the six months ended June 30, 2026, compared to $481 for the six months ended June 30, 2025. Despite reporting a net loss of $2,018, operating cash outflow reflected significant non-cash charges and working capital movements, including a $3,972 non-cash gain from the change in fair value of contingent consideration, $3,964 in amortization of intangible assets, $27 in depreciation, $2,194 in amortization of prepaid expenses, $502 in stock-based compensation expense, $597 in provision for expected credit losses, and $36 in amortization of right of use assets.

Working capital movements during the six months ended June 30, 2026 were substantial but largely offsetting, reflecting the high-volume, low-margin nature of our international voice termination carrier operations. Accounts receivable increased by $82,085, driven by TVS's international voice termination billing cycles, where large volumes of traffic are invoiced to carriers on monthly payment terms. This increase was substantially offset by a corresponding increase of $78,405 in accounts payable, reflecting the parallel payment terms on the supplier side of the VoIP carrier business.

Net cash used in operating activities for the six months ended June 30, 2025 related primarily to corporate overhead and professional fees prior to the completion of the Company's telecommunications acquisitions, with no significant working capital movements.

Cash Used in Investing activities

Net cash used in investing activities was $174 for the six months ended June 30, 2026, compared to $0 for the six months ended June 30, 2025. Investing activities for the six months ended June 30, 2026 consisted of $162 in capitalized internally developed software costs at 42 Telecom and $12 in purchases of property, plant and equipment.

There were no investing activities for the six months ended June 30, 2025.

Cash Provided by Financing Activities

Net cash provided by financing activities was $5,004 for the six months ended June 30, 2026, compared to $380 for the six months ended June 30, 2025. The increase of $4,624 was primarily attributable to $4,784 in net borrowings under the accounts receivable financing facility and $220 in proceeds from the private placement of common stock under the offering approved by the Board of Directors on March 16, 2026, described further in Note 13 - Stockholders' Equity.

Net cash provided by financing activities for the six months ended June 30, 2025 consisted of $295 in proceeds from short-term advances and $85 in proceeds from the sale of common stock.

Capital Requirements and Outlook

The Company has incurred recurring net losses and has an accumulated deficit of $35,433 as of June 30, 2026. We believe that our existing cash resources, together with anticipated cash flows from our telecommunications operations, proceeds from our private placement offering and the working capital advance made by our Chief Executive Officer in July 2026, will be sufficient to fund our operations for the near term. However, we may require additional financing to fund our operations and execute our growth strategy, including in connection with the proposed Intermatica transaction and our planned Nasdaq uplisting. There can be no assurance that additional financing will be available on acceptable terms or at all, that our Registration Statement on Form S-1 will be declared effective, or that the proposed underwritten public offering will be completed. If we are unable to obtain additional financing when needed, we may be required to curtail or reduce our planned operations.

CRITICAL ACCOUNTING ESTIMATES

There have been no material changes to our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2025, except as described below.

Fair Value of Contingent Consideration

The most significant critical accounting estimate relates to the fair value measurement of contingent consideration liabilities associated with the acquisitions of 42 Telecom and TVS. These liabilities are classified as Level 3 within the fair value hierarchy and are remeasured at each reporting date using significant unobservable inputs including the Company's stock price, equity volatility, risk-free rates, projected revenues and operating profits, and a discount for lack of marketability. As of June 30, 2026, the aggregate contingent consideration liability was $16,394, comprising $932 related to the 42 Telecom acquisition and $15,462 related to the TVS acquisition, after giving effect to the partial settlement of the Telvantis contingent consideration through the issuance of 6,924,700 shares of common stock on May 22, 2026. For the three months ended June 30, 2026, the Company recognized a non-cash gain of $9,886 from the change in fair value of contingent consideration. For the six months ended June 30, 2026, the Company recognized a net non-cash gain of $3,972, comprising a $5,914 non-cash loss recognized during the three months ended March 31, 2026 and a $9,886 non-cash gain recognized during the three months ended June 30, 2026. In addition, the Company recognized a settlement of contingent consideration of $14,474 during the six months ended June 30, 2026, representing the fair value of shares issued in satisfaction of the Telvantis earn-out obligation in accordance with ASC 805-30-35-1. See Note 4 - Fair Value Measurements for further details.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.