ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management’s discussion and analysis of our financial condition and results of operations (“MD&A”) should be read in conjunction with our audited consolidated financial statements as of and for the years ended December 31, 2025 and 2024, and the related notes thereto (the “Financial Statements”). Unless the context indicates otherwise, references to “Spectral,” “the Company,” “we,” “us,” and “our” in this MD&A refer to Spectral Capital Corporation and its consolidated subsidiaries. All dollar amounts are in U.S. dollars unless otherwise stated.
OVERVIEW
Spectral Capital Corporation is a technology company focused on the development, monetization, and integration of proprietary intellectual property (IP) at the convergence of artificial intelligence (AI), hybrid classical computing, and emerging quantum technologies. In August 2025, the Company completed the acquisition of 42 Telecom a global telecommunications and messaging infrastructure provider. The transaction marked a major strategic shift, transforming Spectral from a pre-revenue R&D enterprise with operations focused on the identification and development of intellectual property to a much more complex company with established revenue-generating activities. The increase in complexity of our operations also included a substantial increase in personnel related to our telecommunications businesses. Following the acquisition, 42 Telecom and its subsidiaries became wholly owned subsidiaries of Spectral. 42 Telecom provides enterprise messaging, SMS aggregation, SS7 platform access, and PaaS communication solutions to customers across Europe and other regions. As a result, Spectral’s consolidated financial results for the year ended December 31, 2025 reflect the inclusion of 42 Telecom’s operations beginning August 1, 2025. Going forward, the Company’s performance will be driven by both its AI and quantum IP development initiatives and the commercial operations of 42 Telecom and Telvantis, which provide recurring service revenues, operating cash flows, and a foundation for integrating Spectral’s proprietary technologies.
The Company’s strategic platform is organized around four core pillars:
1. The development of patentable and protectable IP;
2. The monetization of that IP through licensing arrangements and equity-based transactions;
3. The development and deployment of cost-effective software solutions derived from proprietary innovations; and
4. The acquisition and transformation of technology companies through the integration of Spectral’s IP.
Each product or service developed or acquired by Spectral is designed to derive from, reinforce, or scale one or more of these strategic growth pillars.
At the center of Spectral’s operations is its research and development capability, which identifies protectable innovations that can improve revenue and operating margins in technology businesses or which are capable of generating stand-alone licensing value. Spectral uses this intellectual property to enhance its current businesses and to identify future businesses whose operations and profits might be enhanced by the integration of Spectral’s technology. Spectral also has an intellectual property licensing capability which enables third-party enterprises to incorporate
Spectral-developed technologies into their own products and platforms. These licensing arrangements are intended to include a mix of upfront cash payments and equity participation, providing both near-term revenues and longer-term upside aligned with the growth of Spectral’s partners. The licensing model is especially attractive to companies operating in sectors such as artificial intelligence, cybersecurity, autonomous systems, logistics, and advanced data analytics, where integration of cutting-edge algorithms and architectures can provide meaningful competitive differentiation.
As of the date of this filing, Spectral has identified over 900 patentable innovations in various stages of research, and development in a broad array of emerging technology fields, with particular concentration at the intersection of artificial intelligence and quantum computing. These applications span innovations in quantum-enhanced machine learning, secure multiparty computation, hybrid neural architectures, synthetic training data generation, and autonomous system optimization. In connection with the Company’s acquisition of 42 Telecom, Spectral intends to license a portfolio of 31 of these patent applications to 42 Telecom, thereby enabling the integration of advanced messaging infrastructure with proprietary Spectral technologies for commercial deployment.
In addition, Spectral is actively commercializing a growing suite of modular, AI-enhanced software products. These tools are designed for rapid deployment and include applications for secure data search, model optimization, pattern recognition, and probabilistic reasoning. These software offerings are particularly well-suited for enterprise customers seeking to improve decision-making, reduce compute overhead, and expand analytical capabilities without incurring major infrastructure costs. In many cases, the Company’s hybrid AI-quantum approaches offer material performance advantages over conventional software.
The Company is also in the R&D phase of developing an intelligent cloud compute environment optimized for high-dimensional AI and quantum-inspired workloads. This platform is being designed to integrate decentralized edge computing with scalable hybrid architectures, with a focus on low latency, high data privacy, and flexible deployment options. Target customers include enterprise and government clients with mission-critical or regulated workloads. The service is intended to support quantum-enhanced simulation, ultra-secure computation, and real-time distributed intelligence.
Spectral also pursues a targeted acquisition strategy focused on underperforming or undercapitalized technology businesses that can be revitalized through integration of Spectral’s IP and computing capabilities. Following acquisition of a particular company, Spectral deploys its proprietary innovations into the acquired business’s operations, driving improvements in revenue growth, margins, and overall market relevance. This transformation model is designed to generate both operational gains and strategic monetization opportunities through future joint ventures, divestitures, or public offerings.
Collectively, Spectral’s integrated approach to IP creation, software development, licensing, and acquisition positions the Company to generate diversified revenue streams while expanding the impact of its technology across multiple sectors.
While the Company believes its business model and proprietary technologies present significant long-term potential, it currently operates with limited financial resources and has not secured reliable capital sources to support ongoing operations. As such, unlike better-capitalized competitors with established revenue streams, operational scale, and customer networks, Spectral’s ability to develop and commercialize its technologies remains subject to continued access to funding and capital markets.
Key Developments in the Year Ended December 31, 2025
During the year ended December 31, 2025, Spectral Capital Corporation advanced a series of strategic, operational, and research initiatives in furtherance of its goal to build a differentiated technology platform at the intersection of artificial intelligence, quantum computing, and hybrid computational systems. The Company’s activities during the year reflect a continued focus on intellectual property development, disciplined capital allocation, and the strengthening of governance and commercialization infrastructure.
Acquisition of 42 Telecom Limited
On August 1, 2025, Spectral completed the acquisition of 42 Telecom, a global provider of enterprise messaging infrastructure. The acquisition closed following the execution of a Closing Certificate confirming the satisfaction of all conditions in the Definitive Share Exchange Agreement signed July 15, 2025.
Under the agreement, Spectral acquired 100% of 42 Telecom’s issued and outstanding shares in exchange for 8 million shares of Spectral common stock, with an additional 8 million shares placed in escrow. The escrow shares are releasable based on 42 Telecom's consolidated net profit for the year ended December 31, 2025, with up to 1,000,000 escrow shares released for each $1,000,000 of net profit above a $1,000,000 threshold, up to the maximum of 8,000,000 escrow shares in aggregate.
The integration of Spectral’s innovations—focused at the intersection of artificial intelligence and quantum computing—positions 42 Telecom to evolve into a global platform with transformative capabilities. These innovations include both patentable innovations as well as trade secrets that can enhance operating efficiency, lower costs and increase product capabilities. By embedding Spectral’s proprietary technologies into 42 Telecom’s existing messaging infrastructure, the company can unlock levels of intelligent automation, fraud prevention, predictive engagement, and dynamic routing. These enhancements are expected to lower operating costs, optimize traffic monetization, and enable sophisticated enterprise-grade CRM and customer engagement features tailored for the U.S. market. With scalable, AI-driven personalization and quantum-secure communications layered into its SMS platform, 42 Telecom Ltd. can potentially differentiate itself in the high-margin U.S. enterprise segment, capturing market share from legacy providers and accelerating growth through value-added, low-latency API integrations for marketing, support, and behavioral analytics applications.
Telecom 42 provides international telecommunications and messaging solutions. Its activities include SMS aggregation, enterprise messaging, OTT messaging (including Viber traffic), access to proprietary SS7 and messaging platforms, and subscription-based communication solutions. Through Arcus Technologies Ltd, Telecom 42 Telecom also offers platform-as-a-service solutions tailored for the tourism sector. Telecom 42 serves a global customer base consisting primarily of mobile network operators and enterprises.
Telecom 42 generates revenue from following streams:
• Messaging Services – includes SMS aggregation, enterprise messaging, and instant messaging. Revenue from these services is recognized at a point in time when each message or lookup is successfully processed and transmitted.
• Platform Services – includes SS7 platform access (see below), managed services provided to related parties, and the Arcus tourism platform-as-a-service. Revenue from these services is recognized over time, as customers receive and consume the benefits of continuous access or managed service delivery. Signaling System No. 7 (SS7) network, is the global signaling backbone used by telecom operators to set up, manage, route, and bill calls and messages between networks.
Patent Portfolio Expansion
During the year, the Company continued to build out its global intellectual property portfolio with the identification and development of new potentially patentable innovations across a range of advanced technologies, including artificial intelligence, quantum computing, and autonomous systems. These innovations support Spectral’s core commercialization strategy, which is centered on licensing, productization, and strategic joint ventures based on the strength of the intellectual property portfolio. The patentable innovations identified and developed during the quarter span both U.S. and international jurisdictions and are closely aligned with high-growth sectors in which Spectral is actively engaged. As of December 31, 2025 the Company had filed or prepared more than 500 patent applications, with additional filings anticipated in the coming quarters.
Scientific Research and Innovation Pipeline
In addition to its active filings, the Company advanced foundational research that has produced a pipeline of more than 400 additional patentable innovations. These innovations—currently in various stages of internal validation, refinement, and drafting—cover a broad array of novel system architectures, signal processing methods, applied machine learning models, and quantum-photonic integration techniques. The Company expects to continue phased filings of these innovations throughout 2026. This pipeline positions Spectral as a potential long-term partner to corporate, academic, and governmental institutions seeking frontier innovation in complex computational environments.
Strategic Consultant Engagements
During the quarter, Spectral deepened its engagement with several senior scientific and commercial consultants with expertise in intellectual property development, deep tech commercialization, and regulatory strategy. These consultants—who include former engineers, patent counsel, and executives from major firms in AI, semiconductors, and quantum computing—have materially contributed to the Company’s R&D velocity and patent quality. Their input has strengthened Spectral’s claim construction, accelerated the innovation capture process, and provided market insights that enhance the Company’s strategic positioning in global IP and commercialization frameworks.
Rescission of Brehm Transactions and Preservation of Core IP
In the second quarter of 2025, the Company successfully completed the rescission of several previously disclosed transactions involving former Chairman Sean Michael Brehm and his affiliated entities. These rescinded transactions—originally structured around entry into the semiconductor markets—were determined to be misaligned with Spectral’s long-term strategic and fiduciary priorities. As a result of the rescission, Spectral preserved full rights to its independently developed IP portfolio, clarified title to over 100 provisional patent applications, and canceled approximately $100 million in share-based consideration in the form of the return to treasury of preferred stock by Sean Brehm based on the common stock value as converted at that time. This action improved governance posture, eliminated potential sources of dilution, and reaffirmed the integrity of the Company’s intellectual property strategy.
Agreement with Intrepid View Partners-Cancellation
On May 30, 2025, Spectral Capital Corporation entered into a Restated Share Transfer Agreement with Intrepid View Partners, LP, pursuant to which Spectral acquired 1,698,890 restricted common shares of a leading global autonomous vehicle company (the “WAV Company”) known for its next-generation, AI-driven approach to assisted and automated driving. The total consideration for the transaction was $16,988,900, payable in the form of 1,698,890 restricted shares of Spectral common stock valued at $10.00 per share. The acquired WAV shares are subject to a 12-month holding period and a three-year transfer restriction, mirroring restrictions on the Spectral shares issued in consideration. The transaction reflects Spectral’s continued strategy of leveraging its equity to gain exposure to transformative technologies in adjacent high-growth sectors, and was executed following restatement of a prior agreement to reflect recent corporate developments and updated disclosures. As of December 31, 2025, there has been no accounting recognition associated with the Restated Share Transfer Agreement. The Company elected to cancel this transaction as of March 11, 2026, as it decided to focus on data infrastructure businesses rather than autonomous vehicles. The parties have no remaining obligations to each other, and Spectral will not be issuing any of its shares nor will it be receiving shares of WAV.
Eliznikcomp OÜ - Asset Purchase (October 2025). On October 15, 2025, Spectral entered into an Asset Purchase Agreement with Eliznikcomp OÜ, an Estonian corporation, pursuant to which Spectral acquired all right, title, and interest in twenty-one (21) patentable innovations related to native artificial intelligence operating systems developed in a Linux environment, FPGA optimization processes, and security and multi-application remote synchronization technology. As consideration, Spectral issued 9,000,000 shares of its common stock to the shareholders of Eliznikcomp. The transaction was structured as a taxable asset purchase. The acquired intellectual property has been recorded as §197 intangible assets and are being amortized over their respective estimated useful life for book purposes and over fifteen years for tax purposes.
Snack Prompt Corp. - Binding Term Sheet (October 2025). On October 3, 2025, Spectral entered into a Binding Term Sheet with Snack Prompt, a Delaware corporation, for the acquisition of 100% of the issued and outstanding capital stock of Snack Prompt. As consideration, Spectral agreed to issue up to 10,000,000 shares of its common stock, consisting of 1,500,000 initial shares and up to 8,500,000 earn-out shares. The transaction is subject to customary closing conditions, including delivery of financial statements audited under PCAOB standards, completion of due diligence, board approval, and execution of a definitive Stock Purchase Agreement. Spectral also committed to invest up to $5,000,000 into the Snack Prompt business unit upon satisfaction of certain conditions. The transaction had not closed as of December 31, 2025. To date, Spectral has not received required diligence materials from Snack Prompt and management believes it is substantially likely to terminate this transaction.
MultiCortex, LLC / Toroa, LLC - Binding Term Sheet (October 2025). On October 4, 2025, Spectral entered into a Binding Term Sheet with MultiCortex for the acquisition of 100% of the issued and outstanding equity of MultiCortex. As consideration, Spectral agreed to issue up to 10,000,000 shares of its common stock, consisting of 1,500,000 initial shares and up to 8,500,000 earn-out shares. Spectral also committed to invest up to $15,000,000 into the MultiCortex business unit upon satisfaction of certain conditions, including completion of an audit of MultiCortex financial statements under PCAOB standards and Spectral’s uplisting to the NASDAQ. Subsequent to year end, the Binding Term Sheet was terminated due to the failure to satisfy closing conditions, including the non-completion of due diligence. The termination was effective as of the date of the termination notice in 2026, and neither party has any continuing obligations under the term sheet.
Agreement with Telvantis Voice Services
On September 29, 2025, Spectral entered into a binding term sheet with Telvantis, a Florida corporation, pursuant to which Spectral will acquire 100% of the issued and outstanding capital stock of Telvantis (the “Transaction”). Pursuant to the term sheet, the consideration consists of 10,000,000 shares of common stock of Spectral, including:
· 1,500,000 initial shares issued at closing; and
· up to 8,500,000 additional earn-out shares, subject to performance milestones.
Telvantis shareholders may earn the additional shares if Telvantis achieves certain 2026 operating profit and/or revenue milestones, including:
· $10,000,000 annualized operating profit, or
· $665,000,000 in annualized revenue at comparable margins.
The shares will be subject to a 12-month lock-up period, with potential extension or cancellation if performance milestones are not met. Closing of the Transaction is subject to customary conditions, including: completion of due diligence, delivery of audited financial statements prepared under U.S. GAAP and audited by a PCAOB-registered accounting firm, and board approvals of both parties.
Closing of Telvantis Transaction
On December 31, 2025, Spectral completed the acquisition of 100% of the issued and outstanding capital stock of Telvantis, pursuant to a definitive Stock Purchase Agreement dated December 29, 2025, by and between Spectral and Telvantis, formerly Raadr, Inc., the sole shareholder of Telvantis. At the closing of the transaction, Spectral issued 1,500,000 shares of its common stock to the seller as initial consideration, with the right to issue up to an additional 8,500,000 shares of common stock subject to the achievement of specified post-closing performance milestones related to revenues and operating profitability. The shares issued and issuable in connection with the transaction are subject to contractual lock-up, resale, earn-out, and beneficial ownership limitation provisions, including a 4.9% ownership cap per holder. The transaction is intended to qualify as a tax-free reorganization under Section 368(a)(1)(B) of the Internal Revenue Code. The acquisition will be reflected in the Company’s consolidated financial statements beginning in the first quarter of fiscal year 2026, and the Company is in the process of completing the allocation of the purchase price and related accounting adjustments.
Subsequent Event-Agreement with Intermatica S.p.A.
On January 7, 2026, Spectral entered into a binding term sheet with Intermatica S.p.A., (“Intermatica”) an Italy-based telecommunications and enterprise messaging company, outlining a proposed strategic transaction pursuant to which Spectral would contribute selected proprietary intellectual property and advanced software technologies in exchange for a combination of equity participation, commercial collaboration rights, and potential future consideration tied to performance milestones. The contemplated transaction was structured to enable Intermatica to integrate Spectral’s AI-enabled and advanced analytics technologies into its existing telecommunications and messaging platforms, with a focus on improving network efficiency, service differentiation, and margin performance, while providing Spectral with exposure to Intermatica’s established European operating footprint and customer relationships. Spectral would issue 5,000,000 shares of its common stock at closing, subject to an escrow, buy-back, and standstill arrangement designed to ensure a minimum liquidity value of $40.0 million for the issued
shares, with Spectral retaining rescission rights if specified performance milestones are not achieved. The transaction also contemplates the issuance of up to an additional 5,000,000 earn-out shares over a three-year period based on Intermatica’s achievement of defined free cash flow thresholds, subject to customary caps and a 4.9% ownership limitation per Intermatica shareholder. The proposed acquisition remains subject to completion of financial and legal due diligence, including an audit of Intermatica’s financial statements under PCAOB standards (or waiver thereof), execution of definitive transaction documents, and satisfaction of customary closing conditions, and there can be no assurance that the transaction will be consummated on the terms described or at all.
Platform and Operations
Intellectual Property Development
At the core of Spectral’s business model is the development of a defensible and forward-looking intellectual property portfolio, particularly at the intersection of artificial intelligence, quantum computing, and hybrid classical architectures. During the 12-month period ended December 31, 2025, Spectral continued its aggressive IP development efforts, filing patent applications across a broad array of emerging technology domains. These protectable innovations are strategically aligned with enterprise, defense, and advanced infrastructure applications. As of the date of this Annual Report on Form 10-K, Spectral had filed or prepared over 500 utility and provisional patent applications and anticipates continued momentum in this area throughout 2026.
Scientific Research and Innovation Pipeline
In parallel with its formal filings and developed applications as well as its growing library of innovations protectable as trade secrets, the Company advanced a growing internal pipeline of over 400 additional patentable innovations, now in various stages of validation, drafting, and scheduling for submission or protection as trade secrets. These inventions cover a range of advanced system architectures, signal optimization methods, photonic-qubit integration techniques, and AI models optimized for quantum-accelerated platforms. This pipeline is the result of sustained internal research and reflects Spectral’s long-term commitment to frontier innovation. The Company views this scientific foundation as a key strategic asset supporting future licensing, spinouts, and co-development with academic, corporate, and governmental partners globally. The Company has a goal to exceed 1000 protectable innovations by the end of 2026.
IP Monetization and Licensing Strategy
Spectral continues to execute on its IP monetization strategy through the negotiation and structuring of licensing agreements that generate both near-term and long-term value. These agreements often combine equity participation and cash components, enabling Spectral to capture immediate upside and longer-term alignment with its licensees’ success. During the quarter, Spectral intends to license a portfolio of 31 patent applications to 42 Telecom that Spectral hopes will improve the financial performance of 42 Telecom. The process of applying its technologies to enhance the performance of its acquired companies is a part of Spectral’s approach to embedding proprietary technologies into operational platforms to enhance revenue and scalability, while preserving core IP ownership. Other technologies may be co-developed by Spectral and the operating subsidiaries.
Strategic Consultant Engagements
During the quarter, Spectral expanded its engagement with senior consultants in the fields of quantum computing, AI architecture, IP law, and regulatory strategy. These experts—many of whom have backgrounds at top-tier technology firms and government institutions—have
contributed to accelerating Spectral’s internal R&D velocity, enhancing the defensibility of its claims, and supporting global IP protection efforts. Their input also informs strategic decisions around commercialization pathways, licensing jurisdictions, and potential regulatory implications of Spectral’s core technologies.
During the year, Spectral rescinded the Sean Brehm transactions, as described herein, and as a result Spectral developed new and independent expertise in quantum computing and new patents and innovations within the area of distributed quantum ledger databases and related technologies.
Integrated Growth Platform
Spectral’s four-pillar platform—comprising IP development, licensing, software productization, and acquisition—forms a tightly integrated and capital-efficient growth model. Each element reinforces the others: IP creation fuels product development and licensing; products validate market applications; and acquisitions provide pathways for embedding Spectral’s technology into operating businesses. The platform is designed to be agile, scalable, and high-leverage—enabling Spectral to expand its footprint without requiring extensive fixed infrastructure or deep operational overhead. As the Company matures from R&D-centric roots into a commercial-stage enterprise, this structure supports repeatable value creation and strategic optionality.
Market Position and Strategy
Spectral is building a differentiated market position at the convergence of artificial intelligence, hybrid classical computing, and quantum-enhanced infrastructure. Unlike companies that focus on narrow-point technologies—such as isolated quantum processor development or large-scale cloud infrastructure—Spectral is constructing a vertically integrated platform anchored in proprietary intellectual property and extensible across industries. This approach combines rigorous scientific research, modular software product development, and value-accretive acquisitions to create a scalable, capital-efficient growth engine.
The Company’s strategy is structured around four mutually reinforcing pillars:
1. The ongoing development of a defensible portfolio of patents and trade secrets;
2. The monetization of that IP through cash and equity-based licensing agreements;
3. The creation of high-utility software products that generate measurable ROI for enterprise users; and
4. The acquisition or investment in companies where Spectral’s technologies can be integrated to unlock margin expansion, growth, and long-term strategic value.
As of the date of this filing, Spectral had filed or prepared over 500 patent applications, with a further 400+ inventions in active development. The Company intends to license 31 of these patents to 42 Telecom.
Spectral operates in a rapidly evolving landscape marked by increased demand for secure, high-performance, and energy-efficient computational capabilities. By focusing on critical domains such as cybersecurity, logistics, simulation, and real-time analytics, Spectral is positioned to meet urgent real-world needs—particularly in sectors requiring high-dimensional or low-latency compute. Through its hybrid AI-quantum architecture and software-first deployment strategy, the Company aims to minimize customer onboarding friction while preserving technological defensibility.
To support this strategy, Spectral has formalized relationships with senior advisors and consultants specializing in quantum systems, IP commercialization, and regulatory frameworks. These experts complement the Company’s internal innovation engine and inform its ongoing technology, licensing, and go-to-market strategies. Spectral’s integrated platform—rooted in invention, monetization, and transformation—positions the Company to lead in the emerging category of AI- and quantum-enabled enterprise infrastructure.
Outlook
As of the date of this Annual Report on Form 10-K, Spectral enters 2026 with a clear strategic mandate: to commercialize its expanding intellectual property portfolio, scale licensing and product operations, and deploy its integrated platform across a growing number of industry verticals. The Company’s immediate priorities include executing new licensing agreements, validating its proprietary software products through pilot deployments, and completing follow-on filings from its internal innovation pipeline of over 400 additional inventions.
Spectral plans to sign a definitive agreement and hopes to close the Intermatica acquisition as well as develop additional in-house research and development capabilities. These developments support the growth of Spectral’s revenue generating operations as well as its research and development activities.
Spectral’s medium-term outlook is shaped by rising demand for AI- and quantum-enhanced solutions in sectors such as cybersecurity, predictive modeling, and advanced logistics. By offering modular, scalable, and capital-light access to complex computational technologies, Spectral intends to reduce adoption barriers while delivering strategic capabilities to enterprise and government clients. Its IP-first model and hybrid deployment architecture are designed to produce rapid ROI and defensibility across a range of verticals.
Looking ahead, the Company remains committed to disciplined innovation and strategic expansion. Spectral continues to evaluate potential joint ventures, spinouts, co-development partnerships, and other strategic alternatives that support commercialization while maintaining optionality. Management is focused on optimizing shareholder value while balancing bold technological advancement with prudent financial and operational execution.
CONSOLIDATED RESULTS OF OPERATIONS
Results of Operations for the Years Ended December 31, 2025 and 2024
Net Revenues and Cost of Revenues
Net revenues were $21,839,868 for the year ended December 31, 2025, consisting of $14,551,774 in third-party revenue and $7,288,094 in related-party revenue derived from the operations of 42 Telecom and its subsidiaries following the acquisition closing on August 1, 2025. Telvantis was consolidated as of December 31, 2025 but contributed no revenues for the year ended December 31, 2025. The Company did not generate revenues for the year ended December 31, 2024.
Cost of revenue for the year ended December 31, 2025 was $18,956,178, consisting of $11,652,662 in third-party cost of revenue and $7,303,516 in related-party cost of revenue, derived from the operations of 42 Telecom and its subsidiaries following the acquisition closing on August 1, 2025. The Company had no cost of revenue for the year ended December 31, 2024.
Gross profit was $2,883,690, representing a gross profit margin of approximately 13.2%.
Operating Expenses
Total operating expenses were $5,811,830 for the year ended December 31, 2025, compared to $3,004,948 for the year ended December 31, 2024, an increase of $2,806,882. The increase was primarily driven by the consolidation of 42 Telecom’s operations and the expansion of the Company’s corporate infrastructure in connection with its growth strategy.
Selling, general and administrative expenses were $3,187,054 for the year ended December 31, 2025, compared to $2,115,924 for the year ended December 31, 2024. The increase of $1,071,130 was primarily attributable to the addition of 42 Telecom’s operating overhead, increased professional fees associated with SEC filings, audit and legal costs related to business combinations, and expanded corporate activities in connection with the Company’s planned NASDAQ uplisting.
Wages and benefits expenses were $1,026,034 for the year ended December 31, 2025, compared to $144,000 for the year ended December 31, 2024. The increase of $882,035 was primarily due to the acquisition of 42 Telecom in August 2025, which added staff across operations, technology, and management functions. Wages and benefit expenses include gross wages and salaries, bonuses, performance-related pay, employer social insurance contributions, pensions, insurance costs, and other staff-related expenditures.
Depreciation and amortization was $1,598,742 for the year ended December 31, 2025, compared to $0 for the year ended December 31, 2024. The increase reflects amortization of identifiable intangible assets recognized in connection with the acquisitions of 42 Telecom and Eliznikcomp OÜ, as well as depreciation of property, plant and equipment acquired through the 42 Telecom acquisition.
Research and development expenses were $0 for the year ended December 31, 2025, compared to $745,024 for the year ended December 31, 2024. During 2024, R&D expenses related primarily to the acquisition of the Node Nexus technology, which was subsequently rescinded. In 2025, the Company’s technology activities consisted primarily of patent application preparation and filing costs, which are not research and development activities.
Other Income (Expense)
Total other income was $3,349,000 for the year ended December 31, 2025, compared to total other expense of $(265,596) for the year ended December 31, 2024. The 2025 balance includes a $3,387,266 gain from the change in fair value of contingent consideration related to the 42 Telecom acquisition, partially offset by $5,573 in interest expense and $32,693 in other expenses. The 2024 other expense consisted entirely of a $265,596 loss on extinguishment of debt.
Income Taxes
The Company recorded an income tax benefit of $(497,495) for the year ended December 31, 2025, compared to $0 for the year ended December 31, 2024. The 2025 tax benefit reflects the net effect of foreign income taxes in Malta and Sweden on 42 Telecom’s profitable operations, offset by a U.S. federal deferred tax benefit arising from the recognition of deferred tax liabilities in connection with the business combinations.
Net Income
Net income was $918,355 for the year ended December 31, 2025, compared to net loss of $(3,270,544) for the year ended December 31, 2024, representing an improvement of $4,188,899. The improvement was driven by the revenue and gross profit contributions from 42 Telecom’s operations and the non-cash gain from the change in fair value of contingent consideration, partially offset by increased operating expenses associated with the Company’s expanded operations and corporate infrastructure. Total comprehensive income was $1,050,906 for the year ended December 31, 2025, which includes $132,551 of foreign currency translation gains.
Revenue Concentration
For the year ended December 31, 2025, two customers individually accounted for 10% or more of the Company’s consolidated revenues. One customer accounted for approximately 35.7% of consolidated revenues. Mexedia SpA, a related party, accounted for approximately 33.0% of consolidated revenues. See Note 11 - Related Party Transactions for further details regarding the Company's transactions and balances with Mexedia SpA. The loss of either of these customers could have a material adverse effect on the Company’s results of operations, cash flows and financial condition.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2025, the Company had cash and cash equivalents of $2,087,400 and restricted cash of $21,174, totaling $2,108,574, compared to $107,475 as of December 31, 2024. The increase of $2,001,099 was primarily attributable to cash acquired through the acquisition of 42 Telecom and Telvantis, proceeds from equity financings, and short-term borrowings, partially offset by cash used in operations and transaction-related expenses.
Year Ended
December 31,
Net cash used in operating activities
Net cash provided by investing activities
Net cash provided by financing activities
Cash used in operating activities
Net cash used in operating activities was $(1,487,560) for the year ended December 31, 2025, compared to $(1,653,959) for the year ended December 31, 2024. The 2025 operating cash flows reflect net income of $918,355 adjusted for the significant non-cash items, $(3,387,266) non-cash gain from the change in fair value of contingent consideration, $(1,042,689) in deferred tax adjustments, $1,572,441 in amortization of intangible assets, $1,077,319 in stock-based compensation, $350,224 in common stock issued for professional and marketing services, $26,302 in depreciation of property, plant and equipment, $23,320 in amortization of right-of-use assets, and $12,995 in bad debt expense.
Changes in working capital reflected the consolidation of 42 Telecom's operations and included increases in accounts payable of $3,882,906, accounts payable to related parties of $5,645,743, due to/from related party $163,922, accrued expenses of $841,566, and contract liabilities of $84,806, partially offset by increases in accounts receivable of $(5,646,523), contract assets of $(5,641,421), prepaid expenses and other current assets of $(282,650), and other receivables including related party of $(9,431), deferred tax liability of $(65,662), and operating lease liabilities of $(11,817).
Cash from investing activities
Net cash provided by investing activities was $1,190,6214 for the year ended December 31, 2025, compared to $0 for the year ended December 31, 2024. The 2025 investing activities consisted primarily of $1,391,391 in cash and restricted cash acquired through business combinations, partially offset by $40,399 in purchases of property, plant and equipment and $160,371 in software development capitalization.
Cash from financing activities
Net cash provided by financing activities was $2,165,487 for the year ended December 31, 2025, compared to $1,761,194 for the year ended December 31, 2024. The 2025 financing activities consisted primarily of $1,834,970 in proceeds from the sale of common stock, $331,432 in net proceeds from the accounts receivable financing facility with Fasanara, partially offset by $915 in loan repayments. For the year ended December 31, 2025, foreign currency translation had a favorable effect of $132,551 on cash and cash equivalents, reflecting the impact of changes in the Euro and Swedish Krona exchange rates relative to the U.S. dollar during the year. Subsequent to year-end, on March 13, 2026, the Company completed a private placement of 100,000 shares of common stock at $2.00 per share for aggregate proceeds of $200,000
Going Concern
As of December 31, 2025, the Company had cash and cash equivalents of $2,087,400 and an accumulated deficit of $(33,415,041). Total current liabilities of $102,018,696 exceeded total current assets of $59,451,611, resulting in a working capital deficit of $(42,567,085). Included within current liabilities is $34,838,484 of contingent consideration arising from the acquisitions of 42 Telecom and Telvantis. Pursuant to the terms of the respective acquisition agreements, the contingent consideration obligations are settleable solely through the issuance of shares of the Company's common stock upon achievement of specified performance conditions. Accordingly, the contingent consideration does not represent a cash funding requirement of the Company. Excluding contingent consideration, the working capital deficit was $(7,728,601).
The Company has incurred recurring losses from operations and has not yet generated consistent positive cash flows from operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern within one year after the date that these financial statements are issued.
Management's plans to address the going concern conditions include continued revenue generation from the operations of 42 Telecom and Telvantis, utilization of the receivables financing arrangements with Fasanara Securitisation S.A. to support near-term working capital needs, the pursuit of additional equity capital through the Company's planned NASDAQ uplisting and related capital raise, and continued moderation of discretionary expenditures. There can be no assurance that the Company will be successful in executing these plans or in obtaining sufficient additional financing on acceptable terms.
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. For further discussion of the going concern assessment and management's plans, see Note 2 — Going Concern to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
PLAN OF OPERATIONS
Overview and Strategic Evolution
Spectral Capital Corporation operates as a technology-focused holding and operating company that combines proprietary research and development, intellectual property creation, and direct participation in revenue-generating operating businesses. Spectral has operated continuously as an operating company, however, prior to 2025, the Company’s operations were primarily research- and development-oriented and centered on the creation, refinement, and protection of intellectual property, including software, algorithmic, and data-driven technologies. During this earlier phase, Spectral devoted substantial management attention and capital resources to internal development efforts, experimentation, and patent strategy. While these activities resulted in the creation of intellectual property assets and technical expertise, the Company’s earlier software products achieved limited commercial traction, and operating revenues were modest.
Beginning in 2025, Spectral initiated a strategic transition toward a more diversified operating model that combines intellectual property development with direct ownership and operation of businesses that maintain established customer relationships and recurring revenues. This transition reflects management’s assessment that long-term value creation is best achieved by pairing technology development with operating platforms that can generate cash flow independently, while also providing practical environments in which Spectral’s technologies may be deployed, tested, and refined. As a result, Spectral now operates as a hybrid organization that integrates research and development, intellectual property strategy, and traditional commercial operations.
Acquired Businesses and Commercial Foundation
A central component of Spectral’s current plan of operations is the ownership and operation of technology-enabled businesses that provide services directly to customers and are not exclusively dependent on the commercialization of Spectral’s proprietary intellectual property. These businesses generate revenues through established commercial offerings and customer contracts, creating a financial foundation that supports ongoing operations and future growth.
Through its telecommunications and communications-platform operations, including the business acquired in 2025, Spectral provides services such as enterprise messaging, SMS aggregation, SS7
platform access, routing, and related communications infrastructure solutions. These services are offered to enterprise customers, aggregators, and service providers across multiple jurisdictions. The telecommunications operations are characterized by recurring usage-based revenues, ongoing customer relationships, and operational complexity involving network performance, routing efficiency, regulatory compliance, and fraud mitigation.
The Company’s plan of operations emphasizes maintaining and expanding these operating businesses by focusing on customer retention, service reliability, regulatory compliance, and selective expansion into new markets or service offerings. Management intends to prioritize disciplined operational execution, including cost management, margin optimization, and investment in systems and personnel necessary to support scalable operations.
Role of Intellectual Property and Technology Development
While Spectral’s operating businesses are not exclusively dependent on its intellectual property portfolio, proprietary technologies remain an important component of the Company’s long-term strategy. Spectral continues to invest in research and development activities focused on artificial intelligence, data analytics, automation, and advanced computing approaches, including quantum-adjacent and hybrid computing concepts. These efforts are intended to produce technologies that can be deployed internally within Spectral’s operating businesses, licensed to third parties, or used to enhance the value of future acquisitions.
Management views intellectual property as a strategic asset that can complement and enhance operating performance rather than as the sole driver of revenue. For example, AI-enabled analytics, routing optimization tools, automation software, and fraud detection systems may be integrated into telecommunications operations to improve efficiency, reduce costs, enhance service quality, and support margin expansion. At the same time, Spectral may pursue external licensing or strategic partnerships where appropriate, although there can be no assurance that such arrangements will materialize.
Spectral’s intellectual property strategy includes a combination of patent filings, provisional patent applications, and trade secret protection. In certain cases, the Company may determine that maintaining technologies as trade secrets provides greater long-term protection than public disclosure through the patent process. This approach requires robust internal controls, confidentiality measures, and contractual protections, and involves inherent risks, including the potential for independent development or unauthorized disclosure.
Integration of Acquisitions
An important element of Spectral’s plan of operations is the integration of acquired businesses into a cohesive operating platform. Management intends to focus on integrating systems, processes, personnel, and reporting functions while preserving the customer relationships and operational expertise of acquired entities. Integration efforts may include aligning financial reporting, implementing centralized controls, rationalizing vendor relationships, and selectively deploying shared technologies across business units.
Spectral expects that integration activities will require significant management attention and resources and may involve operational challenges, including cultural differences, system incompatibilities, and transitional inefficiencies. The Company’s plan of operations emphasizes a measured approach to integration, prioritizing continuity of service and customer satisfaction while gradually implementing operational improvements.
Growth Strategy and Future Acquisitions
Spectral’s growth strategy contemplates a combination of organic growth within existing operating businesses and selective acquisitions of additional technology-enabled companies. Management intends to evaluate acquisition opportunities that offer established revenues, defensible market positions, and the potential to benefit from Spectral’s technology capabilities. The Company does not intend to pursue acquisitions solely for intellectual property; rather, target companies are expected to have ongoing commercial operations and customer relationships.
Future acquisitions, if any, may be financed through a combination of cash, equity, or other consideration, subject to market conditions and the availability of capital. There can be no assurance that Spectral will identify suitable acquisition targets, successfully complete acquisitions, or achieve anticipated benefits from any future transactions.
Research and Development Activities
Spectral plans to continue investing in research and development, with an emphasis on applied technologies that have potential commercial relevance to its operating businesses or target markets. R&D activities are expected to focus on software development, algorithm design, data analytics, and automation tools, rather than speculative or purely theoretical research. Management intends to allocate R&D resources in a disciplined manner, balancing innovation objectives with the need to manage costs and achieve near- and medium-term operational goals.
Certain research initiatives may involve emerging or experimental technologies, including quantum-inspired or hybrid computing approaches. These initiatives are exploratory in nature and may require substantial additional development, validation, and investment before they can be commercialized, if at all. The Company’s plan of operations does not assume that any specific R&D initiative will result in commercially viable products.
Human Capital and Organizational Development
Spectral’s plan of operations depends on its ability to attract, retain, and motivate skilled personnel, including engineers, data scientists, operations specialists, and management professionals. As the Company transitions to a more diversified operating model, management intends to invest in organizational development, including the establishment of appropriate governance structures, internal controls, and operational processes.
The Company expects to incur additional costs associated with personnel, compliance, and systems as it scales its operations and prepares for listing on a national securities exchange. Management believes that these investments are necessary to support sustainable growth, but they may adversely affect operating margins and cash flows in the near term.
Capital Resources and Liquidity
Spectral’s plan of operations assumes access to capital from a combination of operating cash flows, equity financings, and other sources as needed. The Company intends to use available capital to support operating businesses, fund research and development, pursue selective acquisitions, and meet regulatory and compliance obligations. There can be no assurance that additional capital will be available on acceptable terms, or at all.
Management expects to exercise discretion in allocating capital between operating needs and growth initiatives, with an emphasis on maintaining liquidity and financial flexibility. The Company’s ability to execute its plan of operations will depend in part on market conditions, investor sentiment, and the performance of its operating businesses.
Regulatory and Compliance Considerations
Spectral operates in regulated industries, including telecommunications and data-driven services, and is subject to various laws and regulations across multiple jurisdictions. Compliance with regulatory requirements is an ongoing component of the Company’s plan of operations and requires dedicated resources, systems, and expertise. Management intends to continue investing in compliance infrastructure to support existing operations and any future expansion.
Outlook
Spectral’s plan of operations reflects management’s belief that combining intellectual property development with direct ownership of operating businesses provides a more resilient and flexible foundation for long-term growth. While the Company continues to face risks associated with technology development, integration, competition, and regulatory compliance, management believes that the diversified operating model positions Spectral to pursue growth opportunities while reducing reliance on the commercialization of any single technology or intellectual property asset.
There can be no assurance that Spectral will successfully execute its plan of operations or achieve its strategic objectives. The Company’s results of operations, cash flows and financial condition will depend on a variety of factors, many of which are beyond its control.
CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). A summary of our significant accounting policies is included in Note 2 — Summary of Significant Accounting Policies to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
We consider an estimate to be critical when it (i) requires significant judgment or the use of assumptions about matters that are inherently uncertain and (ii) changes in the estimate or different estimates that could reasonably have been used could have a material effect on our consolidated financial statements. Our critical accounting estimates are described below.
Business Combinations and Purchase Price Allocation The acquisition method requires us to allocate the purchase price of each acquired business to identifiable assets acquired and liabilities assumed at their respective acquisition-date fair values. This process involves significant judgment, particularly in valuing identifiable intangible assets such as customer relationships, developed technology, and trade names. Key assumptions include projected cash flows, discount rates, customer retention rates, royalty rates, and discounts for lack of marketability. Changes in these assumptions could materially affect the amounts allocated to intangible assets and goodwill, and the resulting amortization charges and impairment assessments in future periods.
Contingent Consideration Contingent consideration arising from the 42 Telecom and Telvantis acquisitions is classified as a liability and remeasured at fair value at each reporting date using Monte Carlo simulation models. Key assumptions include projected revenues, operating profit, and stock price volatility. Changes in these assumptions, or in actual operating performance relative to projections, could result in material changes in the fair value of contingent consideration recognized in the consolidated statements of comprehensive income (loss).
Goodwill Impairment Goodwill recognized in connection with the 42 Telecom and Telvantis acquisitions is tested for impairment annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The impairment assessment requires significant judgment regarding projected future cash flows, discount rates, and market conditions applicable to each reporting unit. A deterioration in operating performance or adverse changes in macroeconomic conditions could result in impairment charges that may be material to our consolidated financial statements.
Income Taxes The Company operates across multiple tax jurisdictions including the United States, Malta, Sweden, and the United Kingdom. Significant judgment is required in determining the income tax provision, the recoverability of deferred tax assets, and the need for valuation allowances. The Company has recorded a full valuation allowance against its U.S. federal and state deferred tax assets. Changes in management's assessment of the recoverability of these assets, or in the enacted tax rates or regulations in any of our operating jurisdictions, could materially affect the income tax provision and net deferred tax balances.
Useful Lives of Intangible Assets The estimated useful lives assigned to acquired intangible assets directly affect the amount and timing of amortization expense recognized in each period. Useful lives are determined based on the expected period over which the asset will contribute to future cash flows, considering factors such as historical customer attrition rates, contract durations, and the pace of technological change. A reduction in the estimated useful life of any significant intangible asset would result in a material increase in amortization expense in the period of change and in future periods.
