10-K: Scientific Energy Reports Significant Revenue Growth and Returns to Profitability in 2024, Despite Lingering Going Concern Doubts and China-Macau Regulatory Risks

Scientific Energy, Inc. announced a substantial 76% increase in total revenue to $68.6 million and a shift from a net loss of $32.7 million in 2023 to a net income of $69,847 in 2024, driven by its Macau food delivery and new graphite sales businesses, though auditors express substantial doubt about its ability to continue as a going concern.

Summary

• Scientific Energy, Inc. (the Company) is a holding company operating primarily through its 98.75%-owned Macau-based food ordering and delivery subsidiary, Macao E-Media Development Company Limited (MED), and its newly established wholly-owned U.S. graphite sales subsidiary, Graphite Energy, Inc. (GEI).
• Total revenue for the year ended December 31, 2024, increased by 76% to $68,634,071, up from $38,958,211 in 2023.
• The Company achieved a net income attributable to Scientific Energy, Inc. of $69,847 ($0.0003 per share) in 2024, a significant improvement from a net loss of $32,739,144 ($0.12 per share) in 2023.
• Gross profit increased by 18% to $21,085,352 in 2024, compared to $17,860,448 in 2023.
• The food ordering and delivery business in Macau generated $43,517,891 in revenue in 2024, with a Gross Merchandise Volume (GMV) of approximately $141,400,000 from over 10,017,000 transactions.
• The Company's Aomi App in Macau maintains a leading market share of approximately 70% and serves 1,820,000 registered customers and 5,684 partnered merchants as of December 31, 2024.
• The new graphite sales business, established in December 2023, generated $24,773,730 in revenue in its first year of operation (2024).
• Operating expenses decreased significantly by 57% to $22,146,467 in 2024, primarily due to a substantial reduction in goodwill impairment loss from $35,317,639 in 2023 to $1,002,951 in 2024.
• As of December 31, 2024, the Company had cash and cash equivalents of $4,914,559 but a working capital deficit of $7,290,919 and an accumulated deficit of $47,736,443.
• The independent auditor's report includes an explanatory paragraph regarding substantial doubt about the Company's ability to continue as a going concern due to recurring losses and a working capital deficit.
• The Company's 2023 consolidated financial statements were restated to correct misstatements related to goodwill impairment and loan receivables from a joint venture.

Sentiment

Score: 4

Explanation: While the Company achieved a significant turnaround from a large net loss to a small net income and experienced substantial revenue growth, the presence of a 'substantial doubt regarding our ability to continue as a going concern' from the auditor, coupled with a significant accumulated deficit and working capital deficit, indicates underlying financial instability. Furthermore, the extensive list of geopolitical and regulatory risks associated with operating in China and Macau, and the 'penny stock' status with minimal liquidity, temper the positive financial results.

Positives

• Total revenue increased substantially by 76% to $68.6 million in 2024, indicating strong top-line growth.
• The Company successfully transitioned from a significant net loss of $32.7 million in 2023 to a net income of $69,847 in 2024, demonstrating improved financial performance.
• The food ordering and delivery business in Macau maintains a dominant market share of approximately 70%, indicating a strong competitive position in its primary market.
• The newly established graphite sales business generated a significant $24.77 million in revenue in its first year (2024), diversifying the Company's revenue streams.
• Operating expenses decreased by 57% in 2024, largely due to a reduced goodwill impairment charge, contributing to the improved net income.
• The Company has expanded its food delivery services to include flash sales, in-store services, and group dining in Hong Kong, broadening its offerings and potential customer base.
• Strategic agreements, such as the graphite ore purchase agreement with Madagascar Graphite Limited, aim to ensure stable supply for the new business segment.
• The Company's auditor, AOGB CPA Limited, is not on the PCAOB's previous list of firms inaccessible for inspection, potentially mitigating future delisting risks under the HFCAA.

Negatives

• The Company has an accumulated deficit of $47,736,443 and a working capital deficit of $7,290,919 as of December 31, 2024, indicating ongoing financial challenges.
• The independent auditor's report includes an explanatory paragraph raising substantial doubt about the Company's ability to continue as a going concern.
• The 2023 financial statements were restated to correct misstatements related to goodwill impairment and loan receivables, suggesting past financial reporting weaknesses.
• The food delivery segment faces intense competition, with the merger of MFood and Flash Bee creating a stronger rival that now holds a large share of the Macau market.
• The graphite sales business has a limited operating history, making its long-term revenue generation and profitability uncertain.
• The Company is heavily reliant on third parties for graphite ore supply and processing, introducing risks related to quality, quantity, and timely delivery.
• Significant uncertainties and risks are associated with operating in Macau and being subject to potential intervention or increased oversight from the Chinese government, including capital movement restrictions and changes in laws.
• The Company has never declared or paid cash dividends and does not anticipate doing so in the foreseeable future, which may deter income-focused investors.
• The Company's common stock is considered a 'penny stock' and trades on the OTC Pink marketplace with minimal liquidity, making it difficult for shareholders to sell shares at desired prices.

Risks

• The Chinese government may exercise significant oversight and discretion over business operations in Macau, potentially leading to material changes in the Company's business or stock value.
• Increased government oversight of overseas offerings or foreign investment in China-based issuers could restrict or entirely prevent the Company's ability to offer securities, potentially causing their value to decline significantly or become worthless.
• The Chinese government may impose capital movement restrictions, limiting the Company's ability to transfer funds out of Macau for purposes such as distributing earnings, paying dividends, or reinvesting in operations outside Macau.
• Uncertainties exist regarding the interpretation and enforcement of PRC laws, rules, and regulations, which may change rapidly and with little advance notice, potentially limiting legal protections.
• The Company's common stock may be delisted and prohibited from trading in the United States under the Holding Foreign Companies Accountable Act (HFCAA) if the PCAOB is unable to inspect or investigate its auditor completely for two consecutive years.
• There is substantial doubt regarding the Company's ability to continue as a going concern due to recurring losses from operations and a working capital deficit.
• The Company's revenue heavily depends on a limited customer base in Macau, and failure to retain or acquire new merchants and consumers cost-effectively could adversely affect revenue and margins.
• Intense competition in the online food delivery market, including the merger of MFood and Flash Bee, could adversely affect the Company's market share and profitability.
• Reliance on merchants for service levels and pricing, and on third-party payment processors, cloud providers, and data center hosts, poses operational risks.
• Cyberattacks, network disruptions, and security breaches could adversely affect the Company's business, financial condition, and results of operations.
• The Company's success depends on certain key personnel, and the inability to attract and retain qualified personnel could adversely affect its business.
• Economic downturns in Macau and the PRC, as well as geopolitical instability (e.g., Russia-Ukraine conflict, Middle East unrest), could materially and adversely impact the Company's financial condition and operational results.
• Graphite mineral prices are subject to dramatic and unpredictable fluctuations, which could affect the profitability of the graphite sales business.
• The graphite industry is highly competitive, potentially leading to declines in market share, net sales, or net income.
• Future sales opportunities in graphite depend on the growth of markets for electronic vehicles and other graphite-based battery applications, which may develop slower or less than expected.
• Reliance on third parties for graphite ore provision, manufacturing, processing, transportation, warehousing, and logistics services involves significant risks regarding quality, quantity, timeliness, and compliance with regulations.
• The Company's common stock is deemed a low-priced 'Penny' stock, making investment high risk and subject to marketability restrictions, with minimal liquid public market.
• Future issuance of additional common shares could reduce investors' percentage of ownership and dilute the Company's share value.

Future Outlook

The Company intends to retain the majority of its available funds and future earnings to support the development and expansion of its business, and does not anticipate paying cash dividends in the foreseeable future. Growth strategies include broadening the merchant network, increasing consumer engagement and frequency of platform use, improving delivery driver experience, expanding service offerings to become a full-category e-commerce company, delivering excellent customer care, and optimizing operational efficiency. For the graphite business, strategies include maintaining reliable product quality, expanding distribution channels, and stabilizing/deepening cooperation with partners.

Management Comments

• "We believe that our existing cash, cash equivalents, short term investments and borrowings available under the credit facility will be sufficient to meet our working capital requirements for at least the next twelve months."
• "Our liquidity assumptions may prove to be incorrect, and we could utilize our available financial resources sooner than currently expected."
• "If we are unable to obtain needed additional funds, we will have to reduce operating costs, which could impair our growth prospects and could otherwise negatively impact our business."
• "We currently intend to retain the majority, if not all, of our available funds and future earnings to support the development and expansion of our business. Consequently, we do not anticipate paying cash dividends in the foreseeable future."
• "We believe that our mobile ordering platform, innovative products and excellent customer care are our best and most effective marketing tools, helping to generate strong word-of-mouth referrals, which have been the primary driver of our customer growth."
• "We endeavor to set up and maintain a stable, consistent and effective connection among us, end-use customers, and suppliers, especially during todays circumstances full of uncertainty, disruption and restrictions."

Industry Context

Scientific Energy operates in two distinct industries: the highly competitive mobile food and grocery delivery market in Macau and the global graphite trading market. In Macau, the Company holds a leading position with a 70% market share, despite recent consolidation among competitors (MFood and Flash Bee merger). The food delivery market is characterized by increasing smartphone penetration and demand for convenience. In the graphite industry, demand is surging due to the growth of electric vehicles and battery applications, with natural flake graphite increasingly replacing synthetic graphite. China's recent export restrictions on graphite could create opportunities for non-Chinese suppliers like Scientific Energy's Madagascar-sourced products, positioning the Company to capitalize on supply chain diversification trends.

Comparison to Industry Standards

• In the Macau food delivery market, Scientific Energy's Aomi App holds approximately 70% market share, which is a strong leading position compared to its local competitors like MFood and Flash Bee, even after their merger, where Scientific Energy still holds 50% of the local market.
• The Company's shift from a significant net loss to a net income in 2024, alongside a 76% revenue increase, suggests a strong turnaround in operational efficiency and market penetration, which could be considered better than average for a company with a history of losses.
• The graphite sales business, generating $24.77 million in its first year, indicates a rapid entry and initial success in a market driven by global EV and battery demand. While specific comparable companies are not detailed, the Company aims to differentiate itself through 'top-notch graphite products' from Madagascar, known for its quality and large flake size, positioning itself against major producers like China and other African/South American sources (e.g., Mozambique, Brazil).
• The Company's reliance on third-party manufacturers and distributors for its graphite business is a common model in trading, but its success hinges on the reliability and cost-effectiveness of these partners, which can be a point of comparison against vertically integrated competitors in the graphite industry.

Management Changes

Corporate Governance

Legal Proceedings

• As of December 31, 2024, and through the filing date, there were no material outstanding claims or litigation against the Company.

Related Party Transactions

• Balances due from related companies (Citysearch Technology (Macau) Limited, Gloryful Company Limited, Littlemi Technology Company Limited, Nanjing Chengmi Technology Company Limited, Watermelon Cultural Communication Company Limited, Kangaroo Technology Company Limited, Zhuhai Xiangguo Technology Company Limited) are primarily for daily operation purposes, with some controlled by Jiang Haitao, a shareholder of the Company.
• Loan receivables from Gold Gold Gold Limited (3G), a 50% owned joint venture, were fully impaired as of December 31, 2024 and 2023, due to the joint venture's loss-making position.
• Intercompany transactions, such as delivery costs between MED and its subsidiaries (Fresh Life, Green Supply Chain Management Company Limited) and IT supporting service expenses (Zhuhai Migua Technology Company Limited, Zhuhai Chengmi Technology Company Limited), are eliminated in consolidation.

Stakeholder Impact

• **Shareholders**: Potential for significant dilution if additional equity is issued to raise capital. No cash dividends are anticipated in the foreseeable future. The 'penny stock' status and minimal liquidity on the OTC Pink marketplace may make it difficult to sell shares. Delisting risk under HFCAA, though currently mitigated, remains a long-term concern.
• **Employees**: The Company relies on highly skilled personnel, and the ability to attract and retain them is crucial. Pension contributions are made to defined contribution plans in PRC and Macau. The Company had 490 full-time and 393 part-time employees (560 delivery drivers) as of December 31, 2024.
• **Customers (Food Delivery)**: Benefit from a leading mobile platform with a wide selection of merchants, discounted prices through promotions, convenience of ordering, and real-time delivery tracking. The merger of competitors could impact future service offerings or pricing.
• **Customers (Graphite Sales)**: Benefit from the Company's technical expertise and stable supply of high-quality graphite products, with tailored solutions and 360-degree service. However, reliance on third-party suppliers and processors introduces potential supply chain risks.
• **Suppliers/Partners**: The Company relies heavily on third-party payment processors, cloud providers, data center hosts, graphite ore suppliers (e.g., Madagascar Graphite Limited), and graphite processing/manufacturing partners. Their performance and compliance are critical to the Company's operations and could impact costs and service delivery.
• **Creditors**: The Company has a working capital deficit and an accumulated deficit, and its auditor has raised substantial doubt about its going concern ability, which could affect its ability to obtain new financing on reasonable terms.

Next Steps

• The Company plans to expand its Board of Directors and form standing Audit, Nominating, Governance, and Compensation Committees.
• The Company intends to hire additional personnel with technical accounting expertise and may engage consultants or external accounting firms to address material weaknesses in internal control over financial reporting.
• The Company will continue to monitor regulatory developments in the PRC regarding potential approval requirements for overseas listings.
• The Company plans to broaden its network of merchants by providing innovative services and continuing sales efforts.
• The Company intends to increase consumer reach and engagement by expanding service offerings and improving the consumer experience.
• The Company will invest in improving delivery driver experience and satisfaction.
• The Company plans to optimize its cost structure through product improvements to enhance operational efficiency and logistics.
• For the graphite business, the Company endeavors to adopt strategies including maintaining reliable and improving graphite product quality, expanding distribution channels, and stabilizing and deepening cooperation with partners.

Key Dates

Recommendation

Keywords

Food Delivery, Graphite Trading, Macau, SEC Filing, 10-K, Financial Results, Revenue Growth, Net Income, Going Concern, China Regulation, HFCAA, E-commerce, Logistics, Battery Materials, Mineral Trading, Corporate Governance, Risk Factors, Penny Stock