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

________________________

FORM 10-K
______________

(Mark One)
x
 
     ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
For year ended December 31, 2014

 
o
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
SEAFARER EXPLORATION CORP.

(Exact name of registrant as specified in its charter)

 
Florida
90-0473054
(State or other jurisdiction of incorporation or organization)  
(I.R.S. Employer Identification No.)

14497 N. Dale Mabry Highway, Suite 209N, Tampa, Florida 33618

(Address of principal executive offices)(Zip code)

Registrant’s telephone number: (813) 448-3577

Securities registered pursuant to Section 12(g) of the Act:

  Common Stock, par value $0.0001 per share
 
 
 

 
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 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o No  x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o No x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

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. (Check one):

             
Large accelerated filer   o
 
Accelerated filer   o
 
Non-accelerated filer   o
 
Smaller reporting company   x
     
  (Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o No x
 
The aggregate market value of the voting common equity held by non-affiliates of the registrant was approximately $17,460,659 as of the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing sale price on the OTC:BB reported for such date. Shares of common stock held by each officer and director, and by each person who owns 10% or more of the outstanding common stock, have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
 
As of March 23, 2015 the Registrant had 1,041,796,090 outstanding shares of its common stock, $0.0001 par value.

 
 
 

 
 
 

 
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SEAFARER EXPLORATION CORP.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
 
   
Page
PART I
ITEM 1.
BUSINESS
5
ITEM 1A.
RISK FACTORS
10
ITEM 1B.
UNRESOLVED STAFF COMMENTS
10
ITEM 2.
PROPERTIES
11
ITEM 3.
LEGAL PROCEEDINGS
11
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
12
 
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
13
ITEM 6.
SELECTED FINANCIAL DATA
15
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
15
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 
21
ITEM 8.
FINANCIAL STATEMENTS
22
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
23
ITEM 9A.
CONTROLS AND PROCEDURES
23
ITEM 9B.
OTHER INFORMATION
24
 
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
25
ITEM 11.
EXECUTIVE COMPENSATION
26
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
27
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
28
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
31
 
PART IV
ITEM 15.
EXHIBITS
32
SIGNATURES
33


 

 
 

 
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

Statements in this Form 10-K under "Item 1. Business", "Item 2. Properties", "Item 3. Legal Proceedings", "Item 7. Management's Discussions and Analysis of Financial Condition and Results of Operations" and elsewhere constitute "forward-looking statements".  Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Seafarer Exploration Corp., a company organized under the laws of Florida, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: our ability to continue as a going concern; general economic and business conditions; competition; success of operating initiatives; our ability to raise capital and the terms thereof; changes in business strategy or development plans; future revenues; the continuity, experience and quality of our management; changes in or failure to comply with government regulations or the lack of government authorization to continue our projects; and other factors referenced in the Form 10-K.

The use in this Form 10-K of such words as "believes", "plans", "anticipates", "expects", "intends" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. The success of the Company is dependent on our efforts and many other factors including, primarily, our ability to raise additional capital.

We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.  Such forward-looking statements are based on the beliefs and estimates of our management, as well as on assumptions based on information currently available to us at the time such statements were made. Forward looking statements are subject to a variety of risks and uncertainties which could cause actual events or results to differ from those reflected in the forward looking statements, including, without limitation, the failure to successfully locate cargo and artifacts from historic shipwreck sites and a number of other risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements, either as a result of the matters set forth or incorporated in this Report or as a result of certain economic and business factors, some of which may be beyond our control.

We disclaim any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

As used in this Form 10-K, the terms “we,” “us,” “our,” “Seafarer,” and the “Company” mean Seafarer Exploration Corp. unless otherwise indicated.

 
 
 
 
 
 
 
 
 

 
 
 

 
4

 

 PART I
 
Item 1. Business.
 
Summary
 
Seafarer Exploration Corp. ("the Company" or "Seafarer"), a Florida Corporation, was incorporated on May 28, 2003. The Company formerly operated under the name Organetix, Inc. (“Organetix”). The Company's principal business plan is to develop the infrastructure to engage in the archaeologically-sensitive exploration and recovery of historic shipwrecks.

The exploration and recovery of historic shipwrecks is by nature extremely speculative, and there is a high degree of risk inherent in this type of business venture. The exploration and recovery of historic shipwrecks involves a multi-year, multi stage process and it may take several years and/or be prohibitively expensive to locate and recover valuable artifacts, if any are ever located at all, from historic shipwreck sites. It is possible that the Company will never locate any valuable artifacts from historic shipwreck sites.

There are a number of other significant challenges and risks regarding this type of business venture that make it extremely risky with high potential that the Company could fail. If the Company were to cease its operations, it is likely that there would be complete loss of all capital invested in and/or borrowed by the Company to date.

Change of Control

In June of 2008, Organetix entered into a Share Exchange Agreement with Seafarer Exploration, Inc. (“Seafarer Inc.”), a private company formed under the laws of Florida, and the shareholders of Seafarer, Inc. pursuant to which Organetix agreed to acquire all of the outstanding shares of common stock of Seafarer, Inc. from its shareholders. As consideration for the acquisition of the 18,905,083 shares of Seafarer, Inc., Organetix agreed to issue an aggregate of 131,243,235 shares of Common stock, $0.0001 par value to the Seafarer, Inc. shareholders. Following this transaction, the shareholders of Seafarer, Inc. controlled the majority of the Organetix common stock and Seafarer, Inc.’s management assumed operational and management control of Organetix. As a result, this reverse merger transaction was treated retroactively as a recapitalization with Seafarer, Inc. being treated as the acquirer for accounting purposes.

In July of 2008, Organetix filed a Certificate of Ownership with the Secretary of State of the State of Delaware to merge Seafarer Exploration Corp., a wholly-owned subsidiary, into Organetix.  Pursuant to the Certificate of Ownership, Organetix’s Articles of Incorporation were amended to change its name to Seafarer Exploration Corp.  Also during 2008, the Company changed its fiscal year end from April 30 to December 31.
 
No Revenue and Operating Losses

The Company expects to continue to incur significant operating losses and to generate negative cash flows from operating activities while developing the infrastructure necessary for the exploration and recovery of historic shipwreck sites and while actually exploring historic shipwreck sites.

 
5

 

Item 1. Business, continued
 
The Company’s ability to eliminate operating losses and to generate positive cash flow from operations in the future will depend upon a variety of factors, many of which it is unable to control.  Based on our historical rate of expenditures, the Company expects to expend its available cash in less than one month from March 31, 2015. If the Company is unable to implement its business plan successfully, it may not be able to eliminate operating losses, generate positive cash flow, or achieve or sustain profitability, which would materially and adversely affect its business, operations, and financial results, as well as its ability to make payments on its debt obligations, and the Company may be forced to cease its operations.

General

The Company’s principal business plan is to develop the infrastructure to engage in the archaeologically-sensitive exploration and recovery of historic shipwrecks and to actively search for, explore, and recover historic shipwrecks. This type of business venture is extremely speculative in nature and there is a tremendous amount of risk that any capital invested in and/or borrowed by the Company could be lost.
 
It has been estimated that there are over three million undiscovered shipwrecks around the world and a few of these shipwrecks were lost with verifiable cargoes that contained valuable materials, including artifacts and treasure. However, many of these shipwrecks may have very little archaeological or historical value, and furthermore, a very high percentage of these shipwrecks would not have been carrying valuable cargo including artifacts or treasure of any kind.

The exploration and recovery of historic shipwrecks involves a multi-year, multi stage process. It may take many years and/or be prohibitively expensive to locate, if any are ever located at all, and recover valuable artifacts from historic shipwrecks. Locating and recovering valuable artifacts is very difficult and the probability that the Company will locate valuable artifacts or treasure is extremely remote. If the Company is not able to locate artifacts or treasure with significant value then there is high probability that the Company will face adverse consequences.
 
Underwater recovery operations are inherently difficult and dangerous and may be delayed or suspended by weather, sea conditions or other natural hazards. In addition, even though sea conditions in a particular search location may be somewhat predictable, the possibility exists that unexpected conditions may occur, and already have occurred, that adversely affect the Company’s operations. It is also possible that natural hazards may prevent or significantly delay search and recovery operations.

In addition to natural hazards there are constant repair and maintenance issues with treasure salvage vessels which tend to be older vessels that were originally used in other industries that have been converted for use in shipwreck exploration and recovery. The repairs, maintenance and upkeep of this type of vessel, and in particular the Company’s main salvage vessel, is very time consuming and expensive and there may be significant periods of vessel down time that result from lack of financing to make repairs to the vessel.

Furthermore there are very strict international, federal and state laws that govern the exploration and recovery of historic shipwrecks. While the Company has been able to obtain some permits, there is no guarantee that the Company will be able to secure future permits or enter into agreements with government agencies in order to explore and salvage historic shipwrecks. There is a substantial risk that government entities may enact legislation that is so strict that any recovery of artifacts and cargo from historic shipwrecks will be nearly impossible. Additionally, permits and agreements with governmental agencies to conduct historic shipwreck exploration and recovery operations are expensive, in terms of both direct costs and ongoing compliance costs. It is also entirely possible that the Company will not be successful in obtaining title or permission to excavate certain wrecks. It is possible that permits that are sought for potential future international projects may never be issued, and if issued, may not be legal or honored by the entities that issued them.

Even if the Company is able to obtain permits for shipwreck projects there is a possibility that the shipwrecks may have already been salvaged or may not be found, or may not have had anything valuable on board at the time that they sank. The Company does research on its’ targeted sites, but that research may not prove out. In the event that valuable artifacts are located and recovered it is possible that the cost of recovery will be greater than the value of the artifacts recovered. It is also possible that other entities, including both private parties and governmental entities, will assert conflicting claims and challenge the Company’s rights to the recovered artifacts.

Moreover, there is the possibility that should the Company be successful in locating and salvaging artifacts that have significant archeological and/or monetary value that a country whose ship was salvaged may attempt to claim ownership of the artifacts by pursuing litigation. In the event that the Company is able to make a valid claim to artifacts or other items at a shipwreck site there is a risk of theft of such items at sea both before or after the recovery or while the artifacts are in transit to a safe destination as well as when stored in a secured location. Such thefts may not be adequately covered by insurance. Based on a number of these and other potential issues the Company could spend a great deal of time and invest a large sum in a specific shipwreck project and receive very little or no salvage claim or revenue for its work.
   
There are a number of significant issues and challenges including, but not limited to, government regulation and/or the Company’s inability to secure permits and contracts, lack of financing, lack of revenue and cash flow and continued losses from operations that make the exploration and recovery of historic shipwrecks a  speculative and risky business venture with a  high degree of risk that the Company may fail.  There is a possibility that the Company will be forced to cease its operations if it is not successful in eventually locating valuable artifacts. If the Company were to cease its operations, then it is likely that there would be complete loss of all capital invested in or borrowed by the Company.
 
As such, an investment in Seafarer is extremely speculative and of exceptionally high risk with a very high probability that all capital invested in and/or borrowed by the Company may be lost.

 
6

 

Item 1. Business, continued
 
Competition
 
There are a number of competing entities who are engaged in various aspects of the exploration and salvage of historic shipwrecks, and in the future other competitors may emerge. Some of these companies are publicly traded companies and there are a number of small private companies, as well as some loosely affiliated groups and individuals, who claim to be in this business as well. Many of these entities may be better capitalized and may have greater resources to devote to the pursuit of locating and salvaging historic shipwrecks. Many of these competing entities may also have significantly more experience than the Company in the exploration and recovery of historic shipwrecks. The Company is at a material competitive disadvantage as compared to competing entities that are better capitalized, have more resources and/or who possess greater experience in the business.

The expenses associated with being a small publicly traded company engaged in the historic shipwreck recovery business are very prohibitive. The cost of operations may include the cost of buying or leasing a vessel, regular vessel maintenance and upkeep, ongoing vessel repairs due to wear and tear and damage by natural or human causes, docking fees, fuel, upgrades, equipment costs, personnel costs, insurance, registration costs, permitting, temporary lodging and provisions for divers and other personnel, etc. In addition to the operations expenses, a publicly traded company also incurs the significant recurring costs of maintaining publicly traded status, which include, but are not limited to administrative, accounting, audit, executive, legal, etc. These combined expenses are particularly burdensome for a smaller public company. The recurring expenses associated with being a publicly traded company focused on the exploration and recovery of historic shipwrecks may cause the Company to be at a significant competitive disadvantage when compared to some of its competitors who are private companies or compared to its competitors who are larger public companies.

 Lack of Revenues and Cash Flow/Significant Losses from Operations

The exploration and recovery of historic shipwrecks involves a multi-year, multi stage process and it may be many years before any revenue is generated from exploration and recovery activities, if ever. The Company believes that it may be several years before it is able to generate any cash flow from its operations, if any are ever generated at all. Without revenues and cash flow the Company does not have any steady cash flow to rely on to pay its expenses. The Company relies on outside financing in the form of equity and debt and it is possible that the Company may not be able to obtain outside financing in the future. If the Company is not able to obtain financing it would more than likely be forced to cease operations and all of the capital that has been invested in the Company or borrowed by the Company could be lost.
 
The Company has experienced a net loss in every fiscal year since the reverse merger in 2008. The Company’s losses from operations were $1,164,744 for the year ended December 31, 2014 and $1,879,438 for the year ended December 31, 2013. The Company believes that it will continue to generate losses from its operations for the foreseeable future and it may not be able to generate a profit in the long-term, or ever.

Governmental Regulation
 
There are very strict international, federal and state laws that govern the exploration and recovery of historic shipwrecks. There is no guarantee that the Company will be able to secure permits or enter into agreements with government agencies in order to explore and salvage historic shipwrecks although the Company has secured permits in the past. There is a substantial risk that government entities may enact legislation that is so strict that any recovery of artifacts and cargo from historic shipwrecks will be nearly impossible. Additionally, permits and agreements with governmental agencies to conduct historic shipwreck exploration and recovery operations are expensive, both in terms of direct and ongoing compliance costs. It is possible that permits that are sought for potential future international projects may never be issued, and if issued, may not be legal or honored by the entities that issued them.

The laws and regulations regarding the exploration and recovery of historic shipwrecks in waters controlled by the State of Florida are complex. A large amount of time and expense is required, in terms of Company resources to comply with the existing laws and regulations. The State of Florida has, in the past, proposed new rules and regulations regarding the exploration and recovery of shipwrecks in Florida waters. The Company believes any new rules and regulations that are implemented into law would likely increase the cost of compliance and potentially force the Company to cease its operations. It is possible that the State of Florida may enact additional laws that ultimately make it impossible to conduct business as a commercial shipwreck exploration and recovery firm. It may also be possible that the State of Florida attempts to enact legislation that altogether bans the commercial exploration and recovery of historic shipwrecks in State controlled waters.

There is a possibility that new governmental regulations could be enacted at any time at the international, federal or state level that would make it impossible for the Company to continue to attempt to locate and salvage historic shipwrecks. Governmental regulation at all levels may substantially increase the costs and expenses incurred by the Company to obtain permits and agreements and comply with the regulations and represent a very significant risk to the Company and all companies engaged in the commercial exploration and recovery of historical shipwrecks. There is a possibility that governmental regulation could be enacted that would make it impossible for the Company to conduct commercial exploration and recovery of historic shipwrecks anywhere in the world.

 
7

 

Item 1. Business, continued
 
There are also strict environmental regulations associated with the exploration and recovery of historical shipwrecks. In order to explore and salvage shipwrecks that are located in state controlled waters, the Company must obtain permission from both federal authorities and state environmental agencies in order to conduct operations. There is always the possibility that the Company could be denied access to a historic shipwreck site based on federal or state environmental concerns.

Litigation

The Company has been engaged in various litigations (See “Legal Proceedings” below). A negative outcome in these actions could adversely affect the Company’s business. We could be subject to future litigations that could materially affect our ability to operate our business, which would negatively impact our results of operations and financial condition.
 
Historic Shipwreck Exploration and Recovery in Florida

The full time diving season for historic shipwreck exploration and recovery in Florida waters is generally considered to be the summer months, from approximately the middle of May through Labor Day, although good weather conditions may allow operations to extend into the fall and winter months at certain historic shipwreck sites. Inclement weather and hazardous ocean conditions may hamper year round historical shipwreck exploration and recovery efforts in Florida waters.

Other factors that may hinder the Company’s ability to conduct year round operations include a lack of financing, the expiration of permits and agreements or the need to renew or enter into permits and agreements with various governmental or quasi governmental agencies, and the inability to locate and retain skilled, competent and experienced personnel. During down times, the Company's operations personnel may, among other duties, spend time researching sites, reviewing site plans, maps, charts, and other related information and performing maintenance, overhaul, cleaning, etc.

Juno Beach Shipwreck Site

The Company has previously performed exploration and recovery operations at what it believes to be a shipwreck site located off of the coast of Florida in northern Palm Beach County, more specifically in an area known as “Juno Beach” (the “Juno Beach Shipwreck”). The Company believes that it is possible that the Juno Beach shipwreck site may potentially contain remnants of a sunken Spanish ship; however, the Company does not have definitive evidence of the ship’s country of origin. Due to the fact that the Company does not currently have sufficient data to positively identify the potential Juno Beach shipwreck, or its country of origin, it is not possible to determine whether or not the ship was originally carrying cargo of any significant value. Only remnants including pottery, porcelain, cannon balls, musket balls, ballast stones, nails, spikes, wood  and scattered pieces of a sunken ship have been located to date, no main shipwreck body has been located.

It is also possible that a ship began to break up on the site but the body of the ship actually sank in another area that is outside of the designated Juno Beach site and all that was left on the Juno Beach site were scattered remnants of the original ship that have little or no archeological or actual value. There is a possibility that there are no artifacts of significant value located on the Juno Beach shipwreck site.  The chance that the Company will ultimately recover valuable artifacts or treasure from the Juno Beach shipwreck site is remote. Currently the permit with the Florida Bureau of Archaeological Research (“FBAR”) is being renewed in the name of Seafarer Exploration Corp under a judge’s order.

Furthermore, many of the historical ships from the 1500s to the 1700s that sank off of the coast of Florida were not carrying treasure or other valuable cargo. It is possible that the cargo the ship was originally carrying, if any, had little or no value at the time that the ship sank. Many ships of this period were supply ships that carried cargo such as food stores, water, supplies, etc., and if found, this type of cargo would more than likely be completely worthless in modern times.

Additionally, there is a very large amount of sand covering portions of the Juno Beach Shipwreck site and in the highly unlikely scenario that there are valuable artifacts located on the site it may be extremely challenging  to recover them due to the degree of difficulty in being able to dig deep enough under the sand to access them. There is a possibility that the Company will never recover any artifacts or cargo of any significant value from the Juno Beach Shipwreck site.
 
On June 18, 2013, Seafarer began litigation against Tulco Resources, LLC, in a lawsuit filed in the Circuit Court in and for Hillsborough County, Florida. Such suit was filed against Tulco for breach of contract, equitable relief and injunctive relief. Tulco was the party holding the rights under a permit to a treasure site at Juno Beach, Florida. Tulco and Seafarer had entered into contracts in March 2008, and later renewed under an amended agreement on June 11, 2010. Such permit was committed to by Tulco to be an obligation and contractual duty to which they would be responsible for payment of all costs in order for the permit to be reissued. Such obligation is contained in the agreement of March 2008 which was renewed in the June 2010 agreement between Seafarer and Tulco. Tulco made the commitment to be responsible for payments of all necessary costs for the gaining of the new permit. Tulco never performed on such obligation, and Seafarer during the period of approximately March 2008 through April 2012 had endeavored and even had to commence a lawsuit to gain such permit which was awarded in April 2012. Seafarer alleges in their complaint the expenditure of large amounts of shares and monies for financing and for delays due to Tulco’s non-performance. Seafarer seeks monetary damages and injunctive relief for the award of all rights held by Tulco to Seafarer. As of March 24, 2014, Seafarer, through Counsel with the assistance of a licensed investigator, established there was no party or individual to be served from Tulco due to the death of the former Manager, and having no other legal person or entity to serve, has established that it will seek the entry of a default judgment, and final judgment for award of all rights to such site for contractual and other rights held by Tulco. Seafarer gained a default and final Judgment on such matter on July 23, 2014. Although there are no guarantees that a new, updated permit will be issued, Seafarer is now working with the State of Florida for the renewed permit to be in Seafarer’s name and rights only, with Tulco removed per the Order of the Court. On March 4, 2015, the Court awarded full rights to the Juno sight to the Company, erasing all rights of Tulco Resources.
 

 
8

 

Item 1. Business, continued
 
The Company has performed limited, minimal exploration and salvage activities at the Juno Beach site in 2014. It is possible that in the future, the Company will only be able to periodically explore and salvage the Juno Beach site due to vessel repairs and a lack of financing. There may be extended periods of down time where the Company is not performing any operations at the site.
      
The Juno Beach Shipwreck site is an extremely speculative and highly risky project as far as the potential for the Company to ever locate valuable artifacts or treasure. Although the Company has recovered various artifacts that it believes are interesting, it has not located artifacts and/or treasure of any significant value from the Juno Beach Shipwreck site. There is also possibility that there are no artifacts of significant value located at the Juno Beach shipwreck site. Even if there are valuable artifacts and/or treasure located at the site, recovering them may be extremely difficult or impossible due to a variety of challenges that include, but are not limited to; inclement weather, hazardous ocean conditions, large amounts of sand that cover large areas of the site, lack of the necessary equipment to be able to dig deep enough into the sand, ongoing maintenance and repair issues with the Company’s main salvage vessel, permitting issues and/or a lack of financing, etc. The chance that the Company will ultimately recover valuable artifacts or treasure from the Juno Beach shipwreck site is very unlikely, however the possibility exists.

Moreover, the Company does not currently have sufficient data to positively identify the potential Juno Beach shipwreck, or its country of origin, and it is therefore not possible to determine whether or not the ship was originally carrying cargo of any significant value. Only remnants including pottery, porcelain, cannon balls, musket balls, ballast stones, nails, spikes, wood and scattered pieces of a sunken ship have been located to date; no main shipwreck body has been located. It is also possible that a ship began to break up on the site but the main body of the ship actually sank in another area that is outside of the designated Juno Beach site area and all that was left on the Juno Beach site were scattered remnants of the original ship that have little or no archeological or actual value. There is a possibility that there are no artifacts of significant value located on the Juno Beach shipwreck site.  

Lantana Shipwreck Site

There is a historic shipwreck site located off of Lantana Beach Florida in which the Company has received a three stage permit from the Florida Division of Historical Resources. The permit is for three years starting in November 2012 and ending in November 2015. The permit may be renewed at the end of the third year. Phase 1 of the permit has been completed. The Company's plan was to eventually salvage the site in an archeologically sensitive manner once Phase 2 was completed. An archeologist with the technical skills, knowledge, and experience from around the world was hired to help insure the integrity of the work.
   
Under the permit, the Company began remote sensing at the site with a cesium vapor magnetometer and did underwater exploration. Once the remote sensing was completed and the data analyzed, the Exploration permit moved to Phase 2, dig and identify. During Phase 2, testing was done, which confirmed a mid-to-late 18 th century shipwreck. Upon further testing, management believes a 1600s era shipwreck potentially exists, but not within the currently permitted area. Due to other developments and projects the Company is not pursuing Phase 3 at the Lantana site at this time, but will review the site at a later date that has not yet been determined.

There are a significant number of challenges inherent in the exploration and salvage of historic shipwrecks and it is highly likely that the Company will never recover any artifacts or treasure of any significant value from the Lantana site.

North Florida Shipwreck Site

There is a purported historic shipwreck site in the waters off of Brevard County Florida that the Company desires to explore. In February 2013, the Company signed an agreement with a third party who has previously explored this site for the right to explore the site. It is the Company's plan to request a salvage permit from the State of Florida for the site as soon as the research design report is completed. If a salvage permit is granted and the requisite environmental permits are obtained, then the Company plans to salvage the site in an archeologically sensitive manner. An archeologist with the technical skills, knowledge, and experience from around the world has been hired to help insure the integrity of the work. There are a significant number of challenges inherent in the exploration and salvage of historic shipwrecks, including the possibility that the Company will never find artifacts of value at the site.

 
9

 

Item 1. Business, continued
 
In 2014 the Company performed various exploration and recovery operations at this site, including leasing two vessels to work with alongside its main salvage vessel. The Company was hampered from performing extensive operations on the site by poor weather conditions during the fall/winter months in 2014 and so far in 2015. The Company plans to begin extensive operations on the site as soon as the weather permits in 2015.

The Company regularly reviews opportunities to perform exploration and recovery operations at purported historic shipwreck sites; however the Company does not have any specific plans to perform exploration and recovery operations at other shipwreck sites at the present time. The Company is actively reviewing other potential historic shipwreck sites for possible exploration and recovery. Should the Company decide that it will pursue exploration and salvage activities at other potential shipwreck sites it may be necessary to obtain salvage permits as well as environmental permits.

Certain Agreements
 
On March 1, 2014, Seafarer entered into a partnership and ownership with Marine Archaeology Partners, LLC, with the formation of Seafarer’s Quest, LLC. Such LLC was formed in the State of Florida for the purpose of permitting, exploration and recovery of artifacts from a designated area on the east coast of Florida. Such site area is from a defined, contracted area by a separate entity, which a portion of such site is designated from a previous contracted holding through the State of Florida. Under such agreement, Seafarer is responsible for costs of permitting, exploration and recovery, and is entitled to 60% of such artifact recovery. Seafarer has a 50% ownership, with designated management of the LLC coming from Seafarer. Further actions toward the permitting have been taken for such site and the Company and partnership are awaiting the review of such permit request by the State of Florida.  As of December 31, 2014, the partnership has had no operations.

Florida Division of Historical Resources Agreements/Permits

As previously noted on its form 8-K filed on May 9, 2011, the Company and Tulco received a 1A-31 Recovery Permit from the Florida Division of Historical Resources. The Recovery Permit was active through April 25, 2014. The Permit authorizes Seafarer to dig and recover artifacts from the designated site at Juno Beach, Florida. It will be necessary for the Company to obtain a renewal to the Recovery Permit for the Juno Beach shipwreck site in order to continue to perform exploration and recovery work at the site after April 25, 2014. Currently the permit with the FBAR is being renewed in the name of Seafarer Exploration Corp. under a judge’s order. The permit had not been issued as of the filing of this report.

On November 2, 2012, the Company received a three year 1A-31 Exploration Permit from the Division of Historical Resources for an area identified off of Lantana Beach, Florida. Under the permit the Company began remote sensing at the site with a cesium vapor magnotemoter and did underwater exploration. Once the remote sensing was completed and the data analyzed, the Exploration permit moved to Phase 2, dig and identify. During Phase 2 testing was done which confirmed a mid to late 18 th century shipwreck. Upon further testing, management believes a 1600s era shipwreck potentially exists, but not within the currently permitted area. Due to other developments and projects the Company is not pursuing Phase 3 at the Lantana site at this time but review the site at a later date that has not yet been determined.

On July 28, 2014 the Company’s partnership with Marine Archeological Partners, LLC, Seafarer’s Quest, LLC received a 1A-31 Recovery Permit (the “Permit”) from the Florida Division of Historical Resources for an area identified off of Cape Canaveral, Florida. The Permit is active for three years from the date of issuance.

Item 1A. Risk Factors.

Not required for smaller reporting companies.

Item 1B. Unresolved Staff Comments.

Not required for smaller reporting companies.

 
10

 

Item 2. Properties.
 
The Company leases 823 square feet of office space located at 14497 North Dale Mabry Highway, Suite 209-N, Tampa, Florida 33618.  The Company entered into an amended lease agreement on July 1, 2013 for its current location. Under the terms of the amended lease agreement, the lease term has been extended to June 30, 2015, with a base monthly rent of $1,235 from July 1, 2014 through June 30, 2015. There may be additional monthly charges for pro-rated maintenance, late fees, etc. As of December 31, 2014, future minimum rental payments required under this non-cancelable operating lease was $7,407, all of which is due during 2015.   
 
The Company has an operating lease for a house located in Merritt Island, Florida. The Company uses the house to store equipment and gear and to provide temporary work-related living quarters for its divers and other personnel involved in its exploration and recovery operations. The term of the lease agreement commenced on October 1, 2014 and expires on September 30, 2015.   As of December 31, 2014, future minimum rental payments required under this non-cancelable lease was $19,800, all of which is due during 2015.

Item 3. Legal Proceedings.

Since December 11, 2009, the Company, has been involved in a lawsuit where it was named as a Defendant, along with its CEO and transfer agent in Case Number 09-CA-030763, filed in the Circuit Court of Hillsborough County, Florida. The lawsuit was brought in the name of 31 individuals and 1 corporation. The lawsuit alleges that the Company, its CEO, and its transfer agent wrongfully refused to remove the restrictive legend from certain shares of the Company’s common stock that are collectively owned by the plaintiffs, which prevented the plaintiffs from selling or transferring their shares of the Company’s common stock. The plaintiffs allege that they have lost approximately $1,041,000 as of the date of the lawsuit. Such lawsuit continued to a hearing of the Plaintiffs’ motion for summary judgment against the Defendants including Seafarer, which was heard on September 1, 2011 and denied by the Court. Litigation of the matter has continued and the Company has presented evidence and arguments of law that the shares were distributed from their original recipient, Micah Eldred, in an illegal sale to another corporate entity. The Company further contends in its pleadings that such shares were then illegally purchased back by Eldred, then distributed in a manner by Eldred to others including the 31 other Plaintiffs to avoid reporting requirements under the Securities Act and as Eldred had a duty to report as a principal of a brokerage. The actions by Eldred, as pled by the Corporation, is that on or about October 8, 2008,  Eldred  gifted  most  of the  34,700,000   shares  to certain  friends,   family,  and  employees   (i.e.,  the  Plaintiffs   named  in this  Complaint),   and  kept ownership  of 4, 140,000  shares.
 
On September 11, 2013, the Parties attended a voluntary mediation, which ended in an impasse.
 
Some discovery had progressed to the point that Seafarer had, on September 25, 2013, filed a Motion to File Counterclaims and Third-Party Complaint (“Motion for Leave to File Counterclaim”) along with a proposed Counterclaim.  Such counterclaims were filed in December 2013.  Included in the counterclaim was an allegation of conspiracy between Eldred and Sean Murphy for the publication of false information which Seafarer sued Murphy for and received a judgment for libel against Murphy on April 1, 2011 for $5,080,000. Thus the counterclaim was filed against the Plaintiffs: Micah Eldred, Michael J. Daniels, Carl Dilley, Heather Dilley, James Eldred, Mary R. Eldred, Michole Eldred, Nathan Eldred, Toni A. Eldred, Diane J. Harrison, Ioulia Hess, Olessia  Kritskaia,  Anna Krokhina, George Lindner, Elizabeth Lizzano, Karen Lizzano, Robert Lizzano, Abby Lord, Jillian Mally, Ekaterina Messinger, Susan Miller, Michael Mona, Matthew J. Presy, Oksana Savchenko, Vanessa A. Verbosh, Alan Wolper, Sarah Wolper, and Christine Zitman. On April 23, 2014, the trial court ruled on the Counter-Claim Defendants’ motion to dismiss and ordered the dismissal of the claims for section 517.301 violations, conspiracy and fraud. The court ruled that the Corporation did not have standing and was not in privity with the counter-claim defendants at the time of their alleged actions so the company could not maintain the action, unlike private shareholders who could have standing. Thus the Company attempted to protect the shareholders by such suit, but was ruled against as not having standing to do so.
 
On October 18, 2013, the Plaintiffs filed a Notice of Removal to Federal Court in the Tampa Division of the United States District Court, citing the allegation that such lawsuit should be moved to Federal Court based upon the Defendants proposed counterclaims of Federal law. The pleading for removal contained the allegation by the Plaintiffs that they had the consent of all the listed Plaintiffs to remove the matter to Federal Court. On November 4, 2013, Seafarer filed a Motion to Remand back to State Court in the Federal Court, citing legal argument and the undisputed facts that removal to Federal Court was improper as having no basis in law, and asking for attorney’s fees from the Plaintiffs for such removal. On November 7, 2013, Judge James Moody of the United States District Court entered an Order granting the Remand Motion of Seafarer, finding that “Plaintiffs removed the case based on their assumption that the counterclaim would establish federal jurisdiction. Plaintiffs’ removal is patently without merit.” Judge Moody further held “Plaintiffs’ removal had no basis under the law or facts. Simply put, the removal was not objectively reasonable.”   Accordingly, the Court Ordered the case sent back to State Court and that the Federal Court would award Defendants [Seafarer] a reasonable amount of attorney’s fees and costs.” Seafarer collected such attorney’s fees through counsel. Such case was remanded to the Circuit Court in Hillsborough County, where Seafarer had the motion to file the Counterclaims and Third Party Claims heard and an Order Granting the filing and service of such claims was made by Circuit Judge Paul Huey on December 13, 2013. Seafarer filed such complaint and served such Counterclaim Defendants and Third Party Defendants during the months of December 2013 and January 2014. Such complaint included claims by Seafarer for damages including punitive damages against the Plaintiffs for their actions, which is alleged to have materially damaged the Corporation and its shareholders. Such litigation continues and the Company will continue to fight the release of such shares for sale. It is the position of Seafarer that due to the actions involved with such shares, they are tainted and should be ordered to be cancelled. Seafarer intends to continuously pursue this defense will assist any shareholders with any claims they may have against the Plaintiffs who hold such shares as to their actions which may have harmed any shareholders who were shareholders at the time of the Plaintiff’s action.
 
 
11

 
 
Item 3. Legal Proceedings, continued
 
In early October 2013, counsel for Seafarer was contacted by counsel representing the listed Plaintiff, CADEF: The Childhood Autism Foundation (CADEF), as to their being named in the lawsuit as Plaintiffs in the State Court action and the litigation being done in their name. Pursuant to those discussions, on November 5, 2013, Seafarer, Kyle Kennedy (individually), Cleartrust LLC and CADEF entered into a Settlement Agreement and Release from Litigation. CADEF agreed to surrender all rights to the 1,000,000 shares in its name, as well as causing dismissal of any such claims against the Seafarer, Kennedy and Cleartrust that had been brought in their name in the lawsuit. Specifically, CADEF agreed: “CADEF agrees that the following matters of fact exist based upon the knowledge of its Board of Directors and Principals: A) The Board of Directors of CADEF had no knowledge of the share certificate ever being issued for its benefit or the existence of such share certificate until recently in the month of October 2013 when such shares were sent to them. B) The Board of Directors of CADEF never authorized the filing of the lawsuit cited above or to be a party to such. C) Because of the above in B) CADEF’s Board of Directors was never advised of any settlement offer being made by the Defendants nor of the mediation held on September 11, 2013. On approximately October 30, 2013 CADEF delivered such 1,000,000 shares to counsel for Seafarer. Such shares were cancelled subsequently. Seafarer believes this pattern activity.
 
During the fall of 2014, the Company through counsel, conducted a number of depositions in the matter, including Micah Eldred and other parties. As well the Company filed three motions against the Defendants. Included in these motions were a motion to dismiss for fraudulent conduct in the naming of a party as a plaintiff which had no knowledge of the lawsuit, and failure to related settlement offers to the Plaintiffs. The second motion was for sanctions for intentional destruction of documentary evidence related to such shares. As to the second motion, the Court entered an order granting the motion for sanctions, finding that the Defendants had intentionally destroyed evidence, but the Court abated determining the sanctions until a later date. The third motion was to dismiss for fraudulent conduct, wherein the Plaintiffs allege that the Defendant, Eldred had made illicit offers to elicit false testimony. Both of the motions for sanctions are currently pending before the Court. As well in the first week of January 2015, the Defendants filed two simultaneous motions for summary judgment for dismissal of all counts in the case. That motion for summary judgment is currently pending before the Court.
 
In the ongoing litigation in the above case against Micah Eldred and associated persons to protect the interests of the shareholders, the Corporation followed up on its counter-claims against Eldred by the filing of a notice of appeal of the dismissal of such claims, to the Second District Court of Appeal for Florida on May 17, 2014.   On May 29, 2014, the Company was served a secondary lawsuit in Hillsborough County. The lawsuit by challenges the creation of the Preferred B Series of Shares and the increase in authorized shares. The lawsuit in the opinion of the Corporation and multiple counsel has no merit since the corporation’s articles of incorporation and Florida statutes allow for the creation of the preferred shares, and thus the increase in authorized shares. The Corporation is defending such lawsuit and seeking dismissal by motion.
 
On March 2, 2010, the Company filed a complaint naming, Sean Murphy as a Defendant who formerly provided services as a captain, diver, and general laborer to the Company as a defendant in the Circuit Court of Hillsborough County, Florida case number 10-CA-004674. The lawsuit contains numerous counts against the defendant, including civil theft, breach of contract, libel and negligence. On April 5, 2011, a six person jury in Hillsborough County, Florida found in favor of the Company and found that the Defendant was responsible for $5,080,000 in compensatory damages. In 2012, the Company attempted to schedule a trial for the punitive damages, but the Court cancelled the trial due to scheduling of priority cases. The Company is currently seeking final entry of not only the judgment, but will be exercising collection matters against the Defendant. The Company intends to pursue collection, no matter the ability of the Defendant to pay.
 
On June 18, 2013, Seafarer began litigation against Tulco Resources, LLC, in a lawsuit filed in the Circuit Court in and for Hillsborough County, Florida. Such suit was filed for against Tulco based upon  for breach of contract, equitable relief and injunctive relief. Tulco was the party holding the rights under a permit to a treasure site at Juno Beach, Florida. Tulco and Seafarer had entered into contracts  in March 2008, and later renewed under an amended agreement on June 11, 2010. Such permit was committed to by Tulco to be an obligation and contractual duty to which they would be responsible for payment of all costs in order for the permit to be reissued. Such obligation is contained in the agreement of March 2008 which was renewed in the June 2010 agreement between Seafarer and Tulco. Tulco made the commitment to be responsible for payments of all necessary costs for the gaining of the new permit. Tulco never performed on such obligation, and Seafarer during the period of approximately March 2008 and April 2012 had endeavored and even had to commence a lawsuit to gain such permit which was awarded in April 2012. Seafarer alleges in their complaint the expenditure of large amounts of shares and monies for financing and for delays due to Tulco’s non-performance. Seafarer seeks monetary damages and injunctive relief for the award of all rights held by Tulco to Seafarer. As of March 24, 2014, Seafarer, through Counsel with the assistance of a licensed investigator, established there was no party or individual to be served from Tulco due to the death of the former Manager, and having no other legal person or entity to serve, has established that it will seek the entry of a default judgment, and final judgment for award of all rights to such site for contractual and other rights held by Tulco. Seafarer gained a default and final Judgment on such matter on July 23, 2014. Seafarer is now working with the State for the renewed permit to be in Seafarer’s name and rights only, with Tulco removed per the Order of the Court. On March 4, 2015, the Court awarded full rights to the Juno sight to Seafarer Exploration, erasing all rights of Tulco Resources.

The Company currently has litigation pending in Pinellas County, the Sixth Judicial Circuit, Civil Case No. 11-05539-Cl-19 naming Keith Webb Individually and Blue Water Ventures of Key West Inc. as party Defendants. There is a signed Settlement Stipulation in place however and an Order of Court entered acknowledging the same, otherwise ordering and directing the party Defendants to timely comply with the same and at this time the agreement is current and otherwise in compliance. There are currently no counterclaims or adverse liabilities of record in the above case.
 
Item 4. Submission of Matters to a Vote of Security Holders.
 
None. 
 
 
 
 
 

 

 
12

 
 
PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information
 
Our common stock is presently quoted on the Pink Sheets under the symbol “SFRX”, as reflected below, though the current trading volume is small. No assurance can be given that any market for our common stock will continue in the future or be maintained. If an “established trading market” ever develops in the future, the sale of “restricted securities” (common stock) pursuant to Rule 144 of the Securities and Exchange Commission by members of management or others may have a substantial adverse impact on any such market and the sale of restricted securities by management or others may significantly depress the market price of the Company’s shares.

There is currently a limited trading market for our securities on the Pink Sheets. We cannot assure when and if an active-trading market in our shares will be established, or whether any such market will be sustained or sufficiently liquid to enable holders of shares of our common stock to liquidate their investment in our company. If an active public market should develop in the future, the sale of unregistered and restricted securities by current shareholders may have a substantial impact on any such market.
 
During the year ended December 31, 2014 the Company’s share price traded below $0.01 for more than 30 days and as a result is now quoted on the Pink Sheets. Accordingly, an investment in our securities should only be considered by those investors who do not require liquidity and can afford to suffer a total loss of their investment. An investor should consider consulting with professional advisers before making such an investment.

Furthermore, the price of our common stock may be subject to a very high degree of volatility, which makes owning shares of our common stock highly risky. Our stock price fluctuated between $0.0040 and $0.0245 for the year ended December 31, 2014, and $0.0047 and $0.0440 for the year ended December 31, 2013. The price of our shares may fluctuate significantly despite the absence of any apparent reason. In addition, our stock is thinly traded, leading to even greater volatility. You should expect this volatility to continue.

The range of high and low bid prices for our common stock during each quarter for 2013 and 2014 is shown below. The over-the-counter quotations reflect inter-dealer prices, with retail mark-up, mark-down or commission and may not necessarily represent actual transactions. Such prices were determined from information derived from www.nasdaq.com and do not necessarily reflect transactions, retail markups, markdowns or commissions.

Quarter Ended
 
High Price
   
Low Price
 
March 31, 2013
    0.0400       0.0047  
June 30, 2013
    0.0440       0.0151  
September 30, 2013
    0.0400       0.0146  
December 31, 2013
    0.0245       0.0138  
March 31, 2014
    0.0190       0.0111  
June 30, 2014
    0.0200       0.0126  
September 30, 2014
    0.0245       0.0105  
December 31, 2014
    0.0155       0.0040  

Penny Stock
 
Our stock is considered to be a penny stock.  Our stock is subject to certain provisions of the Securities Exchange Act of 1934 (the “Exchange Act”), commonly referred to as the “penny stock” rules as defined in Rule 3a51-1.  A penny stock is generally defined to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. Since our stock is deemed to be a penny stock, trading is subject to additional sales practice requirements of broker-dealers.  

Consequently, penny stock rules may restrict the ability or willingness of broker-dealers to trade and/or maintain a market in our common stock.  Also, prospective investors may not want to get involved with the additional administrative requirements, which may have a material adverse effect on the trading of our shares. 

 
 

 
13

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - continued
 
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a market price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to a violation of such duties or other requirements of the securities laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and is in such form, including language, type size and format, as the SEC shall require by rule or regulation.
 
The broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with: (a) bid and offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) a monthly account statement showing the market value of each penny stock held in the customer's account.

In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

Approximate Number of Holders of Common Stock

The approximate number of record holders of our common stock at March 23, 2015 was 1,758 shareholders holding 343,730,919 restricted shares in certificated securities and 698,065,171 non restricted shares.
   
Transfer Agent
 
The Company’s stock transfer agent is ClearTrust, LLC (“ClearTrust”). ClearTrust’s address is 16540 Pointe Village Drive, Suite 201 Lutz, Florida 33558 and their telephone number is (813) 235-4490. ClearTrust is owned and controlled by a person who is related to the Company’s CEO. 

Dividend Policy

The Company did not declare cash dividends during the years ended December 31, 2014 and 2013.   It is not anticipated that cash dividends will be paid at any time in the foreseeable future as the Company intends to retain earnings, if any, for use in the development of its business. The payment of dividends is contingent upon the Company's future earnings, if any, the Company's financial condition and its capital requirements, general business conditions and other factors.

Equity Compensation Plans

The Company has not established any formal equity compensation plans as of the date of this Annual Report on Form 10-K; however, the Company reserves the right to do so at a later date.

Reports to Security Holders

Seafarer Exploration Corp. is a reporting company pursuant to the Securities and Exchange Act of 1934. As such, the Company makes available its annual report which includes audited financial statements, and its quarterly reports which include unaudited financial statements.
 

 
14

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - continued
   
Recent Sales of Unregistered Securities

During the three month period ended December 31, 2014, the Company issued 336,000 of its restricted shares of its common stock to various consultants. These shares were issued for legal, executive, operations, financial and administrative consulting services. During the year ended December 31, 2014, the Company issued 12,998,141 of its restricted shares of its common stock to various consultants. These shares were issued for archeological, business advisory, legal, executive, operations, corporate and financial, corporate communications, administrative consulting services. During the year ended December 31, 2014 a related party vendor agreed to convert a portion of its debt, $7,683 into 768,293 shares of the Company’s common stock   The issuance of the securities was exempt from registration under the Securities Act of 1933, as amended, in reliance on Section 4(2) of the Securities Act as a transaction by an issuer not involving any public offering and such securities were issued for services rendered to sophisticated and/or accredited investors.
   
The Company issued securities and reported these issuances, which were not registered under the Securities Act of 1933, as amended (the “Securities Act”) in our Forms 10-Q for the quarters ended March 31, 2014, June 30, 2014, and September 30, 2014. On various dates during the three month period ended December 31, 2014, the Company entered into subscription agreements to sell 20,725,000 shares of its restricted common stock to five investors and receive proceeds of $69,120. The proceeds were used for general corporate purposes, working capital and the payment of debt. During the year ended December 31, 2014 the Company entered into subscription agreements to sell 67,420,357 shares of its restricted common stock  and received proceeds of $398,616. The proceeds were used for general corporate purposes, working capital and the payment of debt.

Exemptions from Registration for Sales of Restricted Securities.

The issuance of securities referenced above were issued to persons who the Company believes were either “accredited investors,” or “sophisticated investors” who, by reason of education, business acumen, experience or other factors, were fully capable of evaluating the risks and merits of an investment in us; and each had prior access to all material information about us. None of these transactions involved a public offering. An appropriate restrictive legend was placed on each certificate that has been issued, prohibiting public resale of the shares, except subject to an effective registration statement under the Securities Act of 1933, as amended (the “Act”) or in compliance with Rule 144. The Company believes that the offer and sale of these securities was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) under the Securities Act of 1933 (the “Act”) thereof, and/or Regulation D. There may be additional exemptions available to the Company.

Issuance of Securities Due to Conversion of Notes and Debt
 
During the three month period ended December 31, 2014 the holders of two convertible promissory notes with an aggregate face value of $47,092 elected to convert the principal balance of their notes plus accrued interest into 11,917,754 shares of the Company’s common stock and the holder of a convertible note with an original face value of $107,000 elected to convert $35,000 of the principal balance of the note into 9,956,709 shares of the Company’s common stock. These amounts include 736,450 shares issued to a related party investor. During the year ended December 31, 2014 the holders of various convertible promissory notes with an aggregate face value of $249,773 elected to convert the principal balance of their notes plus accrued interest of into 61,721,283 shares of the Company’s common stock. The Company believes that the offer and sale of these securities were exempt from the registration requirements of the Securities Act pursuant to Sections 3(a)(9) under the Securities Act of 1933, as amended.

  Repurchase of Securities
 
During the years ended December 31, 2014 and 2013, the Company did not purchase any shares of its common stock and the Company is not likely to purchase any shares in the foreseeable future. 

Stock Option Grants

The Company does not have any compensatory stock option grants outstanding at this time.
 
Item 6. Selected Financial Data.
 
Not required for smaller reporting companies.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
FORWARD LOOKING STATEMENTS

The following discussion contains certain forward-looking statements that are subject to business and economic risks and uncertainties and which speak only as of the date of this annual report. No one should place strong or undue reliance on any forward-looking statements.  The Company’s actual results or actions may differ materially from these forward-looking statements for many reasons. This Item should be read in conjunction with the financial statements and related notes and with the understanding that the Company’s actual future results may be materially different from what is currently expected or projected by the Company.

 
15

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
 
Overview

General

The Company’s principal business plan is to develop the infrastructure to engage in the archaeologically-sensitive exploration and recovery of historic shipwrecks. This type of business venture is extremely speculative in nature and there is a tremendous amount of risk that any capital invested in and/or borrowed by the Company will be lost.

It has been estimated that there are over three million undiscovered shipwrecks around the world and a few of these shipwrecks were lost with verifiable cargoes that contained valuable materials, including artifacts and treasure. However, the majority of these shipwrecks may have very little archaeological or historical value, and furthermore, a very high percentage of these shipwrecks would not have been carrying valuable cargo including artifacts or treasure of any kind.

The exploration and recovery of historic shipwrecks involves a multi-year, multi stage process. It may take many years and/or be prohibitively expensive to locate and recover valuable artifacts from historic shipwrecks. Locating and recovering valuable artifacts is difficult and the probability that the Company will locate valuable artifacts or treasure is remote. If the Company is not able to locate artifacts or treasure with significant value then there is a high probability that the Company will fail and all capital invested in or borrowed by the Company will be lost.
 
Underwater recovery operations are inherently difficult and dangerous and may be delayed or suspended by weather, sea conditions or other natural hazards. Even though sea conditions in a particular search location may be somewhat predictable, the possibility exists that unexpected conditions may occur that adversely affect the Company’s operations. It is also possible that natural hazards may prevent or significantly delay search and recovery operations.
 
In addition to natural hazards, there are constant repair and maintenance issues with salvage vessels, which tend to be older vessels that were originally used in other industries which have been converted for use in shipwreck exploration and recovery. The repairs, maintenance and upkeep of this type of vessel, and in particular the Company’s main salvage vessel, is very time consuming and expensive and there may be significant periods of vessel down time that result from lack of financing to make repairs to the vessel.
  
  Furthermore, there are very strict international, federal and state laws that govern the exploration and recovery of historic shipwrecks. There is no guarantee that the Company will be able to secure permits or enter into agreements with government agencies in order to explore and salvage historic shipwrecks. There is a very substantial risk that government entities may enact legislation that is so strict that any recovery of artifacts and cargo from historic shipwrecks will be nearly impossible. Additionally, permits and agreements with governmental agencies to conduct historic shipwreck exploration and recovery operations are expensive, in terms of both direct costs and ongoing compliance costs. It is also entirely possible that the Company will not be successful in obtaining title or permission to excavate certain wrecks. It is possible that permits that are sought for potential future international projects may never be issued, and if issued, may not be legal or honored by the entities that issued them.

 
16

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
 
Even if the Company is able to obtain permits for shipwreck projects, there is a possibility that the shipwrecks may have already been salvaged or may not be found, or may not have had anything valuable on board at the time that they sank. In the event that valuable artifacts are located and recovered, it is possible that the cost of recovery will be greater than the value of the artifacts recovered. It is also possible that other entities, including both private parties and governmental entities, will assert conflicting claims and challenge the Company’s rights to the recovered artifacts.

Moreover, there is the possibility that should the Company be successful in locating and salvaging artifacts that have significant archeological and/or monetary value, a country whose ship was salvaged may attempt to claim ownership of the artifacts by pursuing litigation. In the event that the Company is able to make a valid claim to artifacts or other items at a shipwreck site, there is a risk of theft of such items at sea both before or after the recovery or while the artifacts are in transit to a safe destination as well as when stored in a secured location. Such thefts may not be adequately covered by insurance. Based on a number of these and other potential issues, the Company could spend a great deal of time and invest a large sum in a specific shipwreck project and receive very little or no salvage claim or revenue for its work.
 
There are a number of additional significant issues and challenges including, but not limited to, government regulation and/or the Company’s inability to secure permits and contracts, lack of financing, lack of revenue and cash flow and continued losses from operations that make the exploration and recovery of historic shipwrecks a very speculative and risky business venture with a very high degree of risk that the Company may fail.  There is a possibility that the Company will be forced to cease its operations if it is not successful in eventually locating valuable artifacts. If the Company were to cease its operations, then it is likely that there would be complete loss of all capital invested in or borrowed by the Company. As such, an investment in Seafarer is extremely speculative and of exceptionally high risk with a high probability that all capital invested in and/or borrowed by the Company may be lost.

There is currently a limited trading market for our securities. We cannot assure when and if an active-trading market in our shares will be established, or whether any such market will be sustained or sufficiently liquid to enable holders of shares of our common stock to liquidate their investment in our company. The sale of unregistered and restricted securities by current shareholders, including shares issued to consultants and shares issued to settle convertible promissory notes, may cause a significant drop in the market price of the Company’s securities.
 
Accordingly, an investment in our securities is highly speculative and extremely risky and should only be considered by those investors who do not require liquidity and who can afford to suffer a total loss of their investment. An investor should consider consulting with professional advisers before making an investment in securities.

Plan of Operation

During the years ended December 31, 2014 and 2013, the Company has taken the following steps to implement its business plan:
 
 
·
To date, the Company has devoted its time towards establishing its business to develop the infrastructure capable of exploring, salvaging and recovering historic shipwrecks. The Company has also performed some exploration and recovery activities.
 
 
·
Spent considerable time researching potential shipwrecks, including obtaining information from foreign archives.
 
 
·
Although the Company has not generated revenues to date our development activities continue to evolve.
 
The Company has evaluated various opportunities to enter into agreements or contracts to conduct exploration and recovery operations at known historic shipwreck locations or potential locations. The Company has previously spent some of its efforts exploring what it believes is a historic shipwreck site located off of Juno Beach, Florida. The Company and Tulco renewed their Exploration Agreement regarding the Juno Beach Shipwreck site in June of 2010.   The original three year term of the Exploration Agreement was valid until June 8, 2013 and both Seafarer and Tulco had the option to extend the agreement for an additional three years. There have been no discussions between Tulco and Seafarer regarding extending the Exploration Agreement.

As previously noted on its form 8-K filed on May 9, 2011, the Company and Tulco received a Recovery Permit from the Florida Division of Historical Resources. The Recovery Permit authorized Seafarer to dig and recover artifacts from the designated site at Juno Beach, Florida. On June 18, 2013, Seafarer began litigation against Tulco Resources, LLC, in a lawsuit filed in the Circuit Court in and for Hillsborough County, Florida. Such suit was filed for against Tulco for breach of contract, equitable relief and injunctive relief. Seafarer gained a default and final Judgment on such matter on July 23, 2014. Although there are no guarantees that a new, updated permit will be issued, Seafarer is now working with the State of Florida for the renewed permit to be in Seafarer’s name and rights only, with Tulco removed per the Order of the Court. On March 4, 2015, the Court awarded full rights to the Juno sight to the Company, erasing all rights of Tulco Resources.
 


 
17

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
 
The Juno Beach Shipwreck site is a speculative and highly risky project as far as the potential for the Company to ever locate valuable artifacts or treasure. Although the Company has recovered various artifacts that it believes are interesting, it has not located artifacts and/or treasure of any significant value from the Juno Beach Shipwreck site. There is also the possibility that there are no artifacts of significant value located at the Juno Beach shipwreck site. Even if there are valuable artifacts and/or treasure located at the site, recovering them may be extremely difficult or impossible due to a variety of challenges that include, but are not limited to; inclement weather, hazardous ocean conditions, strong Gulf Stream currents, deep amounts of sand that cover large areas of the site, lack the necessary equipment to be able to dig deep enough into the sand, ongoing maintenance and repair issues with the Company’s main salvage vessel, permitting issues and/or a lack of financing, etc.

Moreover, the Company does not currently have sufficient data to positively identify the potential Juno Beach shipwreck, or its country of origin, and it is therefore not possible to determine whether or not the ship was originally carrying cargo of any significant value. Only remnants and scattered pieces of a sunken ship have been located to date; no main shipwreck body has been located. It is also possible that a ship began to break up on the site but the body of the ship actually sank in another area that is outside of the designated Juno Beach site area and all that was left on the Juno Beach site were scattered remnants of the original ship that have little or no archeological or actual value. There is a possibility that there are no artifacts of significant value located on the Juno Beach shipwreck site.  The chance that the Company will ultimately recover valuable artifacts or treasure from the Juno Beach shipwreck site is very remote.

There is a historic shipwreck site located off of Lantana Beach Florida in which the Company has received a three stage permit from the Florida Division of Historical Resources. The permit is for three years starting in November 2012 and ending in November 2015. The permit may be renewed at the end of the third year. Phase 1 of the permit has been completed. The Company's plan was to salvage the site in an archeologically sensitive manner once Phase 2 has been completed. An archeologist with the technical skills, knowledge, and experience from around the world was hired to help insure the integrity of the work.

Under the permit, the Company began remote sensing at the site with a cesium vapor magnetemoter and did underwater exploration. Once the remote sensing was completed and the data analyzed, the Exploration permit moved to Phase 2, dig and identify. During Phase 2, testing was done which confirmed a mid to late 18th century shipwreck. Upon further testing, management believes a 1600s era shipwreck potentially exists, but not within the currently permitted area. Due to other developments and projects, the Company is not pursuing Phase 3 at the Lantana site at this time, but will review the site at a later date that has not yet been determined.

There is a purported historic shipwreck site in the waters off of Brevard County, Florida that the Company desires to explore. In February 2013, the Company signed an agreement with a third party, who has previously explored this site, for the right to explore the site. On March 1, 2014, Seafarer entered into a partnership and ownership with Marine Archaeology Partners, LLC, with the formation of Seafarer’s Quest, LLC. Such LLC was formed in the State of Florida for the purpose of permitting, exploration and recovery of artifacts from a designated area on the east coast of Florida. Such site area is from a defined, contracted area by a separate entity, which a portion of such site is designated from a previous contracted holding through the State of Florida. Under such agreement, Seafarer is responsible for costs of permitting, exploration and recovery, and is entitled to 60% of such artifact recovery. Seafarer has a 50% ownership, with designated management of the LLC coming from Seafarer. There are a significant number of challenges inherent in the exploration and salvage of historic shipwrecks, including the possibility that the Company will never find artifacts of value at the site.
 
On July 28, 2014, Seafarer’s Quest, LLC received a 1A-31 Recovery Permit (the “Permit”) from the Florida Division of Historical Resources for an area identified off of Cape Canaveral, Florida. The Permit is active for three years from the date of issuance. The Company has been primarily focusing its operations on this site when the weather permts. In addition to the Company’s main salvage vessel, the Company is utilizing two additional rented vessels in order to perform search and recovery operations at this site.
  
The Company regularly reviews opportunities to perform exploration and recovery operations at purported historic shipwreck sites; however the Company does not have any specific plans to perform exploration and recovery operations at other shipwreck sites at the present time. The Company is actively reviewing other potential historic shipwreck sites for possible exploration and recovery. Should the Company decide that it will pursue exploration and salvage activities at other potential shipwreck sites it may be necessary to obtain salvage permits as well as environmental permits.

If the Company is not able to perform any exploration or recovery operations, then it may have to suspend or cease its operations. If the Company ceases its previously stated efforts, there are currently no plans to pursue other business opportunities.     
 
Limited Operating History

The Company has not currently generated any revenue from operations and does not expect to report any significant revenue from operations for the foreseeable future.

 
18

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
 
At December 31, 2014, the Company had a working capital deficit of $1,437,634. The Company is in immediate need of further working capital and is seeking options, with respect to financing, in the form of debt, equity or a combination thereof.

Since inception, the Company has funded its operations through common stock issuances and loans in order to meet its strategic objectives; however, there can be no assurance that the Company will be able to obtain further funds to continue with its efforts to establish a new business. There is a very significant risk that the Company will be unable to obtain financing to fund its operation and as such the Company may be forced to cease operations at any time which would likely result in a complete loss of all capital that has been invested in and/or borrowed by the Company to date.

The Company expects to continue to incur significant operating losses and to generate negative cash flow from operating activities, while building out its infrastructure in order to explore and salvage historic shipwreck sites and establishing itself in the marketplace. Based on our historical rate of expenditures, the Company expects to expend its available cash in less than one month from March 31, 2015.

The Company’s ability to eliminate operating losses and to generate positive cash flow from operations in the future will depend upon a variety of factors, many of which it is unable to control. If the Company is unable to implement its business plan successfully, it may not be able to eliminate operating losses, generate positive cash flow or achieve or sustain profitability, which may have a material adverse effect on the Company’s business, operations, and financial results, as well as its ability to make payments on its debt obligations, and the Company may be forced to cease operations.

The Company’s lack of operating cash flow and reliance on the sale of its common stock and loans to fund operations is extremely risky. If the Company is unable to continue to raise capital or obtain loans or other financing on terms that are acceptable to the Company, or at all, then it is highly likely that the Company will be forced to cease operations. If the Company ceases its operations, then it is likely that all capital invested in and/or borrowed by the Company will be lost.  
 
Results of Operations
 
The Company’s net loss for the year ended December 31, 2014 was $2,151,361 as compared to a net loss of $2,174,354 for the year ended December 31, 2013, a decrease of roughly 1.06% on a year-over-year basis. The decrease in the net loss for the year ended December 31, 2014 was primarily attributable to a decrease in consulting and independent contractor expenses, a decrease in professional fees, and a decrease in vessel related expenses while there was also a significant increase in interest expenses due to the impact of fair value measurement adjustments on several convertible promissory notes. The Company incurred consulting and contractor expenses of $661,899 during the year ended December 31, 2014 versus $1,219,602 for the year ended December 31, 2013. The 46% decrease in consulting related expenses was due to a decrease in stock based compensation paid to consultants and independent contractors for services as well as during the year ended December 31, 2013 the Company made a one-time stock issuance of 10,0000,000 shares to a company for the rights to explore a potential shipwreck site. No such payment was made in 2014. For the year ended December 31, 2014, the Company incurred professional fees of $128,344 as compared to $296,668 for the year ended December 31, 2013. The primary reason for the approximate 57% decrease in professional fees during the year ended December 31, 2014 is that the Company paid less stock based compensation in relation to an ongoing lawsuit and for other general legal matters and the payment of significantly higher levels of stock based compensation for accounting services in 2013. The Company incurred vessel related expenses of $89,631 during the year ended December 31, 2014 versus $126,472 during the year ended December 31, 2013, a decrease of approximately 29%. The 29% decrease in vessel expense was due to the Company having completed extensive repair and maintenance work on its main salvage vessel in prior years and having fewer serious maintenance issues during 2014. The Company has tried to keep repair costs lower for its main salvage vessel by being more proactive with vessel maintenance, however due to the advancing age of the vessel, the Company anticipates that it will continue to require repairs and in some cases major unforeseen repairs. The Company incurred travel and entertainment expenses of $142,792 during the year ended December 31, 2014 as compared to $105,040 during the year ended December 31, 2013, an increase of approximately 36% in 2014. Travel and entertainment expense increased due to international travel by management and an archeological consultant for research purposes and the payments and reimbursement of travel and lodging expenses for certain independent contractors involved in the Company’s operations while they were working on site.  General and administrative expenses increased from $64,258 in the year ended December 31, 2013 to $78,345 in the year ended December 31, 2014, an increase of approximately 22%. The approximate 235% increase in total other expenses was largely due to a significant increase in interest expenses from the impact of the fair value measurement adjustments on several convertible promissory notes, as well as a legal settlement  during the year ended December 31, 2014.
   
Liquidity and Capital Resources
 
At December 31, 2014, we had $12,424 cash in the bank.   During the year ended December 31, 2014 and the year ended December 31, 2013, we incurred net losses of $2,151,361 and $2,174,354, respectively. At December 31, 2014, we had $61,598 in current assets and $1,499,232 in current liabilities, leaving us a working capital deficit of $1,437,634.

 

 
19

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
 
Lack of Liquidity
 
A major financial challenge and significant risk facing the Company is a lack of liquidity. The Company continued to operate with significant debt and a working capital deficit during the year ended December 31, 2014. This working capital deficit indicates that the Company is unable to meet its short-term liabilities with its current assets. This working capital deficit is extremely risky for the Company as it may be forced to cease its operations due to its inability to meet its current obligations. If the Company is forced to cease its operations then it is highly likely that all capital invested in and/or borrowed by the Company will be lost.

The expenses associated with being a small publicly traded company attempting to develop the infrastructure to explore and salvage historic shipwrecks recovery are extremely prohibitive, especially given that the Company does not currently generate any revenues and does not expect to generate any revenues in the near future. There are ongoing expenses associated with operations that are incurred whether the Company is conducting shipwreck recovery operations or not. Vessel maintenance, particularly for an older vessel such as the Company’s main salvage vessel, upkeep expenses and docking fees are continuous and unavoidable regardless of the Company’s operational status. Management anticipates the Company may need to put the vessel in dry dock in order for additional repairs to be made. These repairs and maintenance are expensive and have a negative impact on the Company’s cash position.

In addition to the operations expenses, a publicly traded company also incurs the significant recurring corporate expenses related to maintaining publicly traded status, which include, but are not limited to accounting, legal, audit, executive, administrative, corporate communications, rent, telephones, etc. The recurring expenses associated with being a publicly traded company are very burdensome for smaller public companies such as Seafarer. This lack of liquidity creates a very risky situation for the Company in terms of its ability to continue operating, which in turn makes owning shares of the Company’s common stock extremely risky and highly speculative. The Company’s lack of liquidity may cause the Company to be forced to cease operations at any time which would likely result in a complete loss of all capital invested in or borrowed by the Company to date.

Due to the fact that the Company does not generate any revenues and does not expect to generate revenues for the foreseeable future the Company must rely on outside equity and debt funding. The combination of the ongoing operational, even during times when there is little or no exploration or salvage activities taking place, and corporate expenses as well as the need for outside financing creates a very risky situation for the Company and its shareholders. This working capital shortfall and lack of access to cash to fund corporate activities is extremely risky and may force the Company to cease its operations which would more than likely result in a complete loss of all capital invested in or loaned to the Company to date.
   
If we are unable to secure additional financing, our business may fail and our stock price will likely be materially adversely affected.

Lack of Revenues and Cash Flow/Significant Losses from Operations

The exploration and recovery of historic shipwrecks requires a multi-year, multi stage process and it may be many years before any revenue is generated from exploration and recovery activities, if ever. The Company believes that it may be several years before it is able to generate any cash flow from its operations, if any are ever generated at all. Without revenues and cash flow the Company does not have reliable cash flow to pay its expenses. The Company relies on outside financing in the form of equity and debt and it is possible that the Company may not be able to obtain outside financing in the future. If the Company is not able to obtain financing it would more than likely be forced to cease operations and all of the capital that has been invested in or borrowed by the Company would be lost.

If the Company is unable to secure additional financing, our business may fail or our operating results and our stock price may be materially adversely affected. The raising of additional financing would in all likelihood result in dilution or reduction in the value of the Company’s securities.

The Company may not be able to continue as a going concern. If the Company is not able to continue as a going concern, it is highly likely that all capital invested in the Company or borrowed by the Company will be lost. The report of our independent auditors for the years ended December 31, 2014 and 2013 raises substantial doubt as to our ability to continue as a going concern. As discussed in Note 2 to our financial statements for the year ended December 31, 2014 and 2013, we have experienced operating losses in every year since our inception resulting in an accumulated deficit. Our independent auditors believe, based on our financial results as of December 31, 2014, that such results raised substantial doubts about the Company’s ability to continue as a going concern. If the Company is not able to continue as a going concern, it is highly likely that all capital invested in the Company or borrowed by the Company will be lost.
 
The Company has experienced a net loss in every fiscal year since the reverse merger in 2008. The Company’s losses from operations were $1,164,744 for the year ended December 31, 2014 and $1,879,438 for the year ended December 31, 2013. The Company believes that it will continue to generate losses from its operations for the foreseeable future and the Company may not be able to generate a profit in the long-term, or ever.  

 

 
20

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
 
Convertible Notes Payable and Notes Payable, in Default
 
At December 31, 2014, the Company had convertible notes payable, and notes payable with a face value of $812,800 of which $ 508,300 were in default.   

The Company does not have additional sources of debt financing to refinance its convertible notes payable and notes payable that are currently in default. If the Company is unable to obtain additional capital, such lenders may file suit, including suit to foreclose on the assets held as collateral for the obligations arising under the secured notes. If any of the lenders file suit to foreclose on the assets held as collateral, then the Company may be forced to significantly scale back or cease its operations which would more than likely result in a complete loss of all capital that has been invested in or borrowed by the Company. The fact that the Company is in default regarding several loans held by various lenders makes investing in the Company or providing any loans to the Company extremely risky with a very high potential for a complete loss of capital.  

The convertible notes that have been issued by the Company are convertible at the lender’s option. These convertible notes represent significant potential dilution to the Company’s current shareholders as the convertible price of these notes is generally lower than the current market price of the Company’s shares. As such when these notes are converted into equity there is typically a highly dilutive effect on current shareholders and very high probability that such dilution may significantly negatively affect the trading price of the Company’s common stock. Furthermore, management intends to have discussions or has already had discussions with several of the promissory note holders who do not currently have convertible notes regarding converting their notes into equity. Any such amended agreements to convert promissory notes into equity would more than likely have a highly dilutive effect on current shareholders and there is a very high probability that such dilution may significantly negatively affect the trading price of the Company’s common stock. Some of these note holders have already amended their notes and converted the notes into equity. Based on conversations with other note holders, the Company believes that additional note holders will amend their notes to contain a convertibility clause and eventually convert the notes into equity.
 
Critical Accounting Policies
   
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements requires us to make estimates and judgments which affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities (see Note 3, Significant Accounting Policies, contained in the notes to the Company’s financial statements for the years ended December 31, 2014 and 2013 contained in this filing).  On an ongoing basis, we evaluate our estimates.  We base our estimates on historical experience and on various other assumptions which we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities which are not readily apparent from other sources.  Actual results may differ from these estimates based upon different assumptions or conditions; however, we believe that our estimates are reasonable.

Management is aware that certain changes in accounting estimates employed in generating financial statements can have the effect of making the Company look more or less profitable than it actually is.  Management does not believe that the Company has made any such changes in accounting estimates.

Off-balance Sheet Arrangements
 
None.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Not required.

 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
21

 

Item 8. Financial Statements.



SEAFARER EXPLORATION CORP.
FINANCIAL STATEMENTS
DECEMBER 31, 2014 AND 2013
 

TABLE OF CONTENTS



 
Page No.
Report of Independent Registered Public Accounting Firm
F-1
   
Balance Sheets
F-2
   
Statements of Operations
F-3
   
Statements of Changes in Stockholders’ Deficit
F-4
   
Statements of Cash Flows
F-5
   
Notes to Financial Statements
F-6 - F-31


 
 
 
 
 
 
 
 
 



 

 
 

 
22

 
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and
Shareholders of Seafarer Exploration Corporation
 
We have audited the accompanying balance sheets of Seafarer Exploration Corporation as of December 31, 2014 and 2013, and the related statements of operations, stockholders’ deficit, and cash flows for the years then ended. Seafarer Exploration Corporation’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Seafarer Exploration Corporation as of December 31, 2014 and 2013, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred net losses and negative cash flows since inception. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion on the financial statements is not modified with respect to this matter.
 
/s/ Accell Audit & Compliance, P.A.  

Tampa, Florida March 31, 2015

 

 

 
 

 

 
F-1

 

SEAFARER EXPLORATION CORP.
BALANCE SHEETS
DECEMBER 31, 2014 AND 2013
 
   
2014
   
2013
 
Assets
 
             
Current assets:
           
Cash
  $ 12,424     $ 578  
Prepaid expenses
    29,991       26,824  
Settlement receivable
    18,000       -  
Advances to shareholder
    -       3,267  
Deposits and other receivables
    1,183       1,183  
Total current assets
    61,598       31,852  
                 
Property and equipment, net
    96,255       130,239  
                 
Investment in common stock
    -       1,100  
Total assets
  $ 157,853     $ 163,191  
                 
Liabilities and Stockholders' Deficit
 
                 
Current liabilities:
               
Accounts payable and accrued expense
  $ 191,967     $ 142,583  
Convertible notes payable, net of discounts of $14,148 and $120,533
    10,852       139,457  
Convertible notes payable, related parties, net of discounts of $15,064 and $26,889
    22,936       24,111  
Convertible notes payable, in default
    341,300       191,300  
Convertible notes payable, in default - related parties
    129,500       113,500  
Convertible notes payable, at fair value
    761,677       -  
Shareholder loan
    3,500       -  
Notes payable, in default
    30,000       30,000  
Notes payable, in default - related parties
    7,500       7,500  
Total current liabilities
    1,499,232       648,451  
                 
Commitments and contingencies
               
                 
Stockholders' deficit:
               
Preferred stock, $0.0001 par value - 50,000,000 shares authorized; 67 shares issued
               
Series A - 7 shares issued and outstanding at December 31, 2014 and 2013
    -       -  
Series B - 60 shares issued and outstanding at December 31, 2014 and -0- issued
               
and outstanding at December 31, 2013
    -       -  
Common stock, $0.0001 par value - 1,200,000,000 shares authorized; 986,356,130 and
               
844,216,349 shares issued and outstanding at December 31, 2014 and 2013
    98,636       84,422  
Additional paid-in capital
    8,734,606       7,453,578  
Accumulated deficit
    (10,174,621 )     (8,023,260 )
Total stockholders' deficit
    (1,341,379 )     (485,260 )
Total liabilities and stockholders' deficit
  $ 157,853     $ 163,191  
 
 
See accompanying notes to the financial statements.

 
 
 

 
F-2

 

SEAFARER EXPLORATION CORP.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

   
2014
   
2013
 
Revenue
  $ -     $ -  
                 
Expenses:
               
Consulting and contractor expenses
    661,899       1,219,602  
Professional fees
    128,344       296,668  
General and administrative expense
    78,345       64,258  
Depreciation expense
    33,984       33,984  
Rent expense
    29,749       33,414  
Vessel expense
    89,631       126,472  
Travel and entertainment expense
    142,792       105,040  
Total operating expenses
    1,164,744       1,879,438  
                 
Income (loss) from operations
    (1,164,744 )     (1,879,438 )
                 
Other income (expense):
               
Interest expense
    (1,015,517 )     (356,170 )
Legal Settlement
    30,000       -  
Interest income
    -       99,701  
Impairment loss
    (1,100 )     -  
Loss on extinguishment of debt
    -       (38,447 )
Total other income (expense)
    (986,617 )     (294,916 )
                 
Net loss
  $ (2,151,361 )   $ (2,174,354 )
                 
Net loss per share - basic and diluted
  $ -     $ -  
Weighted average common shares outstanding - basic and diluted
    904,898,653       806,432,658  

 
See accompanying notes to the financial statements.
   

 
 
 

 
F-3

 

SEAFARER EXPLPLORATION CORP.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

               
Additional
             
   
Common
   
Common
   
Paid-in
   
Accumulated
       
   
Stock
   
Stock value
   
Capital
   
Deficit
   
Total
 
Balance, December 31,  2012
    739,313,459     $ 73,931     $ 5,356,866     $ (5,848,906 )   $ (418,109 )
                                         
Common stock issued for services
    47,714,330       4,772       1,142,767       -       1,147,539  
                                         
Common stock issued on conversion of notes payable and
                                       
stockholder loans
    30,893,929       3,090       268,262       -       271,352  
                                         
Common stock issued for subscription agreements
    26,580,335       2,658       275,685       -       278,343  
                                         
Common stock issued to extinguish outstanding invoices
    1,964,296       196       56,733       -       56,929  
                                         
Beneficial conversion feature arising from convertible note
                                       
financing
    -       -       353,040       -       353,040  
                                         
Cancellation of common shares
    (2,250,000 )     (225 )     225       -       -  
                                         
Net loss
    -       -       -       (2,174,354 )     (2,174,354 )
Balance, December 31, 2013
    844,216,349       84,422       7,453,578       (8,023,260 )     (485,260 )
                                         
Common stock issued for services
    12,998,141       1,300       193,935       -       195,235  
                                         
Common stock issued on conversion of notes payable and
                                       
stockholder loans
    61,721,283       6,172       544,152       -       550,324  
                                         
Common stock issued for subscription agreements
    67,420,357       6,742       391,874       -       398,616  
                                         
Beneficial conversion feature arising from convertible note
                                       
financing
    -       -       151,067       -       151,067  
                                         
Net loss
    -       -       -       (2,151,361 )     (2,151,361 )
Balance, December 31, 2014
    986,356,130     $ 98,636     $ 8,734,606     $ (10,174,621 )   $ (1,341,379 )

 
See accompanying notes to the financial statements.


 
 
 

 
F-4

 

SEAFARER EXPLORATION CORP.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
 
   
2014
   
2013
 
Operating activities
           
Net loss
  $ (2,151,361 )   $ (2,174,354 )
Adjustments to reconcile net loss to
               
net cash provided (used) by operating activities
               
Depreciation
    33,984       33,984  
Amortization of debt discount and interest expense on
               
beneficial conversion feature of convertible notes
    269,277       185,715  
Interest (income) expense on fair value adjustment
    717,006       -  
Common stock issued for services
    195,235       1,204,468  
Impairment of assets
    1,100       -  
Decrease (increase) in:
               
Settlement receivable
    (18,000 )     -  
Prepaid expenses
    (3,167 )     9,190  
Advances from shareholder
    3,267       -  
Increase (decrease) in:
               
Accounts payable and accrued expenses
    49,384       2,313  
Net cash provided (used) by operating activities
    (903,275 )     (738,684 )
                 
Cash flows from investing activities
    -       -  
                 
Cash flows from financing activities:
               
Proceeds from the issuance of common stock
    398,616       278,343  
Proceeds from the issuance convertible notes payable
   
456,505
      303,000  
Proceeds from the issuance convertible notes payable, related
               
parties
    81,505       144,000  
Payment on convertible notes payable
    (25,005 )     (30,000 )
Proceeds from loans from stockholders
    5,500       8,750  
Payments on loans from stockholders
    (2,000 )     (8,750 )
Net cash provided by financing activities
    915,121       695,343  
                 
Net increase (decrease) in cash
    11,846       (43,341 )
                 
Cash - beginning of year
    578       43,919  
Cash - ending of year
  $ 12,424     $ 578  
                 
Supplemental disclosure of cash flow information:
               
Cash paid for interest expense
  $ 5,000     $ -  
Cash paid for income taxes
  $ -     $ -  
Noncash operating and financing activities:
               
Common stock issued to satisfy outstanding invoices
  $ -     $ 56,929  
Convertible debt converted and accrued interest to common
               
stock
  $ 550,324     $ 271,352  

 
See accompanying notes to the financial statements.

 
 

 
F-5

 
SEAFARER EXPLORATION CORP.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – DESCRIPTION OF BUSINESS

Seafarer Exploration Corp. (the “Company”), formerly Organetix, Inc. (“Organetix”), was incorporated on May 28, 2003 in the State of Delaware.

The principal business of the Company is to engage in the archaeologically-sensitive exploration, documentation, and recovery of historic shipwrecks with the objective of exploring and discovering Colonial-era shipwrecks for future generations to be able to appreciate and understand.  Seafarer currently has two different wreck sites under permit with the State of Florida and one wreck site under contract with a private party and is working closely with the Florida Department of Historical Resources and the Florida Bureau of Archeological Research to research and document these, and additional, wreck sites.
 

NOTE 2 - GOING CONCERN

These financial statements have been prepared on a going concern basis, which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has incurred net losses since inception, which raises substantial doubt about the Company’s ability to continue as a going concern. Based on its historical rate of expenditures, the Company expects to expend its available cash in less than one month from March 31, 2015. Management's plans include raising capital through the equity markets to fund operations and, eventually, the generation of revenue through its business. The Company does not expect to generate any revenues for the foreseeable future.
   
Failure to raise adequate capital and generate adequate revenues could result in the Company having to curtail or cease operations. The Company’s ability to raise additional capital through the future issuances of the common stock is unknown. Additionally, even if the Company does raise sufficient capital to support its operating expenses and generate adequate revenues, there can be no assurances that the revenue will be sufficient to enable it to develop to a level where it will generate profits and cash flows from operations. These matters raise substantial doubt about the Company's ability to continue as a going concern; however, the accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classifications of the liabilities that might be necessary should the Company be unable to continue as a going concern.
 
This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements.  The financial statements and notes are representations of the Company’s management, who are responsible for their integrity and objectivity.  These accounting policies conform to accounting principles generally accepted in the United States of America, and have been consistently applied in the preparation of the financial statements.
 
 
 
 
 
 
 

 
F-6

 
SEAFARER EXPLORATION CORP.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES
 
Cash and Cash Equivalents

For purposes of the statement of cash flows, the Company considers all highly liquid investments and short-term debt instruments with original maturities of three months or less to be cash equivalents. There are no cash equivalents at December 31, 2014 and 2013.

Earnings Per Share

The Company has adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 260-10 which provides for calculation of "basic" and "diluted" earnings per share.  Basic earnings per share includes no dilution and is computed by dividing net income or loss available to common shareholders by the weighted average common shares outstanding for the period.  Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity.  Basic and diluted losses per share were the same at the reporting dates as there because outstanding common stock equivalents would have been anti-dilutive, as of December 31, 2014 and 2013.
 
Components of loss per share for the respective years are as follows:       
                                            
   
For the Year Ended
December 31, 2014
   
For the Year Ended
December 31, 2013
 
Net loss attributable to common shareholders
 
$
(2,151,361
)
 
$
(2,174,354
)
                 
Weighted average shares outstanding:
               
Basic and diluted
   
904,898,653
     
806,432,658
 
                 
Loss per share:
               
Basic and diluted
 
$
(0.00
)
 
$
(0.00
)
                                                                                      
Fair Value of Financial Instruments

Effective January 1, 2008, fair value measurements are determined by the Company's adoption of authoritative guidance issued by the FASB, with the exception of the application of the statement to non-recurring, non-financial assets and liabilities, as permitted. Fair value is defined in the authoritative guidance as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy was established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
 
 

 
F-7

 
SEAFARER EXPLORATION CORP.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES, continued
 
   
Level 1 – Valuation based on unadjusted quoted market prices in active markets for identical assets or liabilities.
     
 
Level 2 – Valuation based on, observable inputs (other than level one prices), quoted market prices for similar assets such as at the measurement date; quoted prices in the market that are not active; or other inputs that are observable, either directly or indirectly.
     
   
Level 3 – Valuation based on unobservable inputs that are supported by little or no market activity, therefore requiring management’s best estimate of what market participants would use as fair value.
 
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.  The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.  The valuation of the Company’s derivative liability is determined using Level 1 inputs, which consider (i) time value, (ii) current market and (iii) contractual prices. 

The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, receivables,  accounts payable, notes payable and other payables, approximate their fair values because of the short maturity of these instruments.
 
Property and Equipment and Depreciation

Fixed assets are recorded at historical cost. Depreciation is computed on the straight-line method over the estimated useful lives of the respective assets. Property and equipment, net consist of the following at December 31:
 
   
2014
   
2013
 
Diving vessel
 
$
325,000
   
$
325,000
 
Generator
   
7,420
     
7,420
 
Less accumulated depreciation
   
(236,165
)
   
(202,181
)
   
$
96,255
   
$
130,239
 
 
Depreciation expense for the years ended December 31, 2014 and 2013 amounted to $33,984.
 
 
 
 
 

 
F-8

 
SEAFARER EXPLORATION CORP.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES, continued
 
Impairment of Long-Lived Assets

In accordance with ASC 360-10, the Company, on a regular basis, reviews the carrying amount of long-lived assets for the existence of facts or circumstances, both internally and externally, that suggest impairment. The Company determines if the carrying amount of a long-lived asset is impaired based on anticipated undiscounted cash flows, before interest, from the use of the asset. In the event of impairment, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the asset. Fair value is determined based on appraised value of the assets or the anticipated cash flows from the use of the asset, discounted at a rate commensurate with the risk involved. The Company has determined there has been no impairment in the carrying value of its long-lived assets at December 31, 2014 and 2013, respectively.
 
Use of Estimates

The process of preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses.  Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements.  Accordingly, upon settlement, actual results may differ from estimated amounts.

Revenue Recognition

The Company recognizes revenue on arrangements in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” and No. 104, “Revenue Recognition”. In all cases, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed and collectability is reasonably assured. For the years ended December 31, 2014 and 2013, the Company did not report any revenues.

Convertible Notes Payable

The Company accounts for conversion options embedded in convertible notes in accordance with ASC 815. ASC 815 generally requires companies to bifurcate conversion options embedded in convertible notes from their host instruments and to account for them as free standing derivative financial instruments. ASC 815 provides for an exception to this rule when convertible notes, as host instruments, are deemed to be conventional, as defined by ASC 815-40. As of December 31, 2014 and 2013, all of the Company’s convertible notes payable were classified as conventional instruments.
 
The Company accounts for convertible notes deemed conventional and conversion options embedded in non-conventional convertible notes which qualify as equity under ASC 815, in accordance with the provisions of ASC 470-20, which provides guidance on accounting for convertible securities with beneficial conversion features. Accordingly, the Company records, as a discount to convertible notes, the intrinsic value of such conversion options based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt.
 
 
 

 
F-9

 
SEAFARER EXPLORATION CORP.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES, continued
 
Recent Accounting Pronouncements
Recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

NOTE 4 – CAPITAL STOCK

As of December 31, 2014 the Company was authorized to issue 1,200,000,000 shares of $0.0001 par value common stock.

Preferred Stock

The Company is authorized to sell or issue 50,000,000 shares of preferred stock.

Series A Preferred Stock

At December 31, 2014 the Company had seven shares of Series A preferred stock issued and outstanding. Each share of Series A preferred stock has the right to convert into 214,289 shares of the Company’s common stock.  As of December 31, 2014 and 2013, no shares of preferred stock had been converted into shares of the Company’s common stock.
 
Series B Preferred Stock

On February 10, 2014, the Board of Directors of the Company under the authority granted under Article V of the Articles of Incorporation, defined and created a new preferred series of shares from the 50,000,000 authorized preferred shares. Pursuant to Article V, the Board of Directors has the power to designate such shares and all powers and matters concerning such shares. Such share class shall be designated Preferred Class B. The preferred class was created for 60 Preferred Class B shares. Such shares each have a voting power equal to one percent of the outstanding shares issued (totaling 60%) at the time of any vote action as necessary for share votes under Florida law, with or without a shareholder meeting.  Such shares are non-convertible to common stock of the Company and are not considered as convertible under any accounting measure. Such shares shall only be held by the Board of Directors as a Corporate body, and shall not be placed into any individual name. Such shares were considered issued at the time of this resolution’s adoption, and do not require a stock certificate to exist, unless selected to do so by the Board for representational purposes only.  Such shares are considered for voting as a whole amount, and shall be voted for any matter by a majority vote of the Board of Directors. Such shares shall not be divisible among the Board members, and shall be voted as a whole either for or against such a vote upon the vote of the majority of the Board of Directors. In the event that there is any vote taken which results in a tie of a vote of the Board of Directors, the vote of the Chairman of the Board shall control the voting of such shares. Such shares are not transferable except in the case of a change of control of the Corporation when such shares shall continue to be held by the Board of Directors. Such shares have the authority to vote for all matters that require a share vote under Florida law and the Articles of Incorporation.

 
F-10

 
SEAFARER EXPLORATION CORP.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

  NOTE 4 – CAPITAL STOCK, continued

Warrants and Options
 
As of December 31, 2014, a convertible note holder had a warrant to purchase 4,000,000 shares of its common stock with an exercise price of $0.005 per share for a period of ten years beginning on November 20, 2012.  

NOTE 5 - INCOME TAXES
 
At December 31, 2014 and 2013, the Company had available Federal and state net operating loss carry forwards to reduce future taxable income. The amounts available were approximately $10,175,000 and $8,023,000 for Federal purposes. The Federal carry forward begin to expire in 2033. Given the Company’s history of net operating losses, management has determined that it is more likely than not that the Company will not be able to realize the tax benefit of the carryforwards. Accordingly, the Company has not recognized a deferred tax asset for this benefit.
 
The Company adopted FASB guidelines that address the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under this guidance, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. This guidance also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of December 31, 2014 and 2013, the Company did not have a liability for unrecognized tax benefits.

The Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of December 31, 2014 and 2013, the Company has not accrued interest or penalties related to uncertain tax positions. Additionally, tax years 2010 through 2014 remain open to examination by the major taxing jurisdictions to which the Company is subject. There are currently no open federal or state tax years under audit.
 
Upon the attainment of taxable income by the Company, management will assess the likelihood of realizing the tax benefit associated with the use of the carry forwards and will recognize a deferred tax asset at that time.

The items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes are as follows:

   
For the Year Ended
December 31, 2014
   
For the Year Ended
December 31,  2013
 
Income tax at federal statutory rate
   
(34.00
 %)
   
(34.00
%)
State tax, net of federal effect
   
(3.96
%)
   
(3.96
%)
     
37.96
%
   
37.96
%
Valuation allowance
   
(37.96
%)
   
(37.96
%)
Effective rate
   
0.00
%
   
0.00
%
 
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
 
As of December 31, 2014 and 2013, the Company’s only significant deferred income tax asset was a cumulative estimated net tax operating loss of $10,175,000 and $8,023,000, respectively that is available to offset future taxable income, if any, in future periods, subject to expiration and other limitations imposed by the Internal Revenue Service.  Management has considered the Company's operating losses incurred to date and believes that a full valuation allowance against the deferred tax assets is required as of December 31, 2014 and 2013.
 
 
 
 
 

 
F-11

 
SEAFARER EXPLORATION CORP.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – LEASE OBLIGATION

Corporate Office

The Company leases 823 square feet of office space located at 14497 North Dale Mabry Highway, Suite 209-N, Tampa, Florida 33618.  The Company entered into an amended lease agreement on July 1, 2013 for its current location. Under the terms of the amended lease agreement, the lease term has been extended to June 30, 2015, with a base monthly rent of $1,200 from July 1, 2013 to June 30, 2014 and a base monthly rent of $1,235 from July 1, 2014 through June 30, 2015. There may be additional monthly charges for pro-rated maintenance, late fees, etc.
 
As of December 31, 2014, future minimum rental payments required under this non-cancelable operating lease total $7,407 for the year ending December 31, 2015.
 
  Operations House

The Company has an operating lease for a house located in Merritt Island, Florida. The Company uses the house to store equipment and gear and to provide temporary work-related living quarters for its divers and other personnel involved in its exploration and recovery operations. The term of the lease agreement commenced on October 1, 2014 and expires on September 30, 2015.   

As of December 31, 2014, future minimum rental payments required under this non-cancelable lease total $19,800 for the year ending December 31, 2015.


 
F-12

 
SEAFARER EXPLORATION CORP.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE

Upon inception, the Company evaluates each financial instrument to determine whether it meets the definition of “conventional convertible” debt under paragraph 4 of EITF 00-19, which was superseded by ASC 815, and EITF 05-02, which was superseded by ASC 470.

Convertible Notes Payable
 
The following table reflects the convertible notes payable, other than the notes that have been remeasured to fair value which are discussed later in Note 7, as of December 31, 2014:

Issue
Maturity
 
December 31,
   
December 31,
   
Interest
   
Conversion
 
Date
Date
 
2014
   
2013
   
Rate
   
Rate
 
Convertible notes Payable:
                         
October 13, 2014
April 13, 2015
 
$
25,000
 
-
   
6.00
%
 
0.0050
 
January 28,2013
January 28, 2014
   
-
   
25,000
   
6.00
%
 
0.0050
 
January 28,2013
January 28, 2014
   
--
   
25,000
   
6.00
%
 
0.0050
 
August 8, 2013
February 11, 2014
   
-
   
                40,000
   
6.00
%
 
0.0100
 
September 18, 2013
March 18, 2013
   
-
   
                 20,000
   
6.00
%
 
0.0125
 
September 25, 2013
March 25, 2014
   
-
   
                 10,000
   
6.00
%
 
0.0125
 
October 21, 2013
April 21, 2014
   
-
   
                 40,000
   
6.00
%
 
0.0100
 
October 4, 2013
May 12, 2013
   
-
   
50,000
   
6.00
%
 
0.0125
 
October 30, 2013
October 30, 2014
   
-
   
                 49,990
   
6.00
%
 
0.0125
 
       
25,000
   
               259,990
             
Unamortized discounts
     
(14,148
)  
(120,553
)            
Balance
   
$
10,852
  $
139,457
             
 
Convertible notes payable, in default
                   
October 31, 2012
April 30, 2013
 
$
8,000
  $
8,000
   
6.00
%
 
0.0040
 
July 16, 2012
July 30, 2013
   
5,000
   
5,000
   
6.00
%
 
0.0050
 
November 20, 2012
May 20, 2013
   
50,000
   
50,000
   
6.00
%
 
0.0050
 
January 19, 2013
July 30, 2013
   
5,000
   
5,000
   
6.00
%
 
0.0040
 
February 11, 2013
August 11, 2013
   
9,000
   
9,000
   
6.00
%
 
0.0060
 
September 25, 2013
March 25, 2014
   
10,000
   
-
   
6.00
%
 
0.0125
 
August 28, 2009
November 1, 2009
   
4,300
   
4,300
   
10.00
%
 
0.0150
 
April 7, 2010
November 7, 2010
   
70,000
   
70,000
   
6.00
%
 
0.0080
 
November 12, 2010
November 7, 2011
   
40,000
   
40,000
   
6.00
%
 
0.0050
 
October 4, 2013
April 4, 2014
   
50,000
   
-
   
6.00
%
 
0.0125
 
October 30, 2013
October 30, 2014
   
50,000
   
-
   
6.00
%
 
0.0125
 
May 15, 2014
November 15, 2014
   
40,000
   
-
   
6.00
%
 
0.0070
 
       
341,300
   
191,300
             
Unamortized discount
     
-
   
-
             
Balance
   
$
341,300
  $
     191,300
             
                             
Convertible notes payable - related party, in default
                         
January 7, 2013
June 30, 3013
  $
-
  $
7,500
   
6.00
%
 
0.0040
 
January 19, 2013
July 30, 2013
 
 
15,000
   
15,000
   
6.00
%
 
0.0040
 
February 7, 2013
August 7, 2013
   
-
   
10,000
   
6.00
%
 
0.0050
 
July 9, 2013
December 19, 2013
   
-
   
15,000
   
6.00
%
 
0.0150
 

 
F-13

 
SEAFARER EXPLORATION CORP.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 7 - CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE, continued
 
    January 9, 2009 January 9, 2010     10,000      10,000      6.00  %   0.0150   
January 25, 2010
January 25, 2011
   
6,000
   
6,000
   
6.00
%
 
0.0050
 
January 18, 2012
July 18, 2012
   
50,000
   
50,000
   
8.00
%
 
0.0040
 
July 26, 2013
January 26, 2014
   
10,000
   
-
   
6.00
%
 
0.0100
 
January 17, 2014
July 17, 2014
   
31,500
   
-
   
6.00
%
 
0.0060
 
May 27, 2014
November 27, 2014
   
7,000
   
-
   
6.00
%
 
0.0070
 
       
129,500
   
113,500
             
Unamortized discount
     
-
   
 -
             
Balance
   
$
129,500
  $
113,500
             
                             
Convertible notes payable - related party
                         
July 21, 2014
January 25, 2015
  $
17,000
  $
-
   
6.00
%
 
0.0080
 
October 16, 2014
April 16, 2015
   
21,000
   
-
   
6.00
%
 
0.0045
 
July 17, 2013
January 17, 2014
   
-
   
30,000
   
6.00
%
 
0.0010
 
July 26, 2013
January 26, 2014
   
-
   
10,000
   
6.00
%
 
0.0010
 
November 12, 2013
May 12, 2014
   
-
   
11,000
   
6.00
%
 
0.0125
 
       
38,000
   
51,000
             
Unamortized discount
     
(15,064
)
 
(26,889)
             
Balance
   
$
22,936
  $
24,111
             

  Notes Payable
 
The following table reflects the notes payable as of December 31, 2014 and 2013:

 
Issue Date
Maturity Date
   
2014
   
2013
   
Interest Rate
       
Notes payable, in default –related parties:
                   
February 24, 2010
February 24, 2011
    $
7,500
 
$
7,500
      6.00
%
     
                             
Notes payable, in default:
                         
June 23, 2011
August 23, 2011
   
25,000
   
25,000
      6.00
%
     
April 27, 2011
April 27, 2012
   
5,000
   
5,000
      6.00
%
     
       
30,000
   
30,000
             
                             
      $
37,500
  $
37,500
             

 
Convertible Notes Payable

Between January 1, 2014 and December 31, 2014, the Company issued eight (8) convertible notes payable totaling $151,500. The notes include interest at 6%. The principal amount of the notes and interest is payable on the maturity date. The notes and accrued interest are convertible into common stock at fixed conversion prices. The conversion prices and maturity dates of these notes are detailed in the table in the above page.
 
The Company has evaluated the terms and conditions of the convertible notes under the guidance of ASC 815 and other applicable guidance. The conversion feature of four of the notes met the definition of conventional convertible for purposes of applying the conventional convertible exemption. The definition of conventional contemplates a limitation on the number of shares issuable under the arrangement. The note is convertible into a fixed number of shares and there are no down round protection features contained in the contracts. Since the convertible notes achieved the conventional convertible exemption, the Company was required to consider whether the hybrid contracts embody a beneficial conversion feature. The calculation of the effective conversion amount did result in a beneficial conversion feature.
 
 

 
F-14

 
SEAFARER EXPLORATION CORP.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE, continued
 
The following tables reflect the aggregate allocation as of December 31:
 
   
2014
   
2013
 
Face value of convertible notes payable
  $ 151,500     $ 310,990  
                 
Beneficial conversion feature
    (29,212 )     (147,422 )
                 
Carrying value
  $ 122,288     $ 163,568  
 
The discounts on the convertible notes arose from the allocation of basis to the beneficial conversion feature. The discount is amortized through charges to interest expense over the term of the debt agreement. For the twelve months ended December 31, 2014, the Company recorded interest expense related to the amortization of debt discounts in the amount of approximately $232,657. 

At December 31, 2014 and 2013, combined accrued interest on the convertible notes payable, notes payable and stockholder loans was $91,754 and $59,267, respectively, and included in accounts payable and accrued expenses on the accompanying balance sheets.
 
Shareholder Loan
 
At December 31, 2014 the Company had a loan outstanding to a shareholder in the amount of $3,500 at 0% interest. Subsequent to December 31, 2014 the Company repaid the $3,500 loan to the shareholder.
 
Convertible Notes Payable and Notes Payable, in Default
 
The Company does not have additional sources of debt financing to refinance its convertible notes payable and notes payable that are currently in default. If the Company is unable to obtain additional capital, such lenders may file suit, including suit to foreclose on the assets held as collateral for the obligations arising under the secured notes. If any of the lenders file suit to foreclose on the assets held as collateral, then the Company may be forced to significantly scale back or cease its operations which would more than likely result in a complete loss of all capital that has been invested in or borrowed by the Company. The fact that the Company is in default of several promissory notes held by various lenders makes investing in the Company or providing any loans to the Company extremely risky, with a very high potential for a total loss of capital.
 
The convertible notes that have been issued by the Company are convertible at the lender’s option. These convertible notes represent significant potential dilution to the Company’s current shareholders as the convertible price of these notes is generally lower than the current market price of the Company’s shares. As such when these notes are converted into shares of the Company’s common stock there is typically a highly dilutive effect on current shareholders and, it is very possible that such dilution may significantly negatively affect the trading price of the Company’s common stock.

Convertible Notes at Fair Value
 
Convertible Note Payable Dated January 16, 2014 at Fair Value
 
On January 16, 2014, the Company entered into a convertible note payable with a corporation.   The convertible note payable, with a face value of $50,000, bears interest at 6.0% per annum and was due on July 16, 2014. The note payable is convertible, at the holder’s option, into the Company’s common shares at the Variable Conversion Price. The Variable Conversion Price is defined as 50% multiplied by the lowest closing price during the last twenty (20) trading days prior to closing, but not less than $0.002 per share.
 
In the evaluation of the financing arrangement, the Company concluded that the conversion feature did not meet the conditions set forth in current accounting standards for equity classification. Since equity classification is not available for the conversion feature, it requires bifurcation and liability classification, at fair value. The Company elected to account for this hybrid contract under the guidance of ASC 815-15-25-4.
 
In connection with the issuance of the convertible note payable, the Company recognized a day-one derivative loss totaling $51,431 related to the recognition of (i) the hybrid note and (ii) the derivative instrument arising from the fair value measurement due to the fair value of the hybrid note and embedded derivative exceeding the proceeds that the Company received from the arrangement. Therefore, the Company was required to record a loss of $51,431 on the derivative financial instrument and is included in interest expense. In addition, the fair value will change in future periods, based upon changes in the Company’s common stock price and changes in other assumptions and market indicators used in the valuation techniques. These future changes will be currently recognized in interest expense or interest income on the Company’s statement of operations.
 
The conversion of the note into shares of the Company’s common stock is potentially highly dilutive to current shareholders. If the note holder elects to sell the shares that it has acquired as a result of converting the note into shares of common stock, then any such sales may result in a significant decrease in the market price of the Company’s shares.
 
During the year ended December 31, 2014, the note was converted into 6,866,666 shares of common stock.

 

 
F-15

 
SEAFARER EXPLORATION CORP.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE, continued
 
Convertible Note Payable Dated March 17, 2014 at Fair Value
 
On March 17, 2014, the Company entered into a convertible note payable with a corporation. The convertible note payable, with a face value of $40,000, bears interest at 8.0% per annum and is due on March 17, 2015. The note payable is convertible, at the holder’s option, into the Company’s common shares at the Variable Conversion Price. The Variable Conversion Price is defined as 57% multiplied by the lowest closing bid price for the Company’s common stock during the fifteen (15) trading day period including the day the notice of conversion is received by the Company. The conversion feature is subject to full-ratchet, anti-dilution protection if the Company sells shares or share-indexed financing instruments at less than the conversion price.
 
In the evaluation of the financing arrangement, the Company concluded that the conversion feature did not meet the conditions set forth in current accounting standards for equity classification. Since equity classification is not available for the conversion feature, it requires bifurcation and liability classification, at fair value. The Company elected to account for this hybrid contract under the guidance of ASC 815-15-25-4.
 
In connection with the issuance of the convertible note payable, the Company recognized day-one derivative loss totaling $31,321 related to the recognition of (i) the hybrid note and (ii) the derivative instrument arising from the fair value measurement due to the fair value of the hybrid note and embedded derivative exceeding the proceeds that the Company received from the arrangement. Therefore, the Company was required to record a $31,321 loss on the derivative financial instrument and is included in interest expense. In addition, the fair value will change in future periods, based upon changes in the Company’s common stock price and changes in other assumptions and market indicators used in the valuation techniques. These future changes will be currently recognized in interest expense or interest income on the Company’s statement of operations.
 
The conversion of the note into shares of the Company’s common stock is potentially highly dilutive to current shareholders. If the note holder elects to sell the shares that it has acquired as a result of converting the note into shares of common stock, then any such sales may result in a significant decrease in the market price of the Company’s shares.
 
During the year ended December 31, 2014, the note was converted into 11,181,304 shares of common stock.

Convertible Note Payable Dated April 24, 2014 at Fair Value
 
On April 24, 2014, the Company entered into a convertible note payable with a corporation.  The note payable, with a face value of $107,000, including $7,000 of original issue discount, bears interest at 12.0% per annum and is due on April 24, 2015. The convertible note payable is convertible, at the holder’s option, into the Company’s common shares at the Variable Conversion Price. The Variable Conversion Price is defined as 60% multiplied by the lowest closing bid price for the Company’s common stock during the twenty (20) trading day period including the day the notice of conversion is received by the Company. The conversion feature is subject to full-ratchet, anti-dilution protection if the Company sells shares or share-indexed financing instruments at less than the conversion price.
 
In the evaluation of the financing arrangement, the Company concluded that the conversion feature did not meet the conditions set forth in current accounting standards for equity classification. Since equity classification is not available for the conversion feature, it requires bifurcation and liability classification, at fair value. The Company elected to account for this hybrid contract under the guidance of ASC 815-15-25-4.
 
In connection with the issuance of the convertible note payable, the Company recognized day-one derivative loss totaling $166,771 related to the recognition of (i) the hybrid note and (ii) the derivative instrument arising from the fair value measurement due to the fair value of the hybrid note and embedded derivative exceeding the proceeds that the Company received from the arrangement. Therefore, the Company was required to record a $166,771 loss on the derivative financial instrument and is included in interest expense. In addition, the fair value will change in future periods, based upon changes in the Company’s common stock price and changes in other assumptions and market indicators used in the valuation techniques. These future changes will be currently recognized in interest expense or interest income on the Company’s statement of operations. 
 
The conversion of the note into shares of the Company’s common stock is potentially highly dilutive to current shareholders. If the note holder elects to sell the shares that it has acquired as a result of converting the note into shares of common stock, then any such sales may result in a significant decrease in the market price of the Company’s shares.
 

 

 
F-16

 
SEAFARER EXPLORATION CORP.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE, continued
 
During the year ended December 31, 2014, the Company repaid $20,000 of the principle and converted $35,000 of the note into 9,956,709 shares of common stock.   The Balance of the note at December 31, 2014 was $52,000 with an approximate fair value of $167,000 .

Convertible Note Payable Dated August 21, 2014 at Fair Value

On August 21, 2014, the Company entered into a convertible note payable with a corporation.  The convertible note payable, with a face value of $40,000, bears interest at 8.0% per annum and is due on August 21, 2015. The note payable is convertible, at the holder’s option, into the Company’s common shares at the Variable Conversion Price. The Variable Conversion Price is defined as 57% multiplied by the lowest closing bid price   for the Company’s common stock during the fifteen (15) trading day period including the day the notice of conversion is received by the Company. The conversion feature is subject to full-ratchet, anti-dilution protection if the Company sells shares or share-indexed financing instruments at less than the conversion price.
 
In the evaluation of the financing arrangement, the Company concluded that the conversion feature did not meet the conditions set forth in current accounting standards for equity classification. Since equity classification is not available for the conversion feature, it requires bifurcation and liability classification, at fair value. The Company elected to account for this hybrid contract under the guidance of ASC 815-15-25-4.
 
In connection with the issuance of the convertible note payable, the Company recognized day-one derivative loss totaling $34,971 related to the recognition of (i) the hybrid note and (ii) the derivative instrument arising from the fair value measurement due to the fair value of the hybrid note and embedded derivative exceeding the proceeds that the Company received from the arrangement. Therefore, the Company was required to record a $34,971 loss on the derivative financial instrument and is included in interest expense. In addition, the fair value will change in future periods, based upon changes in the Company’s common stock price and changes in other assumptions and market indicators used in the valuation techniques. These future changes will be currently recognized in interest expense or interest income on the Company’s statement of operations.
 
The conversion of the note into shares of the Company’s common stock is potentially highly dilutive to current shareholders. If the note holder elects to sell the shares that it has acquired as a result of converting the note into shares of common stock, then any such sales may result in a significant decrease in the market price of the Company’s shares.
 
At December 31, 2014, the $40,000 face value convertible note payable was recorded at its fair value of $137,614.
 
Convertible Note Payable Dated September 08, 2014 at Fair Value
 
On September 08, 2014, the Company entered into a convertible note payable with a corporation.  The note payable, with a face value of $53,500, including $3,500 of original issue discount,, bears interest at 12.0% per annum and is due on September 8, 2015. The convertible note payable is convertible, at the holder’s option, into the Company’s common shares at the Variable Conversion Price. The Variable Conversion Price is defined as 60% multiplied by the lowest closing bid price  two trading prices for the Company’s common stock during the twenty (20) trading day period including the day the notice of conversion is received by the Company. The conversion feature is subject to full-ratchet, anti-dilution protection if the Company sells shares or share-indexed financing instruments at less than the conversion price.
 
In the evaluation of the financing arrangement, the Company concluded that the conversion feature did not meet the conditions set forth in current accounting standards for equity classification. Since equity classification is not available for the conversion feature, it requires bifurcation and liability classification, at fair value. The Company elected to account for this hybrid contract under the guidance of ASC 815-15-25-4.
 
In connection with the issuance of the convertible note payable, the Company recognized day-one derivative loss totaling $42,080 related to the recognition of (i) the hybrid note and (ii) the derivative instrument arising from the fair value measurement due to the fair value of the hybrid note and embedded derivative exceeding the proceeds that the Company received from the arrangement. Therefore, the Company was required to record a $42,080 loss on the derivative financial instrument and is included in interest expense. In addition, the fair value will change in future periods, based upon changes in the Company’s common stock price and changes in other assumptions and market indicators used in the valuation techniques. These future changes will be currently recognized in interest expense or interest income on the Company’s statement of operations. 
 
The conversion of the note into shares of the Company’s common stock is potentially highly dilutive to current shareholders. If the note holder elects to sell the shares that it has acquired as a result of converting the note into shares of common stock, then any such sales may result in a significant decrease in the market price of the Company’s shares.

 
F-17

 
SEAFARER EXPLORATION CORP.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE, continued
At December 31, 2014, the $53,500 face value convertible note payable was recorded at its fair value of $174,726.

Convertible Note Payable Dated November 5, 2014 at Fair Value

On November 5, 2014, the Company entered into a convertible note payable with a corporation.  The note payable, with a face value of $53,000, bears interest at 8.0% per annum and is due on July 31, 2015.  The convertible note payable is convertible, at the holder’s option, into the Company’s common shares at the Variable Conversion Price.  The Variable Conversion Price is defined as 65% multiplied by the average of the lowest two trading prices for the Company’s common stock during the twenty five trading day period ending one trading day prior to the date the convertible note payable is sent by the holder to the Company.  The conversion feature is subject to full-ratchet, anti-dilution protection if the Company sells shares or share-indexed financing instruments at less than the conversion price.  

In the evaluation of the financing arrangement, the Company concluded that the conversion feature did not meet the conditions set forth in current accounting standards for equity classification.  Since equity classification is not available for the conversion feature, it requires bifurcation and liability classification, at fair value. The Company also concluded that the Default Put required bifurcation because, while puts on debt instruments are generally considered clearly and closely related to the host, the Default Put is indexed to certain events that are not associated with the convertible note payable.

The Company elected to account for this hybrid contract under the guidance of ASC 815-15-25-4.

In connection with the issuance of the convertible note payable on November 5, 2014 the Company encountered the unusual circumstance of a day-one derivative loss of $22,057 related to the recognition of (i) the hybrid note and (ii) the derivative instrument arising from the fair value measurement due to the fair value of the hybrid note and embedded derivative exceeding the proceeds that the Company received from the arrangement.  Therefore, the Company was required to record a $22,057 loss on the derivative financial instrument.  In addition, the fair value will change in future periods, based upon changes in the Company’s common stock price and changes in other assumptions and market indicators used in the valuation techniques.  These future changes will be currently recognized in interest expense or interest income on the Company’s statement of operations.

The holder of this convertible note has the right to convert the balance of the note into shares of the Company’s common stock at a substantial discount to the current market price of the shares. The conversion of the note into shares of the Company’s common stock is potentially highly dilutive to current shareholders. If the note holder elects to sell the shares that it has acquired as a result of converting the note into shares of common stock, then any such sales may result in a significant decrease in the market price of the Company’s shares.
 
At December 31, 2014 the convertible note payable, at fair value, was recorded at $155,344.

Convertible Note Payable Dated December 17, 2014 at Fair Value

On December 17, 2014, the Company entered into a convertible note payable with a corporation.  The note payable, with a face value of $43,000, bears interest at 8.0% per annum and is due on September 19, 2015.  The convertible note payable is convertible, at the holder’s option, into the Company’s common shares at the Variable Conversion Price.  The Variable Conversion Price is defined as 65% multiplied by the average of the lowest two trading prices for the Company’s common stock during the twenty five trading day period ending one trading day prior to the date the convertible note payable is sent by the holder to the Company.  The conversion feature is subject to full-ratchet, anti-dilution protection if the Company sells shares or share-indexed financing instruments at less than the conversion price.  The holder has the option to redeem the convertible note payable for cash in the event of defaults or certain other contingent events (the “Default Put”).

In the evaluation of the financing arrangement, the Company concluded that the conversion feature did not meet the conditions set forth in current accounting standards for equity classification.  Since equity classification is not available for the conversion feature, it requires bifurcation and liability classification, at fair value. The Company also concluded that the Default Put required bifurcation because, while puts on debt instruments are generally considered clearly and closely related to the host, the Default Put is indexed to certain events that are not associated with the convertible note payable.

The Company elected to account for this hybrid contract under the guidance of ASC 815-15-25-4.

In connection with the issuance of the convertible note payable on December 17, 2014 the Company encountered the unusual circumstance of a day-one derivative loss of $40,980 related to the recognition of (i) the hybrid note and (ii) the derivative instrument arising from the fair value measurement due to the fair value of the hybrid note and embedded derivative exceeding the proceeds that the Company received from the arrangement.  Therefore, the Company was required to record a $40,980 loss on the derivative financial instrument.  In addition, the fair value will change in future periods, based upon changes in the Company’s common stock price and changes in other assumptions and market indicators used in the valuation techniques. These future changes will be currently recognized in interest expense or interest income on the Company’s statement of operations.

 
F-18

 
SEAFARER EXPLORATION CORP.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE, continued
 
The holder of this convertible note has the right to convert the balance of the note into shares of the Company’s common stock at a substantial discount to the current market price of the shares. The conversion of the note into shares of the Company’s common stock is potentially highly dilutive to current shareholders. If the note holder elects to sell the shares that it has acquired as a result of converting the note into shares of common stock, then any such sales may result in a significant decrease in the market price of the Company’s shares.

At December 31, 2014 the convertible note payable, at fair value, was recorded at $126,503
 
Convertible Note Payable Dated October 22, 2012

On October 22, 2012, the Company entered into a convertible note payable with a corporation.   The note payable, with a face value of $42,500, bears interest at 8.0% per annum and is due on July 24, 2013. The convertible note payable is convertible, at the holder’s option, into the Company’s common shares at the Variable Conversion Price. The Variable Conversion Price is defined as 60% multiplied by the average of the lowest two trading prices for the Company’s common stock during the twenty five trading day period ending one trading day prior to the date the convertible note payable is sent by the holder to the Company. The conversion feature is subject to full-ratchet, anti-dilution protection if the Company sells shares or share-indexed financing instruments at less than the conversion price. The holder has the option to redeem the convertible note payable for cash in the event of defaults or certain other contingent events (the “Default Put”).

In the evaluation of the financing arrangement, the Company concluded that the conversion feature did not meet the conditions set forth in current accounting standards for equity classification. Since equity classification is not available for the conversion feature, it requires bifurcation and liability classification, at fair value. The Company also concluded that the Default Put required bifurcation because, while puts on debt instruments are generally considered clearly and closely related to the host, the Default Put is indexed to certain events that are not associated with the convertible note payable.

In the evaluation of the financing arrangement, the Company concluded that the conversion feature did not meet the conditions set forth in current accounting standards for equity classification. Since equity classification is not available for the conversion feature, it requires bifurcation and liability classification, at fair value. The Company also concluded that the Default Put required bifurcation because, while puts on debt instruments are generally considered clearly and closely related to the host, the Default Put is indexed to certain events that are not associated with the convertible note payable.

During the year ended December 31, 2013, the Company repaid $30,000 in principal and the remaining $12,500 in principal was converted into 1,136,364 shares of the Company’s common stock.

Convertible Note Payable Dated December 18, 2012

On December 18, 2012, the Company entered into a convertible note payable with a corporation.  The note payable, with a face value of $42,500, bears interest at 8.0% per annum and is due on September 20, 2013. The convertible note payable is convertible, at the holder’s option, into the Company’s common shares at the Variable Conversion Price. The Variable Conversion Price is defined as 60% multiplied by the average of the lowest two trading prices for the Company’s common stock during the twenty five trading day period ending one trading day prior to the date the convertible note payable is sent by the holder to the Company. The conversion feature is subject to full-ratchet, anti-dilution protection if the Company sells shares or share-indexed financing instruments at less than the conversion price. The holder has the option to redeem the convertible note payable for cash in the event of defaults or certain other contingent events (the “Default Put”).

In the evaluation of the financing arrangement, the Company concluded that the conversion feature did not meet the conditions set forth in current accounting standards for equity classification. Since equity classification is not available for the conversion feature, it requires bifurcation and liability classification, at fair value. The Company also concluded that the Default Put required bifurcation because, while puts on debt instruments are generally considered clearly and closely related to the host, the Default Put is indexed to certain events that are not associated with the convertible note payable.

During the year ended December 31, 2013, the full $42,500 in principal and $1,700 in accrued interest was converted into 3,226,278 shares of the Company’s common stock.







 
F-19

 
SEAFARER EXPLORATION CORP.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE, continued
 
The following tables summarize the effects on earnings associated with changes in the fair values of the convertible notes payable, at December 31, 2014 and 2013:
 
    $ 2014     $ 2013  
Face value of the convertible notes payable
    241,000       -  
Interest expense to record the convertible notes at
               
fair value on the date of issuance
    389,611       -  
Interest expense to mark to market the convertible notes
               
      131,066       -  
Fair value, end of year
  $ 761,677     $ -  
 
 
NOTE 8 – MATERIAL AGREEMENTS

Agreement to Explore a Shipwreck Site Located off of Brevard County, Florida
 
On March 1, 2014, Seafarer entered into a partnership and ownership with Marine Archaeology Partners, LLC, with the formation of Seafarer’s Quest, LLC. Such LLC was formed in the State of Florida for the purpose of permitting, exploration and recovery of artifacts from a designated area on the east coast of Florida. Such site area is from a defined, contracted area by a separate entity, which a portion of such site is designated from a previous contracted holding through the State of Florida. Under such agreement, Seafarer is responsible for costs of permitting, exploration and recovery, and is entitled to 60% of such artifact recovery. Seafarer has a 50% ownership, with designated management of the LLC coming from Seafarer.  

Exploration Permit with the Florida Division of Historical Resources for an Area off of Juno Beach, Florida

As previously noted on its form 8-K filed on May 9, 2011, the Company and Tulco received a 1A-31 Recovery Permit from the Florida Division of Historical Resources. The Recovery Permit was active through April 25, 2014. The Permit authorizes Seafarer to dig and recover artifacts from the designated site at Juno Beach, Florida. It will be necessary for the Company to obtain a renewal to the Recovery Permit for the Juno Beach shipwreck site in order to continue to perform exploration and recovery work at the site after April 25, 2014. Currently the permit with the FBAR is being renewed in the name of Seafarer Exploration Corp. under a judge’s order. The permit had not been issued as of the filing of this report.

Exploration Permit with the Florida Division of Historical Resources for an Area off of Lantana, Florida

On November 2, 2012, the Company received a three year 1A-31 Exploration Permit from the Division of Historical Resources for an area identified off of Lantana Beach, Florida. Under the permit the Company began remote sensing at the site with a cesium vapor magnotemoter and did underwater exploration. Once the remote sensing was completed and the data analyzed, the Exploration permit moved to Phase 2, dig and identify. During Phase 2 testing was done which confirmed a mid to late 18th century shipwreck. Upon further testing, management believes a 1600s era shipwreck potentially exists, but not within the currently permitted area. Due to other developments and projects, the Company is not pursuing Phase 3 at the Lantana site at this time, but review the site at a later date that has not yet been determined.

Exploration Permit with the Florida Division of Historical Resources for an Area off of Cape Canaveral, Florida

On July 28, 2014 the Company’s partnership with Marine Archeological Partners, LLC, Seafarer’s Quest, LLC received a 1A-31 Recovery Permit (the “Permit”) from the Florida Division of Historical Resources for an area identified off of Cape Canaveral, Florida. The Permit is active for three years from the date of issuance.

Certain Other Agreements


 
F-20

 
SEAFARER EXPLORATION CORP.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – MATERIAL AGREEMENTS, continued
 
In February of 2014, the Company entered into an agreement with an individual who is related to the Company’s CEO to continue serving as a member of the Company’s Board of Directors. Under the  agreement, the Director agreed to provide various services to the Company including making recommendations for both the short term and the long term business strategies to be employed by the Company, monitoring and assessing the Company's business and to advise the Company’s Board of Directors with respect to an appropriate business strategy on an ongoing basis, commenting on proposed corporate decisions and identifying and evaluating alternative courses of action, making suggestions to strengthen the Company's operations, identifying and evaluating external threats and opportunities to the Company, evaluating and making ongoing recommendations to the Board with respect for one year and may be terminated by either the Company or the Director by providing written notice to the other party. The agreement also terminates automatically upon the death, resignation or removal of the Director.  Under the terms of the agreement, the Company agreed to pay the Director 2,000,000 restricted shares of its common stock at the execution of the agreement and to negotiate future compensation on a year-by-year basis. The Company also agreed to reimburse the Director for preapproved expenses. The 2,000,000 shares are included as an expense in consulting and contractor fees in the accompanying statements of operations.

In March of 2014 the Company entered into an agreement with a marine survey company. Under the terms of the agreement the survey company agreed to provide a forty foot survey vessel and captain in order to provide multi-beam data collection and processing on a daily basis for an area to be designated by the Company. Processed data will be provided to the Company in order to evaluate the area that was surveyed.
 
The Company agreed to pay the surveying company $3,500 per day plus fuel costs. Future surveying services will be provided to the Company at a daily rate of $1,850 plus company stock equal to or greater than $2,000 with a written guarantee as to the minimum value of the stock. The Company issued 142,900 shares to the principal of the marine survey company for services rendered under the agreement.

In April of 2014 the Company entered into an agreement with an individual to join the Company’s advisory council. Under the advisory council agreements the advisor agreed to provide various advisory services to the Company, including making recommendations for both the short term and the long term business strategies to be employed by the Company, monitoring and assessing the Company's business and to advise the Company’s Board of Directors with respect to an appropriate business strategy on an ongoing basis, commenting on proposed corporate decisions and identifying and evaluating alternative courses of action, making suggestions to strengthen the Company's operations, identifying and evaluating external threats and opportunities to the Company, evaluating and making ongoing recommendations to the Board with respect to the Company's business, and providing such other advisory or consulting services as may be appropriate from time to time. The term of each of the advisory council agreements is for one year. In consideration for the performance of the advisory services, the Company agreed to issue the advisor an aggregate total of 300,000 restricted shares of its common stock. According to the agreement the shares vest at a rate of 25,000 per month during the term of the agreement.   If the advisory council agreements are terminated prior to the expiration of the one year terms, then each of the advisors has agreed to return to the Company for cancellation any portion of their shares that have not vested. Under the advisory council agreements, the Company has agreed to reimburse the advisors for pre-approved expenses. The Company issued 300,000 shares of its restricted common stock to the advisor during the year ended December 31, 2014.

In May of 2014 the Company issued 2,000,000 shares of its restricted common stock to a consultant for various business advisory, financial and strategic consulting services. The Company believes that the consultant has provided services at below market rates of compensation and the shares were paid both for services rendered and to more fairly compensate the consultant and as a bonus and inducement for the consultant to continue to provide services to the Company.


 
F-21

 
SEAFARER EXPLORATION CORP.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – MATERIAL AGREEMENTS, continued
 
In July of 2014, the Company entered into a consulting agreement with a corporation under which the consultant agreed to provide various advisory services and corporate communications consulting services as an independent contractor.  The consultant is not providing any legal advice nor acting as an investment advisor is not exclusive. The term of the agreement is for one year and the Company agreed to pay the consultant $4,000 per month while the agreement is in effect and issue the consultant 1,500,000 shares of its restricted common stock. The 1,500,000 shares were issued to the consultant and are included as an expense in consulting and contractor expenses in the accompanying statements of operations.

In July of 2014, the Company agreed to lease a slip in Cape Canaveral for one of its vessels. The lease is month to month and the Company agreed to pay $354 per month including taxes for use of the slip.

In August of 2014, the Company agreed to lease a slip in Port Canaveral for one of its vessels. The lease is month to month and the Company agreed to pay $922 per month including taxes for use of the slip.

In August of 2014, the Company agreed to rent a vessel from a third party for $150 per day that the vessel is actually used by the Company. A day of usage is defined as any day the boat is put in the water and started, the boat may be used by the Company for up to twelve hours per day. The Company must pay an additional fee of $200 for every two hundred hours that it utilizes the boat. The agreement may be cancelled at any time by either party.

In October of 2014, the Company entered into an agreement to lease a house in Merritt Island Florida. The Company uses the house to store equipment and gear and to provide temporary work-related living quarters for its divers and other personnel involved in its exploration and recovery operations. The term of the lease agreement commenced on October 1, 2014 and expires on September 30, 2015.   As of December 31, 2014, future minimum rental payments required under this non-cancelable lease was $19,800, all of which is due during 2015.

The Company has an ongoing verbal agreement with a limited liability company that is controlled by a person who is related to the Company’s CEO to pay the related party consultant $3,000 per month to provide general business consulting, industry research, monitoring and assessing the Company's business and to advise management with respect to an appropriate business strategy on an ongoing basis, commenting on proposed corporate decisions and identifying and evaluating alternative courses of action, perform background research including background checks and provide investigative information on individuals and companies and acting as an administrative specialist to perform various administrative duties and clerical services including reviewing the Company’s agreements and books and records. The consultant provides the services under the direction and supervision of the Company’s CEO. All fees paid to the related party consultant during the period ended December 31, 2014 and 2013 are included as an expense in consulting and contractor expenses in the accompanying statements of operations.
     
The Company has an ongoing agreement with a limited liability company that is owned and controlled by a person who is related to the Company’s CEO to provide stock transfer agency services. At December 31, 2014, the Company owed the related party limited liability company $29,850 for transfer agency services rendered and for the reimbursement of legal fees. In January 2014 the Company entered into a separate debt settlement agreement with the related party vendor to settle a total of $7,683 of outstanding debt related to legal fees incurred by the related party vendor due to a lawsuit against the Company in which suit the related party vendor was also named as a defendant due to its position as the Company’s stock transfer agency. The Company issued 768,293 shares of its common stock to this vendor as satisfaction for the outstanding debt. The agreement between the Company and the vendor stipulated that should the transfer agency realize less than $7,683 from the sale of the stock, then the consultant is entitled to receive up to an additional 700,000 shares of common stock or a cash payment until the balance is paid in full. In March of 2014 the related party limited liability company also agreed to provide various corporate consulting, strategic planning and training under a separate consulting agreement and the Company agreed to pay 500,000 shares of its restricted common stock under the consulting agreement. All fees paid to the related party consultant during the period ended December 31, 2014 and 2013 are included as an expense in consulting and contractor expenses in the accompanying statements of operations.

The Company has an ongoing consulting agreement to pay a limited liability company a minimum of $5,000 per month for providing ongoing business advisory and strategic planning and consulting services, assistance with financial reporting. IT management, and administrative services. The Company also agreed to pay additional compensation to the consultant in the form of cash and/or restricted stock to be awarded solely at the Company’s discretion. The Company also agreed to reimburse the consultant for certain expenses. The agreement is verbal and may be terminated by the Company or the consultant at any time. All fees paid to the related party consultant during the period ended December 31, 2014 and 2013 are included as an expense in consulting and contractor expenses in the accompanying statements of operations.
 
The Company has an ongoing agreement to pay a limited liability company a monthly fee for archeological services and the review of historic shipwreck research consulting services.
All fees paid to the related party consultant during the period ended December 31, 2014 and 2013 are included as an expense in consulting and contractor expenses in the accompanying statements of operations.
 

 
F-22

 
SEAFARER EXPLORATION CORP.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 – DIVISON OF ARTIFACTS AND TREASURE

Under the Exploration Agreement with Tulco that was renewed on June 8, 2010, the Company is required to split any artifacts or treasure that it successfully recovers from the Juno Beach Shipwreck site with the FLDHR and Tulco. Tulco and the Company, assuming that the FLDHR’s portion will be 20%, have agreed to the following division of artifacts and treasure:

20% to the FLDHR
40% to Tulco
40% to the Company

More specifically, the FLDHR has the right to select up to 20% of the total value of recovered artifacts and treasure for the State's museum collection. After the FLDHR has selected those artifacts and treasure that it feels will complement its collection, then the Company and Tulco will split the remaining artifacts and treasure equally.
 
In addition to the division of artifacts with the FLDHR and Tulco, the Company has entered into agreements where it may be required to pay additional percentages of its net share of any artifacts that it recovers at the Juno Beach Shipwreck site:

 
The Company may elect to pay its divers or other personnel involved in the search for artifacts by giving them a percentage of the artifacts that they locate after a division of artifacts takes place with the FLDHR and Tulco. At the present time, the Company does not have any written agreements to pay any of its dive personnel a net percentage of any recovered artifacts; however, the Company reserves the right to do so in the future.
 
 
The Company has become aware that an individual has made a claim that he has a legally valid and binding agreement with Tulco to receive a percentage of any artifacts recovered from the Juno Beach Shipwreck. The individual has purportedly claimed that his agreement with Tulco was executed several years prior to the Company and Tulco entering into the Exploration Agreement in March 2007. The Company has not been able to verify the legal standing of this claim. If this alleged agreement exists and is legally valid and binding, or if there are other agreements that have a valid, legal claim on the Juno Beach Shipwreck site, then such consequences may have a material adverse effect on the Company and its prospects.
 
 
NOTE 10 – LEGAL PROCEEDINGS

  Since December 11, 2009, the Company, has been involved in a lawsuit where it was named as a Defendant, along with its CEO and transfer agent in Case Number 09-CA-030763, filed in the Circuit Court of Hillsborough County, Florida. The lawsuit was brought in the name of 31 individuals and 1 corporation. The lawsuit alleges that the Company, its CEO, and its transfer agent wrongfully refused to remove the restrictive legend from certain shares of the Company’s common stock that are collectively owned by the plaintiffs, which prevented the plaintiffs from selling or transferring their shares of the Company’s common stock. The plaintiffs allege that they have lost approximately $1,041,000 as of the date of the lawsuit. Such lawsuit continued to a hearing of the Plaintiffs’ motion for summary judgment against the Defendants including Seafarer, which was heard on September 1, 2011 and denied by the Court. Litigation of the matter has continued and the Company has presented evidence and arguments of law that the shares were distributed from their original recipient, Micah Eldred, in an illegal sale to another corporate entity. The Company further contends in its pleadings that such shares were then illegally purchased back by Eldred, then distributed in a manner by Eldred to others including the 31 other Plaintiffs to avoid reporting requirements under the Securities Act and as Eldred had a duty to report as a principal of a brokerage. The actions by Eldred, as pled by the Corporation, is that on or about October 8, 2008,  Eldred  gifted  most  of the  34,700,000   shares  to certain  friends,   family,  and  employees   (i.e.,  the  Plaintiffs   named  in this  Complaint),   and  kept ownership  of 4,140,000  shares.
 
On September 11, 2013, the Parties attended a voluntary mediation, which ended in an impasse.
 
Some discovery had progressed to the point that Seafarer had, on September 25, 2013, filed a Motion to File Counterclaims and Third-Party Complaint (“Motion for Leave to File Counterclaim”) along with a proposed Counterclaim.  Such counterclaims were filed in December 2013.  Included in the counterclaim was an allegation of conspiracy between Eldred and Sean Murphy for the publication of false information which Seafarer sued Murphy for and received a judgment for libel against Murphy on April 1, 2011 for $5,080,000. Thus the counterclaim was filed against the Plaintiffs: Micah Eldred, Michael J. Daniels, Carl Dilley, Heather Dilley, James Eldred, Mary R. Eldred, Michole Eldred, Nathan Eldred, Toni A. Eldred, Diane J. Harrison, Ioulia Hess, Olessia  Kritskaia,  Anna Krokhina, George Lindner, Elizabeth Lizzano, Karen Lizzano, Robert Lizzano, Abby Lord, Jillian Mally, Ekaterina Messinger, Susan Miller, Michael Mona, Matthew J. Presy, Oksana Savchenko, Vanessa A. Verbosh, Alan Wolper, Sarah Wolper, and Christine Zitman. On April 23, 2014, the trial court ruled on the Counter-Claim Defendants’ motion to dismiss and ordered the dismissal of the claims for section 517.301 violations, conspiracy and fraud. The court ruled that the Corporation did not have standing and was not in privity with the counter-claim defendants at the time of their alleged actions so the company could not maintain the action, unlike private shareholders who could have standing. Thus the Company attempted to protect the shareholders by such suit, but was ruled against as not having standing to do so.
 
 
 
F-23

 
 
NOTE 10 – LEGAL PROCEEDINGS, continued
 
On October 18, 2013, the Plaintiffs filed a Notice of Removal to Federal Court in the Tampa Division of the United States District Court, citing the allegation that such lawsuit should be moved to Federal Court based upon the Defendants proposed counterclaims of Federal law. The pleading for removal contained the allegation by the Plaintiffs that they had the consent of all the listed Plaintiffs to remove the matter to Federal Court. On November 4, 2013, Seafarer filed a Motion to Remand back to State Court in the Federal Court, citing legal argument and the undisputed facts that removal to Federal Court was improper as having no basis in law, and asking for attorney’s fees from the Plaintiffs for such removal. On November 7, 2013, Judge James Moody of the United States District Court entered an Order granting the Remand Motion of Seafarer, finding that “Plaintiffs removed the case based on their assumption that the counterclaim would establish federal jurisdiction. Plaintiffs’ removal is patently without merit.” Judge Moody further held “Plaintiffs’ removal had no basis under the law or facts. Simply put, the removal was not objectively reasonable.”   Accordingly, the Court Ordered the case sent back to State Court and that the Federal Court would award Defendants [Seafarer] a reasonable amount of attorney’s fees and costs.” Seafarer collected such attorney’s fees through counsel. Such case was remanded to the Circuit Court in Hillsborough County, where Seafarer had the motion to file the Counterclaims and Third Party Claims heard and an Order Granting the filing and service of such claims was made by Circuit Judge Paul Huey on December 13, 2013. Seafarer filed such complaint and served such Counterclaim Defendants and Third Party Defendants during the months of December 2013 and January 2014. Such complaint included claims by Seafarer for damages including punitive damages against the Plaintiffs for their actions, which is alleged to have materially damaged the Corporation and its shareholders. Such litigation continues and the Company will continue to fight the release of such shares for sale. It is the position of Seafarer that due to the actions involved with such shares, they are tainted and should be ordered to be cancelled. Seafarer intends to continuously pursue this defense will assist any shareholders with any claims they may have against the Plaintiffs who hold such shares as to their actions which may have harmed any shareholders who were shareholders at the time of the Plaintiff’s action.
 
In early October 2013, counsel for Seafarer was contacted by counsel representing the listed Plaintiff, CADEF: The Childhood Autism Foundation (CADEF), as to their being named in the lawsuit as Plaintiffs in the State Court action and the litigation being done in their name. Pursuant to those discussions, on November 5, 2013, Seafarer, Kyle Kennedy (individually), Cleartrust LLC and CADEF entered into a Settlement Agreement and Release from Litigation. CADEF agreed to surrender all rights to the 1,000,000 shares in its name, as well as causing dismissal of any such claims against the Seafarer, Kennedy and Cleartrust that had been brought in their name in the lawsuit. Specifically, CADEF agreed: “CADEF agrees that the following matters of fact exist based upon the knowledge of its Board of Directors and Principals: A) The Board of Directors of CADEF had no knowledge of the share certificate ever being issued for its benefit or the existence of such share certificate until recently in the month of October 2013 when such shares were sent to them. B) The Board of Directors of CADEF never authorized the filing of the lawsuit cited above or to be a party to such. C) Because of the above in B) CADEF’s Board of Directors was never advised of any settlement offer being made by the Defendants nor of the mediation held on September 11, 2013. On approximately October 30, 2013 CADEF delivered such 1,000,000 shares to counsel for Seafarer. Such shares were cancelled subsequently. Seafarer believes this pattern activity.
 
During the fall of 2014, the Company through counsel, conducted a number of depositions in the matter, including Micah Eldred and other parties. As well the Company filed three motions against the Defendants. Included in these motions were a motion to dismiss for fraudulent conduct in the naming of a party as a plaintiff which had no knowledge of the lawsuit, and failure to related settlement offers to the Plaintiffs. The second motion was for sanctions for intentional destruction of documentary evidence related to such shares. As to the second motion, the Court entered an order granting the motion for sanctions, finding that the Defendants had intentionally destroyed evidence, but the Court abated determining the sanctions until a later date. The third motion was to dismiss for fraudulent conduct, wherein the Plaintiffs allege that the Defendant, Eldred had made illicit offers to elicit false testimony. Both of the motions for sanctions are currently pending before the Court. As well in the first week of January 2015, the Defendants filed two simultaneous motions for summary judgment for dismissal of all counts in the case. That motion for summary judgment is currently pending before the Court.
 
In the ongoing litigation in the above case against Micah Eldred and associated persons to protect the interests of the shareholders, the Corporation followed up on its counter-claims against Eldred by the filing of a notice of appeal of the dismissal of such claims, to the Second District Court of Appeal for Florida on May 17, 2014.   On May 29, 2014, the Company was served a secondary lawsuit in Hillsborough County. The lawsuit by challenges the creation of the Preferred B Series of Shares and the increase in authorized shares. The lawsuit in the opinion of the Corporation and multiple counsel has no merit since the corporation’s articles of incorporation and Florida statutes allow for the creation of the preferred shares, and thus the increase in authorized shares. The Corporation is defending such lawsuit and seeking dismissal by motion.
 
On March 2, 2010, the Company filed a complaint naming, Sean Murphy as a Defendant who formerly provided services as a captain, diver, and general laborer to the Company as a defendant in the Circuit Court of Hillsborough County, Florida case number 10-CA-004674. The lawsuit contains numerous counts against the defendant, including civil theft, breach of contract, libel and negligence. On April 5, 2011, a six person jury in Hillsborough County, Florida found in favor of the Company and found that the Defendant was responsible for $5,080,000 in compensatory damages. In 2012, the Company attempted to schedule a trial for the punitive damages, but the Court cancelled the trial due to scheduling of priority cases. The Company is currently seeking final entry of not only the judgment, but will be exercising collection matters against the Defendant. The Company intends to pursue collection, no matter the ability of the Defendant to pay.
 
 
 
F-24

 
 
NOTE 10 – LEGAL PROCEEDINGS, continued
 
On June 18, 2013, Seafarer began litigation against Tulco Resources, LLC, in a lawsuit filed in the Circuit Court in and for Hillsborough County, Florida. Such suit was filed for against Tulco based upon  for breach of contract, equitable relief and injunctive relief. Tulco was the party holding the rights under a permit to a treasure cite at Juno Beach, Florida. Tulco and Seafarer had entered into contracts  in March 2008, and later renewed under an amended agreement on June 11, 2010. Such permit was committed to by Tulco to be an obligation and contractual duty to which they would be responsible for payment of all costs in order for the permit to be reissued. Such obligation is contained in the agreement of March 2008 which was renewed in the June 2010 agreement between Seafarer and Tulco. Tulco made the commitment to be responsible for payments of all necessary costs for the gaining of the new permit. Tulco never performed on such obligation, and Seafarer during the period of approximately March 2008 and April 2012 had endeavored and even had to commence a lawsuit to gain such permit which was awarded in April 2012. Seafarer alleges in their complaint the expenditure of large amounts of shares and monies for financing and for delays due to Tulco’s non-performance. Seafarer seeks monetary damages and injunctive relief for the award of all rights held by Tulco to Seafarer. As of March 24, 2014, Seafarer, through Counsel with the assistance of a licensed investigator, established there was no party or individual to be served from Tulco due to the death of the former Manager, and having no other legal person or entity to serve, has established that it will seek the entry of a default judgment, and final judgment for award of all rights to such site for contractual and other rights held by Tulco. Seafarer gained a default and final Judgment on such matter on July 23, 2014. Seafarer is now working with the State for the renewed permit to be in Seafarer’s name and rights only, with Tulco removed per the Order of the Court. On March 4, 2015, the Court awarded full rights to the Juno sight to Seafarer Exploration, erasing all rights of Tulco Resources.

The Company currently has litigation pending in Pinellas County, the Sixth Judicial Circuit, Civil Case No. 11-05539-Cl-19 naming Keith Webb Individually and Blue Water Ventures of Key West Inc. as party Defendants. There is a signed Settlement Stipulation in place however and an Order of Court entered acknowledging the same, otherwise ordering and directing the party Defendants to timely comply with the same and at this time the agreement is current and otherwise in compliance. There are currently no counterclaims or adverse liabilities of record in the above case.

 
NOTE 11 – RELATED PARTY TRANSACTIONS

In January of 2014, a related party shareholder provided the Company with a short term loan in the amount of  $2,000. The Company repaid the related party shareholder the entire $2,000 balance during the year ended December 31, 2014. The Company did not pay any interest or fees to the related party shareholder for providing the short term loan.

In January of 2014, the Company entered into a convertible loan agreement in the amount of $31,500 with an individual who is related to the Company’s CEO. This loan pays interest at a rate of 6% per annum and the principle and accrued interest was due on or before July 17, 2014. The note is not secured and is convertible at the lender’s option into shares of the Company’s common stock at a rate of $0.006 per share.

In February of 2014, the Company entered into an agreement with an individual who is related to the Company’s CEO to continue serving as a member of the Company’s Board of Directors. Under the  agreement, the Director agreed to provide various services to the Company including making recommendations for both the short term and the long term business strategies to be employed by the Company, monitoring and assessing the Company's business and to advise the Company’s Board of Directors with respect to an appropriate business strategy on an ongoing basis, commenting on proposed corporate decisions and identifying and evaluating alternative courses of action, making suggestions to strengthen the Company's operations, identifying and evaluating external threats and opportunities to the Company, evaluating and making ongoing recommendations to the Board with respect for one year and may be terminated by either the Company or the Director by providing written notice to the other party. The agreement also terminates automatically upon the death, resignation or removal of the Director.  Under the terms of the agreement, the Company agreed to pay the Director 2,000,000 restricted shares of its common stock at the execution of the agreement and to negotiate future compensation on a year-by-year basis. The Company also agreed to reimburse the Director for pre-approved expenses. The 2,000,000 shares are included as an expense in consulting and contractor fees in the accompanying income statement.

In April of 2014 the Company entered into a convertible promissory agreement in the amount of $5,005 with an individual who is related to the Company’s CEO. This loan pays interest at a rate of 6% per annum and the principle and accrued interest was due on or before October 22, 2014. The note is not secured and is convertible at the lender’s option into shares of the Company’s common stock at a rate of $0.007 per share.

In May of 2014 the Company entered into a convertible promissory note agreement in the amount of $7,000 with an individual who is related to the Company’s CEO. This loan pays interest at a rate of 6% per annum and the principle and accrued interest was due on or before November 27, 2014. The note is not secured and is convertible at the lender’s option into shares of the Company’s common stock at a rate of $0.007 per share.
 
In June of 2014 an individual who is related to the Company’s CEO entered into a subscription agreement to purchase 900,000 shares of the Company’s restricted common stock at a price of $0.007 per share and the Company received proceeds of $6,300.
 

 
F-25

 
SEAFARER EXPLORATION CORP.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 – RELATED PARTY TRANSACTIONS , continued
 
On various dates in April, May and June of 2014 a related party investor converted the principal balance plus accrued interest of three convertible promissory notes and the accrued interest of three separate promissory notes into 4,492,150 shares of the Company’s common stock.

On various dates in August and September of 2014 a related party investor converted the principal balances totaling $40,000 plus the accrued interest of two convertible promissory notes into 5,125,000 shares of the Company’s common stock.

In July of 2014 the Company entered into a convertible promissory note agreement in the amount of $17,000 with an individual who is related to the Company’s CEO. This loan pays interest at a rate of 6% per annum and the principle and accrued interest are due on or before January 25, 2015. The note is not secured and is convertible at the lender’s option into shares of the Company’s common stock at a rate of $0.008 per share.

In August of 2014, a related party investor converted the accrued interest of $10,000 of a convertible promissory note into 2,500,000 shares of the Company’s common stock.

In September of 2014, the Company’s CEO provided an interest free loan to the Company in the amount of $1,500. The entire loan balance was repaid prior to September 30, 2014 and no interest or fees of any kind were paid to the CEO for providing the loan.

In October of 2014, a related party investor converted the principal balance and accrued interest of $5,160 of a convertible promissory note into 736,450 shares of the Company’s common stock.