SCIENTIFIC ENERGY, INC - Quarter Report: 2012 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2012

or

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

Commission File Number: 000-50559

SCIENTIFIC ENERGY, INC.

(Exact name of registrant as specified in its charter)

Utah                                                                   87-0680657

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

27 Weldon Street, Jersey City, New Jersey             07306

(Address of principal executive offices)                  (Zip Code)

(201) 985-8100

(Registrant's telephone number, including area code)

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

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 (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   [X ]    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 definition of "large accelerated filer, accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer        [   ]      Accelerated filer      [   ]      Non Accelerated filer   [   ]     Smaller Reporting Company [X]

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes [   ]     No    [X]

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 19, 2012.

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TABLE OF CONTENTS

Item 1.    Financial Statements

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SCIENTIFIC ENERGY, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

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.  As of the date of this 10-Q, Makeliving Ltd. has conducted no operations, and has no assets and there are no expenses and liabilities that have been incurred.

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, 2011, 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 nine months ended September 30, 2012 are not necessarily indicative of results that may be expected for the year ending December 31, 2012. 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, 2011 included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on April 9, 2012.

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.

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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 Company’s 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/trading securities

Long-term investment as of December 31, 2011 was comprised of 1,452 troy ounces of gold 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.  During the nine months ended September 30, 2012 due to its exchange for trading securities, the Company recorded  gain of  $77,339 related to the investment, and reclassified $319,081 from other comprehensive income to earnings during the nine months ended September 30, 2012.

In September 2012, the Company entered into a Trust Agreement with a law firm as the trustee to hold the Company’s 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 Company’s electronic commerce platform known as MakeLiving.com.  As of September 30, 2012, the Company has remaining $604,129 available for purchase of product or services ("trading securities").

Concentration of Credit Risk

The Company’s financial instruments that are exposed to a concentration of credit risk are cash and accounts receivable.  Effective December 31, 2010 and extending through December 31, 2012, all non-interest-bearing transaction accounts are fully insured by the Federal Deposit Insurance Corporation (FDIC), regardless of the balance of the account. Generally, the Company’s 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 September 30, 2012 and December 31, 2011, the Company maintained $184,548 and $1,147,531 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 September 30, 2012 and December 31, 2011 were $7.7539 and $7.7688, respectively and average rates of $7.7587 and $7.7867 for the nine months ended September 30, 2012 and 2011, 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:

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 Company’s President and CEO.  The net book value of these vehicles was $103,671 and $167,879, as of September 30, 2012 and December 31, 2011, respectively.

Depreciation expense for the three and nine months ended September 30, 2012 was $22,009 and $66,018, respectively; and for the three and nine months ended September 30, 2011 was $21,882 and $65,704, respectively.

Advertising Costs and Prepaid Advertising

The Company expenses advertising costs when incurred.  Advertising expenses were $51,709 for the three and nine months ended September 30, 2012 and nil for the three and six months ended September 30, 2011.  As of September 30, 2012, the Company has prepaid for television media time with purchase rights acquired (see above) valued at the time of acquisition totaling $1,944,125 to be used for promoting the Company’s electronic commerce platform known as MakeLiving.com.

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Fair Value of Financial Instruments

Effective January 1, 2008, the Company adopted the provisions of FASB ASC 820-10 (the “Fair Value Topic”) which provides a framework for measuring fair value under GAAP for assets and liabilities that are recognized using fair values on a recurring basis.  The Fair Value Topic 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.  It requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. It also establishes a fair value hierarchy, which prioritizes the valuation inputs into three broad levels.

There are three general valuation techniques that may be used to measure fair value, as described below:

A)   Market approach — Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. Prices may be indicated by pricing guides, sale transactions, market trades, or other sources;

B)   Cost approach — Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost); and

C)   Income approach — Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about the future amounts (includes present value techniques and option-pricing models). Net present value is an income approach where a stream of expected cash flows is discounted at an appropriate market interest rate.

There are no assets and liabilities that were measured on a recurring basis at fair value as of September 30, 2012 using the market and income approaches.

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 September 30, 2012 and 2011.

SCHEDULE OF EARNINGS (LOSS) PER SHARE

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 September 30, 2012, 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.

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As of September 30, 2012, 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.

Item 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 conducts business primarily through its wholly owned subsidiary Sinoforte Ltd., a Hong Kong corporation.

Prior to August 2011, the Company operated primarily as a merchant, buying and selling various type and grades of graphite, such as medium- and high-carbon graphite, high-purity graphite, micro-powder graphite and expandable graphite. As a merchant, the Company acted as a reseller. It purchased graphite products in bulk, primarily from graphite producers, and resold them, either in bulk or in smaller quantities (in either case, without further processing), to various small and mid-sized customers.    

For the year ended December 31, 2011, the Company generated no sales. For much of 2011, due to the unstable and intermittent graphite supplies, shrinking profit margin and risk of loss, the Company had been waiting for the graphite price to stabilize so as to minimize trading risk and ensure profitability.  In the meantime, the Company began to look for other business opportunities. 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, “Makeliving.com” ("Makeliving"), which provides an e-commerce platform, where registered members can exchange goods and services.

Makeliving will act both as a platform and as a conduit between those (individuals or companies) who desire to acquire goods and services and those (individuals or companies) who desire to offer goods and services.  Makeliving plans to charge a certain percentage fee for the transactions.  Currently this website is under trial operation.

Results of Operations

For the Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011

Sales

For the quarter ended September 30, 2012 and 2011, the Company generated no sales. 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.

Costs of Goods Sold

Cost of goods sold for the three months ended September 30, 2012 and 2011 was Nil because there were no sales.

Operating expenses

For the three months ended September 30, 2012, the Company’s selling, general and administrative expenses were $339,430 compared to $184,284 for the same period of the previous year.  The increase is primarily the result of consulting fees paid towards business development.

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Other Income (Expense)

For the three months ended September 30, 2012, the Company had $11 of interest income, as compared to $35,101 of interest income for the same period last year, which was primarily from our investment in a convertible debenture. In August 2011, the issuer of the convertible debenture paid 1,452 troy ounces of gold in exchange for the cancelation of the debenture.  In addition, for the three months ended September 30, 2012, the Company realized a $77,339 gain and an unrealized loss of $188,955 on trading securities and other income of $536 compared to nil for the same period, last year.  During the three months ended September 30, 2011, the Company exchanged its held to maturity convertible debenture for 1,452 troy ounces of gold.  As such, the Company realized a $769,748 gain on exchange of investments as compared to nil in the same period current year.

Net Loss

For the three months ended September 30, 2012, the Company had a net loss of $472,508, or $(0.00) per share, as compared to a net profit of $598,683, or $0.01 per share, for the same period of 2011.

For the Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011

Sales

For the nine months ended September 30, 2012 and 2011, the Company generated no sales. 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. For the same period of 2011, the Company generated no sales as well.

Costs of Goods Sold

Cost of goods sold for the nine months ended September 30, 2012 and 2011 was Nil because there were no sales.

Operating expenses

For the nine months ended September 30, 2012, the Company’s selling, general and administrative expenses were $884,620 compared to $475,067 for the same period of the previous year.  The increase is primarily the result of consulting fees paid towards business development.

Other Income (Expense)

For the nine months ended September 30, 2012, the Company had $57 of interest income, as compared to $137,757 of interest income for the same period last year, which was primarily from our investment in a convertible debenture. In August 2011, the issuer of the convertible debenture paid 1,452 troy ounces of gold in exchange for the cancelation of the debenture.  In addition, for the nine months ended September 30, 2012, the Company realized a $77,339  gain and an unrealized loss of $188,955 on trading securities and other income of $536 compared to nil for the same period, last year.  During the nine months ended September 30, 2011, the Company exchanged its held to maturity convertible debenture for 1,452 troy ounces of gold.  As such, the Company realized a $769,748 gain on exchange of investments as compared to nil in the same period current year.

Net Loss

For the nine months ended September 30, 2012, the Company had a net loss of $1,061,661, or $(0.01) per share, as compared to a net income of $366,734, or $0.00 per share, for the same period of 2011.

Liquidity and Capital Resources

As of September 30, 2012, the Company had cash and cash equivalents of $196,974 and a working capital of $2,883,830.  For the nine months ended September 30, 2012, the Company used net cash of $971,793 from its operating activities primarily from our net loss of $1,061,661, our increase in prepaid expenses of $115,056, our increase in deposits of $21,276, our decrease in accounts payable of $3,143, offset by non-cash depreciation of $66,018 and amortization of prepaid advertising of $51,709, realized gains of $77,339 and unrealized loss of $188,955. By comparison, net cash used in operating activities was $252,203 for the same period of 2011.

During the nine months ended September 30, 2012, we used $48,420 net cash in investing activities mainly from trading activities of $167,780, net cash outflow of $47,879,  and $541 purchase of equipment.

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The Company did not have any financing activities for the nine months ended September 30, 2012 and 2011, respectively.

Until we are able to generate sufficient liquidity from operations, we intend to continue to fund operations from cash on-hand, and through private debt or equity placements of our securities. Our continued operations will depend on whether we are able to generate sufficient liquidity from operations and/or raise additional capital through such sources as equity and debt financings, collaborative and licensing agreements and strategic alliances. There can be no assurance that additional capital will become available or, if it does, that it will become available on acceptable terms, or that any additional capital we may obtain will be sufficient to meet our long-term needs. We currently have no commitments for any additional capital, both internally and externally.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Contractual Obligations

We do not have any contractual obligations.

Critical Accounting Policies

In preparing the financial statements, we follow accounting principles generally accepted in the United States (“GAAP”).  GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. We re-evaluate our estimates on an on-going basis.  Our estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances.  Actual results may differ from these estimates under different assumptions and conditions.  

We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently applied.  Our significant accounting policies are summarized in Note 1 to 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 4.  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 September 30, 2012, 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 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

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Item 1A. Risk Factors

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

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

         None

Item 3.  Defaults Upon Senior Securities

         None

Item 4.  Mine Safety Disclosures

         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

101 INS       XBRL Instance Document

101SCH       XBRL Taxonomy Extension Schema Document

101 CAL      XBRL Taxonomy Extension Calculation Linkbase Document

101LAB       XBRL Taxonomy Extension Label Linkbase Document

101PRE        XBRL Taxonomy Extension Presentation Linkbase Document

101DEF        XBRL Taxonomy Extension Definition Linkbase Document.

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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

November 19, 2012

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