# Safe Pro Group Inc.: Form 10-Q for the period ended Jun 30, 2024

- Company: [Safe Pro Group Inc.](/companies/spai.md) (CIK 2011208)
- Form: 10-Q
- Filed: 2024-09-26
- Accepted by EDGAR: Sep 26, 2024, 16:15 ET
- Period: 2024-06-30
- Accession: 0001493152-24-038306
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/2011208/000149315224038306/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/2011208/000149315224038306/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-04-01 to 2024-06-30 | $643.0k | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2024-01-01 to 2024-06-30 | $950.6k | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2024-04-01 to 2024-06-30 | $458.4k | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2024-01-01 to 2024-06-30 | $638.8k | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2024-04-01 to 2024-06-30 | $184.6k | us-gaap:GrossProfit |
| Gross profit | 6 months, 2024-01-01 to 2024-06-30 | $311.8k | us-gaap:GrossProfit |
| Research and development | 6 months, 2024-01-01 to 2024-06-30 | $85.9k | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2024-04-01 to 2024-06-30 | $249.5k | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2024-01-01 to 2024-06-30 | $434.7k | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2024-04-01 to 2024-06-30 | −$1.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2024-01-01 to 2024-06-30 | −$2.2m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2024-04-01 to 2024-06-30 | $92.1k | us-gaap:InterestExpenseNonoperating |
| Interest expense | 6 months, 2024-01-01 to 2024-06-30 | $151.1k | us-gaap:InterestExpenseNonoperating |
| Net income | 3 months, 2024-04-01 to 2024-06-30 | −$1.2m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2024-01-01 to 2024-06-30 | −$2.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-04-01 to 2024-06-30 | −$0.14 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2024-01-01 to 2024-06-30 | −$0.27 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-04-01 to 2024-06-30 | −$0.14 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2024-01-01 to 2024-06-30 | −$0.27 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-04-01 to 2024-06-30 | 8,900,762 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2024-01-01 to 2024-06-30 | 8,840,294 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2024-01-01 to 2024-06-30 | −$1.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2024-01-01 to 2024-06-30 | $50.9k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2024-06-30 | $176.0k | us-gaap:Cash |
| Current assets | at 2024-06-30 | $776.4k | us-gaap:AssetsCurrent |
| Total assets | at 2024-06-30 | $3.0m | us-gaap:Assets |
| Current liabilities | at 2024-06-30 | $2.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-06-30 | $2.5m | us-gaap:Liabilities |
| Long-term debt | at 2024-06-30 | $256.0k | us-gaap:LongTermDebt |
| Shareholders' equity | at 2024-06-30 | $531.4k | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 37,972 characters.

### MANAGEMENT’S DISCUSSION AND ANALYSIS OF

### FINANCIAL CONDITION AND RESULTS OF OPERATIONS

*The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. See the section titled “Risk Factors” in our prospectus dated August 28, 2024 (“Prospectus”) filed with the Securities and Exchange Commission (the “SEC”) on August 29, 2024 pursuant to Rule 4245(b)(4) under the Securities Act of 1933, as amended (the “Securities Act”), which is available on the SEC’s EDGAR website at www.sec.gov, for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this Form 10-Q.*

### Business Overview

We were incorporated in the State of Delaware on December 15, 2021. Safe Pro Group Inc. is the parent company of Airborne Response Corp. and Safe-Pro USA, LLC, which were both incorporated in Florida, in 2016 and 2008, respectively. On March 9, 2023, Safe Pro Group Inc. acquired Safe Pro AI LLC (formerly known as Demining Development LLC), a privately held developer of Artificial Intelligence (“AI”) and Machine Learning (“ML”) software technology for processing of drone-based imagery and data. . We are a company focused on innovative security and protection solutions, specifically, advanced artificial intelligence / machine learning (AI/ML) software technology for the creation of robust datasets sourced from the analysis of aerial imagery, bullet and blast resistant personal protection equipment and providing mission-critical aerial managed services.

Through a layered approach to the development and integration of advanced technologies in artificial intelligence, drone-based remote sensing technologies and services, and personal protective gear, Safe Pro Group seeks to provide government, NGOs and enterprises with innovative solutions designed to respond to evolving threats.

### Recent Developments

On August 29, 2024, we consummated our initial public offering (“IPO”), pursuant to which we sold 1,020,000 shares of common stock at an offering price of $5.00 per share. In connection with the IPO, we entered into an underwriting agreement (the “Underwriting Agreement”) with Dawson James Securities, Inc., as representative of the underwriters listed on Schedule I thereto (the “Underwriters”). Pursuant to the Underwriting Agreement, we issued a common stock purchase warrant to the Underwriter for the purchase of 51,000 shares of common stock at an exercise price of $6.25, subject to adjustments (the “Warrant”). The Warrant will be exercisable at any time and from time to time, in whole or in part, during the period commencing on March 1, 2025 and ending on August 28, 2029 and may be exercised on a cashless basis under certain circumstances. In connection with the IPO, (i) our outstanding Series A preferred stock and Series B preferred stock were converted into an aggregate of 2,810,000 shares of common stock; (ii) 480,000 shares of common stock was issued to certain executives pursuant to their respective employment agreements, (iii) 252,666 shares of common stock was issued upon conversion of convertible notes and accrued interest.

In connection with the IPO, we sold 1,020,000 shares of common for gross proceeds of $5,100,000 and received net proceeds of $4,304,000, after fees and expenses of $796,000. The Underwriters did not exercise the option to purchase up to an additional 153,000 shares of common stock from the Company.

### Principle of Consolidation

Our consolidated financial statements included in this report include our accounts and those of our subsidiaries: Airborne Response Corp., Safe-Pro USA LLC, and Safe Pro AI LLC from their respective dates of acquisition.

### Supplier Concentration

The following table sets forth information as to each supplier that accounted for 10% or more of the Company’s purchases for the three months ended June 30, 2024 and 2023.

|  | June 30, 2024 |  | June 30, 2023 |  |
| --- | ---: | ---: | ---: | ---: |
| Minelab Electronics | $132,100 | 37.0% | $- | - |
| Mithix Pro | $37,642 | 10.6% | $- | - |
| Hextronics | $39,600 | 11.1% | $- | - |
| Ideal Products Inc. | $- | - | $3,012 | 11.6% |
| Amazon | $- | - | $6,802 | 26.2% |
| NTS Technical Systems | $- | - | $3,755 | 14.4% |

The following table sets forth information as to each supplier that accounted for 10% or more of the Company’s purchases for the six months ended June 30, 2024 and 2023.

|  | June 30, 2024 |  | June 30, 2023 |  |
| --- | ---: | ---: | ---: | ---: |
| Minelab Electronics | $181,600 | 40.0% | $- | - |
| Industries Bitossi Inc | $- | - | $67,631 | 51.4% |

### Segment Information

The Company uses “the management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. The Company’s chief operating decision maker is the chief executive officer of the Company, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. During the six months ended June 30, 2024 and 2023, the Company operated in three reportable business segments which consisted of (1) the business of Safe-Pro USA, (2) the business of Airborne Response, and (3) the business of Safe Pro AI. The Company’s reportable segments are strategic business units that offer different products. They are managed separately based on the fundamental differences in their operations and locations.

### Significant Components of Our Results of Operations

***Revenues.*** Our revenues are generated primarily from the sale of our products, which consist primarily of personal protective gear (“PPE”) and ballistic protective equipment including Explosive Ordnance Disposal (“EOD”) and blast and fragmentation resistant vests and body armor, as well as aerial managed services (drones) for the inspection of customer’s critical infrastructure including radio towers and power grids. At contract inception, we assess the goods and services promised in the contract with customers and identify a performance obligation for each. To determine the performance obligation, we consider all products and services promised in the contract regardless of whether they are explicitly stated or implied by customary business practices. The timing of satisfaction of the performance obligation is not subject to significant judgment. We measure revenue as the amount of consideration expected to be received in exchange for transferring goods and services. We generally recognize product revenues at the time of shipment, provided that all other revenue recognition criteria have been met.

***Cost of Goods Sold and Gross Profit.*** Gross profit has been and will continue to be affected by various factors, including changes in our supply chain and the evolving product mix. The margin profile of our current products and future products will vary depending on operating performance, features, materials, manufacturer and supply chain. Gross margin will vary as a function of changes in pricing due to competitive pressure, our third-party manufacturing, labor costs for services and depreciation for our drone related fixed assets, our production costs, which includes depreciation related costs for manufacturing equipment, costs of shipping and logistics, provision for excess and obsolete inventory and other factors. We expect our gross margins will fluctuate from period to period depending on the interplay of these various factors.

***Operating Expenses.*** We classify our operating expenses as salary, wages and payroll taxes, research and development, professional fees, selling, general, administrative, non-production and services related depreciation and amortization. Additionally, we separate depreciation and amortization expense into its own category.

***Salary, Wages and Payroll Taxes.*** Salaries are representative of officer and stock-based compensation and administrative personnel costs. Wages consist primarily of manufacturing wages. The salary and wages associated payroll tax is reflected here as well.

***Research and Development*** expenses consist of costs associated with personnel and contractor fees associated with the design and development of our products, product certification, travel, recruiting and information technology. We generally recognize research and development expenses as incurred. Development costs incurred prior to establishment of technological feasibility are expensed as incurred. We expect our research and development costs to continue to increase as we develop new products and modify existing products to meet the changes within our markets.

***Professional Fees*** primarily represent certain costs for legal, audit, accounting, public company expense, investor relations, consulting fees and share-based compensation.

***Selling, General and Administrative*** expenses consist of expenses associated with our training programs, trade shows, marketing programs, promotional materials, demonstration equipment, commissions payable, national and local regulatory approvals of our products, travel, entertainment, recruiting, operating supplies such as, computer equipment, drones, EOD testing supplies; and facilities and other supporting overhead costs. For the year ending December 31, 2024, we expect selling, general and administrative expenses to increase, as we ramp up our sales and marketing expansion efforts to correspond with our increased production efforts, relating to our personal protective gear, the availability of additional AI-powered image processing solutions and new drone-based services such as Drone as a Responder (DaaR).

***Depreciation and Amortization*** expense consists of depreciation related to computer and related office equipment, as well as amortization related to finite-lived intangibles.

***Interest Expense*** is comprised of interest expense associated with our secured notes payable and convertible notes. The amortization of debt discounts is also recorded as part of interest expense.

***Provision for Income Taxes.*** Current and deferred income tax expense or benefit in any given period will depend upon a number of events and circumstances, one of which is the income tax net income or loss from operations for the period which is usually different from the U.S. GAAP net income or loss, for the period due to differences in tax laws and timing differences. Management assesses our deferred tax assets in each reporting period, and if it is determined that it is not more likely than not to be realized, we will record a change in our valuation allowance in that period.

### Results of Operations

### Comparison of the Three and Six Months Ended June 30, 2024 and 2023

### For the Three Months Ended June 30, 2024 and 2023:

| REVENUES: | June 30, 2024 | June 30, 2023 | Change% |  |
| --- | ---: | ---: | ---: | ---: |
| Product Sales | $584,083 | $91,446 | $492,637 | 538.7% |
| Services | 58,906 | 11,562 | 47,344 | 409.5% |
| Total Revenues | 642,989 | 103,008 | 539,981 | 524.2% |
| COST OF REVENUES: |  |  |  |  |
| Product sales | 411,969 | 54,593 | 357,376 | 654.6% |
| Services | 29,613 | 880 | 28,733 | 3265.1% |
| Cost of depreciation | 16,792 | 13,751 | 3,041 | 22.1% |
| Total Cost of Revenues | 458,374 | 69,224 | 389,150 | 562,2% |
| Gross profit | 184,615 | 33,784 | 150,831 | 446.5% |
| Operating expenses: |  |  |  |  |
| Salary, wages and payroll taxes | 394,898 | 317,611 | 77,287 | 24.3% |
| Research and development | - | 130,474 | (130,474) | (100.0)% |
| Professional fees: |  |  |  |  |
| Professional fees - other | 167,438 | 138,048 | 29,390 | 21.3% |
| Stock based compensation – professional fees | 450,000 | 37,500 | 412,500 | 1100.0% |
| Total Professional fees | 617,438 | 175,548 | 441,890 | 251.7% |
| Selling, general and administrative expenses | 249,499 | 94,959 | 154,540 | 162.7% |
| Depreciation and amortization | 45,586 | 45,529 | 57 | 0.1% |
| Total operating expenses | 1,307,421 | 764,121 | 543,300 | 71.1% |
| Loss from operations | (1,122,806) | (730,337) | (392,469) | 53.7% |
| Other income (expense): |  |  |  |  |
| Interest income | - | - | - | -% |
| Interest expense | (92,117) | (1,151) | (90,966) | 7903.2% |
| Total other income (expense) | (92,117) | (1,151) | (90,966) | 7903.2% |
| Net loss | $(1,214,923) | $(731,488) | $(483,435) | 66.1% |

35

### For the Six Months Ended June 30, 2024 and 2023:

| REVENUES: | June 30, 2024 | June 30, 2023 | Change% |  |
| --- | ---: | ---: | ---: | ---: |
| Product Sales | $808,622 | $458,415 | $350,207 | 76.4% |
| Services | 142,020 | 18,100 | 123,920 | 684.6% |
| Total Revenues | 950,642 | 476,515 | 474,127 | 99.5% |
| COST OF REVENUES: |  |  |  |  |
| Product sales | 548,186 | 271,904 | 276,282 | 101.6% |
| Services | 58,758 | 6,390 | 52,368 | 819.5% |
| Cost of depreciation | 31,868 | 27,501 | 4,367 | 15.9% |
| Total Cost of Revenues | 638,812 | 305,795 | 333,017 | 108.9% |
| Gross profit | 311,830 | 170,720 | 145,477 | 73.4% |
| Operating expenses: |  |  |  |  |
| Salary, wages and payroll taxes | 829,476 | 572,327 | 257,149 | 44.9% |
| Research and development | 85,937 | 152,432 | (66,945) | (43.6)% |
| Professional fees: |  |  |  |  |
| Professional fees - other | 530,210 | 236,490 | 293,720 | 124.2% |
| Stock based compensation – professional fees | 548,000 | 130,000 | 418,000 | 321.5% |
| Total Professional fees | 1,078,210 | 366,490 | 711,720 | 194.2% |
| Selling, general and administrative expenses | 434,712 | 200,873 | 233,839 | 116.4% |
| Depreciation and amortization | 91,186 | 91,057 | 129 | 0.1% |
| Total operating expenses | 2,519,521 | 1,383,179 | 1,136,342 | 82.2% |
| Loss from operations | (2,207,691) | (1,212,459) | (995,232) | 82.1% |
| Other income (expense): |  |  |  |  |
| Interest income | - | 505 | (505) | (100.0)% |
| Interest expense | (151,092) | (2,520) | (148,572) | 5,895.7% |
| Total other income (expense) | (151,092) | (2,015) | (149,077) | 7,398.4% |
| Net loss | $(2,358,783) | $(1,214,474) | $(1,144,309) | 94.2% |

*Net Revenue.* For the three months ended June 30, 2024 and 2023, revenues generated were $642,989 and $103,008, an increase of $539,981 or 524.2%. Comparable sales for Safe-Pro USA were $430,039 for the three months ended June 30, 2024 as compared to $94,169 for the same period in 2023, an increase of $389,150 or 562.2%. Comparable sales for Airborne Response were $212,950 for the three months ended June 30, 2024 as compared to $8,839 for the same period in 2023, an increase of $204,111 or 2309.2%. The increase in revenue was attributable to two additional customers, which represented 79.0% of the total sales for the three months ended June 30, 2024.

For the six months ended June 30, 2024 and 2023, revenues generated were $950,642 and $476,515, an increase of $474,127 or 99.5%. Comparable sales for Safe-Pro USA were $652,395 for the six months ended June 30, 2024 as compared to $461,138 for the same period in 2023, an increase of $191,256 or 41.5%. Comparable sales for Airborne Response were $298,248 for the six months ended June 30, 2024 as compared to $15,377 for the same period in 2023, an increase of $282,871 or 1839.6%. The increase in revenue was attributable to two additional customers, which represented 60.3% of the total sales for the six months ended June 30, 2024.

*Cost of Revenue.* During the three months ended June 30, 2024 and 2023, cost of revenues increased to $458,374 compared to $69,224, an increase of $389,150, or 562.2%. Gross profit margins were 28.7% and 32.8%, respectively. The increase in cost of revenue is attributable to the increase in revenue of product at a lower gross profit margin. For the six months ended June 30, 2024 and 2023, cost of revenue increased to $638,812, as compared to $305,795, for the same period in the prior year, an increase of $333,017 or 108.9%. Gross profit margins were 32.8% and 35.8%, respectively. The decrease in margin was attributable to increase in sales for Fragmentation and Blast resistant personal protective equipment (PPE), which have a lower gross profit margin, as compared to law enforcement safety equipment. We expect our cost of revenues to continue to increase during fiscal 2024 and beyond, as we expand our operations and begin generating additional revenues under our current business. However, we are unable at this time to estimate the amount of the expected increases.

*Operating Expenses.* Total operating expenses for the three months ended June 30, 2024 and 2023 were $1,307,421 and $764,121, an increase of $543,300 or 71.1%. Total operating expenses for the six months ended June 30, 2024 and 2023 of $2,519,521 and $1,383,179, an increase of $1,136,342 or 82.2%. Factors resulting in the increase are described more fully below.

*Salaries, wages and payroll taxes.* Total salaries, wages and payroll taxes for the three months ended June 30, 2024 and 2023 were $394,898 and $317,611, an increase of $77,287 or 24.3%. Total salaries, wages and payroll taxes for the six months ended June 30, 2024 and 2023 were $829,476 and $572,327, an increase of $257,149 or 54.2%. The increases were primarily attributable pursuant to new employment agreements, in preparation for the Company’s initial public offering.

*Research and Development* expenses were $0 and $130,474, for the three months ended June 30, 2024 and 2023, respectively, a decrease of $130,474 or 100.0%. Research and Development expenses were $85,937 and $152,432, for the six months ended June 30, 2024 and 2023, respectively, a decrease of $66,945 or 14.0%.The decrease is primarily attributable to the Company’s capitalization of development costs of $172,596 for the advanced artificial intelligence (“AI”) -powered object detection and data analysis and reporting tools for hyper-scalable, cloud-based processing of drone imagery, which will be put in service on July 1, 2024.

*Professional fees* were $617,438 and $175,548 for the three months ended June 30, 2024 and 2023, respectively, an increase of $441,890 or 251.7%. Professional fees were $1,078,210 and $366,490 for the six months ended June 30, 2024 and 2023, respectively, an increase of $711,720 or 150.1%. The increases for the three and six months ended June 30, 2024 and 2023, are indicative by the increase for the six months ended June 30, 2024, as compared to the prior period in 2023, of $711,720, which was attributable to; an increase in audit related expenses of $196,721, investor relations of $39,170, public company expense of $11,128, other professional fees of $61,762 associated with the preparation of the Company’s initial public offering, non-cash expenses for share-based compensation of $418,000, offset by a decrease of legal fees of $15,061.

*Selling, general and administrative* expenses were $249,499 and $94,959 for the three months ended June 30, 2024 and 2023, respectively, an increase of $154,540 or 162.7%. Selling, general and administrative expenses were $434,712 and $200,873 for the six months ended June 30, 2024 and 2023, respectively, an increase of $233,839 or 49.3%. The increases for the three and six months ended June 30, 2024 and 2023, are indicative by the increase for the six months ended June 30, 2024 and 2023, of $233,839 which is attributable to increases in: advertising of $26,331, employee benefits of $51,926, variable costs which fluctuates by an increase in sales $68,142, insurance of $10,948, travel of $79,655, franchise taxes of $10,954, other selling, general and administrative costs of $16,444, offset by product costs incurred in the prior year of $30,561.

*Depreciation and amortization* expenses were $45,586 and $45,529 for the three months ended June 30, 2024 and 2023, respectively, an increase of $57, or 0.1%. For the six months ended June 30, 2024 and 2023, depreciation and amortization costs were $91,186 and $91,057 respectively, an increase of $129, or 0.1%.

We expect our expenses in each of these areas to continue to increase during fiscal 2024 and beyond as we expand our operations and begin generating additional revenues for our current business. However, we are unable at this time to estimate the amount of the expected increases.

*Total Other (Income) Expense.* Our total other expenses were $92,117 compared to $1,151, during the three months ended June 30, 2024 and 2023 respectively, an increase of $90,966 or 7903.2%. Our total other expenses were $151,092 compared to $2,015, during the six months ended June 30, 2024 and 2023 respectively, an increase of $149,077 or 31.4%. The increase is primarily attributed to an increase in interest expense related to convertible debt in the six months ended June 30, 2024 of $148,572, and an increase in interest expense of $90,966, from the three months ended June 30, 2023, which was further offset by a decrease of interest income of $505.

*Net Loss*. We recorded a net loss of $1,214,923 for the three months ended June 30, 2024 as compared to a net loss of $731,488, for the three months ended June 30, 2023. We recorded a net loss of $2,358,783 for the six months ended June 30, 2024 as compared to a net loss of $1,214,474, for the six months ended June 30, 2023. The increase is a result of the factors as described above.

### Consolidated Balance Sheet Data:

*(Unaudited)*

|  | June 30, 2024 | December 31, 2023 | Change% |  |
| --- | ---: | ---: | ---: | ---: |
| Cash | $175,953 | $703,368 | $(527,415) | -75.0% |
| Property and equipment, net | 339,169 | 320,928 | 18,241 | 5.7% |
| Current assets | 776,402 | 1,273,908 | (497,506) | -39.1% |
| Total assets | 3,018,419 | 3,430,199 | (411,780) | -12.0% |
| Current liabilities | 2,279,352 | 1,416,729 | 862,623 | 60.9% |
| Working capital deficit | (1,502,950) | (142,821) | (1,360,129) | 952.3% |
| Total liabilities | 2,487,040 | 1,653,841 | 833,199 | 50.4% |
| Additional paid in capital | 9,710,913 | 8,597,147 | 1,113,766 | 13.0% |
| Accumulated deficit | (9,181,073) | (6,822,290) | (2,358,783) | 34.6% |
| Total stockholders’ equity | $531,379 | $1,776,358 | $(1,244,979) | -70.1% |

### Liquidity and Capital Resources

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. At June 30, 2024, we had a cash balance of $175,953 and negative working capital of $1,502,950.

Our current assets at June 30, 2024 decreased by $497,506, or 39.1%, to $776,402 from $1,273,908, from December 31, 2023. The decreases included cash of $527,415 and accounts receivable of $121,954, offset by an increase in inventory of $5,413 and prepaid expenses and other current assets of $146,450.

Our current liabilities at June 30, 2024 increased to $2,279,352 from $1,416,729 or an increase of $862,623, or 60.9% from December 31, 2023. The increase is comprised of increases in; convertible note payable, net of discount of $287,205, notes payable of $110,000, accrued compensation of $344,633, current portion of lease liabilities of $5,112, accounts payable of $58,206, accrued expenses of $83,157 and offset by a decreases in due to related parties of $18,434 and contract liabilities of $7,257.

### Operating Activities

Net cash flows used in operating activities for the six months ended June 30, 2024 amounted to $1,159,475 and were primarily attributable to our net loss of $2,358,783, offset by depreciation and amortization expense of $123,054, stock-based compensation and professional fees of $548,000, lease costs of $9,584, and amortization of debt discount of $89,006. Changes in operating assets and liabilities were reflected by increases in; inventory of $5,413, prepaid and other current assets of $146,449, accounts payable of $58,207, accrued expenses of $83,157, accrued compensation of $344,633; and offset by decreases in accounts receivable of $121,954, and contract liabilities of $7,257.

Net cash flows used in operating activities for six months ended June 30, 2023 amounted to $1,170,373 and were primarily attributable to our net loss of $1,214,474 offset by depreciation and amortization expense of $118,558, stock-based compensation of $113,200 and lease costs of $1,398. Changes in operating assets and liabilities were reflected by increases in; accounts receivable of $226,106 and accounts payable of $40,415 and offset by decreases in; inventory of $50,842, prepaid and other current assets of $44,874, accrued expenses of $24,288, contract liabilities of $43,978 and accrued compensation of $30,814.

### Investing Activities

Net cash flows used in investing activities were $223,509 and $0, for the six months ended June 30, 2024 and 2023, respectively. During the six months ended June 30, 2024, we purchased property and equipment of $50,913 and investment in intangible technologies of $172,596.

### Financing Activities

Net cash flows provided by financing activities were $855,569 and $83,381 for the six months ended June 30, 2024 and 2023, respectively.

During the six months ended June 30, 2024, we had proceeds from the sale of convertible notes payable of $275,001, proceeds from the sale of common stock and warrants of $489,002, and proceeds of notes payable of $110,000, offset by repayments due to related party for $18,434.

During the six months ended June 30, 2023, we had proceeds from the sale of convertible notes payable of $393,000 offset by repayments due to related party for $309,619.

### Critical Accounting Policies and Estimates

The following is not intended to be a comprehensive list of our accounting policies or estimates. Our significant accounting policies are more fully described in Note 2 — Summary of Significant Accounting Policies in the Notes. In preparing our consolidated financial statements and accounting for the underlying transactions and balances, we apply our accounting policies and estimates as disclosed in the Notes. We consider the policies and estimates discussed below as critical to an understanding of our consolidated financial statements because their application places the most significant demands on our judgment, with financial reporting results dependent on estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Specific risks for these critical accounting estimates are described in the following paragraphs. Preparation of our financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates.

Besides estimates that meet the “critical” accounting estimate criteria, we make many other accounting estimates in preparing our consolidated financial statements and related disclosures. All estimates, whether or not deemed critical, affect reported amounts of assets, liabilities, revenue and expenses as well as disclosures of contingent assets and liabilities. Estimates are based on experience and other information available prior to the issuance of the financial statements. Materially different results can occur as circumstances change and additional information becomes known, including for estimates that we do not deem “critical.”

### Accounts receivable and other receivables

The Company adopted ASC 326 “Financial Instruments – Credit Losses” on January 1, 2023. The Company recognizes an allowance for losses on accounts receivable and other receivables in an amount equal to the estimated probable losses net of recoveries under the current expected credit loss method. The allowance is based on an analysis of historical bad debt experience, current receivables aging, and expected future write-offs, as well as an assessment of specific identifiable customer accounts or other accounts considered at risk or uncollectible. The bad debt expense associated with the allowance for doubtful accounts related to accounts receivable and other receivables is recognized in selling, general and administrative expenses.

### Revenue recognition

In accordance with ASU Topic 606 - Revenue from Contracts with Customers, the Company recognizes revenue in accordance with that core principle by applying the following steps:

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

The Company offers a warranty on its manufactured products. The Company considered the need to make an accrual for warranty expenses that may be incurred. Historically, the Company has incurred no warranty expense and accordingly, the Company believes that no warranty expense accrual is deemed necessary.

Safe-Pro USA

The Company recognizes revenue when, or as, the performance obligation is satisfied. Performance obligations are determined through a review of customer contracts and may differ between customers depending upon contract terms.

For a Bangladesh customer for which Safe-Pro USA historically derived a significant portion of its revenue the Company has identified two performance obligations:

1\) The sale and delivery of safety equipment, ballistic and bomb vests, helmets, and other equipment.

2\) Training and final inspections related to the sale of the equipment.

The Company estimated the allocation of the transaction price to each of the above performance obligations since it does not have evidence of standalone selling process, which is summarized as follows:

- Performance Obligation 1 - Historically, the Company has received 80% of the contract price upon shipment and presentation of required documents.
- Performance Obligation 2 - The remaining 20% of the contract price shall be authorized and received after 1) post-shipment inspection is performed, functionality testing is performed, and approval of the testing is granted. The 20% is triggered after testing and training. Local training with the contracted items consists of 1) use and care training, 2) engineering, repair, & maintenance, and 3) inventory management. Historically, the remaining 20% has not been collected. Although the Company believes this 20% will ultimately be collected, due to the historical non-payment of this 20%, the Company will not record such revenue until such time as collection is probable and all training and inspections are completed.

In connection with the revenue associated with the significant customer discussed above, the Company shall pay a commission of approximately 10% of amounts collected to local agents that assist with the facilitation of training, shipment, and documentation.

Revenue from other Safe-Pro USA customers is generally recognized at the time of shipment, which is the time that the Company satisfies its performance obligations.

Revenue from product sales is recognized when the related goods are shipped whereas revenue from training and inspection activities is recognized when the services are completed and payment is probable. Discounts in multiple elements sold as a single arrangement are allocated proportionately to the individual elements based on the fair value charged when the element is sold separately.

Airborne Response

Airborne Response recognizes revenue when, or as, the performance obligation is satisfied. Performance obligations are determined through a review of customer contracts and may differ between customers depending upon contract terms. Revenues from services are recognized at a point in time when Airborne Response completes services pursuant to its agreements with clients and collectability is probable.

### Goodwill and intangible assets

The Company’s business acquisitions typically result in the recording of goodwill and other intangible assets, which affect the amount of amortization expense and possibly impairment write-downs that the Company may incur in future periods.

Intangible assets are carried at cost less accumulated amortization for finite-lived assets, computed using the straight-line method over the estimated useful life, less any impairment charges.

Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired in business acquisitions. Goodwill is not subject to amortization but is subject to impairment tests at least annually. The Company reviews the carrying amounts of goodwill by reporting unit at least annually, or when indicators of impairment are present, to determine if goodwill may be impaired. To test goodwill impairment, the Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of goodwill is less than its carrying value. The Company would not be required to quantitatively determine the fair value of goodwill unless it determines, based on the qualitative assessment there are indicators of impairment. Under the quantitative test of goodwill, the Company compares the fair value of the reporting unit to its carrying value, including goodwill. If the carrying value exceeds the fair value, then the goodwill is impaired by the excess amount. The Company performs its annual testing for goodwill during the fourth quarter of each fiscal year or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit.

Intangibles assets, net consists of contractual employment agreements, customer relationships and acquired capitalized internal-use software. All intangible assets determined to have finite lives are amortized over their estimated useful lives. The useful life of an intangible asset is the period over which the asset is expected to contribute directly or indirectly to future cash flows. The Company periodically evaluates both finite and indefinite lived intangible assets for impairment upon occurrence of events or changes in circumstances that indicate the carrying amount of intangible assets may not be recoverable.

### Impairment of long-lived assets

In accordance with ASC Topic 360, the Company reviews long-lived assets, including intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.

### Stock-based compensation

Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation –Stock Compensation”, which requires recognition in the consolidated financial statements of the cost of employee, director, and non-employee services received in exchange for an award of equity instruments over the period the employee, director, or non-employee is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee, director, and non-employee services received in exchange for an award based on the grant-date fair value of the award. The Company has elected to recognize forfeitures as they occur as permitted under the FASB’s Accounting Standards Update (“ASU”) 2016-09 Improvements to Employee Share-Based Payment.

### Business acquisitions

The Company accounts for business acquisitions using the acquisition method of accounting where the assets acquired and liabilities assumed are recognized based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions, including, but not limited to, the selection of appropriate valuation methodology, projected revenue, expenses, and cash flows, weighted average cost of capital, discount rates, and estimates of terminal values. Business acquisitions are included in the Company’s consolidated financial statements as of the date of the acquisition.

### Asset Acquisitions

The Company evaluates acquisitions pursuant to ASC 805, “Business Combinations,” to determine whether the acquisition should be classified as either an asset acquisition or a business combination. Acquisitions for which substantially all of the fair value of the gross assets acquired are concentrated in a single identifiable asset or a group of similar identifiable assets are accounted for as an asset acquisition. For asset acquisitions, the Company allocates the purchase price of these acquired assets on a relative fair value basis and capitalizes direct acquisition related costs as part of the purchase price. Acquisition costs that do not meet the criteria to be capitalized are expensed as incurred and presented in general and administrative costs in the consolidated statements of operations, if any.

## Market risk

As filed, 147 characters.

As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this Item.

## Controls and procedures

As filed, 3,053 characters.

### Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) are designed to ensure that information required to be disclosed by us in reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the appropriate time periods, and that such information is accumulated and communicated to our Chief Executive Officer, who serves as our principal executive officer, and Chief Financial Officer, who serves as our principal financial officer, as appropriate, to allow timely discussions regarding required disclosure. We, under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures.

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures were not effective as of June 30, 2024 to provide assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to management as appropriate, to allow timely decisions regarding disclosures due to management identifying material weaknesses in internal controls over financials reporting related to (i) inventory control management; and (ii) a lack of segregation of duties within accounting functions. Therefore, our internal controls over financial reporting were not effective as of June 30, 2024.

Due to our size and nature, segregation of all conflicting duties may not always be possible or economically feasible. However, to the extent possible, we are implementing procedures to assure that the initiation of transactions, the custody of assets and the recording of transactions will be performed by separate individuals.

Notwithstanding this conclusion, we believe that our unaudited consolidated financial statements contained in this Quarterly Report fairly present our financial position, results of operations and cash flows for the periods covered thereby in all material respects.

### Changes in Internal Control over Financial Reporting

Except as set forth in the following sentence, there were no changes to our internal control over financial reporting during the quarter ended June 30, 2024, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. During the quarter ended June 30, 2024, we engaged a third-party inventory control management consultant to assist us in implementing an inventory control management system. Additionally, we have designed and implemented new internal policies and procedures to address a prior material weakness related to revenue recognition cut-offs.

## Risk factors

As filed, 584 characters.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in the section entitled “Risk Factors” in our Prospectus, which is incorporated herein by reference. The risks described in the Prospectus are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. There have been no material changes to our risk factors from those set forth in our Prospectus.

Filed Sep 26, 2024.
Source: SEC EDGAR, the filing index for accession 0001493152-24-038306. Last ingested by Listed: Nov 6, 2026, 10:58 ET. No prices; not investment advice.