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FCCN > SEC Filings for FCCN > Form 10-K on 31-Mar-2014All Recent SEC Filings

Show all filings for SPECTRAL CAPITAL CORP

Form 10-K for SPECTRAL CAPITAL CORP


31-Mar-2014

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, 2013 and 2012 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.

Development Stage Company
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles related to accounting and reporting by development-stage companies. A development-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.

Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company, Spectral Holdings, Inc, its 60% owned subsidiary, Noot Holdings, Inc, from its date of incorporation of February 28, 2013, and its 60% owned subsidiary, Monitr Holdings, Inc. from its date of incorporation of December 1, 2013. Previously, the Company included the operations of Extractive Resources Corporation and Shamrock Oil and Gas, Ltd. Shamrock is 60% owned by Extractive Resources Corporation which were disposed on December 31, 2012. All material intercompany accounts and transactions have been eliminated in consolidation.

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.

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 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.


The Company follows ASC Topic 505-50, formerly EITF 96-18, 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 or prepaid expense and additional paid-in capital over the period during which services are rendered.

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 development 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.

OVERVIEW

Spectral Capital Corporation ("Spectral" or the Company, also "We or Us") is a development 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 three 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 three 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 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 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 three portfolio companies we have acquired interests in.

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;

Market and grow the user base for the Noot Mobile Application;

Launch the initial product under the Monitr brand

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

Build the necessary infrastructure to close on one or more additional portfolio company purchases/investments in the next 12 to 24 months


RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

Revenues

We are currently engaged in a technology development business and have exited natural resources. We generated revenues in 2012 due to our oil and gas business, which is discontinued. Our revenues decreased $182,109 from $182,109 for the year ended December 31, 2012 to $0 for the year ended December 31, 2013 as we continued to develop our technology business.

Operating Expenses

Operating expenses, including wages and benefits and legal fees and increased $8,480,284, from $439,200 for the year ended December 31, 2012 to $8,919,484 for the year ended December 31, 2013, excluding stock based compensation, which was $2,707,016 during the year ended December 31, 2013 and $2,517,642 during the year ended December 31, 2012.

The significant increase in operating costs during the year ended December 31, 2013, was a direct result of day one charges in connection with the Kontexto and Monitr investments whereby the fair market value of common stock issued was in excess of the fair market value of the assets received.

Selling, general and administrative expenses principally include professional fees, investor relations fees, rent and general corporate overhead. The decrease of selling, general and administrative expense of $39,422 to $232,891 during the year ended December 31, 2013 from $272,313 for the year ended December 31, 2012 was directly related to decreases in rent and legal fees.

Research and development expenses increased to $81,107 during the year ended December 31 2013 from $0 during the year ended December 31, 2012. The increase is related to amounts paid to consultants for the continued internal development of the Noot technology after the initial project launch.

Depreciation and amortization primarily consists of the amortization of the Noot technology. The Company began amortizing such costs in October 2013 when the Noot product was launched.

During the year ended December 31, 2012, the Company divested itself of various operations related to the oil and gas industry. These operations were not present during the year ended December 31, 2013.

LIQUIDITY AND CAPITAL RESOURCES

As of the year ended December 31, 2013 we had $786,137 of cash on hand. We intend to fund operations through the use of cash on hand and through additional debt and equity financings until sufficient cash flows from operations can be achieved.


Net cash used in operating activities decreased $638,776, from $1,122,124 for the year ended December 31, 2012 to $483,348 for the year ended December 31, 2013. This decrease was primarily the result of increased non-cash charges during the current year. In addition, the prior year included a significant increase to net cash used in operations related to a gain recorded in connection with the disposition of our oil and gas operations.

Net cash used in investing activities decreased by $131,881 from $246,903 during the year ended December 31, 2012 to $115,022 during the year ended December 31, 2013. Net cash used in investing activities during the year ended December 31, 2013 related to additional monies expended by us in connection with the development of the Noot product.

Net cash provided by financing activities increased by $578,220 from $722,196 for the year ended December 31, 2012 to $1,300,416 for the year ended December 31, 2013. Net cash provided by financing activities during the year ended December 31, 2013 related to net advances from a related party in connection with payment of Spectral's obligations and $1.0 million in proceeds from the sale of common stock.

We believe that our current financial resources are sufficient to meet our working capital requirements over the next year, provided we do not significantly increase our development expenses and develop our portfolio companies as cash permits.

Our short-term prospects are promising given our success to date in securing the three portfolio companies, Noot, Kontexto, and Monitr 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

                         (A DEVELOPMENT STAGE COMPANY)

                                TABLE OF CONTENTS

                               DECEMBER 31, 2013



Report of Independent Registered Public Accounting Firm                    F - 1

Consolidated Balance Sheets as of December 31, 2013 and 2012               F - 2

Consolidated Statements of Operations for the years ended December 31,     F - 3
2013 and 2012 and the period from February 9, 2005 (inception) to December
31, 2013

Consolidated Statement of Stockholders' Equity (Deficit) as of December    F - 4
31, 2013                                                                   - F -
                                                                             6

Consolidated Statements of Cash Flows for the years ended December 31,     F - 7
2013 and 2012 and the period from February 9, 2005 (inception) to December
31, 2013

Notes to Consolidated Financial Statements                                  F -
                                                                           8 - F
                                                                           - 21

F - 1

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"), a development stage company, as of December 31, 2013 and 2012, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the years then ended and the period from February 9, 2005 (inception) to December 31, 2013. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated 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, 2013 and 2012, 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, 2013, in conformity with accounting principles generally accepted in the United States of America.

/s/ Silberstein Ungar, PLLC

March 26, 2014

F - 2

                          SPECTRAL CAPITAL CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                          CONSOLIDATED BALANCE SHEETS
                 AS OF DECEMBER 31, 2013 AND DECEMBER 31, 2012

                                                               December 31,       December 31,
                                                                   2013               2012
                                                                                 (As Restated)
Assets:
Cash and cash equivalents                                      $     786,137     $       84,091
Accounts receivable - related party                                  323,978            323,978
Current assets                                                     1,110,115            408,069

Property and equipment, net                                                -                717
Other assets:
Investment in Kontexto, Inc.                                         537,000                  -
Intangible assets, net                                             4,693,770                  -
Total assets                                                   $   6,340,885     $      408,786

Liabilities and Stockholders' Equity:
Current liabilities
Accounts payable and accrued liabilities                       $           -     $       14,000
Related party advances                                               398,112             97,696
Current liabilities                                                  398,112            111,696
Total liabilities                                                    398,112            111,696

Commitments and contingencies

Stockholders' Equity:
Preferred stock, par value $0.0001, 5,000,000
shares authorized, no shares issued and outstanding                        -                  -
Common stock, par value $0.0001, 500,000,000
shares authorized, 117,857,623 and 101,207,623 shares
issued and outstanding as of December 31, 2013 and December
31, 2012, respectively                                                11,786             10,121
Additional paid-in capital                                        24,687,359         12,683,132
Common stock warrants                                              1,831,500                  -
Prepaid consulting                                                   (47,345 )         (615,469 )
Deficit accumulated during the development/exploration stage     (22,339,584 )      (11,780,694 )
Total stockholders' equity                                         4,143,716            297,090
Non-controlling interest                                           1,799,057                  -
Total equity                                                       5,942,773            297,090
Total liabilities and stockholders' equity                     $   6,340,885     $      408,786

The accompanying notes are an integral part of these consolidated financial statements.

F - 3

                          SPECTRAL CAPITAL CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                 FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
         PERIOD FROM FEBRUARY 9, 2005 (INCEPTION) TO DECEMBER 31, 2013

                                                                                            Period from
                                                                                             February 9,
                                                                                                2005
                                                      Year ended         Year ended        (Inception) to
                                                     December 31,       December 31,        December 31,
                                                         2013               2012                2013
                                                                       (As Restated)

Revenues                                             $           -     $            -     $              -

Costs of sales                                                   -                  -                    -

Gross profit (loss)                                              -                  -                    -

Operating expenses:
Selling, general and administrative                        232,891            272,313            4,648,727
Wages and benefits                                         155,350            165,930            2,622,104
Research and development                                    81,107                  -            2,046,531
Stock-based compensation                                 2,707,016          2,517,642            5,659,175
Beneficial conversion expense                                    -                  -              230,900
Depreciation and amortization                              426,969                957              450,271
Impairment of investments                                8,023,167                  -            8,023,167
Total operating expenses                                11,626,500          2,956,842           23,680,875

Operating loss                                         (11,626,500 )       (2,956,842 )        (23,680,875 )

Other income and (expense)
Interest expense                                                 -           (113,761 )           (113,761 )
Other income (expense)                                           -                  -              (10,651 )
Total other income (expensee)                                    -           (113,761 )           (124,412 )

Loss from operations and before provision for
income taxes, discontinued operations and
non-controlling interest                               (11,626,500 )       (3,070,603 )        (23,805,287 )

Provision for income taxes                                       -                  -                    -

Net loss before discontinued operations and
non-controlling interest                               (11,626,500 )       (3,070,603 )        (23,805,287 )

Gain (loss) from discontinued operations                         -            144,546              128,407

Net loss                                             $ (11,626,500 )   $   (2,926,057 )   $    (23,676,880 )

Loss attributable to non-controlling interest           (1,067,610 )         (269,686 )         (1,337,296 )

Net loss attributable to Spectral Capital
Corporation                                          $ (10,558,890 )   $   (2,656,371 )   $    (22,339,584 )

Basic and diluted loss per common share              $       (0.09 )   $        (0.03 )
Weighted average shares - basic and diluted            111,257,897        101,207,623

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