SCIENTIFIC ENERGY, INC - Quarter Report: 2009 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

For the quarterly period ended September 30, 2009

or

For the transition period from                  to                 .

Commission file number 000-50559

Scientific Energy, Inc.

(Exact name of registrant as specified in its charter)

(201) 985-8100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ¨   No  ¨

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 Rule12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes  ¨    No  x

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Applicable Only to Corporate Issuers

Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:   94,915,855 shares of common stock, par value $0.01, as of November 13, 2009.

SCIENTIFIC ENERGY, INC.

PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements

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SCIENTIFIC ENERGY, INC.

CONSOLIDATED BALANCE SHEETS

See accompanying notes to unaudited consolidated financial statements.

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SCIENTIFIC ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

 (unaudited)

See accompanying notes to unaudited consolidated financial statements.

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SCIENTIFIC ENERGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 (unaudited)

See accompanying notes to unaudited consolidated financial statements.

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SCIENTIFIC ENERGY, INC.

Notes to Unaudited Consolidated Financial Statements

September 30, 2009

Note 1.  Nature of Operations and Basis of Presentation

Scientific Energy, Inc. (the "Company") was incorporated under the laws of the State of Utah on May 30, 2001.  The business plan of the Company is to enter into natural resources industry in China. As of September 30, 2009, we have begun our principle operations and have obtained significant revenues. Therefore, we are no longer in the development stage.

The consolidated financial statements include the accounts of the Company and its subsidiaries, PDI Global Limited and Sinoforte Limited. All material intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Item 8-03 of Regulation S-X of the U.S. Securities and Exchange Commission.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements.

In the opinion of management, the accompanying consolidated financial statements contain all adjustments, including normal recurring adjustments, necessary for the fair presentation of the Company's results of operations and financial position for the periods presented.  The results of operations for the three months ended September 30, 2009 are not necessarily indicative of the results of operations to be expected for the year ended December 31, 2009. The accompanying financial statements should be read in conjunction with the financial statements and the notes thereto of Scientific Energy, Inc. included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

Note 2. Summary of Significant Accounting Policies

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.

Concentration of Credit Risk

The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements.

Use of Estimates

The preparation of financial statements in conformity with the accounting principles generally accepted in the United States of America requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. Actual results could vary from those estimates, and those variances might be significant.

Property, Plant, and Equipment

Property, plant, and equipment are carried at cost less accumulated depreciation, which is computed using the straight-line method over the useful lives of the assets. Upon disposal of assets, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in income. Property and equipment are depreciated over their estimated useful lives as follows:

     Office equipment            5 years

     Furniture and fixtures     7 years

Depreciation expense for the nine months ended September 30, 2009 and 2008 was $596 and $314, respectively.

Revenue Recognition

The Company recognizes revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104 “Revenue Recognition” (“SAB No. 104”).  Sales revenues are recognized when the products are shipped to the customers, net of discounts and collectibility is reasonably assured.  

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Accounts Receivable

Accounts receivable are recorded at the invoiced amount and do not bear interest.  The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in its existing accounts receivable. The Company determines the allowance based on a review of specifically identified accounts and aging data. The Company reviews its allowance for doubtful accounts monthly. As of September 30, 2009, no allowance for doubtful accounts is made.

Inventory

The Company values inventories, consisting of purchased graphite products, at the lower of cost or market.  Cost is determined on the First-in and First-out method.  The Company regularly reviews its inventories on hand and, when necessary, records a provision for excess or obsolete inventories.  The Company determined that there was no inventory obsolescence as of September 30, 2009.

Note Receivable

The Note Receivable of the Company is considered short-term.  The Company reviews its allowance for doubtful accounts monthly.  As of September 30, 2009, no allowance was recorded.

Principles of Consolidation

The consolidated financial statements, prepared in accordance with generally accepted accounting principles in the United States of America, include the assets, liabilities, revenues, expenses and cash flows of the Company and all its subsidiaries. The accompanying consolidated financial statements reflect necessary adjustments not recorded in the books and records of the Company’s subsidiaries to present them in conformity with generally accepted accounting principles in the United States of America.

Income (loss) per Share

Income (loss) per common share is computed pursuant to the provisions of FASC Topic 260. Basic income (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per common share reflects the additional dilution for all potentially dilutive securities such as unvested restricted common stock and convertible preferred stock.

Recent Accounting Pronouncements

In June 2009, the FASB established the Accounting Standards Codification (“Codification” or “ASC”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) issued under authority of federal securities laws are also sources of GAAP for SEC registrants. Existing GAAP was not intended to be changed as a result of the Codification, and accordingly the change did not impact our financial statements. The ASC does change the way the guidance is organized and presented.

Statement of Financial Accounting Standards (“SFAS”) No. 165 (ASC Topic 855), “Subsequent Events”, SFAS No. 166 (ASC Topic 810), “Accounting for Transfers of Financial Assets-an Amendment of FASB Statement No. 140”, SFAS No. 167 (ASC Topic 810), “Amendments to FASB Interpretation No. 46(R),” and SFAS No. 168 (ASC Topic 105), “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles- a replacement of FASB Statement No. 162” were recently issued. SFAS No. 165, 166, 167, and 168 have no current applicability to the Company or their effect on the financial statements would not have been significant.

Accounting Standards Update (“ASU”) ASU No. 2009-05 (ASC Topic 820), which amends Fair Value Measurements and Disclosures – Overall, ASU No. 2009-13 (ASC Topic 605), Multiple Deliverable Revenue Arrangements, ASU No. 2009-14 (ASC Topic 985), Certain Revenue Arrangements that include Software Elements, and various other ASU’s No. 2009-2 through ASU No. 2009-15 which contain technical corrections to existing guidance or affect guidance to specialized industries or entities were recently issued. These updates have no current applicability to the Company or their effect on the financial statements would not have been significant.

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Note 3 - Principal Stockholder

As of September 30, 2009, Kelton Capital Group Ltd., controlled by Stanley Chan, our president and CEO, owned 32,790,500 shares, or 34.5%, of the Company’s common stock.  Other than Stanley Chan, no persons own 5% or more of the Company's issued and outstanding shares.

Note 4- Capital Stock

The Company is authorized to issue 100,000,000 shares of common stock, $0.01 par value, and 25,000,000 shares of preferred stock, $0.01 par value. As of September 30, 2009, there were 94,915,855 shares of the Company's common stock issued and outstanding, and none of the preferred shares were issued and outstanding.

On May 23, 2006, the Company entered into a stock purchase agreement with Kelton Capital Group Ltd., the controlling shareholder of the Company, and ten individual investors in a private placement.  Pursuant to the agreement, the Company sold and the investors purchased an aggregate of 4,000,000 shares of the Company's common stock for an aggregate consideration of $400,000 in cash.

On January 25, 2007, the Company amended its Articles of Incorporation to affect a reverse stock split of the Company's common stock in which every ten (10) outstanding shares would be combined into one (1) share.  All share transactions disclosed in these financial statements give retroactive effect to this 1:10 reverse split.

On May 15, 2008, the Company issued 90,000,000 shares to eighteen investors in a private placement in exchange for an aggregate consideration of $5,400,000 in cash.

Note 5 - Transactions with Related Parties

On May 15, 2008, the Company issued 28,800,000 shares of its common stock as part of the 90,000,000 issued in the private placement, to Kelton Capital Group Ltd., a company controlled by Stanley Chan, our president and CEO, in exchange for $1,728,000 in cash.

Note 6 – Establishment of a Subsidiary

On January 21, 2008, the Company, through its wholly owned subsidiary PDI Global Ltd., which was incorporated under the laws of Territory of the British Virgin Islands on January 21, 2008, entered into a joint venture agreement with China Resources Development Group Ltd., a Hong Kong company. Under the agreement, a joint venture company, Kabond Investments Limited (the “JVC”), has been established in Hong Kong, and the Company invested $39.6 million Hong Kong dollars (approximately USD$5.09 million) into the JVC for 72% of the JVC’s capital shares, and China Resources Development Group Ltd., jointly with its partner, invested $15.4 million Hong Kong dollars (approximately USD$1.98 million) into the JVC to receive 28% of the JVC’s capital shares.

On December 22, 2008, all equity interest of the JVC, Kabond Investments Ltd., owned by the Company, was sold to Silverbird Holdings Limited for $39.6 million Hong Kong dollars (approximately USD$5,109,743).

On January 15, 2009, the Company, through its wholly owned subsidiary PDI Global Ltd., entered into a joint venture agreement with China Resources Development Group Ltd., ("China Resources"). Under the agreement, the Company invested $43,040,000 Hong Kong dollars (approximately US$5.55 million) into a joint venture company Sinoforte Ltd in Hong Kong.  The Company got 80% of Sinoforte's capital shares, and China Resources invested $10,222,000 Hong Kong dollars, approximately US$1,318,967, and another investor invested HK$538,000, or approximately US$69,419, into Sinoforte for 19% and 1% of Sinoforte's capital shares, respectively. The main business of Sinoforte is trading mineral products such as graphite produced in China.

In June 2009 and September 2009, respectively, China Resources and the other small investor cancelled their investments to the Company, and the full amount of their original investments was returned.  As a result, Sinoforte become the 100% owned subsidiary of the Company. Please also see Note 9 below.

Note 7 – Income Taxes

The Company recognizes the tax effects of transactions in the year in which such transactions enter into the determination of net income regardless of when reported for tax purposes.  Deferred taxes are provided in the financial statements under FASC 718-740-20 to give effect to the temporary differences which may arise from differences in the bases of fixed assets, depreciation methods and allowances based on the income taxes expected to be payable in future years.  Minimal development stage deferred tax assets arising as a result of net operating loss carry-forwards (net operating losses) have been offset completely by a valuation allowance due to the uncertainty of their utilization in future periods.  

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The Company adopted the provisions of FASC Topic 740, Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the implementation of Interpretation 48, the Company recognized approximately no increase in the liability for unrecognized tax benefits.

During the quarter ended September 30, 2009, the Company paid $100 of minimum income tax to the State of Utah on its state tax return. The Company has no tax positions at September 30, 2009 and 2008 for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.

The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.  During the three months ended September 30, 2009 and 2008, the Company recognized no interest and penalties.  The Company had no accruals for interest and penalties at September 30, 2009 and 2008.

Note 8 - Note Receivable

On December 22, 2008, the Company, through its subsidiary PDI Global Ltd. entered into a share purchase agreement with Silverbird Holdings Ltd. to sell 72% of equity interest in Kabond Investments Ltd., a subsidiary of PDI Global, for $39.6 million Hong Kong dollars (approximately US$5.11 million) in the form of a note receivable. The Note bears no interest. As of September 30, 2009, $20 million Hong Kong dollars, or approximately US$2,580,618 have been repaid, and the remaining US$2,529,125 are expected to be collected in full by the end of 2009.

Note 9 – Noncontrolling Interest

In June 2009 and September 2009, China Resources and the other investor canceled their original investments respectively. Because they received the full amount of their original investment back, the losses attributed to their shares were considered a dividend in the amount of US$17,732.

Note 10 – Subsequent Event

The company has evaluated subsequent events from the balance sheet date through November 10, 2009 and determined there are no events to disclose.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

This report contains certain forward-looking statements that involve risks and uncertainties. We use words such as "anticipate," "believe," "expect," "future," "intend," "plan," and similar expressions to identify forward-looking statements.  These statements are only predictions.  Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  You should not place undue reliance on these forward-looking statements, which apply only as of the date of this report.  Our actual results could differ materially from those anticipated in these forward-looking statements.

Overview

The Company had not engaged in material operations or realized revenues for several years. In April 2007, the Company acquired certain heavy drilling equipment, facilities and contract rights associated with crude oil drilling and service business from PT Prima Jasa Energy, an Indonesian crude oil drilling and service firm (“PJE”). At the same time, the Company entered into a long-term drilling services agreement with PJE, pursuant to which PJE provided crude oil drilling and services to the Company. In October 2007, the Company sold all drilling equipment, facilities and associated contract rights and intends to enter into natural resources industry in China.

On January 21, 2008, the Company, through its wholly owned subsidiary PDI Global Ltd., entered into an agreement with China Resources Development Group Ltd., a Hong Kong company. Under the agreement, a joint venture company, Kabond Investments Limited, was set up in Hong Kong, and the Company invested $39.6 million Hong Kong dollars (approximately US$5.09 million) into the JVC to get 72% of the JVC’s capital shares, and China Resources, jointly with its partner, agreed to invest $15,400,000 Hong Kong dollars (approximately US$1.98 million) into the JVC to receive 28% of the JVC’s capital shares.

On December 22, 2008, PDI Global Ltd. entered into a share purchase agreement with Silverbird Holdings Ltd., (“Silverbird”). Pursuant to the agreement, PDI Global agreed to sell and Silverbird agreed to acquire 72% of equity interest in Kabond Investments Ltd., a subsidiary of PDI Global, for $39.6 million Hong Kong dollars, approximately US$5.11 million in the form of a note receivable.

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On January 15, 2009, the Company, through its wholly owned subsidiary PDI Global Ltd., entered into a joint venture agreement with China Resources Development Group Ltd. ("China Resources"). Under the agreement, the Company invested $43,040,000 Hong Kong dollars (approximately US$5.55 million) into a joint venture company Sinoforte Ltd in Hong Kong.  The Company got 80% of Sinoforte's capital shares, and China Resources invested $10,222,000 Hong Kong dollars, and another investor invested HK$538,000 into Sinoforte for 19% and 1% of Sinoforte's capital shares, respectively. In June 2009 and September 2009, China Resources and the other investor cancelled their original investments respectively. As a result, Sinoforte became 100% owned subsidiary of the Company.

The main business of Sinoforte is trading mineral products such as graphite produced in China. Sinoforte currently acts as a reseller of graphite products. Since the second quarter of 2009, Sinoforte has started to generate sales.

In August 2009, after a free try of several months, the Company engaged a consulting firm to provide strategic planning, financing, marketing and business development services.  

Results of Operations

For the Three Months Ended September 30, 2009 and 2008

Sales

For the three months ended September 30, 2009, the Company’s sales were $804,513.  The Company’s purchase and sale of graphite products began in April 2009. Prior to that, the Company had no significant business operations. The Company had no sales for the same period of 2008.

Costs of Goods Sold

Cost of goods sold for the three months ended September 30, 2009 was $761,670, or approximately 94.7% of the sales. No cost of goods sold occurred for the same period of the previous year.

General and Administrative Expenses

For the three months ended September 30, 2009, the Company's general and administrative expenses were $190,215 compared to $26,679 for the same period of the prior year. The increase in general and administrative expenses was largely due to Sinoforte’s general and administrative expenses from its newly launched business activities in 2009.

Net Income (Loss)

For the three months ended September 30, 2009, the Company had a net loss of $147,296, or $(0.00) per share, as compared to a net loss of $26,679, or $(0.00) per share, for the same period of the previous year.

For the Nine Months Ended September 30, 2009 and 2008

Sales

For the nine months ended September 30, 2009, the Company’s sales were $1,528,419. The Company had no sales for the same period of the last year.

Costs of Goods Sold

Cost of goods sold for the nine months ended September 30, 2009 was $1,467,143, or approximately 96.0% of the sales.  No cost of goods sold occurred for the same period of the previous year.

General and Administrative Expenses

For the nine months ended September 30, 2009, the Company's general and administrative expenses were $295,163 compared to $86,132 for the same period of the prior year. The increase in general and administrative expenses was largely due to Sinoforte’s general and administrative expenses from its newly launched business activities in 2009.

Net Income (Loss)

For the nine months ended September 30, 2009, the Company had a net loss of $233,638, or $(0.00) per share, as compared to a net loss of $86,132, or $(0.00) per share, for the same period of the previous year.

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Liquidity and Capital Resources

Since inception, the Company has funded its operations primarily by equity capital and short-term loans from its directors and officers. In May 2006, the Company issued an aggregate of 4,000,000 shares of its common stock to ten investors for an aggregate consideration of $400,000 in cash. In May 2008, the Company issued an aggregate of 90,000,000 shares of its common stock to 18 investors, in a private placement, for an aggregate of purchase price of $5.4 million in cash.

At September 30, 2009, the Company had cash and cash equivalents of $1,725,098. For the nine months ended September 30, 2009, the Company used cash of $1,499,583 in its operating activities, primarily as a result of its net loss of $233,638, an increase in accounts receivable of $529,194, and increase in inventory of $1,278,968, and offset by increase in accounts payable of $529,623, and an increase in salary payable of $12,000. By comparison, net cash used in operating activities was $84,437 for the nine months ended September 30, 2008.

Net cash provided by investing activities for the nine months ended September 30, 2009 was $2,578,335, largely resulting from the proceeds (by installment) from the sale of an investment of $5.11 million in December 2008. The net cash provided by financing activities for the nine months ended September 30, 2009 was $0, primarily as a result of investment in subsidiary by noncontrolling interest of $1,388,386, and withdrawals of the same amount during the period.  By comparison, net cash provided by financing activities was $6,592,076 for the nine months ended September 30, 2008.

The Company’s sources of working capital are limited.  Its current proposed business plan may call for additional capital.  To finance any business operations, it may be necessary for the Company to raise additional funds through public or private financings.  Additional funds may not be available on terms that are favorable to us, and, in the case of equity financings, would result in dilution to our stockholders.  There can be no assurance that such additional financing, when and if necessary, will be available to us on acceptable terms, or at all.

Off-Balance Sheet Arrangements

None.

Critical Accounting Policies

Our financial statements and related public information are based on the application of generally accepted accounting principles in the United States (“GAAP”). GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that may have an impact on the assets, liabilities, revenue and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently applied. We base our estimates on historical experience and on various assumptions that we believe are reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.

Our significant accounting policies are summarized in Note 2 to our financial statements. While all of these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

A smaller reporting company is not required to provide the information in this Item.

Item 4T.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the Company’s management including its principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")).  Based on this evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that the Company files or submits under the

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Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, in a manner that allows timely decisions regarding required disclosure.

Changes in Internal Controls Over Financial Reporting

There was no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

         None

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

         None

Item 3.  Defaults Upon Senior Securities

         None

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

         None

Item 5.  Other Information

         None

Item 6.  Exhibits and Reports

 (a)    Exhibits:

Exhibit No.                Title of Document

----------      ----------------------------------------------

  31               Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

  32               Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SCIENTIFIC ENERGY, INC.

By: /s/ Stanley Chan

-----------------------------------------

Stanley Chan

President and Chief Executive Officer

Date:  November 12, 2009

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