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FCCN > SEC Filings for FCCN > Form 10-Q on 13-Aug-2013All Recent SEC Filings

Show all filings for SPECTRAL CAPITAL CORP

Form 10-Q for SPECTRAL CAPITAL CORP


13-Aug-2013

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

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.

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.

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.

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 December, 2012, the Company entered into an agreement with Akoranga AG, a Company owned by the CEO of Spectral, to transfer its ownership interests in the Alberta oil and gas properties for $950,000, the value of Spectral's contributions to the project to date. In satisfaction of the purchase price, Akoranga agreed to offset liabilities of Spectral in the amount of $626,022. The balance owing of $323,978 is non-interest bearing and is to be repaid within a one year period.

On February 26, 2013, Spectral Capital Corporation, through its subsidiary, Spectral Holdings, Inc. signed a definitive Technology Acquisition Agreement ("Agreement") to acquire mobile search engine and mobile sharing technology from Fiveseas Securities Ltd. Under the Agreement, Spectral issued Fiveseas 5,000,000 common shares of Spectral Capital Corporation, par value $0.0001. The Agreement calls for the technology to reside within a newly formed entity called Noot Holdings, Inc., a Delaware corporation, which Spectral will be a 60% owner of and Fiveseas will be a 40% owner of. Fiveseas was granted a right of first refusal for any subsequent sale of the technology.

On March 7, 2013, Spectral sold 1,650,000 common shares, par value $0.0001 at $0.65 per share and received a total of $1,000,000 USD in financing proceeds. Spectral also issued warrants to purchase 1,650,000 common shares, par value $0.0001 to the purchasers at an exercise price of $0.80 per share. The warrants expire on March 6, 2015. The shares were sold in a private placement to a non-US purchaser. There were no commissions paid in the financing and no registration rights granted.


On March 14, 2013, Spectral Capital Corporation purchased 8% of the issued and outstanding shares of Kontexto, Inc., a Canadian corporation. Spectral purchased the shares from a minority shareholder in exchange for 5,000,000 common shares of Spectral stock, par value $0.0001 and warrants to purchase 5,000,000 common shares at $0.85 per share, expiring on March 13, 2015. There were no commissions associated with the transaction and the shares are to be issued to non US shareholders of a Sargas Capital, Ltd., a Canadian company through a process still to be determined.

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

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, so comparisons with 2012 and the quarter ending March 31, 2013, may not be illustrative of our comparative performance.

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 June 30, 2013, the Company generated $301,227 in revenues and posted a net loss of $19,168,602 resulting from costs of general and administrative expenses, website development, stock compensation, impairments, expenses on oil and gas properties and interest expenses. The Company was considered an exploration stage company and is now considered a development stage company.

Cash and Working Capital

The Company's cash balance as of June 30, 2013 was $1,058,796, as compared to the cash balance of $84,091 of December 31, 2012.

Three month Period Ending June 30, 2013 and June 30, 2012

Operating expenses for the three-month period ended June 30, 2013 totalled $6,650,900, compared to $462,097 for the similar prior year period. The company experienced a net loss of $6,650,900 and $345,241 for the three month periods ended June 30, 2013 and 2012, respectively. The major expenses during this three-month period ended June 30, 2013 were for stock based compensation, wages, general and administrative expenses and impairment of investment.

In a company like Spectral that has not produced significant revenue from its operations, quarter-to-quarter expense comparisons can be difficult, especially as we have recently exited the natural resource sector. We had a small amount of revenues from our oil production activities in 2012, but have since disposed of these and have no current revenue. It can be meaningful to compare operating expenses between the three-month period ending June 30, 2013 and the three-month period ending June 30, to assess the trajectory of operating expenses with respect to operations not dependent on natural resources.


Six month Period Ending June 30, 2013 and June 30, 2012 and from Inception to March 31, 2013

Operating expenses for the six-month period ended June 30, 2013 totalled $7,387,908, compared to $1,107,112 for the similar prior year period. The company experienced a net loss of $7,387,908 and $861,254 for the six month periods ended June 30, 2013 and 2012, respectively. The major expenses during this six-month period ended June 30, 2013 were for stock based compensation, wages, general and administrative expenses and impairment of investment.

In a company like Spectral that has not produced significant revenue from its operations; quarter-to-quarter expense comparisons can be difficult, especially as we have recently exited the natural resource sector. We have had a small amount of revenues from our oil production activities in 2012, but have since disposed of these and have no current revenue. It can be meaningful to compare operating expenses between the six-month period ending June 30, 2013 and the six-month period ending June 30, to assess the trajectory of operating expenses with respect to operations not dependent on natural resources.

Liquidity and Capital Resources

For the six-month period ended June 30, 2013, net cash used by operating activities, consisting mostly of loss from operations, was $169,922 compared to $856,209 for the six months ended June 30, 2012 and $5,862,272 for the period from Inception to June 30, 2013.

Net cash provided by financing activities was $1,144,627, $556,060, and $7,221,674 for the six months ended June 30, 2013, 2012 and the period from Inception to June 30, 2013, respectively.

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-Q for the period ended June 30, 2013, we do not have any specific financing terms from any particular financier other than the financing we closed in March 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 favourable, 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.


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.

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

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.

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