Quarterly Report for Quarter Ending March 31, 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 months ended March 31, 2026 represent a transformational period for the Company, marking the first 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 $328,512 for the three months ended March 31, 2026, representing its first full quarter as a consolidated Spectral subsidiary. 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 months ended March 31, 2026 reflect both the scale of the consolidated telecommunications business and the impact of non-cash accounting charges associated with our acquisition structure. Net loss for the period was $9,405, driven primarily by a non-cash charge of $5,914 from the remeasurement of contingent consideration liabilities at fair value, $1,988 in depreciation and amortization, $1,097 in amortization of prepaid stock-based compensation, and $275 in stock option expense, collectively totaling $9,274. Excluding this non-cash charge, loss from operations was $131, reflecting integration costs and corporate overhead associated with our rapidly expanding consolidated operations.

Key Developments in Q1 2026

Proposed Acquisition of Intermatica S.p.A

On January 7, 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. The Company expects the transaction to close in the second quarter of 2026, subject to completion of due diligence and finalization of definitive agreements.

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 March 31, 2026, the Company raised $200 under this offering through the issuance of 100,000 shares at $2.00 per share.

RESULTS OF OPERATIONS

Results of Operations for the Three Months Ended March 31, 2026 and 2025

Net Revenues and Cost of Revenues

Net revenues were $328,512 for the three months ended March 31, 2026, compared to $0 for the three months ended March 31, 2025. The Company generated no revenues in Q1 2025 as neither 42 Telecom nor TVS had been acquired as of that date. Q1 2026 revenues consisted of voice termination revenues from TVS of $324,499, messaging and platform revenues from 42 Telecom Ltd. of $3,776, and platform revenues from 42 Telecom AB of $237. The revenue growth between periods reflects the transformative impact of the Company's acquisition strategy executed during 2025 and the first full quarter of consolidated operations across both subsidiaries.

Cost of revenues was $326,322 for the three months ended March 31, 2026, compared to $0 for the three months ended March 31, 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.

Gross profit was $2,190 for the three months ended March 31, 2026, representing a gross profit margin of approximately 0.7%. 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 $5,169 for the three months ended March 31, 2026, compared to $660 for the three months ended March 31, 2025, an increase of $4,509. The increase reflects the first full quarter of consolidated operations at both 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 $2,440 for the three months ended March 31, 2026, compared to $624 for the three months ended March 31, 2025, an increase of $1,816. The increase is primarily attributable to the consolidation of both 42 Telecom's and Telvantis's operating overhead during the first full quarter of combined operations, increased professional fees associated with SEC filings and expanded corporate activities in connection with the Company's planned Nasdaq Stock Market uplisting.

Wages and benefits were $741 for the three months ended March 31, 2026, compared to $36 for the three months ended March 31, 2025, an increase of $705. 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 $1,988 for the three months ended March 31, 2026, compared to $0 for the three months ended March 31, 2025. The increase 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 $1,973 and depreciation of property, plant and equipment was $15 for the three months ended March 31, 2026. The absence of depreciation and amortization in Q1 2025 reflects the fact that neither the 42 Telecom nor the Telvantis acquisition had been completed as of that date.

Other Income (expense)

Total other expense was $6,326 for the three months ended March 31, 2026, compared to $0 for the three months ended March 31, 2025. The Q1 2026 balance includes a non-cash loss of $5,914 from the change in fair value of contingent consideration related to the 42 Telecom and Telvantis acquisitions, $415 in net interest expense related to the accounts receivable financing facilities and other obligations, partially offset by other income of $3. The change in fair value of contingent consideration arose primarily from the decline in the Company's stock price from $4.13 at December 31, 2025 to $2.56 at March 31, 2026, which increased the estimated number of additional shares required under the minimum valuation guarantee provisions of the respective acquisition agreements. See Note 4 - Fair Value Measurements for further details.

Income Taxes

The Company recorded income tax expense of $100 for the three months ended March 31, 2026, compared to $0 for the three months ended March 31, 2025. The Q1 2026 tax expense reflects current tax obligations arising from the foreign operations of 42 Telecom in Malta and Sweden.

Net Loss

Net loss was $9,405 for the three months ended March 31, 2026, compared to $660 for the three months ended March 31, 2025, representing an increase in net loss of $8,745. The increase was driven primarily by the non-cash loss from the change in fair value of contingent consideration of $5,914 and increased operating expenses associated with the Company's expanded operations following the consolidation of both 42 Telecom and Telvantis, partially offset by gross profit of $2,190 generated by the telecommunications subsidiaries. Total comprehensive loss was $9,492 for the three months ended March 31, 2026, which includes $87 of foreign currency translation losses.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2026, we had cash and cash equivalents of $2,705 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, and additional debt or equity financings as needed.

The following table summarizes our cash flows for the three months ended March 31, 2026 and 2025 (in thousands):

	Three Months Ended
	March 31,
	2026		2025
Net cash used in operating activities	$(523)		$(220)
Net cash used in investing activities	$(45)		$-
Net cash provided by financing activities	$1,273		$135

Cash Used in Operating Activities

Net cash used in operating activities was $523 for the three months ended March 31, 2026, compared to $220 for the three months ended March 31, 2025. Despite reporting a net loss of $9,405, operating cash outflow was limited to $523 due to significant non-cash charges including the $5,914 change in fair value of contingent consideration, $1,973 in amortization of intangible assets, $15 in depreciation, $1,097 in amortization of prepaid stock-based compensation, and $275 in stock-based compensation expense.

Working capital movements during the three months ended March 31, 2026 were substantial but largely offsetting, reflecting the high-volume, low-margin nature of our international voice termination carrier operations. Accounts receivable increased by $237,821 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 $236,536 in accounts payable, reflecting the parallel payment terms on the supplier side of the VoIP carrier business.

Net cash used for the three months ended March 31,2025 in operating activities, $220 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 $45 for the three months ended March 31, 2026, compared to $0 for the three months ended March 31, 2025. Investing activities in Q1 2026 consisted of $39 in capitalized internally developed software costs at 42 Telecom and $6 in purchases of property, plant and equipment.

There were no investing activities for the three months ended March 31, 2025.

Cash Provided by Financing Activities

Net cash provided by financing activities was $1,273 for the three months ended March 31, 2026, compared to $135 for the three months ended March 31, 2025. The increase of $1,138 was primarily attributable to $1,073 in net borrowings under the accounts receivable financing facility and $200 in proceeds from the private placement of 100,000 shares of common stock at $2.00 per share under the offering approved by the Board of Directors on March 16, 2026.

Cash provided by financing activities for the three months ended March 31, 2025, consisted entirely of $135 in proceeds from short-term advances.

Capital Requirements and Outlook

The Company has incurred recurring net losses and has an accumulated deficit of $42,820 as of March 31, 2026. We believe that our existing cash resources, together with anticipated cash flows from our telecommunications operations and proceeds from our private placement offering, 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. 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 March 31, 2026, the aggregate contingent consideration liability was $40,753, comprising $6,614 related to the 42 Telecom acquisition and $34,139 related to the TVS acquisition. For the three months ended March 31, 2026, the Company recognized a non-cash loss of $5,914 from the change in fair value of contingent consideration, driven primarily by the decline in the Company's stock price from $4.13 to $2.56 during the quarter. 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.