SPECTRAL CAPITAL Corp 10-K

Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm To the shareholders and the board of directors of Spectral Capital Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Spectral Capital Corporation (the “Company”) as of December 31, 2022 and 2021, the related statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 20201, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. Substantial Doubt about the Company’s Ability to Continue as a Going Concern The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company’s minimal activities raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. /s BF Borgers CPA PC BF Borgers CPA PC We have served as the Company’s auditor since 2017 Lakewood, CO March 2, 2023 F-2 SPECTRAL CAPITAL CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 2022 December 31, 2021 Assets: Cash and cash equivalents $ 10,672 $ 264 Accounts receivable 25,000 - Current assets 35,672 264 Total assets $ 35,672 $ 264 Liabilities and Stockholders' Deficit: Current liabilities Accounts payable and accrued liabilities $ 222,174 $ 1,136 Related party advances and accruals 5,500 1,261,609 Current liabilities 227,674 1,262,745 Commitments and contingencies Stockholders' Deficit: Preferred stock, par value $ 0.0001 , 5,000,000 shares authorized, no shares issued and outstanding - - Common stock, par value $ 0.0001 , 1,000,000,000 and 500,000,000 shares authorized, 42,017,948 and 11,785,762 shares issued and outstanding as of December 31, 2022 and 2021, respectively 4,202 1,179 Additional paid-in capital 29,106,804 27,798,288 Accumulated deficit ( 29,081,212 ) ( 28,840,224 ) Total stockholders' equity (deficit) 29,794 ( 1,040,757 ) Non-controlling interest ( 221,796 ) ( 221,724 ) Total stockholders' deficit - Spectral Capital Corp. ( 192,002 ) ( 1,262,481 ) Total liabilities and stockholders' deficit $ 35,672 $ 264 The accompanying notes are an integral part of these consolidated financial statements. F-3 SPECTRAL CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS For the Year Ended December 31, 2022 For the Year Ended December 31, 2021 Revenues $ 98,323 $ - Costs of sales - - Gross income 98,323 - Operating expenses: Selling, general and administrative 195,383 28,230 Wages and benefits 144,000 144,000 Total operating expenses 339,383 172,230 Net loss before non-controlling interest ( 241,060 ) ( 172,230 ) Loss attributable to non-controlling interest 72 61 Net loss attributable to Spectral Capital Corporation $ ( 240,988 ) $ ( 172,169 ) Basic loss per common share $ ( 0.01 ) $ ( 0.01 ) Diluted loss per common share $ ( 0.01 ) $ ( 0.01 ) Weighted average shares - basic 34,644,111 11,857,623 Weighted average shares - diluted 34,644,111 11,857,623 The accompanying notes are an integral part of these consolidated financial statements. F-4 SPECTRAL CAPITAL CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021 Common Stock Non- Total Shares Amount Additional Paid-in Capital Controlling Interest Accumulated Deficit Stockholders' Deficit December 31, 2020 11,785,762 $ 1,179 $ 27,798,288 $ ( 221,663 ) $ ( 28,668,055 ) $ ( 1,090,251 ) Non-controlling interest - - - ( 61 ) - ( 61 ) Net loss - - - - ( 172,169 ) ( 172,169 ) December 31, 2021 11,785,762 $ 1,179 $ 27,798,288 $ ( 221,724 ) $ ( 28,840,224 ) $ ( 1,262,481 ) Proceeds from sale of common stock 5,000,000 500 49,430 - - 49,930 Conversion of convertible note 25,232,186 2,523 1,259,086 - - 1,261,609 Non-controlling interest - - - ( 72 ) - ( 72 ) Net loss - - - - ( 240,988 ) ( 240,988 ) September 30, 2021 42,017,948 $ 4,202 $ 29,106,804 $ ( 221,796 ) $ ( 29,081,212 ) $ ( 192,002 ) The accompanying notes are an integral part of these consolidated financial statements. F-5 SPECTRAL CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the Year Ended December 31, 2022 For the Year Ended December 31, 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss attributable to Spectral Capital Corporation $ ( 240,988 ) $ ( 172,169 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) by operating activities: Non-controlling interest ( 72 ) ( 61 ) Accounts receivable ( 25,000 ) - Due to related parties - accrued salary 144,000 144,000 Accounts payable and accrued expenses 77,038 ( 270 ) Net cash used in operating activities ( 45,022 ) ( 28,500 ) CASH FLOWS FROM INVESTING ACTIVITIES: Net cash used in investing activities - - CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from related party advances 5,500 28,351 Proceeds from sale of common stock 49,930 - Net cash provided by financing activities 55,430 28,351 Change in cash and cash equivalents 10,408 ( 149 ) Cash and cash equivalents, beginning of year 264 413 Cash and cash equivalents, end of year $ 10,672 $ 264 Supplemental disclosures of cash flow information: Cash paid for interest $ - $ - Cash paid for income taxes $ - $ - Non-cash investing and financing activities: Exchange of related party advances and accruals for a convertible note payable and subsequent conversion into common stock $ 1,261,609 $ - The accompanying notes are an integral part of these consolidated financial statements. F-6 SPECTRAL CAPITAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – BUSINESS AND NATURE OF OPERATIONS Spectral Capital Corporation (the “Company” or “Spectral”) was incorporated on September 13, 2000 under the laws of the State of Nevada. Spectral is focused on the identification, acquisition, development, and financing of technology that has the potential to transform existing industries. Spectral has acquired significant stakes in two technology companies as well as interests within telecommunications, data and switching services, specifically providing international long distance reselling services on a business-to-business (B2B) basis. In January 2022, the Company commenced a new line of business which is providing data and telecommunications reselling services on a global basis. On February 15, 2022, the Company entered into a telecommunications services agreement with Sky Data PLL OU (Estonia) to provide long distance switching services. The contract does not contain a fixed term or value and is on an as needed basis via invoice for Sky Data PLL OU. The Company is focusing on this line of business and is currently expanding its network on an as needed basis by adding as many ports as its customers require in any given month. We provide business to business (B2) telecommunications interconnection services to mainly Asia, South America and Africa. This is done by negotiating directly with international private and public carriers for telecommunications rates based on certain volume and transaction levels. Our wholesale voice services provide global routing solutions and direct bilateral connections with many major PTTs, Tier-1 carriers and Mobile operators around the world to further expand our network and improve voice quality. Our global network is comprised of over 100 Tier 1 carriers, Mobile Operators & PTTs from across all continents. A geographically-load balanced, multi-data center architecture design ensures 99.999% uptime and business continuity with 24-hour fully redundant, state-of-the-art Network Operations Center (NOC) and we conduct routine security audits. NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company is in the development stage and has sustained substantial losses since inception. As of December 31, 2022, the Company has cash on hand of $ 10,672 and negative working capital of $ 192,002 . The Company expects current cash on hand will not be able to fund operations for a period 12 months or more. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. To date management has funded its operations through selling equity securities and advances from related parties. The ability of the Company to continue as a going concern is dependent on the Company generating cash from the sale of its common stock and/or obtaining debt financing and attaining future profitable operations, however, there can be no assurance the Company will be successful in these efforts. As of the date of these consolidated financial statements the Company does not have any firm commitments for capital. Without the required capital, the Company will be required to reduce their development expenditures which will potentially delay the completion of products which are expected to generate future revenues. Risks and Uncertainties The Company has a limited operating history and has not generated revenues from our planned principal operations. The Company’s business and operations are sensitive to general business and economic conditions in the U.S. and worldwide. These conditions include short-term and long-term interest rates, inflation, fluctuations in debt and equity capital markets and the general condition of the U.S. and world economy. A host of factors beyond the Company’s control could cause fluctuations in these conditions, including the political environment and acts or threats of war or terrorism. Adverse developments in these general business and economic conditions, including through recession, downturn or otherwise, could have a material adverse effect on the Company’s consolidated financial condition and the results of its operations. F-7 The Company currently has no sales and limited marketing and/or distribution capabilities. The Company has limited experience in developing, training or managing a sales force and will incur substantial additional expenses if we decide to market any of our current and future products. Developing a marketing and sales force is also time consuming and could delay launch of our future products. In addition, the Company will compete with many companies that currently have extensive and well-funded marketing and sales operations. Our marketing and sales efforts may be unable to compete successfully against these companies. In addition, the Company has limited capital to devote sales and marketing. The Company’s industry is characterized by rapid changes in technology and customer demands. As a result, the Company’s products may quickly become obsolete and unmarketable. The Company’s future success will depend on its ability to adapt to technological advances, anticipate customer demands, develop new products and enhance our current products on a timely and cost-effective basis. Further, the Company’s products must remain competitive with those of other companies with substantially greater resources. The Company may experience technical or other difficulties that could delay or prevent the development, introduction or marketing of new products or enhanced versions of existing products. Also, the Company may not be able to adapt new or enhanced products to emerging industry standards, and the Company’s new products may not be favourably received. Nor may we have the capital resources to further the development of existing and/or new ones. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company, Spectral Holdings, Inc, and its 60 % owned subsidiaries, Noot Holdings, Inc. from its date of incorporation of February 28, 2013, and Monitr Holdings, Inc. from its date of incorporation of December 1, 2013. All material intercompany accounts and transactions have been eliminated in consolidation. Basis of Presentation The consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America and are presented in US dollars. Stock-Based Compensation The Company accounts for employee stock-based compensation in accordance with the guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, Compensation – Stock Compensation which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The Company follows ASC Topic 505-50, Equity: Equity-Based Payments to Non-Employees for stock options and warrants issued to consultants and other non-employees. In accordance with ASC Topic 505-50, these stock options and warrants issued as compensation for services provided to the Company are accounted for based upon the fair value of the services provided or the estimated fair market value of the option or warrant, whichever can be more clearly determined. The fair value of the equity instrument is charged directly to compensation expense and additional paid-in capital over the period during which services are rendered. Because the Company’s stock-based compensation options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the estimate, amounts estimated using the Black-Scholes option pricing model may differ materially from the actual fair value of the Company’s stock-based compensation options. Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-8 Revenue Recognition The Company revenues in accordance with Accounting Standards Codification (“ASC”) 606, “Revenue from contracts with customers”. Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Revenues during the year ended December 31, 2022, were provided primarily to three customers. The loss of these customers would have a significant impact on the Company’s financial statements. At June 30, 2022, the Company paused their operations to improve their internal processes and expect to recommence in second quarter of 2023. Fair Value of Financial Instruments Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance provides an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors that market participants would use in valuing the asset or liability. There are three levels of inputs that may be used to measure fair value: Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 - Include other inputs that are directly or indirectly observable in the marketplace. Level 3 - Unobservable inputs which are supported by little or no market activity. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. As of December 31, 2022 and 2021, the Company does not have any assets or liabilities which would be considered Level 2 or 3. The Company’s financial instruments primarily consist of cash and cash equivalents, accounts payable, deferred revenue and amounts payable to related parties. The carrying amount of these financial instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these consolidated financial statements. Income Taxes The Company follows ASC 740, Income Taxes for recording the provision for income taxes. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Tax law and rate changes are reflected in income in the period such changes are enacted. The Company records a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. The Company includes interest and penalties related to income taxes, including unrecognized tax benefits, within the income tax provision. The Company’s income tax returns are based on calculations and assumptions that are subject to examination by the Internal Revenue Service and other tax authorities. In addition, the calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. While the Company believes it has appropriate support for the positions taken on its tax returns, the Company regularly assesses the potential outcomes of examinations by tax authorities in determining the adequacy of its provision for income taxes. The Company continually assesses the likelihood and amount of potential adjustments and adjusts the income tax provision, income taxes payable and deferred taxes in the period in which the facts that give rise to a revision become known. F-9 The Company recognizes windfall tax benefits associated with share-based awards directly to stockholders’ equity only when realized. A windfall tax benefit occurs when the actual tax benefit realized by the Company upon an employee’s disposition of a share-based award exceeds the deferred tax asset, if any, associated with the award that the Company had recorded. When assessing whether a tax benefit relating to share-based compensation has been realized, the Company follows the tax law ordering method, under which current year share-based compensation deductions are assumed to be utilized before net operating loss carryforwards and other tax attributes. We are currently delinquent with respect to our U.S. federal income tax filings for the past several years. Investment in Securities The Company’s investments consisting of common shares of non-controlled entities are accounted for on the cost basis. Impairment losses will be recorded when indicators of impairment are present. Cash and Cash Equivalents The Company considers all highly liquid investments with maturities of three months or less to be cash equivalents. Basic Loss Per Share Basic loss per share is calculated by dividing the Company’s net loss applicable to common shareholders by the weighted average number of common shares during the period. Diluted earnings per share is calculated by dividing the Company’s net income available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity. Common share equivalents totalling zero and 10,000,000 were outstanding at December 31, 2022 and 2021, respectively, representing outstanding options, and were not included in the computation of diluted earnings per share for the years ended December 31, 2022 and 2021, as their effect would have been anti-dilutive. Non-Controlling Interests Non-controlling interests disclosed within the consolidated statement of operations represent the minority ownership’s 40% share of net losses of Noot Holdings, Inc. and Monitr Holdings, Inc incurred during the years ended December 31, 2022 and 2021. The following table sets forth the changes in non-controlling interest for the years ended December 31, 2022 and 2021: Non-Controlling Interest Balance at December 31, 2019 $ ( 221,085 ) Net loss attributable to non-controlling interest ( 578 ) Balance at December 31, 2020 ( 221,663 ) Net loss attributable to non-controlling interest ( 61 ) Balance at December 31, 2021 $ ( 221,724 ) Foreign Currency The Company’s functional currency is the United States Dollar. Transaction gains or losses related to balances denominated in a currency other than the functional currency are recognized in the consolidated statements of operations. Recent Accounting Pronouncements In August 2020, the FASB issued ASU 2020-06, ASC Subtopic 470-20 “Debt—Debt with “Conversion and Other Options” and ASC subtopic 815-40 “Hedging—Contracts in Entity’s Own Equity”. The standard reduced the number of accounting models for convertible debt instruments and convertible preferred stock. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting; and, (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. The amendments in this update are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company adopted this standard on January 1, 2022 with no impact on the financial statements. F-10 The FASB issues ASUs to amend the authoritative literature in the FASB Accounting Standards Codification (“ASC”). There have been a number of ASUs to date, including those above, that amend the original text of ASC. Management believes that those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to the Company or (iv) are not expected to have a significant impact on the Company’s financial statements. NOTE 3 – RELATED PARTY TRANSACTIONS Jenifer Osterwalder, the Company’s Chief Executive Officer Jenifer Osterwalder charges the Company $12,000 per month beginning January 1, 2021 for services rendered. Previously, she was charging 12,350 CHF per month for services rendered. Total amounts expended in the Company's condensed consolidated financial statements in connection with the CEO's services was $ 144,000 and $ 144,000 for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022 and 2021, amounts due to the CEO related to accrued salaries were $ 144,000 and $ 1,054,653 , respectively. Decrease in the current period is due to the conversion of accounts payable into a related party convertible note payable. From time to time due to the limited cash flow available, the Company's CEO pays certain operating expenditures on behalf of the Company. These advances bear no interest and are due on demand. As of December 31, 2022 and 2021, the Company's CEO was due $ 5,500 and $ 206,956 in connection with these advances, respectively. Decrease in the current period is due to the conversion of accounts payable into a related party convertible note payable. As noted above, all amounts due to the Chief Executive Officer as December 31, 2021, were converted into a convertible note payable. The note is due and demand and convertible at $0.005 per share. During the first quarter of 2022, the Chief Executive Officer sold the $1,054,653 and $206,956 convertible notes to a third party which was then converted into approximately 25.2 million shares in April 2022. NOTE 4 – STOCKHOLDERS’ DEFICIT Changes in Stockholders’ Deficit During the year ended December 31, 2022, the Company sold 5 million shares of common stock resulting in proceeds of $49,930. See Note 3 for discussion of convertible note converted into common stock. Net loss and non-controlling interest were the only changes to stockholders’ deficit during the year ended December 31, 2021. Employee Options The Company accounts for employee stock-based compensation in accordance with the guidance of FASB ASC Topic 718, Compensation – Stock Compensation which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The Company has adopted a stock option and award plan to attract, retain and motivate its directors, officers, employees, consultants and advisors. Options provide the opportunity to acquire a proprietary interest in the Company and to benefit from its growth. Vesting terms and conditions are determined by the Board of Directors at the time of the grant. The Plan provides for the issuance of up to 15,000,000 common shares for employees, consultants, directors, and advisors. As of December 31, 2022, all options were expired. F-11 NOTE 5 – INCOME TAXES As of December 31, 2022, the Company had net operating loss carry forwards of approximately $ 14,700,000 that may be available to reduce future years’ taxable income through 2037. Future tax benefits which may arise as a result of these losses have not been recognized in these consolidated financial statements, as their realization is determined not likely to occur and accordingly, the Company has recorded a valuation allowance for the deferred tax asset relating to these tax loss carry-forwards. The difference between the Company’s tax rate and the statutory rate is due to a full valuation allowance. The provision for Federal income tax consists of the following: December 31, December 31, 2022 2021 Federal income tax benefit attributable to: Current operations $ 50,607 $ 36,155 Less: valuation allowance ( 50,607 ) ( 36,155 ) Net provision of income taxes $ - $ - The cumulative tax effect at the expected rate of 21 % of significant items comprising our net deferred tax amount is as follows: December 31, December 31, 2022 2021 Deferred tax asset attributable to: Net operating loss carryforward $ 4,921,930 $ 4,871,323 Less: valuation allowance ( 4,921,930 ) ( 4,871,323 ) Net deferred tax asset $ - $ - Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry forwards for federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur net operating loss carry forwards may be limited as to use in future years. The Company is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. The Company believes they are no longer subject to income tax examinations for years prior to 2012. NOTE 6 – COMMITMENTS AND CONTINGENCIES The Company leases office space on a three-month basis in Seattle, Washington. NOTE 7– SUBSEQUENT EVENTS In accordance with ASC 855-10, the Company has analysed its operations subsequent to December 31, 2022 to the date these consolidated financial statements were issued and has determined that it does not have any material subsequent events to disclose in these consolidated financial statements, other than those disclosed above. F-12 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AN ACCOUNTING FINANCIAL DISCLOSURE Not applicable.