10-K 1 spectral.htm SPECTRAL CAPITAL CORPORATION 10K 2013-12-31 spectral.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)

 
[X]
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the year ended December 31, 2013.

 
[  ]
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to _________
 
Commission File No. 0-50274

Spectral Capital Corporation
(Name of small business issuer in its charter)

Nevada
51-0520296
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
701 Fifth Avenue, Suite 4200, Seattle, Washington
98104
(Address of principal executive offices)
(Zip Code)


Issuer’s telephone number:  (206) 262-7820

Securities registered under Section 12(b) of the Exchange Act:

None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, $0.0001 par value
(Title of Class)


Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes T  No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

           Large accelerated filer   [ ]                                           Accelerated filer   [ ]
           Non-accelerated filer (Do not check if a smaller reporting company) [ ]                                                                                                                     Smaller reporting company   T

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No T

The number of shares of the issuer’s Common Stock outstanding as of March 15, 2014 is 117,857,623. 

As of June 30, 2013, the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the last reported sales price of such common equity was approximately $50,785,930.

DOCUMENTS INCORPORATED BY REFERENCE

None

 
 

 
 
TABLE OF CONTENTS

FORWARD LOOKING STATEMENTS
Page Number
   
PART I
 
     
ITEM 1
Description of Business.
ITEM 1A
Risk Factors
10
ITEM 2
Description of Property.
15
ITEM 3
Legal Proceedings.
15
ITEM 4.
Mine Safety Disclosures
15
     
PART II
   
     
ITEM 5.
Market for Common Equity and Related Stockholder Matters.
16
ITEM 7
Management’s Discussion and Analysis or Plan of Operation.
19
ITEM 8
Financial Statements.
F-1
ITEM 9
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.
24
ITEM 9A
Controls and Procedures.
24
ITEM 9B
Other Information.
25
     
PART III
   
     
ITEM 10.
Directors, Executive Officers, Promoters and Control Persons and Corporate Governance;  Compliance With Section 16(a) of the  Exchange Act.
27
ITEM 11
Executive Compensation.
29
ITEM 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
30
ITEM 13
Certain Relationships and Related Transactions, and Director Independence.
32
ITEM 14
Principal Accountant Fees and Services.
32
     
 PART IV    
     
 ITEM 15. Exhibits 33
  Signatures 34

 
 

 
                  
PART I

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-K, press releases and certain information provided periodically in writing or verbally by our officers or our agents contain statements which constitute forward-looking statements. The words “may”, “would”, “could”, “will”, “expect”, “estimate”, “anticipate”, “believe”, “intend”, “plan”, “goal”, and similar expressions and variations thereof are intended to specifically identify forward-looking statements. These statements appear in a number of places in this Form 10-K and include all statements that are not statements of historical fact regarding the intent, belief or current expectations of us, our directors or our officers, with respect to, among other things: (i) our liquidity and capital resources; (ii) our financing opportunities and plans; (iii) our ability to generate revenues; (iv) competition in our business segments; (v) market and other trends affecting our future financial condition or results of operations; (vi) our growth strategy and operating strategy; (vii) the declaration and/or payment of dividends; and (viii) any statements regarding any reserves, potential reserves, potential mineral yield or extraction costs with respect to our mining properties.

Investors and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. The factors that might cause such differences include, among others, those set forth in Part II, Item 7 of this annual report on Form 10-K, entitled Management’s Discussion and Analysis or Plan of Operation, including without limitation the risk factors contained therein. Except as required by law, we undertake no obligation to update any of the forward-looking statements in this Form 10-K after the date of this report.

ITEM 1. DESCRIPTION OF BUSINESS.

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.
 
 
1

 
 
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 nine 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.

 
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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 had 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 was to be repaid within a one year period. Subsequent to the year ended December 31, 2013, the fulfillment of the agreement was extended to December 31, 2014.
 
 
3

 
 
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 is a 60% owner of and Fiveseas is 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 approximately $0.61 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 Sargas Capital, Ltd., 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. The Company's CEO is an officer of Sargas Capital, Ltd. but does not have any holdings in Sargas Capital, Ltd.
 
On December 1, 2013, Spectral Capital Corporation, through its subsidiary, Spectral Holdings, Inc. signed a definitive Technology Acquisition Agreement (“Agreement”) to acquire a technology application and service that enhances the way people find, consume, analyze, share and discuss financial news and topics, equities, commodities and currencies on the web from TL Global Inc.  Under the Agreement, Spectral issued TL Global Inc. 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 Monitr Holdings, Inc., a Delaware corporation, which Spectral is a 60% owner of and TL Global Inc. is a 40% owner of. TL Global Inc. was granted a right of first refusal for any subsequent sale of the technology.
 
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 yearend is December 31.

PRINCIPAL PRODUCTS AND SERVICES
 
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.
 
 
4

 
 
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 currently have three technology companies in the Spectral portfolio, Noot, Kontexto, and Monitr.

Noot is a mobile technology company that has created “Noot” which ulitilizes proprietary search engine technology for mobile devices Noot helps people easily find news, social media, photos and video that match their interests. The technology actually learns what users like and improves its results over time, providing very personalized information for the user. A key benefit of Noot is that the search engine continues to work even when the user is not actively searching and will discover new and relevant items without prompting, providing more enhanced and personalized information the next time the user searches for that topic.

Kontexto founded in 2009, is a technology company that has developed software and services that acquire, analyze and visualize streaming real time data for companies and institutions. Kontexto has developed and markets the product publishflow(TM) based on their proprietary analysis platform and provides data capture and visualization services for select clientele. UK Trade and Investment, the largest government and business trade organization in the United Kingdom awarded them 'technology of exceptional potential'. Kontexo's customers include some of the biggest names in publishing, Post Media Network, The Guardian, Getty Images, Abu Dhabi Media, Bell Media and The Daily Mail.

Monitr, although uses of the technology are still being developed, intends to be a service that enhances the way people find, consume, analyze, share and discuss financial news and topics, equities, commodities and currencies on the web although the product scope will most likely be altered closer to product launch, which is planned for late 2014.

 
5

 
 
Competition

We compete with a wide variety of parties in connection with our efforts to: (i) attract users to our various Analytics, Search & Software portfolio companies and the ones we intend to develop; (ii) develop, market and distribute our current and anticipated B2C (“Business to Consumer”) and B2B (“Business to Business”) software applications (“Applications or Apps”) as developed by our portfolio companies; (iii) attract third parties to distribute our Applications and related technology; and (iv) attract advertisers. In the case of our anticipated search services generally, our competitors include Google, Yahoo!, Facebook, Amazon and other destination search websites and searchcentric portals (some of which provide a broad range of content and services and/or link to various desktop applications), third party toolbar, convenience search and applications providers, other search technology and convenience service providers (including internet access providers, social media platforms, online advertising networks, traditional media companies and companies that provide online content). Other competitors within the news reader market place include Flipboard, Trove, Paper to name a few. When we market our portfolio search and analytics services, we compete against a variety of established players and new entrants.

Moreover, some of our current and potential competitors have longer operating histories, greater brand recognition, larger customer bases and/or significantly greater financial, technical and marketing resources than we do. As a result, they have the ability to devote comparatively greater resources to the development and promotion of their products and services, which could result in greater market acceptance of their products and services relative to those offered by us.

In the case of our portfolio companies Noot,  Kontexto, and Monitr, we believe that our ability to compete successfully will depend primarily upon the relevance and authority of our search results, the usefulness of our analytics and other content, the functionality of our various Websites and software and the quality of related content and features and the attractiveness of the services provided by our technology generally to consumers and business relative to those of our competitors.

Marketing and Customers

Currently, we have in person sales efforts that have been effective for Kontexto, as the number of media enterprises with an interest in Kontexto can be segmented to insure a very large target of potential customers with the economics to support in person sales.  As Kontexto develops, we expect to get more and more of our sales through customers that subscribe for our services directly by contacting us and we expect that this process can be automated in the future to become less reliant on our sales and business development staff as Kontexto expands its market penetration beyond the largest media clients.

Kontexto is not dependent on any one customer and has a variety of exceptional, global and regional media enterprises as its clients.

Noot anticipates competing in the rapidly evolving area of mobile search as well as within the news reader market place.  We anticipate having millions of individual consumer users of Noot and not being dependent on one channel or customer, through we will be dependent on the App Store from Apple and the Android Marketplace for a significant number of our mobile search application downloads.

Monitr is still in the developmental stage and currently has no marketing or sales activity.

 
6

 
 
Principal Agreements Affecting Our Ordinary Business

We do not have any current long term agreements that impact our business, other than the license agreements for Kontexto customers.

Information Technology Governmental Regulation

Our operations are subject to various rules, regulations and limitations impacting the information technology industry as whole.

Environmental Matters

We do not anticipate any significant impact of environmental regulations on our business.

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.

The majority of our operations consist of (1) the development and commercialization of portfolio technology; including attendant information security needs and providing consistent and reliable access to our applications/technology.

RESEARCH AND DEVELOPMENT

We conducted development efforts regarding our previously held oil and gas properties.  As we have divested of our operating oil assets, we do not anticipate any additional development expenses in existing the natural resource sector.
 
From February 9, 2005 (inception) through the year ended December 31, 2013 we incurred research and development expenses of $2,046,531, almost entirely from the development of our previous technology business. We believe that our research and development expenses will increase substantially in 2014.   We expect to spend in excess of $5,000,000 in development expenses on our existing and to be acquired technology portfolio companies, assuming available financing.  We have already begun these efforts and have already expended substantial amounts on these activities.

 
7

 
 
COMPETITION

Overview

Some of the largest and most technologically sophisticated and financially successful companies in the world compete in the search engine and software development space. Capital requirements in this space can easily run into the hundreds of millions of dollars and Spectral is in no way able to compete directly against its larger and more well-financed competitors with respect to technology brands which require hundreds of millions of dollars to be spent either on technology development or sales and marketing.  Instead, we tend to compete against much smaller companies, with limited capital resources, who are all looking at early stage technology companies which require 1-4 years of development and $2-$5 million dollars in financing in order to reach critical mass in an important market.

Therefore, Spectral, like its smaller competitors within this space, can compete only by having a low enough overhead, a flexible enough risk profile, patience, a willingness to secure expensive management and technological resources on a flexible project basis and the utilization of equity based incentives to attract talented personnel who find the risk reward profile of emerging growth companies appealing.
 
Failure of Competitors
 
Many of our smaller competitors fail because of improperly architected technology, excessive spending on sales and marketing, information technology security problems, the failure to secure required development capital, the inability to efficiently develop a customer acquisition program cost effectively and the inability to efficiently and cost effectively manage technology development.

Our Competitive Position

Because we currently have already acquired interests in three portfolio companies, our competitive position with respect to our existing projects is relevant to our ability to attract and retain key management personnel.   The technology sector is booming and successes like Google, Facebook and Twitter, as well as a proliferation of other mobile technologies, drive intense competition for executive talent in the industry.  As a smaller competitor without a track record operating in a booming area, we will have to offer significant cash and equity incentives to attract talented personnel.  As we have had some limited success to date in attracting officers and board members based on the strength of our portfolio companies to date, we believe that we are reasonably well positioned to compete for these human resources.

SIGNIFICANT CUSTOMERS AND SUPPLIERS

We are not particularly dependent on any one customer or supplier.
 
 
8

 
 
INTELLECTUAL PROPERTY

Overview

Our intellectual property consists almost exclusively of patentable or trade secret protectable software code and proprietary information technology architecture.

We regard our intellectual property rights, including trademarks, domain names, trade secrets, patents, copyrights and other similar intellectual property, as critical to our success.

The businesses within our Noot Search segment also rely upon trade secrets, including algorithms for the generation, organization and presentation of search results.  To a lesser extent, these businesses also rely upon patent-pending proprietary technologies and processes, primarily those relating to search-related products and services, with expiration dates for patented technologies ranging from 2027 and beyond, if filed, and copyrighted material, including trade dress.

We rely on a combination of laws and contractual restrictions with employees, customers, suppliers, affiliates and others to establish and protect our various intellectual property rights.

For example, we intend to apply to register and renew, or secure by contract where appropriate, trademarks and service marks as they are developed and used, and reserve, register and renew domain names as we deem appropriate.  Effective trademark protection may not be available or may not be sought in every country in which products and services are made available and contractual disputes may affect the use of marks governed by private contract.  Similarly, not every variation of a domain name may be available or be registered, even if available.

We also generally intend to seek to apply for patents or for other similar statutory protections as and if we deem appropriate, based on then current facts and circumstances, and will continue to do so in the future.  No assurances can be given that any patent application we will have filed will result in a patent being issued, or that any future patents will afford adequate protection.

We cannot be certain that the precautions we have taken to safeguard pending trademarks and trade secrets will provide meaningful protection from unauthorized use. If we must pursue litigation in the future to enforce or otherwise protect our intellectual property rights, or to determine the validity and scope of the proprietary rights of others, we may not prevail and will likely have to make substantial expenditures and divert valuable resources in the process. Moreover, we may not have adequate remedies if our intellectual property is appropriated or our trade secrets are disclosed.

Trademarks

We intend to apply for registration of a trademark with the United States Patent and Trademark Office in order to establish and protect our brand names as part of our intellectual property assets. As of the date of this annual report on Form 10-K for the year ended December 31, 2013, no filings have been made in application process.

Trade Secrets

Whenever we deem it important for purposes of maintaining the secrecy of information, such as sensitive and valuable search algorithms, we require parties with whom we share, or who otherwise are likely to become privy to, our trade secrets or other confidential information to execute and deliver to us confidentiality and/or non-disclosure agreements. Among others, this may include employees, consultants and other advisors, each of whom may require us to execute such an agreement upon commencement of their employment, consulting or advisory relationships. These agreements generally provide that all confidential information developed or made known to the individual by us during the course of the individual’s relationship with us is to be kept confidential and not to be disclosed to third parties except under specific circumstances.

 
9

 
 
As of the date of this annual report on Form 10-K for the year ended December 31, 2013, we have executed non-disclosure agreements with all of our key employees, consultants or advisors.

EMPLOYEES

For the year ended December 31, 2013, we had one full-time employee and three full-time or part-time consultants.

On February 17, 2014, the Company's CTO, Harsh Shetty resigned and the Company has closed its Mumbai, India office as a result.  The resignation was a result of our efforts in seeking new partners and acquisitions in India have not proven effective. The Company may resume such activities at a later date.

We are not subject to any collective bargaining agreements and believe that our relationships with our employees and consultants are good.

Item 1A.  RISK FACTORS
 
In addition to the other information included in this annual report, the following factors should be carefully considered in evaluating our business, financial position and future prospects. Any of the following risks, either alone or taken together, could materially and adversely affect our business, financial position or future prospects. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from what we have projected.

We have incurred losses since inception and anticipate that, we will continue to incur losses throughout the foreseeable future.
 
We have operated continuously at a loss since inception. We expect to experience continuing financial losses until our properties have been in production for some time.  Losses for the year ended December 31, 2013, and losses since inception were approximately $10,558,890 and $22,339,584, respectively.  Most of these losses were as a result of investments in our previous technology businesses and as a result of expenses due to stock-based compensation, but a substantial portion also come from expenses related to the identification, negotiation and due diligence on our previous natural resource projects.  The extent to which we continue to experience losses will depend on a number of factors, including:
 
 
The timeframe and costs involved in bringing our existing portfolio technology into commercialization;

 
Expenses related to  due diligence on new portfolio companies and investments in new portfolio companies;
 
 
Expenses related to consumer adoption of the Noot Mobile Search Engine;
 
 
our ability to attract, retain and motivate qualified personnel, if we have the resources to hire such individuals; and
 
 
our cost of capital.

 
10

 
 
Although we can see a scenario in which we can derive positive cash flow from one or more of our portfolio companies in 2014, our anticipated high growth makes this unlikely.  There can be no assurance that we will not continue to be cash flow negative.  In addition, it is possible that we may never obtain or sustain positive operating cash flow or generate net income.

Although we have sufficient cash to maintain our current operations, we do not have sufficient financing yet to efficiently develop our technology to its fullest potential

Although we have enough cash to meet our current operating requirements for 12 months, we do not have enough cash to fund the acquisition of new technologies or the full development of existing technologies.  We are currently seeking such financing but there can be no assurance that we will obtain such financing.
 
We are dependent on our ability to attract and retain key personnel

We must attract and retain qualified personnel, at the senior management, information technology and programmer level.  The information technology industry is experiencing a sustained period of growth and it is exceptionally difficult to attract and retain such personnel.  Without a history of successful operations and our lack of substantial current capital resources, we may have difficulty attracting the necessary, qualified personnel.  Failure to attract and retain such personnel could cause us to sub-optimally develop our projects and would have a material, negative impact on our operational and financial performance.

Risks Related The Information Technology Industry

Our success depends, in part, on the integrity of our systems and infrastructures and those of third parties. System interruptions and the lack of integration and redundancy in our and third party information systems may affect our business.

To succeed, our systems and infrastructures must perform well on a consistent basis. From time to time, we may experience occasional system interruptions that make some or all of our systems or data unavailable or that prevent us from providing products and services, which could adversely affect our business. Moreover, as traffic to our websites, applications and online properties increases and the number of new (and presumably more complex) products and services that we introduce continues to grow, we will need to upgrade our systems, infrastructures and technologies generally to facilitate this growth. If we do not do so, users, customers and third parties with whom we do business may not be able to access our products and services on an intermittent or prolonged basis, which could adversely affect the quality of their experiences. In addition, we could experience inefficiencies and/or operational failures in connection with these efforts, which could have the same effect. Moreover, even if we do not encounter any inefficiencies and/or operational failures in connection with these efforts, third parties with whom we do business may not make the changes to their systems, infrastructures and technologies needed to access our products and services on a timely basis, if at all.

The occurrence of any of these events could adversely affect our business, financial condition and results of operations.

 
11

 
 
We also rely on third party computer systems, data centers, broadband and other communications systems and service providers in connection with the provision of our products and services generally, as well as to facilitate and process certain transactions with our users and customers.

Any interruptions, outages or delays in our systems or those of our third party providers, or deterioration in the performance of these systems, could impair our ability to provide our products and services and/or process certain transactions with users and customers. Furthermore, data security breaches (as a result of actions taken by hackers or otherwise), fire, power loss, telecommunications failure, natural disasters, acts of war or terrorism, acts of God and other similar events or disruptions may damage or interrupt computer, data, broadband or other communications systems at any time. Any event of this nature could cause system interruptions, delays and loss of critical data, and could prevent us from providing services to users and customers. While we have backup systems for certain aspects of our operations, our systems are not fully redundant and disaster recovery planning is not sufficient for all eventualities. In addition, we may not have adequate insurance coverage to compensate for losses from a major interruption.

In particular, our destination search websites may be adversely affected by fraudulent, surreptitious or other unwanted computer programs, applications and activity that make changes to users' computers and interfere with the overall experience of our products and services, such as by hijacking queries to these websites or altering or replacing search results generated. This type of interference often occurs without disclosure to (or consent from) users, resulting in a negative experience that users may associate with us. These disruptive programs and applications may be difficult or impossible to uninstall or disable, may reinstall themselves and may circumvent efforts to block or remove them.

In addition, downloadable applications through which we provide search services are also subject to attack by viruses, worms and other malicious software programs, which could jeopardize the security of information stored in users' computers or in our systems and networks. No assurances can be given that our efforts to combat these malicious applications will be successful and/or that our products and services will not have (or will not be perceived to have) vulnerabilities in this regard.

We may be unable to obtain additional capital that we will require to implement our business plan, which could restrict our ability to grow.

We expect that our cash will be sufficient to fund our minimal capital requirements through 2014. However, those funds will not be sufficient to fund both our continuing operations and our planned growth. We will require additional capital to continue to grow our business via acquisitions and to further expand our existing portfolio companies. We may be unable to obtain additional capital if and when required.

We may pursue sources of additional capital through various financing transactions or arrangements, including joint venturing of projects, debt financing, equity financing or other means. We may not be successful in identifying suitable financing transactions in the time period required or at all, and we may not obtain the capital we require by other means. If we do not succeed in raising additional capital, our resources may not be sufficient to fund our planned expansion of operations in the future.

Any additional capital raised through the sale of equity may dilute the ownership percentage of our shareholders. Raising any such capital could also result in a decrease in the fair market value of our equity securities because our assets would be owned by a larger pool of outstanding equity. The terms of securities we issue in future capital transactions may be more favorable to our new investors, and may include preferences, superior voting rights and the issuance of other derivative securities. In addition, we have granted and will continue to grant equity incentive awards under our equity incentive plans, which may have a further dilutive effect.

 
12

 
 
We may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, which may adversely impact our financial condition.

Unless an active trading market develops for our securities, you may not be able to sell your shares.

Although, we are a reporting company and our common shares are listed on the OTC Bulletin Board (owned and operated by the Nasdaq Stock Market, Inc.) under the symbol “FCCN”, there is currently a volatile and thinly traded market for our common stock, which may not be maintained. Failure to develop maintain adequate trading volumes and price stability in the stock will have a generally negative effect on the price of our common stock, and you may be unable to sell your common stock or any attempted sale of such common stock may have the effect of lowering the market price and therefore your investment could be a partial or complete loss.

Since our common stock is thinly traded it is more susceptible to extreme rises or declines in price, and you may not be able to sell your shares at or above the price paid.

Since our common stock is thinly traded its trading price is likely to be highly volatile and could be subject to extreme fluctuations in response to various factors, many of which are beyond our control, including:

·
the trading volume of our shares;
   
·
the number of securities analysts, market-makers and brokers following our common stock;
   
·
changes in, or failure to achieve, financial estimates by securities analysts;
   
·
new products introduced or announced by us or our competitors;
   
·
announcements of technological innovations by us or our competitors;
   
·
actual or anticipated variations in quarterly operating results;
   
·
conditions or trends in our business industries;
   
·
announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
   
·
additions or departures of key personnel;
   
·
sales of our common stock; and
   
·
general stock market price and volume fluctuations of publicly-traded, and particularly microcap, companies.

You may have difficulty reselling shares of our common stock, either at or above the price you paid, or even at fair market value. The stock markets often experience significant price and volume changes that are not related to the operating performance of individual companies, and because our common stock is thinly traded it is particularly susceptible to such changes. These broad market changes may cause the market price of our common stock to decline regardless of how well we perform as a company. In addition, securities class action litigation has often been initiated following periods of volatility in the market price of a company’s securities. A securities class action suit against us could result in substantial legal fees, potential liabilities and the diversion of management’s attention and resources from our business. Moreover, and as noted below, our shares are currently traded on the OTC Bulletin Board and, further, are subject to the penny stock regulations. Price fluctuations in such shares are particularly volatile and subject to manipulation by market-makers, short-sellers and option traders.

 
13

 
 
Trading in our common stock on the OTC Bulletin Board may be limited thereby making it more difficult for you to resell any shares you may own.

Our common stock trades on the OTC Bulletin Board (owned and operated by the Nasdaq Stock Market, Inc.). The OTC Bulletin Board is not an exchange and, because trading of securities on the OTC Bulletin Board is often more sporadic than the trading of securities listed on a national exchange or on the Nasdaq National Market, you may have difficulty reselling any of the shares of our common stock that you may own.

Our common stock is subject to the “penny stock” regulations, which are likely to make it more difficult to sell.

Our common stock is considered a “penny stock,” which generally is a stock trading under $5.00 and not registered on a national securities exchange or quoted on the Nasdaq National Market. The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. These rules generally have the result of reducing trading in such stocks, restricting the pool of potential investors for such stocks, and making it more difficult for investors to sell their shares once acquired. Prior to a transaction in a penny stock, a broker-dealer is required to:

·
deliver to a prospective investor a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market;
   
·
provide the prospective investor with current bid and ask quotations for the penny stock;
   
·
explain to the prospective investor the compensation of the broker-dealer and its salesperson in the transaction;
   
·
provide investors monthly account statements showing the market value of each penny stock held in the their account; and
   
·
make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction.

These requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that is subject to the penny stock rules. Since our common stock is subject to the penny stock rules, investors in our common stock may find it more difficult to sell their shares.

 
14

 
 
We do not intend to pay any common stock dividends in the foreseeable future.

We have never declared or paid a dividend on our common stock and, because we have very limited resources and a substantial accumulated deficit, we do not anticipate declaring or paying any dividends on our common stock in the foreseeable future. Rather, we intend to retain earnings, if any, for the continued operation and expansion of our business. It is unlikely, therefore, that the holders of our common stock will have an opportunity to profit from anything other than potential appreciation in the value of our common shares held by them. If you require dividend income, you should not rely on an investment in our common stock.

Future issuances of our common stock may depress our stock price and dilute your interest.

We may issue additional shares of our common stock in future financings or grant stock options to our employees, officers, directors and consultants under our stock incentive plan. Any such issuances could have the affect of depressing the market price of our common stock and, in any case, would dilute the percentage ownership interests in our company by our shareholders. In addition, we could issue serial preferred stock having rights, preferences and privileges senior to those of our common stock, including the right to receive dividends and/or preferences upon liquidation, dissolution or winding-up in excess of, or prior to, the rights of the holders of our common stock. This could depress the value of our common stock and could reduce or eliminate amounts that would otherwise have been available to pay dividends on our common stock (which are unlikely in any case) or to make distributions on liquidation.

ITEM 2. DESCRIPTION OF PROPERTY.

Our principal executive offices are located at 701 Fifth Avenue, Suite 4200, Seattle, Washington, 98104.  Our telephone number is (206) 262-7820. The lease for this space is a month-to-month term. We also have contracted with a Swiss company for office space and operational support services outside of Zurich, Switzerland on a month-to-month basis.

ITEM 3. LEGAL PROCEEDINGS.

As of the date of this annual report on Form 10-K for the year ended December 31, 2013, there were no pending material legal proceedings to which we were a party and we are not aware that any were contemplated. There can be no assurance, however, that we will not be made a party to litigation in the future. Any finding of liability imposed against us is likely to have an adverse effect on our business, our financial condition, including liquidity and profitability, and our results of operations
 
ITEM 4. MINE SAFETY DISCLOSURES.

N/A.

 
15

 
 
PART II
 
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Our common stock is quoted on the OTC Bulletin Board, a service provided by the Nasdaq Stock Market Inc., under the symbol “FCCN”, and on certain international Exchanges under the symbol “F3SN”.

The following table sets forth the high and low bid prices for our common stock as reported each quarterly period within the last seven years on the OTC Bulletin Board, and as obtained from investopedia.com. The high and low prices reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions.
 
 
    High*      Low*  
Year ended 2012 Quarter ended
           
March 31, 2012
  $ 0.92     $ 0.49  
June 30, 2012
  $ 0.76     $ 0.51  
September 30, 2012
  $ 0.60     $ 0.31  
December 31, 2012
  $ 0.38     $ 0.21  

Year ended 2013 Quarter ended
           
March 31, 2013
  $ 1.12     $ 0.25  
June 30, 2013
  $ 0.64     $ 0.28  
September 30, 2013
  $ 0.49     $ 0.32  
December 31, 2013
  $ 0.40     $ 0.25  
 
*
All stock prices are adjusted to reflect three-for-one common stock dividend paid on May 13, 2005 to all stockholders of record as of May 3, 2005 and adjusted to reflect 1,500-to-1 reverse stock split for shareholders of record on July 6, 2009.

STOCKHOLDERS

As of March 15, 2014, there were approximately 87 holders of record of our common shares.

DIVIDENDS

From our inception we have never declared or paid any cash dividends on shares of our common stock and we do not anticipate declaring or paying any cash dividends in the foreseeable future. The decision to declare any future cash dividends will depend upon our results of operations, financial condition, current and anticipated cash needs, contractual restrictions, restrictions imposed by applicable law and other factors that our board of directors deem relevant. Although it is our intention to utilize all available funds for the development of our business, no restrictions are in place that would limit our ability to pay dividends. The payment of any future cash dividends will be at the sole discretion of our board of directors.

 
16

 
 
RECENT SALES OF UNREGISTERED SECURITIES
 
Date Securities Issued
Securities Title
Issued to
 
Number of
Securities Issued
   
Consideration *
 
Footnotes
Common Stock Issuances
                 
  Issued for cash
                 
7/9/2010
Common Stock
Jenifer Osterwalder
    10,000     $ 10,000  
(A)(1)
8/19/2010
Common Stock
Trafalgar Wealth Management
    50,000,000     $ 50,000  
(A)(2)
8/19/2010
Common Stock
Various
    50,000,000     $ 50,000  
(A)(3)
10/28/2010
Common Stock
Trafalgar Wealth Management
    150,000     $ 150,000  
(A)(4)
12/10/2010
Common Stock
VP Bank
    1,000,000     $ 2,000,000  
(A)(5)
3/7/2013
Common Stock
 Green Wings, LTD
    1,650,000     $ 1,000,000  
(A)(6)

*      There were no underwriter discounts or commissions associated with these sales of common stock for cash.
        
(1)
Valued at $1.00  per common share.
   
(2)
Valued at $0.001  per common share.
   
(3)
Valued at $0.001  per common share.  Issued for the cancellation of $50,000 in indebtedness.
   
(4)
Valued at $1.00 per common share.
   
(5)
Valued at $2.00 per common share.
   
(6)
Valued at $0.61 per common share.

General Footnotes
 
(A)
We relied in each case for these unregistered sales on the private offering exemption of Section 4(2) of the Securities Act and/or the private offering safe harbor provision of Rule 506 of Regulation D promulgated there under based on the following factors: (i) the number of offerees or purchasers, as applicable, (ii) the absence of general solicitation, (iii) representations obtained from the acquirers relative to their accreditation and/or sophistication (or from offeree or purchaser representatives, as applicable), (iv) the provision of appropriate disclosure, and (v) the placement of restrictive legends on the certificates reflecting the securities coupled with investment representations obtained from the acquirers.
 
 
17

 
 
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.

 
18

 
 
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.

 
19

 
 
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
 
 
20

 
 
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.

 
21

 
 
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.
 
 
22

 

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, 2013 and 2012 and the period from February 9, 2005 (inception) to December 31, 2013
F - 3
   
Consolidated Statement of Stockholders’ Equity (Deficit) as of December 31, 2013
F - 4 – F - 6
   
Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012 and the period from February 9, 2005 (inception) to December 31, 2013
F - 7
   
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,
2013
   
December 31,
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

   
Year ended
December 31,
2013
   
Year ended
 December 31,
2012
   
Period from
 February 9,
2005
(Inception) to
December 31,
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          
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F - 4

 
 
SPECTRAL CAPITAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AS OF DECEMBER 31, 2013
 
     
Common Stock
     
Additional
Paid in
     
Prepaid
     
Common Stock
     
Non-Controlling
      Deficit
Accumulated
During the
Development
     
Total
Stockholders’
 
   
Shares
   
Amount
   
Capital
   
Consulting
   
Warrants
   
Interest
   
Stage
   
Equity
 
Balance, February 9, 2005, Inception
    -       -       -       -       -       -       -       -  
                                                                 
Stock based compensation
    19,883       2,983       2,914,209       -       -       -       -       2,917,192  
                                                                 
Net loss for the period ended March 6, 2005
    -       -       -       -       -       -       (11,605 )     (11,605 )
                                                                 
Restated recapitalization, March 7, 2005
    18,299       2,744       (104,701 )     -       -       -       -       (101,957 )
                                                                 
PPMs
    620       93       305,907       -       -       -       -       306,000  
                                                                 
Beneficial conversion feature
    -       -       230,900       -       -       -       -       230,900  
                                                                 
Net loss for the year ended December 31, 2005
    -       -       -       -       -       -       (4,079,552 )     (4,079,552 )
Balance, December 31, 2005
    38,802     $ 5,820     $ 3,346,315       -       -       -     $ (4,091,157 )   $ (739,022 )
                                                                 
Stock options
    -       -       11,724       -       -       -       -       11,724  
                                                                 
Shares issued for services
    23       4       37,996       -       -       -       -       38,000  
                                                                 
PPMs
    757       112       951,888       -       -       -       -       952,000  
                                                                 
Shares exchanged for debt
    716       107       985,026       -       -       -       -       985,133  
                                                                 
Cancellation of shares issued for compensation
    (400 )     (60 )     (731,940 )     -       -       -       -       (732,000 )
                                                                 
Net loss for the year ended December 31, 2006
    -       -       -       -       -       -       (435,407 )     (435,407 )
Balance, December 31, 2006
    39,898     $ 5,983     $ 4,601,009       -       -       -     $ (4,526,564 )   $ 80,428  
                                                                 
PPMs
    1,733       260       649,740       -       -       -       -       650,000  
                                                                 
Share par value adjustments
    -       (6,239 )     6,239       -       -       -       -       -  
                                                                 
Net loss for the year ended December 31, 2007
    -       -       -       -       -       -       (720,112 )     (720,112 )
Balance, December 31, 2007
    41,631     $ 4     $ 5,256,988       -       -       -     $ (5,246,676 )   $ 10,316  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F - 5

 
 
SPECTRAL CAPITAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AS OF DECEMBER 31, 2013 (Continued)
 
     
Common Stock
     
Additional
Paid in
     
Prepaid
     
Common Stock
     
Non-Controlling
      Deficit
Accumulated
During the
Development
     
Total
Stockholders’
 
   
Shares
   
Amount
   
Capital
   
Consulting
   
Warrants
   
Interest
   
Stage
   
Equity
 
Balance forward, December 31, 2007
    41,631     $ 4     $ 5,256,988       -       -       -     $ (5,246,676 )   $ 10,316  
Issuance of common stock for cash @ $0.04 per share
    5,000       1       299,999       -               -       -       300,000  
                                                                 
Net loss for the year ended December 31, 2008
    -       -       -       -       -       -       (292,310 )     (292,310 )
Balance, December 31, 2008
    46,631     $ 5     $ 5,556,987       -       -       -     $ (5,538,986 )   $ 18,006  
                                                                 
Conversion of debt to common stock
    133       -       1,000       -               -       -       1,000  
Reverse stock split 1500:1 fractional shares issued
    859       -       -       -               -       -       -  
                                                                 
Net loss for the year ended December 31, 2009
    -       -       -       -       -       -       (77,998 )     (77,998 )
Balance, December 31, 2009
    47,623     $ 5     $ 5,557,987       -       -       -     $ (5,616,984 )   $ (58,992 )
                                                                 
Conversion of debt to common stock
    10,000       1       9,999       -       -       -       -       10,000  
                                                                 
Issuance of common stock for cash @ $0.001 per share
    50,000,000       5,000       45,000       -       -       -       -       50,000  
                                                                 
Conversion of debt to common stock
    50,000,000       5,000       51,181       -       -       -       -       56,181  
                                                                 
Exercise of 150,000 warrants @$1.00 per share
    150,000       15       170,985       -       (21,000 )     -       -       150,000  
                                                                 
Stock options issued as compensation
    -       -       1,170,713       -       -       -       -       1,170,713  
Stock warrants issued for mineral properties
    -       -       -       -       1,311,508       -       -       1,311,508  
                                                                 
Issuance of stock warrants
    -       -       (2,821,069 )     -       2,821,069       -       -       -  
Issuance of common stock for cash @ $2.00 per share
    1,000,000       100       1,999,900       -       -       -       -       2,000,000  
                                                                 
Net loss for the year ended December 31, 2010
    -       -       -               -       -       (1,449,474 )     (1,449,474 )
Balance, December 31, 2010
    101,207,623     $ 10,121     $ 6,184,696       -     $ 4,111,577             $ (7,066,458 )   $ 3,239,936  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F - 6

 

SPECTRAL CAPITAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AS OF DECEMBER 31, 2013 (Continued)

   
Common Stock
   
Additional
 Paid in
   
 
 
 
Prepaid
   
Common Stock
   
Non-Controlling
   
Deficit
 Accumulated
During the
Development
   
Total
 Stockholders’
 
   
Shares
   
Amount
   
Capital
   
Consulting
   
Warrants
   
Interest
   
Stage
   
Equity
 
Balance forward, December 31, 2010
    101,207,623     $ 10,121     $ 6,184,696       -     $ 4,111,577    
 
    $ (7,066,458 )   $ 3,239,936  
Stock warrants issued to acquire mineral properties
    -       -       -       -       15,547,500       -       -       15,547,500  
                                                                 
Stock warrants rescinded and cancelled
    -       -       -       -       (15,547,500 )     -       -       (15,547,500 )
                                                                 
Stock warrants rescinded and cancelled
    -       -       -       -       (1,311,508 )     -       -       (1,311,508 )
                                                                 
Stock options issued for consultant
    -       -       400,425       -       -       -       -       400,425  
                                                                 
Stock options issued as compensation
    -       -       434,517       -       -       -       -       434,517  
Net loss for the year ended December 31, 2011
    -       -       -       -       -       -       (2,057,865 )     (2,057,865 )
Balance, December 31, 2011
    101,207,623     $ 10,121     $ 7,019,638       -     $ 2,800,069       -     $ (9,124,323 )   $ 705,505  
                                                                 
Stock options issued as compensation (as restated)
    -       -       3,133,111       (615,469 )     -       -       -       2,517,642  
                                                                 
Stock warrants expired
    -       -       2,800,069       -       (2,800,069 )     -       -       -  
                                                                 
Termination of non-controlling interest
    -       -       (269,686 )     -       -       269,686       -       -  
                                                                 
Net loss for the year ended December 31, 2012 (as restated)
    -       -       -       -       -       (269,686 )     (2,656,371 )     (2,926,057 )
Balance, December 31, 2012 (as restated)
    101,207,623     $ 10,121     $ 12,683,132     $ (615,469 )   $ -     $ -     $ (11,780,694 )   $ 297,090  
                                                                 
Shares issued for cash
    1,650,000       165       716,835       -       283,000       -       -       1,000,000  
                                                                 
Stock options issued for consulting
    -       -       -       568,124       -       -       -       568,124  
                                                                 
Stock options issued for compensation
    -       -       2,138,892       -       -       -       -       2,138,892  
                                                                 
Shares issued for technology asset
    5,000,000       500       2,999,500       -       -       -       -       3,000,000  
                                                                 
Shares and warrants issued to acquire investment
    5,000,000       500       4,849,500       -       1,548,500       -       -       6,398,500  
                                                                 
Shares issued for technology asset
    5,000,000       500       1,299,500       -       -       -       -       1,300,000  
                                                                 
Non-controlling interest
    -       -       -       -       -       1,799,057       1,067,610       2,866,667  
                                                                 
Net loss for the year ended December 31, 2013
    -       -       -       -       -       -       (11,626,500 )     (11,626,500 )
Balance, December 31, 2013
    117,857,623     $ 11,786     $ 24,687,359     $ (47,345 )   $ 1,831,500     $ 1,799,057     $ (22,339,584 )   $ 5,942,773  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F - 7

 
 
SPECTRAL CAPITAL CORPORATION
 (A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
PERIOD FROM FEBRUARY 9, 2005 (INCEPTION) TO DECEMBER 31, 2013
 
                   
   
Year ended
December 31,
2013
   
Year ended
December 31,
2012
   
Period from
February 9,
2005 (Inception)
 to December 31,
2013
 
         
(As Restated)
       
CASH FLOWS FROM OPERATING ACTIVITIES:
                 
Net loss attributable to Spectral Capital Corporation
  $ (10,558,890 )   $ (2,656,371 )   $ (22,339,584 )
Adjustments to reconcile net loss to net cash provided by operating activities:
                       
Non-controlling interest
    (1,067,610 )     (269,686 )     (1,337,296 )
Depreciation and amortization
    426,969       957       450,272  
Stock-based compensation
    2,707,016       2,517,642       9,462,232  
Beneficial conversion feature on warrant issued
    -       -       230,900  
Gain on sale of oil business
    -       (845,680 )     (845,680 )
Loss on disposal of property and equipment
    -       -       5,879  
Property and equipment traded for services
    -       -       24,805  
Impairment of investments
    8,023,167       -       8,023,167  
Changes in operating assets and liabilities:
                       
Legal trust account
    -       (14,207 )     (14,207 )
Prepaids and other assets
    -       20,411       -  
Accounts payable and accrued expenses
    (14,000 )     124,810       127,235  
Due to related parties
    -       -       36,579  
Net cash used in operating activities
    (483,348 )     (1,122,124 )     (6,175,698 )
                         
CASH FLOWS FROM INVESTING ACTIVITIES:
                       
Purchase of property and equipment
    -       -       (54,197 )
Development of internet search technology
    (115,022 )     -       (115,022 )
Increase in security deposits
    -       (27,810 )     (27,810 )
Proceeds from disposal of property and equipment
    -       -       494  
Purchase of oil and gas properties
    -       (219,093 )     (219,093 )
Net cash used in investing activities
    (115,022 )     (246,903 )     (415,628 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES:
                       
Cash received in recapitalization of the Company
    -       -       184  
Proceeds from related party advances
    300,416       722,196       1,919,279  
Proceeds from sale of common stock
    1,000,000       -       5,412,000  
Proceeds from note payable
    -       -       50,000  
Offering costs from issuance of common stock
    -       -       (4,000 )
Net cash provided by financing activities
    1,300,416       722,196       7,377,463  
                         
Change in cash and cash equivalents
    702,046       (646,831 )     786,137  
Cash and cash equivalents, beginning of period
    84,091       730,922