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, 2013

 
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 $30,948,329 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 April 7, 2014, the Registrant had 866,769,978 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
11
ITEM 1B.
UNRESOLVED STAFF COMMENTS
11
ITEM 2.
PROPERTIES
11
ITEM 3.
LEGAL PROCEEDINGS
12
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
13
 
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
14
ITEM 6.
SELECTED FINANCIAL DATA
16
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
16
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 
22
ITEM 8.
FINANCIAL STATEMENTS
23
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
24
ITEM 9A.
CONTROLS AND PROCEDURES
24
ITEM 9B.
OTHER INFORMATION
25
 
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
26
ITEM 11.
EXECUTIVE COMPENSATION
27
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
28
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
29
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
32
 
PART IV
ITEM 15.
EXHIBITS
33
SIGNATURES
34


 

 
 
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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 stockholders 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.

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 April 11, 2014. 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 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, 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.

 
5

 
 
Item 1. Business - continued
 
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 remote. If the Company is not able to locate artifacts or treasure with significant value then there is a very 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. In addition, 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 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 sites 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 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 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 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 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 very high probability that all capital invested in and/or borrowed by the Company may be lost.

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.

 
6

 

Item 1. Business - continued
 
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 would likely 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 $1,879,438 for the year ended December 31, 2013 and $693,783 for the period ended December 31, 2012. The Company believes that it will continue to generate losses from its operation 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.

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.

 
7

 

Item 1. Business - continued
 
Employees

As of December 31, 2013, Seafarer Exploration Corp. had one employee, its CEO Kyle Kennedy, who serves full time.

Other Consultants and Contractors

Seafarer uses consultants and independent contract personnel in its operation, and intend to continue to use contract divers and archeologist for our exploration and recovery operations. From time to time, we have or intend to hire other contractors, subcontractors and consultants to perform specific services.

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 months at certain historic shipwreck sites. Inclement weather and hazardous ocean conditions generally 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 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 very remote.

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.

The Company’s exploration and recovery activities at the Juno Beach site were limited in 2013 due to some repair and maintenance issues with its main salvage vessel and a lack of financing. So far in 2014, the Company has performed some limited exploration and salvage activities as the weather has permitted.

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 or impossible 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 very strong possibility that the Company will never recover any artifacts or cargo of any significant value from the Juno Beach Shipwreck site.

The Company and Tulco renewed their Exploration Agreement regarding the Juno Beach Shipwreck site in June of 2010.  
 
 
8

 

Item 1. Business - continued
 
Even though the Company had an Agreement with Tulco for the Exploration of the Juno Beach site through June 8, 2013, the Company is uncertain as to whether Tulco plans to renew this Exploration Agreement. Tulco did not cash the check that the Company paid under the terms of the Exploration Agreement in 2012. The Company has not paid Tulco the $20,000 fee due in January 2013 as contemplated in the Exploration Agreement and does not intend to make the payment until legal counsel is able to determine Tulco’s intent with regard to the Exploration Agreement. Tulco has not provided any conservation services as required under the Exploration Agreement. The Company has previously received correspondence from Tulco’s legal counsel demanding that the Company pay additional fees that are not in the Exploration Agreement and that the Company turn over artifacts to Tulco. Tulco has stated that if the Company does not meet its demands then Tulco will seek other groups to work at the Juno Beach site and that it will terminate its agreement with the Company and Tulco has also threatened to take legal action against the Company. 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 to extend the Exploration Agreement. It is possible that Tulco may claim that the Exploration Agreement is no longer valid and therefore the Company has no further rights to explore and salvage the Juno Beach 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 for 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 expects to have such final judgment within 90 days of March 1, 2014, unless another party or person responds to such lawsuit, including publication of such matter under Florida law.  
 
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 is active through April 25, 2014. The Permit authorizes Seafarer to dig and recover artifacts from the designated site at Juno Beach, Florida.

The Company has performed limited 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 sporadically 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 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 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.  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.

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.

 
9

 

Item 1. Business - continued
 
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.

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

As previously noted in its 8-K filing on June 11, 2010, the Company entered into an agreement with Tulco Resources, Ltd. (“Tulco”) on June 8, 2010 which granted the Company the exclusive rights to explore, locate, identify, and salvage a possible shipwreck within the territorial limits of the State of Florida, off of Palm Beach County, in the vicinity of Juno Beach, Florida (the “Exploration Agreement”).  The term of the Agreement is for three years and may renew for an additional three years under the same terms unless otherwise agreed to in writing by the Tulco and Seafarer. The Agreement may be terminated by mutual agreement of both Tulco and Seafarer or it may be terminated by either party for cause. Termination for cause may include willful misconduct or gross negligence with respect to carrying out any duties responsibilities or commitments under the agreement and/or failure by Seafarer to fully pay the annual conservation payment on time. Under the Agreement the Company paid Tulco a total of $40,000, a total which included $20,000 to cover fees owed to Tulco from the 2009 diving season and a $20,000 payment for the 2010 diving season. The Company also agreed to pay Tulco a conservation payment of $20,000 per calendar year during the term of the Agreement.  The amount of the conservation payment my increase in future years based on the mutual agreement of Tulco and the Company. The Company agreed to furnish its own personnel, salvage vessel and equipment necessary to conduct operations at the shipwreck site. The Company also agreed to pay all of its own expenses directly associated with salvage operations, including but not limited to fuel, food, ground tackle, electronic equipment, dockage, wages, dive tanks, and supplies. The Company agreed to split any artifacts that it recovers equally with Tulco, after the State of Florida has selected up to twenty percent of the total value of recovered artifacts for the State of Florida’s museum collection. The Company and Tulco agreed to receive their share of the division of artifacts at the same time.  The Company and Tulco agreed to jointly handle all correspondence with the State of Florida regarding any agreements and permits required for the exploration and salvage of the shipwreck site.

In 2012, the Company received correspondence from Tulco’s legal counsel demanding that the Company pay additional fees that are not contemplated in the Exploration Agreement and that the Company turn over artifacts to Tulco. In the past, Tulco has stated that if the Company does not meet its demands, then Tulco will seek other groups to work at the Juno Beach site and that it will terminate its agreement with the Company, and it has threatened to take legal action against the Company. The Company paid Tulco the $20,000 fee in January 2012 as required under the Exploration Agreement, however Tulco has not cashed the check from 2012. The Company did not pay Tulco the $20,000 fee in January 2013 as contemplated in the Agreement and does not intend to make the payment until legal counsel is able to determine Tulco’s intent with regard to the Exploration Agreement. Tulco has not provided any conservation services as required under the Exploration Agreement. The original three year term of the Exploration Agreement was valid until June 10, 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. It is possible that Tulco may claim that the Exploration Agreement is no longer valid and that therefore the Company has no further rights to explore and salvage the Juno Beach site.

 
10

 

Item 1. Business - 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 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 jointly responsible for payment of all costs in order for the permit to be reissued. Such obligation is contained in the agreement of March 2008 and as 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 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. Such service of process is continuing as Tulco is being sought for service.

Florida Division of Historical Resources Agreemenst/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 is 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.

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.

Item 1A. Risk Factors.

Not required for smaller reporting companies.

Item 1B. Unresolved Staff Comments.

Not required for smaller reporting companies.

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 $1,200 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, 2013, future minimum rental payments required under this non-cancelable operating lease was $22,015, of which $14,608 is due during 2014 and $7,407 is due during 2015.  
 
 
 
 
 
 
 
11

 

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 one 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.  The proposed Counterclaim names as defendants the Plaintiffs in the Lawsuit, as well as non-parties Spartan Securities Group, Ltd., (“Spartan Securities”) and Am- Asia Consulting (“Am-Asia”) (collectively the “Proposed Counterclaim Defendants”).  Neither Spartan Securities nor Am-Asia has yet been joined or served with any process in the Lawsuit. The allegations in the proposed Counterclaim arise from the same transaction or occurrence that gave rise to the Lawsuit.  Specifically, the proposed Counterclaim alleges that the Plaintiffs including Eldred violated and conspired to violate securities laws, specifically Rule 10b-5 promulgated under the Securities Exchange Act, 15 U.S.C. § 78j, and Fla. Stat. § 517.301, in connection with the activities which form the basis of Plaintiffs’ claims in the Lawsuit.  Included in the proposed 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 proposed and filed as a proposed claim 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 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 attorneys 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. 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 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. Management believes that this is a pattern of activity by the Plaintiff. Such litigation is now pending a motion to dismiss by the Counterclaim Defendants, as well as the Third Party Defendants, which motion is set for hearing in March 2014. Management and counsel of Seafarer stand by the legal argument that there no longer exists any legal basis under the Securities Act for such shares to ever have their legend removed. 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 and the counterclaims and third party claims on behalf of the Corporation and its shareholders.
 
 

 
 
12

 

Item 3. Legal Proceedings - continued
 
On February 24, 2011, the Company was named as defendants in Case Number 11000393CC filed in the Circuit Court of Martin County, Florida, by a limited liability company. The limited liability company claimed that the Company owed $12,064, plus court costs. On February 21, 2013, both parties settled the matter with neither party making any admission of liability. Such settlement and dismissal was finalized and filed with no ongoing impact to the Company.

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.

Seafarer Exploration Inc., currently has litigation pending in Pinellas County, the Sixth Judicial Circuit, Civil Case No. 11-05539-Cl-19 naming as Defendants both an individual and a corporation controlled by the individual. The case is a collection case against the corporation for the balance of a promissory note due to the Company, and against the individual as a guarantor of the promissory note. The Defendants have filed an Answer in the nature of a general denial, certain affirmative defenses. Legal discovery is ongoing, and the pleadings are not otherwise currently “at-issue” to schedule the action for trial. There are currently no counterclaims or adverse liabilities of record in the above case as of the filing of this Form 10-K.

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. 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 expects to have such final judgment within 90 days of March 1, 2014, unless another party or person responds to such lawsuit, including publication of such matter under Florida law.

Item 4. Submission of Matters to a Vote of Security Holders.
 
None. 
 
 
 
 
 

 
13

 
  
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 OTC Bulletin Board 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 OTC-BB. 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.
 
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 $0.0047 and $0.044 for the year ended December 31, 2013, and between $0.0032 and $0.0136 for the year ended December 31, 2012. 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 2012 and 2013 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, 2012
  0.0136     0.005  
June 30, 2012
  0.0120     0.0032  
September 30, 2012
  0.0095     0.0038  
December 31, 2012
  0.0085     0.0032  
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  

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. 

 
14

 

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 April 7, 2014 was 1,762 shareholders holding 312,087,368 restricted shares in certificated securities and 554,682,610 non restricted shares.
   
Transfer Agent
 
ClearTrust, LLC (“ClearTrust”) is the Company’s stock transfer agent. 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 periods ended December 31, 2013 and 2012 or during the period from inception to December 31, 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.
 
 
 
 
15

 

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 months ended December 31, 2013, the Company issued 6,088,888 of its restricted shares of its common stock to various consultants. These shares were issued for business advisory, legal, executive, operations, archeological, corporate and administrative consulting services. 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 or persons who are thoroughly familiar with the Company’s proposed business by virtue of their affiliation with the Company.  
 
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, 2013, June 30, 2013, and September 30, 2013. The proceeds from the sale of such commons stock were used for general corporate purposes, working capital and the repayment of debt. During the three months ended December 31, 2013, the Company sold 3,200,000 shares of its restricted common stock and received proceeds of $37,000. The proceeds from the sale of such commons stock were used for general corporate purposes, working capital and the repayment of some 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.
 
Repurchase of Securities
 
During the years ended December 31, 2013 and 2012, 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.

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.

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, 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 very remote. If the Company is not able to locate artifacts or treasure with significant value then there is a very high probability that the Company will fail and all capital invested in or borrowed by the Company will be lost.

 
16

 

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

Even if the Company is able to obtain permits for shipwreck sites 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 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 very high probability that all capital invested in and/or borrowed by the Company may be lost.

Plan of Operation

During the years ended December 31, 2013 and 2012, 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.

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.  
 
 
17

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued
 
Even though the Company had an Agreement with Tulco for the Exploration of the Juno Beach site through June 8, 2013, the Company is uncertain as to whether Tulco plans to renew this Exploration Agreement. Tulco did not cash the check that the Company paid under the terms of the Exploration Agreement in 2012. The Company has not paid Tulco the $20,000 fee due in January 2013 as contemplated in the Exploration Agreement and does not intend to make the payment until legal counsel is able to determine Tulco’s intent with regard to the Exploration Agreement. Tulco has not provided any conservation services as required under the Exploration Agreement. The Company has previously received correspondence from Tulco’s legal counsel demanding that the Company pay additional fees that are not contemplated in the Exploration Agreement and that the Company turn over artifacts to Tulco. Tulco has stated that if the Company does not meet its demands then Tulco will seek other groups to work at the Juno Beach site and that it will terminate its agreement with the Company and Tulco has also threatened to take legal action against the Company. 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. It is possible that Tulco may claim that the Exploration Agreement is no longer valid and therefore the Company has no further rights to explore and salvage the Juno Beach 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 for against Tulco 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 jointly responsible for payment of all costs in order for the permit to be reissued. Such obligation is contained in the agreement of March 2008 and as 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 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. Such service of process is continuing as Tulco is being sought for service.

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 is active through April 25, 2014. The Permit authorizes Seafarer to dig and recover artifacts from the designated site at Juno Beach, Florida.

The Company performed limited exploration and salvage activities at the Juno Beach site in 2013. It is possible that in the future, the Company will only be able to sporadically 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 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, large 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 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.

 
18

 

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

At December 31, 2013, the Company had a working capital deficit of $616,599. 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 April 11, 2014.

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 commons 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.  
 
 
 
19

 

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

The Company’s net loss for the year ended December 31, 2013 was $2,174,354 as compared to a net loss of $956,798 for the year ended December 31, 2012, an increase of roughly 127% on a year-over-year basis. The increase in 2013 was primarily due to an increase overall business activity as the Company obtained a permit for a second historic shipwreck site off the east coast of Florida near Lantana Beach and commenced exploration operations at this site and also performed limited operations at the Juno Beach shipwreck site. The Company also attempted to grow its operations and keep its independent contract divers together in anticipation of a potential third site based on an agreement signed in January 2013. The Company incurred consulting and contractor expenses of $1,219,602 during the year ended December 31, 2013 versus $387,433 for the year ended December 31, 2012. The 215% year-over-year increase in consulting and contractor expenses was due to the Company ramping up its operations due to having two actively permitted sites and anticipation of a potential third shipwreck site. The Company hired additional independent contractor divers for its operations. Additionally the Company paid higher levels of stock based compensation during the year ended December 31, 2013 to various consultants for corporate advisory services, archaeological services, legal services, financial reporting, operations, executive and administrative services. The Company paid increased compensation to some of its independent contract divers as the Company attempts to perform exploration and recovery at multiple historic shipwreck sites. For the year ended December 31, 2013, the Company incurred professional fees of $296,668 as compared to $81,592 for the year ended December 31, 2012. The primary reason for the 264% increase in professional fees during 2013 was due to the Company paying increased stock based compensation for legal services. Additionally the Company settled outstanding fees owed to a related party vendor that were associated with legal fees incurred by the related party vendor that were incurred in performance of services for the Company. The Company incurred vessel related expenses of $126,472 during the year ended December 31, 2013 versus $100,916 during the year ended December 31, 2012. The increase in vessel expenses in 2013 was largely due to the Company performing various ongoing maintenance and repairs on its main salvage vessel and a concerted attempt to keep the vessel running at peak performance.   The Company’s main salvage vessel requires constant maintenance, repairs and upkeep, especially as the vessel continues to age. The Company incurred travel and entertainment expenses of $105,040 during the year ended December 31, 2013 as compared to $48,080 during the year ended December 31, 2012, an increase of 118% in 2013. The significant increase in travel and entertainment expenses in 2013 were generally due to the Company paying for hotel lodging and travel expenses on a regular basis for several of its independent contract divers when they travelled to perform services for the Company at a shipwreck site and increased travel, including international travel, by management and consultants related to archeological research and meetings pertaining to historic shipwrecks. General and administrative expenses increased from $26,886 in the year ended December 31, 2012 to $64,258 in the year ended December 31, 2013. The 139% year-over-year increase in general and administrative expenses was primarily due to the Company ramping up its operations and increased fees paid for corporate communications and filing fees. Rent expense for the year ended December 31, 2013 was $33,414 versus rent expense of $16,093 during the year ended December 21, 2012, a year-over-year increase of 108%. The rent increase was mostly due to the payment of fees to a person who owned a dive house that the Company has previously disputed the fees, but paid to settle a lawsuit. The 12% increase in total other expenses was largely due to an increase in interest expense during the year ended December 31, 2013. For the year ended December 31, 2013, the Company incurred interest expense of $356,170 as compared to $297,654 for the year ended December 31, 2012. The 20% increase in interest expense was due to the application of fair value measurement analysis of convertible notes.
   
Liquidity and Capital Resources
 
At December 31, 2013, we had $578 cash in the bank.   During the year ended December 31, 2013 and the year ended December 31, 2012, we incurred net losses of $2,174,354 and $956,798, respectively. At December 31, 2013, we had $31,852 in current assets and $648,451 in current liabilities, leaving us a working capital deficit of $616,599.

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, 2013. 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 a drain on the Company’s cash.
 
 
20

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued
 
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 or our operating results and our stock price may 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, 2013 and December 31, 2013 is qualified subject to substantial doubt as to our ability to continue as a going concern. As discussed in Note 1 to our financial statements for the year ended December 31, 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, 2013, 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 $1,879,438 for the year ended December 31, 2013 and $693,783 for the year ended December 31, 2012. 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.  

Convertible Notes Payable and Notes Payable, in Default

At December 31, 2013, the Company had convertible notes payable, and notes payable with a face value of $653,290 of which $342,300 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 non-convertible notes to be convertible 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.

 
21

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued
 
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, Summary of Significant Accounting Policies, contained in the notes to the Company’s financial statements for the years ended December 31, 2013 and 2012 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 either the Company or its auditors have made any such changes in accounting estimates.

Off-balance Sheet Arrangements
 
None.

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

Not required.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
22

 
 
 
 Item 8. Financial Statements.



SEAFARER EXPLORATION CORP.
FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
 

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-42


 
 
 
 
 
 
 
 
 



 

 
23

 
 
 

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
To the Board of Directors and
Stockholders of Seafarer Exploration Corporation
 
We have audited the accompanying balance sheets of Seafarer Exploration Corporation as of December 31, 2013 and 2012, 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 audit 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 audit 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, 2013 and 2012, and the results of its operations and its cash flows for 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, the Company has incurred net losses and negative cash flow from operations since inception.  These factors, and the need for additional financing in order for the Company to meet its business plans, raise substantial doubt about the Company’s ability to continue as a going concern.   
 

 
/s/ Accell Audit & Compliance, P.A.
 
   
Tampa, FL
April 11, 2014
   
   

 
 

4868 West Gandy Boulevard Tampa, Florida 33611 813.440.6380
 

 
F-1

 
SEAFARER EXPLORATION CORP.
BALANCE SHEETS
DECEMBER 31, 2013 AND 2012

 
 
             
   
2013
   
2012
 
Assets
 
             
Current assets:
           
Cash
  $ 578     $ 43,919  
Prepaid expenses
    26,824       36,014  
Advances to shareholder
    3,267       3,267  
Deposits and other receivables
    1,183       1,183  
                 
Total current assets
    31,852       84,383  
                 
Property and equipment, net
    130,239       164,223  
                 
Investment in common stock
    1,100       1,100  
                 
Total assets
  $ 163,191     $ 249,706  
                 
Liabilities and Stockholders' Deficit
 
                 
Current liabilities:
               
Accounts payable and accrued expense
  $ 142,583     $ 140,270  
Convertible notes payable, net of discounts of $120,533 and $13,997
    139,457       91,503  
Convertible notes payable, related parties, net of discounts of $26,889 and -0-
    24,111       -  
Convertible notes payable, in default
    191,300       149,300  
Convertible notes payable, in default - related parties
    113,500       66,000  
Convertible notes payable, at fair value
    -       183,242  
Notes payable, in default
    30,000       30,000  
Notes payable, in default - related parties
    7,500       7,500  
                 
Total current liabilities
    648,451       667,815  
                 
Commitments and contingencies
               
                 
Stockholders' deficit:
               
Preferred stock, $0.0001 par value - 50,000,000 shares authorized; 7 shares issued
               
and outstanding at December 31, 2013 and 2012
    -       -  
Common stock, $0.0001 par value - 850,000,000 shares authorized; 844,216,349 and
               
739,313,459 shares issued and outstanding at December 31, 2013 and 2012
    84,422       73,931  
Additional paid-in capital
    7,453,578       5,356,866  
Accumulated deficit
    (8,023,260 )     (5,848,906 )
                 
Total stockholders' deficit
    (485,260 )     (418,109 )
                 
Total liabilities and stockholders' deficit
  $ 163,191     $ 249,706  
 
See accompanying notes to the financial statements.

 
 
F-2

 
SEAFARER EXPLORATION CORP.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

 
 
   
2013
   
2012
 
Revenue
  $ -     $ -  
                 
Expenses:
               
Consulting and contractor expenses
    1,219,602       387,433  
Professional fees
    296,668       81,592  
Vessel expense
    126,472       100,916  
Travel and entertainment expense
    105,040       48,080  
General and administrative expense
    64,258       26,886  
Depreciation expense
    33,984       32,783  
Rent expense
    33,414       16,093  
                 
Total operating expenses
    1,879,438       693,783  
                 
Income from operations
    (1,879,438 )     (693,783 )
                 
Other income (expense):
               
Interest expense
    (356,170 )     (297,654 )
Interest income
    99,701       93,636  
Loss on extinguishment of debt
    (38,447 )     (37,197 )
Loss on impairment
    -       (21,800 )
                 
Total other income (expense)
    (294,916 )     (263,015 )
                 
Net loss
  $ (2,174,354 )   $ (956,798 )
                 
Net loss per share - basic and diluted
  $ -     $ -  
Weighted average common shares outstanding - basic and diluted
   
806,432,658
      670,703,572  
                 
 
See accompanying notes to the financial statements.
   

 
 
F-3

 
SEAFARER EXPLPLORATION CORP.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

 
 
               
Additional
             
   
Common
   
Common
   
Paid-in
   
Accumulated
       
   
Stock
   
Stock value
   
Capital
   
Deficit
   
Total
 
Balance, January 1, 2012
    606,642,995     $ 60,664     $ 4,615,946     $ (4,892,108 )   $ (215,498 )
                                         
Common stock issued for services
    19,425,000       1,943       123,944       -       125,887  
                                         
Common stock issued on conversion of notes payable and
                                       
stockholder loans
    39,486,259       3,948       256,038       -       259,986  
                                         
Common stock issued for subscription agreements
    59,953,571       5,995       252,405       -       258,400  
                                         
Common stock issued as financing fees
    300,000       30       1,470       -       1,500  
                                         
Common stock issued to extinguish outstanding invoices
    8,171,694       817       51,173       -       51,990  
                                         
Common stock issued as investment in LLC
    1,000,000       100       9,700       -       9,800  
                                         
Common stock issued to extinguish debt
    4,333,940       434       29,904       -       30,338  
                                         
Beneficial conversion feature arising from convertible note
                                       
financing
    -       -       2,000       -       2,000  
                                         
Warrants arising from convertible note financing
    -       -       14,286       -       14,286  
                                         
Net loss
    -       -       -       (956,798 )     (956,798 )
                                         
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 )
                                         
 
See accompanying notes to the financial statements.


 
 
F-4

 
SEAFARER EXPLORATION CORP.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

 
 
   
2013
   
2012
 
Operating activities
           
Net loss
  $ (2,174,354 )   $ (956,798 )
Adjustments to reconcile net income to
               
net cash provided (used) by operating activities
               
Depreciation
    33,984       32,782  
Amortization of deferred financing costs
    -       26,114  
Amortization of debt discount and interest expense on
               
beneficial conversion feature of convertible notes payable
   
185,715
      204,644  
Loss on extinguishment of debt
    -       37,197  
Loss on impairment
    -       21,800  
Common stock issued for services
    1,147,539       125,887  
Common stock issued for legal services
    56,929       25,754  
Common stock issued for financing fees
    -       1,500  
Decrease (increase) in:
               
Prepaid expenses
    9,190       (4,400 )
Advances from shareholder
    -       (1,015 )
Increase (decrease) in:
               
Accounts payable and accrued expenses
    2,313       (13,284 )
                 
Net cash provided (used) by operating activities
   
(738,684
)     (499,819 )
                 
Cash flows from investing activities:
               
Purchase of common stock
    -       (12,000 )
                 
Net cash provided used by investing financing activities
    -       (12,000 )
                 
Cash flows from financing activities:
               
Proceeds from the issuance of common stock
    278,343       258,400  
Proceeds from the issuance of convertible notes payable
   
303,000
      249,500  
Proceeds from the issuance of convertible notes payable, related
               
party
   
144,000
      50,000  
Proceeds from issuance of notes payable
    -       10,000  
Proceeds from issuance of notes payable, related parties
    -       2,500  
Payment on convertible notes payable
    (30,000 )     (11,000 )
Payments on notes payable
    -       (12,500 )
Proceeds from loans from stockholders
   
8,750
      5,000  
Payments on loans from stockholders
   
(8,750
)     (5,000 )
                 
Net cash provided by financing activities
   
695,343
      546,900  
                 
Net increase (decrease) in cash
   
(43,341
)     35,081  
                 
Cash - beginning
    43,919       8,838  
                 
Cash - ending
  $
578
    $ 43,919  
 
See accompanying notes to the financial statements.

 
 
 
F-5

 
SEAFARER EXPLORATION CORP.
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. As shown in the accompanying financial statements, the Company has incurred net losses totaling $8,023,260 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, 2014. 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.
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, 2013 and 2012.

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-dilutivet December 31, 2013 and 2012.
 
Components of loss per share for the respective years are as follows:       
                                            
   
For the Year Ended
December 31, 2013
   
For the Year Ended
December 31, 2012
 
Net loss attributable to common shareholders
 
$
(2,174,354
)
 
$
9956,798
)
                 
Weighted average shares outstanding:
               
Basic and diluted
   
806,432,658
     
670,703,572
 
                 
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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES, continued
 
 
Level 1 – Valuation based on quoted market prices in active markets for identical assets or liabilities.

 
Level 2 – Valuation based on quoted market prices for similar assets and liabilities in active markets.

 
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. 

T he carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, short-term bank loans, accounts payable, notes payable and other payables, approximate their fair values because of the short maturity of these instruments. The carrying values of long-term loans approximate their fair values due to the fact that the interest rates on these loans are reset each year based on prevailing market interest rates.
 
Fixed Assets 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, 2013 and 2012:
 
   
2013
   
2012
 
Diving vessel
  $ 325,000     $ 325,000  
Generator
    7,420       7,420  
Less accumulated depreciation
    (202,181 )     (168,197 )
    $ 130,239     $ 164,223  
 
Depreciation expense for the years ended December 31, 2013 and 2012 amounted to $33,984 and $32,783, respectively
 
 
 
 
 
 
F-8

 
SEAFARER EXPLORATION CORP.
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 recognized impairment losses of -0- and $21,800 during the years ended December 31, 2013 and 2012, 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 periods ended December 31, 2013 and 2012, 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, 2013 and 2012, 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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES, continued
 
Recent Accounting Pronouncements

In February 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-04.  This update clarifies how entities measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date.  This guidance is effective for fiscal years beginning after December 15, 2013 and interim reporting periods thereafter.   This update is not expected to have an impact on the Company’s financial position or results of operations.

In April 2013, the FASB issued ASU 2013-07 to clarify when it is appropriate to apply the liquidation basis of accounting.  Additionally, the update provides guidance for recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting.  Under the amendment, entities are required to prepare their financial statements under the liquidation basis of accounting when a liquidation becomes imminent.  This guidance is effective for annual reporting periods beginning after December 15, 2013, and interim reporting periods thereafter.  This update is not expected to have an impact on the Company’s financial position or results of operations.

In July 2013, the FASB issued ASU 2013-11 which provides guidance relating to the financial statement presentation of unrecognized tax benefits. The update provides that a liability related to an unrecognized tax benefit would be presented as a reduction of a deferred tax asset for a net operating loss carry forward, a similar tax loss or a tax credit carry forward, if such settlement is required or expected in the event the uncertain tax position is disallowed.  This update does not require any new recurring disclosures and is effective for public entities for fiscal years beginning after December 15, 2013, and interim reporting periods thereafter.  This update is not expected to have an impact on the Company’s financial position or results of operations.

Other 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

Common Stock

As of December 31, 2013 and 2012, the Company was authorized to issue 850,000,000 shares of $0.0001 par value common stock.  All shares have equal voting rights, are non-assessable and have one vote per share.  Voting rights are not cumulative and, therefore, the holders of more than 50% of the common stock could, if they choose to do so, elect all of the directors of the Company.
 
 
 
 
 
F-10

 
SEAFARER EXPLORATION CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 
NOTE 4 – CAPITAL STOCK, continued
 
Series A Convertible Preferred Stock
 
The Company is authorized to sell or issue 50,000,000 shares of preferred stock.
 
During the period ended December 31, 2011, the Company issued seven shares of its preferred stock. The Company and the preferred shareholders have agreed to amend the preferred shareholder agreements so that each share of preferred stock has the right to convert into 214,286 shares of the Company’s common stock and receive a 1% share of any artifacts found at the Church Hollow Site. As of December 31, 2013, no shares of preferred stock had been converted into shares of the Company’s common stock.

Warrants and Options
 
As of December 31, 2013, a convertible note holder had a warrant to purchase 4,000,000 shares of its common stock with an exercise price of $.005 per share for a period of ten years beginning on November 20, 2012.  

NOTE 5 - INCOME TAXES
 
At December 31, 2013 and 2012, the Company had available Federal and state net operating loss carry forwards to reduce future taxable income. The amounts available were approximately $8,023,000 and $5,849,000 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.
 
Effective January 1, 2007, 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. At the date of adoption, and as of December 31, 2013 and 2012, the Company did not have a liability for unrecognized tax benefits, and no adjustment was required at adoption.

The Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of December 31, 2013 and 2012, the Company has not accrued interest or penalties related to uncertain tax positions. Additionally, tax years 2010 through 2013 remain open to examination by the major taxing jurisdictions to which the Company is subject.
 
 
 
 
 
F-11

 
SEAFARER EXPLORATION CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 
NOTE 5 - INCOME TAXES, continued
 
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, 2013
   
For the Year Ended
December 31,  2012
 
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, 2013 and 2012, the Company’s only significant deferred income tax asset was a cumulative estimated net tax operating loss of $8,023,260 and $5,848,906, 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, 2013 and 2012.
 
 
 
 
 
 
 
F-12

 
SEAFARER EXPLORATION CORP.
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, 2013, future minimum rental payments required under this non-cancelable operating lease are as follows:
 
Years ending December 31,
     
2014
  $ 14,608  
2015
    7,407  
                                            Total
  $ 22,015  
 
NOTE 7 – SUPPLEMENTAL CASH FLOW DISCLOSURES
 
   
2013
   
2012
 
Supplemental disclosure of cash flow information:
           
Cash paid for interest expense
  $ -     $ -  
Cash paid for income taxes
  $ -     $ -  
Noncash operating and financing activities:
               
Common stock issued to satisfy debt
  $ 56,929     $ 76,528  
Convertible debt converted and accrued interest to common
               
stock
  $ 271,352     $ 259,986  
Common stock issued in exchange for fixed assets
  $ -     $ 7,420  
Common stock issued in conjunction with joint venture
  $ -     $ 9,800  
 
 
 
 
 
 
F-13

 
SEAFARER EXPLORATION CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 
NOTE 8 – 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 remeasured to fair value, which are discussed in Note 9, as of December 31, 2013 and 2012:

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
F-14

 
SEAFARER EXPLORATION CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 
NOTE 8 – CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE, continued
 
Issue
Maturity
 
December 31,
   
December 31,
   
Interest
   
Conversion
 
Date
Date
 
2013
   
2012
   
Rate
   
Rate
 
Convertible notes Payable:
                         
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, 2014
    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, 2014
    50,000       -       6.00 %     0.0125  
October 30, 2013
October 30, 2014
    49,990       -       6.00 %     0.0125  
February 17, 2012
February 17, 2013
    -       7,500       6.00 %     0.0040  
April 5, 2012
April 5, 2013
    -       15,000       6.00 %     0.0050  
July 16, 2012
July 16, 2013
    -       5,000       6.00 %     0.0050  
October 31, 2012
April 30, 2013
    -       8,000       6.00 %     0.0040  
November 20, 2012
May 20, 2013
    -       50,000       6.00 %     0.0050  
December 20, 2012
June 20, 2013
    -       20,000       6.00 %     0.0040  
        259,990       105,500                  
Unamortized discounts
      (120,533 )     (13,997 )                
Balance
    $ 139,457     $ 91,503                  
                                   
Convertible notes payable, in default
                               
October 31, 2012
April 30, 2013
  $ 8,000     $ -       6.00 %     0.0040  
July 16, 2012
July 30, 2013
    5,000       -       6.00 %     0.0050  
November 20, 2012
May 20, 2013
    50,000       -       6.00 %     0.0050  
January 19, 2013
July 30, 2013
    5,000       -       6.00 %     0.0040  
February 11, 2013
August 11, 2013
    9,000       -       6.00 %     0.0040  
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 %     0.0080  
November 9, 2011
December 31, 2012
    -       35,000       6.00 %     0.0040  
        191,300       149,300                  
Unamortized discount
      -       -                  
Balance
    $ 191,300     $ 149,300                  
                                   
Convertible notes payable - related party, in default
                               
January 7, 2013
June 30, 2013
    7,500       -       6.00 %     0.0040  
January 19, 2013
July 30, 2013
    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  
January 9, 2009
January 9, 2010
    10,000       10,000       10.00 %     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  
        113,500       66,000                  
Unamortized discount
      -       -                  
Balance
    $ 113,500     $ 66,000                  
                                   
Convertible notes payable - related party
                               
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  
        51,000       -                  
Unamortized discount
      (26,889 )                        
Balance
    $ 24,111     $ -                  
   
 
F-15

SEAFARER EXPLORATION CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 8 – CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE,  continued

Notes Payable

The following table reflects the notes payable, as of December 31, 2013 and 2012:

  
Issue Date
Maturity Date
 
December 31, 2013
   
December 31, 2012
   
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
August 23, 2011
   
5,000
     
5,000
     
6.00
%
       
30,000
     
30,000
         
                           
     
$
37,500
   
$
37,500
         

In August of 2013 a related party shareholder provided the Company with emergency short term loan proceeds totaling $2,500. The Company repaid the related party shareholder the entire $2,500 balance prior to December 31, 2013. The Company did not pay any interest or fees to the related party shareholder for providing the short term loan.
 
In October of 2013 a related party shareholder provided the Company with emergency short term loan proceeds totaling $6,250. The Company repaid the related party shareholder the entire $6,250 loan balance prior to December 31, 2013. The Company did not pay any interest or fees to the related party shareholder for providing the short term loan.
 
At December 31, 2013 and 2012, combined accrued interest on the convertible notes payable, notes payable and stockholder loans was $59,267 and $45,898, respectively, and are included in accounts payable and accrued liabilities on the accompanying balance sheets. 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 amending their notes to make them convertible into shares of the Company’s common stock. Any such agreements to convert promissory notes into shares of the Company’s common stock would more than likely have a highly dilutive effect on current shareholders and such dilution may significantly depress the trading price of the Company’s common stock.

Convertible Notes Payable and Notes Payable, in Default

At December 31, 2013, the Company had convertible notes payable, notes payable and stockholder loans of $505,868, of which $342,300 were in default.  The convertible notes payable and notes payable in default at December 31, 2013 are reflected in the tables shown above.
 
 
 
 
F-16

SEAFARER EXPLORATION CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 8 – CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE, continued
 
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, including foreclosure on the Company’s main salvage vessel, 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 convertible notes that have been issued by the Company are convertible at the lender’s option. These convertible notes represent 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. When these notes are converted into equity, there is typically a highly dilutive effect on current shareholders.
 
NOTE 9 – CONVERTIBLE NOTES PAYABLE AT FAIR VALUE

Convertible Note Payable Dated October 6, 2011

On October 6, 2011, the Company entered into a convertible note payable with a corporation.  The convertible note payable, with a face value of $42,500, bears interest at 8.0% per annum and is due on July 11, 2012.  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 58% multiplied by the average of the lowest three trading prices for the Company’s common stock during the ten 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 October 6, 2011, the Company encountered the unusual circumstance of a day-one derivative loss 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 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-17

SEAFARER EXPLORATION CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 9 – CONVERTIBLE NOTES PAYABLE AT FAIR VALUE, continued
 
The holder of this convertible note has substantial rights and protections regarding dilution if certain events, including a default were to occur. There are a number of events that could trigger a default, including but not limited to failure to pay principal or interest, failure to issue shares under the conversion feature, breach of covenants, breach of representations and warranties, appointment of a receiver or trustee, judgments, bankruptcy, delisting of common stock, failure to comply with the exchange act, liquidation, cessation of operations, failure to maintain assets, material financial statement restatement, reverse split of borrowers stock, etc. In the event of that any of these events were to occur then the lender would be entitled to receive significant amounts of additional shares of the Company’s stock above the amounts for conversion and such occurrence would be highly dilutive to the Company’s shareholders.

Furthermore, there are additional events that could cause the lender to be due additional shares of common stock above and beyond the shares due from a conversion. Some of these events include, but are not limited to a merger or consolidation of the Company, dividend distribution or spin off, dilutive issuances of the Company’s stock, etc. If the lender receives additional shares of the Company’s commons stock due to any of the foregoing events or for other reasons, then this may have an extremely dilutive effect on the shareholders of the Company. Such dilution would likely result in a significant drop in the per share price of the Company’s common stock. The potential dilutive nature of this note presents a very high degree of risk to the Company and its shareholders.
 
During the year ended December 31, 2012, the holder converted the note in full into 15,524,573 shares of the Company’s common stock.
 
Convertible Note Payable Dated January 31, 2012

On January 31, 2012, the Company entered into a convertible note payable with a corporation.  The convertible note payable, with a face value of $32,500, bears interest at 8.0% per annum and is due on November 2, 2012.  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 58% multiplied by the average of the lowest three trading prices for the Company’s common stock during the ten 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”).
 
 
 
 
 
 
F-18

SEAFARER EXPLORATION CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 9 – CONVERTIBLE NOTES PAYABLE AT FAIR VALUE, continued
 
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, 2012, the holder converted the note in full into 11,655,173 shares of the Company’s common stock.

Convertible Note Payable Dated May 7, 2012

On May 7, 2012, the Company entered into a convertible note payable with a corporation.  The convertible note payable, with a face value of $32,500, bears interest at 8.0% per annum and is due on February 11, 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 58% multiplied by the average of the lowest three trading prices for the Company’s common stock during the ten 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, 2012, the holder converted the note in full into 12,306,513 shares of the Company’s common stock.

Convertible Note Payable Dated October 22, 2012
 
On October 22, 2012, the Company entered into a convertible note payable with a corporation.  The convertible 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”).
 
 
 
 
F-19

SEAFARER EXPLORATION CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 9 – CONVERTIBLE NOTES PAYABLE AT FAIR VALUE, continued
 
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 convertible 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-20

SEAFARER EXPLORATION CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – MATERIAL AGREEMENTS

Agreement to Explore a Shipwreck Site Located off of Brevard County, Florida

On February 1, 2013, the Company entered into an agreement with a corporation under which Seafarer was given the rights to explore a purported historic shipwreck located off of Brevard County, Florida. Under the terms of the agreement Seafarer agreed to provide services that are normal to the exploration and salvage of historic shipwrecks, including exploration, dig and identify, research and establish historic province, salvage, recover and conserve artifacts and archeological material from abandoned and lost shipwreck sites. Seafarer will also assist to obtain and/or update the necessary permits and contracts with various governmental agencies including the Florida Division of Historical Resources, including environmental permits, which are required to be able to explore and eventually salvage the shipwreck site. Seafarer will also act as the project manager for the exploration and salvage of the shipwreck site. Under the agreement, Seafarer will receive 60% of any recovery of archeological material from the shipwreck site and the corporation will receive 40%, net of any percentages that are donated to the State of Florida. All ancillary rights, including, but not limited to public exhibits, publicity, movies, real time video, television, literary, archival research, and replica rights shall be shared equally between Seafarer and the corporation. Seafarer agreed to pay to the corporation 10 million shares of its restricted common stock with 2.5 million shares due and payable upon execution of the agreement, 2.5 million shares due and payable upon the receipt of a salvage and recovery contract from the State of Florida, 2.5 million shares upon commencement of the work at the site, and 2.5 million shares upon the discovery of valuable archeological material. Seafarer may, in its discretion, issue additional performance shares of stock to the corporation.  Seafarer and the corporation will be jointly responsible for overseeing the conservation of archeological materials from the site and will mutually locate and agree on a third party to handle the conservation of the artifacts. Seafarer will be responsible for 60% of the cost of the conservation of the artifacts and the corporation will be responsible for 40% of the cost. Seafarer and the corporation are individually responsible for their own costs and expenses that they incur that are associated with the agreement, including, but not limited to fees, insurance, independent contractors, food, permit and contract fees, repairs, equipment, vessels, divers, safety equipment, travel, legal expenses, etc. Subsequent to December 31, 2013 this Agreement was cancelled and the parties, through an affiliate of the corporation that originally entered into the Agreement with Seafarer, agreed to form a new limited liability company to continue to pursue obtaining the permits required for the exploration and recovery of the site.
 
Agreement with Tulco Resources, Ltd.

As previously noted in its 8-K filing on June 11, 2010, the Company entered into an agreement with Tulco Resources, Ltd. (“Tulco”) on June 8, 2010 which granted the Company the exclusive rights to explore, locate, identify, and salvage a possible shipwreck within the territorial limits of the State of Florida, off of Palm Beach County, in the vicinity of Juno Beach, Florida (the “Exploration Agreement”).  The term of the Agreement is for three years and may renew for an additional three years under the same terms unless otherwise agreed to in writing by the Tulco and Seafarer. The Agreement may be terminated by mutual agreement of both Tulco and Seafarer or it may be terminated by either party for cause. Termination for cause may include willful misconduct or gross negligence with respect to carrying out any duties responsibilities or commitments under the agreement and/or failure by Seafarer to fully pay the annual conservation payment on time. Under the Agreement the Company paid Tulco a total of $40,000, a total which included $20,000 to cover fees owed to Tulco from the 2009 diving season and a $20,000 payment for the 2010 diving season. The Company also agreed to pay Tulco a conservation payment of $20,000 per calendar year during the term of the Agreement.  The amount of the conservation payment my increase in future years based on the mutual agreement of Tulco and the Company. The Company agreed to furnish its own personnel, salvage vessel and equipment necessary to conduct operations at the shipwreck site. The Company also agreed to pay all of its own expenses directly associated with salvage operations, including but not limited to fuel, food, ground tackle, electronic equipment, dockage, wages, dive tanks, and supplies. The Company agreed to split any artifacts that it recovers equally with Tulco, after the State of Florida has selected up to twenty percent of the total value of recovered artifacts for the State of Florida’s museum collection. The Company and Tulco agreed to receive their share of the division of artifacts at the same time.  The Company and Tulco agreed to jointly handle all correspondence with the State of Florida regarding any agreements and permits required for the exploration and salvage of the shipwreck site.

 
 
 
F-21

SEAFARER EXPLORATION CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 10 – MATERIAL AGREEMENTS, continued
 
The Company has previously received correspondence from Tulco’s legal counsel demanding that the Company pay additional fees that are not contemplated in the Exploration Agreement and that the Company turn over artifacts to Tulco. Tulco has stated that if the Company does not meet its demands then Tulco will seek other groups to work at the Juno Beach site and that it will terminate its agreement with the Company and it has threatened to take legal action against the Company. The Company paid Tulco the $20,000 fee in January 2012, as required under the Exploration Agreement, however Tulco has not cashed the check. The Company has not paid Tulco the $20,000 fee in January 2013, as contemplated in the Agreement and does not intend to make the payment until legal counsel is able to determine Tulco’s intent with regard to the Exploration Agreement. Tulco has not provided any conservation services as required under the Exploration Agreement. The original three year term of the Exploration Agreement was valid until June 10, 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. It is possible that Tulco may claim that the Exploration Agreement is no longer valid and therefore the Company has no further rights to explore and salvage the Juno Beach 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