SPECTRAL CAPITAL Corp 10-Q

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. The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and related notes included in this report and those in our Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission on March 28, 2024 and all subsequent filings. OVERVIEW Spectral Capital Corporation (“us”, “we”, “our” or the “Company”) is a 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 management has been searching for this type of technology to develop, finance and commercialize for more than a decade. We had previously acquired stakes in two technology companies at the cutting edge of semantic search and we have been looking to combine these companies with other emerging technologies that are at an inflection point of adoption and growth where enormous value can be unlocked. We believe that the technologies that will accelerate decentralized cloud computing, in particular quantum technologies, are the enormously promising and we have determined to focus on this field. According to Acumen Research and Consulting, in their October 12, 2023 report, the global cloud computing market will be worth $2.5 trillion dollars by 2032 and is growing at a compounded annual rate of over 17%. Spectral management determined that the best technology to identify, incubate, accelerate and finance was in the cloud computing industry, which seemed ripe for disruption, with 60% of the business controlled by a handful of large companies who charge high rates for hosting, with limited competition and fragile security solutions. Spectral determined that quantum computing technology would be faster, safer, cheaper, more secure and more energy efficient and that facilitating the infrastructure, including decentralized data centers, hardware and software solutions and the ecosystem of companies developing these solutions would be the best area within emerging technology to concentrate its efforts. Spectral now sees its focused mission as accelerating the development of decentralized cloud computing solutions that are quantum forward, including edge and hybrid computing solutions and the materials, energy solutions, software and hardware solutions that will enable the secure, energy efficient, decentralized cloud future. Spectral believes that individuals, small and large businesses, and governments have a deep, unmet need to be freed from the tyranny of high price, quasi-monopoly, energy inefficient, insecure, centralized data centers. These centralized data centers are vulnerable to physical and cyber attack, cost a fortune and take years to build and have a negative impact on climate change. We believe there is a vast global market for the development of an alternative-and Spectral has committed to the development and deployment of decentralized, energy efficient, quantum forward micro data centers all around the world. These data centers will be cheaper and faster to build, more energy efficient, more environmentally friendly, more secure and will therefore enjoy superior profit margins to centralized cloud providers. Quantum forward, energy efficient, decentralized, hyper-secure micro data centers will deliver superior hosting solutions at a lower price. We have been studying the cloud computing and data hosting space for some time. In December 2021, we began providing wholesale telecommunications, data and switching services consisting of international long distance reselling services on a business-to-business (“B2B”) basis. Since December 2021, we have provided this service in conjunction with approximately 3 network providers who, in turn, provided services directly to customers around the world. We paused these services in Q3 2022 because we believed that we could increase our profits if we could find partners that provide real time data exchange and technical advantages over what we had previously. We intend to resume this business in the first half of 2025 facilitated by our emerging QAAS capabilities. On January 3, 2022, we entered into a telecommunications services agreement with Sky Data PLL OU (Estonia) (“Sky”) to provide long distance switching services. We provided services under this agreement to 3 customers and 14 generated $98,323 of revenue from the contract during 2022. We have paused this line of business and plan to resume our telecommunications reselling services through our partnership with SKY/Scandere in early 2025 and without third-party intervention. Testing of these services will begin initially via SKY/Scandere, and after sufficient revenue streams and data providers have been resolved, we intend to join this arrangement. Having control of this traffic will allow full transparency and full control of this line of business and will allow us to scale the initial small traffic into higher amounts without added costs. We began the journey to augment cloud hosting solutions with decentralized, quantum forward technologies in April of 2024. At that time, Spectral management concluded that the best course to pursue in fulfilling the mission of pursuing the development and acceleration of emerging technologies was to develop expertise in the area of Quantum Computing and related technologies. Spectral engaged additional management and board resources to enhance its expertise in this area, including the engagement of board chairman Sean Michael Brehm. The Company believes it can derive revenue through the development, acquisition and sale of Quantum Computing as a Service (QAAS) as well as providing services, support and platforms to Company’s operating in that sector. Toward this end, the Company has signed an agreement on June 7, 2024 for a share exchange with a Quantum Computing technology company, Node Nexus Network Co. LLC (“NNN”) in order to enhance its Quantum Computing offerings through acquiring NNN. On August 24, 2024, we closed the NNN acquisition. Due to tax considerations and the applicability of US Federal Research and Development grants and due to the Company’s desire to solicit sensitive US government work, the stock exchange transaction entered into with Node Nexus Network, LLC, a UAE limited liability company (“NNN”) that closed on August 29, 2024 has been modified in a post-closing amendment attached hereto as Exhibit 10.1 dated November 13, 2024. The post-closing amendment specifies that the intellectual property being acquired by the Company from NNN has been assigned to a newly formed Delaware US entity called Vogon Cloud, Inc., a Delaware corporation (“Vogon Cloud”). The original NNN transaction has been rescinded and the shares reissued to Vogon Cloud for the above reasons. Therefore, the Company will proceed with an audit of Vogon Cloud and will continue to commercialize the intellectual property without interruption. There is no longer any relationship between the Company and NNN and the parties have signed a mutual release to that effect. The licenses to the formerly NNN intellectual property are now held by the Company through its interest in Vogon Cloud, which includes the underlying concepts and assignments of 104 innovations that the Company is in the process of protecting under US and international patent law. The Company expects to file 104 provisional utility patents with the USPTO by December 31, 2024 based on the Vogon Cloud technology and the Quantomo OU acquisition listed below. In addition to the innovations developed in the patents referenced in this section which are related to the middleware, load balancing, security, efficiency, design, energy consumption, composite materials and semiconductor design of hybrid and edge computing systems. In addition, Vogon Cloud owns the following products which are now owned by Spectral: (1) Vogon Cloud-Superior Quantum Hosting Software. This software provides Distributed Quantum ledger technology to Spectral. This product provides immutable, fast, decentralized, cost-effective and environmentally friendly storage for enterprise-level data and for critical transactions. (2) QuantumVM-Critical Middleware . Spectral now owns as a result of the Vogon Cloud acquisition, QuantumVM-Critical Middleware, which is a hyper-efficient virtual machine that allows companies to use and integrate their legacy data in a quantum environment, optimizing the mix of classical cloud and quantum systems for maximum efficiency. The Company believes that QAAS is exactly the type of technology that management has been searching for, as it has the potential to disrupt the way that classical computing cloud service providers meet the needs of enterprise customers. QAAS offerings have the potential to create faster, safer and more efficient methods of data storage and retrieval. The additional management resources that the Company has added in this area include the appointment of Chairman and member of the board of directors, Sean Michael Brehm. Mr. Brehm has a background developing and deploying large scale enterprise software solutions for the public and the private sector. He has led teams that have developed Quantum Computing solutions that make these technologies accessible for enterprise software clients without developed Quantum Computing infrastructure. Management intends to develop a suite of QAAS solutions as well as to identify and partner with startups in the QAAS field. Quantum Computing harnesses the principles of quantum mechanics to perform computations that far surpass the capabilities of classical computers. Its transformative potential spans numerous sectors, including cryptography, drug discovery, supply chain management and materials science, with the potential to transform what is possible in these 15 sectors. However, practical implementation remains challenging due to technological complexities, high development costs, and a shortage of skilled professionals. This is a field where a number of startups have emerged that lack the full infrastructure, funding, expertise, access to shared platforms and markets that exist as mature ecosystems within the software as a service field (SAAS) that traditionally meets the classical computing needs of enterprise customers. Spectral’s approach to QAAS is a fundamentally decentralized one that puts users in full charge and control of Quantum Computing technologies. We believe that this approach, which follows in the open source software ethos, will be attractive to enterprise customers. Our market research to date suggests that the advantages of incumbency in the SAAS space seem to be less pronounced in the QAAS space, where no company has yet established itself as a market leader. This gives Spectral the opportunity to compete for business with enterprise customers in the QAAS field on a more level playing field than in the field of classical cloud computing solutions. The Company has also undertaken to revitalize both its Noot and Monitor technologies and resume operations of those two companies using a QAAS approach. Management believes that the architecture of both of these products is well suited to the type of enhancements a QAAS approach can provide. The Company also believes that QAAS will increase demand for the SKY/Scandere data and switching services and that the data centers required by QAAS companies will allow the Company to substantially grow its data center business in a way that enhances customer security, is climate friendly and facilitates needed decentralization in the sector. Item 1.01. Entry into a Material Definitive Agreement. On September 10, 2024, the Company entered into an Acquisition Agreement to exchange shares with Crowdpoint Technologies, Inc., a Texas corporation (“Crowdpoint”), a company controlled by Sean Michael Brehm, and its wholly owned subsidiary, Crwdunit Inc., a Delaware corporation (“Target”), whereby the Company agreed to acquire from Crowdpoint 100% of the Target’s outstanding shares in exchange for 3,750,000 shares of the Company’s common stock. The closing of the transaction is expected to occur by December 10, 2024, subject to the satisfaction of certain closing conditions as defined within the agreement. On September 10, 2024, the Company entered into an Acquisition Agreement to exchange shares (the “ Exchange Agreement ”) with Quantomo OU., an Estonian corporation (“ Seller ”), whereby the Company agreed to acquire from the Seller, and Seller agreed to sell to the Company, 100% of the Seller’s outstanding shares in exchange for 2,000,000 newly issued shares (the “ Exchange Shares ”) of the Company’s common stock, $.0001 par value (the “ Common Stock ”) and a one-time cash payment of $135,000 or (120,000 Euros). The Company will acquire 100% of the issued and outstanding shares of the Seller for a total purchase price of $8,135,000, paid through the issuance of the Exchange Shares and cash. The closing of the transaction (the “ Closing ”) is expected to occur by December 10, 2024, subject to the satisfaction of the following conditions: · Approval by the boards of directors of the Company and Target · All necessary regulatory approvals and compliance with applicable securities and commercial laws. · Completion of satisfactory due diligence by both parties, including financial, legal, technical, and operational audits. · Execution of all necessary legal agreements, including those governing the transfer of the Crwdunit Utility and Quantization Mechanism intellectual property. · Confirmation that all Target shareholders have been duly notified and rights have been protected according to this term sheet. On June 7, 2024, the Company entered into a Share Exchange Agreement (the “ Exchange Agreement ”) with the NNN (“Target”) and the Sean Michael Brehm (“Target Shareholder”), whereby (i) the Company agreed to acquire from the Target, and Target agreed to sell to the Company, 150 shares of capital stock, representing 100% of the Target’s outstanding shares, in exchange for 40,000,000 newly issued shares (the “ Exchange Shares ”) of our common stock, $.0001 par value (the “ Common Stock ”) and (ii) the Target Shareholder agreed to purchase 5,000,000 shares of the Company’s restricted Common Stock at a per share price of $0.20 or an aggregate of $1,000,000 (the “ Purchase Price ”) concurrently with or prior to the Closing (“ Financing Shares ”). 16 On June 23, 2024, the Parties entered into a licensing agreement (“ Licensing Agreement ”) for the Intellectual Property as defined in the Exchange Agreement which consists of: oDistributed Quantum Ledger Database Technology (DQ-LDB) technologies involved with data processing, storage and security as embodied in the Vogon Quantum Ledger Product. oDecentralized Infrastructure software associated with data collection, processing and security of data as provided to the Licensee. oDecentralized Cloud and Distributed Cloud Solutions as provided to the Licensee. oArtificial Intelligence technologies involved with data integrity and security as provided to the Licensee. On July 23, 2024, the Parties entered into an amendment to the Exchange Agreement (the “ Amendment ”) to extend the Closing date to on or before August 31, 2024 (the “ Closing Date ”). On July 23, 2024, the Parties entered into an amendment to the Exchange Agreement (the “ Amendment ”) with the following terms: ●The Closing shall occur on or before August 31, 2024, unless extended (the “ Closing ”). ●The Company and its transfer agent shall enter into an escrow agreement (the “ Escrow Agreement ”) whereby the Financing Shares shall be held in escrow pending the Company’s receipt of the Purchase Price, and the Exchange Shares shall be held in escrow pending the closing of the transactions contemplated by the Exchange Agreement on or before August 31, 2024. ●In the event that the Closing does not occur on or prior to August 31, 2024, the Financing Shares and Exchange Shares shall be cancelled and returned to Treasury. ●Parties shall enter into a licensing agreement (“ Licensing Agreement ”) for the Intellectual Property as defined in the Exchange Agreement. On August 14, 2024, the Target Shareholder delivered $1,010,000 to the Company to complete the purchase of the Financing Shares, and on August 15, 2024, the Company issued to the Target Shareholder 5,050,000 shares of Common Stock at $.20 per share. On August 22, 2024. we issued 40 million shares of the Common Stock in escrow to Node Nexus under the Exchange Agreement as amended and took possession and control of the Node Nexus assets. On August 28, 2024, we executed a second amendment to the Exchange Agreement whereby we agreed to issue 1,000,000 shares of Series Quantum preferred stock (the “Series Quantum Preferred Stock”) in lieu of the 40,000,000 common shares provided for under the Exchange agreement as previously amended. Each one (1) share of the Series Quantum Preferred Stock is convertible into forty (40) shares of our Common Stock by the holder or the Company provided that the holder has held the Series Quantum Preferred Stock for at least 12 months and the Company has authorized common shares to effectuate such conversion. On August 29, 2024, the Exchange Agreement as amended was fully performed and the shares in Node Nexus were delivered to the Company. Due to tax considerations and the applicability of US Federal Research and Development grants and due to the Company’s desire to solicit sensitive US government work, the stock exchange transaction entered into with Node Nexus Network, LLC, a UAE limited liability company (“NNN”) that closed on August 29, 2024 was been modified in a post-closing amendment attached hereto as Exhibit 10.1 dated November 13, 2024. The post-closing amendment specifies that the intellectual property being acquired by the Company from NNN has been assigned to a newly formed Delaware US entity called Vogon Cloud Inc., a Delaware corporation (“Vogon Cloud”). The original NNN transaction has been rescinded and the 1,000,000 shares reissued to Sean Michael Brehm for the above reasons. Therefore, the Company will proceed with an audit of Vogon Cloud and will continue to commercialize the intellectual property without interruption. There is no longer any relationship between the Company and NNN and the parties have signed a mutual release to that effect. The licenses to the formerly NNN intellectual property are now held by the Company through its interest in Vogon Cloud. The Company expects to file 104 provisional utility patents with the USPTO by December 31, 2024 based on the Vogon Cloud technology and the Quantomo OU acquisition listed below. It was originally determined that the share exchange agreement closed effective August 29, 2024. However, the Company 17 has determined that the transaction was never formally closed or title to the IP formally delivered to Spectral because of problems NNN had with its record keeping and ability to deliver certificates and other requirements under the agreement and that Spectral never formally received the shares in NNN as required by the agreement. Therefore, it was an error to state that the transaction had formally closed. Rather than revisit the transaction in an effort to cure defects, the Company and NNN decided to rescind the transaction. On November 14, 2024, the transaction was rescinded. The 1,000,000 Series Quantum Preferred Shares that were issued have been assigned to a new Delaware corporation which was assigned the intellectual property previously owned by NNN. There is no longer a connection between NNN and Spectral. See Note 3. Item 2.01. Completion of Acquisition or Disposition of Assets. The information contained in 1.01 above is incorporated into this Item 2.01. Item 3.02. Unregistered Sales of Equity Securities. Sean Michael Brehm, the Company’s Chairman and a member of the board of directors, is also the sole shareholder of Node Nexus Network and Vogon Cloud, which the Company has acquired in exchange for 1,000,000 shares of newly designated Series Quantum Preferred Stock effective August 29, 2024 which convert to the Company’s common shares in a 40 to 1 ratio. In connection with the acquisition, Sean Michael Brehm also purchased 5,050,000 of the Company’s common shares at $0.20 per share for a total purchase price of $1,010,000. This sale was originally consummated on August 29, 2024 and amended on November 13, 2024 to include Vogon Cloud, Inc. RESULTS OF OPERATIONS Comparison of the three months ended September 30, 2024 and 2023 Operating Expenses Operating expenses increased $1,194,986, from $45,722 for the three months ended September 30, 2023 to $1,194,986 for the three months ended September 30, 2024. During the current period, the increase was primarily due to stock-based compensation of $419,819 related to the vesting of options for services as well as $548,398 in research and development incurred related to the development of our technologies and software. Comparison of the nine months ended September 30, 2024 and 2023 Operating Expenses Operating expenses increased $1,571,142, from $173,133 for the nine months ended September 30, 2023 to $1,744,275 for the nine months ended September 30, 2024. During the current period, the increase was primarily due to stock-based compensation of $749,332 related to the issuance of options and common stock from services as well as $548,398 in research and development incurred related to the development of our technologies and software. Liquidity and Capital Resources As of September 30, 2024, we had $190,614 cash on hand. We intend to fund operations through the use of cash on hand, cash flows from operations and through debt and equity financings until sufficient cash flows from operations can be achieved. Net cash used in operating, activities increased $846,127 from $40,133 in cash used during the nine months ended September 30, 2023 to $886,260 cash used in the nine months ended September 30, 2024. This increase was due to the Company collecting a significant amounts of accounts receivable in the prior year as well as an increase in the loss during the current year due to the Company expending a significant amount of capital to improve the corporate structure of the Company and to pursue and exploit new technologies. 18 Net cash used in investing activities increased by $128,907 from $0 for the nine months ended September 30, 2023 to $128,907 for the nine months ended September 30, 2024. Net cash used in investing activities during the nine months ended September 30, 2024 primarily related to the cash payment made in connection with the proposed acquisition further discussed in Note 5. Net cash provided by financing activities increased by $1,174,963 from $30,577 for the nine months ended September 30, 2023 to $1,205,540 for the nine months ended September 30, 2024. Net cash provided by financing activities during the nine months ended September 30, 2024 related to proceeds from short term advances and capital raised through our offerings. We believe that our current financial resources are not sufficient to meet our working capital requirements over the next year. Additional funding will be necessary in order to expand portfolio operations and to reach our goals. Currently, the Company does not have any commitments or assurances for additional capital nor can the Company provide assurance that such financing will be available to it on favourable terms, or at all. If, after utilizing the existing sources of capital available to the Company, further capital needs are identified and the Company is not successful in obtaining the financing, it may be forced to curtail its existing or planned future operations. In addition, if necessary, we will decrease expenses and redirect our efforts towards a sale of one of more of our assets should funding become inadequate. We believe that our short-term prospects are promising. The Company has spent more than a decade actively researching, identifying and testing the types of disruptive technologies that could be enhanced by common management and technological resources and it feels that it has found such technologies in the Quantum Computing field as well as in the applications of Quantum Computing to both the Noot and Monitor portfolio company solutions. We also believe that we will experience significant operational and financial growth as a result of entering the QAAS field, as a result of the enhancements this technology will provide to our two portfolio companies as well as to our data center business. We also believe that the acquisition of Vogon Cloud, Inc. and Quantomo.OU will further enhance our QAAS offerings. However, we need significant capital to implement our plan. On September 27, 2024, Spectral Capital Corporation, a Nevada corporation (the “Company”, “we”, “our” or “us” ) provided an extension of the Subscription Agreement (the “ Subscription Agreement ”) with Spark Market, LLC (“ Subscriber ”), a product of Mundial Financial, a FINRA registered broker dealer, that extended the previous Subscription Agreement entered into between the Parties and updated certain information. The Subscription Agreement provides that the Subscriber may purchase up to 5,000,000 common shares of the Company at a per share purchase price of $3.00. The Subscription Agreement originally was entered into on July 8, 2024 and expired on September 1, 2024. The Company has elected to extend the original term of the Subscription Agreement for 90 days through November 30, 2024 and to update some associated representations by the Company. The Company does not intend to further extend the subscription agreement. On September 30, 2024, the Company provided an extension of the Subscription Agreement (the “ Subscription Agreement ”) with Ras al Khaimah Investment and Development Co LLC (“ RAKNI ”) that extended the previous Subscription Agreement entered into between the Parties and updated certain information. The Subscription Agreement provides that the Subscriber may purchase up to 6,000,000 common shares of the Company at a per share purchase price of $2.50. The Subscription Agreement originally was entered into on August 23, 2024 and expired on September 22, 2024. The Company has elected to extend the original term of the Subscription Agreement for another 30 days through October 22, 2024 and to update some associated representations by the Company. The Subscription Agreement expired without the transaction taking place. 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not required for a smaller reporting company. 19