10-Q/A: World Scan Project Restates Q2, Reports Revenue Decline

World Scan Project, Inc. filed an amended quarterly report, restating revenue to a gross basis and revealing a significant decline in sales and a shift to net loss.

Summary

• The company filed an Amendment No. 1 to its Form 10-Q for the period ended April 30, 2024, to restate its prior quarterly report.
• Revenue previously presented on a net basis for crypto miner sales has been revised to a gross basis following discussions with the company's current auditor.
• Total revenues for the six months ended April 30, 2024, were $10,856,066, a significant decrease from $23,261,095 for the same period in 2023.
• The company reported a net loss of $197,986 for the six months ended April 30, 2024, compared to a net income of $7,148,756 in the prior year period.
• Cash and cash equivalents decreased to $231,669 as of April 30, 2024, from $5,698,883 as of October 31, 2023.
• Net cash used in operating activities increased to $10,588,383 for the six months ended April 30, 2024, from $4,071,264 in the prior year period.
• Working capital increased by 68% to approximately $11.1 million as of April 30, 2024, compared to $6.6 million as of October 31, 2023.
• The company successfully raised $5,832,000 from the sale of 486,000 common shares to 21 shareholders through an S-1 offering, which has been extended to November 21, 2024.
• Research and development expenses for the six months ended April 30, 2024, were $311,642, up from $0 in the prior year period.

Sentiment

Score: 3

Explanation: While a capital raise was successful and working capital increased, the significant decline in revenue and net income, coupled with substantial negative operating cash flow and identified material weaknesses in internal controls, indicates a challenging financial position and governance concerns.

Positives

• Working capital increased by 68% to approximately $11.1 million as of April 30, 2024, from $6.6 million as of October 31, 2023.
• Successfully raised $5,832,000 through the sale of common shares, providing capital for operations.
• Management believes the circumstances that led to a doubt about the company's ability to continue as a going concern have been mitigated.
• No legal proceedings are currently against the company, and none are contemplated.

Negatives

• Total revenues decreased significantly to $10,856,066 for the six months ended April 30, 2024, from $23,261,095 in the prior year period, primarily due to decreased crypto miner sales.
• The company shifted from a net income of $7,148,756 to a net loss of $197,986 for the six months ended April 30, 2024.
• Net cash used in operating activities substantially increased to $10,588,383 for the six months ended April 30, 2024, from $4,071,264 in the prior year, attributed to prepaid manufacturing services, inventory purchases, and decreased revenue.
• Cash and cash equivalents declined sharply to $231,669 as of April 30, 2024, from $5,698,883 as of October 31, 2023.
• Material weaknesses in internal controls were identified, including domination of management by a single individual, lack of a majority of outside directors, inadequate segregation of duties, and lack of an audit committee.
• Significant concentration of purchases from a few suppliers (e.g., Musashi Inc. 27.11%, Web3 Computing Corporation 23.62%, CU Holdings Co., Ltd 17.99%).
• Significant concentration of revenues from a few customers (e.g., Irom Co. Ltd. 28.6%, TSUBOI Industries Co., Ltd. 17.02%, Drone Net, Inc. 13.99%).

Risks

• Material weaknesses in internal controls over financial reporting, including domination of management by a single individual, lack of a majority of outside directors, inadequate segregation of duties, and lack of an audit committee.
• Reliance on a limited number of suppliers for a significant portion of inventory, creating supply chain risk.
• Concentration of revenue from a few key customers, posing a risk if any major customer reduces business.
• The company's ability to continue as a going concern depends on its capacity to generate and increase revenue and procure necessary funds to meet debt obligations.
• Potential future impact of COVID-19 on operations and sales results, despite current belief of minimal impact on crypto miner sales.
• Inherent limitations of internal control over financial reporting, which may not prevent or detect misstatements due to human error, collusion, or management override.

Future Outlook

Management believes the current cash balance is sufficient to fund operations without additional funding. They also assert that circumstances leading to prior going concern doubts have been mitigated due to positive financial trends like increased working capital. The company will continue to monitor the potential effects of COVID-19 on its business, although it currently believes the impact on crypto miner sales is minimal.

Management Comments

• "Currently, our cash balance is sufficient to fund our operations without the need for additional funding."
• "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 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."

Industry Context

World Scan Project, Inc. operates in the dynamic sectors of autonomous aerial vehicles (drones), Web3 infrastructure, IoT equipment, and crypto miner sales. The restatement of revenue recognition for crypto miners and the significant decline in sales in this segment highlight the inherent volatility and evolving regulatory and market conditions within the cryptocurrency industry. The company's ongoing R&D efforts in areas like data center cooling systems and NFT technology suggest a strategic diversification within the broader technology and Web3 space, aiming to capture emerging opportunities beyond its current primary revenue source.

Comparison to Industry Standards

• No specific comparable companies, projects, or results are mentioned in the filing to assess performance against global benchmarks.

Management Changes

Corporate Governance

Related Party Transactions

• As of April 30, 2024, CEO and Director Ryohei Uetaki advanced the company $18,758 for salary and $458 for expenses. This advance is an unsecured, noninterest-bearing loan payable on demand.
• Historically, Ryohei Uetaki received 10,000,000 common shares and 10,000,000 Series A Preferred Stock for incorporation expenses on October 25, 2019.
• On February 19, 2020, Ryohei Uetaki gifted 7,000,000 common shares and 10,000,000 Series A Preferred Stock to SKYPR LLC, which he 100% owns and controls.

Stakeholder Impact

• Shareholders face potential dilution from ongoing capital raises and risks associated with declining financial performance and governance weaknesses, but also potential upside from R&D and new product development.
• Customers may be affected by the company's reliance on a few key customers, which could impact stability if customer relationships change.
• Suppliers face risks due to the company's concentration of purchases from a few key vendors, potentially impacting supply chain stability.
• Creditors, particularly CEO Ryohei Uetaki, are providing unsecured, noninterest-bearing loans, indicating a reliance on related-party financing for operational needs.

Next Steps

• Continue to monitor the potential effects of COVID-19 on business operations and sales results.
• Focus on generating and increasing revenue to ensure the ability to continue as a going concern.
• Procure any required funds needed to meet debt redemption during normal business operations.
• Address identified material weaknesses in internal controls and corporate governance.

Key Dates

Recommendation

The company reported a substantial year-over-year decline in revenue and a shift from profit to a net loss, coupled with a significant increase in cash used in operations. While working capital improved and a capital raise was completed, the underlying operational performance is deteriorating. Furthermore, the identified material weaknesses in corporate governance and internal controls present significant red flags regarding oversight and financial reliability. These factors collectively suggest high risk and poor financial health, warranting a 'sell' recommendation for a seasoned investor.

Keywords

SEC filing, 10-Q/A, Restatement, Revenue recognition, Crypto miners, Drones, Web3, IoT, Financial results, Net loss, Cash flow, Internal controls, Corporate governance, Capital raise, Going concern, Japan, Autonomous aerial vehicles