UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q








(Mark One)


þ

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





For the quarterly period ended March 31, 2012





or


o

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





For the transition period from _________ to __________.





Commission File Number 000-29461










SEAFARER EXPLORATION CORP. (Exact name of registrant as specified in its charter)








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





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


(Address of principal executive offices)(Zip code)





(813) 448-3577


Registrant’s telephone number





1








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 þ No o





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).





Yes o No þ





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
oNon-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
þ





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).





Yes     o  No     þ





As of May 11, 2012, there were 653,180,645 shares of the registrant’s common stock, $.0001 par value per share, outstanding.


































2











SEAFARER EXPLORATION CORP.


Form 10-Q


For the Quarterly Period Ended March 31, 2012





TABLE OF CONTENTS








PART I: FINANCIAL INFORMATION
4Item 1. Financial Statements (unaudited)
5Condensed Balance Sheets: March 31, 2012 and December 31, 2011
5Condensed Statements of Operations: For the three ended March 31, 2012 and 2011 and the period from inception (February 15, 2007) to March 31, 2012
6 - 7Condensed Statements of Cash Flows: Three months ended March 31, 2012 and 2011 and the period from inception (February 15, 2007) to March 31, 2012
8Notes to Condensed Financial Statements
9 - 21Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
22Item 3. Quantitative and Qualitative Disclosures About Market Risk
26Item 4T. Controls and Procedures
27PART II: OTHER INFORMATION
28Item 1. Legal Proceedings
28Item 1A. Risk Factors
29Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
29Item 3. Defaults Upon Senior Securities
29Item 4. Submission of Matters to a Vote of Security Holders
29Item 5. Other Information
30Item 6. Exhibits
30SIGNATURES
31





























3





Part 1: Financial Information





Statements in this Form 10-Q Quarterly Report may be “forward-looking statements.”  Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions.  These statements are based on our current expectations, estimates and projections about our business based, in part, on assumptions made by our management.  These assumptions are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict.  Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including those risks discussed in this Form 10-Q Quarterly Report, under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other documents which we file with the Securities and Exchange Commission.





In addition, such statements could be affected by risks and uncertainties related to our financial condition, factors that affect our industry, market and customer acceptance, changes in technology, fluctuations in our quarterly results, our ability to continue and manage our growth, liquidity and other capital resource issues, compliance with government regulations and permits, agreements with third parties to conduct operations, competition, fulfillment of contractual obligations by other parties and general economic conditions.  Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q Quarterly Report, except as required by Federal Securities law.
































































4


Item 1. Financial Statements





SEAFARER EXPLORATION CORP. AND SUBSIDIARIES


(A Development Stage Company)


CONDENSED BALANCE SHEETS






(Unaudited)March 31, 2012


December 31, 2011ASSETSCurrent assets:Cash

$
16,816


$
8,838Notes receivable, net of allowance for doubtful accounts


--



--Prepaid expenses


27,752



57,728Advances to shareholder


3,253



2,252Deposits and other receivables


1,183



1,183Total current assets


49,004



70,001Property and equipment – net


181,461



189,586Investments


13,100



1,100Total Assets

$
243,565


$
260,686LIABILITIES AND STOCKHOLDERS’ DEFICITCurrent liabilities:Accounts payable and  accrued liabilities

$
131,086


$
133,827Convertible notes payable


42,500



35,000Convertible notes payable related parties


50,000



--Convertible notes payable, in default


114,300



114,300Convertible notes payable, in default – related parties


16,000



16,000Convertible note payable, at fair value


123,387



119,557Notes payable – related parties


5,000



5,000Notes payable, in default


45,000



45,000Notes payable in default related parties


7,500



7,500Total current liabilities


534,773



476,184Commitments and contingenciesStockholders’ deficit:Preferred stock, $0.0001 par value –  50,000,000 shares authorized; 7 and 0 shares issued and outstanding at March 31, 2012 and December 31, 2011


--



--Common stock, $0.0001 par value – 500,000,000 shares authorized; 624,642,995 and 606,642,995 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively


62,465



60,664Additional paid-in capital


4,702,046



4,615,946Deficit accumulated during the development stage


(5,055,719
)


(4,892,108
)Total stockholders’ deficit


(291,208
)


(215,498
)Total Liabilities and Stockholders’ Deficit

$
243,565


$
260,686


See notes to condensed financial statements.







5





SEAFARER EXPLORATION CORP. AND SUBSIDIARIES


(A Development Stage Company)


CONDENSED  STATEMENTS OF OPERATIONS


(Unaudited)


Three months endedMarch 31,2012


2011Revenue

$
--


$
--Expenses:Consulting and contractor expenses


111,172



94,787Professional fees


14,500



17,624Depreciation


8,125



8,125General and administrative expenses


12,530



7,274Vessel expenses


22,540



6,655Travel and entertainment


12,661



5,105Rent expense


3,796



3,742Total operating expenses


185,324



143,312Loss from operations


(185,324
)


(143,312
)Other income (expense):Interest expense


(11,437
)


(14,029
)Interest income


33,150



34,288Loss on extinguishment of debt


--



--Total other income (expense)


21,713



20,259Net loss

$
(163,611
)

$
(123,053
)Net loss per share applicable to common stockholders — basic and diluted

$
(0.00
)

$
(0.00
)Weighted average number of shares outstanding – basic and diluted


613,383,473



454,027,902




See notes to condensed financial statements.
















































6





SEAFARER EXPLORATION CORP. AND SUBSIDIARIES


(A Development Stage Company)


CONDENSED STATEMENTS OF OPERATIONS


(Unaudited)





February 15,2007(Inception) toMarch 31,2012Revenue

$
-Expenses:Consulting and contractor expenses


2,906,889Vessel expenses


300,507Professional fees


421,166Travel and entertainment


181,958General and administrative expenses


305,578Rent expense


108,389Depreciation


143,540Other operating expenses


13,187Total operating expenses


4,381,214Loss from operations


(4,381,214
)Other income (expense)Interest expense


(393,324
)Interest income


83,735Loss on extinguishment of debt


(343,916
)Loss on impairment


(21,000
)Total other income (expense)


(674,505
)Net loss

$
(5,055,719
)






See notes to condensed financial statements.




















7








SEAFARER EXPLORATION CORP. AND SUBSIDIARIES


(A Development Stage Company)


CONDENSED STATEMENTS OF CASH FLOWS


(Unaudited)




February 15,2007Three months ended


(Inception) toMarch 31,


March 31,2012


2011


2012CASH FLOWS FROM OPERATING ACTIVITIES:Net loss

$
(163,611
)

$
(123,053
)

$
(5,055,719
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation


8,125



8,125



143,540Allowance for uncollectible notes receivable


--



--



38,867Amortization of deferred finance costs


--



1,250



33,492Interest (income) expense on fair value adjustment on convertible notes   payable


(28,670
)


(32,290
)


219,259Interest accrued on note receivable


--



--



(11,705
)Write off of uncollectible deposit


--



--



20,000Loss on extinguishment of debt


--



--



343,916Loss on impairment


--



--



21,000Stock issued for services


7,901



19,751



1,715,871Stock issued to satisfy legal services


--



--



40,557Stock issued for financing fees


--



--



3,500Changes in operating assets and liabilities:Prepaid expenses


29,975



--



(13,885
)Advances to shareholders


(1,001
)






(1,001
)Deposits and other receivables


--



--



(23,346
)Accounts payable and accrued liabilities


(2,741
)


889



241,925Net cash used in operating activities


(150,022
)


(125,328
)


(2,283,728
)CASH FLOWS FROM INVESTING ACTIVITIES:Net proceeds from notes receivable


--



--



--Issuance of notes receivable


--



--



(25,000
)Purchase of investment in LLC


(12,000
)


--



(34,100
)Acquisition of equipment


--



--



(325,000
)Net cash used in investing activities


(12,000
)


--



(384,100
)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of common stock


80,000



138,670



1,869,144Proceeds from the issuance of convertible notes, related parties


50,000



--



56,000Proceeds from the issuance of convertible notes, non related parties


40,000



20,000



553,300Proceeds from the issuance of  notes payable


--



20,000



276,500Proceeds from the issuance of notes payable – related parties


--



--



6,000Payments on convertible notes payable


--



(25,000
)


(25,000
)Payments on notes payable


--



--



(55,000
)Payments on notes payable – related parties


--



--



(1,000
)Proceeds from loans from stockholders


--



--



35,925Payments on loans from stockholders


--



(5,225
)


(31,225
)Net cash provided by financing activities


170,000



148,445



2,684,644NET INCREASE IN CASH


7,978



23,117



16,816CASH, BEGINNING OF PERIOD


8,838



3,071



--CASH, END OF PERIOD

$
16,816


$
26,188


$
16,816NONCASH FINANCING ACTIVITIES:Due to Organetix, Inc. reclassified to additional paid-in capital

$
--


$
--


$
91,500Common stock issued to satisfy minimum value guarantee

$
--


$
--


$
87,667Convertible debt converted to common stock including accrued interest

$
--


$
32,766


$
978,262SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Interest

$
--


$
--


$
3,660





See notes to condensed financial statements.


8
 
 SEAFARER EXPLORATION CORP. AND SUBSIDIARIES
 (A Development Stage Company)
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 (Unaudited)


The accompanying condensed financial statements of Seafarer Exploration Corp. (“Seafarer” or the “Company”) are unaudited, but in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) necessary to fairly state the Company’s financial position, results of operations, and cash flows as of and for the dates and periods presented. The financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information.





These unaudited condensed financial statements should be read in conjunction with the Company’s audited financial statements and footnotes included in the Company’s Report on Form 10-K for the twelve months ended December 31, 2011, filed with the Securities and Exchange Commission (the “Commission”). The results of operations for the three month ended March 31, 2012 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2012 or for any future period.





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 develop the infrastructure necessary to engage in the archaeologically-sensitive exploration and recovery of historic shipwrecks. During 2008, the Company changed its fiscal year end from April 30 to December 31.





The Company is in the development stage and its activities during the development stage include developing a business plan and raising capital.





In June of 2008, the Company merged with Organetix pursuant to a Share Exchange Agreement (the “Exchange Agreement”). The Exchange Agreement provided for the exchange of all of the Company’s common shares for 131,243,235 of Organetix post-merger common shares. Considering that Seafarer Inc.’s former stockholders controlled the majority of Organetix’s outstanding voting common stock, Seafarer Inc.’s management had actual operational control of Organetix and Organetix effectively succeeded its otherwise minimal operations to the Company’s operations.  The Company was considered the accounting acquirer in this reverse-merger transaction. A reverse-merger transaction with a non-operating public shell company is considered and accounted for as a capital transaction in substance; it is equivalent to the issuance of Seafarer Inc.’s common stock for the net monetary assets of Organetix, accompanied by a recapitalization. Accordingly, the accounting does not contemplate the recognition of unrecorded assets of the accounting acquiree, such as goodwill. On the date of the merger, Organetix was a blank-check public shell company and had no assets and no liabilities.  The condensed financial statements presented herein and subsequent to the merger reflect the condensed financial assets and liabilities and operations of Seafarer Inc., at their historical costs, giving effect to the recapitalization, as if it had been Organetix during the periods presented.





In July of 2008, the Company changed its name from Organetix, Inc. to Seafarer Exploration Corp.





NOTE 2 - GOING CONCERN





These condensed 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 condensed financial statements, the Company has incurred net losses of $5,055,719 since inception. Based on its historical rate of expenditures, the Company expects to expend its available cash in less than one month from May 15, 2012. Management's plans include raising capital through the equity markets to fund operations and eventually, the generating 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 condensed 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 condensed 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.








9
 
 SEAFARER EXPLORATION CORP. AND SUBSIDIARIES
 (A Development Stage Company)
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 (Unaudited)





NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





This summary of significant accounting policies of Seafarer Exploration Corp. is presented to assist in understanding the Company’s condensed financial statements.  The condensed 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 condensed financial statements.





Accounting Method





The Company’s condensed financial statements are prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.





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.





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 March 31, 2012 and 2011, and for the period from inception to March 31, 2012, the Company did not report any revenues.





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 stockholders 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 were no common stock equivalents outstanding at March 31, 2012 and 2011.





Fair Value of Financial Instruments





Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157 Fair Value Measurements  (“SFAS 157”), superseded by ASC 820-10, which defines fair value, establishes a framework for measuring fair value and expands required disclosure about fair value measurements of assets and liabilities. The impact of adopting ASC 820-10 was not significant to the Company’s condensed financial statements. ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:





●
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.









10
 
 SEAFARER EXPLORATION CORP. AND SUBSIDIARIES
 (A Development Stage Company)
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 (Unaudited)
  NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- continued





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.  Our 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 our derivative liability is determined using Level 1 inputs, which consider (i) time value, (ii) current market and (iii) contractual prices.





Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of March 31, 2012 andDecember 31, 2011.  The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments.  These financial instruments include cash, notes receivable, accounts payable and accrued expenses. The fair value of the Company’s debt instruments is estimated based on current rates that would be available for debt of similar terms, which is not significantly different from its stated value, except for the convertible note payable, at fair value, which has been revalued based on current market rates using Level 1 inputs.





Income Taxes





The Company provides for federal and state income taxes payable, as well as for those deferred because of the timing differences between reporting income and expenses for financial statement purposes versus tax purposes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recoverable or settled. The effect of a change in tax rates is recognized as income or expense in the period of the change. A valuation allowance is established, when necessary, to reduce deferred income tax assets to the amount that is more likely than not to be realized.





Upon inception, the Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), superseded by ASC 740-10. The Company did not recognize a liability as a result of the implementation of ASC 740-10. A reconciliation of the beginning and ending amount of unrecognized tax benefits has not been provided since there is no unrecognized benefit as of the date of adoption. The Company did not recognize interest expense or penalties as a result of the implementation of ASC 740-10. If there were an unrecognized tax benefit, the Company would recognize interest related to unrecognized tax benefits in interest expense and penalties in other operating expenses.





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. Currently the Company’s only asset is a diving vessel, which was purchased for $325,000 during 2008 and is being depreciated over a 10 year useful life.





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. There were no impairment charges recorded during the periods ended March 31, 2012 and 2011. During the period from inception to March 31, 2012, the Company has incurred $21,000 in impairment charges related to its investment in Church Hollow, LLC.




Employee Stock Based Compensation


The FASB issued SFAS No.123 (revised 2004), Share-Based Payment , which was superseded by ASC 718-10. ASC 718-10 provides investors and other users of financial statements with more complete and neutral financial information, by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS 123(R) covers a wide range of share-based compensation arrangements, including share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. As of March 31, 2012, the Company has not implemented an employee stock based compensation plan.








11
 
 SEAFARER EXPLORATION CORP. AND SUBSIDIARIES
 (A Development Stage Company)
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 (Unaudited)




NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued




Non-Employee Stock Based Compensation





The Company accounts for stock based compensation awards issued to non-employees for services, as prescribed by ASC 718-10, at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services , which was superseded by ASC 505-50.  The Company issues compensatory shares for services including, but not limited to, executive, management, accounting, archeological, operations, corporate communication, financial and administrative consulting services.




Use of Estimates





The process of preparing condensed 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 condensed financial statements.  Accordingly, upon settlement, actual results may differ from estimated amounts.





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.





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.  As of March 31, 2012 and 2011, none of the Company’s convertible notes payable included a beneficial conversion feature.





Subsequent Events





In accordance with FASB ASC 855, Subsequent Events, the Company evaluated subsequent events through May 11, 2012, the date the Company’s quarterly report on Form 10-Q was ready to issue.





NOTE 4 - LOSS PER SHARE





Components of loss per share for the three months ended March 31, 2012 and 2011 are as follows:





For the Three Months Ended

March 31, 2012


For the Three Months Ended

March 31, 2011Net loss attributable to common stockholders

$
(163,611
)

$
(123,053
)Weighted average shares outstanding:Basic and diluted


613,383,473



454,027,902Loss per share:Basic and diluted

$
(0.00
)

$
(0.00
)











12
 
 SEAFARER EXPLORATION CORP. AND SUBSIDIARIES
 (A Development Stage Company)
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 (Unaudited)





NOTE 5 – CAPITAL STOCK




Common Stock





The Company is authorized to issue 750,000,000 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.





Series A Preferred Stock





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





On March 30, 2011, the Company designated 50,000 shares, par value $0.0001 per share as Series A Preferred Stock (“Series A Preferred”). The Series A Preferred has a liquidation preference of $1. The holders have no voting rights and are entitled to receive dividends if and when declared by the board. Additionally, the Series A Preferred does not have a term or a maturity date; it is a perpetual financial instrument. We analyzed the instrument under EITF D-109 Determining the Nature of a Host Contract Related to a Hybrid Financial Instrument Issued in the Form of a Share under FASB Statement 133 (FASB Codification ASC 815) to determine if the host preferred stock is more akin to an equity instrument or a debt instrument in terms of their economic characteristics and risks. The Company concluded that the Series A Preferred is more akin to an equity instrument. The Company further analyzed the instrument under EITF D-98 Classification and Measurement of Redeemable Securities (FASB Codification ASC 480-10) and concluded that because the instrument is not redeemable for cash, it does not require classification in the mezzanine section of the financial statements.





Through March 31, 2012 the Company has issued a total of 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 March 31, 2012, no shares of preferred stock had been converted into shares of the Company’s common stock.





NOTE 6 - INCOME TAXES





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 Three Months Ended March 31, 2012


For the Year Ended December 31, 2011Income 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 March 31, 2012 and December 31, 2011, the Company’s only significant deferred income tax asset was an estimated net tax operating loss of $5,055,719 and $4,892,108 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 March 31, 2012 and December 31, 2011.





NOTE 7 - LEASE OBLIGATION





Office


The Company leases 823 square feet of office space located at 14497 North Dale Mabry Highway, Suite 209-N, Tampa, Florida 33618. The original term of the lease agreement commenced on October 1, 2008 and expired on March 31, 2010. The Company executed an amendment to the original lease effective retroactive to April 1, 2010. Under the amended lease agreement, the base rental rate, including taxes, is $1,166 per month, plus additional monthly charges for services used by the Company. Under the amendment, the lease term was extended to May 31, 2012.










13
 
 SEAFARER EXPLORATION CORP. AND SUBSIDIARIES
 (A Development Stage Company)
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 (Unaudited)





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 ultimately superseded by ASC 470.





Convertible Notes Payable





The following table reflects the convertible notes payable, other than the one remeasured to fair value, which is discussed in Note 10, as of March 31, 2012 and December 31, 2011:




Issue Date
Maturity Date

March 31, 2012


December 31, 2011


Interest Rate


Conversion

RateConvertible notes payable:November 9, 2011      December 31, 2012

35,000


35,000


6.00
%

0.004February 17, 2012         February 17, 2013

7,500


--


6.00
%

0.00442,500



35,000Convertible notes payable -related party:January 18, 2012
July 18, 2012

$
50,000


$
--



8.00
%

$
0.004Convertible notes payable, in default :August 28, 2009
November 1, 2009


4,300



4,300



10.00
%

$
0.0150April 7, 2010
November 7, 2010


70,000



70,000



6.00
%

$
0.0080November 12, 2010
November 7, 2010


40,000



40,000



6.00
%

$
0.0080114,300



114,300Convertible notes payable – related parties, in default:January 9, 2009
January 9, 2010


10,000



10,000



10.00
%

$
0.0150January 25, 2010
January 25, 2011


6,000



6,000



6.00
%

$
0.005016,000



16,000$
222,800


$
165,300





The convertible notes payable classified as “in default” are in default as of the date this quarterly report on Form 10-Q and were ready for issue.























14
 
 SEAFARER EXPLORATION CORP. AND SUBSIDIARIES
 (A Development Stage Company)
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 (Unaudited)
  NOTE 8 - CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE - continued
  Notes Payable





The following table reflects the notes payable as of March 31, 2012 and December 31, 2011:




Issue Date
Maturity Date

March 31, 2012


December 31, 2011


Interest RateNotes payable  – related parties, in default:February 24, 2010
February 24, 2011

$
7,500


$
7,500



6.00
%Notes payable :February 24, 2010
February 24, 2011

$
5,000


$
5,000



6.00
%Notes payable, in default:February 22, 2010
August 22, 2010


20,000



20,000



7.00
%February 23, 2011
March 23, 2011


25,000



25,000



6.00
%45,000



45,000$
57,500


$
57,500





At March 31, 2012 and December 31, 2011, combined accrued interest on the convertible notes payable, notes payable and stockholder loans was $21,261 and $11,769, respectively, and included in accounts payable and accrued liabilities on the accompanying balance sheets.





Convertible Notes Payable and Notes Payable, in Default




At March 31, 2012, the Company had convertible notes payable, convertible notes payable at fair value and notes  with a face value of $469,987 of which $182,800 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.











15
 
 SEAFARER EXPLORATION CORP. AND SUBSIDIARIES
 (A Development Stage Company)
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 (Unaudited)
 
 NOTE 9 – CONVERTIBLE NOTE PAYABLE, AT FAIR VALUE





Convertible Note Payable Dated October 6, 2011 at Fair Value




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.





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.





At March 31, 2012 and December 31, 2011 the convertible note payable, at fair value, was recorded at $86,407 and $119,557, respectively.





Convertible Note Payable Dated January 31, 2012 at Fair Value





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”).





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.




16
 
 SEAFARER EXPLORATION CORP. AND SUBSIDIARIES
 (A Development Stage Company)
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 (Unaudited)




NOTE 9 – CONVERTIBLE NOTE PAYABLE, AT FAIR VALUE - continued




In connection with the issuance of the convertible note payable on January 31, 2012, 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.





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.





At March 31, 2012 the convertible note payable, at fair value, was recorded at $36,980.





The following tables summarize the effects on earnings associated with changes in the fair values of the convertible note payable, at fair value for the three months ended March 31, 2012 and 2011:




For the quarterended

For the quarter endedMarch 31,

March 31,2012

2011Interest expense recorded upon issuance of the convertible note payable

$
(16,462
)

$
--Interest recapture on fair value re-measurement of the convertible note payable


45,132



34,288$
28,670


$
34,288





NOTE 10 – MATERIAL AGREEMENT





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”).  There 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.








17
 
 SEAFARER EXPLORATION CORP. AND SUBSIDIARIES
 (A Development Stage Company)
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 (Unaudited)




NOTE 10 – MATERIAL AGREEMENT - continued




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.





The Company has 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 certain 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.





Other Agreements





On March 2, 2012, the Company entered into an agreement to become a limited partner in limited partnership joint venture. Under the terms of the agreement the Company agreed to pay $12,000 to the limited partnership in exchange for 16% of the net income received by the general partner. A division committee made up of the limited partners will be appointed to devise an equitable method and time schedule for the division and distribution of any treasure items. The Company agreed to abide by the decision of the division committee.  The agreement expires on June 1, 2012.




NOTE 11 – DIVISON OF ARTIFACTS AND TREASURE





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





20% to the FLDHR


40% to Tulco


40% to the Company





More specifically, the FLDHR has the right to select up to 20% of the total value of recovered artifacts and treasure for the State's museum collection. After the FLDHR has selected those artifacts and treasure that it feels will complement its collection, then the Company and Tulco will split the remaining artifacts and treasure equally.





In addition to the division of artifacts with the FLDHR and Tulco, the Company has entered into agreements where it may be required to pay additional percentages of its net share of any artifacts that it recovers at the Juno Beach Shipwreck site:





●
The Company may elect to pay its divers or other personnel involved in the search for artifacts by giving them a percentage of the artifacts that they locate after a division of artifacts takes place with the FLDHR and Tulco. At the present time, the Company does not have any written agreements to pay any of its dive personnel a net percentage of any recovered artifacts; however, the Company reserves the right to do so in the future.




●
The Company has become aware that an individual has made a claim that he has a legally valid and binding agreement with Tulco to receive a percentage of any artifacts recovered from the Juno Beach Shipwreck. The individual has purportedly claimed that his agreement with Tulco was executed several years prior to the Company and Tulco entering into the Exploration Agreement in March 2007. The Company has not been able to verify the legal standing of this claim. If this alleged agreement exists and is legally valid and binding, or if there are other agreements that have a valid, legal claim on the Juno Beach Shipwreck site, then such consequences may have a material adverse effect on the Company and its prospects.





To date the Company has not located any artifacts that have any significant monetary value.  The chance that the Company will actually recover artifacts of any significant value from the Juno Beach shipwreck site is very remote and highly unlikely.








18
 
 SEAFARER EXPLORATION CORP. AND SUBSIDIARIES
 (A Development Stage Company)
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 (Unaudited)
 
 NOTE 12 – LEGAL PROCEEDINGS





On December 11, 2009, the Company, its CEO and transfer agent were named as defendants in Case Number 09-CA-030763, filed in the Circuit Court of Hillsborough County, Florida, by 31 individuals and 1 corporation. The lawsuit alleges that the Company, its CEO, and its transfer agent wrongfully refused to remove the restrictive legend from certain shares of the Company’s common stock that are collectively owned by the plaintiffs, which prevented the plaintiffs from selling or transferring their shares of the Company’s common stock.  The plaintiffs allege that they have lost approximately $1,041,000 as of the date of the lawsuit. The plaintiffs are seeking actual damages in an amount greater than $15,000, punitive damages to be determined at trial, injunctive relief requiring the defendants to reissue the plaintiff’s stock without the restrictive legends, injunctive relief barring the defendants from removing the stock legends from any Seafarer stock until the dispute with the plaintiffs is fully resolved, injunctive relief barring the defendants from selling their Seafarer stock, directly or indirectly, until the dispute with the plaintiffs is fully resolved, a declaratory judgment that plaintiffs are entitled to have their shares reissued without the restrictive legend, such other incidental and consequential damages as may be proven at trial, costs, interest, and legal expenses allowed by law and such other further relief as the court may deem just and proper.  The Company contends that the restrictive legends were either (i) not qualified for removal under Rule 144 promulgated under the Securities Act of 1933, (ii) the plaintiffs failed to provide sufficient facts supporting removal of the restrictive legends, or (iii) the plaintiffs failed to provide sufficient facts to demonstrate that the distribution was not part of a plan or scheme to evade the registration requirements of the Securities Act of 1933. The Company had previously been in settlement discussions with the plaintiffs however on September 1, 2011 the plaintiffs filed a motion for summary judgment in the matter. The Company’s legal counsel filed a response to the motion for summary judgment, in which pleading and supporting affidavit, the Company presented factual allegations that the initial investment by one of the Plaintiff’s (the “Lead Plaintiff”) was made in the private company of Seafarer, Inc. on June 15, 2007 for $5,000. The Lead Plaintiff was issued shares of the private company Seafarer, Inc. which was later involved in a transaction of a reverse merger with a public company becoming Seafarer Exploration Corp. Upon the merger such private shares as held by the Lead Plaintiff were exchanged for 34,700,000 shares of the public company with all such share rights being held by the Lead Plaintiff. The Company alleged in its responsive court filing, that at the time of the investment, share rights and disbursal of such shares in the public company, the Lead Plaintiff was a registered and licensed broker with the NASD; any ownership interests and in this case a control position held by the Lead Plaintiff would have had to have been reported to overseeing authorities. The Company alleged in its filing that in order to avoid and evade the detection, knowledge of oversight authorities and restrictions of the Securities Act and regulations of the governing bodies over his licensing in the brokerage business, the Lead Plaintiff instructed the former transfer agency for the Company to not issue a physical certificate to himself, but keep the shares in book entry form. The Company alleges that the Lead Plaintiff then instructed the transfer agent to instead issue the shares to a private corporation (the “private corporation”), informing the transfer agent that he (the Lead Plaintiff) had sold the shares in a private transaction. The Company also alleged in the court filing that on or about July 18, 2008 the Lead Plaintiff instructed the transfer agent to issue the shares to the private corporation, as a third party straw man entity. Then on or about October 13, 2008, the Lead Plaintiff, in order to avoid any level of scrutiny or restriction over his ownership of such shares, then “purchased” such shares back from the private corporation, but in order to again avoid and evade detection, knowledge and regulation of governing authorities, the Lead Plaintiff immediately instructed the transfer agent that he was “gifting” such shares to family, friends, and his own acquaintances. The Lead Plaintiff made the distribution of such shares on that same date as the purchase from the private corporation, and actually had the private corporation “gift” the shares to the people and entities named as Plaintiffs in the main complaint on October 18, 2008. The Company and CEO maintain in their court filings that such transactions were unlawful under Rule 144 and that the distribution scheme was done in order to avoid the strictures of the Securities Act. The transfer agent has also brought on new counsel alleging the same matters in response to the case. As of the filing of this Form 10-Q such matter has not gone to hearing on the Plaintiff’s motion for summary judgment.





On December 17, 2009, the Company was named a defendant in Case Number 09-012905CO39, filed in the Circuit Court of Pinellas County, Florida, by a limited liability company, of which the Company’s CEO was previously a minority, non-controlling member.  The lawsuit alleges that the Company has failed and/or refused to pay for services rendered by the plaintiff, in breach of an agreement between the two parties. The plaintiff is seeking judgment against the Company in the amount of $13,520, plus damages that may accrue after the filing of the lawsuit, together with prejudgment interest, recoverable costs associated with the lawsuit and such other relief as may be appropriate under the circumstances.   The parties are currently in settlement discussions and case management has been extended.





On March 2, 2010, the Company filed a complaint naming an individual 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. Among other matters, the Company alleges that the defendant caused extensive damage to the Company’s main salvage vessel due to negligent operation, breached his separation agreement with the Company, and has made false and defamatory statements damaging the Company’s reputation. The Company alleged that the defendant has engaged is such malicious and defamatory campaign as revenge for his termination by the Company and in effort to obtain additional money from the Company. On April 5, 2011, a 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. The Company is currently pursuing the punitive damages portion and expects a substantial award of such at trial for the Punitive damages. The punitive damages portion of the case is set for trial in January, 2012. The Company’s management believes that collection of such award is extremely unlikely; however it will continue to pursue the matter against the defendant.








19
 
 SEAFARER EXPLORATION CORP. AND SUBSIDIARIES
 (A Development Stage Company)
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 (Unaudited)




NOTE 12 – 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 is claiming that the Company owes $12,064, plus court costs and attorney’s fees under a lease agreement. The plaintiff is demanding that the court render judgment against the Company in the amount of $12,064, plus court costs and attorney’s fees pursuant to Section 720.305(1) of the Florida Statutes costs and other relief as the court deems just and proper. Management believes that the limited liability company was paid all of the fees owed to it under the lease agreement and the Company plans to mount a vigorous defense against this claim and is currently seeking all attorney’s fees and costs for what it sees as a spurious claim. The Company has presented proof of payment for all billed liabilities and believes that full payment was made. The Company has filed and will keep pending a motion for sanctions and dismissal of the cause of action.





The Company 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 Seafarer, 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, and a singular counterclaim against Seafarer and its CEO, individually, alleging that Seafarer and its CEO were negligent in the use or maintenance of a vessel owned by the corporation, for which damages are sought in excess of $15,000. Seafarer’s legal counsel intends to argue that Seafarer’s CEO has been improperly individually joined in this action. The counterclaim allegations are being vigorously legally contested by both the Company and its CEO. Motion to strike and dismiss defenses and counterclaims are currently pending, legal discovery is ongoing, and the pleadings are not otherwise currently “at-issue” to schedule the action for trial.





NOTE 13 – RELATED PARTY TRANSACTIONS





During the three month period ended March 31, 2012:





In January of 2012 two individuals who are related to the Company’s CEO entered into a subscription agreement to purchase 1,250,000 shares of the Company’s restricted common stock at a price of $0.004 per share and the Company received proceeds of $5,000.





In January of 2012 the Company entered into a convertible loan agreement in the amount of $50,000 with two individuals who are related to the Company’s CEO. This loan pays interest at a rate of 8% per annum and the principle and accrued interest are due on or before July 18, 2012. The note is secured and is convertible at the lender’s option into shares of the Company’s common stock at a rate of $0.004 per share.





The Company had an ongoing agreement to pay a person who is related to the Company’s CEO a minimum of $3,000 per month for providing various administrative, clerical, office management and consulting services. The Company also agreed to pay the related party consultant additional cash and/or stock based compensation at its discretion based on additional time that the consultant spent rendering services. The agreement is verbal and may be terminated by the Company or the consultant at any time. In January 2012, the Company issued 1,000,000 shares of its restricted common stock to the related party consultant. The shares were recorded as an expense of $7,900 in consulting and contractor fees in the accompanying income statement. All fees paid to the related party consultant during the three month period ended March 31, 2012 are included as an expense in consulting and contractor fees in the accompanying income statement. At March 31, 2012 the Company owed the consultant $2,000 for past services rendered. This amount is included in accounts payable and accrued liabilities in the accompanying balance sheet.





The Company paid a limited liability company that is controlled by a person who is related to the Company’s CEO a total of $6,000 to provide background research, background checks and investigative information on individuals and companies, and act as an administrative specialist to perform administrative duties and clerical services. The consultant provided the services under the direction of the Company’s CEO. All fees paid to the related party consultant during the three month period ended March 31, 2012 are included as an expense in consulting and contractor fees in the accompanying income statement.





The Company has an ongoing agreement with a limited liability company that is owned and controlled by a person who is related to the Company’s CEO to provide stock transfer agency services. At March 31, 2012, the Company owed the limited liability company $22,114 for transfer agency services rendered, legal fees and other services. This amount is included in accounts payable and accrued liabilities in the accompanying balance sheet.












20
 
 SEAFARER EXPLORATION CORP. AND SUBSIDIARIES
 (A Development Stage Company)
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 (Unaudited)


NOTE 13 – RELATED PARTY TRANSACTIONS - continued
  At March 31, 2012 the following promissory notes and shareholder loans were outstanding to related parties:
  A convertible note payable dated January 9, 2009, due to a person related to the Company’s CEO with a face amount of $10,000. This note bears interest at a rate of 10% per annum with interest payment to be paid monthly and is convertible at the note holder’s option into the Company’s common stock at $0.015 per share.  The convertible note payable was due on or before January 9, 2010 and is secured.  This convertible note payable is currently in default due to non-payment of principal and interest.





A convertible loan dated January 25, 2010, in the principal amount of $6,000 with a person who is related to the Company’s CEO. This loan pays interest at a rate of 6% per annum and the principle and accrued interest are due on or before January 25, 2011. The note is not secured and is convertible at the lender’s option into shares of the Company’s common stock at a rate of $0.005 per share. This loan is currently in default due to non-payment of principal and interest.





A loan agreement dated February 24, 2010, the principal amount of $7,500 with a corporation. The Company’s CEO is a director of the corporation and a former Director of the Company is an officer of the corporation. The loan is not secured and pays interest at a rate of 6% per annum and the principle and accrued interest were due on or before February 24, 2011. This loan is currently in default due to non-payment of principal and interest.





NOTE 14 – SUBSEQUENT EVENTS





None.

































21


Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations





FORWARD LOOKING STATEMENTS





The following discussion contains certain forward-looking statements that are subject to business and economic risks and uncertainties, and which speak only as of the date of this annual report. No one should place strong or undue reliance on any forward-looking statements. The use in this Form 10-Q 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 Company’s actual results or actions may differ materially from these forward-looking statements for due to many factors and the success of the Company is dependent on our efforts and many other factors including, primarily, our ability to raise additional capital. 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-Q. This Item should be read in conjunction with the financial statements,  the 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.





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 made by and 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 the Juno Beach shipwreck site 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 generally and certain economic and business factors, some of which may be beyond our control.





We disclaim any obligation subsequently to 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.





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 some of these shipwrecks were lost with verifiable cargoes that may have 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.





Underwater recovery operations are inherently difficult and dangerous and may be delayed or suspended by weather, sea conditions or other natural hazards. Such operations may be undertaken more safely during certain months of the year than others. 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.


22




Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations - continued




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 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. 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 the 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 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 periods ended March 31, 2012 and March 31, 2011, 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.





·
Although the Company has not generated revenues to date our development activities continue to evolve. We have been a development stage company since inception, in accordance with ASC 915-10.


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.  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.





Both a lack of financing and maintenance and repair issues for the Company’s main salvage vessel may hamper the Company’s ability to continuously work the site year round in 2012. It is possible that in the future the Company will only be able to sporadically explore and salvage the Juno Beach site due to both the need to make repairs to its main salvage vessel and a lack of financing. There may be extended periods of down time where the Company is not performing any operations at the site.





23




Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations - continued
  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 not any 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 not any 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.





The Company has received correspondence from Tulco’s legal counsel demanding that the Company pay additional fees that are not contemplated in the Exploration Agreement and turn over artifacts to Tulco. Tulco has stated in the correspondence that if the Company does not meet its demands then Tulco will seek other groups to work at the Juno Beach 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 has signed an agreement with an individual to perform exploration and salvage operations at a purported historic shipwreck site allegedly known to the individual, however the Company is in the very early stages of its review and research of the purported shipwreck site and it is unknown if this site contains a historic shipwreck as claimed. Should the Company decide that it will pursue exploration and salvage activities at this site it will be necessary to obtain a salvage permit 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 not any plans to pursue other business opportunities.





Limited Operating History





To date, the Company has devoted its time towards establishing its business and no revenues have been generated. As such, the Company is considered as being in the development stage, since its inception, in accordance with ASC 915-10. 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.





The Company is a development stage company. In a development stage company, management devotes most of its activities to establishing a new business. At March 31, 2012, the Company had a working capital deficit of $552,069. 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 May 15, 2012.





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 the 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 its operations.








24




Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations - continued
  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 it operations. If the Company ceases its operations, then it is likely that all capital invested in and/or borrowed by the Company will be lost.





Results of Operations





Since February 15, 2007, our inception, we have generated no revenues.  Our operating and other expenses from inception through March 31, 2012 are $4,381,214. Since inception, we have incurred $2,906,889 in expenses for various consulting services including executive, management, accounting, operations, archeological, administrative, corporate communications, diving, etc. Since inception, we have incurred $300,507 in vessel expenses related to repair, maintenance and operation of its main salvage vessel and other vessels used in its operations.  Since inception, we have also incurred $421,166 in professional fees related to legal, auditing and accounting services.




The Company’s net loss for the three month period ended March 31, 2012 was $163,611 as compared to a net loss of $123,053 during the three month period ended March 31, 2011. The increase in the net loss for the three month period ended March 31, 2012 was primarily attributable to an increase in consulting and contractor expenses as well as vessel expenses. During the three month period ended March 31, 2012 consulting and contractor fees were $111,172 as compared to $94,787 during the three month period ended March 31, 2011. The 17% increase in consulting and contractor fees in 2012 was largely a result of an increase in fees paid for administrative and operating consulting expenses and a fee paid under a joint venture agreement. During the three month period ended March 31, 2012, the Company incurred vessel related expenses of $22,540 versus $6,655 during the three month period ended March 31, 2011. The 239% increase in vessel expenses in 2012 was due to repairs and maintenance work done on the Company’s primary salvage vessel and a continued lull in the Company’s operations due to permitting issues in 2011 that reduced the need for repairs and maintenance. The General and administrative expenses for the period ended March 31, 2012 was $12,530 compared to $7,274 for the period ended March 31, 2011. This 72% increase was mainly due to an increase in corporate communications and administrative expenses. During the three month period ended March 31, 2012 professional fees were $14,500 as compared to $17,624 during the three month period ended March 31, 2011. The approximate 18% decrease in professional fees in 2012 was largely attributable to fewer fees paid to attorneys due to fewer associated costs pertaining to legal issues. The Company incurred travel and entertainment expenses of $12,661 during the three month period ended March 31, 2012 as compared to $5,105 during the three month period ended March 31, 2011. The 148% increase in travel and entertainment is due to increased activity by management and consultants preparing for the 2012 salvage season. The Company has however continued to monitor travel and entertainment expenses closely as a part of the Company’s efforts to control expenses.
 
 Liquidity and Capital Resources
 
 At March 31, 2012, we had cash in the bank of $16,816.   During the period ended March 31, 2012, and the period from inception to March 31, 2012, we incurred net losses of $163,611 and $5,055,719, respectively. At March 31, 2012, we had $49,004 in current assets and $534,773 in current liabilities, leaving us a working capital deficit of $485,769.
  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 three month period ended March 31, 2012. This working capital deficit, which was $485,769 at March 31, 2012, 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 very 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. The Company’s main salvage vessel required numerous repairs and maintenance in 2011. In the spring of 2012 the salvage vessel has been put in dry dock in order for maintenance to be performed and for additional repairs to be made so as to prepare the vessel for the 2012 summer dive season. These maintenance and repairs are expensive and a drain on the Company’s cash.




25




Item 2. 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 commons 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.





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.





The Company has experienced a net loss in every fiscal year since the reverse merger in 2008. The Company’s losses from operations were $185,325 for the three month period ended March 31, 2012 and $1,106,466 for the twelve month period ended December 31, 2011. The Company believes that it will continue to generate losses from its operation for the foreseeable future and the Company may not be able to generate a profit in the long-term, or ever.





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 periods ended March 31, 2012 and 2011, and for the period from inception to March 31, 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 3. Quantitative and Qualitative Disclosures About Market Risk





Not required for smaller reporting companies.














26


Item 4T. Controls and Procedures





Evaluation of disclosure controls and procedures




Under the supervision and with the participation of our principal executive officer, the Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act, as of March 31, 2011.  Based on this evaluation, the Company’s principal executive officer has concluded that the Company’s disclosure controls and procedures as of the end of such periods are not effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.





Internal Control Over Financial Reporting





Management has not made any change in our internal control over financial reporting during the period ended March 31, 2011. The Company has limited resources and as a result, management has concluded that material weaknesses in financial reporting currently exist, including those described below.  These material weaknesses were described in Item 9A(T) of the Company’s Form 10-K for the year ended December 31, 2010.





* The Company has an insufficient quantity of dedicated resources and experienced personnel involved in reviewing and designing internal controls. As a result, a material misstatement of the interim and annual financial statements could occur and not be prevented or detected on a timely basis.





* We have not achieved the optimal level of segregation of duties relative to key financial reporting functions.





* We do not have an audit committee or an independent audit committee financial expert. While not being legally obligated to have an audit committee or independent audit committee financial expert, it is management’s view that an audit committee, comprised of independent board members, and an independent financial expert is an important entity-level control over the Company's financial statements.





* We have not achieved an optimal segregation of duties for executive officers of the Company.































27


Part II. Other Information





Item 1. Legal Proceedings





On December 11, 2009, the Company, its CEO and transfer agent were named as defendants in Case Number 09-CA-030763, filed in the Circuit Court of Hillsborough County, Florida, by 31 individuals and 1 corporation. The lawsuit alleges that the Company, its CEO, and its transfer agent wrongfully refused to remove the restrictive legend from certain shares of the Company’s common stock that are collectively owned by the plaintiffs, which prevented the plaintiffs from selling or transferring their shares of the Company’s common stock.  The plaintiffs allege that they have lost approximately $1,041,000 as of the date of the lawsuit. The plaintiffs are seeking actual damages in an amount greater than $15,000, punitive damages to be determined at trial, injunctive relief requiring the defendants to reissue the plaintiff’s stock without the restrictive legends, injunctive relief barring the defendants from removing the stock legends from any Seafarer stock until the dispute with the plaintiffs is fully resolved, injunctive relief barring the defendants from selling their Seafarer stock, directly or indirectly, until the dispute with the plaintiffs is fully resolved, a declaratory judgment that plaintiffs are entitled to have their shares reissued without the restrictive legend, such other incidental and consequential damages as may be proven at trial, costs, interest, and legal expenses allowed by law and such other further relief as the court may deem just and proper.  The Company contends that the restrictive legends were either (i) not qualified for removal under Rule 144 promulgated under the Securities Act of 1933, (ii) the plaintiffs failed to provide sufficient facts supporting removal of the restrictive legends, or (iii) the plaintiffs failed to provide sufficient facts to demonstrate that the distribution was not part of a plan or scheme to evade the registration requirements of the Securities Act of 1933. The Company had previously been in settlement discussions with the plaintiffs however on September 1, 2011 the plaintiffs filed a motion for summary judgment in the matter. The Company’s legal counsel filed a response to the motion for summary judgment, in which pleading and supporting affidavit, the Company presented factual allegations that the initial investment by one of the Plaintiff’s (the “Lead Plaintiff”) was made in the private company of Seafarer, Inc. on June 15, 2007 for $5,000. The Lead Plaintiff was issued shares of the private company Seafarer, Inc. which was later involved in a transaction of a reverse merger with a public company becoming Seafarer Exploration Corp. Upon the merger such private shares as held by the Lead Plaintiff were exchanged for 34,700,000 shares of the public company with all such share rights being held by the Lead Plaintiff. The Company alleged in its responsive court filing, that at the time of the investment, share rights and disbursal of such shares in the public company, the Lead Plaintiff was a registered and licensed broker with the NASD; any ownership interests and in this case a control position held by the Lead Plaintiff would have had to have been reported to overseeing authorities. The Company alleged in its filing that in order to avoid and evade the detection, knowledge of oversight authorities and restrictions of the Securities Act and regulations of the governing bodies over his licensing in the brokerage business, the Lead Plaintiff instructed the former transfer agency for the Company to not issue a physical certificate to himself, but keep the shares in book entry form. The Company alleges that the Lead Plaintiff then instructed the transfer agent to instead issue the shares to a private corporation (the “private corporation”), informing the transfer agent that he (the Lead Plaintiff) had sold the shares in a private transaction. The Company also alleged in the court filing that on or about July 18, 2008 the Lead Plaintiff instructed the transfer agent to issue the shares to the private corporation, as a third party straw man entity. Then on or about October 13, 2008, the Lead Plaintiff, in order to avoid any level of scrutiny or restriction over his ownership of such shares, then “purchased” such shares back from the private corporation, but in order to again avoid and evade detection, knowledge and regulation of governing authorities, the Lead Plaintiff immediately instructed the transfer agent that he was “gifting” such shares to family, friends, and his own acquaintances. The Lead Plaintiff made the distribution of such shares on that same date as the purchase from the private corporation, and actually had the private corporation “gift” the shares to the people and entities named as Plaintiffs in the main complaint on October 18, 2008. The Company and CEO maintain in their court filings that such transactions were unlawful under Rule 144 and that the distribution scheme was done in order to avoid the strictures of the Securities Act. The transfer agent has also brought on new counsel alleging the same matters in response to the case. As of the filing of this Form 10-Q such matter has not gone to hearing on the Plaintiff’s motion for summary judgment.





On December 17, 2009, the Company was named a defendant in Case Number 09-012905CO39, filed in the Circuit Court of Pinellas County, Florida, by a limited liability company, of which the Company’s CEO was previously a minority, non-controlling member.  The lawsuit alleges that the Company has failed and/or refused to pay for services rendered by the plaintiff, in breach of an agreement between the two parties. The plaintiff is seeking judgment against the Company in the amount of $13,520, plus damages that may accrue after the filing of the lawsuit, together with prejudgment interest, recoverable costs associated with the lawsuit and such other relief as may be appropriate under the circumstances.   The parties are currently in settlement discussions and case management has been extended.





On March 2, 2010, the Company filed a complaint naming an individual 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. Among other matters, the Company alleges that the defendant caused extensive damage to the Company’s main salvage vessel due to negligent operation, breached his separation agreement with the Company, and has made false and defamatory statements damaging the Company’s reputation. The Company alleged that the defendant has engaged is such malicious and defamatory campaign as revenge for his termination by the Company and in effort to obtain additional money from the Company. On April 5, 2011, a 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. The Company is currently pursuing the punitive damages portion and expects a substantial award of such at trial for the Punitive damages. The punitive damages portion of the case is set for trial in January, 2012. The Company’s management believes that collection of such award is extremely unlikely; however it will continue to pursue the matter against the defendant.








28




Item 1. 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 is claiming that the Company owes $12,064, plus court costs and attorney’s fees under a lease agreement. The plaintiff is demanding that the court render judgment against the Company in the amount of $12,064, plus court costs and attorney’s fees pursuant to Section 720.305(1) of the Florida Statutes costs and other relief as the court deems just and proper. Management believes that the limited liability company was paid all of the fees owed to it under the lease agreement and the Company plans to mount a vigorous defense against this claim and is currently seeking all attorney’s fees and costs for what it sees as a spurious claim. The Company has presented proof of payment for all billed liabilities and believes that full payment was made. The Company has filed and will keep pending a motion for sanctions and dismissal of the cause of action.





The Company 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 Seafarer, 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, and a singular counterclaim against Seafarer and its CEO, individually, alleging that Seafarer and its CEO were negligent in the use or maintenance of a vessel owned by the corporation, for which damages are sought in excess of $15,000. Seafarer’s legal counsel intends to argue that Seafarer’s CEO has been improperly individually joined in this action. The counterclaim allegations are being vigorously legally contested by both the Company and its CEO. Motion to strike and dismiss defenses and counterclaims are currently pending, legal discovery is ongoing, and the pleadings are not otherwise currently “at-issue” to schedule the action for trial.





Item 1A.  Risk Factors





Not required for smaller reporting companies.





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





During the three month period ended March 31, 2012, the Company issued 1,000,000 restricted common shares to a consultant for various consulting services. The Company believes that 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 based on the fact that such securities were issued for services to sophisticated or accredited investors and persons who are thoroughly familiar with the Company’s proposed business by virtue of their affiliation with the Company.





On various dates during the three month period ended March 31, 2012, the Company sold 19,775,000 shares of its restricted common stock and received proceeds of $92,000. The proceeds were used for general corporate purposes and working capital.





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.





Item 3. Defaults Upon Senior Securities





See Part I, Item 2, notes payable and convertible notes payable, in default, for discussion of defaults on certain debt obligations of the Company.





Item 4. Submission of Matters to a Vote of Security Holders





None.





29


Item 5. Other Information





None





Item 6. Exhibits





Set forth below is a list of the exhibits to this quarterly report on Form 10-Q.





Exhibit Number
Description*31.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities and  Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*32.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities and  Exchange Act of 1934, as amended, and 18 U.S.C. 1350, as adopted pursuant to Section906 of the  Sarbanes-Oxley Act of 2002.








* Filed herewith.








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SIGNATURE





Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.








Seafarer Exploration Corp.Date: May 15, 2012
By:
/s/ Kyle KennedyKyle Kennedy

President, Chief Executive Officer, and Chairman of the Board

(Principal Executive Officer and Principal Accounting Officer)








Date: May 15, 2012
By:
/s/ Chuck BranscombChuck Branscomb, Director







































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