GUER · Read the filing

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties as described under the heading “Cautionary Note Regarding Forward-Looking Statements” elsewhere in this Annual Report. You should review the disclosure under the heading “Risk Factors” in this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

Guerrilla RF is a fabless semiconductor company based in Greensboro, N.C. Guerrilla RF was founded in 2013 with a mission to employ RF semiconductor technology to deliver RF solutions to customers in underserved markets. Over the past several years, Guerrilla RF has become a leader in developing high-performance MMIC products for wireless connectivity. It continues to target underserved markets and customers, delivering a range of high-performance MMIC products and associated technical support to a diverse set of customers that enable a more connected world. Guerrilla RF is a wholly-owned subsidiary of the Company. Guerrilla RF holds all material assets and conducts all business activities and operations of the Company. Accordingly, throughout this discussion and analysis, there are frequent references to Guerrilla RF.

Guerrilla RF possesses in-house design, applications, sales, and customer support functions as a fabless semiconductor company. We outsource the manufacture and production of our MMIC products to subcontractors located overseas, providing access to multiple semiconductor process technologies. Guerrilla RF’s primary external wafer foundries are in Taiwan and Singapore, and our primary assembly and test suppliers are located in Malaysia and the Philippines.

The current COVID-19 pandemic and resulting safety protocols have prompted a significant shift towards increased electronic information communication and transmission and we believe such information communication and transmission will remain an important part of information communication even after the end of the COVID-19 pandemic.

The COVID-19 pandemic has also required some modifications to how we conduct our business. Inclusive of our outsourced manufacturing and testing operations, local shelter in place orders have required some employees to work from home and some employees have voluntarily requested such working arrangements. We and our outsourced operational vendors will continue a feasible work from home model if, and as, required by local conditions and regulations. We instituted additional system controls to ensure compliance with our privacy practices.

Highlights from 2021

In 2021, we achieved a number of critical successes in what was a challenging time for Guerrilla RF and our industry, generally. We shipped over 30 million units in 2021, a 65% increase over 2020. Our customer base grew as more customers chose Guerrilla RF for its RF solutions. We also achieved record sales of $10.5 million in the year ended December 31, 2021. Organic product sales increased 63% finishing out the year at $9.8 million. Despite COVID-19 headwinds, the automotive category experienced 43% growth and finished 2021 with $4.3 million in sales.

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Merger Agreement

On October 22, 2021, the Company (formerly known as Laffin Acquisition Corp.), Guerrilla RF Acquisition Corp., and Guerrilla RF entered into a merger agreement (the 'Merger Agreement') pursuant to which Guerrilla RF Acquisition Corp. merged with and into Guerrilla RF, with Guerrilla RF continuing as the surviving corporation and a wholly-owned subsidiary of the Company.

As a result of the Merger, on October 22, 2021, the Company acquired the business of Guerrilla RF, a fabless semiconductor company based in Greensboro, N.C. See “Description of Business.” At the effective time, October 22, 2021, each of Guerrilla RF’s shares of capital stock issued and outstanding immediately prior to the closing of the Merger was converted into the right to receive approximately 2.95 shares of the Company's common stock. Immediately prior to the effective time, an aggregate of 2,025,000 shares of common stock owned by the original stockholders of the Company were forfeited and cancelled, leaving only 2,975,000 shares outstanding immediately prior to the Merger.

In addition, pursuant to the Merger Agreement, options to purchase 1,065,067 shares of Guerrilla RF’s common stock under the 2014 Plan were assumed by the Company and converted into options to purchase 3,146,366 shares of the Company's common stock.

Private Placement Offering

Following the Merger, we sold 5,766,550 shares of our common stock pursuant to a private placement offering at a price of $2.00 per share. Also in connection with the private placement, the placement agent and its affiliates received 275,000 shares of our common stock and warrants to purchase an aggregate of 331,580 shares at an exercise price of $2.00 per share and a term of five years.

COVID-19 Pandemic Update

In light of the uncertain and rapidly evolving situation relating to the spread of the COVID-19 pandemic and in compliance with government orders, we have taken measures intended to help minimize the risk of transmitting the virus to our employees, our customers, and the communities in which we participate, which could negatively impact our business. While we have a distributed workforce and our employees are accustomed to working remotely or working with other remote employees, our workforce is not fully remote. Under normal conditions, our employees travel frequently to establish and maintain relationships with one another and with our customers, partners and investors.

The COVID-19 pandemic negatively impacted revenue for six months for the year ended December 31, 2021, as we experienced lower revenues due a significant number of customers experiencing supply chain challenges during 2021. We implemented cost reduction actions across our functional disciplines. We believe our cost reduction actions and current liquidity provide us with operating and financial flexibility to assist us in navigating through what continues to be an uncertain environment.

Our management team has, and will likely continue, to spend time, attention, and resources monitoring the COVID-19 pandemic and seeking to manage its effects on our business and workforce. The extent to which the COVID-19 pandemic and our precautionary measures may impact our business will depend on future developments, which remain uncertain and cannot be predicted at this time.

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Key metrics

We regularly review the following key metrics to measure our performance, identify trends affecting our business, formulate financial projections, make strategic business decisions, and assess working capital needs.

Year Ended Year Ended

December 31, December 31,

Key Metrics

Number of products released 14 12

Number of total products 101 87

Number of products with lifetime revenue exceeding $100 thousand 40 24

Number of products released: The total quantity of distinct new products released into production (products that have completed design, quality, and supply chain readiness) for the period.

Number of total products: The cumulative number of production-released products since Guerrilla RF's inception through the end of the period.

Number of products with lifetime revenue exceeding $100 thousand: The number of products that have achieved the threshold of cumulative sales of $100,000 during the period, i.e., a product achieved cumulative lifetime sales exceeding $100 thousand since we released the product at any prior point in time.

Components of Results of Operations

Revenues

We derive our revenue from sales of high-performance RF semiconductor products. We design, integrate, and package differentiated, semiconductor-based products that we sell to customers through our direct sales organization, our network of independent sales representatives, and our distributors. We generate revenue from customers located within and outside the U.S. In addition to sales to customers, we generate royalty revenue under a royalty agreement with one semiconductor manufacturer.

Direct Product Costs and Gross Profit

Direct Product Costs. Our direct product costs primarily consist of salaries and related expenses, overhead, third party services vendors, and depreciation expense related to the equipment and information technology costs incurred directly in the Company’s revenue-generating activities.

Gross Profit. Our gross profit is calculated by subtracting our cost of revenues from revenues. Gross margin is expressed as a percentage of total revenues. Our gross profit may fluctuate from period to period as revenues fluctuate due to the mix of products we sell to customers, royalty revenue volume, operational efficiencies, and changes to our technology expenses and customer support.

We plan to focus on and grow the sales volume of new and existing products with the highest gross margin. We intend to continue investing additional resources in our engineering and design capabilities, which drives our research and development efforts and, in turn, drives additional revenue streams and enables us to improve our gross margin over time. The level and timing of investment in these areas could affect our cost of revenues in the future.

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Operating Expenses

Operating expenses consist primarily of research and development expenses, sales and marketing expenses, and employee compensation costs for operations management, finance, accounting, information technology, compliance, and human resources personnel. In addition, general and administrative expenses include non-personnel costs, such as facilities, legal, accounting, and other professional fees, and other supporting corporate expenses not allocated to other departments. We expect our general and administrative expenses will increase in absolute dollars as our business grows, but we expect general and administrative expenses to decrease as a percent of revenues in the coming years.

Research and development expenses consist of costs for the design, development, testing, and enhancement of our products and are generally expensed as incurred. These costs consist primarily of personnel costs, including salaries, benefits, bonuses, and share-based compensation for our product development personnel. Research and development expenses also include training costs, product management, third-party partner fees, and third-party consulting fees. We expect our research and development expenses to increase in absolute dollars as our business grows, but as a percent of revenues, R&D expenses are expected to decrease.

Sales and marketing expenses consist primarily of employee compensation costs related to sales and marketing, including salaries, benefits, bonuses, and share-based compensation, costs of general marketing activities and promotional activities, travel-related expenses, and allocated overhead. Sales and marketing expenses also include costs for advertising and other marketing activities. Advertising is expensed as incurred. We expect our sales and marketing expenses will increase in absolute dollars as we expand our sales and marketing efforts.

Interest Expense

Interest expense consists primarily of the interest incurred on our debt obligations, our factoring arrangement expense, the non-cash interest expense associated with the amortization of warrants issued to certain of our debtholders that have a contingent beneficial conversion feature related to certain convertible notes payable, and lease expense related to our capital leases.

PPP Loan Forgiveness

On April 30, 2020, Guerrilla RF received loan proceeds of $535,800 under the Paycheck Protection Program (“PPP”). Established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) administered by the Small Business Administration (“SBA”). PPP loans and accrued interest are forgivable after a “covered period” (24 weeks) as long as the borrower maintains its payroll levels and uses the loan proceeds for eligible purposes, including payroll, benefits, rent, and utilities. As of December 31, 2020, Guerrilla RF had $535,800 of principal outstanding on the PPP loan together with accrued interest of $3,611 as accounts payable and accrued expenses on the consolidated balance sheet. On February 17, 2021, Guerrilla RF received approval from the SBA that the $535,800 PPP loan was forgiven, including all accrued interest.

On February 19, 2021, Guerrilla RF received loan proceeds of $833,300 (the “2021 PPP Loan”) also under the same CARES Act. Guerrilla RF used the 2021 PPP Loan to retain current employees, maintain payroll, and make lease and utility payments. On August 18, 2021, Guerrilla RF received confirmation from the SBA that the 2021 PPP Loan, including accrued interest, had been forgiven.

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The following table summarizes the results of our operations for the periods presented:

Year Ended December 31,

Operating expenses:

Other income (expenses):

Comparison for the years ended December 31, 2021 and 2020:

Year Ended December 31,

Revenues increased $2.4 million to $10.5 million for the year ended December 31, 2021, as compared to $8.1 million for the year ended December 31, 2020. The increase in revenue was driven by the growth of product sales to our automotive supplier customers and our wireless infrastructure customers over a wide breadth of applications and customers. Sales to our large automotive supplier customers grew approximately 42% from the previous year. New and established catalog products also contributed over 71% in revenue growth. Our overall number of product offerings and the number of customers we ship to in volume continue to contribute to increased sales. Our increased sales were driven by market share increases and rebounding volumes in markets recovering from supply chain difficulties that have impacted sales of our products.

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We generate revenue from customers located within and outside the U.S. While we have several large customers, we define major customers as those responsible for more than 10% of Guerrilla RF’s annual product shipment revenue. Using this definition, Guerrilla RF had one major customer, Richardson RFPD, Inc. ("RFPD"), during the years ended December 31, 2021, and December 31, 2020. RFPD, a large product distributor serving numerous end customers, generated 81% of product shipment revenue for the years ended December 31, 2021 and 2020.

Royalty revenues decreased 69% for the year ended December 31, 2021, compared to December 31, 2020, as our customer with which we have a royalty agreement experienced a decline in sales of wireless infrastructure products licensed under our proprietary designs.

International shipments amounted to $5.6 million (approximately 59% of product revenue) and $3.4 million (approximately 43

% of product revenue) for the years ended December 31, 2021, and December 31, 2020, respectively.

Direct Product Costs and Gross Profit

Year Ended December 31,

Direct Product Costs increased $1.4 million to $4.3 million for the year ended December 31, 2021, compared to $2.9 million for the year ended December 31, 2020. The 49% increase in direct product cost was driven by a product sales volume increase of 64% (excluding royalty revenue), which was partially offset by greater absorption of fixed overhead costs and product mix improvements year over year. Year over year gross profit was negatively impacted by reduced royalty revenues of $1.5 million for the year ended December 31, 2021.

Research and Development Expenses

Year Ended December 31,

Research and development expenses increased $1.0 million to $4.6 million for the year ended December 31, 2021, compared to $3.6 million for the year ended December 31, 2020. The increase was attributable to $0.3 million of employee additions in our engineering department, and $0.7 million was attributable research a lab and equipment expenses.

Sales and Marketing Expenses

Year Ended December 31,

Sales and marketing expenses increased $0.6 million to $2.8 million for the year ended December 31, 2021, compared to $2.1 million for the year ended December 31, 2020. The moderate increase year over year was driven by increases in a variety of sales and marketing expenses including sales commissions, information technology support, and customer support.

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General and Administrative Expenses

Year Ended December 31,

General and Administrative expenses increased $1.5 million to $2.5 million for the year ended December 31, 2021, compared to $1.0 million for the year ended December 31, 2020. The increase was primarily related to increases in wages and benefits ($1.0 million) and $0.3 million of professional fees. The increase in wages, benefits, and professional fees was driven by headcount additions within our information technology and accounting departments, and expenses incurred as we prepared for and evolved into being a public company. The remaining increase of general and administrative expenses ($0.2 million) is related to share-based compensation.

Other Income (Expenses)

Year Ended December 31,

Interest expense increased approximately $0.1 million to $0.6 million for the year ended December 31, 2021, compared to $0.5 million for the year ended December 31, 2020. The increase was attributable to increased factoring fees.

Other income increased to $1.4 million for the year ended December 31, 2021, compared to the year ended December 31, 2020. The increase was primarily due to both PPP loans being forgiven in 2021. There was no PPP loan forgiveness in 2020.

Liquidity and Capital Resources

Our primary sources of liquidity are cash raised from our private placement offering, which are further described below. As of December 31, 2021, we had cash resources of $5.3 million. As described in Note 1 of our audited consolidated financial statements, we have incurred recurring losses, and negative cash flows from operations since inception and have an accumulated deficit at December 31, 2021, of $15.0 million. We have relied on debt and equity financing to fund operations to date. We expect losses and negative cash flows to continue, primarily due to continued research, development, and marketing efforts as well as increased administration expenses as our Company grows. We raised $11.5 million of gross proceeds through four closings of our private placement in October and November 2021. As our fiscal year 2022 progresses and we use the private placement proceeds to catalyze the implementation of our long-term strategic plan, additional debt or equity financing may be required if we do not generate sufficient revenue from new and existing products. Based upon our current financial projection models, we anticipate that the private placement proceeds will continue to help fund our ongoing operations through 2022. We anticipate that we will require additional funding in the future and we are actively evaluating alternative funding sources as part of our ongoing strategic planning. If we need additional funds in the future, there is no assurance that appropriate financing will be available on terms, which are acceptable to us, or at all. This requirement for additional funding raises substantial doubt about our ability to continue as a going concern.

The following table summarizes our sources and uses of cash for each of the periods presented:

Cash (used in) provided by:

Year Ended December 31,

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Operating Activities

Cash used in operating activities was $4.8 million and $2.0 million for the years ended December 31, 2021 and 2020, respectively. Cash used in operating activities for the year ended December 31, 2021 principally resulted from our net loss of $2.8 million, which included PPP loan forgiveness of $1.4 million for a total net loss, excluding PPP loan forgiveness, of $4.2 million. There was also $1.1 million used for prepaid expenses and an offset of $0.4 million for the increase in our accounts payable and accrued expenses.

Cash used in operating activities for the year ended December 31, 2020, principally resulted from our net loss of $2.0 million. Moderate increases in our accounts receivable and inventories were partially offset by moderate increases in accounts payable and a small decrease in our prepaid expenses.

Investing Activities

Cash used in investing activities was $0.4 and $0.3 million for the years ended December 31, 2021 and 2020, respectively. Cash used in investing activities resulted from capital expenditures on property and equipment for all periods presented.

Financing Activities

Cash provided by financing activities for the year ended December 31, 2021 of $10.1 million was principally attributable to $8.4 million in net proceeds from the sale of our common stock. The other $1.7 million was the net of notes payable, PPP loan, payment on capital leases, and our factoring advance.

Cash provided by financing activities during the year ended December 31, 2020, of $1.8 million principally resulted from proceeds from the issuance of notes payable ($0.4 million), the use of our factoring agreement totaling $0.9 million, and government-subsidized debt ($0.5 million).

Contractual Obligations and Commitments

The following summarizes our significant contractual obligations as of December 31, 2021; however, the following table does not include any contractual obligations or commitments that will develop as we continue the preparation, planning, and asset financing negotiations associated with the planned move of our business headquarters in 2022. We anticipate approximately $4.0 million of new headquarter building asset additions, and an annual lease expense to be approximately $1.1 million upon occupancy.

Payments due by period

Total Less than 1 year 1 – 3 years 4 – 5 years More than 5 years

Short-term debt obligations (excluding interest) 5,117 5,117 — — —

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Off-Balance Sheet Arrangements

As of December 31, 2021 and 2020, we do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet date and reported amounts of revenue and expenses during the reporting period. Our most significant estimates and judgments involve the valuation of our share-based compensation, including the underlying estimated fair value of our preferred and common stock. Accordingly, actual results may differ from these estimates. To the extent that there are differences between our estimates and actual results, our future consolidated financial statement presentation, financial condition, results of operations, and cash flows will be affected.

Other than as described under Note 2 to our audited consolidated financial statements, the Critical Accounting Policies and Significant Judgments and Estimates included in our Current Report on Form 8-K for the year ended December 31, 2020, filed with the U.S. Securities and Exchange Commission on October 27, 2021, have not materially changed.

We believe that the accounting policies described below involve a greater degree of judgment and complexity. Accordingly, these are the policies we think are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.

Share-Based Compensation

We recognize the grant-date fair value of share-based awards issued as compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period of the award. To date, we have not issued awards where vesting is subject to performance or market conditions. The fair value of stock options is estimated at the time of grant using the Black-Scholes option pricing model, which requires the use of inputs and assumptions such as the estimated fair value of the underlying common stock, exercise price of the option, expected term, risk-free interest rate, expected volatility and dividend yield, the most critical of which is the estimated fair value of our common stock.

The estimated fair value of each grant and modification of stock options awarded during fiscal 2021 and fiscal 2020 was determined using the following methods and assumptions:

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The inputs and assumptions used to estimate the fair value of share-based payment awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different inputs and assumptions, our share-based compensation expense could be materially different for future awards.

In valuing our common and preferred stock, our Board of Directors determined the equity value of our business by taking a combination of the income and market approaches.

The income approach estimates the fair value of a company based on the present value of its future estimated cash flows and the residual value of the company beyond the forecast period. These future values are discounted to their present values using a discount rate which is derived from an analysis of the cost of capital of comparable publicly-traded companies in the same industry or similar lines of business as of each valuation date and is adjusted to reflect the risks inherent in us achieving these estimated cash flows. For the market approach, we utilized the guideline company method by analyzing a population of comparable companies and selected those semiconductor companies that we considered to be the most comparable to us in terms of product offerings, revenue, margins, and growth. We then used these guideline companies to develop relevant market multiples and ratios, which are then applied to our corresponding financial metrics to estimate our equity value.

The enterprise values determined by the income and market approaches were then allocated to our common stock using the Option Pricing Method, or OPM.

The OPM treats common stock and preferred stock as call options on a company’s enterprise value, with exercise prices based on the liquidation preferences of the preferred stock. Therefore, the common stock has value only if the funds available for distribution to the stockholders exceed the value of the liquidation preference at the time of an assumed liquidity event such as a merger, sale or initial public offering. The common stock is modeled as a call option with a claim on the enterprise at an exercise price equal to the remaining value immediately after the preferred stock is liquidated. The OPM uses the Black-Scholes option-pricing model to determine the price of the call option. The OPM is appropriate to use when the range of possible future outcomes is so difficult to predict that forecasts would be highly speculative.

Given the absence of a public trading market for our capital stock as of December 31, 2021, our Board of Directors exercised reasonable judgment and considered a number of subjective factors to determine the best estimate of the fair value of our common stock, including:

● the lack of marketability of our preferred and common stock;

● the market performance of comparable publicly traded companies; and,

● U.S. and global economic and capital market conditions and outlook.

As our common stock is not yet quoted on an OTC Markets Group trading platform, or any exchange, it will be necessary to use estimates to determine the fair value of the common stock for our year ended December 31, 2022. In addition, as all of Guerrilla RF's preferred stock was converted into common stock in October 2021, we will no longer need to estimate the fair value of preferred stock as there was no issued or outstanding preferred stock as of December 31, 2021.

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JOBS Act Accounting Election

We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we are no longer an emerging growth company, or affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. We have not elected to early adopt certain new accounting standards, as described in Note 2 of our consolidated financial statements. As a result, our consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

Recently Issued Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our audited consolidated financial statements appearing elsewhere in this Annual Report.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Guerrilla RF, Inc.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Report of Independent Registered Public Accounting Firm 53

Consolidated Balance Sheets 54

Consolidated Statements of Operations 55

Consolidated Statements of Changes in Stockholders’ Equity (Deficit) 56

Consolidated Statements of Cash Flows 57

Notes to Consolidated Financial Statements 58

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Report of Independent Registered Public Accounting Firm

Shareholders and the Board of Directors

Guerrilla RF, Inc.

Greensboro, North Carolina

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Guerrilla RF, Inc. (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows for each of the years ended December 31, 2021 and 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and cash flows for each of the two years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.

Substantial Doubt about the Company’s Ability to Continue as a Going Concern

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has an accumulated deficit that raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 1 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Dixon Hughes Goodman LLP

We have served as the Company's auditor since 2021.

Raleigh, North Carolina

March 31, 2022

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Guerrilla RF, Inc.

Consolidated Balance Sheets

December 31, 2021 and 2020

Assets

Liabilities and Stockholders' Equity (Deficit)

Total Liabilities and Stockholders' Equity (Deficit) $ 10,634,735 $ 3,964,741

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Guerrilla RF, Inc.

Consolidated Statement of Operations

For the Years Ended December 31, 2021 and 2020

Operating Expenses:

Net loss per share $ (0.24 ) $ (0.30 )

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Guerrilla RF, Inc.

Consolidated Statements of Change in Stockholders' Equity (Deficit)

For the Years Ended December 31, 2021 and 2020

Debt converted to equity - - (4,912 ) - (4,912 )

Change in par value of common stock - (1,767 ) - (1,767 )

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Guerrilla RF, Inc.

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2021 and 2020

Cash flows from operating activities

Adjustment to reconcile net loss to net cash used in operating activities

Gain on extinguishment of debt (14,960 ) -

Inventory allowance 12,794 -

Changes in assets and liabilities:

Cash flows from investing activities

Purchases of property, plant, and equipment (393,359 ) (310,718 )

Cash flows from financing activities

Proceeds from APO, net of issuance costs 8,382,826 -

Proceeds from exercise of stock options 36,995 10,512

Proceeds from notes payable and factoring agreement 5,097,870 1,249,900

Principal payment of notes payable and recourse factoring agreement (4,150,701 )

Noncash transactions:

Property and equipment acquired through capital leases $ 144,177 $ 328,916

Property and equipment additions included in accounts payable $ 50,625 $ -

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Guerrilla RF, Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2021 and 2020

1. Organization and Nature of Business

Guerrilla RF, Inc. (formerly known as Laffin Acquisition Corp., the “Company”) was incorporated in the State of Delaware on November 9, 2020. On October 22,2021, the Company's wholly-owned subsidiary, Guerrilla RF Acquisition Corp., a corporation formed in the State of Delaware on October 20,2021 (“Acquisition Sub”) and privately held Guerrilla RF Operating Corporation (formerly known as Guerrilla RF, Inc.) entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, on October 22,2021 (the “Closing Date”), Acquisition Sub merged with and into Guerrilla RF Operating Corporation with Guerrilla RF Operating Corporation continuing as the surviving corporation and a wholly-owned subsidiary of the Company (the “Merger”).

Prior to the Merger, Laffin Acquisition Corp. was a “shell” company registered under the Exchange Act, with no specific business plan or purpose until it began operating the business of Guerrilla RF Operating Corporation following the closing of the Merger.

All references in these Consolidated Financial Statements to “Guerrilla RF” refer to Guerrilla RF Operating Corporation, our direct, wholly-owned subsidiary. Unless otherwise stated or the context otherwise indicates, references to the “Company”, “we”, “our”, “us” or similar terms refer to Guerrilla RF, Inc. (formerly known as Laffin Acquisition Corp.) together with its wholly-owned subsidiary, Guerrilla RF. Guerrilla RF holds all material assets and conducts all business activities and operations of the Company. Accordingly, throughout these Consolidated Financial Statements, there are frequent references to Guerrilla RF.

Guerrilla RF designs and manufactures high‐performance Monolithic Microwave Integrated Circuits (MMICs) for the wireless infrastructure market. Guerrilla RF primarily focuses on researching and developing its existing products and building an infrastructure to handle a global distribution network; therefore, it has incurred significant start‐up losses.

The Merger was accounted for as a “reverse acquisition” since, immediately following the consummation of the Merger, Guerrilla RF effectively controlled the Company. For accounting purposes, Guerrilla RF was deemed to be the accounting acquirer in the Merger and, consequently, the Merger is treated as a recapitalization of Guerrilla RF (i.e., a capital transaction involving the issuance of shares by the Company for the shares of Guerrilla RF). Accordingly, the assets, liabilities, and results of operations of Guerrilla RF became the historical consolidated financial statements of the Company, and the Company’s assets, liabilities, and results of operations were consolidated with Guerrilla RF beginning at the Closing Date. No step-up in basis or intangible assets or goodwill were recorded in the Merger.

Liquidity and Going Concern

Per Accounting Standards Update (“ASU”) No.2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued.

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Guerrilla RF, Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2021 and 2020

The accompanying consolidated financial statements have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the ordinary course of business. The Company has historically financed its activities principally from common and preferred equity securities and debt issuance.

The Company has incurred substantial and negative cash flows from operations in nearly every fiscal period since inception. For the year ended December 31, 2021, the Company incurred a net loss of $2.8 million and used $4.8 million in cash to fund operations. As a result, the Company had an accumulated deficit of $15.0 million as of December 31, 2021. The Company's cash as of December 31, 2021 was $5.3 million.

Management believes that the Company has sufficient cash to support its operations through 2022. Still, it will require significant additional cash resources to continue its planned research and development activities. The Company will need additional funds for promoting new products and working capital necessary to support increased sales. However, there can be no assurance that such financing will be available when needed, if at all, or on favorable terms and conditions. The precise amount and timing of the funding needs cannot be determined accurately at this time. They will depend on many factors, including the market demand for the Company's products, the quality of product development efforts, management of working capital, and the continuation of standard payment terms and conditions for purchasing goods and services. As a result, the Company is uncertain whether its cash balances and cash flow from operations will be sufficient to fund its operations for the next twelve months. This requirement for additional funding raises substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of liabilities that may be necessary should the Company be unable to continue as a going concern.

To address its capital needs, including its planned research and development activities and other expenditures, the Company is actively pursuing additional debt and equity financing. The Company has been in ongoing discussions with investors and other parties for such possible offerings. However, adequate financing opportunities might not be available to the Company, when and if needed, on acceptable terms or at all. If the Company is unable to obtain additional financing in sufficient amounts or on acceptable terms, the Company will be forced to delay, reduce, or eliminate some or all of its research and development programs and product portfolio expansion, which could adversely affect its operating results or business prospects. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all.

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Guerrilla RF, Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2021 and 2020

Risks and Uncertainties

The Company is subject to several risks associated with companies at a similar stage, including dependence on key individuals, competition from similar products and larger companies, volatility of the industry, ability to obtain adequate financing to support growth, the ability to attract and retain additional qualified personnel to manage the anticipated growth of the Company, and general economic conditions.

2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements are presented in U.S. dollars and have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and as amended by Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”). The accompanying consolidated financial statements include the accounts of Guerrilla RF, Inc. and its wholly-owned subsidiary, Guerrilla RF Operating Corporation. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and reported amounts of revenue and expenses during the reporting period. In addition, the Company’s significant estimates and judgments involve the identification of performance obligations in revenue recognition and the valuation of share-based compensation, including the underlying fair value of the common stock. Accordingly, actual results could differ from those estimates.

Concentrations of Credit Risk and Major Customers

Financial instruments at December 31, 2021 and 2020 that potentially subject the Company to concentration of credit risk consist primarily of cash and accounts receivable.

The Company’s cash is deposited with major financial institutions in the U.S. At times, deposits in financial institutions located in the U.S. may be in excess of the amount of insurance provided on such deposits by the Federal Deposit Insurance Corporation (FDIC). To date, the Company has not experienced any losses on its cash deposits.

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Guerrilla RF, Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2021 and 2020

The Company’s accounts receivable are derived from revenue earned from customers located in and outside of the U.S. Major customers are defined as those generating revenue in excess of 10% of the Company’s annual product shipment revenue. The Company had one major customer during the years ended December 31, 2021 and December 31, 2020. Revenues from the major customer accounted for 81% of product shipment revenue for the year ended December 31, 2021, and 82% of product shipment revenue for the year ended December 31, 2020. Accounts receivable from our major customer represented78% of accounts receivable at December 31, 2021, and 89% of accounts receivable at December 31, 2020.

Accounts Receivable

Accounts receivable primarily relate to amounts due from customers, which are typically due within 30 to 45 days. The accounts receivable also includes royalty revenue from our one royalty agreement. The Company provides credit to its customers in the ordinary course of business and evaluates the need for allowances for potential credit losses. The Company does not require collateral or other security for accounts receivable. To reduce credit risk with accounts receivable, the Company performs ongoing evaluations of its customers’ financial condition. Historically, such losses have been immaterial and within management's expectations.

The Company has a factoring agreement that provides advance payments on up to 85% of invoices issued to one customer, our largest distributor, with receivables less than 90 days outstanding, secured by the remaining 15%. As of December 31, 2021 and 2020, the Company had $0 and $1,000,000 of factored invoices, respectively, at 0.98% for the first30 days and prorated on a per diem basis at 0.0327% each day after. At December 31, 2021 and 2020, the Company had $0 and $150,000due from the factoring counterparty, respectively, included in accounts receivable on the consolidated balance sheets. See Note 5 for additional discussion on the factoring agreement.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation and amortization. The Company depreciates computer hardware, software, production and computer equipment, and lab equipment using the straight-line method over their estimated useful lives, ranging from three to five years. The Company depreciates furniture and fixtures using the straight-line method over their estimated useful lives of seven years. Leasehold improvements are amortized over the shorter of the asset’s useful life or the remaining lease term. Repairs and maintenance are expensed as incurred by the Company.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The recoverability of assets held and used is measured by comparing the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets, less costs to sell. The Company did not record any expense related to asset impairment in 2021 or 2020.

Deferred Offering Costs

The Company has not capitalized legal, professional, accounting, and other third-party fees directly associated with common equity financings as deferred offering costs as these acquisition costs are immaterial in relation to the financing and as a portion of our consolidated balance sheet. Transaction costs consisting of legal, accounting, financial advisory, and other professional fees incurred as part of the Merger mentioned in Note 1 were offset against the total proceeds from the Merger in the accompanying consolidated financial statements for the year ended December 31, 2021.

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Guerrilla RF, Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2021 and 2020

Convertible Preferred Stock Warrants

Accounting standards require that freestanding warrants and similar instruments, with certain settlement features of the financial instruments, should be accounted for as a preferred stock warrant liability even though the underlying shares of capital stock may be classified as equity. Such warrants would be measured and recognized at fair value and subject to re-measurement at each balance sheet date. All of the Company’s convertible preferred stock warrants were previously classified as equity (see Note 1 for further discussion of the equity conversion as part of the Merger). The Company did not have any convertible preferred stock warrants as of December 31, 2021.

Revenue Recognition

The Company recognizes product revenue when it satisfies a performance obligation by transferring a product or service to its customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products and services. Sales and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. Shipping and handling fees charged to customers are reported within revenue. The Company does not have any significant financing components as payment is received at or shortly after the point of sale. The Company provides an assurance-type warranty to its customers as part of its contracts' standard terms and conditions, which does not include a right of return for properly functioning products not deemed obsolete. These warranties do not provide an additional distinct service to the customer and are not deemed a separate performance obligation. Royalty revenue is recognized at the later of when the subsequent sale or usage occurs, or the performance obligation to which some or all the sales-based royalties have been allocated are satisfied. The costs incurred by the Company for shipping and handling are classified as cost of revenue in the consolidated statements of operations. Any incidental items that are immaterial in the context of a sale to a customer are recognized as expense.

Cost of Revenue

The Company’s cost of revenue consists primarily of salaries and related expenses, overhead, third party services vendors, depreciation expense related to the equipment and information technology costs incurred directly in the Company’s revenue-generating activities.

Share-Based Compensation

The Company measures and recognizes compensation expense for all stock options awarded to employees and nonemployees based on the estimated fair market value of the award on the grant date. The Company uses the Black-Scholes option pricing model to value its stock option awards. The Company recognizes compensation expense on a straight-line basis over the requisite service period, which is generally the award's vesting period. In addition, the Company accounts for forfeitures of stock options as they occur.

The Company applies ASU 2018-7,Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. As a result of the adoption in the year ended December 31, 2020, share-based awards issued to nonemployees are no longer required to be revalued at each reporting period.

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Guerrilla RF, Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2021 and 2020

Estimating the fair market value of options requires the input of subjective assumptions, including the estimated fair value of the Company’s common stock, the expected life of the options, stock price volatility, the risk-free interest rate, and expected dividends. Therefore, the assumptions used in the Company’s Black-Scholes option-pricing model represent management’s best estimates and involve many variables, uncertainties, and assumptions, and the application of management’s judgment, as they are inherently subjective.

Research and Development Costs

Research and development costs are expensed as incurred and consist primarily of personnel-related engineering and technical staff wages and benefits, prototype costs, and other direct expenses.

Advertising Costs

All advertising costs are expensed as incurred and included in sales and marketing expenses. Advertising expenses for the years ended December 31, 2021, and 2020 were $18,108 and $42,563, respectively.

Inventories

Inventories are valued at the lower of cost and net realizable value. Cost is determined by the first‐in, first‐out (FIFO) method.

Income Taxes

Income taxes are accounted for under the asset and liability method as required by FASB ASC Topic 740,Income Taxes (“ASC 740”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period corresponding to the enactment date. Under ASC 740, a valuation allowance is required when it is more likely than not all or some portion of the deferred tax assets will not be realized through generating sufficient future taxable income.

FASB ASC Subtopic 74010,Accounting for Uncertainty of Income Taxes, (“ASC 74010”) defines the criterion upon which an individual tax position must meet for any part of the benefit of the tax position to be recognized in consolidated financial statements prepared in conformity with GAAP. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not such tax position will be sustained on examination by the taxing authorities, based solely on the technical merits of the respective tax position. The tax benefits recognized in the consolidated financial statements from such a tax position should be measured based on the largest benefit having a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority. In accordance with the disclosure requirements of ASC 74010, the Company’s policy on income statement classification of interest and penalties related to income tax obligations is to include such items as part of total income tax expense.

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Guerrilla RF, Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2021 and 2020

Net Loss Per Share

Basic net loss per share of common stock is computed by dividing net loss by the weighted average number of common stock outstanding during each period. Diluted net loss per common stock includes the effect, if any, from the potential exercise or conversion of securities, such as options and warrants, which would result in the issuance of incremental common stock. For periods prior to the Merger mentioned in Note 1, each of Guerrilla RF’s shares of capital stock issued and outstanding immediately prior to the closing of the Merger was retrospectively converted into approximately 2.95 shares of the Company's common stock. In computing basic and diluted net loss per share, the weighted average number of shares is the same for both calculations because a net loss existed for the years ended December 31, 2021 and 2020. As such, all preferred stock, warrants, and options were excluded from the calculation of net loss per share for the years ended December 31, 2021, and 2020.

The following potentially dilutive securities have been excluded from the computation of diluted weighted-average shares of common stock outstanding, as they would be anti-dilutive:

Convertible preferred stock - 4,852,414

Convertible preferred stock warrants - 116,732

Common stock warrants 331,580 -

Recent Accounting Pronouncements

In February 2016, the FASB issued ASC Topic 842,Leases. This standard requires all entities that lease assets with terms of more than 12 months to capitalize the assets and related liabilities on the balance sheet. In June 2020, the FASB issued ASU 2020-05, which amended the effective date of Topic 842 until January 1, 2022. Upon adoption, the standard requires the use of a modified retrospective transition approach for its adoption. The Company will be adopting Topic 842 in the fiscal quarter ending March 31, 2022. However, management expects the assets leased under operating leases, similar to the leases disclosed in Note 10 to the consolidated financial statements, to be capitalized with the related lease obligations on the balance sheet upon adopting Topic 842.

In August 2020, the FASB issued ASC Update No.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): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The goal of the ASC is to simplify the complexity associated with applying GAAP for certain financial instruments with characteristics of liabilities and equity. More specifically, the amendments focus on the guidance for convertible instruments and derivative scope exception for contracts in an entity’s own equity. The new standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company will be adopting this accounting guidance in the fiscal quarter ending March 31, 2022.

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Guerrilla RF, Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2021 and 2020

3. Inventories

Inventories are summarized as follows:

Inventory allowance (12,794 ) -

As of December 31, 2021, there was an inventory allowance of $12,794. The inventory allowance is made up of potential scrap and obsolete inventory worth $3,082 and $9,712, respectively.

4. Property and Equipment

Property and equipment is summarized as follows:

Construction work in progress 63,750 -

Depreciation expense was $371,435 and $266,622 for the years ended December 31, 2021 and 2020, respectively.

5. Debt

Short-Term Debt

Factoring Arrangement

The Company has an accounts receivable factoring arrangement with a financial institution (the “Factor”). Under the terms of the agreement, the Company, from time to time, sells to the Factor certain of its accounts receivable balances on a recourse basis for credit approved accounts. The Factor remits 85% of the domestic accounts receivable balance to the Company (the “Advance Amount”), with the remaining balance, less fees to be forwarded to the Company once the Factor collects the entire accounts receivable balance from the customer. The factoring fee is0.98% of the invoice’s face value factored for the first30 days required to collect the invoice and prorated on a per diem basis at0.0327 % each day thereafter. The minimum invoice fee for any factored invoices is $1.50. The Company includes the cost of factoring in interest expense.

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Guerrilla RF, Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2021 and 2020

As stated above, the Company factors the accounts receivable on a recourse basis. Therefore, if the Factor cannot collect the factored accounts receivable, the Company must refund the Advance Amount remitted to us for the uncollected accounts receivable. Accordingly, the Company records the liability of having to refund the Advance Amount as short-term debt when the factoring arrangement is utilized. As of December 31, 2021 , there is no liablity.

Due from Factor consisted of the following:

Original Invoice Value Factored Amount Factored Balance Due

Factored accounts receivable $ - $ - $ -

The cost of factoring was as follows:

Long-Term Debt

Loans Payable – PPP and EIDL

PPP

On April 30, 2020, Guerrilla RF received loan proceeds of $535,800 under the Paycheck Protection Program (“PPP”). Established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) administered by the Small Business Administration (“SBA”). PPP loans and accrued interest are forgivable after a “covered period” (24 weeks) as long as the borrower maintains its payroll levels and uses the loan proceeds for eligible purposes, including payroll, benefits, rent, and utilities. As of December 31, 2020, Guerrilla RF had $535,800 of principal outstanding on the PPP loan together with accrued interest of $3,611 as accounts payable and accrued expenses less $90,000 shown as long-term liability on the consolidated balance sheet. On February 17, 2021, Guerrilla RF received approval from the SBA that the $535,800 PPP loan was forgiven, including all accrued interest.

The Company recorded the forgiveness of both PPP loans and the related accrued interest as a gain in other income (expense) on the consolidated statements of operations. Accordingly, as of December 31, 2021, the Company had no principal outstanding on the PPP loans or accrued interest.

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Guerrilla RF, Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2021 and 2020

EIDL

In response to COVID-19, small business owners, including agricultural businesses and nonprofit organizations in all U.S. states, Washington D.C., and territories, the SBA created the COVID-19 Economic Injury Disaster Loan (EIDL) program in March 2020. The program's purpose was to help small businesses meet financial obligations that could have been met had the Covid-19 pandemic not occurred. Unlike the PPP Loan Program, a loan under EIDL is not forgivable in the future but provides favorable interest and payment terms to approved applications. The maximum EIDL available is equivalent to six months of a business’s working capital, up to $150,000. Businesses can use EIDL proceeds for working capital and normal operating expenses. On June 24, 2020, the Company received loan proceeds of $150,000 under the EIDL Program. As part of the EIDL program, the Company agreed to SBA collateral conditions and agreed to pay an annual interest of 3.75% per annum with the principal balance and interest payable 30 years from the loan date, June 24, 2050. As of December 31, 2021, the Company had$149,900of principal outstanding on the EIDL loan together with accrued interest of $8,532.

Notes Payable

Since its founding, the Company has utilized privately placed funding through equity and unsecured debt instruments. (See Note 6 for details on equity funding.)

The Company has entered into several debt arrangements from capital raise events and bridge loans from existing investors. These debt arrangements are characterized by interest-only quarterly payments paid in arrears. Per the terms of the debt arrangements, principal is paid in its entirety at the respective maturity date. In addition, all such debt agreements may be prepaid by the Company without any penalty.

On March 27, 2017, the Company entered into a round of debt financing with three investors as part of the Series D capital raise for a total of $1,000,000 in promissory notes with a maturity date of December 31, 2022. Under terms of the notes, the Company could make four draws against each note, with the minimum draw being 25% of the specific note amount. The Company made draws under these promissory notes in October 2017 and January 2018. The outstanding balance of the promissory notes was converted to common stock at the closing of the Merger.

On March 12, 2018, the Company delivered a promissory note to an existing investor for $1,000,000, with interest at 8% annum paid quarterly in arrears. Under the promissory note provisions, the Company could receive funds in one or more draws, each in a minimum increment of $250,000. The maturity of the promissory note was December 31, 2023. The Company made draws under this promissory note in March 2018 and January 2019. The outstanding balance of this promissory note was converted to common stock at the closing of the Merger.

On June 1, 2018, the Company entered into a promissory note with an investor for $1,000,000 with a maturity date of May 31, 2020. In connection with this promissory note and the terms of the related loan agreement, the Company issued two warrants for the purchase of Series E preferred stock of the Company. On April 15, 2020, the note and warrants were transferred to a related party of the lender. Following that transfer, the new warrant holder exercised these warrants and purchased shares of preferred stock for a total cash consideration of $500,001 to satisfy $500,000 of the $1,000,000 note payable. In addition, this new holder of the note payable agreed to refinance the remaining $500,000 of the $1,000,000 note payable, which then had a maturity date of May 31, 2022. The outstanding balance of this promissory note was converted to common stock at the closing of the Merger.

On March 31, 2019, the Company entered into a round of debt financing with investors and employees for $1.75 million at an annual interest rate of 12% and maturing in March 2022. All unpaid principal and accrued interest of these notes could be prepaid without penalty or premium at the Company’s discretion. Any prepayment was to be credited first against accrued interest, then principal. These notes were only issued to accredited investors within the meaning of the Securities Act of 1933. The outstanding balances from this debt financing was converted to common stock at the closing of the Merger.

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Guerrilla RF, Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2021 and 2020

On July 28, 2020, the Company entered into a promissory note for $250,000 with a member of its Board of Directors with an interest rate of 12% per annum. The maturity date of this promissory note was September 30, 2023. The loan evidenced by this promissory note was not a part of any of the issuance of preferred stock discussed below in Note 7. The outstanding balance of this promissory note was converted to common stock at the closing of the Merger.

Convertible Promissory Notes

As further described in Note 1, the Company entered into a Merger Agreement effective October 22, 2021. On October 22, 2021, pursuant to the terms of the Merger Agreement, all of the common stock of Guerrilla RF (including common stock issued upon the conversion of preferred stock and $4.5 million of pre-2021 convertible notes) held by accredited investors was converted into an aggregate of 24,130,642 shares of Company common stock. These pre-2021 convertible notes were converted into 2,647,059 shares of the Company’s common stock at a price of $1.70 per share. In addition, in connection with the Merger, the Company issued 744,300 shares of common stock in exchange for $1,488,600 of convertible notes that were issued by Guerrilla RF in contemplation of the Merger.

Per the terms of several debt arrangements entered into with new and existing investors prior to the Merger, principal was to be paid in its entirety at the respective maturity date or upon conversion as a result of the Merger without any penalty. Upon successful closing of the aforementioned Merger and related financing, all of the outstanding principal amounts of the new notes payable issued just prior to the Merger ($1,488,600) and the above described existing notes payable ($4.5 million), automatically, without the necessity of any action by the noteholder or the Company, converted into securities of the Company. All accrued but unpaid interest on the existing and new notes payable as of the effective date of the Merger were paid in cash to the noteholder within fifteen (15) business days following the Merger ($51,627).

Warrants

In connection with some of the debt described above, certain lenders were issued warrants to purchase up to 116,733 pre-Merger shares of Series D and E preferred stock at $2.57 per share. In April 2018, Guerrilla RF completed a Series E preferred stock convertible note private offering in which 898,542 pre-Merger shares of Series E Preferred Stock were issued at $2.57 per share together with warrants to purchase an additional 77,821 pre-Merger shares of Series E preferred stock. In consideration of funds advanced pursuant to a $1,000,000 promissory note accruing interest at 8% per annum from an existing investor, Guerrilla RF issued warrants on June 1, 2018, for the purchase of 38,911 pre-Merger shares of Series E Preferred Stock (in total) at $2.57 per share with different termination dates. All outstanding warrants immediately prior to the closing date of the Merger were converted into Company common stock (as further described in Note 1).

Balances related to the debt and warrants for the year ended December 31, 2021 are as follows:

Carrying Accumulated Carrying

Value at Amortization Value at

December 31, Converted of Debt December 31,

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Guerrilla RF, Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2021 and 2020

Long‐term debt is summarized as follows at December 31, 2021:

Notes payable with associated warrants

Total notes payable with associated warrants - 2,454,473

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Guerrilla RF, Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2021 and 2020

Long-term debt is expected to mature as follows:

6. Common Stock and Convertible Preferred Stock

Common Stock

The Company is authorized to issue 300,000,000 shares of common stock with a par value of $ 0.0001 as of December 31, 2021 and 8,484,000 shares of privately held Guerrilla RF common stock with a par value of $0.001 per share were authorized as of December 31, 2020. Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Subject to preferences that may apply to any outstanding preferred stock, holders of common stock are entitled to receive ratably any dividends that the Company’s Board of Directors may declare out of funds legally available for that purpose on a non-cumulative basis. No dividends had been declared through December 31, 2021.

Following the Effective Time of the Merger, the Company sold 33,147,192 shares of common stock pursuant to a private placement offering at a purchase price of $2.00 per share (“Offering”) for aggregate gross proceeds of $11.5 million. The Company incurred issuance costs of $2.1 million, which were offset against the proceeds from the Offering and are recorded in the accompanying consolidated financial statements for the year ended December 31, 2021.

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Guerrilla RF, Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2021 and 2020

Common Stock Warrants

In October and November 2021, the Company issued warrants to nonemployees to purchase, 183,100 and 148,480 shares of common stock, respectively, as payment for services related to the private placement and the Merger. The warrants have an exercise price of $2.00 per share and are immediately exercisable and expire in October and November 2026, respectively. The Company determined the warrants to be equity classified awards and recorded them as issuance costs related to the sale of common stock related to the private placement and Merger.

Preferred Stock

Prior to the Merger Guerrilla RF had utilized convertible preferred share issuances, convertible debt issuances, and convertible warrants from private investors to fund its business operations and growth. No dividend was payable on shares of Guerrilla RF common stock or its classes of preferred stock. At the closing of the Merger, all Guerrilla RF preferred stock was converted into common shares of the Company. There is no issued or outstanding preferred stock as of December 31, 2021.

Subject to certain exceptions, prior to the Merger, holders of Guerrilla RF preferred stock were entitled to a secondary right of first refusal prior to any sale of common stock by Guerrilla RF's founder (the “Key Holder”) subject to Guerrilla RF's first right of first refusal for the same Key Holder shares.

Prior to the Merger, the shares of preferred stock were convertible 1:1 to common stock at any time at the holder's option, subject to adjustments for stock dividends, splits, combinations, and similar events. Prior to the Merger, the preferred stock would automatically convert to common stock (A) upon the closing of an underwritten public offering with a price of at least $10.00 per share of common stock (subject to adjustments for stock dividends, splits, combinations, and similar events) and net proceeds to Guerrilla RF in excess of $37.5 million; or (B) upon the written consent of the holders of the majority of shares of preferred stock then outstanding.

Prior to the Merger, holders of preferred stock held certain rights to elect three of the seven members of the board of directors as follows: (i) the holders of Series A, A-2, and C preferred stock were entitled to elect two board of directors members, with one being nominated by one specific preferred shareholder, and (ii) the holders of Series B, D and E preferred stock were entitled to elect one member of the board of directors. Two board of directors seats were elected exclusively by the holders of common stock, and the final two seats were elected by all holders of Guerrilla RF common stock and preferred stock.

Prior to the Merger, after each offering of a class of preferred stock, the investors of that class of preferred stock were given a pro-rata right, based on their percentage equity ownership, to participate in the next offering or issuance of capital stock by Guerrilla RF.

Prior to the Merger, the following summarizes the past issuances of preferred stock series, A, A2, B, C, D, and E:

Series A

On June 26th,2014, the Guerrilla RF authorized 1,050,000 shares of Series A preferred stock, 1,042,853 of which were issued and outstanding in a private placement at an issue price of $1.00 per share.

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Guerrilla RF, Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2021 and 2020

Series A-2

On February 13, 2015, the Guerrilla RF authorized 420,000 shares in a follow-on raise to the Series A preferred placement. As a result, the Guerrilla RF issued 412,735 of Series A-2 preferred stock which were issued in a private placement at an issue price of $1.21 per share.

Series B

On May 15, 2015, Guerrilla RF issued 1,049,997 shares of Series B preferred stock at an issue price of $1.43 per share. In connection with this sale, investors were issued options to purchase an additional 350,000 shares of Series B preferred stock at any time during the 90 days after the Series B preferred stock offering. Each holder received the right to purchase 1/3 share of Series B preferred stock for every share purchased.

Series C

On August 1, 2016, Guerrilla RF issued 483,092 Series C preferred stock shares in a private placement at an issue price of $2.07 per share. The proceeds from the sale of Series C preferred stock to be used for working capital associated with the mass production of Guerrilla RF’s products, continuing operations, and brand building activities, including print ads and increased sales travel.

In addition, holders of the Series C preferred stock, together with holders of the Series A preferred stock and Series A-1 preferred stock, shall be entitled to identify and select two of the five members of Guerrilla RF’s board of directors.

Series D

On March 8, 2017, the Guerrilla RF issued 692,292 shares of Series D preferred stock in a private placement at an issue price of $2.57 per share. Based on their percentage equity ownership, investors were given a pro-rata right to participate in a future offering or issuance by Guerrilla RF unless subsequently waived due to failure to exercise such rights. The shares of Series D preferred stock will initially be convertible 1:1 to common stock at any time at the holder's option, subject to adjustments for stock dividends, splits, combinations, and similar events.

On March 27, 2017, Guerrilla RF granted 58,366 warrants to purchase Guerrilla RF preferred stock at $2.57 per share to two investors, with termination dates of January 1, 2023. (See Note 5 for additional details.)

Series E

On April 16, 2018, Guerrilla RF issued 703,989 Series E Convertible preferred stock shares at $2.57. As a result of the Series E offering, Guerrilla RF increased the number of authorized shares of common stock to 8,224,000 common shares and had increased the number of authorized shares of preferred stock to 5,042,000 shares.

Based on their percentage equity ownership, investors in Series E were given a pro-rata right to participate in a future offering or issuance by Guerrilla RF unless subsequently waived due to failure to exercise such rights. The shares of Series E preferred stock will initially be convertible 1:1 to common stock at any time at the holder's option, subject to adjustments for stock dividends, splits, combinations, and similar events.

As part of the Series E capital raise, Guerrilla RF shareholders approved a loan transaction with the lead investor pursuant to which Guerrilla RF could borrow up to $1,000,000 at an 8% interest rate commencing March 14, 2018, and in connection with such loan transaction, Guerrilla RF could award warrants to the lead investor for additional Series E preferred shares at a strike price of $2.57 per share for up to an additional 38,911 shares of Series E preferred stock. (See Note 5 for further details.)

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Guerrilla RF, Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2021 and 2020

For consideration of a $1,000,000 note at 12% interest from the investor, Guerrilla RF issued warrants on June 1, 2018, and March 12, 2018, for the purchase of Series E preferred stock at $2.57 with a termination date of April 15, 2020. The warrants provided the right for the investor to purchase up to 194,553 shares of preferred shares. These warrants came with two different grant and maturity dates and an option to purchase additional preferred shares at $2.57 per share. (See Note 5 for further information.)

In connection with the Merger described in Note 1, all preferred stock outstanding as of October 22, 2021 was converted into common stock of the Company. As of December 31, 2021 there is no outstanding preferred stock.

7. Equity Incentive Plan

In 2014, the Board adopted the Long‐Term Stock Incentive Plan (the “2014 Plan”), with 568,000 shares of common stock authorized for issuance under the 2014 Plan. Subsequently, stockholders approved an increase in the number of shares covered by the 2014 Plan to 1,260,000 shares. Exercise prices range from $0.70 to $1.57 per share, depending on the date of the award.

In 2021, the Board adopted another Long‐Term Stock Incentive Plan (the “2021 Plan”), which authorizes the award of stock options, restricted stock awards, SARs, RSUs, performance awards, cash awards, and stock bonus awards. The Company initially reserved 222,991 shares of common stock, plus any reserved shares not issued or subject to outstanding grants under the 2014 Plan on the effective date of the 2021 Plan, for issuance pursuant to awards granted under the 2021 Plan. The number of shares reserved for issuance under the 2021 Plan will increase automatically on January 1 of each of 2022 through 2031 by the number of shares equal to the lesser of 5% of the total number of outstanding shares of our common stock as of the immediately preceding December 31, or a number as may be determined by the Company's Board of Directors. There have been no awards made under the 2021 Plan as of December 31, 2021.

The general purpose of the 2014 Plan and the 2021 Plan is to allow the Company to attract and motivate key employees and directors to align their interests with those of the Company’s shareholders.

The Company measures the fair value of each option award on the date of grant using the Black‐Scholes option pricing model, which takes into account inputs such as the exercise price, the value of the underlying ordinary shares at the grant date, expected term, expected volatility, risk-free interest rate, and dividend yield. The fair value of each grant of options during the year ended December 31, 2021 was determined using the methods and assumptions discussed below:

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Guerrilla RF, Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2021 and 2020

For the years ended December 31, 2021, and 2020, the grant date fair value of all option grants was estimated at the time of grant using the Black-Scholes option-pricing model using the following weighted-average assumptions:

Expected term (in years) 6.25 5.00

Expected Volatility 67 % 45 %

Dividend rate — —

The weighted average grant date fair value of stock option awards granted was$1.62 and $0.36 during the years ended December 31, 2021, and 2020, respectively.

The value of stock options is recognized as compensation expense by the straight-line method over the vesting period. Compensation expense recorded for options in the consolidated statements of operations was $176,045 and $19,487 for the years ended December 31, 2021 and 2020, respectively. Unrecognized compensation costs related to non‐vested options at December 31, 2021, and 2020 amounted to $69,974 and $24,119, respectively, which are expected to be recognized over an average of three years.

Stock option activity by share is summarized as follows for the years ended December 31:

Outstanding shares at end of year (Post-Merger) 3,180,882

Each outstanding unexercised stock option at the Closing Date of the Merger ( October 22, 2021) was converted into the right to purchase approximately 2.95 shares of the Company's common stock. Pursuant to the Merger Agreement, options to purchase 1,065,067 shares of Guerrilla RF’s common stock issued and outstanding immediately prior to the closing of the Merger under the 2014 Plan were assumed and converted into options to purchase 3,146,366 shares of the Company's common stock. In conjunction with the modification of the number of shares to be purchased under the options, the exercise price of the options was also reduced by a corresponding 2.95 factor.

No income tax benefits have been recognized in the consolidated financial statements for share-based compensation arrangements, and no share-based compensation costs have been capitalized as property and equipment through December 31, 2021.

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Guerrilla RF, Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2021 and 2020

8. Commitments and Contingencies

Lease Commitments

Under an operating lease agreement, the Company leases its office facilities in Greensboro, North Carolina, which expires in June 2024. The lease agreement allows for early cancellation with a penalty dependent upon providing the landlord advance notice of at least six months. Under the operating lease agreement terms, the Company is responsible for certain insurance and maintenance expenses. In addition, the lease agreement contains scheduled rent increases. The related rent expense for the lease is calculated on a straight-line basis according to the rental terms of the lease.

In July 2021, the Company entered into an operating lease agreement for additional office facilities in Greensboro, North Carolina, which has an estimated expiration date of June 2031, pending the date of when the Company commences occupancy.

The July 2021 lease agreement was contingent on the Company completing additional equity financing in the form of a private placement that the Company completed to the landlord's satisfaction as of November 15, 2021.

Under the operating lease agreement terms, the Company is responsible for certain insurance and maintenance expenses. In addition, the lease agreement contains scheduled rent increases. Upon taking control of the building, the related rent expense for the lease will be calculated on a straight-line basis according to the lease's rental terms. The Company will not remit any scheduled lease payments until it occupies the building. The Company anticipates approximately $4.0 million of new headquarter building asset additions, and an annual lease expense to be approximately $1.1 million upon occupancy.

The Company also leases software and equipment under capital leases expiring through October 2026. Capital lease payments under all capital leases were $102,280during the year ended December 31, 2021. Rent expense under all operating leases was $128,618 and $126,096during the years ended December 31, 2021, and 2020, respectively.

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Guerrilla RF, Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2021 and 2020

Future minimum lease payments under the leases are as follows:

Capital Operating

Leases Leases

Less amount representing interest (40,292 )

Legal

In the ordinary course of business, the Company may receive inquiries or become involved in legal disputes regarding various litigation matters. In the opinion of management, any potential liabilities resulting from such claims would not have a material adverse effect on the Company’s financial position or results of operations. As a result, no liability related to such claims has been recorded at December 31, 2021, or 2020.

Indemnification Agreements

From time to time, in the ordinary course of business, the Company may indemnify other parties when it enters into contractual relationships, including members of the Board of Directors, employees, customers, lessors, and parties to other transactions with the Company. In addition, the Company may agree to hold other parties harmless against specific losses, such as those that could arise from a breach of representation, covenant, or third-party infringement claims. It may not be possible to determine the maximum potential amount of liability under such indemnification agreements due to the unique facts and circumstances likely to be involved in each particular claim and indemnification provision. Management believes any liability arising from these agreements will not be material to the consolidated financial statements. As a result, no liability for these agreements has been recorded at December 31, 2021, or 2020.

Employment Agreement

The Company has an employment agreement with one executive. This employment agreement was entered into effective as of January 1, 2020. The Company desired the assurance of the executive's continued association and services to retain the executive's experience, skills, abilities, background, and knowledge. The employment is at-will, and the Company may terminate the employment relationship at any time, with or without cause, and with or without notice. The terms of the agreement stipulate compensation, benefits, specific restrictive covenants, and Company obligations upon termination of the employment agreement, including severance pay.

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Guerrilla RF, Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2021 and 2020

9. Income Taxes

Deferred tax assets and liabilities are determined based on the differences between the consolidated financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect for years in which differences are expected to reverse.

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Guerrilla RF, Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2021 and 2020

Significant components of the Company's deferred tax assets for federal income taxes consisted of the following:

Noncurrent deferred income tax asset arising from:

Noncurrent deferred income tax liability arising from:

Net $ - $ -

In assessing the need for a valuation allowance, management must determine that there will be sufficient taxable income to realize deferred tax assets. Based upon the historical and anticipated future losses, management has determined that the deferred tax assets do not meet the more likely than not threshold for realizability. Accordingly, a full valuation allowance has been recorded against the Company’s net deferred tax assets as of December 31, 2021, and 2020.

The Company does not have unrecognized tax benefits as of December 31, 2021, or December 31, 2020. The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.

The Company had net operating loss carryforwards (“NOL”) for federal and state income tax purposes at December 31, 2021, and December 31, 2020 of approximately:

December 31,

The net operating loss carryforwards generated before 2018 begin expiring in 2033 for federal and 2030 for state income tax purposes. Federal and state net operating losses generated in 2018 and into the future now have an indefinite life.

December 31,

The credit carryforwards begin expiring in 2038 for federal tax purposes.

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Guerrilla RF, Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2021 and 2020

The NOL and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”), respectively, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The annual limitation amount is determined based on the Company's value immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. To date, the Company has not performed an analysis to determine whether or not ownership changes have occurred since inception.

A reconciliation of income tax benefit at the statutory federal income tax rate and income taxes as reflected in the consolidated financial statements is as follows:

December 31,

Federal tax benefit at the statutory rate (21.0 )% (21.0 )%

State tax, net of federal benefit (2.0 )% (2.0 )%

Nondeductible expenses 1.0 % — %

Other — % 1.0 %

Life insurance 5.0 % — %

Provision to return true up 1.0 % — %

Research & development credits (4.0 )% (7.0 )%

Change in the valuation allowance 30.0 % 29.0 %

PPP loan forgiveness (10.0 )% — %

Income Tax Expense (Benefit) — % — %

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company’s tax returns remain subject to examination; carryforward amounts from all tax years remain subject to adjustment.

Potential 382 Limitation

The Company’s ability to utilize its net operating loss (NOL) and research and development (R&D) credit carryforwards may be substantially limited due to ownership changes that may have occurred or that could occur in the future, as required by Section 382 of the Code, as well as similar state provisions. These ownership changes may limit the amount of NOL and R&D credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change,” as defined by Section 382 of the Code, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percent of the outstanding stock of a company by certain stockholders or public groups.

The Company has not completed a study to assess whether one or more ownership changes have occurred since the Company became a loss corporation under the definition of Section 382; however, the Company anticipates completing such a study in the middle of 2022. If the Company has experienced an ownership change, utilization of the NOL or R&D credit carryforwards would be subject to an annual limitation, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments, as required. Any such limitation may result in the expiration of a portion of the NOL or R&D credit carryforwards before utilization. Until a study is completed and any limitation known, no amounts are being considered as an uncertain tax position or disclosed as an unrecognized tax benefit under ASC-740. Any carryforwards that expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance. Due to the existence of the valuation allowance, it is not expected that any possible limitation will have an impact on the results of operations of the Company.

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Guerrilla RF, Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2021 and 2020

10. Related Party Transactions

We describe below transactions since January 1,2019, in which the amounts involved exceeded or will exceed $120,000, and any of our directors, executive officers or holders of more than 5% of Guerrilla RF’s pre-Merger capital stock, or an affiliate or immediate family member thereof, had or will have a direct or indirect material interest. Other than as described below, there have not been transactions to which we have been a party other than compensation arrangements.

The following description is historical and has

not been adjusted to give effect to the Merger.

2019 Notes

In March 2019, Guerrilla RF sold in a private placement an aggregate of $1.75 million of term notes at an interest rate of 12% per annum (each, a “2019 Note” and collectively, the “2019 Notes”). Prior to the Merger, and in anticipation of the Merger and the related private placement offering, all of the 2019 Notes were amended to cause the principal amount to convert to shares of our common stock at $1.70 per share, and at the time of the private placement offering, the principal amounts owed under the 2019 Notes were converted under those terms, and accrued interest owed under such 2019 Notes was paid. The following table sets forth the principal amount of the 2019 Notes, and the number of shares of our common stock into which they were converted upon the closing of the Merger, sold to our directors, executive officers or holders of more than 5% of Guerrilla RF’s pre-Merger capital stock, or an affiliate or immediate family member thereof.

Principal Number of Shares of Common Stock Issued Upon Mandatory

Name of Stockholder Amount Conversion

AMB Notes

Guerrilla RF previously issued several promissory notes (the “AMB Notes”) to AMB Investments LLC (“AMB Investments”), which holds more than 5% of our outstanding capital stock. Certain of the AMB Notes were originally issued to Al Bodford, and each AMB Note originally issued to Al Bodford was assigned by him to AMB Investments in September 2021. The AMB Notes and their original terms are as follows: (i) Non-Negotiable Note dated March 27,2017 issued to Al Bodford in the principal amount of $333,333 accruing interest at the rate of 8% per annum; (ii) Non-Negotiable Note dated March 12,2018 issued to Al Bodford in the principal amount of $1,000,000 accruing interest at the rate of 8% per annum; (iii) Term Note dated March 31,2019 issued to Al Bodford in the principal amount of $175,000 accruing interest at the rate of 12% per annum (a 2019 Note, discussed above); and (iv) Term Note dated April 15,2020 issued to AMB Investments in the principal amount of $500,000 accruing interest at the rate of 12% per annum; and, (v) Term Note dated April 2, 2019 issued to CML Microcircuits (USA), Inc. (f/k/a CML Microsystems, Inc.) in the principal amount of $400,000 and assigned to AMB Investments on October 15, 2021 (a 2019 Note discussed above). Prior to the Merger, and in anticipation of the Merger and the private placement offering, all of the AMB Notes were amended to cause the principal amount to convert to shares of our common stock at $1.70 per share, and upon the closing of the private placement offering, the principal amount owed under the AMB Notes was converted under those terms, and accrued interest owed under such AMB Notes was paid.

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Guerrilla RF, Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2021 and 2020

Thompson Note and unexecuted debt financing

In July 2020, Guerrilla RF issued an unsecured Term Note (the “Thompson Note”) to Greg Thompson, a member of our Board of Directors, in the principal amount of $250,000 accruing interest at the rate of 12% per annum. Prior to the Merger, and in anticipation of the Merger and the private placement offering, the Thompson Note was amended to cause the principal amount to convert to shares of our common stock at $1.70 per share, and upon the closing of the private placement offering, the principal amount owed under the Thompson Note was converted under those terms, and accrued interest owed thereunder was paid.

In July 2021, Mr. Thompson intended to enter into another promissory note with Guerrilla RF in the principal amount of $300,000 accruing interest at the rate of 6% per annum; however, Mr. Thompson decided not to enter into the transaction after he transmitted $300,000 to Guerrilla RF. On September 30, 2021, Guerrilla RF remitted the $300,000 of principal back to Mr. Thompson and accrued interest owed thereunder was paid ($4,842).

2021 Convertible Debt Financing

Between July 15,2021 and October 1,2021, Guerrilla RF sold an aggregate of $1,488,600 of convertible promissory notes to ten accredited investors at an interest rate of 6% per annum (each, a “Convertible Note” and collectively, the “Convertible Notes”). The corresponding note purchase agreements provided for the mandatory conversion of the Convertible Notes into shares of the Company’s common stock upon the closing of the Merger and the private placement offering at the offering price ($2.00 per share).

The following table sets forth the principal amount of the Convertible Notes, and the number of shares of our common stock into which they were converted upon the closing of the Merger, sold to our directors, executive officers or holders of more than 5% of Guerrilla RF’s pre-Merger capital stock, or an affiliate or immediate family member thereof.

2021 Promissory Notes to Warrant Holders

In August 2021, Guerrilla RF issued promissory notes for an aggregate principal amount of approximately $300,000 to the holders of its outstanding warrants (the “2021 Notes”). The 2021 Notes accrued interest at the rate of 6% per annum until November 30,2021 and at the rate of 12% per annum thereafter. Immediately prior to the closing of the Merger, the warrants were exercised and the warrant exercise price paid in exchange for the cancelation of the 2021 Notes. The following table sets forth the principal amount of the 2021 Notes.

Name of Stockholder Principal Amount

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Guerrilla RF, Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2021 and 2020

Participation in the Offering

Certain of privately held Guerrilla RF, Inc.'s existing investors, including investors affiliated with certain of our directors and officers, purchased an aggregate of 1,294,000 shares of our common stock in the private placement offering, for an aggregate gross purchase price of $2,588,000. Such purchases were made on the same terms as the shares that were sold to other investors in the private placement offering and not pursuant to any pre-existing contractual rights or obligations.

Policies and Procedures for Related Party Transactions

We did not have a formal review and approval policy for related party transactions at the time of any of the transactions described above. However, all of the transactions described above were entered into after presentation, consideration and approval by our Board of Directors. Subsequently, our audit committee adopted a charter, which requires that any transaction with a related person and any other potential conflict of interest situation must be reviewed, approved, and monitored by our audit committee.

See Note 5 for additional discussion of debt agreements with members of the Guerrilla RF’s board of directors.

11. Employee Benefit Plan

The Company has a 401(k) plan to provide defined contribution retirement benefits for all eligible employees. Participants may contribute a portion of their compensation to the plan, subject to the limitations under the Internal Revenue Code. The Company’s contributions to the plan are at the discretion of Executive Management with Board of Directors advisement. The Company made $208,105 and $150,255 of contributions to the plan in 2021 and 2020, respectively.

12. Subsequent Events

Subsequent events have been evaluated through the date that the Company approved the consolidated financial statements. The following subsequent events have occurred during the period.

Coronavirus Pandemic

On March 11, 2020, the World Health Organization characterized the novel COVID-19 virus as a global pandemic. The pandemic has affected the Company’s business operations to a limited extent, most of which impacted its customers ordering patterns due to the pandemic’s effect on their operations; however, the Company continues to monitor the evolving situation related to COVID-19 actively and may take further actions that alter its business operations, including those that may be required by federal, state, or local authorities, or that the Company determines are in the best interests of its employees, partners, and shareholders. To date, the Company has been able to continue to deliver its products and solutions without material delays or difficulties despite the COVID-19 pandemic.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Management’s Evaluation of our Disclosure Controls and Procedures

Under the supervision of and with the participation of our management, including our principal executive officer and our principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2021, the end of the period covered by this Annual Report on Form 10-K. The term “disclosure controls and procedures,” as set forth in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act, means controls and other procedures of a company that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.

Based on this evaluation, as a result of our material weaknesses on internal controls over financial reporting noted below, management concluded that our disclosure controls and procedures were not effective as of December 31, 2021.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting (as defined in Rule 13a-15(f) promulgated under the Exchange Act) is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with U.S. GAAP. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our consolidated financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our consolidated financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our consolidated financial statements would be prevented or detected.

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As a result of becoming a public company, we are required, under Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting beginning with this Annual Report on Form 10-K. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. The SEC defines a material weakness as a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim consolidated financial statements will not be detected or prevented on a timely basis. Management conducted an evaluation of the effectiveness, as of December 31, 2021, of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Based on this evaluation, management identified deficiencies in internal control over financial reporting as of December 31, 2021. We have identified deficiencies in our internal controls over financial reporting related to the following financial reporting areas to be material weaknesses: significant positions utilized for our tax provisions, accounting policy and documentation of management's contemplation of the accounting treatment and implications over significant unusual transactions, our Chief Financial Officer's rights and access to post journal entries, and our financial reporting process. Therefore, because management concluded these deficiencies represent a material weaknesses in our internal control over financial reporting, our internal control over financial reporting was ineffective as of December 31, 2021.

As an “emerging growth company” under the JOBS Act, we are exempt from the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. As a result, our independent registered public accounting firm has not audited or issued an attestation report with respect to the effectiveness of our internal control over financial reporting as of December 31, 2021.

Changes in Internal Control over Financial Reporting

During the quarter ended December 31, 2021, there have been no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15(d)-15(f) promulgated under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. However, to respond to the material weaknesses noted above, we have devoted, and plan to continue to devote, significant effort and resources to the remediation and improvement of our internal control over financial reporting. Our plans at this time include retaining a public accounting firm to assist us with our tax accounting and tax provision calculations, enhancing our procedures to evaluate and document the accounting treatment over significant unusual transactions including the utilization of an accounting research tool, eliminating our CFO's rights and access to post journal entries to enhance our segregation of duties, and enhancing our financial reporting scheduling and closing calendar and our secondary review process during our financial reporting process. The elements of our remediation plans can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have the intended effects.

ITEM 9B. OTHER INFORMATION

None.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

(a) Directors and Executive Officers – The information required by this Item regarding directors, nominees and executive officers of the Company is set forth in the Proxy Statement under the sections captioned “Proposal 1 – Election of Directors” and “Executive Officers of the Company,” which sections are incorporated herein by reference.

(b) Section 16(a) Compliance – The information required by this Item regarding compliance with Section 16(a) of the Exchange Act is set forth in the Proxy Statement under the section captioned “Delinquent Section 16(a) Reports,” which section is incorporated herein by reference.

(c) Audit Committee – The information required by this Item regarding the Company’s audit committee, including the audit committee financial expert, is set forth in the Company’s Proxy Statement under the sections captioned “Board Committees – Audit Committee” and “Board Committees – Audit Committee – Audit Committee Report,” which sections are incorporated herein by reference.

(d) Code of Ethics – The information required by this Item regarding the Company’s code of ethics is set forth in the Proxy Statement under the section captioned “Code of Business Conduct and Ethics,” which section is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is set forth in the Proxy Statement under the sections captioned “Executive Compensation,” “Summary Compensation Table,” “Outstanding Equity Awards at 2021 Fiscal Year-End,” and “Director Compensation,” which sections are incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this Item is set forth in the Proxy Statement under the sections captioned “Security Ownership of Certain Beneficial Owners” and “Beneficial Ownership Table" which sections and Item are incorporated herein by reference.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this Item is set forth in the Proxy Statement under the sections captioned “Proposal 1 – Election of Directors,” “Transactions with Related Persons,” and “Board Committees,” which sections are incorporated herein by reference.

GUER US Equity

GUER · 10-K · period ended 2021-12-31

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

ITEM 9A. CONTROLS AND PROCEDURES

ITEM 9B. OTHER INFORMATION

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

GUER US Equity☆

GUER · 10-K · period ended 2021-12-31

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

ITEM 9A. CONTROLS AND PROCEDURES

ITEM 9B. OTHER INFORMATION

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

GUER US Equity