Safe Pro Group Inc.(SPAI) - 2024 Q2 - Quarterly Report

PART I: FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Unaudited financial statements for Safe Pro Group Inc. as of June 30, 2024, show increased liabilities, decreased equity, and widened net losses despite revenue growth Consolidated Balance Sheets As of June 30, 2024, total assets decreased to $3.02 million, total liabilities increased to $2.49 million, and stockholders' equity fell to $0.53 million Consolidated Balance Sheet Highlights (in USD) | Balance Sheet Item | June 30, 2024 (Unaudited) | December 31, 2023 | | :--- | :--- | :--- | | Total Current Assets | $776,402 | $1,273,908 | | Cash | $175,953 | $703,368 | | Total Assets | $3,018,419 | $3,430,199 | | Total Current Liabilities | $2,279,352 | $1,416,729 | | Convertible notes payable, net | $631,001 | $343,796 | | Total Liabilities | $2,487,040 | $1,653,841 | | Total Stockholders' Equity | $531,379 | $1,776,358 | Consolidated Statements of Operations Revenues for the three and six months ended June 30, 2024, grew significantly, but net loss also widened substantially to $1.21 million and $2.36 million respectively Statement of Operations Summary (in USD) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $642,989 | $103,008 | $950,642 | $476,515 | | Gross Profit | $184,615 | $33,784 | $311,830 | $170,720 | | Loss from Operations | $(1,122,806) | $(730,337) | $(2,207,691) | $(1,212,459) | | Net Loss | $(1,214,923) | $(731,488) | $(2,358,783) | $(1,214,474) | | Basic and Diluted EPS | $(0.14) | $(0.09) | $(0.27) | $(0.16) | Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity decreased from $1.78 million to $0.53 million by June 30, 2024, primarily due to a $2.36 million net loss, partially offset by capital contributions - Total stockholders' equity decreased by $1,244,979 in the first six months of 2024, from $1,776,358 to $531,379[16][20] - The decrease was driven by a net loss of $2,358,783, partially offset by capital contributions from stock-based compensation, warrant issuances, and share sales totaling approximately $1.1 million[16][17][20] Consolidated Statements of Cash Flows For the six months ended June 30, 2024, net cash used in operations was $1.16 million, investing activities used $0.22 million, and financing provided $0.86 million, resulting in a $0.53 million cash decrease Cash Flow Summary for Six Months Ended June 30 (in USD) | Cash Flow Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(1,159,475) | $(1,170,373) | | Net Cash Used in Investing Activities | $(223,509) | $0 | | Net Cash Provided by Financing Activities | $855,569 | $83,381 | | Net Decrease in Cash | $(527,415) | $(1,086,992) | | Cash, End of Period | $175,953 | $665,274 | Notes to Unaudited Consolidated Financial Statements Notes detail company formation, acquisitions, accounting policies, going concern mitigation via IPO, convertible debt, equity transactions, customer/supplier concentrations, and executive commitments - The company acquired Safe-Pro USA in 2022 (ballistics solutions), Airborne Response in 2022 (drone services), and Safe Pro AI in 2023 (AI/ML software)[27][28][29] - The company's IPO in August 2024, which raised net proceeds of $4.3 million, mitigates substantial doubt about its ability to continue as a going concern[34][35] - For the six months ended June 30, 2024, four customers accounted for 96.1% of total sales, and one supplier accounted for 40.0% of inventory purchases[163][165] - Subsequent to quarter end, the company completed its IPO on August 29, 2024, selling 1,020,000 shares for gross proceeds of $5.1 million, converting all outstanding preferred stock and convertible notes into common stock[183][185][186] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's security and protection solutions business, highlighting significant Q2 2024 revenue growth, widened net loss due to increased expenses, and improved liquidity post-IPO - The company operates through three main subsidiaries: Airborne Response Corp. (drone services), Safe-Pro USA, LLC (personal protective gear), and Safe Pro AI LLC (AI/ML software)[190][199] - A key recent development was the consummation of its IPO on August 29, 2024, which raised gross proceeds of $5.1 million and resulted in the conversion of preferred stock and convertible notes[193][194] Results of Operations Q2 2024 revenues surged by 524.2% to $643k, but total operating expenses increased by 71.1% to $1.3 million, widening the net loss to $1.21 million Comparison of Three Months Ended June 30, 2024 and 2023 (in USD) | Metric | 2024 | 2023 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $642,989 | $103,008 | $539,981 | 524.2% | | Gross Profit | $184,615 | $33,784 | $150,831 | 446.5% | | Total Operating Expenses | $1,307,421 | $764,121 | $543,300 | 71.1% | | Net Loss | $(1,214,923) | $(731,488) | $(483,435) | 66.1% | - The increase in revenue for Q2 2024 was primarily due to sales to two new customers, which represented 79.0% of total sales for the quarter[211] - The increase in operating expenses was driven by higher salaries related to new employment agreements, and a significant increase in professional fees ($441,890) and SG&A ($154,540) in preparation for the IPO[214][215][216][217] Liquidity and Capital Resources As of June 30, 2024, the company had a cash balance of $175,953 and a $1.5 million working capital deficit, significantly improved by $4.3 million net IPO proceeds post-quarter Balance Sheet and Liquidity Comparison (in USD) | Metric | June 30, 2024 | December 31, 2023 | Change | | :--- | :--- | :--- | :--- | | Cash | $175,953 | $703,368 | $(527,415) | | Working Capital Deficit | $(1,502,950) | $(142,821) | $(1,360,129) | | Total Liabilities | $2,487,040 | $1,653,841 | $833,199 | - Net cash used in operating activities for the six months ended June 30, 2024, was $1,159,475, primarily due to the net loss of $2,358,783, offset by non-cash charges like stock-based compensation and depreciation[227] - Net cash from financing activities was $855,569 for the first six months of 2024, from proceeds of convertible notes ($275,001), common stock and warrants ($489,002), and notes payable ($110,000)[231] Critical Accounting Policies and Estimates Critical accounting policies requiring significant judgment include revenue recognition, goodwill and intangible asset impairment, long-lived asset impairment, stock-based compensation, and acquisition classification - Revenue recognition for a key Bangladesh customer involves two performance obligations, with the second (20% of contract value) recognized only upon completion of training and inspection, and historically uncollected[239][241] - Goodwill is tested for impairment annually or when indicators are present, potentially using a qualitative assessment before a quantitative test[247] - Stock-based compensation is measured at grant-date fair value and recognized over the service period, with forfeitures recognized as they occur[250] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Safe Pro Group Inc. is not required to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company, Safe Pro Group Inc. is not required to provide quantitative and qualitative disclosures about market risk[254] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of June 30, 2024, due to material weaknesses in inventory control and segregation of duties, with remediation efforts underway - Management identified material weaknesses in internal controls over financial reporting as of June 30, 2024[256] - The weaknesses relate to (i) inventory control management and (ii) a lack of segregation of duties within accounting functions[256] - Remediation efforts include engaging a third-party inventory control management consultant and implementing new policies for revenue recognition cut-offs[259] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is not currently involved in any material pending legal proceedings that would adversely affect its business or financial condition - As of the report date, the Company is not involved in any material pending legal proceedings[260] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Prospectus dated August 28, 2024 - There have been no material changes to the risk factors previously disclosed in the company's Prospectus[261] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the first six months of 2024, the company conducted several unregistered sales of securities, including convertible notes, common stock units, and shares for compensation, relying on Securities Act exemptions - In March 2024, the company sold convertible notes totaling $275,002 with associated warrants[263][264] - In April and June 2024, the company sold units (common stock and warrants) in private placements for gross proceeds of $163,998, $225,005, and $100,000, respectively[265][266][267] - In June 2024, 180,000 fully vested shares of common stock were issued as compensation, valued at $450,000[268] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the reporting period - None[269] Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[269] Item 5. Other Information No director or executive officer adopted or terminated a Rule 10b5-1 trading arrangement during the reporting period - No director or executive officer adopted or terminated a Rule 10b5-1 trading arrangement during the reporting period[270] Item 6. Exhibits This section lists exhibits filed with the quarterly report, including the Underwriting Agreement, promissory notes, employment agreements, and officer certifications - Key exhibits filed include the Underwriting Agreement, warrants, promissory notes, employment agreements, and Sarbanes-Oxley certifications[270]