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FCCN > SEC Filings for FCCN > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for SPECTRAL CAPITAL CORP

Form 10-Q for SPECTRAL CAPITAL CORP


14-Nov-2012

Quarterly Report


Item 2. 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.

OVERVIEW

We are an exploration stage natural resources company focused on the identification, acquisition, development, financing and extraction of natural resources in regions with a recent history of significant natural resource production. We have a acquired a controlling interest in an oil and gas property in Alberta, Canada as well as conducted due diligence, evaluation and pre-acquisition activities on a number of other natural resource properties around the world. Although we do not have a historical track record in the development of natural resource properties, we have begun to assemble an appropriate management team that can help us to efficiently exploit these resources and identify other complimentary resources. We have also engaged industry-leading consultants and are in the process of continuing to engage such consultants to help us in the planning and development of these resources.

CORPORATE HISTORY AND DEVELOPMENT

We were incorporated in the State of Nevada on September 13, 2000 as Galaxy Championship Wrestling, Inc., a media and entertainment company focused on developing, producing and marketing live entertainment in the professional wrestling sphere.

On March 31, 2004, unable to generate sufficient revenues to sustain our professional wrestling business, we ceased operations in this field and began exploring other business opportunities.

Also on March 31, 2004 our controlling shareholders entered into a certain private stock purchase agreement, wherein they sold an aggregate of 5,750,000 of our common shares, representing a sixty-two and seventeen twentieths percent (62.85%) controlling interest, to an unrelated third party.

By certificate of amendment filed June 17, 2004, we changed our name from Galaxy Championship Wrestling, Inc. to FUSA Capital Corporation.

During the period from March 31, 2004 until March 7, 2005 we had no meaningful operations and did not carry on any active business, focusing instead on identifying and evaluating the merits of alternative potential business and acquisition opportunities which might allow us to restart operations.

On March 7, 2005 we entered into a certain plan and agreement of reorganization with FUSA Technology Investments Corp. ("FTIC"), a Nevada corporation engaged in the emerging growth field of audio and video search engine technology, whereby we acquired all of the issued and outstanding capital stock of FTIC in addition to obtaining certain intellectual property concepts related to search engine technology as developed by FTIC and its principals. In March of 2005 we also entered into a 3 for one stock dividend payable to our shareholders.

From April, 2005 until September 2010, we were engaged continuously in the development and operation of consumer focused media search engine technologies and portals. During the last six months of 2009, we began to substantially curtail our operations and ongoing technology development as a consequence of
(i) having completed a substantial portion of our planned principal technology development work and (ii) being unable to raise sufficient funds through revenue or sales of debt or equity securities to continue our previous levels of operation and development. We ceased operating our Internet properties in December 2010 but have not yet made a final determination regarding the status or disposition of these properties, which we expect to make within the next 90 days.

We had consistently lost money on our on-line consumer media properties due to the expenses involved in hosting, promotion, development and management of those sites. In an effort to maintain as much traffic as possible on our most popular media site, www.searchforvideo.com, which is also responsible for a large proportion of our expenses, we contracted with Brass Consulting Ltd. to maintain the site in exchange for net revenue produced from the site. This agreement was cancellable after 30 days notice. We cancelled this agreement in September 2009. We were not able to operate the site properly internally or through an external provider.


On June 29, 2009, our Board of Directors resolved to amend the Articles of Incorporation pursuant to Nevada Revised Statues 78.207 to decrease the number of authorized shares of our common stock, par value $.0001, from 500,000,000 to 333,333 shares. Correspondingly, our Board of Directors affirmed a reverse split of one thousand and five hundred (1,500) to one (1) in which each shareholder was issued one (1) share in exchange for every one thousand and five hundred (1,500) common shares of their currently issued common stock. The record date for the reverse split was July 6, 2009.

On July 27, 2010, our shareholders voted to change our name to Spectral Capital Corporation and to increase number of shares of our authorized common stock from 333,333, par value $0.0001 to 500,000,000, par value $0.0001.

On August 18, 2010, we entered into a financing with a third party, Trafalgar Wealth Management. Under the terms of the financing, for aggregate consideration of $50,000 or $0.001 per common share, we sold 50,000,000 common shares and issued warrants to purchase 10,000,000 common shares at an exercise price of $1.00 per share. Under the terms of the agreements as amended in 2011, subject to certain terms and conditions, Trafalgar is obligated to exercise at least $1,000,000 worth of these warrants over the next 24 months or Spectral will receive back 5,000,000 of the shares.

Pursuant to a notice of conversion by holders of our April 2009 promissory notes, we converted the outstanding of interest and principal under the notes, which was in excess of $50,000, for a settled amount of $50,000. Under the terms of the April 2009 note, we are required to convert these shares at the current financing price of $0.001 per share. Therefore, on August 18, 2010 we issued 50,000,000 shares to various holders of the April 2009 promissory notes, which represents 49.9% of our current issued and outstanding shares.

In September 2010, the Company purchased an interest in mineral properties in the Chita region of the Russian Federation. The Kadara and Kaltagay license is located in the Mogochinsky district of the Chita Region in the Russian Federation. Initially, we purchased 47% of the License for prospecting, exploration and production of gold and all other metals. The length of the License runs to August 31, 2031. The size of the License is 186 square kilometers or 18,200 hectares. Development and exploration activities are currently being undertaken. In December, 2010, we purchased an additional interest of 5% in this property, bringing our total interest in the property to 52%.

In January, 2011, we purchased a 65% interest in mineral properties in the Bayankol River region of Kazakhstan ("Bayankol").

In July, 2011, we conveyed our interest in our Chita property back to our counterparty in exchange for cancellation of warrants to purchase Spectral common stock issued in the transaction and our right to be reimbursed for incurred costs to date. We have not yet sought any reimbursement under this agreement.


In September, 2011, we developed a partnership in Saratov, Russia to acquire and develop oil leases in the region.

In December, 2011, we restructured our interest in our Bayankol property The agreement rescinded the original transaction of January 14, 2011 and the previously issued warrants were cancelled. Spectral agreed to issue 1,000,000 common shares of Spectral stock in exchange for an option to purchase 65% of the property. Spectral will also have an obligation to find third party debt financing of $200,000,000 over five years to maintain its interest in the Bayankol property. We have not taken any steps to finance or develop this property and our title to our interest remains unclear.

In February, 2012, we acquired a 60% interest in a Canadian oil and gas field in the Red Earth region of Alberta for a cash payment of $750,000, which we paid. Under the agreement, we also have the right to fund additional drilling on the property up to $17,500,000 on a secured creditor basis. The property is currently in production and producing oil. There are eight permitted drilling locations on the property.

In May, 2012, we acquired approximately nine sections of additional leased land for oil and gas exploration in the same region.

Our principal executive offices are located at 701 Fifth Avenue, Suite 4200, Seattle, Washington 98104. Our phone number is (206) 262-7820. The Company's year-end is December 31.

RESULTS OF OPERATIONS

Financial Condition and Liquidity

Overview

Our financial statements contained herein have been prepared on a going concern basis, which assumes that we will be able to realize our assets and discharge our obligations in the normal course of business. We have limited capital resources. In the period from February 9, 2005 (Date of Inception) to September 30, 2012, the Company generated $246,979 in revenues and posted a net loss of $11,414,053 resulting from costs of general and administrative expenses, website development, stock compensation, impairments on mineral properties, expenses on oil and gas properties and interest expenses. The Company is considered an exploration stage company.


Cash and Working Capital

The Company's cash balance as of September 30, 2012 was $132,013, as compared to the cash balance of $730,922 of December 31, 2011.

Three month Period Ending September 30, 2012 and September 30, 2011 and from Inception to September 30, 2012

Operating expenses for the three-month period ended September 30, 2012 totaled $1,546,173, for the three month period ended September 30, 2011, $406,156 and from inception to the period ended September 30, 2012 totaled $11,886,075. The company experienced a net loss of $1,428,476, $406,156 and $11,414,053 for the three month periods ended September 30, 2012, September 30, 2011 and from inception to period ended September 30, 2012, respectively, against $100,374 in revenues from operations for the three month period ending September 30, 2012, $0 for the three month period ended September 30, 2011 and $246,979 in revenue from the period since inception. The major expenses during this three-month period ended September 30, 2012 were for stock based compensation, exploration costs, wages, general and administrative expenses and legal and accounting fees.

In a company like Spectral that has not produced significant revenue from its operations, quarter-to-quarter expense comparisons can be difficult, as the natural resources exploration business tends to involve seasonal expenditures. We have had a small amount of revenues from our oil production activities in the three-month period ending September 30, 2012, however weather issues and an unusually high water cut in the oil not typical for the region make these results possibly not representative of what future production results would be. However, as we were not operating an oil property during the first nine months of 2011 as we were in 2012, it can be meaningful to compare operating expenses between the three-month period ending September 30, 2012 and the three-month period ending September 30, 2011, to assess the trajectory of operating expenses.

Operating expenses for the three months ending September 30, 2012 were $1,546,173 and for the three months ending September 30, 2011, they were $406,156. Excluding the one time item of stock based compensation of $1,260,145, this means expenses increased by $179,872 or 169% during the quarter, however if we exclude exploration expenses which did not exist in the comparable quarter, expenses of $190,668, we are left with a decrease in operating expenses of $10,796 or a decrease of 10%. We believe that we experienced an increase despite this lower overhead attributable to exploration expenses related to the Company's project in Alberta, Canada and stock based compensation. Costs would be higher, but for management's continued efforts to streamline costs, extract service provider discounts and control expenses. Although management anticipates that we will end up spending several million dollars on exploration related expenses in the next 24 months, management's ability to contain operating expense growth relative to the worldwide financing, acquisition and exploration activities the company is undertaking maximizes the company's ability to make exploration expenditures when appropriate.

We do not believe the revenues from the quarter are representative of the current productive capacity of our existing well due to the fact that weather conditions and an unusually high oil cut for the region from the well mean that we could experience some revenue improvement in the next quarter. There is no comparable period because we were not operating any oil and gas properties in the three-month period ending September 30, 2011.

The earnings per share (fully diluted -- weighted average) consisted of a net loss of $0.00 for the three-month period ended September 30, 2012 and $0.00 for the three-month period ended September 30, 2011.

Liquidity and Capital Resources

For the nine-month period ended September 30, 2012, net cash used by operating activities, consisting mostly of loss from operations, was $1,019,267. For the period from inception to September 30, 2012, net cash used in operating activities, consisting mostly of loss from operations net of non-cash compensation, was $5,626,072.

For the period from inception to September 30, 2012, net cash resulting from financing activities was in the amount of $6,030,881. We did not conduct a financing during the three-month period ending September 30, 2012.

Our capital resources are not sufficient to meet our current operating needs for the next 12 months or longer, however we believe have the ability to finance our cash needs through borrowings from our commercial partners, though we do not have any such arrangement currently in place and will otherwise have to seek alternative financings to meet our cash needs. We will not be able to grow our natural resources properties as we desire to make targeted acquisitions without raising additional funds. While we are currently generating some revenue, the predictability and sufficiency of the revenue stream is unknown, and to date have relied almost entirely on the sale of equity securities and the exercise of warrants to fund our operations.


Future Financings

We anticipate that we will pursue additional financing and that the financing would be an equity financing achieved through the sale of our common stock or the sale of debt securities based on the earning potential of our mineral resources or a loan from a business partner of ours. We do not have any arrangement in place for any debt or equity financing except for the outstanding warrants we have issued. These warrants could yield a total of $9,850,000 in financing for the company and the investor was required to exercise at least $1,000,000 in warrants by August 17, 2011 or the Company had the right to repurchase the common stock held by the investor. The agreements were amended. Under the terms of the agreements as amended in 2011, subject to certain terms and conditions, Trafalgar is obligated to exercise at least $1,000,000 worth of these warrants by August 17, 2013 or Spectral will receive back 5,000,000 of the shares.

Off Balance Sheet Arrangements

We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

PLAN OF OPERATION

Significant Contingencies

Our financial statements have been prepared assuming we will continue as a going concern. In order to develop and finance our natural resource properties, we will need to have the licenses for these properties transferred into an appropriate special purpose vehicle formed for such a transfer. The transfer must also be approved by the appropriate governmental body. It is unlikely that we would be able to enforce our rights to exploit the natural resource properties in the event of a dispute under local law until the license is transferred. Additionally, we do not have modern, NI 43-101 or JORC qualified geological data or equivalents on our properties and the assumptions we have made regarding the economic feasibility of natural resource extraction on our properties may need to be revised once such reports become available. This could have a material negative or positive impact on our prospects.

Over the next year we intend to continue to develop our oil and gas property in Alberta, Canada, to drill additional wells on the property, to acquire additional land positions and abandoned or shut-in wells. We intend to close on our oil and gas project in Saratov, Russia. We intend to resolve title and environmental issues on our Bayankol River Gold project and make a final decision as to whether to proceed or not with its development. If we do proceed, we intend to make sure that the previous drilling, sampling and geological data that dates from as far back as the Soviet-Era is brought into compliance with contemporary geological standards.

We intend to raise additional funds to finance the above operational plan.

Because our property in Alberta is currently producing oil and because it has drilling locations that can be drilled and could produce substantial revenue in 2013, we may be able to fund some of our additional growth through this revenue, provided we could finance such drilling. Such revenue, while it could arrive in 2012, will be most impactful to us in 2013 as our drilling program becomes more developed and our land positions increase. Because our Kazakhstan property contains primarily alluvial gold, it is possible to begin a lower-cost, rapidly assembled extraction operation through the importation of a mobile, barge based extraction plant that can begin to produce gold at the property within the next 12 months if we were able to resolve all title and environmental issues.

We also intend to continue to identify and acquire desirable oil and gas gold mining properties throughout Canada, the former Soviet Union and within other regions in as much as we are able to acquire such properties under similar terms and conditions to those of the two properties we have acquired.

We anticipate spending significant sums on hiring a senior management team with substantial mining experience, including a VP of Oil and Gas Exploration. These executive expenditures, together with expenses related to the acquisition of land, geological surveys, drilling programs and extraction expenses we anticipate over the next 12 months, mean that we could spend as much as $10 million over the next 12 months or more, depending on the availability and timing of financing.

However, the preliminary results of our oil production activities in Alberta have not produced as much revenue as we had anticipated and we continue to evaluate options to improve our financial performance, which include the acquisition of other natural resource assets, the disposition of some assets, the acquisition of assets outside of the natural resource sector and partnership on some of our existing assets.


Our twelve-month plan projects us to accomplish the following steps:

? Produce free cash flow from our Alberta property;

? Complete additional wells on our Alberta property;

? Build the necessary infrastructure and complete the necessary drilling programs and feasibility studies to begin large scale production operations on our present Alberta property and additionally acquired properties within the next 12 to 24 months;

? Complete one or more private equity placements to provide interim funding for drilling programs and extraction operations;

? Hire a senior management team with a proven track record at the development of oil and gas properties in challenging areas.

? Improve revenue substantially in our oil properties, and if we cannot do that sell or otherwise dispose of them and seek alternative assets or asset classes.

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