SPAI Safe Pro Group Inc

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2024

 

OR

 

☐	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

For the transition period from ______________to _______________.

 

Commission File Number 001-42261

 

SAFE PRO GROUP INC.

(Exact name of registrant as specified in its charter)

 

Delaware		87-4227079
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
18305 Biscayne Blvd. Suite 222 Aventura, Florida		33160
(Address of principal executive offices)		(Zip Code)

 

(786) 409-4030

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.0001		SPAI		The Nasdaq Stock Market Inc.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date.

 

As of September 26, 2024, the registrant had outstanding 13,680,249 shares of common stock.

 

 

 

EXPLANATORY NOTE

 

Safe Pro Group, Inc. (the “Company”) became subject to the filing requirements of Sections 13 and 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”) when its Registration Statement on Form S-1 (File No. 333-280599), filed with the Securities and Exchange Commission (the “SEC”) on June 28, 2024, as amended (“Form S-1”), became effective on August 12, 2024 (the “Effective Date”). The Company’s Form S-1 included financial statements for the fiscal years ended December 31, 2023 and 2022 and for the three-month periods ended March 31, 2024 and 2023. This Quarterly Report on Form 10-Q is being filed pursuant to Rule 13a-13 of the Exchange Act, in order to file financial statements for the second fiscal quarter ended June 30, 2024 subsequent to the most recent periods reported in the Form S-1.

 

 

FORM 10-Q

 

INDEX

 

	Page
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)	2
CONSOLIDATED BALANCE SHEETS	2
CONSOLIDATED STATEMENTS OF OPERATIONS	3
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY	4
CONSOLIDATED STATEMENTS OF CASH FLOWS	6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS	7
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	32
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	42
ITEM 4. CONTROLS AND PROCEDURES	42
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	43
ITEM 1A. RISK FACTORS	43
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	44
ITEM 3 DEFAULTS UPON SENIOR SECURITIES	44
ITEM 4. MINE SAFETY DISCLOSURES	44
ITEM 5. OTHER INFORMATION	44
ITEM 6. EXHIBITS	45
SIGNATURES	46

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Form 10-Q includes forward-looking statements. These statements involve risks known to us, significant uncertainties, and other factors which may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by those forward-looking statements.

 

Some of the statements used in this report constitute “forward-looking statements” that represent our beliefs, projections and predictions about future events. Forward-looking statements are all statements other than statements of historical fact, including statements that refer to plans, intentions, objectives, goals, targets, strategies, hopes, beliefs, projections, prospects, expectations or other characterizations of future events or performance, and assumptions underlying the foregoing. The words “may,” “could,” “should,” “would,” “will,” “project,” “intend,” “continue,” “believe,” “anticipate,” “estimate,” “forecast,” “expect,” “plan,” “potential,” “opportunity,” “scheduled,” “goal,” “target,” and “future,” variations of such words, and other comparable terminology and similar expressions and references to future periods are often, but not always, used to identify forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements about the following:

 

	●	our prospects, including our future business, revenues, expenses, net income, earnings per share, gross margins, profitability, cash flows, cash position, liquidity, financial condition and results of operations, backlog of orders and revenue, our targeted growth rate, our goals for future revenues and earnings, and our expectations about realizing the revenues in our backlog and in our sales pipeline;
	●	the effects on our business, financial condition, and results of operations of current and future economic, business, market and regulatory conditions, including the current economic and market conditions and their effects on our customers and their capital spending and ability to finance purchases of our products, services, technologies and systems;
	●	the effects of fluctuations in sales on our business, revenues, expenses, net income, earnings per share, margins, profitability, cash flows, capital expenditures, liquidity, financial condition, and results of operations;
	●	our products, services, technologies, and systems, including their quality and performance in absolute terms and as compared to competitive alternatives, their benefits to our customers and their ability to meet our customers’ requirements, and our ability to successfully develop and market new products, services, technologies and systems;
	●	our markets, including our market position and our market share;
	●	our ability to successfully develop, operate, grow and diversify our operations and businesses;
	●	our business plans, strategies, goals and objectives, and our ability to successfully achieve them;
	●	the sufficiency of our capital resources, including our cash and cash equivalents, funds generated from operations, availability of borrowings under our credit and financing arrangements and other capital resources, to meet our future working capital, capital expenditure, lease and debt service and business growth needs;
	●	the value of our assets and businesses, including the revenues, profits and cash flows they are capable of delivering in the future;
	●	the effects on our business operations, financial results, and prospects of business acquisitions, combinations, sales, alliances, ventures and other similar business transactions and relationships;
	●	industry trends and customer preferences and the demand for our products, services, technologies and systems; and
	●	the nature and intensity of our competition, and our ability to successfully compete in our markets.

 

These statements are necessarily subjective, are based upon our current plans, intentions, objectives, goals, strategies, beliefs, projections and expectations, and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements described in or implied by such statements. Actual results may differ materially from expected results described in our forward-looking statements, including with respect to correct measurement and identification of factors affecting our business or the extent of their likely impact, the accuracy and completeness of the publicly available information with respect to the factors upon which our business strategy is based, or the success of our business. Furthermore, industry forecasts are likely to be inaccurate, especially over long periods of time.

 

Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of whether, or the times by which, our performance or results may be achieved. Forward-looking statements are based on information available at the time those statements are made and management’s belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that may cause actual results, our performance or achievements, or industry results to differ materially from those contemplated by such forward-looking statements include, without limitation, those discussed under the caption “Risk Factors” in our prospectus filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended.

 

 

PART I: FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

The unaudited consolidated financial statements of Safe Pro Group Inc., (the “Company,” “we,” or “our”), for the three and six months ended June 30, 2024 and for comparable periods in the prior year are included below. The financial statements should be read in conjunction with the notes to consolidated financial statements that follow.

 

SAFE PRO GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS AS OF

 

		June 30, 2024				December 31, 2023
		(unaudited)
ASSETS
Current assets:
Cash		$	175,953			$	703,368
Accounts receivable			41,375				163,329
Inventory			364,572				359,159
Prepaid expenses and other current assets			194,502				48,052
Total current assets			776,402				1,273,908
Property and equipment, net			339,169				320,928
Right of use, net			138,676				153,404
Goodwill			684,867				684,867
Intangible assets, net			1,069,505				987,292
Security deposits			9,800				9,800
Total other assets			2,242,017				2,156,291
TOTAL ASSETS		$	3,018,419			$	3,430,199
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	227,287			$	169,081
Accrued expenses			224,818				141,660
Accrued compensation and benefits			548,079				203,446
Contract liabilities			77,413				84,670
Note payable			110,000				-
Convertible notes payable, net of discount			631,001				343,796
Due to related parties			387,120				405,554
Lease liabilities - current			73,634				68,522
Total current liabilities			2,279,352				1,416,729
Long term liabilities:
Note payable – long term			146,000				146,000
Lease liabilities - long term			61,688				91,112
Total long-term liabilities			207,688				237,112
Total liabilities			2,487,040				1,653,841
Commitments and Contingencies (See Note 11)			-				-
Stockholders’ Equity:
Preferred Stock, $0.0001 par value; 10,000,000 shares authorized			-				-
Series A preferred stock; 3,000,000 shares designated, 3,000,000 shares issued and outstanding at June 30, 2024 and December 31, 2023			300				300
Series B preferred stock; 3,275,000 shares designated, 3,275,000 shares issued and outstanding at June 30, 2024 and December 31, 2023			328				328
Preferred stock, value			328				328
Common stock: $0.0001 par value, 200,000,000 shares authorized; 9,117,583 and 8,734,770 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively			911				873
Additional paid-in capital			9,710,913				8,597,147
Accumulated deficit			(9,181,073	)			(6,822,290	)
Total stockholders’ equity			531,379				1,776,358
Total liabilities and stockholders’ equity		$	3,018,419			$	3,430,199

 

See the accompanying notes to the unaudited consolidated financial statements.

 

 

SAFE PRO GROUP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

 

		2024				2023				2024				2023
		Three Months Ended								Six Months Ended
		June 30,				June 30,				June 30,				June 30,
		2024				2023				2024				2023
Revenues:
Product sales		$	584,083			$	91,446			$	808,622			$	458,415
Services			58,906				11,562				142,020				18,100
Total Revenues			642,989				103,008				950,642				476,515
Cost of Revenues:
Product sales			411,969				54,593				548,186				271,904
Services			29,613				880				58,758				6,390
Depreciation expense			16,792				13,751				31,868				27,501
Total Cost of Revenues			458,374				69,224				638,812				305,795
Gross Profit			184,615				33,784				311,830				170,720
Operating Expenses:
Salaries, wages and payroll taxes			394,898				317,611				829,476				572,327
Research and development			-				130,474				85,937				152,432
Professional services			617,438				175,548				1,078,210				366,490
Selling, general and administrative expenses			249,499				94,959				434,712				200,873
Depreciation and amortization			45,586				45,529				91,186				91,057
Total Operating Expenses			1,307,421				764,121				2,519,521				1,383,179
Loss from Operations			(1,122,806	)			(730,337	)			(2,207,691	)			(1,212,459	)
Other Income (Expense):
Interest income			-				-				-				505
Interest expense			(92,117	)			(1,151	)			(151,092	)			(2,520	)
Total Other Expense, net			(92,117	)			(1,151	)			(151,092	)			(2,015	)
Net loss		$	(1,214,923	)		$	(731,488	)		$	(2,358,783	)		$	(1,214,474	)
Basic and diluted loss per share of common stock		$	(0.14	)		$	(0.09	)		$	(0.27	)		$	(0.16	)
Basic and diluted weighted average number of shares of common stock outstanding			8,900,762				7,882,501				8,840,294				7,733,642

 

See the accompanying notes to the unaudited consolidated financial statements.

 

 

SAFE PRO GROUP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN OF STOCKHOLDERS’ EQUITY

 

For the Six Months Ended June 30, 2024

 

		# of Shares				Amount				# of Shares				Amount				# of Shares				Amount				Paid-in Capital				Accumulated Deficit				Shareholders’ Equity
		Series A Preferred Stock								Series B Preferred Stock								Common Stock								Additional								Total
		# of Shares				Amount				# of Shares				Amount				# of Shares				Amount				Paid-in Capital				Accumulated Deficit				Shareholders’ Equity
Balance, December 31, 2023			3,000,000			$	300				3,275,000			$	328				8,734,770			$	873			$	8,597,147			$	(6,822,290	)		$	1,776,358
Stock based compensation issued for stock awards			-				-				-				-				230,000				23				547,977				-				548,000
Relative fair value of warrants issued with convertible debt			-				-				-				-				-				-				76,802				-				76,802
Common shares and warrants units issued for cash			-				-				-				-				152,813				15				488,987				-				489,002
Net loss			-				-				-				-				-				-				-				(2,358,783	)			(2,358,783	)
Balance, June 30, 2024			3,000,000			$	300				3,275,000			$	328				9,117,583			$	911				9,710,913			$	(9,181,073	)		$	531,379

 

For the Six Months Ended June 30, 2023

 

		Series A Preferred Stock								Series B Preferred Stock								Common Stock								Additional								Total
		# of Shares				Amount				# of Shares				Amount				# of Shares				Amount				Paid-in Capital				Accumulated Deficit				Shareholders’ Equity
Balance, December 31, 2022			3,000,000			$	300				3,275,000			$	328				7,514,379			$	751			$	3,087,037			$	(507,641	)		$	2,580,775
Common shares issued for asset acquisition			-				-				-				-				281,250				28				545,597				-				545,625
Stock based compensation in relation to restricted stock awards			-				-				-				-				30,000				3				58,197				-				58,200
Common shares and warrants units issued for cash			-				-				-				-				122,813				13				392,987				-				393,000
Accretion of stock-based compensation and professional fees																											55,000								55,000
Net loss			-				-				-				-				-				-				-				(1,214,474	)			(1,214,474	)
Balance, June 30, 2023			3,000,000			$	300				3,275,000			$	328				7,948,442			$	795				4,138,818			$	(1,722,115	)		$	2,418,126

 

See accompanying notes to unaudited consolidated financial statements

 

 

For the Three Months Ended June 30, 2024

 

		Series A Preferred Stock								Series B Preferred Stock								Common Stock								Additional								Total
		# of Shares				Amount				# of Shares				Amount				# of Shares				Amount				Paid-in Capital				Accumulated Deficit				Shareholders’ Equity
Balance, March 31, 2024			3,000,000			$	300				3,275,000			$	328				8,784,770			$	873			$	8,771,944			$	(7,966,150	)		$	807,300
Stock based compensation issued for stock awards			-				-				-				-				180,000				18				449,982				-				450,000
Common shares and warrant units issued for cash			-				-				-				-				152,813				15				488,987				-				489,002
Net loss			-				-				-				-				-				-				-				(1,214,923	)			(1,214,923	)
Balance, June 30, 2024			3,000,000			$	300				3,275,000			$	328				9,117,583			$	911				9,710,913			$	(9,181,073	)		$	531,379

 

For the Three Months Ended June 30, 2023

 

		Series A Preferred Stock								Series B Preferred Stock								Common Stock								Additional								Total
		# of Shares				Amount				# of Shares				Amount				# of Shares				Amount				Paid-in Capital				Accumulated Deficit				Shareholders’ Equity
Balance, March 31, 2023			3,000,000			$	300				3,275,000			$	328				7,795,629			$	779			$	3,687,634			$	(990,627	)		$	2,698,414
Balance			3,000,000			$	300				3,275,000			$	328				7,795,629			$	779			$	3,687,634			$	(990,627	)		$	2,698,414
Stock based compensation in relation to restricted stock awards			-				-				-				-				30,000				3				58,197				-				58,200
Common shares and warrant units issued for cash			-				-				-				-				122,813				13				392,987				-				393,000
Net loss			-				-				-				-				-				-				-				(731,488	)			(731,488	)
Balance, June 30, 2023			3,000,000			$	300				3,275,000			$	328				7,948,442			$	795				4,138,818			$	(1,722,115	)		$	2,418,126
Balance			3,000,000			$	300				3,275,000			$	328				7,948,442			$	795				4,138,818			$	(1,722,115	)		$	2,418,126

 

See accompanying notes to unaudited consolidated financial statements.

 

 

SAFE PRO GROUP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		2024				2023
		For the Six Months Ended
		June 30,
		2024				2023
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(2,358,783	)		$	(1,214,474	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense			123,054				118,558
Stock-based compensation and professional fees			548,000				113,200
Amortization of debt discount			89,006				-
Lease costs			(9,584	)			1,398
Change in operating assets and liabilities:
Accounts receivable			121,954				(226,106	)
Inventory			(5,413	)			50,842
Prepaid expenses and other assets			(146,449	)			44,874
Accounts payable			58,207				40,415
Accrued expenses			83,157				(24,288	)
Contract liabilities			(7,257	)			(43,978	)
Accrued compensation			344,633				(30,814	)
NET CASH USED IN OPERATING ACTIVITIES			(1,159,475	)			(1,170,373	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment			(50,913	)			-
Investment in intangible technologies			(172,596	)			-
NET CASH USED IN INVESTING ACTIVITIES			(223,509	)			-
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible notes payable			275,001				393,000
Proceeds from notes payable			110,000				-
Proceeds from sale of common stock and warrants			489,002				-
Repayment of due to related parties			(18,434	)			(309,619	)
NET CASH PROVIDED BY FINANCING ACTIVITIES			855,569				83,381
NET DECREASE IN CASH			(527,415	)			(1,086,992	)
CASH, beginning of period			703,368				1,752,266
CASH, end of period		$	175,953			$	665,274
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for:
Interest		$	4,562			$	7,120
Income taxes		$	-			$	-
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Increase in intangible assets and equity for asset acquisition		$	-			$	545,625
Increase in debt discount and additional paid-in capital		$	76,802			$	-

 

See accompanying unaudited notes to the consolidated financial statements.

 

 

SAFE PRO GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2024 AND 2023

 

NOTE 1 - NATURE OF ORGANIZATION

 

Safe Pro Group. Inc. (the “Company”) is a Delaware corporation organized on December 15, 2021 under the name of Cybernate Corp and started doing business on January 1, 2022. On July 13, 2022, the Company changed its name from Cybernate Corp. to Safe Pro Group Inc. Through a layered approach to the development and integration of advanced artificial intelligence and machine learning, drone-based remote sensing technologies and services, and personal protective gear, the Company has acquired companies with unique safety and security technologies and solutions that can provide governments, enterprises and non-government organization with innovative solutions designed to respond to evolving threats.

 

On June 7, 2022 and amended on October 27, 2022, May 12, 2022, August 15, 2023, August 26, 2023 and April 11, 2024, the Company entered into a Share Exchange Agreement (the “Exchange Agreement”) with (i) Safe-Pro USA, LLC. (“Safe-Pro USA”), a Florida limited liability company organized on November 19, 2008, (ii) the members of Safe-Pro USA (the “Safe-Pro USA Members”), and (iii) the Representative of the Safe-Pro USA Members. Pursuant to the Exchange Agreement, the Company acquired 100% of the Safe-Pro USA Members units, representing 100% of Safe-Pro USA’s issued and outstanding member interests (the “Safe Pro USA Member Interests”). On June 7, 2022, the Company closed the Exchange Agreement and acquired 100% of the Safe-Pro USA Member Interests. The Safe-Pro USA Member Interests were exchanged for 3,000,000 shares of the Company’s Series A preferred stock. Safe-Pro USA is a premier manufacturer and seller of high-performance ballistics solutions, including ballistic protective equipment, consisting of explosive ordinance disposal and unexploded ordinance disposal products, ballistic vests, body armor, helmets, ballistic blankets, and more.

 

On August 29, 2022, the Company entered into an Acquisition Agreement (the “Acquisition Agreement”) with (i) Airborne Response Corp. (“Airborne Response”), a company incorporated under the laws of the State of Florida on September 7, 2016 under the name of Airborne Response, LLC. and (ii) the shareholders of Airborne Response. On March 21, 2022, Airborne Response, LLC changed its name to Airborne Response Corp. and converted from a limited liability company to a corporation. Pursuant to the Acquisition Agreement, the Company acquired 100% of the issued and outstanding shares of Airborne Response in exchange for 3,275,000 Series B preferred stock of the Company. Airborne Response is a provider of mission critical aerial intelligence solutions using uncrewed aircraft systems (UAS), more commonly known as “drones,” to its customers. Airborne Response delivers a full range of drone-based, aerial services including site surveys/mapping, infrastructure inspection, data capture, analytics and processing powered by machine learning and artificial intelligence (AI) to provide customers with comprehensive data-driven insights and reporting.

 

On March 9, 2023 (the “Closing Date”), the Company entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with (i) Safe Pro AI LLC (“Safe Pro AI”), organized under the state of New York on February 22, 2021, under the name of Demining Development LLC. and (ii) the members of Safe Pro AI. Pursuant to the Share Exchange Agreement, the Company acquired 100% of the member interests of Safe Pro AI in exchange for 281,250 shares of the Company’s common stock, which 70,312 shares vested on September 9, 2023 and remaining shares were to vest as follows: 70,314 shares twelve-month anniversary of the Closing Date, 70,312 on the eighteen-month anniversary of the Closing Date, and 70,312 on the twenty-four-month anniversary of the Closing Date. On December 31 2023, the Company’s board of directors approved the vesting of the remaining 210,938 shares. Safe Pro AI owns certain software technologies that enables the rapid, automated processing of aerial and ground-based imagery making it an ideal solution for a number of applications including demining and in law enforcement and security. These shares were valued at $545,625, or $1.94 per share, on the measurement date based on recent sales of units of common stock and warrants. Other than owning certain technologies, Safe Pro AI had no operations and no employees and was not considered a business. Pursuant to ASU 2017-01 and ASC 805, the Company analyzed the Exchange Agreement and the business of Safe Pro AI to determine if the Company acquired a business or acquired assets. Based on this analysis, it was determined that the Company acquired assets. No goodwill was recorded since the Exchange Agreement was accounted for as an asset purchase. In accordance with ASC 805, the fair value of the assets acquired is based on either the fair value of the consideration given or the fair value of the assets acquired, whichever is more clearly evident, and thus, more reliably measurable. The Company used the fair value of the 281,250 common shares issued of $545,625 as the fair value of the assets acquired since this value was more clearly evident, and thus, more reliably measurable than the fair value of the software technologies acquired.

 

 

SAFE PRO GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2024 AND 2023

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation and principles of consolidation

 

The unaudited consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries, Safe-Pro USA since its acquisition on June 7, 2022, Airborne Response since its acquisition on August 29, 2022 and Safe Pro AI since its acquisition on March 9, 2023. All intercompany accounts and transactions have been eliminated in consolidation.

 

Management acknowledges its responsibility for the preparation of the accompanying unaudited consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its financial position and the results of its operations for the periods presented. The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (the “U.S. GAAP”) for interim financial information and with the instructions Article 8-03 of Regulation S-X. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole.

 

Certain information and note disclosure normally included in consolidated financial statements prepared in accordance with U.S. GAAP has been condensed or omitted from these statements pursuant to such accounting principles and, accordingly, they do not include all the information and notes necessary for comprehensive consolidated financial statements. These unaudited consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to the consolidated financial statements for the years ended December 31, 2023 and 2022 of the Company which is included on our Registration Statement on Form S-1 on July 19, 2024.

 

Liquidity

 

As reflected in the accompanying unaudited consolidated financial statements, the Company generated a net loss of $2,358,783 and used cash in operations of $1,159,475 during the six months ended June 30, 2024. Additionally, the Company has an accumulated deficit of $9,181,073 on June 30, 2024. As of June 30, 2024, the Company had a working capital deficit of $1,502,950. However, on August 29, 2024, in connection with the IPO, the Company 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 (See Note 16).

 

The IPO net proceeds serve to mitigate the conditions that historically raised substantial doubt about the Company’s ability to continue as a going concern. The Company believes that the Company has sufficient cash to meet its obligations for a minimum of twelve months from the date of this filing.

 

Use of estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates during the three months ended June 30, 2024 and 2023, include estimates for allowance for credit losses on accounts receivable and other receivables, estimates for obsolete or slow-moving inventory, the useful life of property and equipment, the valuation of assets acquired in an asset acquisition, the valuation of intangible assets and goodwill to determine any impairment, the estimate of the fair value of lease liabilities and related right of use assets, assumptions used in assessing impairment of long-lived assets, estimates related to the allocation of the transaction price for revenue recognition purposes, estimates of current and deferred income taxes and deferred tax valuation allowances, and the fair value of non-cash equity transactions.

 

8

 

SAFE PRO GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2024 AND 2023

 

Fair value of financial instruments and fair value measurements

 

The Company measures and discloses the fair value of assets and liabilities to be carried at fair value in accordance with ASC 820 – Fair Value Measurements. Under this standard, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Disclosures about the fair value of financial instruments are based on pertinent information available to the Company on the reporting dates. Accordingly, the estimates presented in these unaudited consolidated financial statements are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments. FASB ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:

 

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

 

Level 2—Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

 

Level 3—Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

 

The carrying amounts reported in the unaudited consolidated balance sheets for cash, accounts and other receivables, inventory, prepaid expenses and other current assets, notes and convertible notes payable, accounts payable, accrued expenses, contract liabilities, accrued compensation and benefits and due to related parties approximate their fair market value based on the short-term maturity of these instruments.

 

ASC 825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.

 

Risks and uncertainties

 

The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. As of June 30, 2024 and December 31, 2023, the Company had cash in bank in excess of FDIC insured levels of approximately $0 and $338,739, respectively. To reduce the risk associated with the failure of such financial institutions, the Company evaluates at least annually the rating of the financial institutions in which it holds deposits. Any material loss that the Company may experience in the future could have an adverse effect on its ability to pay its operational expenses or make other payments and may require the Company to move its cash to other high quality financial institutions. In August 2024, the Company entered into a deposit placement agreement for Insured Cash Sweep Service (“ICS”). This service is a secure, and convenient way to access FDIC protection on large deposits, earn a return, and enjoy flexibility. This will reduce the Company’s risk as it relates to uninsured FDIC amounts in excess of $250,000.

 

The Company’s results of operations could be adversely affected by general conditions in the global economy and in the global financial markets, including conditions that are outside of its control, including the impact of health and safety concerns, such as the war in Ukraine and the Middle East. The most recent global financial crisis caused extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn could result in a variety of risks to our business, including weakened demand for the Company’s products and services and its ability to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy could strain the Company’s domestic and international customers, possibly resulting in delays in customer payments. Any of the foregoing could harm the Company’s business and it cannot anticipate all the ways in which the current economic climate and financial market conditions could adversely impact the Company’s business.

 

9

 

SAFE PRO GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2024 AND 2023

 

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 unaudited consolidated statements of operations, if any.

 

Cash and cash equivalents

 

For purposes of the statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less at the purchase date and money market accounts to be cash equivalents. The Company has no cash equivalents as of June 30, 2024 and December 31, 2023, respectively.

 

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 credit losses related to accounts receivable and other receivables is recognized in selling, general and administrative expenses.

 

Inventory

 

Inventory, consisting of finished goods, work in process and raw materials, are stated at the lower of cost and net realizable value utilizing the first-in, first-out (FIFO) method. A reserve is established when management determines that certain inventories may not be saleable. If inventory costs exceed the expected net realizable value due to obsolescence or quantities in excess of expected demand, the Company will record reserves for the difference between the cost and the net realizable value. These reserves are recorded based on estimates and are included in cost of sales.

 

Property and equipment

 

Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives, which range from five to ten years. Leasehold improvements are depreciated over the shorter of the useful life or lease term including scheduled renewal terms. Maintenance and repairs are charged to expense as incurred. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of these assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.

 

10

 

SAFE PRO GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2024 AND 2023

 

The estimated useful lives of property and equipment are generally as follows:

 SCHEDULE OF ESTIMATED USEFUL LIVES OF PROPERTY AND EQUIPMENT

		Years
Manufacturing equipment			7 - 10
Drones and related equipment			5
Furniture, fixtures and office equipment			5

 

Capitalized internal-use software

 

Costs incurred to develop internal-use software are expensed as incurred during the preliminary project stage. Internal-use software development costs are capitalized during the application development stage, which is after: (i) the preliminary project stage is completed; and (ii) management authorizes and commits to funding the project and it is probable the project will be completed and used to perform the function intended. Capitalization ceases at the point the software project is substantially complete and ready for its intended use, and after all substantial testing is completed. Upgrades and enhancements are capitalized if it is probable that those expenditures will result in additional functionality. Amortization is provided for on a straight-line basis over the expected useful life of the internal-use software development costs and related upgrades and enhancements, which currently is three years. When existing software is replaced with new software, the unamortized costs of the old software are expensed when the new software is ready for its intended use. During the six months ended June 30, 2024 and 2023, the Company capitalized $172,596 and $0 of internal-use software development direct costs, respectively.

 

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.

 

See Note 7 for additional information regarding intangible assets and goodwill.

 

11

 

SAFE PRO GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2024 AND 2023

 

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.

 

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.

 

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 (see Note 12), 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 (See Note 11 – Commitments regarding this revenue stream).

 

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. For the six months ended June 30, 2024 and 2023, there was $0 and $30,788 in commission expense, which is included in selling, general and administration expense on the accompanying unaudited consolidated statement of operations. As of June 30, 2024 and December 31, 2023, accrued commissions amounted to $52,988 and $70,555, respectively, which is included in accrued expenses on the accompanying unaudited consolidated balance sheets.

 

12

 

SAFE PRO GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2024 AND 2023

 

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.

 

Safe Pro AI

 

Safe Pro AI will sell subscriptions to its customers for the use of its software under a software as a service subscription model (“SaaS”), which will allow for the rapid, automated processing of aerial and ground-based imagery uploaded by customers, making it an ideal solution for a number of applications including demining, in law enforcement and security. The Company’s SaaS offerings shall be sold under a prepaid or postpaid, usage-based pricing system pursuant to a tiers model, allowing customers to choose the subscription level to be charged based upon their intended usage. The subscription tiers will utilize declining prices as the volume grows. Under this model, customers are charged an upfront fee based upon the number of gigapixels of aerial images uploaded into the system for processing. For customer convenience, Safe Pro AI will initially charge data processing fees on a per hectare basis (1 hectare = 1,000 square meters). Under prepaid pay-as-you-go plans, revenues related to contracts that do not include a specified contract period are recognized upon usage by the customer and satisfaction of the Company’s performance obligation. These usage-based revenues are constrained to the amount the Company expects to be entitled to and receive in exchange for providing access to its platform. If professional services are deemed to be distinct, revenue is recognized as services are performed. The Company does not view the signing of the contract or the provision of initial setup services as discrete earnings events that are distinct.

 

Contract liabilities

 

Advance payments received from customers, as well as unpaid amounts that customers are contractually obligated to pay, are deferred until all revenue recognition criteria are satisfied. As of June 30, 2024 and December 31, 2023, customer advances payments amounted to $77,413 and $84,670, respectively, which are included in contract liabilities on the accompanying unaudited consolidated balance sheets.

 

Product warranties

 

The Company’s subsidiary, Safe-Pro USA, provides product warranties on its equipment or components of equipment sold from one to five years. For Safe-Pro USA’s significant customer, Safe-Pro USA provides product warranties of twelve months from the date of receipt of the inspection note, which should occur after the completion of performance obligation 2 discussed above under the revenue recognition policy footnote. 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.

 

Cost of sales

 

The cost of sales includes the cost of labor and fringe benefits, sub-contractor costs, production costs, supplies and materials, freight, production, services and related depreciation, and other direct and indirect costs.

 

13

 

SAFE PRO GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2024 AND 2023

Advertising costs

 

All costs related to advertising of the Company’s services and products are expensed in the period incurred. For the three and six months ended June 30, 2024 and 2023, advertising costs charged to operations for the three and six months ended June 30, 2024 were $16,953 and $30,598, respectively, and for the three and six months ended June 30, 2023 were $2,795 and $4,267, respectively are included in general and administrative expenses on the accompanying unaudited consolidated statements of operations.

 

Federal and state income taxes

 

The Company accounts for income tax using the liability method prescribed by ASC 740, “Income Taxes”. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.

 

The Company follows the accounting guidance for uncertainty in income taxes using the provisions of ASC 740 “Income Taxes”. Using that guidance, tax positions initially need to be recognized in the consolidated financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. As of June 30, 2024 and December 31, 2023, the Company had no uncertain tax positions that qualify for either recognition or disclosure in the consolidated financial statements. Tax years that remain subject to examination are the years ending on and after December 31, 2023 and 2022. The Company recognizes interest and penalties related to uncertain income tax positions in other expenses. However, no such interest and penalties were recorded during the six months ended June 30, 2024 and 2023.

 

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.

 

Net loss per common share

 

ASC 260 “Earnings Per Share”, requires dual presentation of basic and diluted earnings (loss) per common share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilutive securities and non-vested forfeitable shares. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares or resulted in the issuance of common shares that then shared in the earnings of the entity. Basic net loss per common share is computed by dividing net loss available to shareholders by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss by the weighted average number of common shares, common share equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive common shares were excluded from the computation of diluted shares outstanding for the six months ended June 30, 2024 and 2023, as they would have an anti-dilutive impact on the Company’s net losses and consisted of the following:

 SCHEDULE OF ANTI-DILUTIVE IMPACT ON NET LOSSES

		June 30, 2024				June 30, 2023
Stock warrants			849,768				271,251
Common shares issuable upon conversion of convertible notes			234,376				-
Common shares issuable upon conversion of Preferred Series A			1,500,000				1,500,000
Common shares issuable upon conversion of Preferred Series B			1,310,000				1,310,000
Non-vested forfeitable shares			-				1,615,000
Total			3,894,144				4,696,251

 

14

 

SAFE PRO GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2024 AND 2023

 

The Company has 3,000,000 Series A Preferred and 3,275,000 Series B Preferred shares, issued and outstanding, which upon listing on a National Market Exchange and assuming an initial listing price of $5.00 per share, Preferred Series A would convert into 1,500,000 common shares and Preferred Series B would convert into 1,310,000 common shares, (See Note 10).

 

Segment reporting

 

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 three and 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.

 

Leases

 

The Company accounts for its leases using the method prescribed by ASC 842 – Lease Accounting. The Company assess whether the contract is, or contains, a lease at the inception of a contract which is based on (i) whether the contract involves the use of a distinct identified asset, (ii) whether the Company obtains the right to substantially all the economic benefit from the use of the asset throughout the period, and (iii) whether the Company has the right to direct the use of the asset. The Company allocates the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. The Company has elected not to recognize right-of-use (“ROU”) assets and lease liabilities for short-term leases that have a term of 12 months or less.

 

Operating and financing lease ROU assets represents the right to use the leased asset for the lease term. Operating and financing lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. As most leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at the adoption date in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses in the unaudited consolidated statements of operations.

 

Recent accounting pronouncements

 

In August 2020, FASB issued ASU 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40), (“ASU 2020-06”) to simplify accounting for certain financial instruments. ASU 2020-06 eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted. The adoption of ASU 2020-06 on January 1, 2024 had no impact on the Company’s consolidated financial statements

 

Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.

 

 

SAFE PRO GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2024 AND 2023

 

NOTE 3 – ACQUISITION

 

Safe Pro AI

 

On March 9, 2023 (the “Closing Date” and measurement date), the Company entered into and closed on a Share Exchange Agreement (the “Share Exchange Agreement”) with (i) Safe Pro AI and (ii) the members of Safe Pro AI. Pursuant to the Share Exchange Agreement, the Company acquired 100% of the member interests of Safe Pro AI in exchange for 281,250 shares of the Company’s common stock, which 70,312 shares vested on September 9, 2023 and remaining shares were to vest as follows: 70,314 shares twelve-month anniversary of the Closing Date, 70,312 on the eighteen-month anniversary of the Closing Date, and 70,312 shares on the twenty-four-month anniversary of the Closing Date. On December 31 2023, the Company’s board of directors approved the vesting of the remaining 210,938 shares. Safe Pro AI owns certain software technologies that enables the rapid, automated processing of aerial and ground-based imagery making it an ideal solution for a number of applications including demining and in law enforcement and security. These shares were valued at $545,625, or $1.94 per share, on the measurement date based on recent sales of units of common stock and warrants. Other than owning certain technologies, Safe Pro AI had no operations or no employees and was not considered a business. Pursuant to ASU 2017-01 and ASC 805, the Company analyzed the Exchange Agreement and the business of Safe Pro AI to determine if the Company acquired a business or acquired assets. Based on this analysis, it was determined that the Company acquired an asset. No goodwill was recorded since the Exchange Agreement was accounted for as an asset purchase. In accordance with ASC 805, the fair value of the assets acquired is based on either the fair value of the consideration given or the fair value of the assets acquired, whichever is more clearly evident, and thus, more reliably measurable. The Company used the fair value of the 281,250 common shares issued of $545,625 as the fair value of the assets acquired since this value was more clearly evident, and thus, more reliable measurable than the fair value of the software acquired. This acquisition was treated as an asset acquisition under ASC 805 “Business Combinations” since Safe Pro AI did not meet the definition of a business under ASC 805. ACS 805 requires the use of the relative fair value method for asset acquisitions to allocate the purchase price, however, since only a single software asset was acquired, the entire purchase price was allocated to this asset.

 

NOTE 4 – ACCOUNTS RECEIVABLE AND OTHER RECEIVABLES

 

Accounts receivable

 

On June 30, 2024 and December 31, 2023, accounts receivable consisted of the following:

 SCHEDULE OF ACCOUNTS RECEIVABLE

		June 30, 2024				December 31, 2023
Accounts receivable		$	41,375			$	163,329
Less: allowance for doubtful accounts			-				-
Accounts receivable, net		$	41,375			$	163,329

 

For the three and six months ended June 30, 2024 and 2023, the Company recorded $0 and $0 bad debt expense related to accounts receivable, respectively.

 

Performance bond receivable

 

On June 30, 2024 and December 31, 2023, other receivables consisted solely of performance bond receivables as follows:

 SCHEDULE OF OTHER RECEIVABLES

		June 30, 2024				December 31, 2023
Other receivables		$	142,526			$	142,526
Less: allowance for doubtful other receivables			(142,526	)			(142,526	)
Other receivables, net		$	-			$	-

 

16

 

SAFE PRO GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2024 AND 2023

 

In relation to Safe-Pro USA’s historically significant customer, Safe-Pro USA was required to obtain a Performance Guarantee (PG) at a bank designated by the customer. The amount of each separate Performance Guarantee is 10% of the CFR (Cost and Freight) value of the contract in US Dollars. The Performance Guarantee was required to be submitted prior to the Contract being executed. In case of the supplier’s failure to fulfill the contractual obligations as per the terms of the contract, the Performance Guarantee may be forfeited. Upon certain conditions being met, the Company would be entitled to reimbursement from the Performance Guarantee being held. The Company has yet to receive any receipts from their performance bonds being held at the designated bank. As of June 30, 2024 and December 31, 2023, the total amount of the performance bond receivables outstanding is $142,526 and $142,526, respectively, which expire on various dates through December 2024. Prior to June 7, 2022, the Company has elected to write down the performance bond receivable since collectability is not probable and accordingly, the performance bond receivable is fully reserved.

 

NOTE 5 – INVENTORY

 

On June 30, 2024 and December 31, 2023, inventories consisted of the following:

 SCHEDULE OF INVENTORIES

		June 30, 2024				December 31, 2023
Raw materials		$	269,398			$	253,737
Work in process			88,054				93,532
Finished goods			7,120				11,890
Less reserve for obsolete inventory			-				-
Total		$	364,572			$	359,159

 

NOTE 6 – PROPERTY AND EQUIPMENT

 

On June 30, 2024 and December 31, 2023, property and equipment consisted of the following:

 SCHEDULE OF PROPERTY AND EQUIPMENT

		June 30, 2024				December 31, 2023
Manufacturing equipment		$	340,009			$	340,009
Drones and related equipment			112,535				61,622
Furniture, fixtures and office equipment			7,329				7,329
Property and equipment, gross			459,873				408,960
Less accumulated depreciation			(120,704	)			(88,032	)
Total		$	339,169			$	320,928

 

For the three and six months ended June 30, 2024 depreciation expense amounted to $17,228 and $32,671, respectively. For the three and six months ended June 30, 2023 depreciation expense amounted to $14,046 and $28,092, respectively.

 

NOTE 7 – INTANGIBLE ASSETS AND GOODWILL

 

As a result of the acquisition of Safe Pro AI on March 9, 2023, there was a $545,625 increase in the gross intangible assets made up of $545,625 of finite lived intangible assets, consisting of a single software asset, which has not yet been placed in service as of June 30, 2024. For the three months ended June 30, 2024 the Company capitalized $172,596 as direct costs related to its launch on July 1, 2024, for its Spotlight AI product. For the six months ended June 30, 2024, the Company has $718,221 of finite lived intangible assets, which it will start amortizing when it is put into service on July 1, 2024, with a useful life of three years.

 

As of June 30, 2024, and December 31, 2023, intangible assets subject to amortization consisted of the following:

 SCHEDULE OF INTANGIBLE ASSETS SUBJECT TO AMORTIZATION

		June 30, 2024
		Amortization period (years)				Gross Amount				Accumulated Amortization				Net finite intangible assets
Customer relationships			5			$	388,000			$	(144,933	)		$	243,067
Contractual employment agreements			3				310,000				(201,783	)			108,217
Acquired capitalized internal-use software development costs			3				718,221				-				718,221
						$	1,416,221			$	(346,716	)		$	1,069,505

 

17

 

SAFE PRO GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2024 AND 2023

 

		December 31, 2023
		Amortization period (years)				Gross Amount				Accumulated Amortization				Net finite intangible assets
Customer relationships			5			$	388,000			$	(106,145	)		$	281,855
Contractual employment agreements			3				310,000				(150,188	)			159,812
Acquired capitalized internal-use software development costs			3				545,625				-				545,625
						$	1,243,625			$	(256,333	)		$	987,292

 

For the three and six months ended June 30, 2024 amortization of intangible assets amounted to $45,150 and $90,383, respectively. For the three and six months ended June 30, 2023 amortization of intangible assets amounted to $45,233 and $90,466, respectively.

 

On June 30, 2024 and December 31, 2023, goodwill consisted of the following:

 SCHEDULE OF GOODWILL

		June 30, 2024				December 31, 2023
Safe-Pro USA		$	518,255			$	518,255
Airborne Response			166,612				166,612
Total goodwill		$	684,867			$	684,867

 

Amortization of intangible assets with finite lives attributable to future periods is as follows:

 SCHEDULE OF AMORTIZATION OF INTANGIBLE ASSETS

Year ending June 30:		Amount
2025		$	420,340
2026			321,890
2027			317,007
2028			10,268
Total		$	1,069,505

 

NOTE 8 – NOTE PAYABLE

 

On June 30, 2020, Safe-Pro USA entered into a Loan and Authorization Agreement (the “SBA COVID-19 EIDL Loan”) with respect to a loan of $146,000 from the U.S. Small Business Administration (the “SBA”). Initially, the SBA COVID 19 EIDL Loan was due in monthly installment payments, including principal and interest, of $712, beginning 12 months from the date of the promissory Note. Subsequently, through several loan payment deferrals, the SBA deferred the first payment due from 12 months from the date of the promissory note to 30 months from the date of the Note. The balance of principal and interest will be payable 30 years from the date of the promissory Note, or July 1, 2050. Interest shall accrue at the rate of 3.75% per annum and will accrue only on funds actually advanced from the date(s) of each advance. Each payment will be applied first to interest accrued to the date of receipt of each payment, and the balance, if any, will be applied to principal balance. Safe-Pro USA began paying interest only payments of $712 in January 2023. The SBA Loan is secured by a continuing security interest in and to any and all “Collateral” as described in the SBA COVID-19 EIDL Loan, including all Safe Pro USA’s tangible and intangible personal property, including, but not limited to inventory, equipment, accounts receivable, and deposit accounts. As of June 30, 2024 and December 31, 2023, accrued interest related to this note amounted to $6,742 and $7,598, respectively, and is included in accrued expenses on the accompanying unaudited consolidated balance sheets.

 

18

 

SAFE PRO GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2024 AND 2023

 

On June 17, 2024, the Company entered into a promissory note with an investor for $110,000 (the “June 2024 Note). The June 2024 Note bears interest at 8% per annum and is due on the earlier of August 31, 2024 or 5 business days after the Company’s IPO. The June 2024 Note was repaid on August 28, 2024 (See Note 16).

 

On June 30, 2024 and December 31, 2023, note payable consisted of the following:

 SCHEDULE OF NOTES PAYABLE

		June 30, 2024				December 31, 2023
Notes payable		$	256,000			$	146,000
Total notes payable			256,000				146,000
Less: current portion of notes payable			(110,000	)			-
Notes payable – long-term		$	146,000			$	146,000

 

The following schedule provides minimum future note payable principal payments required during future periods:

 SCHEDULE OF MINIMUM FUTURE NOTE PAYABLE PRINCIPAL PAYMENTS

Year ending June 30:		Amount
2025		$	110,000
2026			-
2027			4,129
2028			3,280
2029			3,405
2030			3,535
Thereafter			131,651
Total note payable		$	256,000

 

NOTE 9 – CONVERTIBLE NOTES PAYABLE

 

On December 27, 2023, the Company entered into convertible debt agreements with an investor pursuant to which the Company issued and sold to the Investor (i) a convertible note in the principal amount of $475,000 (the “December 2023 Convertible Note”) and (ii) three-year warrants to purchase up to 148,438 shares of the Company’s common stock at an initial exercise price of $1.00, subject to adjustment (the December 2023 Warrants”). The Company received net proceeds of $475,000. The December 2023 Convertible Note matures 12 months after issuance and bears interest at a rate of 15% per annum. Upon default, the interest rate shall be 18%. At any time on or before the Maturity Date of December 27, 2024, the investor may convert any outstanding and unpaid principal portion and accrued and unpaid interest of the December 2023 Convertible Note into shares of the Company’s common stock at the conversion price of $3.20 per share (“Conversion Price”), subject to adjustment, as provided in agreement, including price protection. If at any time the December 2023 Convertible Note is outstanding the Company shall offer, issue or agree to issue any common stock or securities convertible into or exercisable for shares of common stock to any person or entity at a price per share or conversion or exercise price per share which shall be less than the then applicable Conversion Price, without the consent of the Investor, except with respect to Excepted Issuances, as defined, then the Company shall issue, for each such occasion, additional shares of Common Stock to each Investor so that the average per share purchase price of the shares of common stock issued to the investor (for only conversion shares still owned by the investor) is equal to such other lower price per share and the Conversion Price shall automatically be reduced to such other lower price per share. Should the price of the Company’s common stock upon the Company’s IPO be less than $5.00 per share, then for any amounts the Investor converted prior to IPO Date, the Company shall issue to the Investor that number of Shares so that the value of the Conversion Shares on the IPO Date shall have a value equal to $5.00 per share. For any amounts the Investor has not converted prior to IPO Date, the Conversion Price shall be reduced proportionally to the IPO price. As an example, if the IPO price is equal to $4.00 per share then the Conversion Price shall be reduced by 20% from $3.20 per share to $2.56 per share ($4.00 representing a 20% discount to the $5.00 minimum IPO price).

 

The 148,438 December 2023 Warrants were valued at $184,063, or $1.24, and using the relative fair value method, the Company recorded as a debt discount of $132,658 to be amortized over the life of the December 2023 Convertible Note. The December 2023 Warrants were valued on the grant date using a Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 2.91%, expected dividend yield of 0%, expected option term of three years, and expected volatility of 70.0% based on the calculated volatility of comparable companies.

 

During March 2024, the Company entered into convertible debt agreements with investors pursuant to which the Company issued and sold to the Investors (i) convertible notes in the principal amount of $275,001 (the March 2024 Convertible Notes”) and (ii) three-year warrants to purchase up to 85,938 shares of the Company’s common stock at an initial exercise price of $1.00, subject to adjustment (the “March 2024 Warrants”). The Company received net proceeds of $275,001. The March 2024 Convertible Notes mature 12 months after issuance and bear interest at a rate of 15% per annum. Upon default, the interest rate shall be 18%. At any time on or before the Maturity Date of March 2025, the investors may convert any outstanding and unpaid principal portion and accrued and unpaid Interest of the March 2024 Convertible Notes into shares of the Company’s common stock at the conversion price of $3.20 per share, subject to adjustment, as provided in agreement, including price protection. If at any time the March 2024 Convertible Notes are outstanding the Company shall offer, issue or agree to issue any common stock or securities convertible into or exercisable for shares of common stock to any person or entity at a price per share or conversion or exercise price per share which shall be less than the then applicable Conversion Price, without the consent of the Investors, except with respect to Excepted Issuances, as defined, then the Company shall issue, for each such occasion, additional shares of Common Stock to each Investor so that the average per share purchase price of the shares of common stock issued to the investor (for only conversion shares still owned by the investor) is equal to such other lower price per share and the Conversion Price shall automatically be reduced to such other lower price per share. Should the price of the Company’s common stock upon the Company’s IPO be less than $5.00 per share then for any amounts the Investors converted prior to IPO Date, the Company shall issue to the Investors that number of Shares so that the value of the Conversion Shares on the IPO Date shall have a value equal to $5.00 per share. For any amounts the Investor has not converted prior to IPO Date, the Conversion Price shall be reduced proportionally to the IPO price. As an example, if the IPO price is equal to $4.00 per share then the Conversion Price shall be reduced by 20% from $3.20 per share to $2.56 per share ($4.00 representing a 20% discount to the $5.00 minimum IPO price).

 

The 85,938 March 2024 Warrants were valued at $106,563, or $1.24, and using the relative fair value method, the Company recorded as debt discount of $76,802 to be amortized over the life of the March 2024 Convertible Notes. The March 2024 Warrants were valued on the grant date using a Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 2.91%, expected dividend yield of 0%, expected option term of three years, and expected volatility of 70.0% based on the calculated volatility of comparable companies.

 

The December 2023 Convertible Note, March 2024 Convertible Notes, December 2023 Warrants, and March 2024 Warrants contain conversion limitations providing that a holder thereof may not convert the Notes or exercise the Warrants to the extent (but only to the extent) that, if after giving effect to such conversion, the holder or any of its affiliates would beneficially own in excess of 4.9% of the outstanding shares of the Company’s common stock immediately after giving effect to such conversion or exercise.

 

During the three and six months ended June 30, 2024, amortization of debt discount, which is reflected in interest expense on the accompanying consolidated statements of operations, amounted to $52,222 and $89,006, respectively. During the three and six months ended June 30, 2023, the Company did not record any amortization of debt discount.

 

Subsequent to June 30, 2024, in connection with the Company’s IPO, the December 2023 Convertible Note and March 2024 Convertible Notes with principal balances of $750,001 and accrued interest payable of $58,531 were converted into 252,666 common shares of the Company pursuant to contractual conversion terms (See Note 16).

 

On June 30, 2024 and December 31, 2023, convertible notes payable consisted of the following:

 SCHEDULE OF CONVERTIBLE NOTES PAYABLE

		June 30, 2024				December 31, 2023
Convertible notes payable		$	750,001			$	475,000
Less: debt discount			(119,000	)			(131,204	)
Convertible notes payable, net			631,001				343,796
Less: current portion of convertible notes payable			(631,001	)			(343,796	)
Convertible notes payable – long-term		$	-			$	-

 

NOTE 10 – STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

Series A Preferred Stock

 

On June 7, 2022, the Company’s board of directors approved an Amendment to its Articles of Incorporation to designate a series of preferred stock, the Series A Convertible Preferred Stock (the “Series A Preferred”). The Series A Preferred Certificate of Designation became effective on January 20, 2023, with the Secretary of State of the State of Delaware. The Certificate of Designations established 3,000,000 shares of the Series A Preferred, par value $0.0001, having such designations, preferences, and rights as determined by the Company’s Board of Directors in its sole discretion, in accordance with the Company’s Articles of Incorporation and Amended and Restated Bylaws.

 

19

 

SAFE PRO GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2024 AND 2023

 

Each share of Series A Preferred had an initial stated value of $10.00 per share. On August 28, 2023, the Company amended its Series A Preferred Certificate of Designation to amend the Series A Stated Value to $2.50 per share (the “Series A Stated Value”).

 

The holders of the Series A Preferred Stock shall have conversion rights as follows. Each share of Series A Preferred is convertible into the number of common shares equal to the Series A Stated Value divided by the Fair Market Value of the common stock. The Series A Stated Value is $2.50 per share and the Fair Market Value is equal to the average of the closing price for the Company’s common stock on a National Market Exchange, for the 20 trading days prior to conversion or in the case of an initial public offering the initial listing price. Series A Preferred has voting rights equal to the number of common shares into which it may convert. The conversion rights of Preferred Series A are contingent upon the Company’s completion of the initial public offering and/or listing on a National Market Exchange.

 

The holders of the Series A Preferred shall be entitled to any dividend that is payable to the holders of the Company’s common stock. The holders of the Series A Preferred then outstanding shall first receive, or simultaneously receive, a dividend on each outstanding share of Series A Preferred in an amount at least equal to (i) in the case of a dividend on common stock or any class or series that is convertible into common stock, that dividend per Share of Series A Preferred as would equal the product of (A) the dividend payable on each share of such class or series determined, if applicable, as if all shares of such class or series had been converted into common stock and (B) the number of shares of common stock issuable upon conversion of a share of Series A Preferred, in each case calculated on the record date for determination of holders entitled to receive such dividend.

 

In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, each share of Series A Preferred shall automatically be converted into shares of the Company’s common stock at the then applicable conversion rate determined in accordance with the Series A Preferred Certificate of Designation. In the case of a Deemed Liquidation Event, as defined in the Certificate of Designation, each share of Series A Preferred shall automatically be converted into shares of common stock at the then applicable conversion rate, except that the Series A Conversion Price was equal to the per share Series A Stated Value, as amended.

 

The Series A Preferred also contains certain protection provisions, as defined.

 

In any matter presented to the shareholders of the Company for their action or consideration at any meeting of shareholders of the Company (or by written consent of shareholders in lieu of meeting), each holder of outstanding shares of Series A Preferred shall be entitled to cast the number of votes equal to the number of whole shares of common stock into which the shares of Series A Preferred held by such holder are convertible as of the record date for determining shareholders entitled to vote on such matter. Except as provided by law or by the other provisions of the Articles of Incorporation, holders of Series A Preferred shall vote together with the holders of common stock as a single class.

 

The Series A Preferred were evaluated to determine whether temporary or permanent equity classification on the consolidated balance sheet was appropriate. As per the terms of the Series A Preferred Certificate of Designation, Series A Preferred is not redeemable for cash. As such, the Series A Preferred is classified as permanent equity. The Company concluded that the conversion rights under the Series A Preferred were clearly and closely related to the equity host instrument. Accordingly, the conversion rights feature on the Series A Preferred were not considered an embedded derivative that required bifurcation.

 

On June 7, 2022, in connection with the acquisition of 100% of the Safe-Pro USA, the Company issued 3,000,000 share of Series A preferred stock.

 

20

 

SAFE PRO GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2024 AND 2023

 

Series B Preferred Stock

 

On August 29, 2022, the Company’s board of directors approved an Amendment to its Articles of Incorporation to designate a series of preferred stock, the Series B Convertible Preferred Stock (the “Series B Preferred”). The Series B Preferred Certificate of Designation became effective on January 30, 2023 with the Secretary of State of the State of Delaware. The Series B Preferred Certificate of Designations established 3,275,000 shares of the Series B Preferred, par value $0.0001, having such designations, preferences, and rights as determined by the Company’s Board of Directors in its sole discretion, in accordance with the Company’s Articles of Incorporation and Amended and Restated Bylaws.

 

Each share of Series B Preferred shall have a stated value of $2.00 per share (the “Series B Stated Value”).

 

The holders of the Series B Preferred Stock shall have conversion rights as follows. Each share is convertible into that number of common shares equal to the Series B Stated Value divided by the Fair Market Value of the common stock. The Series B Stated Value is $2.00 per share and the Fair Market Value is equal to the average of the closing price for the Company’s common stock a National Market Exchange, for the 20 trading days prior to conversion or in the case of an initial public offering the initial listing price. The Series B Preferred has voting rights equal to the number of common shares into which it may convert. The conversion rights of Preferred Series B are contingent upon the Company’s completion of the initial public offering and/or listing on a National Market Exchange.

 

The holders of the Series B Preferred shall be entitled to any dividend that is payable to the holders of the Company’s common stock. The holders of the Series B Preferred then outstanding shall first receive, or simultaneously receive, a dividend on each outstanding share of Series B Preferred in an amount at least equal to (i) in the case of a dividend on common stock or any class or series that is convertible into common stock, that dividend per Share of Series B Preferred as would equal the product of (A) the dividend payable on each share of such class or series determined, if applicable, as if all shares of such class or series had been converted into common stock and (B) the number of shares of common stock issuable upon conversion of a share of Series A Preferred, in each case calculated on the record date for determination of holders entitled to receive such dividend.

 

In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, each share of Series B Preferred shall automatically be converted into shares of the Company’s common stock at the then applicable conversion rate determined in accordance with the Series B Preferred Certificate of Designation. In the case of a Deemed Liquidation Event, as defined in the Certificate of Designation, each share of Series B Preferred shall automatically be converted into shares of common stock at the Series B Conversion Price equal to $2.00 per share.

 

In any matter presented to the shareholders of the Company for their action or consideration at any meeting of shareholders of the Company (or by written consent of shareholders in lieu of meeting), each holder of outstanding shares of Series B Preferred shall be entitled to cast the number of votes equal to the number of whole shares of common stock into which the shares of Series B Preferred held by such holder are convertible as of the record date for determining shareholders entitled to vote on such matter. Except as provided by law or by the other provisions of the Articles of Incorporation, holders of Series B Preferred shall vote together with the holders of common stock as a single class.

 

The Series B Preferred also contains certain protection provisions, as defined.

 

The Series B Preferred were evaluated to determine whether temporary or permanent equity classification on the consolidated balance sheet was appropriate. As per the terms of the Series B Preferred Certificate of Designation, Series B Preferred is not redeemable for cash. As such, the Series B Preferred is classified as permanent equity. The Company concluded that the conversion rights under the Series B Preferred were clearly and closely related to the equity host instrument. Accordingly, the conversion rights feature on the Series B Preferred were not considered an embedded derivative that required bifurcation.

 

On August 29, 2022, in connection with the acquisition of 100% of Airborne Response, the Company issued 3,275,000 share of Series B preferred stock.

 

21

 

SAFE PRO GROUP INC. AND SUBSIDIARIES

NOTES TO SAFE PRO GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2024 AND 2023

 

Common Stock

 

In connection with 314,141 and 148,438 Units issued for cash at $3.20 per unit in 2023 and 2022, respectively, at any time during the 12 months following the acceptance of the investor’s subscription by the Company (the “Protection Period”), which expires through November 2024, should the Company sell shares of its common stock or securities convertible into shares of its common stock for less than the Per Share Purchase Price (the “New Purchase Price”), except for issuances pursuant to a stock award program for bona fide services provided to Company, the Company shall issue that number of additional shares of its common stock to the Subscriber such that the number of shares of common stock issued to the Subscriber (the Subscribed Shares plus the additional shares divided by the Subscription Proceeds is equal to the New Purchase Price. Additionally, should the Company have an IPO or become public through a reverse merger or similar transaction where the Company and its shareholders represent the controlling interest in the public company during the Protection Period, the Company covenants that if the price per share at the IPO (the “IPO Price”) is less than $5.00 per share (after giving effect to any split or consolidation) then the Company shall issue to the Subscriber that number of Shares so that the value of the Subscribers subscribed for shares shall be equal to not less than $5.00 per share.

 

Common stock issued for services

 

2024

 

On January 9, 2024, the Company issued 50,000 vested restricted common shares to a director for services rendered pursuant to a board of directors’ agreement (See Note 11). The Company valued these common shares at the fair value of $98,000, or $1.96 per share based on sales of common stock units in recent private placements.

 

On June 24, 2024, the Company issued 180,000 fully vested restricted common shares to consultants for services rendered. The Company valued these common shares at $450,000 or $2.50 per share based on sales of common stock units in recent private placements. In connection with these shares, during the three and six months ended June 30, 2024, the Company recorded stock-based professional fees of $450,000 and $548,000, respectively.

 

2023

 

For the three and six months ended June 30, 2023, the Company issued 30,000 fully vested restricted common shares, pursuant to an employment agreement with Theresa Carlise. The Company valued these common shares at the fair value of $58,200, or $1.94 per share based on sales of common stock units in recent private placements.

 

Common stock issued for asset acquisition

 

2023

 

On March 9, 2023, the Company entered into and closed on a Share Exchange Agreement (the “Share Exchange Agreement”) with (i) Safe Pro AI and (ii) the members of Safe Pro AI. Pursuant to the Share Exchange Agreement, the Company acquired 100% of the member interests of Safe Pro AI in exchange for 281,250 shares of the Company’s common stock, These shares were valued at $545,625, or $1.94 per share, on the measurement date based on recent sales of units of common stock and warrants, and the acquired asset was recorded as an intangible asset on the accompanying unaudited consolidated balance sheets (See Note 3).

 

Common stock and warrants issued for cash

 

2024

 

During the three months ended June 30, 2024, the Company completed a private placement of (i) 51,249 Units for aggregate proceeds of $163,998, or $3.20 per Unit. Each Unit consisted of one share of common stock and one common stock purchase warrant of the Company. Each warrant entitles the holder thereof to acquire one share of common stock of the Company for a price of $1.00 for a period of 3 years from the date of issuance and (ii) 101,564 Units for aggregate proceeds of $325,004, or $3.20 per Unit. Each Unit consisted of one share of common stock and one common stock purchase warrant of the Company. Each warrant entitles the holder thereof to acquire one share of common stock of the Company for a price of $3.20, for a period of 3 years from the date of issuance.

 

22

 

SAFE PRO GROUP INC. AND SUBSIDIARIES

NOTES TO SAFE PRO GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2024 AND 2023

 

2023

 

For the six months ended June 30, 2023, the Company completed a private placement of 122,813 Units for aggregate proceeds of $393,000, or $3.20 per Unit. Each Unit consisted of one share of common stock and one common stock purchase warrant of the Company. Each warrant entitles the holder thereof to acquire one share of common stock of the Company for a price of $3.20 for a period of 3 years from the date of issuance.

 

Warrants issued for convertible debt

 

During March 2024, the Company entered into convertible note agreements with investors pursuant to which the Company issued and sold to the Investors (i) the March 2024 Convertible Notes in the principal amount of $275,001 and (ii) the March 2024 Warrants to purchase up to 85,938 shares of the Company’s common stock at an initial exercise price of $1.00, subject to adjustment.

 

As discussed above, in connection with a private placement, during the three months ended June 30, 2024, the Company issued an aggregate of 152,813 common stock purchase warrants of the Company consisting of (i) 51,249 warrants which entitle the holder thereof to acquire one share of common stock of the Company for a price of $1.00 for a period of 3 years from the date of issuance and (ii) 101,564 warrants of the Company which entitle the holder thereof to acquire one share of common stock of the Company for a price of $3.20, for a period of 3 years from the date of issuance.

 

A summary of the status of the Company’s total outstanding warrants and changes during the six months ended June 30, 2024 are as follows:

 SCHEDULE OF OUTSTANDING WARRANTS AND CHANGES

		Number of Warrants				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (Years)				Aggregate Intrinsic Value (1)
Balance Outstanding on December 31, 2023			611,017			$	1.00				2.5			$	574,356
Issued			238,751				1.94				2.8				-
Balance Outstanding on June 30, 2024			849,768			$	1.26				2.2			$	1,051,211
Exercisable, June 30, 2024			849,768			$	1.26				2.2			$	1,051,211

 

(1)

The aggregate intrinsic value on June 30, 2024 was calculated based on the difference between the calculated fair value on June 24, 2024 of $2.50 and the exercise price of the underlying warrants. The aggregate intrinsic value on December 31, 2023 was calculated based on the difference between the calculated fair value on December 31, 2023 of $1.94 and the exercise price of the underlying warrants.

 

The Company determined that the warrants do not meet the definition of liability under FASB ASC Topic 480 and therefore classified the warrants as equity instruments.

 

2022 Equity Incentive Plan

 

On July 1, 2022, the Company’s Board of Directors authorized and adopted the 2022 Equity Incentive Plan (the “2022 Plan”) and reserved 5,000,000 shares of common stock for issuance thereunder. The 2022 Plan’s purpose is to encourage ownership in the Company by employees, officers, directors and consultants whose long-term service the Company considers essential to its continued progress and, thereby, encourage recipients to act in the stockholders’ interest and share in the Company’s success. The 2022 Plan provides for the issuance of incentive stock options, non-statutory stock options, restricted stock, restricted stock units (“RSUs”), and other stock-based awards. During the year ended December 31, 2023 and 2022, 595,000 and 830,000 of the Company’s common shares issued for services, as described above, were issued pursuant to the 2022 Plan, respectively. During the six months ended June 30, 2024, 230,000 of the Company’s common shares issued for services, as described above, were issued pursuant to the 2022 Plan. As of June 30, 2024 and December 31, 2023, the Company had 3,345,000 and 3,575,000 shares available for issuance under the 2022 Plan.

 

23

 

SAFE PRO GROUP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2024 AND 2023

 

NOTE 11 – COMMITMENTS AND CONTINGENCIES

 

Legal matters

 

From time to time, the Company may be involved in litigation related to claims arising out of its operations in the normal course of business. As of June 30, 2024, the Company is not involved in any pending or threatened legal proceedings that it believes could reasonably be expected to have a material adverse effect on its financial condition, results of operations, or cash flows.

 

Employment agreements

 

Daniyel Erdberg – Chief Executive Officer – Airborne Response Corp.

 

On March 21, 2022, the Company’s wholly owned subsidiary, Airborne Response Corp. (“Airborne”), entered into a three-year Employment Agreement, (“Agreement”) with Daniyel Erdberg, that extends for successive one-year renewal terms unless either party gives 30-days’ advance notice of non-renewal. Under the Agreement Mr. Erdberg will serve as Airborne’s Chief Executive Officer and will receive an annual base salary of $225,000 and participation in retirement and welfare benefits. At the discretion of the Board of Directors, a portion of the Base Salary may be accrued and at the election of the Employee be paid in common stock of the Company. The Agreement provides for a performance bonus based upon certain customer contracts of 15% in 2022; 10% in 2023; and 5% in 2024 of the Contribution Margin provided by such contracts during the term of the Agreement. “Contribution Margin” shall mean net revenue from sales (gross revenue net of refunds or charge backs), less expenses related to the provision of services or equipment under the contract. During the years ended December 31, 2023 and 2022, Airborne recorded performance bonuses to Mr. Erdberg of $