NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
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 Company's consolidated financial statements are prepared using the generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not generated significant revenues since 2011 and is unlikely to generate significant earnings in the immediate or foreseeable future. The continuation of the Company as a going concern is dependent upon the ability of the Company to obtain necessary equity financing to continue operations and the attainment of profitable operations. The management will seek to raise funds from shareholders.
For the year ended December 31, 2015, the Company since inception has generated no revenues and has incurred an accumulated deficit $7,258,863. As of December 31, 2015, its current liabilities exceeded its current assets by $593,039. The Company may not be sufficient to pay for the operating expenses in next 12 months. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. These factors noted above raise substantial doubts regarding the Company's ability to continue as a going concern.
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.
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.
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.
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 December 31, 2015 and December 31, 2014, the Company maintained $536,491 and $894,280 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.
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 financial statements were presented in US Dollars except as other specified.
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 December 31, 2015 and December 31, 2014 were $7.7515 and $7.7574, respectively and average rates of $7.7521 and $7.7544 for the year ended December 31, 2015 and 2014, respectively. The Company uses historical rates for stockholders equity accounts.
Property, plant and equipment
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The estimated useful lives of property, plant and equipment are as follows:
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Office equipment
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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.
Depreciation expense for the years ended December 31, 2015 and 2014 was $-0- and $3,638, respectively.
Advertising Expense
The Company expenses advertising costs when incurred. Advertising expenses were $-0- for the years ended December 31, 2015 and 2014.
Fair Value Measurements
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 is 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.
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 December 31, 2015 and 2014.
Schedule of Earnings (Loss) Per Share
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Year Ended 12/31/2015
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Year Ended 12/31/2114
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Numerator - basic and diluted
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Net loss
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$
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(397,017)
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$
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(972,380)
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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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(0.01)
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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 - INCOME TAXES
The Company has adopted Accounting Standards Codification subtopic 740-10, Income Taxes (ASC 740-10) which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes are insignificant.
For the year ended December 31, 2015, the Company's realized net taxable income which offset existing deferred tax assets relating to net operating losses, was offset further (100%) by the valuation allowance. Other temporary differences are expected to be immaterial. Therefore there were no expected income taxes, either current or deferred, reflected in the income statement.
At December 31, 2015, the Company has available for U.S. federal income tax purposes a net operating loss carryforward of approximately $6,500,000, expiring in the year 2035, that may be used to offset future taxable income. The Company has provided a valuation reserve against the full amount of the net operating loss benefit, since in the opinion of management based upon the earnings history of the Company, it is more likely than not that the benefits will not be realized.
Due to possible significant changes in the Company's ownership, the future use of its existing net operating losses may be limited. Components of deferred tax assets as of December 31, 2015 are as follows. All or a portion of the remaining valuation allowance may be reduced in future years based on an assessment of earnings sufficient to fully utilize these potential tax benefits.
At December 31, 2015, the significant components of the deferred tax assets (liabilities) are summarized below:
Schedule of Income Taxes
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Deferred Tax Assets:
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December 31, 2015
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December 31, 2014
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Net operating loss carryforward
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$
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(397,017)
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$
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(972,380)
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Inventory obsolescence
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-
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-
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Total deferred tax assets
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(397,017)
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(972,380)
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Valuation allowance
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397,017
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972,380
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Net deferred tax assets
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$
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-
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$
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-
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The Company is subject to income tax holidays with respect to its Asian operations, and accordingly has recognized no provision for foreign income taxes.
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Rate Reconciliation:
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December 31, 2015
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December 31, 2014
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Book losses (worldwide) at federal statutory rate (35%)
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$
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138,956
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$
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340,333
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Book loss at state rate, net of federal benefit
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(16,675)
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(41,029)
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Excluded tax gains/losses foreign
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Change in valuation allowance
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122,281
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299,304
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Net expense (benefit)
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$
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-
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$
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-
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The net deferred tax asset generated by the U.S. loss carry-forward has been fully reserved.
The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. During the years ended December 31, 2015 and 2014, the Company recognized no interest and penalties. The Company had no accruals for interest and penalties at December 31, 2015 and 2014. Tax years from 2010 through 2014 are open to examination by the taxing authorities.
NOTE 3 PROPERTY AND EQUIPMENT
Furniture and equipment as of December 31, 2015 and 2014 is summarized as follows:
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2015
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2014
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Office furniture and fixtures
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$
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679
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$
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679
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Office equipment
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7,027
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7,027
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Vehicles
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165,313
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344,427
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Less: accumulated depreciation
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(173,019
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)
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(351,998
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)
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$
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-
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$
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-
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Depreciation expense for the years ended December 31, 2015 and 2014 was $-0- and $3,638, respectively.
NOTE 4 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 December 31, 2015, there were 94,915,852 shares of the Companys common stock issued and outstanding, and none of the preferred shares were issued and outstanding.
As of December 31, 2015, Kelton Capital Group Ltd. owned 31,190,500 shares or 32.9% of the Companys common stock. Other than Kelton Capital Group Ltd, no person owns 5% or more of the Companys issued and outstanding shares.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Consulting agreements
(1) Consulting Agreement with Tsui Siu Ting: On January 1, 2010, the Company entered into a Consulting Agreement with Tsui Siu Ting. Under the Agreement, Mr. Tsui shall serve as a business advisor to the Company, on a non-exclusive basis, and render such advice and services to the Company as may be reasonably requested or assigned by the Company, including, without limitation, new business development and marketing activities in China and Hong Kong. In consideration for his services, the Company agrees to pay to Mr. Tsui a monthly fee of $20,000 Hong Kong dollars (approximately $2,564). The initial term of this agreement is five years, which shall be automatically extended for additional five years if no notice of termination is given by any party 60 days prior to expiration.
(2) Consulting Agreement with GHL International. On November 18, 2011, the Company entered into a Consulting and Service Agreement with GHL International Ltd. Pursuant to the Agreement, GHL shall provide the Company and its subsidiaries with a
service of designing, developing, marketing and technical support, as well as other services, to the Companys Makeliving.com website. In consideration of GHLs services, the Company agrees to pay to GHL a fee of $50,000 per month. The term of this Agreement was two years ending on December 31, 2014.
Operating leases
The Company leases approximately 250 square feet in Jersey City, New Jersey on a month to month basis of approximately $565 per month. In addition, the Company entered into a two year lease for office space of approximately 770 square feet in Hong Kong, expiring January 2016, with monthly payments of approximately $3,780 per month.
During the years ended December 31, 2015 and 2014, rent expense was $49,783 and $51,932, respectively
Litigation
The Company may be subject to other legal proceedings and claims, which arise in the ordinary course of its business. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters should not have a material adverse effect on its financial position, results of operations or liquidity. There was no outstanding litigation as of December 31, 2015.
NOTE 6 - 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.