10-Q/A: World Scan Project Restates Q3 Revenue to Gross Basis

World Scan Project, Inc. filed an amended quarterly report to restate revenue recognition for crypto miner sales from a net to a gross basis, impacting financial metrics and revealing ongoing capital raises.

Summary

• World Scan Project, Inc. filed an Amendment No. 1 to its Form 10-Q for the period ended July 31, 2024, to restate the prior quarterly report.
• Revenue previously presented on a net basis has been revised to a gross basis for crypto miner sales, based on discussions with the company's current auditor.
• Total revenues for the nine months ended July 31, 2024, were restated to $12,956,465, a significant increase from the previously reported $4,176,496.
• Cost of revenues for the nine months ended July 31, 2024, also significantly increased to $9,654,160 from the previously reported $873,191 due to the change in accounting method.
• Net loss for the nine months ended July 31, 2024, improved to $(1,057,883) compared to a net loss of $(3,747,311) for the same period in 2023.
• Cash and cash equivalents decreased to $1,121,894 as of July 31, 2024, from $5,698,883 as of October 31, 2023.
• Net cash used in operating activities increased to $(11,448,551) for the nine months ended July 31, 2024, from $(5,865,495) in the prior year.
• Working capital increased by 103% to approximately $13.4 million as of July 31, 2024, from approximately $6.6 million as of October 31, 2023.
• The company's disclosure controls and procedures were deemed not effective as of April 30, 2024, due to material weaknesses including management domination, lack of outside directors, inadequate segregation of duties, and absence of an audit committee.
• The company raised $8,565,948 from the sale of 743,000 common shares during the nine months ended July 31, 2024, through an S-1 offering extended to November 2024.

Sentiment

Score: 4

Explanation: While the restatement provides clearer financial reporting and the company has improved its net loss and working capital, the substantial decline in gross revenue and increased cash burn from operations are concerning. The identified material weaknesses in internal controls and corporate governance issues, including management domination and lack of an audit committee, present significant risks. The ongoing capital raise is positive for liquidity but also indicates a continued need for external funding despite management's statement of sufficiency.

Positives

• Net loss significantly improved to $(1,057,883) for the nine months ended July 31, 2024, compared to $(3,747,311) in the prior year.
• Working capital increased by 103% to approximately $13.4 million as of July 31, 2024, from $6.6 million as of October 31, 2023.
• Successfully raised $8,565,948 through common share sales during the nine months ended July 31, 2024, providing significant financing.
• Management believes they have "completely mitigated" prior going concern doubts due to positive financial trends.
• Research and development expenses decreased significantly to $630,500 for the nine months ended July 31, 2024, from $18,431,449 in the prior year, potentially indicating a shift from heavy R&D investment to commercialization or more focused spending.

Negatives

• Total revenues decreased to $12,956,465 for the nine months ended July 31, 2024, from $28,315,324 in the prior year, primarily due to a decrease in crypto miner sales.
• Gross profit significantly declined to $3,302,305 for the nine months ended July 31, 2024, from $28,285,910 in the prior year.
• Cash and cash equivalents decreased substantially to $1,121,894 as of July 31, 2024, from $5,698,883 as of October 31, 2023.
• Net cash used in operating activities increased to $(11,448,551) for the nine months ended July 31, 2024, indicating a higher cash burn from core operations.
• Disclosure controls and procedures were deemed not effective as of April 30, 2024, highlighting significant internal control weaknesses.
• The company is heavily reliant on a single individual (Ryohei Uetaki) for management, with a lack of outside directors and an audit committee, posing governance risks.
• 100% of accounts receivable as of July 31, 2024, were owed by a single customer, Apparatus, LLC, representing a high concentration risk.
• Significant concentration in purchases from three suppliers (MUSASHI Inc., Web3 Computing Corp, CU Holdings Co., Ltd) and revenues from four customers (Irom Co. Ltd., TSUBOI Industries Co., Ltd., Drone Net, Inc., Naniwa Co., Ltd) for the period ended July 31, 2024.

Risks

• The company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain.
• Changes in economic conditions could materially adversely affect operations and future prospects.
• Potential impact from legislative and regulatory changes.
• Risk related to the availability of capital.
• Fluctuations in interest rates could affect financial performance.
• Competitive pressures in the drone, industrial automation, Web3, and IoT markets.
• Changes in generally accepted accounting principles could impact financial reporting.
• Material weaknesses in internal controls, including domination of management by a single individual, lack of a majority of outside directors on the board, inadequate segregation of duties, and lack of an audit committee, pose significant risks to financial reporting and oversight.
• High reliance on a few key customers for revenue and a single customer for accounts receivable creates concentration risk.
• A significant portion of inventories is purchased from a few suppliers, leading to supplier concentration risk.
• While management believes doubts are mitigated, the company still needs to generate and increase revenue and procure funds to meet debt obligations to continue as a going concern.
• Although currently believed to be minimal on crypto miner sales, the company will continue to monitor potential social and economic effects of COVID-19 that could impact operations and sales.

Future Outlook

Management believes that its current cash balance is sufficient to fund operations without the need for additional funding. They also believe they have mitigated prior going concern doubts due to positive financial trends, including an increase in net income (reduced loss) and working capital. The company will continue to monitor the potential effects of COVID-19 on its operations, although currently, the impact on crypto miner sales is considered minimal.

Management Comments

• "This Amendment No. 1 to the Form 10-Q for the period is being filed to restate the prior quarterly report. Revenue previously presented on a net basis has been revised to a gross basis based on discussions with the Company's current auditor."
• "Currently, our cash balance is sufficient to fund our operations without the need for additional funding."
• "This decrease in revenues was due mainly to a decrease in the sales of crypto miners."
• "This decrease in net income was due mainly to a decrease in the sales of crypto miners."
• "The decrease in operating cash flow is attributed to prepaid manufacturing services, purchases of inventory and decreased revenue during this period."
• "Having reviewed the above, the Company realizes that whether we shall be able to continue demonstrating the positive trends demonstrated in our financial statements lies in our ability to continue to generate revenue and increase revenue going forward."
• "Based on this, the Company also recognizes that it is critical for us to continue to operate and/or perform our obligation(s) in the future and procure any required funds needed to meet the redemption of its debt during normal business operations."
• "The Company assessed the impact of COVID-19 and believes there to be minimal impact of COVID-19 on the Company's crypto miner sales, which is currently the Company's primary source of revenue."
• "At this time, the Company believes that it will not affect our assumptions as a going concern."
• "Management believes that it has completely mitigated the circumstances that led to a doubt with respect to the Company's ability to continue as a going concern, which existed at the time of the filing of the Company's prior year report."
• "The officers concluded that the disclosure controls and procedures were not effective as of the end of the period covered by this report due to material weaknesses identified below."

Industry Context

World Scan Project operates in the dynamic and evolving sectors of autonomous aerial vehicles (drones), industrial automation, Web3 infrastructure, and IoT equipment. The significant decrease in crypto miner sales suggests a potential shift away from or a decline in that specific market segment, which was previously a primary revenue source. The company's focus on developing and manufacturing drones aligns with broader industry trends towards automation and advanced robotics. The substantial R&D expenditure in prior periods on data center cooling systems and NFT technology indicates an attempt to diversify or capitalize on emerging tech trends, though current R&D spending has significantly reduced.

Comparison to Industry Standards

• The filing does not provide specific comparable companies, projects, or results to assess the company's performance against global industry benchmarks.

Management Changes

Corporate Governance

Legal Proceedings

• No legal proceedings against the company, and no awareness of such proceedings contemplated.

Related Party Transactions

• Ryohei Uetaki, CEO and Director, advanced the company $18,791 for salary and $458 for expenses as of July 31, 2024. This is an unsecured, noninterest-bearing loan payable on demand.
• Ryohei Uetaki owns and controls 100% of SKYPR LLC, which received gifted shares of common and preferred stock from him.

Stakeholder Impact

• Shareholders: The restatement provides clearer financial information, but the decline in gross revenue and significant internal control weaknesses could be concerning. The ongoing capital raise dilutes existing shareholders but provides necessary funding. The improvement in net loss and working capital are positive.
• Employees: No direct impact mentioned, but the company's financial health and governance issues could indirectly affect employee morale and stability.
• Customers: The decrease in crypto miner sales suggests a shift in product focus or market demand. Concentration of revenue among a few customers indicates potential dependency.
• Suppliers: High concentration of purchases from a few suppliers could create dependency and risk for both the company and its suppliers.
• Creditors: The unsecured, noninterest-bearing loan from the CEO indicates a reliance on related-party financing. The improved working capital and reduced net loss are positive for creditworthiness, but increased operating cash burn is a negative.

Next Steps

• The S-1 offering period, extended on August 13, 2024, is expected to conclude on or about November 21, 2024.
• Management needs to address the identified material weaknesses in disclosure controls and internal control over financial reporting.
• The company will continue to monitor the effects of COVID-19 on its operations.
• Management aims to continue generating and increasing revenue to ensure ongoing operations and meet debt obligations.

Key Dates

Recommendation

The restatement provides much-needed clarity on revenue recognition, and the improvement in net loss and working capital are positive signals. However, the substantial decline in gross revenue, increased cash burn from operations, and the severe internal control weaknesses, including management domination and lack of an audit committee, present significant risks. The ongoing capital raise is a positive for liquidity but also highlights a continued need for external funding. Given the mixed financial signals and the serious governance issues, a 'hold' recommendation is appropriate until there is clear evidence of sustained revenue growth, improved operating cash flow, and concrete steps to address the internal control deficiencies.

Keywords

World Scan Project, 10-Q/A, Restatement, Revenue Recognition, Crypto Miners, Drones, Web3, IoT, Financial Reporting, SEC Filing, Internal Controls, Capital Raise, Shareholders Equity, Japan, Autonomous Aerial Vehicles