Safe Pro Group Inc.(SPAI) - 2024 Q3 - Quarterly Report

PART I: FINANCIAL INFORMATION Financial Statements (Unaudited) Safe Pro Group Inc.'s unaudited financial statements as of September 30, 2024, reflect asset growth and a widened net loss, primarily due to its August 2024 IPO Consolidated Balance Sheets As of September 30, 2024, total assets increased to $5.48 million and stockholders' equity to $4.23 million due to the IPO and preferred share conversion Consolidated Balance Sheet Highlights (Unaudited) | Account | Sep 30, 2024 | Dec 31, 2023 | Change (%) | | :--- | :--- | :--- | :--- | | Assets | | | | | Cash | $2,334,715 | $703,368 | +231.9% | | Total Current Assets | $3,349,635 | $1,273,908 | +162.9% | | Total Assets | $5,476,549 | $3,430,199 | +59.7% | | Liabilities & Equity | | | | | Total Current Liabilities | $1,049,187 | $1,416,729 | -25.9% | | Convertible notes payable, net | $0 | $343,796 | -100.0% | | Total Liabilities | $1,242,593 | $1,653,841 | -24.9% | | Total Stockholders' Equity | $4,233,956 | $1,776,358 | +138.4% | - All Series A and Series B preferred stock was converted into common stock as of September 30, 2024, eliminating preferred stock from the balance sheet[13][72] Consolidated Statements of Operations For the nine months ended September 30, 2024, revenues doubled to $1.28 million, but net loss widened to $6.04 million due to increased operating expenses Statement of Operations Summary (Unaudited) | Metric | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | $1,281,399 | $640,062 | +100.2% | | Gross Profit | $442,301 | $233,166 | +89.7% | | Total Operating Expenses | $6,192,066 | $2,123,844 | +191.5% | | Loss from Operations | ($5,749,765) | ($1,890,678) | +204.1% | | Net Loss | ($6,044,239) | ($1,894,258) | +219.1% | | Basic and diluted loss per share | ($0.64) | ($0.25) | +156.0% | - Salaries, wages, and payroll taxes for the nine months ended Sep 30, 2024, surged to $3.57 million from $0.91 million YoY, primarily due to increased stock-based compensation[15] - Professional services expenses for the nine months ended Sep 30, 2024, increased to $1.51 million from $0.54 million YoY, also driven by higher stock-based compensation and costs associated with the IPO[15] Consolidated Statements of Changes in Stockholders' Equity For the nine months ended September 30, 2024, stockholders' equity increased to $4.23 million, primarily due to preferred stock and debt conversions, IPO proceeds, and stock-based compensation - On August 28, 2024, all outstanding Series A and Series B preferred stock was converted into 1,500,000 and 1,310,000 shares of common stock, respectively[16][112][122] - The company issued 1,020,000 common shares for cash, raising $4,179,500 in net proceeds from its IPO[16][30] - Stock-based compensation for services and employees added $2.95 million to additional paid-in capital during the first nine months of 2024[16] Consolidated Statements of Cash Flows For the nine months ended September 30, 2024, net cash used in operations increased to $3.1 million, while financing activities provided $4.9 million, primarily from IPO proceeds Cash Flow Summary (Unaudited) | Cash Flow Activity | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | ($3,065,107) | ($1,752,025) | | Net Cash Used in Investing Activities | ($226,397) | ($28,749) | | Net Cash Provided by Financing Activities | $4,922,851 | $668,571 | | Net Increase (Decrease) in Cash | $1,631,347 | ($1,112,203) | - Financing activities were dominated by $4.18 million in net proceeds from the IPO common stock offering and $0.49 million from other common stock sales[20][193] Notes to Unaudited Condensed Consolidated Financial Statements The notes detail the company's three segments, $4.18 million IPO proceeds, preferred stock and convertible note conversions, and significant customer concentration - The company operates through three wholly-owned subsidiaries: Safe-Pro USA (ballistic solutions), Airborne Response (drone services), and Safe Pro AI (AI/ML software)[23][24][25] - Following its IPO, which raised net proceeds of $4.18 million, management believes it has sufficient cash to mitigate going concern risks for at least the next 12 months[30][31] - For the nine months ended Sep 30, 2024, four customers accounted for 95.2% of total sales, indicating significant customer concentration[166] - On August 27, 2024, convertible notes with a principal of $750,001 and accrued interest of $58,531 were converted into 252,666 common shares[102] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes 100.2% revenue growth to increased sales, while a widened net loss is due to higher operating expenses, with liquidity significantly improved post-IPO Results of Operations For the nine months ended September 30, 2024, total revenues increased by 100.2% to $1.28 million, but operating expenses surged 191.5% to $6.19 million, leading to a $6.04 million net loss Revenue by Segment - Nine Months Ended Sep 30 | Segment | 2024 Revenue | 2023 Revenue | Change (%) | | :--- | :--- | :--- | :--- | | Safe-Pro USA | $751,031 | $519,728 | +44.5% | | Airborne Response | $525,992 | $120,334 | +337.1% | | Safe Pro AI | $4,375 | $0 | N/A | | Total | $1,281,399 | $640,062 | +100.2% | - The increase in operating expenses for the nine months ended Sep 30, 2024 was primarily driven by stock-based compensation of $2.95 million and increased audit, legal, and consulting fees related to the IPO[211][213] - Gross profit margin for the nine months ended Sep 30, 2024, decreased to 34.5% from 36.4% in the prior year, attributed to a higher sales mix of non-manufactured products with lower margins[209] Liquidity and Capital Resources As of September 30, 2024, liquidity significantly improved with cash at $2.33 million and positive working capital, driven by $4.9 million in net financing cash flows from the IPO Key Liquidity Metrics | Metric | Sep 30, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Cash | $2,334,715 | $703,368 | | Working Capital | $2,300,448 | ($142,821) | - Net cash provided by financing activities for the nine months ended Sep 30, 2024, was $4.92 million, primarily from the IPO and other equity/debt issuances[228][229] Quantitative and Qualitative Disclosures About Market Risk The company is not required to provide this information as it qualifies as a smaller reporting company - As a smaller reporting company, Safe Pro Group Inc. is exempt from providing quantitative and qualitative disclosures about market risk[250] Controls and Procedures As of September 30, 2024, management concluded that disclosure controls were not effective due to material weaknesses in inventory control and segregation of duties, with remediation efforts underway - The CEO and CFO concluded that disclosure controls and procedures were not effective as of September 30, 2024[252] - Material weaknesses were identified in (i) inventory control management and (ii) a lack of segregation of duties within accounting functions[252] - Remediation efforts include engaging an inventory control consultant and implementing new policies for revenue recognition[255] PART II: OTHER INFORMATION Legal Proceedings The company is not currently involved in any pending legal proceedings that are expected to have a material adverse effect on its business, financial condition, or operating results - As of the filing date, the Company is not a party to any material legal proceedings[256] Risk Factors There have been no material changes to the company's risk factors from those disclosed in its Prospectus dated August 28, 2024 - The company states there have been no material changes to its risk factors from those set forth in its Prospectus[257] Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2024 and thereafter, the company conducted several unregistered sales of securities, including shares issued for convertible debt and preferred stock conversions, and compensation - In August 2024, the company issued 252,666 shares to convert $750,002 in debt and $58,531 in accrued interest[259] - In August 2024, a total of 2,810,000 common shares were issued upon the conversion of all outstanding Series A and Series B preferred stock[259] - In August 2024, 480,000 fully vested shares of common stock were issued for compensation, valued at $2,400,000[261] Defaults Upon Senior Securities The company reports no defaults upon its senior securities - None[262] Mine Safety Disclosures This item is not applicable to the company - Not applicable[262] Other Information During the quarter, none of the company's directors or executive officers adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement - No director or executive officer has adopted or terminated a Rule 10b5-1 trading arrangement during the reporting period[263] Exhibits This section lists the exhibits filed with the quarterly report, including the Underwriting Agreement, various promissory notes and warrants, and officer certifications required by the Sarbanes-Oxley Act