SPECTRAL CAPITAL Corp - Quarter Report: 2012 September (Form 10-Q)

spectral.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

	[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

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

For the transition period from ________ to ________

Commission File No. 000-50274

Spectral Capital Corporation

(Exact name of Registrant as specified in its charter)

Nevada	510520296
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

701 Fifth Avenue, Suite 4200, Seattle, WA	98104
(Address of principal executive offices)	(Zip/Postal Code)

(206) 262-7820

(Telephone Number)

(Former name or former address if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] YES [ ] NO

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 smaller reporting company)	Smaller Reporting Company [ X]

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

As of November 12, 2012 there are issued and outstanding only common equity shares in the amount of 101,267,623 shares, par value $0.0001, of which there is only a single class. There are 5,000,000 preferred shares authorized and none issued and outstanding.

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION	Page

Item 1.	Financial Statements:

	Interim Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011 (unaudited)	4

	Interim Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and September 30, 2011 and cumulative from inception on February 9, 2005 through September 30, 2012 (unaudited)	5

	Interim Consolidated Statement of Stockholders’ Deficit from inception on February 9, 2005 through September 30 , 2012 (unaudited)	6

	Interim Consolidated Statement of Cash Flows for the nine months ended September 30, 2012 and September 30, 2011 and cumulative from inception on February 9, 2005 through September 30, 2012 (unaudited)	7

	Notes to Financial Statements (unaudited)	8

Item 2.	Plan of Operation	19

Item 3.	Quantitative and Qualitative Disclosures about market risk	24

Item 4.	Controls and Procedures	24

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	25

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25

Item 3.	Defaults Upon Senior Securities	25

Item 4.	Mine Safety Disclosures	25

Item 5.	Other Information	25

Item 6. Exhibits & Signature		25

FORWARD-LOOKING STATEMENTS

In addition to historical information, this Report contains forward-looking statements. Such forward-looking statements are generally accompanied by words such as "intends," "projects," "strategies," "believes," "anticipates," "plans," and similar terms that convey the uncertainty of future events or outcomes. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in ITEM 2 of this Report, the section entitled "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION." Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof and are in all cases subject to the Company's ability to cure its current liquidity problems. There is no assurance that the Company will be able to generate sufficient revenues from its current business activities to meet day-to-day operation liabilities or to pursue the business objectives discussed herein.

The forward-looking statements contained in this Report also may be impacted by future economic conditions. Any adverse effect on general economic conditions and consumer confidence may adversely affect the business of the Company.

Spectral Capital Corporation undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission.

SPECTRAL CAPITAL CORPORATION

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

SPECTRAL CAPITAL CORPORATION

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

AS OF SEPTEMBER 30, 2012 AND DECEMBER 31, 2011

	September 30, 2012			December 31, 2011
ASSETS
Current assets
Cash and cash equivalents	$	132,013		$	730,922
Prepaid consulting		1,855			20,411
Total Current Assets		133,868			751,333

Property and equipment
Office equipment		2,870			2,870
Less: accumulated depreciation		(1,914	)		(1,196	)
Property and equipment, net		956			1,674
Other assets Reclamation deposit		27,810			-
Oil and gas properties, net		2,354,042			-
Total Other Assets		2,381,852			-

Total Assets	$	2,516,676		$	753,007

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Liabilities
Current liabilities
Accounts payable	$	2,233,928		$	-
Due to related parties		676,030			36,579
Accrued expenses		19,023			10,923
Total Liabilities		2,928,981			47,502

Stockholders’ Equity (Deficit)
Preferred stock, par value $0.0001, 5,000,000 shares authorized, no shares issued and outstanding		0			0
Common stock, par value $0.0001, 500,000,000 shares authorized, 101,207,623 shares issued and outstanding		10,121			10,121
Additional paid in capital		10,632,411			6,619,213
Common stock warrants		674,355			3,200,494
Deficit accumulated during the exploration stage		(11,414,053	)		(9,124,323	)
Stockholders’ Equity (Deficit) before non-controlling interest		(97,166	)		705,505
Non-controlling interest		(315,139	)		-
Total Stockholders’ Equity (Deficit)		(412,305	)		705,505

Total Liabilities and Stockholders' Equity (Deficit)	$	2,516,676		$	753,007

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

SPECTRAL CAPITAL CORPORATION

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

PERIOD FROM FEBRUARY 9, 2005 (INCEPTION) TO SEPTEMBER 30, 2012

	Three months ended September 30, 2012			Three months ended September 30, 2011			Nine months ended September 30, 2012			Nine months ended September 30, 2011			Period from February 9, 2005 (Inception) to September 30, 2012

REVENUES	$	100,374		$	-		$	127,861		$	-		$	246,979

OPERATING EXPENSES
Selling, general and administrative		48,598			152,463			156,646			419,231			3,725,802
Wages and benefits		37,569			70,954			126,129			188,727			2,426,953
Legal fees		8,954			83,000			77,254			213,444			651,621
Research and development		-			-			-			-			1,965,424
Exploration costs		190,668			99,500			805,479			110,210			940,736
Stock based compensation		1,260,145			-			1,487,059			-			1,921,576
Beneficial conversion expense		-			-			-			-			230,900
Depreciation and amortization		239			239			718			717			23,063
TOTAL OPERATING EXPENSES		1,546,173			406,156			2,653,285			932,329			11,886,075

LOSS FROM OPERATIONS		(1,445,799	)		(406,156	)		(2,525,424	)		(932,329	)		(11,639,096	)

OTHER INCOME (EXPENSE)
Interest Expense		(34,314	)		-			( 79,445	)		-			(90,096	)

LOSS FROM OPERATIONS BEFORE NON-CONTROLLING INTEREST		(1,480,113	)		(406,156	)		(2,604,869	)		(932,329	)		(11,729,192	)

LESS: LOSS ATTRIBUTABLE TO NON-CONTROLLING INTEREST		51,637			-			315,139			-			315,139

LOSS BEFORE PROVISION FOR INCOME TAXES		(1,428,476	)		(406,156	)		(2,289,730	)		(932,329	)		(11,414,053	)

PROVISION FOR INCOME TAXES		-			-			-			-			-

NET LOSS	$	(1,428,476	)	$	(406,156	)	$	(2,289,730	)	$	(932,329	)	$	(11,414,053	)

NET LOSS PER SHARE: BASIC AND DILUTED	$	(0.00	)	$	(0.00	)	$	(0.01	)	$	(0.01	)

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: BASIC AND DILUTED		101,207,623			101,207,623			101,267,623			101,267,623

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

SPECTRAL CAPITAL CORPORATION

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED)

AS OF SEPTEMBER 30, 2012

	Common Stock				Additional Paid in			Non-Controlling						Deficit Accumulated During the Exploration			Total Stockholders’
	Shares		Amount		Capital			Interest			Warrants			Stage			Equity (Deficit)
Balance, December 31, 2007, as originally reported		41,631	$	4	$	5,256,988		$	-		$	-		$	(5,252,623	)	$	4,369

Correction of an accounting error		-		-		-			-			-			5,947			5,947

Balance, December 31, 2007, as Restated		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

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		6,619,213						3,200,494			(9,124,323	)		705,505

Stock issued for compensation						1,487,059												1,487,059
Warrants expired						2,526,139						(2,526,139						-
Net loss for the nine months ended September 30, 2012		-		-		-			(315,139	)		-			(2,289,730	)		(2,604,869	)

Balance, September 30, 2012		101,207,623	$	10,121	$	10,632,411		$	(315,139	)	$	674,355		$	(11,414,053	)	$	(412,305	)

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

SPECTRAL CAPITAL CORPORATION

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

PERIOD FROM FEBRUARY 9, 2005 (INCEPTION) TO SEPTEMBER 30, 2012

	Nine Months ended September 30, 2012			Nine months ended September 30, 2011			Period from February 9, 2005 (Inception) to September 30, 2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period	$	(2,604,869	)	$	(932,329	)	$	(11,729,192	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		718			717			23,063
Share-based services		1,487,059			-			5,724,633
Beneficial conversion feature on warrant issue		-			-			230,900
Loss on disposal of property and equipment		-			-			5,879
Property and equipment traded for services		-			-			24,805
Changes in assets and liabilities:
Prepaid expenses		(9,254	)		65,149			(29,665	)
Accounts payable & accrued expenses		107,079			(75,798	)		123,505
Cash flows used in operating activities		(1,019,267	)		(942,261	)		(5,626,072	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of oil and gas properties		(219,093	)		-			(219,093	)
Purchase of property and equipment		-			-			(54,197	)
Proceeds from disposal of property and equipment		-			-			494
Cash flows used in investing activities		(219,093	)		-			(272,796	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related party loans		639,451			-			676,030
Cash received in recapitalization of the Company		-			-			184
Proceeds from note payable		-			-			50,000
Proceeds from issuance of common stock		-			-			4,412,000
Offering costs from issuance of common stock		-			-			(4,000	)
Net advances		-			-			896,667
Cash flows provided by financing activities		639,451			-			6,030,881
Net increase (decrease) in cash and cash equivalents		(598,909	)		(942,261	)		132,013
Cash and cash equivalents, beginning of the period		730,922			1,993,751			-
Cash and cash equivalents, end of the period	$	132,013		$	1,051,490		$	132,013

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	0		$	0		$	2,881
Income taxes paid	$	0		$	0		$	0
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Non-monetary net liabilities assumed in recapitalization	$	0		$	0		$	101,956
Properties acquired through assumption of debt	$	2,134,949		$	0		$	2,134,949
Common stock issued for debt	$	0		$	0		$	1,000
Stock warrants issued for acquisition of mineral properties	$	0		$	0		$	16,859,008
Stock warrants rescinded and cancelled	$	0		$	15,547,500		$	15,547,500
Stock warrants rescinded and cancelled	$	0		$	0		$	1,311,508
Issuance of common stock warrants	$	0		$	0		$	2,821,069

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

SPECTRAL CAPITAL CORPORATION

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 1 – NATURE OF OPERATIONS

Galaxy Championship Wrestling Inc. was incorporated on September 13, 2000 under the laws of the State of Nevada and changed its name to FUSA Capital Corporation on June 17, 2005. On March 7, 2005, the Company acquired all of the issued and outstanding shares of FUSA Technology Investments, Inc., formed on February 9, 2005 under the laws of the State of Nevada. For accounting purposes, the transaction was accounted for as a recapitalization such that the historical transactions of the acquired company were carried forward.

On July 27, 2010, the Company changed its name to Spectral Capital Corporation.

The Company was formerly in the business of developing internet search engine technology. The Company is currently evaluating and acquiring mineral properties as well as oil and gas properties.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidation financial statements include the accounts of the Company and its subsidiaries Extractive Resources Corporation and Shamrock Oil and Gas Ltd.. All material intercompany accounts and transactions have been eliminated in consolidation.

Basis of Presentation

The financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America and are presented in US dollars. The accompanying unaudited interim financial statements have been prepared by Spectral Capital Corporation (the “Company”) pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these financial statements have been included. Such adjustments consist of normal recurring adjustments. These interim financial statements should be read in conjunction with the audited financial statements of the Company for the fiscal year ended December 31, 2011. These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Extractive Resources Corporation.

The results of operations for the three and nine months ended September 30, 2012 are not indicative of the results that may be expected for the full year.

Accounting Basis

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

SPECTRAL CAPITAL CORPORATION

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Exploration Stage Company

The accompanying financial statements have been prepared in accordance with generally accepted accounting principles related to accounting and reporting by exploration-stage companies. An exploration-stage company is one in which planned principal operations have not commenced, or if its operations have commenced, there has been no significant revenues there from. Our planned mineral property operations, which are our primary focus at this time, are still in the exploration stage.

Reclassifications

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

Fair Value of Financial Instruments

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

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less to be cash equivalents. At September 30, 2012, the Company had $132,013 of unrestricted cash to be used for future business operations.

Concentrations of Credit Risk

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

Stock-Based Compensation

The Company accounts for employee stock-based compensation in accordance with the guidance of FASB ASC Topic 718, Compensation – Stock Compensation which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. In 2010, the Company issued 3,000,000 options vesting over periods ranging from immediate to five years. Unrecognized expense of $1,325,175 remains to be recognized over the next three years.

In February 2012, the Company issued 7,500,000 options vesting over a two year period. Unrecognized expense of 2,784,813 remains to be recognized over the next 1.41 years.

The Company follows ASC Topic 505-50, formerly EITF 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services,” for stock options and warrants issued to consultants and other non-employees. In accordance with ASC Topic 505-50, these stock options and warrants issued as compensation for services provided to the Company are accounted for based upon the fair value of the services provided or the estimated fair market value of the option or warrant, whichever can be more clearly determined. The fair value of the equity instrument is charged directly to compensation expense and additional paid-in capital over the period during which services are rendered. There were 750,000 options issued in 2011 to settle a dispute with an advisor. These options were valued at $400,425 using the Black-Scholes pricing model.

SPECTRAL CAPITAL CORPORATION

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Income Taxes

Income taxes are computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized. It is the Company’s policy to classify interest and penalties on income taxes as interest expense or penalties expense. As of September 30, 2012, there have been no interest or penalties incurred on income taxes.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

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

Basic Income (Loss) Per Share

Basic income (loss) per share is calculated by dividing the Company’s net loss applicable to common shareholders by the weighted average number of common shares during the period. Diluted earnings per share is calculated by dividing the Company’s net income available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity. Common share equivalents totaling 4,750,000 and 18,850,000 were outstanding at September 30, 2012 and 2011, respectively, representing outstanding warrants and options, and were not included in the computation of diluted earnings per share for the periods ended September 30, 2012 and 2011, as their effect would have been anti-dilutive.

Dividends

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

Mineral Properties

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

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

SPECTRAL CAPITAL CORPORATION

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Property and Equipment

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

Recent Accounting Pronouncements

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

Reclassifications

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

NOTE 3 – MINERAL PROPERTIES

On September 20, 2010, Spectral Capital Corporation entered into a Definitive Financing Agreement ("Agreement") with Gamma Investment Holdings Ltd. (“Gamma”) regarding the acquisition of a 47% undivided interest in two mineral properties in the Chita region of the Russian Federation. The acquisition described in this Note 3 was reversed on July 8, 2011 and the property returned to Gamma. Under the original September 20 Agreement, Spectral owned 47% of the License for prospecting, exploration and production of gold and all other metals. The length of the License ran to August 31, 2031. The size of the License was 186 square kilometers or 18,200 hectares. Under the Agreement, Spectral had agreed to invest a minimum of $35,000,000 into the development of the mineral properties over the next two years as follows: March 20, 2011 - $2,500,000; September 20, 2011 - $2,500,000; September 20, 2012 - $30,000,000, plus additional investments as determined by a Joint Venture Board that was to be formed under the terms and conditions of the Agreement. Spectral was also granted a net smelter royalty of 2% on gold and 1% on other minerals extracted from the property to Gamma. Spectral didn’t make any of the required payments and the acquisition was terminated pursuant to the July 8, 2011 agreement described later in this Note 3.

Concurrently, the parties entered into a Joint Venture Agreement that specified how the development of the mineral properties was to take place. Under the Agreement and the Joint Venture Agreement, Spectral had agreed to provide all of the financing that the Joint Venture requires to develop the mineral properties.

On July 8, 2011, the Company entered into an agreement with Gamma Investment Holdings Ltd. to convey to Gamma it’s 52% interest in a gold mining property in the Chita region of Russia previously granted under the agreement of September 20, 2010 and related agreements thereto. The conveyance was in exchange for the cancellation of Gamma’s 5,000,000 outstanding warrants in the Company and the reimbursement of the Company by Gamma of all expenditures on the project to date. Spectral has not sought reimbursement under the agreement.

SPECTRAL CAPITAL CORPORATION

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 3 – MINERAL PROPERTIES (CONTINUED)

On January 14, 2011, Spectral entered into a Definitive Financing Agreement with International Asset Holding Corp. (“IAHC”) whereby Spectral acquired a 65% interest in a gold mining property in the Bayankol River region of Kazakhstan. In order to facilitate license transfer of this property and financing, Spectral formed a wholly-owned Delaware subsidiary called Extractive Resources Corporation, which was the party to this Definitive Financing Agreement. Under this Agreement, IAHC was entitled to 5,000,000 warrants of Spectral with a five year term with an exercise price of $3.50 per share. Extractive also agreed to provide $200,000,000 in financing over a five year term to maintain its rights in the property and to pay a 1% net smelter royalty on minerals extracted from the property.

Effective December 31, 2011, Spectral and IAHC entered into a Property Acquisition Option Agreement and Definitive Financing Agreement Rescission restating Spectral’s position in the Bayankol property in light of the difficulties with local regulation and title transfer. The agreement rescinded the original transaction of January 14, 2011 and the previous 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. The 1,000,000 common shares of Spectral stock issuable to IAHC will be escrowed until IAHC complies with requirements that include placing ownership in the mineral property in an appropriate Kazakh special purpose vehicle so that Spectral’s option is exercisable with clear title to the property post-exercise. There were no other payments made or due under the agreement.

NOTE 4 – OIL AND GAS PROPERTIES

On February 13, 2012, Spectral Capital Corporation (the "Company") closed its planned purchase of an oil and gas property in the Red Earth Region of Alberta, Canada, which property Spectral purchased from receivership though its newly formed Canadian subsidiary, Shamrock Oil & Gas Ltd. Spectral is the 60% owner of the Canadian subsidiary and its Canadian joint venture partner owns 40% of the subsidiary. The total purchase price for the property was $2,134,949, in the form of the assumption of secured and unsecured claims on the property. Additionally, Spectral has advanced $750,000 in working capital to its Canadian subsidiary to operate the property and service the assumed debts. Spectral has the right, but not the obligation, to fund the project’s requirements on a first position secured creditor basis for up to $17,500,000 at 10% annual interest. If Spectral fails to provide such financing within 24 months, Spectral’s operating joint venture partner may seek co-dilutive financing with Spectral having a right of first refusal on such financing.

The Carrying value of the Company’s oil and gas properties are attributable to unproved properties. As exploration and development work progresses and the reserves on the properties are proven, capitalized costs attributable to the properties will be reclassified to producing properties and subject to depletion. If the exploration and development work were to be unsuccessful, the capitalized costs of the properties related to this unsuccessful work would be expensed in the year in which the determination was made. The timing of any write downs of these unproved properties, if warranted, depends upon the nature, timing and extent of future exploration and development activities and their results. The Company believes its exploration and development efforts will allow it to realize the unproved property balance.

SPECTRAL CAPITAL CORPORATION

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 5 – RELATED PARTY TRANSACTIONS

On July 9, 2010, the Company issued 10,000 shares of common stock in settlement of $10,000 of debt owed to an Officer of the Company.

Accounts payable totaling $16,467 at September 30, 2012 and $16,467 at December 31, 2011 are owed to the CEO of the Company for reimbursement of expenses incurred on behalf of the Company.

At September 30, 2012, $626,022 (December 31, 2011- $ 20,111) is owed to Akoranga AG, a Swiss Company owned by the CEO of Spectral. Akoranga was formed to facilitate Spectral’s business in Europe. Fees expensed for services provided by Akoranga totaled $20,381 for the period ended September 30, 2012 and $11,644 for the period ended September 30, 2011.

At September 30, 2012, $33,541 (December 31, 2011-$nil) is owed to a related party for expenses incurred on behalf of the subsidiary.

Related party loans to the Company are unsecured, non-interest bearing, and have no specific terms of repayment.

NOTE 6 – CAPITAL STOCK

On July 9, 2010, the Company issued 10,000 shares of common stock in settlement of $10,000 of debt owed to an Officer of the Company.

On August 18, 2010, the Company sold 50,000,000 shares of common stock at $.001 per share for total cash consideration of $50,000 to an unrelated third party.

On August 19, 2010, the Company converted the outstanding interest and principal under its promissory note, which was in excess of $50,000, for a settled amount of $50,000. Under the terms of the note, the shares were converted at the current financing price of $0.001 per share. Therefore, 50,000,000 common shares were issued to various unrelated third party holders of the April 2009 promissory note.

On October 18, 2010, 150,000 warrants, which were issued earlier in the year, were exercised to acquire 150,000 shares of the Company’s common stock for total cash consideration of $150,000.

On November 25, 2010, the Company issued 1,000,000 shares of common stock at $2.00 per share for total cash consideration of $2,000,000 to an unrelated third party.

There were no shares issued in 2012.

NOTE 7 – NON-CONTROLLING INTEREST

The Company owns 60% of Shamrock Oil & Gas Ltd. The assets and liabilities of Shamrock have been included in these consolidated financial statements. The 40% of Shamrock not owned by the Company has been presented as a non-controlling interest in these financial statements.

SPECTRAL CAPITAL CORPORATION

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 8 - STOCK-BASED COMPENSATION

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 10,000,000 common shares for employees, consultants, directors, and advisors.

A summary of changes in employee stock options during the period ended September 30, 2012 is as follows:

	Stock Options		Weighted Average Exercise Price
Outstanding, December 31, 2011		3,000,000	$	1.00
Issued		7,500,000		0.61
Exercised		0		0
Expired		0		0
Outstanding, September 30, 2012		10,500,000	$	0.72

As of September 30, 2012, the Company had incentive stock options issued and outstanding to employees as follows:

Stock Options		Exercise Price		Expiry Date
	1,000,000	$	1.00	10/20/20
	2,000,000	$	1.00	10/21/20
	7,500,000	$	0.61	2/6/22
	10,500,000

Because the Company’s stock-based compensation options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the estimate, amounts estimated using the Black-Scholes option pricing model may differ materially from the actual fair value of the Company’s stock-based compensation options.

As of September 30, 2012, there was $4,109,988 of unrecognized compensation expense related to non-vested share awards that we expect to recognize over a weighted average period of 2.28 years.

NOTE 9 – NON-EMPLOYEE OPTIONS AND COMMON STOCK WARRANTS

The Company granted 11,000,000 warrants in Fiscal 2010 in connection with private placements to unrelated third parties. The Company has accounted for these warrants as equity instruments in accordance with EITF 00-19 (ASC 815-40), Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, and as such, were classified in stockholders’ equity. The Company has estimated the fair value of the warrants issued in connection with the private placements at $2,821,069 as of the grant date using the Black-Scholes option pricing model. The Company also issued 5,000,000 warrants in connections with the Definitive Financing Agreement entered into with Gamma Investment Holdings Ltd. (“Gamma”) regarding the acquisition of a 47% undivided interest in two mineral properties in the Chita region of the Russian Federation. The warrants issued to Gamma were capitalized as acquisition costs of the mineral interests. The Company has estimated the fair value of the warrants issued in connection with the acquisition of mineral interests at $1,311,508 as of the grant date using the Black-Scholes option pricing model. The Gamma warrants were cancelled in 2011.

SPECTRAL CAPITAL CORPORATION

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 9 – NON-EMPLOYEE OPTIONS AND COMMON STOCK WARRANTS (CONTINUED)

On January 14, 2011, the Company issued 5,000,000 warrants in connection with a definitive financing agreement with International Asset Holding Corp. regarding the acquisition of a 65% interest in a mining property in Kazakhastan. The Company estimated the fair value of the warrants issued in connection with the acquisition of the mineral interest at $15,547,500. These warrants were cancelled on September 30, 2012 due to problems with title transfer of the property.

On June 2, 2011, the Company issued 750,000 options to settle a dispute with an advisor over services provided to the Company. The options were valued at $400,425 using the Black-Scholes pricing model.

Cash received from the exercise of stock warrants was $0 in 2012 and 2011.

A summary of changes in non-employee share purchase warrants and options during the period ended September 30, 2012 is as follows:

	Warrants and Options			Weighted Average Exercise Price
Outstanding, December 31, 2009		0		$	0.00
Issued		16,000,000			1.06
Exercised		(150,000	)		(1.00	)
Expired		0			0.00
Outstanding, December 31, 2010		15,850,000			1.06
Issued		5,750,000			1.55
Cancelled		(10,000,000	)		(1.00	)
Outstanding, December 31, 2011		11,600,000		$	1.09
Expired		(9,850,000	)		1..06
Oustanding, September 30, 2012		1,750,000			1.81

As of September 30, 2012, the Company had warrants and non-employee options outstanding as follows:

Warrants and Options	Exercise Price	Expiry Date
1,000,000	$2.00	11/25/2012
750,000	1.55	2/11/2016

The estimated grant date fair value of the warrants granted during the period to December 31, 2010 was estimated using the Black-Scholes option pricing model with the following assumptions: our stock price on date of grant, expected dividend yield of 0%, expected volatility of 80-142%, risk-free interest rate of .51-1.93%, and expected terms of 2-5 years. Grant date fair value of the options issued in 2011 was estimated using the Black-Scholes option pricing model with the following assumptions: our stock price on date of grant, an exercise price of $1.55, expected dividend yield of 0%, expected volatility of 79%, risk-free interest rate of 1.65%, and an expected term of 4.7 years.

SPECTRAL CAPITAL CORPORATION

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 10 – INCOME TAXES

As of September 30, 2012, the Company had net operating loss carry forwards of approximately $11,414,000 that may be available to reduce future years’ taxable income through 2022. Future tax benefits which may arise as a result of these losses have not been recognized in these financial statements, as their realization is determined not likely to occur and accordingly, the Company has recorded a valuation allowance for the deferred tax asset relating to these tax loss carry-forwards.

The provision for Federal income tax consists of the following:

	September 30, 2012			September 30, 2011
Federal income tax benefit attributable to:
Current operations	$	885,600		$	316,990
Less: valuation allowance		(885,600	)		(316,990	)
Net provision for Federal income taxes	$	0		$	0

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

	September 30, 2012			December 31, 2011
Deferred tax asset attributable to:
Net operating loss carryover	$	3,988,300		$	3,102,700
Less: valuation allowance		(3,988,300	)		(3,102,700	)
Net deferred tax asset	$	0		$	0

Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry forwards for federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur net operating loss carry forwards may be limited as to use in future years.

NOTE 11 – COMMITMENTS AND CONTINGENCIES

On September 20, 2010, Spectral Capital Corporation entered into a Definitive Financing Agreement ("Agreement") with Gamma Investment Holdings Ltd. (“Gamma”) regarding the acquisition of a 47% undivided interest in two mineral properties in the Chita region of Russia. Under the Agreement, Spectral has agreed to invest a minimum of $35,000,000 into the development of the mineral properties over the next two years as follows: March 20, 2011 - $2,500,000; September 20, 2011 - $2,500,000; September 20, 2012 - $30,000,000, plus additional investments as determined by a Joint Venture Board that is to be formed under the terms and conditions of the Agreement. Also, under the Agreement, Spectral must maintain a Market Capitalization Minimum as follows: Beginning 12 months from the date of this Agreement, Spectral will maintain a minimum market capitalization on the OTC Bulletin Board, AMEX, NASDAQ or NYSE exchange of at least $100,000,000 based on thirty day trailing volume weighted average closing price ("VWAP") or it would owe Gamma an additional payment of $1,000,000 due within 90 days of the failure to achieve such a VWAP price. Such a minimum capitalization requirement will continue as long as any of Gamma's Warrants granted under the Warrant Agreement remain valid but unexercised. Spectral also granted a net smelter royalty of 2% on gold and 1% on other minerals extracted from the property to Gamma.

Gamma was also issued a warrant to purchase 5,000,000 shares of Spectral common stock at a per share exercise price of $1.00 for a term of five years. The warrant provides for a cashless exercise provision, provides anti-dilution protections to Gamma and provides penalties to Spectral for failure to promptly issue common shares under the exercised warrants.

SPECTRAL CAPITAL CORPORATION

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 11 – COMMITMENTS AND CONTINGENCIES (CONTINUED)

Concurrently, the parties entered into a Joint Venture Agreement that specifies how the development of the mineral properties is to take place. Under the Agreement and the Joint Venture Agreement, Spectral has agreed to provide all of the financing that the Joint Venture requires to develop the mineral properties. In the event that Spectral does not meet minimum financing covenants under the Agreement, Spectral's development payments would be converted to a five year, 5% interest bearing loan and Spectral will lose its interest in the mineral properties. In the event that Spectral does meet the minimum financing covenants, but fails to fully fund the development of the mineral properties, Spectral would experience a reduction in its ownership.

On July 8, 2011 Spectral Capital Corporation (the "Company") entered into a Project Partnership and Financing Agreement ("Agreement") with representatives of the ROEL Group of companies based in Moscow, Russia to develop oil and gas projects in the Saratov Oblast of Russia. Under the terms of the Agreement and ancillary documents, Spectral has agreed to obtain financing necessary to pay all expenses related to the development of an oil and gas property in the Saratov Oblast of Russia, including immediate commitments to provide for financing of geological work, legal expenses and procurement expenses involved in having a license to the oil property issued to a newly constructed special purpose corporate entity where the project license and assets will reside. The agreements give Spectral a 74% interest in the project for an initial financing commitment of $10,000,000 and a subsequent financing commitment that could be as much as $100,000,000 if the property meets relevant production and growth criteria. The partnership is also focused on the securing of additional oil and gas and gold properties in the region.

Effective December 31, 2011, Spectral and International Asset Holdings Corp (“IAHC”) entered into a Property Acquisition Option Agreement and Definitive Financing Agreement Rescission restating Spectral’s position in the Bayankol property in light of the difficulties with local regulation and title transfer. The agreement rescinded the original transaction of January 14, 2011. Instead, Spectral will 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. The 1,000,000 common shares of Spectral stock issuable to IAHC will be escrowed until IAHC complies with requirements that include placing ownership in the mineral property in an appropriate Kazakh special purpose vehicle so that Spectral’s option is exercisable with clear title to the property post-exercise. There were no other payments made or due under the agreement.

The Company leases office space under an operating lease that expires on October 31, 2011. The monthly rent is approximately $3,052. The lease agreement has been extended on a month to month agreement at the same monthly rent. Rent expense for the periods ended September 30, 2012 and 2011 was $26,887 and $28,609 respectively.

SPECTRAL CAPITAL CORPORATION

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 12– GOING CONCERN

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has sustained substantial losses since inception, and is in need of additional capital to grow its operations so that it can become profitable.

In view of this matter, the ability of the Company to continue as a going concern is dependent upon growth of revenues and the ability of the Company to raise additional capital. Management believes that its successful ability to raise capital and increases in revenues will provide the opportunity for the Company to continue as a going concern.

NOTE 13– SUBSEQUENT EVENTS

In accordance with ASC 855-10, the Company has analyzed its operations subsequent to September 30, 2012 to the date these financial statements were issued, and has determined that it does not have any material subsequent events to disclose in these financial statements other than those events described above.

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of our operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements.

OVERVIEW

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

CORPORATE HISTORY AND DEVELOPMENT

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

RESULTS OF OPERATIONS

Financial Condition and Liquidity

Overview

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

Cash and Working Capital

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

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

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

Future Financings

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

Off Balance Sheet Arrangements

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

PLAN OF OPERATION

Significant Contingencies

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

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

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

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

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

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

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

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

	Produce free cash flow from our Alberta property;

	Complete additional wells on our Alberta property;

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

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

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

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

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency and Credit Risk. The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. The Company’s reporting currency is the US Dollar. We do undertake mineral and oil development activities in Canada Kazakhstan and financial and consultative activities in Europe, which involve transactions in the Canadian dollar, Tenge, and Euro respectively.

Fair Value of Financial Instruments. The carrying value of the Company's financial instruments, including prepaid expenses, related party receivables, accounts payable and accrued liabilities at September 30, 2012 approximates their fair values due to the short-term nature of these financial instruments.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). As a result of this evaluation, we identified material weaknesses in our internal control over financial reporting as of December 31, 2011. Accordingly, we concluded that our disclosure controls and procedures were not effective as of December 31, 2011.

As required by SEC Rule 15d-15(b), our Chief Executive Officer carried out an evaluation under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 15d-14 as of the end of the period covered by this report. Based on the foregoing evaluation, our Chief Executive Officer has concluded that our disclosure controls and procedures are not effective in timely alerting them to material information required to be included in our periodic SEC filings and to ensure that information required to be disclosed in our periodic SEC filings is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure as a result of the deficiency in our internal control over financial reporting discussed below.

The material weaknesses identified in our annual report on Form 10-K for the year ended December 31, 2011 were related to a lack of an accounting staff resulting in a lack of segregation of duties and accounting technical expertise necessary for an effective system of internal control. The weakness still exists at September 30, 2012.

(b) Changes in internal control over financial reporting.

There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 2. Unregistered Sales of Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

Not Applicable

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information

None.

Item 6. Exhibits

EXHIBITS

31.1	Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002

31.2	Certification of Chief Financial and Principal Accounting Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002

32.1	Certification of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2	Certification of the Company’s Chief Financial and Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101 INS	XBRL Instance Document*

101 SCH	XBRL Schema Document*

101 CAL	XBRL Calculation Linkbase Document*

101 DEF	XBRL Definition Linkbase Document*

101 LAB	XBRL Labels Linkbase Document*

101 PRE	XBRL Presentation Linkbase Document*

* The XBRL related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

SIGNATURE

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: November 14, 2012	Spectral Captial Corporation

	/s/ Jenifer Osterwalder
	Jenifer Osterwalder
	President and Chief Executive Officer
	/s/ Stephen Spalding
	Chief Financial Officer
	(Duly Authorized Officer and Principal
	Financial and Accounting Officer)