NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the presentation of the accompanying financial statements follows:
Basis and Business Presentation
Scientific Energy, Inc., (the "Company") was incorporated under the laws of the State of Utah on May 30, 2001. Prior to August 2011, the Company was principally devoted to the buying and selling of various types and grades of graphite, such as medium- and high-carbon graphite, high-purity graphite, micro-powder graphite and expandable graphite. In August 2011, the Company decided to engage in a business of e-commerce platform. Currently the Company is in the process of developing a website, which provides an e-commerce platform, where registered members can exchange goods and services.
On February 28, 2012, the Company set up a wholly-owned subsidiary, Makeliving Ltd., which was incorporated in the Cayman Islands in order to engage in a business of e-commerce platform.
The accompanying consolidated financial statements present the financial position and the results of operations of the Company and its 100% owned subsidiaries, Makeliving, Ltd. and PDI Global Limited (a British Virgin Islands corporation, PDI). PDI, in turn, is the 100% owner and consolidates Sinoforte Limited, a Hong Kong corporation.
All significant intercompany transactions and balances have been eliminated in consolidation.
Interim Financial Statements
The following (a) condensed consolidated balance sheet as of December 31, 2012, which has been derived from audited financial statements, and (b) the unaudited condensed consolidated interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2013 are not necessarily indicative of results that may be expected for the year ending December 31, 2013. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2012 included in the Companys Annual Report on Form 10-K, filed with the Securities and Exchange Commission (SEC) on April 15, 2013.
Revenue Recognition
The Company recognizes revenue in accordance with Accounting Standards Codification subtopic 605-10, Revenue Recognition (ASC 605-10) which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed or determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded.
ASC 605-10 incorporates Accounting Standards Codification subtopic 605-25, Multiple-Element Arrangements (ASC 605-25). ASC 605-25 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. The effect of implementing ASC 605-25 on the Company's financial position and results of operations was not significant.
The Company defers any revenue for which the product has not been delivered or services have not been rendered or are subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or services have been rendered or no refund will be required. As of March 31, 2013 and December 31, 2012, deferred revenue was $103,150 and $-0-, respectively
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Revenues on the sale of products, net of estimated costs of returns and allowance, are recognized at the time products are shipped to customers, legal title has passed, and all significant contractual obligations of the Company have been satisfied. Products are generally sold on open accounts under credit terms customary to the geographic region of distribution. The Company performs ongoing credit evaluations of the customers and generally does not require collateral to secure the accounts receivable.
The Company is exploring web based e-commerce to bring buyers and sellers together recognizing revenue as commissions on closed transactions.
Segment information
ASC 280-10 establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. ASC 280-10 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance. All sales and substantial assets of the Company are in China. The Company applies the management approach to the identification of our reportable operating segments as provided in accordance with ASC 280-10. The information disclosed herein materially represents all of the financial information related to the Companys principal operating segment.
Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Long-Term Investments
Long-term investment as of March 31, 2013 and December 31, 2012 was comprised of 242 gold bullions, 5 tael per bullion, for a total of 1,210 tael which were in exchange for the cancelation of the debenture on August 26, 2011. The Company recorded the fair value of the gold received as of August 26, 2011 of $2,577,474 realizing a gain on exchange of long-term investments of $769,748 in fiscal 2011.
Since the investment in gold was considered a commodity in which the fair value is readily determinable, the recorded carrying value is reviewed each reporting period and adjusted to the underlying market price as other comprehensive income or loss. At March 31, 2013, the Company reviewed and adjusted for the change in the underlying market price as other comprehensive loss of $83,855 related to the investment.
192 Gold bullions, approximately USD $2 million, have been committed to pay for MakeLiving.com advertising expense.
In September 2012, the Company entered into a Trust Agreement with a law firm as the trustee to hold the Companys gold bullions. Upon receipt of the gold bullions, the Trustee issued electronic receipts therefore, each known as a Goldeq or purchase rights, which can be used, in lieu of gold, as an intermediary to facilitate the exchange of goods and services conducted on the Companys electronic commerce platform known as MakeLiving.com.
Concentration of Credit Risk
The Companys financial instruments that are exposed to a concentration of credit risk are cash and accounts receivable. Generally, the Companys cash and cash equivalents in interest-bearing accounts may exceed FDIC insurance limits. The financial stability of these institutions is periodically reviewed by senior management.
As of March 31, 2013 and December 31, 2012, the Company maintained $96,328 and $55,546 in foreign bank accounts not subject to FDIC coverage
The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements.
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Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash equivalents include cash on hand and demand deposits held by banks.
Comprehensive Income (Loss)
The Company adopted Accounting Standards Codification subtopic 220-10, Comprehensive Income (ASC 220-10) which establishes standards for the reporting and displaying of comprehensive income and its components. Comprehensive income is defined as the change in equity of a business during a period from transactions and other events and circumstances from non-owners sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. ASC 220-10 requires other comprehensive income (loss) to include foreign currency translation adjustments.
Foreign Currency Translation
The Company translates the foreign currency financial statements into US Dollars (USD) using the year or reporting period-end or average exchange rates in accordance with the requirements of Accounting Standards Codification subtopic 830-10, Foreign Currency Matters (ASC 830-10). Assets and liabilities of these subsidiaries were translated at exchange rates as of the balance sheet date. Revenues and expenses are translated at average rates in effect for the periods presented.
The cumulative translation adjustment is included in the accumulated other comprehensive gain (loss) within stockholders equity (deficit). Foreign currency transaction gains and losses arising from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the consolidated results of operations.
The conversion rates of Hong Kong Dollars (HKD) to USD at March 31, 2013 and December 31, 2012 were $7.7632 and $7.7509, respectively and average rates of $7.7556 and $7.7596 for the three months ended March 31, 2013 and 2012, respectively. The Company uses historical rates for stockholders equity accounts.
Property, plant and equipment
The estimated useful lives of property, plant and equipment are as follows:
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Office
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3 years
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Furniture and fixtures
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3 years
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Vehicles
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4 years
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The Company evaluates the carrying value of items of property, plant and equipment to be held and used whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The carrying value of an item of property, plant and equipment is considered impaired when the projected undiscounted future cash flows related to the asset are less than its carrying value. The Company measures impairment based on the amount by which the carrying value of the respective asset exceeds its fair value. Fair value is determined primarily using the projected future cash flows discounted at a rate commensurate with the risk involved.
The Company has two vehicles that are provided for business and personal use of the Companys President and CEO. The net book value of these vehicles was $60,488 and $82,130, as of March 31, 2013 and December 31, 2012, respectively.
Depreciation expense for the three months ended March 31, 2013 and 2012 was $21,809 and $22,007, respectively.
Advertising Costs
The Company expenses advertising costs when incurred. Advertising expenses were $144,767 and $ -0- for the three months ended March 31, 2013 and 2012, respectively. As of March 31, 2013, the Company has committed 192 gold bullions, approximately USD $2 million, to pay for MakeLiving.com advertising expense (see above).
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Fair Value of Financial Instruments
ASC Topic 820 defines fair value, establishes a framework for measuring fair value and enhances disclosure requirements for fair value measurements. This topic does not require any new fair value measurements. ASC Topic 820 defines fair value as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC Topic 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
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Level 1
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Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
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Level 2
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Other inputs that are directly or indirectly observable in the marketplace.
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Level 3
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Unobservable inputs which are supported by little or no market activity.
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The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. In accordance with ASC Topic 820, the long term investment for 99 Tael Gold are classified within Level 1 since they are valued using active market prices.
At March 31, 2013:
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Level 1
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Level 2
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Level 3
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Total
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Quoted Prices
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Significant
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Significant
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in Active
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Other
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Unobservable
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Markets for
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Observable
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Inputs
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Identical Assets
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Inputs
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Investment - 99 Tael Gold
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$
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2,323,926
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$
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-
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$
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-
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$
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2,323,926
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Total assets measured at fair value
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$
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2,323,926
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$
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-
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$
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-
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$
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2,323,926
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At December 31, 2012:
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Level 1
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Level 2
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Level 3
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Total
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Quoted Prices
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Significant
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Significant
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in Active
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Other
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Unobservable
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Markets for
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Observable
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Inputs
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Identical Assets
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Inputs
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Investment - 99 Tael Gold
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$
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2,411,601
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$
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-
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$
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-
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$
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2,411,601
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Total assets measured at fair value
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$
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2,411,601
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$
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-
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$
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-
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$
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2,411,601
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Earnings (Loss) Per Share
Earnings Per Share (EPS) is computed by dividing net income available to common stockholders by the weighted average number of common stock shares outstanding during the year. Diluted EPS is computed by dividing net income available to common stockholders by the weighted average number of common stock shares outstanding during the year plus potential dilutive instruments such as stock options and warrants. The effect of stock options on diluted EPS is determined through the application of the treasury stock method, whereby proceeds received by the Company based on assumed exercises are hypothetically used to repurchase the Company's common stock at the average market price during the period. The Company has no stock options, warrants or other potentially dilutive instruments outstanding at March 31, 2013 and 2012.
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Three Months Ended March 31
,
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2013
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2012
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Numerator - basic and diluted
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Net loss
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$
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(427,210
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)
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$
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(287,012
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)
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Denominator
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Weighted average number of common shares outstanding basic and diluted
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94,915,852
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94,915,852
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Loss per common share basic and diluted
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$
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(0.00
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)
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$
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(0.00
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)
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Recent Accounting Pronouncements
There are various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's consolidated financial position, results of operations or cash flows.
NOTE 2 CAPITAL STOCK
The Company is authorized to issue 500,000,000 shares of common stock, $0.01 par value, and 25,000,000 shares of preferred stock, $0.01 par value. As of March 31, 2013, there were 94,915,852 shares of the Company's common stock issued and outstanding, and none of the preferred shares were issued and outstanding.
As of March 31, 2013, Kelton Capital Group Ltd. owned 31,261,920 shares or 32.9% of the Company's common stock. Other than Kelton Capital Group Ltd, no person owns 5% or more of the Company's issued and outstanding shares.
NOTE 3 - SUBSEQUENT EVENTS
In accordance with ASC 855, Subsequent Events, the Company has evaluated subsequent events through the date of filing. No material subsequent events were noted.