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FCCN > SEC Filings for FCCN > Form 10-K on 16-Apr-2013All Recent SEC Filings

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Form 10-K for SPECTRAL CAPITAL CORP


16-Apr-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

The following discussion and analysis of our financial condition, results of operations and liquidity should be read in conjunction with our consolidated financial statements for the years ended December 31, 2012 and 2011 and the related notes appearing elsewhere in this annual report. Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles.

CRITICAL ACCOUNTING POLICIES

Our critical accounting policies, including the assumptions and judgments underlying those policies, are more fully described in the notes to our consolidated financial statements. We have consistently applied these policies in all material respects. Investors are cautioned, however, that these policies are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially. Set forth below are the accounting policies that we believe most critical to an understanding of our financial condition, results of operations and liquidity.


Principles of Consolidation
The accompanying consolidation financial statements include the accounts of the Company and its subsidiary Extractive Resources Corporation. All material intercompany accounts and transactions have been eliminated in consolidation.

Exploration Stage Company
The accompanying financial statements have been prepared in accordance with generally accepted accounting principles related to accounting and reporting by exploration-stage companies. An exploration-stage company is one in which planned principal operations have not commenced, or if its operations have commenced, there has been no significant revenues there from.

Basis of Presentation
The 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.

Accounting Basis
The Company uses the accrual basis of accounting and accounting principles generally accepted in the United States of America ("GAAP" accounting). The Company has adopted a December 31 fiscal year end.

Fair Value of Financial Instruments
Spectral Capital's financial instruments consist of cash and cash equivalents, prepaid expenses, accounts payable, and accrued expenses, and due to related parties. The carrying amount of these financial instruments approximates fair value due to either length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these financial statements.

Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less to be cash equivalents. At December 31, 2012, the Company had $84,091 of unrestricted cash to be used for future business operations.

Concentrations of Credit Risk
The Company maintains its cash in bank deposit accounts, the balances of which at times may exceed federally insured limits. The Company continually monitors its banking relationships and consequently has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.

Stock-Based Compensation
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.

On February 6, 2012, the Company granted 7,500,000 options to two employees. Stock-based compensation is being recognized over the two year vesting period. The options were valued at $3,408,750 using the Black-Scholes Option Pricing Model with the following assumptions:

                                                Employee
                                              Stock Options
                      Stock Price           $           0.55
                      Exercise Price        $            .61
                      Expected volatility              84.47 %
                      Risk-free rate                    1.93 %
                      Vesting period                 2 years
                      Expected term                 10 years

Employee stock-based compensation expense relating to options granted in 2010 and 2012, and recognized in 2012 and 2011 totalled $2,118,892 and $434,517, respectively. Unrecognized expense of $2,923,404 remains to be recognized through 2015.

The Company follows ASC Topic 505-50, formerly EITF 96-18, "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services," 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 or prepaid expense and additional paid-in capital over the period during which services are rendered. There were 2,500,000 options valued at $1,136,250 issued to an advisor on February 6, 2012. Based on the vesting term, $520,781 was charged to consulting expense and $615,469 was recorded as prepaid consulting. There were 750,000 options issued in 2011 to settle a dispute with an advisor. These options were valued at $400,425 using the Black-Scholes pricing model.

A summary of changes in stock options during the years ended December 31, 2012 and 2011 is as follows:


                                                             Weighted
                                                              Average
                                                              Exercise     Expiry
                                         Stock Options         Price        Date
       Outstanding, December 31, 2010         3,000,000     $      1.00   10/21/20
       Issued                                   750,000            1.55   2/11/16
       Exercised                                      0               0
       Expired                                        0               0
       Outstanding, December 31, 2011         3,750,000            1.39
       Issued                                10,000,000             .61    2/6/22
       Exercised                                      0               0
       Expired                                        0               0
       Outstanding, December 31, 2012        13,750,000     $       .75

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.

Income Taxes
As of December 31, 2012, the Company had net operating loss carry forwards of approximately $11,923,000 that may be available to reduce future years' taxable income through 2032. Future tax benefits which may arise as a result of these losses have not been recognized in these 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 provision for Federal income tax consists of the following:

                                              December 31,       December 31,
                                                  2012               2011
Federal income tax benefit attributable to:
Current operations                            $   1,043,100     $      699,700
Less: valuation allowance                        (1,043,100 )         (699,700 )
Net provision for Federal income taxes        $           0     $            0


The cumulative tax effect at the expected rate of 34% of significant items comprising our net deferred tax amount is as follows:

                                              December 31,      December 31,
                                                   2012             2011
        Deferred tax asset attributable to:
        Net operating loss carryover          $   4,145,800     $   3,102,700
        Less: valuation allowance                (4,145,800 )      (3,102,700 )
        Net deferred tax asset                $           0     $           0

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.

Use of Estimates
The preparation of 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 the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition
The Company is in the exploration stage and has yet to realize revenues from operations. Once the Company has commenced operations, it will recognize revenues when delivery of goods or completion of services has occurred provided there is persuasive evidence of an agreement, acceptance has been approved by its customers, the fee is fixed or determinable based on the completion of stated terms and conditions, and collection of any related receivable is probable.

Basic Income (Loss) Per Share
Basic income (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 13,750,000 and 14,600,000 were outstanding at December 31, 2012 and 2011, respectively, representing outstanding warrants and options, and were not included in the computation of diluted earnings per share for the periods ended December 31, 2012 and 2011, as their effect would have been anti-dilutive.

Dividends
The Company has not adopted any policy regarding payment of dividends. No dividends have been paid during the periods shown.


Mineral Properties
Costs of exploration, carrying and retaining unproven mineral lease properties are expensed as incurred. Mineral property acquisition costs are capitalized including licenses and lease payments. Although the Company has taken steps to verify title to mineral properties in which it has an interest, these procedures do not guarantee the Company's title. Such properties may be subject to prior agreements or transfers and title may be affected by undetected defects.

Impairment losses are recorded on mineral properties used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount.

Property and Equipment
Property and equipment are stated at cost. Depreciation is computed on the straight line method over the estimated useful lives of the assets, which are three years for the assets currently owned by the Company

Recent Accounting Pronouncements
Spectral Capital does not expect the adoption of recently issued accounting pronouncements to have a significant impact on the Company's results of operations, financial position or cash flows.

Reclassifications
Certain accounts and financial statement captions in the prior periods have been reclassified to conform to the current period financial statements.

OVERVIEW

Spectral Capital Corporation ("Spectral" or the Company, also "We or Us") is an exploration stage technology company focused on the identification, acquisition, development, financing of technology that has the potential to transform existing industries. We look for technology that can be protected through patents or laws regarding trade secrets. Spectral has acquired significant stakes in two technology companies currently and actively works with management to drive these companies toward increasing market penetration in their particular verticals. Spectral intends to own, in full or in part, technology companies whose founders and key management can take advantage of the deep networks and experience in technology development embodied in Spectral management.

PLAN OF OPERATIONS

Spectral is focused on the identification, acquisition, development, financing of technology that has the potential to transform existing industries. We look for technology that can be protected through patents or laws regarding trade secrets. Spectral has acquired significant stakes in two technology companies currently and actively works with management to drive these companies toward increasing market penetration in their particular verticals. Spectral intends to own, in full or in part, technology companies whose founders and key management can take advantage of the deep networks and experience in technology development embodied in Spectral management.

Companies within the technology development and commercialization sector have a variety of areas of principal competence. Some companies focus on aggressively developing a portfolio of intellectual property and then licensing that property and defending it through litigation. Others focus on a technology embodied in a software product or device which has the potential to be acquired by businesses and/or consumers at a profit. Others seek to develop and commercialize technology that attracts a significant number of users who can be monetized through advertising. Of course, technology development and commercialization is a vast and complex field. Spectral has had an initial focus on information technology with a direct value proposition to businesses or consumers.


Like all companies that seek to develop a portfolio of high impact technologies and the corporate and organizational structure to monetize those technologies, Spectral must do the specialized work of lowering the risk profile of the commercialization of a particular technology to the point where it is able to grow at a reasonable customer acquisition cost.

We have a deep management expertise, developed knowledge within the search, media and analytics fields, attractive positioning, the ability to identify and close transactions quickly and a willingness to invest in technology that is mispriced relative to its economic potential. Although the 2008 financial crisis has abated and technology companies generally are enjoying some robust growth, it still remains a challenge for early stage technology companies to find the financial and human resources to foster required growth. This challenge creates an environment where Spectral can seek out and find high impact technology and invest in or acquire this technology at reasonable valuations.

Our business differs from those companies whose capital reserves, successful previous ability to monetize technology and scale, efficiencies and existing customer base allow them to select and develop technology by flooding the technology with financial and human resources. Spectral's approach is much more targeted. We only develop technology that we believe has a very specific fit with our expertise and limited capital. We develop technology that does not require massive investments in sale and marketing in order to reach an initial audience.

We also intend to continue to identify and acquire desirable technologies throughout the United States, Canada, India and elsewhere within other regions in as much as we are able to acquire and develop such technologies under similar terms and conditions to those of the two portfolio companies we have acquired interests in.

We anticipate spending significant sums on hiring a senior management team with substantial technology experience, including a VP of Information Security and a VP of Sales and Marketing. These executive expenditures, together with expenses related to the development of our portfolio companies technology and expenses we anticipate over the next 12 months, mean that we could spend as much as $5-$10 million over the next 12 months or more, depending on the availability and timing of financing.

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

Continue to Grow Kontexto's customer base around the world and increase revenues and earnings;

Complete and launch the Noot Mobile Application;

Build the necessary infrastructure and complete the necessary staff expertise to close on several additional portfolio company purchases/investments in the next 12 to 24 months ;

Complete one or more private equity placements to provide funding for developing of our current technologies and the acquisition of additional portfolio companies;

Hire a senior management team with a proven track record at the development of high growth, high impact technology.


RESULTS OF OPERATIONS FROM FEBRUARY 9, 2005 (INCEPTION) AND THE YEARS ENDED DECEMBER 31, 2012 and 2011

Revenues

We are currently engaged in a technology development business and have exited natural resources. We incurred revenues in 2012 due to our oil and gas business, which is discontinued. Our revenues increased $182,109 from $0 for the year ended December 31, 2011 to $182,109 for the year ended December 31, 2012 as we ramped up our technology business and wound down our natural resource projects.

Research and Development

Research and development expenses remained at $0 for both the year ended December 31, 2011 and $0 for the year ended December 31, 2012.

General and Administrative Expenses

General and administrative expenses principally include professional fees, investor relations fees, rent and general corporate overhead. Operating expenses, including wages and benefits and legal fees and increased $300,905, from $1,623,348 for the year ended December 31, 2011 to $1,322,443 for the year ended December 31, 2012, excluding stock based compensation, which was $434,517 in the period ending December 31, 2011 and $2,659,673 in the year ending December 31, 2012.

LIQUIDITY AND CAPITAL RESOURCES

As of the year ended December 31, 2012 we had $84,091 of cash on hand.

Our net loss increased $740,537, from $2,057,865 for the year ended December 31, 2011 to $2,798,402 for the year ended December 31, 2012. This increased net loss was caused primarily by increased expenses related to stock option based compensation.

Net cash used in operating activities decreased $140,705, from $1,262,829 for the year ended December 31, 2011 to $1,122,124 for the year ended December 31, 2012. This decrease was primarily the result of a decrease in wages, travel, legal and expert fees and prepaid expenses.

Net cash provided by financing activities increased $722,196, from $0 for the year ended December 31, 2011 to $722,196 for the year ended December 31, 2012. Net cash provided by financing activities was from an advance from a related party.

We believe that our current financial resources are sufficient to meet our working capital requirements over the next year, given that we have closed a financing subsequent to the end of the period of this report, provided we do not significantly increase our development expenses and develop our portfolio companies as cash permits. We are seeking to raise additional capital though private equity and debt financings. As of the date of this annual report on Form 10-K for the year ended December 31, 2012, we do not have any specific financing terms from any particular financier other than the financing we closed in February, 2013. We are currently engaged in a number of discussions with potential financiers. There can be no assurance that we will be able to secure these financings, or, if we are able to secure these financings, that it will be on terms favorable, or even acceptable, to us. If necessary, we may explore strategic alternatives, including a merger, asset sale, joint venture or other comparable transactions in order to maximize the value of our assets, though we have no present plans, intentions or negotiations toward such arrangements. Any inability to obtain additional financing would have a material adverse effect on our business, financial condition, and results of operations and would diminish our ability to adequately exploit our mineral properties and could result in the diminution of our interest in those properties.

Our short-term prospects are promising given our success to date in securing the two portfolio companies, Noot and Kontexto and the success that Kontexto has enjoyed in the market to date. We believe we will experience significant operational and financial growth from these and other portfolio companies during the next 12 months.


SPECTRAL CAPITAL CORPORATION

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012


SPECTRAL CAPITAL CORPORATION

(AN EXPLORATION STAGE COMPANY)

                                TABLE OF CONTENTS

                               DECEMBER 31, 2012






Report of Independent Registered Public Accounting Firm                    F - 1

Consolidated Balance Sheets as of December 31, 2012 and 2011               F - 2

Consolidated Statements of Operations for the years ended December 31,     F - 3
2012 and 2011 and the period from February 9, 2005 (inception) to December
31, 2012

Consolidated Statement of Stockholders' Equity as of December 31, 2012     F - 4
                                                                           - F -
                                                                           5

Consolidated Statements of Cash Flows for the years ended December 31,     F - 6
2012 and 2011 and the period from February 9,2005 (inception) to December
31, 2012

Notes to Consolidated Financial Statements                                 F - 7
                                                                           - F -
                                                                           17


Silberstein Ungar, PLLC CPAs and Business Advisors Phone (248) 203-0080 Fax (248) 281-0940 30600 Telegraph Road, Suite 2175 Bingham Farms, MI 48025-4586 www.sucpas.com

Report of Independent Registered Public Accounting Firm

To the Board of Directors of
Spectral Capital Corporation
Seattle, Washington

We have audited the accompanying consolidated balance sheets of Spectral Capital Corporation (the "Company") as of December 31, 2012 and 2011, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended and the period from February 9, 2005 (inception) to December 31, 2012. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Spectral Capital Corporation as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended and the period from February 9, 2005 (inception) to December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that Spectral Capital Corporation will continue as a going concern. As discussed in Note 7 to the financial statements, the Company has incurred losses from operations, and is in need of additional capital to grow its operations so that it can become profitable. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans with regard to these matters are described in Note 7. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Silberstein Ungar, PLLC

Bingham Farms, Michigan
April 15, 2013

F - 1

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