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.
FISCAL 2022 FINANCIAL HIGHLIGHTS
● Revenue for fiscal year 2022 increased 11% as compared to fiscal year 2021, driven primarily by higher royalties for our 5G wireless infrastructure products, and higher demand for our 5G infrastructure and catalog products for a wide variety of customer applications. Partially offsetting the increase in these product categories was a decline in our automotive product revenues caused by constraints that affected the global automotive industry, caused by supply chain disruptions and the lingering effects of the COVID-19 pandemic.
● Gross profit for fiscal year 2022 was 58.3% of revenues as compared to 58.6% for fiscal year 2021. Although the Company has continued to experience supply chain price increases, we have been able to mitigate the effect of these increases by increasing the prices we charge our customers related to the raw materials and assembly/test cost increases we experienced. Product contribution margins increased from 68.4% to 71.2%, from 2021 to 2022, mostly due to these aforementioned price increases which outpaced corresponding cost increases. The higher product contribution margins were partially offset by higher overhead costs, on a comparative period basis, which increased due to headcount additions in our Quality group, as well as increased costs of production mask amortization.
● Operating loss was $11.1 million for 2022 as compared to $3.7 million for 2021. This operating loss increase was primarily due to higher operating expenses relative to sales (154.0% in 2022 vs. 93.6% in 2021). Increased operating expenses were primarily attributable to increased investment in research and development (which grew 77% year over year), sales and marketing headcount additions, and additional costs associated with being a public company. Selling, general, and administrative costs increased year over year by 87.0% from 2021 to 2022.
● Net loss per share was $0.36 and $0.24 for fiscal year 2022 and 2021, respectively.
● Purchases of property, plant and equipment were $0.4 million for fiscal year 2022 and 2021. The majority of capital expenditures for 2022 are related to capital additions for the Company's laboratory equipment and related facilities.
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COVID-19 Pandemic and Supply Chain Update
The COVID-19 pandemic negatively impacted revenue for the year ended December 31, 2022, as we experienced lower revenues due to a significant number of customers experiencing supply chain challenges. Consequently, we implemented cost-reduction actions across our functional disciplines to assist us in navigating through what continues to be an uncertain environment. We experienced increased sales during the first half of 2022, driven by rebounding volumes in markets recovering from supply chain difficulties that impacted the timing of our customers' orders of our products; however, lingering supply chain disruptions through the end of 2022 negatively impacted customer order patterns, resulting in reduced sales growth.
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 the supply chain, our business, and our workforce. The extent to which the COVID-19 pandemic and its effects on the supply chain may impact our business will depend on future developments, which remain uncertain and cannot be predicted at this time.
Merger Agreement an Associated Private Placement Offering
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.
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.
Market Qualification
In May 2022, the Company's common stock qualified to trade on the OTCQX market (OTCQX: GUER).
Ongoing Funding of Operations
As an emerging growth company in its early stages of market penetration and customer acquisition, we continue to seek funding to support our operations and our research and development efforts, which result in new product introductions, market share increases, and participation in new markets. On February 28, 2023, we completed a private placement offering, raising gross proceeds of $9.2 million, including $5.0 million in an initial closing in late December 2022 and $4.2 million in January and February 2023. Guerrilla RF will continue to seek funding from capital and debt markets to continue as a going concern and to provide adequate capital for the continued growth of the company.
New Headquarters
In the first quarter of 2023, we moved into a new headquarters building in Greensboro, NC to support our growing employee base and research and development and customer support laboratory space requirements. The new facility incorporates over 50,000 square feet of office and clean laboratory space, and will replace our former headquarters (also in Greensboro) of approximately 10,000 square feet of space.
Expansion of Distributor and Sales Networks
We work with global distributors and sales representatives to promote and expand our sales force. Guerrilla RF leverages these ongoing business partnerships for long-term sales and market strategies. In 2022, we expanded our sales representative network in North America, Korea, Japan, and China. Currently, we work with two large electronic component distributors and over 20 sales representative organizations worldwide.
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Key Metrics (Non-GAAP Measures)
These non-GAAP measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of Company results as reported under GAAP. The Company compensates for such limitations by relying primarily on GAAP results and using non-GAAP measures only as supplemental data. In addition, because these non-GAAP measures are not measures of financial performance under GAAP and are susceptible to varying calculations, these measures, as defined by us, may differ from and may not be comparable to similarly titled measures used by other companies.
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.
Key Metrics
Number of products released 18 14
Number of total products 119 101
Number of products with lifetime revenue exceeding $100 thousand 52 40
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 since our inception through the end of the period.
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, a network of independent sales representatives, and 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 consist of actual direct product expenses, 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 drive our research and development efforts and, in turn, drive additional revenue streams and enable 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. As we expand our sales and marketing efforts, we expect our sales and marketing expenses will increase in absolute dollars.
Non-income taxes include excise taxes, sales and use taxes, capital stock and franchise taxes, and property taxes. Capital stock and franchise taxes are taxes that States charge the Company for the privilege of incorporating or doing business in a State.
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 equityholders and debtholders that have a contingent beneficial conversion feature related to certain convertible notes payable, and lease expense related to our capital leases.
Other Income (Expenses)
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 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 maintained its payroll levels and used 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 its PPP loan together with accrued interest of $3,611, recorded as accounts payable and accrued expenses on our consolidated balance sheet. On February 17, 2021, Guerrilla RF received notice from the SBA that the $535,800 PPP loan was forgiven, including all accrued interest.
On February 19, 2021, Guerrilla RF received a second PPP loan of $833,300 (the 2021 PPP Loan). 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 notice 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, 2022 and 2021:
Year Ended December 31,
Revenues increased $1.1 million to $11.6 million for the year ended December 31, 2022, as compared to $10.5 million for the year ended December 31, 2021. The increase in revenue was driven by the growth of product sales to our catalog customers, our repeaters and DSA customers, and our wireless infrastructure customers over a wide breadth of applications and customers. Sales to our catalog customers grew approximately 69% from the previous year. New and established repeater and DSA product revenue also expanded 34% from 2021 to 2022. 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, in part due to COVID pandemic-related interruptions in worldwide manufacturing. Royalty and non-recurring engineering revenue grew 60% to $0.8 million in 2022. Recent agreements for aerospace engineering consulting and development have been a key contributor to the increase in our nonproduct revenue.
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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, 2022, and December 31, 2021. RFPD, a large product distributor serving numerous end customers, generated 81% of product shipment revenue for the years ended December 31, 2022 and 2021.
Nonproduct (royalty and non-recurring engineering ("NRE")) revenues increased 60% for the year ended December 31, 2022, compared to December 31, 2021, from $0.7 million to $1.1 million, as our royalty revenues flattened while NRE revenues grew. We continued to develop and sell new products into our markets, and new product sales grew from $0.7 million for the year ended December 31, 2021 to $0.9 million for the year ended December 31, 2022, or 36%. Also, our existing product sales continued to increase from $9.2 million for the year ended December 31, 2021 to $9.7 million for the year ended December 31, 2022, or 5%.
International shipments amounted to $7.8 million (approximately 70% of product revenue) and $6.5 million (approximately 66% of product revenue) for the years ended December 31, 2022, and December 31, 2021, respectively.
Direct Product Costs and Gross Profit
Year Ended December 31,
Direct product costs increased $0.5 million to $4.8 million for the year ended December 31, 2022, compared to $4.3 million for the year ended December 31, 2021. The 11% increase in direct product cost was driven by a product sales volume increase of 11% (excluding royalty and NRE revenue). This increase was partially offset by increased fixed overhead costs (Quality staffing and related costs). Year-over-year gross profit was consistent with the percent change of direct product costs increasing 10% from 2021 to 2022.
Research and Development Expenses
Year Ended December 31,
Research and development expenses increased $3.5 million to $8.1 million for the year ended December 31, 2022, compared to $3.6 million for the year ended December 31, 2021. The increase was attributable to $1.4 million of employee additions in our engineering department, and $2.1 million was attributable to product development costs including prototype material and laboratory costs.
Sales and Marketing Expenses
Year Ended December 31,
Sales and marketing expenses increased $1.9 million to $4.6 million for the year ended December 31, 2022, compared to $2.8 million for the year ended December 31, 2021. The 68% increase year over year was driven predominantly by employee additions at the executive level in customer support and inside sales.
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General and Administrative Expenses
Year Ended December 31,
General and administrative expenses increased $2.6 million to $5.1 million for the year ended December 31, 2022, compared to $2.5 million for the year ended December 31, 2021. The increase was primarily related to increases in wages and benefits of $1.6 million, $0.7 million of legal and professional fees, and $0.3 million related to insurance. The increase in wages, benefits, and professional fees was driven by headcount additions within our information technology and accounting departments, and expenses required of being a public company.
Other Income (Expenses)
Year Ended December 31,
Interest expense increased approximately $0.3 million to $0.9 million for the year ended December 31, 2022, compared to $0.6 million for the year ended December 31, 2021. The increase was attributable to two debt vehicles Guerrilla RF entered into in 2022. The first was an asset-based loan with a total available draw of up to $3 million secured by inventory and accounts receivables. The second was a $8 million commercial line of credit of which Guerrilla RF has drawn $5 million.
Other income decreased $1.4 million for the year ended December 31, 2022 to $.03 million other expense for the year ended December 31, 2022. The driver of the other income in 2021 was due to both PPP loans being forgiven in 2021. There was no PPP loan forgiveness in 2022.
Liquidity and Capital Resources
Our primary source of liquidity is cash raised from private placements and debt financing. As of December 31, 2022, we had cash resources of $4.3 million. We also have two loan facilities, one of which is for up to $3.0 million with a specialty lender (referred to as the Spectrum Loan Facility, described in Note 5 to our consolidated financial statements), and the other of which is for up to $8.0 million with a different lender (referred to as the Salem Loan Facility, also described in Note 5 to our consolidated financial statements). As of December 31, 2022, we had drawn down $0.72 million under the Spectrum Loan Facility and $5.0 million under the Salem Loan Facility. The Company raised gross proceeds of approximately $9.2 million in a private placement offering with the final closing on February 28, 2023, including $4.2 million after December 31, 2022, to further support its current and future liquidity needs. The Company believes that its existing cash and cash equivalents will provide sufficient resources to support operations through the second quarter of 2023. Potentially, the Company could draw down additional funds under the Spectrum Loan Facility; however, its ability to do so is dependent upon the value of eligible accounts receivable assigned to Spectrum as security for advances under the Spectrum Loan Facility, which value fluctuates from time to time and is ultimately outside of the Company’s control. In addition, the Company anticipates seeking permission from Salem to draw down up to an additional $3.0 million of the $8.0 million Salem Loan Facility; however, Salem has the discretion to, and may, decline the Company’s request. The Company is also pursuing additional funding opportunities, including planning for a further capital raise in the second quarter of 2023 in connection with its planned uplisting to the Nasdaq or another national securities exchange. In the event the Company is unable to secure these or other funding sources, it may be unable to fund ongoing operations and pay its obligations as they become due after the second quarter of 2023.
As described in Note 1 to our consolidated financial statements, we have incurred recurring losses and negative cash flows from operations since inception and have an accumulated deficit at December 31, 2022 of $27.1 million. We expect losses and negative cash flows to continue in the near term, primarily due to continued investment in research and development, sales and marketing efforts, and increased administration expenses as our Company grows. We plan to continue to invest in the implementation of our long-term strategic plan and we anticipate that we will require additional funding in fiscal 2023. We will be actively pursuing additional funding as part of our ongoing strategic planning. There is no assurance that appropriate funding 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 Company moved into its new corporate headquarters, located in Greensboro, North Carolina, in the first quarter of 2023. As of December 31, 2022, the Company owed the new landlord $2.5 million related to agreed-upon excess construction costs, deferral fees, and interest for the new facilities as construction-in-progress. The Company remitted the payment to the landlord for these costs in January 2023. The Company anticipates at least another $0.7 million of excess construction costs and related interest and deferral fees for which it will be responsible, and they will become due in the first half of 2023.
Initial building asset addition financing related to furniture for the new headquarter facilities was completed in April 2022 and is further discussed in Note 5 to our consolidated financial statements as of December 31, 2022. The Company will not make any scheduled lease payments for the new headquarter building until the second quarter of 2023, but it will begin recognizing associated lease expense in the first quarter of 2023. The Company anticipates annual building lease payments of approximately $1.1 million, with the first annual lease payment period commencing in the second quarter of 2023.
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 $9.2 million and $4.8 million for the years ended December 31, 2022 and 2021, respectively. Cash used in operating activities for the year ended December 31, 2022 principally resulted from our net loss of $12.0 million, with uses offset by non-cash depreciation and amortization of $1.4 million as well as $0.6 million in share-based compensation. There was also $0.2 million provided from the decrease of prepaid expenses of $0.9 million, a decrease of accounts receivable of $0.5 million, and a decrease in operating lease expense of $1.2 million. In addition, there was a $0.8 million increase in accounts payable and accrued expenses and a $0.2 million increase in inventory.
Cash used in operating activities for the year ended December 31, 2021, principally resulted from our net loss of $2.8 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 $0.5 million and $0.4 million for the years ended December 31, 2022 and 2021, 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 during the year ended December 31, 2022, of $8.8 million was principally attributable to $5.1 million in net proceeds from two debt transactions noted above as well as total net proceeds from the first close of the private placement of common stock of $4.8 million. Principal payments on capital leases reduced total cash provided by financing by $1.0 million.
Contractual Obligations and Commitments
The following summarizes our significant contractual obligations as of December 31, 2022. As mentioned above associated with the move of our business headquarters in the first quarter of 2023, the Company anticipates at least another $0.7 million of excess construction costs and related interest and deferral fees for which it will be responsible, and they will become due in the first half of 2023. We anticipate an annual lease expense of approximately $1.1 million over the 10-year and two-month term of the building lease.
Payments due by period
Total Less than 1 year 1 – 3 years 4 – 5 years More than 5 years
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Off-Balance Sheet Arrangements
As of December 31, 2022 and 2021, 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 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 Annual Report on Form 10-K for the year ended December 31, 2021, filed with the U.S. Securities and Exchange Commission on April 1, 2022, 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.
Liquidity and Going Concern
Our recurring operating losses and our current operating plans raise substantial doubt about our ability to continue as a going concern for the next twelve months. Our independent registered public accounting firm issued their audit report on our consolidated financial statements for the years ended December 31, 2022 and 2021, which included an explanatory paragraph as to our ability to continue as a going concern. While we believe that our existing cash and cash equivalents will be sufficient to fund our current operating plans through the second quarter of 2023, we have based these estimates on assumptions that may prove to be wrong, and we could spend our available financial resources much faster than we currently expect and need to raise additional funds sooner than we anticipate.
Our ability to continue as a going concern will depend on us being able to raise additional capital and/or secure additional loans to fund our operations and achieve our business objectives. Our cash balance stood at $4.3 million on December 31, 2022; however, we have recorded a net loss of $12.0 million for the year ended December 31, 2022, or approximately $1.0 million per month. On February 28, 2023, we completed a private placement offering, raising gross proceeds of $9.2 million, including $5.0 million in an initial closing in late December 2022 and $4.2 million in January and February 2023.
Potentially, we could draw down additional funds under our existing Spectrum Loan Facility; however, our ability to do so is dependent upon the value of eligible accounts receivable assigned to Spectrum as security for advances under the Spectrum Loan Facility, which value fluctuates from time to time and is ultimately outside of our control. We anticipate seeking permission from Salem to draw down up to an additional $3.0 million of our $8.0 million Salem Loan Facility; however, Salem has the discretion to, and may, decline our request. We are also pursuing additional funding opportunities, including planning for a further capital raise in the second quarter of 2023 in connection with our planned uplisting to the Nasdaq or another national securities exchange. The ongoing inflationary economic environment and related capital market effects caused by the lingering effects of the COVID-19 pandemic, including its impact on the supply chain, cannot be predicted with certainty and may make it more difficult or preclude us from raising additional capital, increase our costs of capital and otherwise adversely affect our business, results of operations, financial condition, and liquidity. Our failure to do any of the aforementioned things could harm our business, financial condition and results of operations. Ultimately, if we do not secure additional financing in a timely manner, we will be unable to fund ongoing operations and pay our obligations as they become due, affecting our ability to continue as a going concern.
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 2022 and fiscal 2021 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 limited public trading market for our capital stock as of December 31, 2022, 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.
Our common stock became quoted on the OTCQX, an OTC Markets Group trading platform, on May 13, 2022. We began using our quoted common stock price as a fair value estimation factor to value our common stock once it achieved sufficient trading volume during the 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, 2022.
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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
To the Shareholders and Audit Committee of Guerrilla RF, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Guerrilla RF, Inc. (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated 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 consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, effective January 1, 2022, the Company changed its method of accounting for leases, effective January 1, 2022 due to the adoption of Financial Accounting Standards Board’s Accounting Standards Codification 842, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated 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 the 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 audits to obtain reasonable assurance about whether the consolidated 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 consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated 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 consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ FORVIS, LLP
(Formerly, Dixon Hughes Goodman LLP)
We have served as the Company’s auditor since 2021.
Raleigh, NC
March 3, 2023
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Guerrilla RF, Inc.
Consolidated Balance Sheets
December 31, 2022 and 2021
Assets
Prepaid expenses and other 3,574,746 -
Operating lease right-of-use assets 209,669 -
Liabilities and Stockholders' Equity
Operating lease, current portion 139,794 -
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Guerrilla RF, Inc.
Consolidated Statements of Operations
For the Years Ended December 31, 2022 and 2021
Year Ended December 31,
Operating Expenses:
Net loss per share - basic and diluted $ (0.36 ) $ (0.24 )
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Guerrilla RF, Inc.
Consolidated Statements of Change in Stockholders' Equity (Deficit)
For the Years Ended December 31, 2022 and 2021
Change in par value of common stock - (1,767 ) - - (1,767 )
Conversion of promissory notes to common stock - 4 51,996 - 52,000
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Guerrilla RF, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2022 and 2021
Year Ended December 31,
Cash flows from operating activities
Adjustment to reconcile net loss to net cash used in operating activities
Accretion of notes payables 48,070 -
Warrant amortization - 45,527
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 (549,850 ) (393,359 )
Cash flows from financing activities
Proceeds from notes payable and factoring agreement 9,070,726 5,097,870
Proceeds from equity financing 4,765,232 -
Proceeds from exercise of stock options 5,232 36,995
Repayment of finance insurance premiums (53,115 )
Proceeds from PPP loan - 833,300
Noncash transactions:
Property and equipment financed through finance leases $ 4,745,311 $ 144,177
Other long-term asset additions included in accounts payable $ 2,369,612 $ -
Financing of insurance premiums and software $ 382,843 $ -
Right-of-use assets obtained through operating lease $ 327,400 $ -
Conversion of promissory notes to common stock $ 52,000 $ 5,988,602
Property and equipment additions included in accounts payable $ 15,873 $ 50,625
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Guerrilla RF, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2022 and 2021
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.
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 negative cash flows from operations in nearly every fiscal period since inception. For the year ended December 31, 2022, the Company incurred a net loss of $12.0 million and used $9.2 million in cash to fund operations. As a result, the Company had an accumulated deficit of $27.1 million as of December 31, 2022. The Company's cash as of December 31, 2022 was $4.3 million. We expect losses and negative cash flows to continue in the near term, primarily due to continued investment in research and development, sales and marketing efforts, and increased administration expenses as our Company grows. We plan to continue to invest in the implementation of our long-term strategic plan and we anticipate that we will require additional funding in fiscal 2023. There is no assurance that appropriate funding 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.
Our primary source of liquidity is cash raised from private placements and debt financing. We also have two loan facilities, one of which is for up to $3.0 million with a specialty lender (referred to as the Spectrum Loan Facility, described in Note 5 to our consolidated financial statements), and the other of which is for up to $8.0 million with a different lender (referred to as the Salem Loan Facility, also described in Note 5 to our consolidated financial statements). As of December 31, 2022, we had drawn down $0.72 million under the Spectrum Loan Facility and $5.0 million under the Salem Loan Facility. The Company raised gross proceeds of approximately $9.2 million in a private placement offering with the final closing on February 28, 2023, including $4.2 million after December 31, 2022, to further support its current and future liquidity needs. The Company believes that its existing cash and cash equivalents will provide sufficient resources to support operations through the second quarter of 2023. Potentially, the Company could draw down additional funds under the Spectrum Loan Facility; however, its ability to do so is dependent upon the value of eligible accounts receivable assigned to Spectrum as security for advances under the Spectrum Loan Facility, which value fluctuates from time to time and is ultimately outside of the Company’s control. In addition, the Company anticipates seeking permission from Salem to draw down up to an additional $3.0 million of the $8.0 million Salem Loan Facility; however, Salem has discretion to, and may, decline the Company’s request. The Company is also pursuing additional funding opportunities, including planning for a further capital raise in the second quarter of 2023 in connection with its planned uplisting to the Nasdaq or another national securities exchange. In the event the Company is unable to secure these or other funding sources, it may be unable to fund ongoing operations and pay its obligations as they become due after the second quarter of 2023.
The Company will require additional funds to respond to business challenges, including developing new solutions or enhancing existing solutions, enhancing our operating infrastructure, expanding our sales and marketing capabilities, and acquiring complementary businesses, technologies, or assets. We plan to engage in additional equity or debt financing to secure the necessary funds; however, equity and debt financing might not be available when needed or, if available, might not be available on terms satisfactory to us. If we raise additional funds through equity financing, our stockholders may experience dilution. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. If we are unable to obtain adequate financing or financing on terms satisfactory to us in the future, our ability to continue as a going concern, to support our business growth, and to respond to business challenges could be significantly limited as we may have to delay, reduce the scope of, or eliminate some or all of our initiatives, which could harm our operating results.
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Guerrilla RF, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2022 and 2021
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 have been prepared in accordance with GAAP and with the rules and regulations for reporting the Annual Report on Form 10-K ("Form 10-K"), and are presented in U.S. dollars. Accordingly, they do not include all of the information and notes required by GAAP for annual consolidated financial statements. 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 the Company and its wholly-owned subsidiary, Guerrilla RF. All intercompany accounts and transactions have been eliminated in consolidation.
Emerging Growth Company
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended (the "Securities Act"), as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of the extended transition period, which means that when a standard is issued or revised and it has different application dates for public and private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
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.
Segment Information
Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one segment.
Concentrations of Credit Risk and Major Customers
Financial instruments at December 31, 2022 and 2021 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, 2022 and 2021
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, 2022 and 2021. Revenues from the major customer accounted for 81% of product shipment revenue for both the years ended December 31, 2022 and 2021. Accounts receivable from our major customer represented76% of accounts receivable at December 31, 2022, and 78% of accounts receivable at December 31, 2021.
Accounts Receivable
Accounts receivable primarily relate to amounts due from customers, which are typically due within 30 to 45 days. Accounts receivable also include 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. The Company establishes an allowance for expected credit losses and other customer claims. Historically, such losses have been immaterial and within management's expectations.
The Company had a factoring agreement that provided advance payments on up to 85% of invoices issued to RFPD, its largest distributor, with receivables less than 90 days outstanding secured by the remaining 15%. As of December 31, 2021, the Company had $0 of factored invoices. The Company terminated this factoring agreement in the second quarter of 2022.
On June 1, 2022, the Company established a new loan facility (the Spectrum Loan Facility) with Spectrum. The Spectrum Loan Facility provides for advance payments up to $3 million, calculated, in part, based on the value of eligible accounts receivable assigned to Spectrum as security for advances under the Spectrum Loan Facility. As of December 31, 2022, there were $0.7 million of advances under the Spectrum Loan Facility. At December 31,2022, $0.1 million of excess collateral was due from Spectrum, which is included in accounts receivable on the consolidated balance sheets. See Note 5 for additional discussion on the Spectrum Loan Facility.
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 evaluated its long-lived assets for impairment in the year ended December 31,2022 and determined a small subset of its production mask sets and one laptop were impaired and recorded an asset impairment expense. See Note 4 for further information. The Company did not record any expense related to asset impairment in 2021.
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,and the private placements mentioned in Note 6 were offset against the total proceeds from the Merger and private placements in the accompanying consolidated financial statements for both the years ended December 31, 2022 and 2021.
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Guerrilla RF, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2022 and 2021
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, 2022 and 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.
As of December 31, 2022 and 2021, the Company had $250 thousand and $0, respectively, of revenue from contracts with customers to be recognized over time as the services are delivered to the customer. Certain nonrecurring engineering service revenues are recognized over time as the services are delivered to the customer. During the year ended December 31, 2022, the Company recognized $0 of revenue that was deferred as of December 31, 2021. As of December 31, 2022 and 2021, the Company did not have any contract liabilities where performance obligations have not yet been satisfied. During the years ended December 31,2022 and 2021, there was no revenue recognized from performance obligations satisfied (or partially satisfied) in previous periods.
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.
Direct Product Costs
The Company’s direct product costs consist primarily of salaries and related expenses, overhead, third-party services vendors, shipping and handling, and 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.
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Guerrilla RF, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2022 and 2021
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, 2022 and 2021 were $39,219 and $18,108, 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. The Company analyzes its product portfolio and inventory aging in determining whether an inventory allowance is needed. Historically, such allowances have been immaterial and within management's expectations.
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 the statement of operations 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, 2022 and 2021
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, 2022 and 2021. As such, all preferred stock, warrants, and options were excluded from the calculation of net loss per share for the years ended December 31, 2022 and 2021.
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:
Restricted stock units 873,820 -
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 delayed the effective date of Topic 842 until January 1, 2022. The Company adopted Topic 842 in the fiscal quarter ended March 31, 2022. See Note 8 for further information related to lease obligations on the consolidated balance sheet upon adopting ASC Topic 842.
In June 2016, the FASB issued ASU 2016-13,Financial Instruments - Credit Losses, which requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. This standard is effective for fiscal years beginning after December 15, 2022, and early adoption is permitted. The Company does not intend to adopt this standard early and is currently evaluating the impact of this standard.
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 adopted this accounting guidance in the fiscal quarter ended March 31, 2022, and it did not have a material impact on its consolidated financial statements.
Effective January 1, 2022, the Company adopted ASU No.2019-12,Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. The amendments in ASU 2019-12 eliminate certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarifies and simplifies other aspects of the accounting for income taxes. The amendments in ASU 2019-12 became effective for the Company as of the beginning of our 2022 fiscal year. The Company adopted ASU 2019-12 on a prospective basis and the adoption did not have a material impact upon its financial condition or results of operations.
In September 2022, the FASB issued ASU No.2022-04,Liabilities- Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. This guidance requires annual and interim disclosures for entities that use supplier finance programs in connection with the purchase of goods and services. These amendments are effective for fiscal years beginning after December 15, 2022, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. The Company is currently assessing the impact of this guidance on our consolidated financial statements.
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Guerrilla RF, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2022 and 2021
3. Inventories
Inventories are summarized as follows:
Inventory allowance - (12,794 )
As of December 31, 2021, there was an inventory allowance of $12,794 made up of potential scrap and obsolete inventory.
4. Property and Equipment
Property and equipment is summarized as follows:
Depreciation expense was $1,357,571 and $371,435 for the years ended December 31, 2022 and 2021, respectively.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount maynot be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with ASC 360-10,Property, Plant, and Equipment. ASC 360-10 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.
In fiscal 2022, the Company concluded the undiscounted future cash flows associated with certain of its long-lived assets, specifically mask sets used in the production of a small subset of Company products and information technology equipment, indicated the carrying amount of those items was not recoverable. As a result, the Company reviewed the long-lived assets for impairment and recorded a $20 thousand impairment charge included in General and Administrative expenses on the consolidated statement of operations. The impairment was measured under an income approach utilizing forecasted discounted cash flows to determine fair values of the impairment assets. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820,Fair Value Measurement.
At December 31,2022, the Company concluded it did not have any other triggering events requiring assessment of impairment of its long-lived assets.
5. Debt
Factoring Arrangement
The Company previously had an accounts receivable factoring arrangement with a financial institution (the “Factor”), which ended in the second quarter of 2022. Under the terms of the agreement, the Company, from time to time, sold to the Factor certain of its accounts receivable balances on a recourse basis for credit-approved accounts. The Factor remitted 85% of the domestic accounts receivable balance to the Company (the “Advance Amount”), with the remaining balance, less fees to be paid to the Company once the Factor collected the entire accounts receivable balance from the customer. The factoring fee was 0.98 % of the invoice’s face value factored for the first30 days required to collect the invoice and prorated on a per diem basis at 0.0327 % each day thereafter. The minimum invoice fee for any factored invoices was $1.50. The Company included 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, 2022 and 2021
As stated previously, the Company factored the accounts receivable on a recourse basis. Therefore, if the Factor could not collect the factored accounts receivable, the Company had to refund the Advance Amount remitted to it for any uncollected accounts receivable. Accordingly, the Company recorded the liability of having to refund the Advance Amount as short-term debt when the factoring arrangement was utilized. The Company terminated the factoring arrangement as of June 1, 2022. As of December 31,2022, and 2021 there were no advances or other liabilities outstanding under the factoring arrangement.
The cost of factoring was as follows:
Factoring Fees $ - $ 87,122
Spectrum Loan Facility
The Company entered into the Spectrum Loan Facility with Spectrum pursuant to the terms of the General Credit and Security Agreement (the "Credit Agreement"), the Company may borrow monies to purchase eligible equipment in an amount equal to the lesser of (i) 75% of the cost of such eligible equipment and (ii) $500,000; provided that this maximum eligibility will automatically be reduced by 1/48th each month during the term of the facility. The Credit Agreement also allows for additional borrowing in an amount equal to the lesser of (i) 50% of the net amount of eligible inventory (as defined in the Credit Agreement), (ii) $350,000, and (iii) 50% of the purchased accounts receivable outstanding under the related Assignment of Accounts and Security Agreement (the “AR Agreement”).
Under the terms of the AR Agreement, Spectrum has agreed to advance funds equal to approximately 85% of eligible accounts receivable that are collected by Spectrum under a “lock box” arrangement. The maximum amount that may be advanced under the AR Agreement is $3,000,000 less any amounts loaned under the Credit Agreement.
The scheduled term of the Spectrum Loan Facility is 24 months from the Spectrum Effective Date, unless earlier terminated as per the terms of the Spectrum Loan Facility. The term of the facility will automatically renew unless either party provides at least 60 days’ notice prior to the scheduled expiration date. In the event of an early termination of the AR Agreement by the Company or resulting from the Company’s default or other circumstances impacting the Company (including bankruptcy, reorganization, sale of assets, and cessation of business), the Company will be required to pay a prepayment fee.
The Company’s obligations under the Spectrum Loan Facility are secured by first-priority liens on essentially all of the Company’s assets; provided, however, that the Company is permitted to grant purchase money security interests on certain equipment, furniture and similar tangible assets financed by a third party.
In addition to annual facility fees of $30,000 and other quarterly and transaction fees payable to Spectrum, interest accrues on amounts owed under the Spectrum Loan Facility at the prime rate as quoted by the Wall Street Journal plus 3.5%, but in no event lower than 7.0%.
The Spectrum Loan Facility contains various covenants and restrictions on the Company's financial and business operations including restrictions on the purchase or redemption of any Company shares and the declaration or payment of any dividends on the Company's stock. For the year ended December 31, 2022, the Company maintained compliance with these covenants and restrictions.
The Company has borrowed $0.7 million under the Spectrum Loan Facility as of December 31,2022. The Company includes the interest expense of the Spectrum Loan Facility ($66 thousand) as part of its interest expense on its consolidated statements of operations, and the total amount of $0.7 million borrowed under the Spectrum Loan Facility is included as short-term debt on the consolidated balance sheet as of December 31,2022.
SalemLoan Facility
On August 11,2022 (the “ Salem Effective Date”), the Company entered into the Salem Loan Facility with Salem. The Salem Loan Facility provides for a loan facility in the aggregate amount of up to $8.0 million.
The Salem Loan Facility provided for an initial advance of $5.0 million, and additional advances over the next twelve months from the Salem Effective Date of up to $3.0 million at Salem’s discretion. The Salem Loan Facility has a five-year term, is secured by a second-priority lien on essentially all of the Company’s assets and provides for aggregate interest payments of 13.0% per annum, with 11.0% payable in cash and 2.0% paid-in-kind, with the principal and outstanding interest due in August 2027. In addition to a 2.0% fee paid prior to closing on the Salem Loan Facility, the Company issued Salem 150,000 shares of common stock as consideration for the Salem Loan Facility. The Company will issue up to an additional 150,000 shares in the event that Salem advances the additional $3.0 million.
The Salem Loan Facility contains various covenants and restrictions on the Company's financial and business operations including restrictions on the purchase or redemption of any Company shares and the declaration or payment of any dividends on the Company's stock. For the year ended December 31, 2022, the Company maintained compliance with these covenants and restrictions.
Should the Company repay the Salem loan during the firstthree years of the five-year term, it may be required to pay a prepayment premium equal to (i) 3.0% of the prepaid principal during year 1, (ii) 2.0% of the prepaid principal during year 2, and (iii) 1.0% of the prepaid principal during year 3. The Salem Loan Facility contains customary affirmative and negative covenants that impose restrictions on the Company’s financial and business operations, including limitations on liens, indebtedness, and fundamental changes in the nature of the Company’s business. In addition, the Salem Loan Facility provides that the Company must maintain compliance with a maximum leverage ratio and a minimum liquidity covenant.
On August 11, 2022, in connection with the closing of the Salem Loan Facility, the Company paid off its obligations under its Economic Injury Disaster Loan ("EIDL") loan from the Small Business Administration (see further discussion of the EIDL loan below).
The Company has borrowed $5.0 million under the Salem Loan Facility as of December 31,2022. As of December 31,2022, the Company includes the interest expense of the Salem Loan Facility ($172 thousand) as part of its interest expense on its consolidated statements of operations, the total amount of $5.0 million borrowed as undiscounted long-term debt on its consolidated balance sheets ($4.6 million discounted long-term debt), and the 150,000 shares of common stock issued ($0.5 million) within the consolidated statements of stockholders' equity (deficit) .
Loans Payable – EIDL
In response to COVID-19, the SBA created the 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 Paycheck Protection Program ("PPP"), an EIDL loan is not forgivable in the future but provides favorable interest and payment terms. The maximum EIDL available was equivalent to six months of a business’s working capital, up to $150,000. Businesses could 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 the SBA collateral conditions and agreed to pay annual interest of 3.75% per annum on the outstanding principal balance. Monthly installment payments were to commence at the end of the anticipated deferral allowance period in December 2022 for up to a maximum of 30 years from the loan date (thus, 2050). As mentioned above, in conjunction with closing the Salem Loan Facility on August 11, 2022, the Company repaid the entire outstanding principal ($149,900) and accrued interest ($12 thousand) of the EIDL loan.
Loans Payable – PPP
On April 30, 2020, Guerrilla RF received loan proceeds of $535,800 under the PPP. Established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) administered by the 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.
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.
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, 2022, the Company had no principal outstanding on the PPP loans or accrued interest.
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Notes to Consolidated Financial Statements
For the Years Ended December 31, 2022 and 2021
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 entered into several debt arrangements from capital raise events and bridge loans from existing investors. These debt arrangements were characterized by interest-only quarterly payments paid in arrears. Per the terms of the debt arrangements, the principal was paid in its entirety at the respective maturity date. In addition, all such debt agreements could be prepaid by the Company without any penalty.
From March 2017 through July 2020, the Company entered into debt financings with multiple investors for a total of $4,000,000 in promissory notes with various maturity dates from March 2022 to December 31, 2023. The debt instruments had interest rates from 8% to 12% per annum. The outstanding balances of the promissory notes were 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.
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Guerrilla RF, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2022 and 2021
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, the 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 October 22, 2021 closing date of the Merger were converted into Company common stock (as further described in Note 1).
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Guerrilla RF, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2022 and 2021
Long‐term debt is summarized as follows:
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Guerrilla RF, Inc.
Notes to Consolidated Fin
ancial Statements
For the Years Ended December 31, 2022 and 2021
Debt Maturity
Debt is expected to mature as follows:
Thereafter -
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, 2022 and 2021. 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, 2022.
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 for aggregate gross proceeds of $11.5 million. The Company incurred issuance costs of $2.1 million, which were offset against the proceeds from this offering and are recorded in the accompanying consolidated financial statements for the year ended December 31, 2021.
On December 30,2022, Guerrilla RF, Inc. the Company completed the initial closing of a private placement of up to $10.0 million in aggregate gross proceeds (the “Offering”) as it entered into a Unit Purchase Agreement (the “Unit Purchase Agreement”) with investors (the “Purchasers”) pursuant to which the Company sold 3,882,340 units (the “Units”), each Unit consisting of one share of the Company’s common stock and one warrant to purchase one-half of a share of common stock (the “Warrant”). The purchase price of each Unit was $1.30 per Unit, resulting in gross proceeds at this initial closing of approximately $5.0 million before the deduction of estimated Offering expenses of approximately $700,200. Pursuant to the terms of the Offering, the Company continued to accept subscriptions for Units and had additional closings through February 28, 2023.
Each full Warrant has an exercise price of $2.00 per whole share of common stock, subject to adjustment, and is exercisable for a period of five years beginning six (6) months from the date of the final closing of the Offering.
In connection with the Offering, the Company also entered into a registration rights agreement (the “Registration Rights Agreement”) with the Purchasers, pursuant to which the Company is required to prepare and file a registration statement with the Securities and Exchange Commission (the “SEC”) covering the resale of (i) the shares of common stock issued to the Purchasers in the Offering, and (ii) the shares of common stock issuable upon exercise of the Warrants (the “Warrant Shares”) within 30 days following the final closing of the Offering. The Company is required to use its reasonable best efforts to cause the registration statement to be declared effective no later than 120 days following the final closing of the Offering.
Laidlaw & Company (UK), Ltd. served as the exclusive placement agent and GP Nurmenkari, Inc. served as a selected dealer for the Offering (collectively, the “Placement Agents”). In addition to an aggregate cash fee of approximately $504,704, representing 10% of the gross proceeds from the initial closing, the Placement Agents will receive warrants (the “Placement Agent Warrants”) to purchase 582,351 shares of Common Stock (the “Placement Agent Warrant Shares”). The Placement Agent Warrants are exercisable for a period of five years and have an exercise price of $1.30 per share.
The aforementioned Units and Warrants have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), but were offered and sold pursuant to an exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.
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Guerrilla RF, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2022 and 2021
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 associated with the private placement and Merger (see Note 1). As mentioned above, on December 30,2022, the Company completed the initial closing of its Offering. Each Unit sold in the Offering includes one warrant to purchase one-half of a share of common stock. Thus, as of December 31, 2022, Units sold in the Offering include warrants to purchase 2,523,521 shares, which warrants will be issued upon the final closing of the Offering. The 2,523,521 Warrant Shares comprise 1,941,170 Purchaser Warrant Shares and 582,351 Placement Agent Warrant Shares, each exercisable for a period of five years beginning six months following the final closing of the Offering.
Preferred Stock
The Company’s Board of Directors is authorized, subject to limitations prescribed by Delaware law, to issue preferred stock in one or more series, to establish from time to time the number of shares to be included in each series, and to fix the designation, powers, preferences, and rights of the shares of each series.
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, 2022 and 2021.
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7. Share-Based Compensation
In 2014, the Company 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 available under 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. No further awards may be made under the 2014 Plan.
In 2021, the Board adopted the Equity Incentive Plan (the “2021 Plan”), which authorizes the award of stock options, restricted stock awards, stock appreciation rights, restricted stock units ("RSU"), 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 each year until 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 our Board.
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.
Stock Awards
On January 1, 2022, the Compensation Committee of the Board awarded 75,000 shares of common stock (valued at $2.00 per share) to the non-employee directors for services provided in 2021. These common stock awards vested immediately.
Stock Option Awards
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 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, 2022 and 2021
For the years ended December 31, 2022 and 2021, 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 6.25
Expected volatility 52 % 67 %
Dividend rate — —
The weighted average grant date fair value of stock option awards granted was $1.30 and $0.97 during the years ended December 31,2022, and 2021, respectively.
The value of stock options is recognized as compensation expense by the straight-line method over the vesting period. Unrecognized compensation costs related to non‐vested options at December 31, 2022 amounted to$496,659, which are expected to be recognized over an average of approximately three years.
Stock option activity by share is summarized as follows for the years ended December 31,2022 and 2021:
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 issuable under the options, the exercise price of the options was also reduced by a corresponding 2.95 factor.
In April 2022, the Compensation Committee of the Board granted 248,500 stock options to new employees at an exercise price of $2.00 per share. These option awards vest equally over four years (25% per year) on the anniversary of the date the recipient started working for the Company.
In September 2022, the Compensation Committee of the Board granted 93,500 stock options to new employees at multiple exercise prices between $2.00 and $4.15 per share. These option awards vest equally over four years (25% per year) on the anniversary of the date the recipient started working for the Company.
The number of options exercised during the year ended December 31, 2022 was 12,702. The aggregate intrinsic value of outstanding options exercisable as of December 31, 2022, was $3.3million. As of December 31, 2022, stock-based compensation for unvested options granted of $0.5 million will be recognized over a remaining weighted-average requisite service period of2.3 years.
Restricted Stock Unit ("RSU") Awards
In the year ended December 31,2022, the Compensation Committee of the Board granted 873,820 RSUs (net of cancellations/forfeitures) to various employees and directors. The RSU awards made to non-employees (150,000, net of cancellations/forfeitures) vest 100% on the earliest of (i) June 2, 2023, subject to the recipient's continued service to the Company, (ii) the recipient's death, or (iii) the recipient's disability. The RSUs awarded to employees (723,820, net of cancellations/forfeitures) vest over three equal annual installments from the date of the grant. The RSUs awarded are subject to the recipient’s continued service through the applicable vesting date and the shares not vested are forfeited upon separation from or discontinuation of services to the Company. The share-based compensation expense to be recognized for these RSUs over the remaining vesting period subsequent to December 31,2022 is approximately $1.1 million.
The employee stock option and RSU grants during the year ended December 31, 2022 were issued from the 2021 Plan. The fair value of each RSU was estimated on the date of grant, based on the weighted average price of the Company's stock reduced by the present value of the expected dividend stream during the vesting period using the risk-free interest rate. The Company will issue new shares of common stock to satisfy RSUs upon vesting. The Company did not make any RSU grants in 2021. The following table summarizes the RSU activity and weighted averages.
The following table summarizes RSU activity:
Number of RSUs Weighted Average Grant Date Fair Value
Outstanding at December 31, 2021 - $ -
Vested - -
Pursuant to awards made under the 2014 Plan and the 2021 Plan, the Company recorded stock-based compensation expense in the following expense categories in the consolidated statements of operations for the years ended December 31, 2022 and 2021:
Direct product costs $ 21,088 $ -
Research and development $ 181,792 $ -
Sales and marketing $ 108,318 $ -
No income tax benefits have been recognized in the consolidated statements of operations for stock-based compensation arrangements, and no stock-based compensation costs have been capitalized as property and equipment through December 31,2022.
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Guerrilla RF, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2022 and 2021
8. Commitments and Contingencies
Lease Commitments
As of January 1, 2022, the Company adopted ASC Topic 842 and selected the transition alternative method with no comparative period adjustment. The practical expedients elected were no reassessment of lease classification, no re-evaluation of embedded leases, no reassessment of initial direct costs, and short-term lease exemption. On January 1, 2022, the Company recorded a finance lease asset and liability of $2.6 million and an operating right-of-use asset and liability of $0.3 million.
The Company determines whether an arrangement is an operating lease or financing lease at inception. Lease assets and obligations are recognized at the lease commencement date based on the present value of lease payments over the term of the lease. The Company generally uses its incremental borrowing rate, which is based on information available at the lease commencement date, to determine the present value of lease payments.
The Company has entered into leases primarily for real estate and equipment used in research and development. Operating lease expense is recognized in continuing operations by amortizing the amount recorded as an asset on a straight-line basis over the lease term. Financing lease expense is comprised of both interest expense, which will be recognized using the effective interest method, and amortization of the right-of-use assets. These expenses are presented consistently with other interest expense and amortization or depreciation of similar assets. In determining lease asset values, the Company considers fixed and variable payment terms, prepayments, incentives, and options to extend, terminate or purchase. Renewal, termination, or purchase options affect the lease term used for determining lease asset value only if the option is reasonably certain to be exercised.
Balance sheet information related to right-of-use assets and liabilities is as follows:
Balance Sheet Location December 31, 2022
Operating Leases:
Noncurrent portion of operating lease liabilities Operating lease 71,714
Total operating lease liabilities $ 211,508
Finance Leases:
Finance lease right-of-use assets Property, plant, and equipment $ 4,124,093
Noncurrent portion of finance lease liabilities Finance lease 2,984,618
Total finance lease liabilities $ 4,063,124
Lease cost recognized in the consolidated financial statements is summarized as follows:
For the Year Ended December 31, 2022 For the Year Ended December 31, 2022(1)
Finance lease cost:
(1) Represent amounts under ASC 840.
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Notes to Consolidated Financial Statements
For the Years Ended December 31, 2022 and 2021
Other supplemental information related to leases is summarized as follows:
Weighted average remaining lease term (in years):
Operating leases 1.48
Finance leases 3.73
Weighted average discount rate:
Operating leases 7.35 %
Finance leases 7.05 %
Operating cash flows from operating leases $ 133,637
Operating cash flows from finance leases $ 251,228
Financing cash flows from finance leases $ 985,622
The following table summarizes our future minimum payments under contractual obligations for operating and financing liabilities as of December 31, 2022:
Payments Due by Period
The Company leases its former headquarters office facilities in Greensboro, North Carolina under a lease agreement, which expires in June 2024. The lease agreement allows for early cancellation, subject to payment of an early cancellation penalty. Under the lease agreement, 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.
New Headquarters Capital Addition Financing
In July 2021, the Company entered into a lease agreement for new headquarters (also in Greensboro, North Carolina), with a lease term of ten (10) years and two months from the date the Company commences occupancy, which occurred in the first quarter of 2023. Under the lease agreement, the Company is responsible for certain insurance and maintenance expenses, which are not part of the minimum lease payments. 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 commence remitting scheduled lease payments in the second quarter of 2023. The Company anticipates an annual lease expense of approximately $1.1 million over the term of the lease and lease expense recognition will commence in the first quarter of 2023. The initial lease payment will be made in the second quarter of 2023.
In conjunction with the Company's planned move into expanded office facilities in early 2023, which will become the Company's new headquarters, the Company entered into a lease financing arrangement related to furniture for the new office facilities in April 2022. The total cost of the furniture financed was $1.1 million, which included tax, freight, interim storage, and installation labor. The Company was responsible for paying interest-only payments to the financing company related to the furniture procurement order (interest on principal of $496 thousand) placed in April 2022 prior to the first scheduled principal financing payment, which occurred in August 2022 ($246 thousand). The Company made interest-only payments to the financing company related to the furniture procurement order through August 2022 in the amount of $17 thousand. Subsequent to August 2022 through December 31, 2022, the Company has paid $96 thousand in principal and $14 thousand in interest. The total scheduled principal and interest payments to be made after December 31, 2022 are $692 thousand.
The Company entered into a lease agreement in July 2021 for its new headquarters. The new headquarters were renovated in accordance with plans agreed upon with the landlord, and the Company took possession of the building in the first quarter 2023 when all improvements and renovations (the "new building asset additions") were substantially complete. Initially, the Company anticipated the new building asset additions being completed and taking possession in September 2022; however, the landlord, as the sole improvement and renovation contractor, experienced significant construction delays. In August 2022, the Company reached an agreement with the landlord over the timing of the payments for the new building asset additions in light of the significant construction delays. The Company anticipates the total cost of the new building asset additions will be approximately $7.5 million, with the Company being responsible for the balance in excess of the landlord's $3.5 million allowance (the "excess construction costs") plus deferral fees and interest.
As part of the aforementioned August 2022 lease amendment, the Company made the landlord an initial payment of $1.3 million towards the excess construction costs and related financing costs. The August 2022 lease amendment included new financing terms for the excess construction costs, which include a deferral fee (2% per annum) and interest (18% per annum). Thus, the Company will pay the landlord a 2% deferral fee to be applied to all current and future excess construction costs as invoiced by the landlord. The Company will also pay 18% interest on all such current and future excess construction costs and deferral fees from the date the landlord invoices them until the Company remits payment. The initial payment of $1.3 million towards the excess construction costs was applied first to accrued interest, then to the deferral fee, and then to advanced rent payments. The Company was not required to make any additional payments until after the Company completed an additional capital raise, but no later than December 15,2022 (and up to December 31, 2022 at the landlord's discretion). At that time, the Company was required to pay the landlord, in full, all unpaid excess construction costs, deferral fees, and interest then due (the "Capital Raise Payment"). After the Capital Raise Payment, the Company must resume making monthly invoiced payments related to the excess construction costs, including deferral fees and interest. The Company had the initial closing of its capital raise on December 30, 2022. The Company has recorded the advanced rent amounts paid and payable to the landlord as long-term prepaid expenses and other on the consolidated balance sheets as of December 31, 2022. These amounts will be reclassified to the operating lease right-of-use asset upon lease commencement in the first quarter of 2023. The Company remitted the Capital Raise Payment to the landlord on January 3, 2023 for $2.5 million.
Legal
In the ordinary course of business, the Company may become involved in legal disputes. In the opinion of management, any potential liabilities resulting from any disputes would not have a material adverse effect on the Company’s consolidated financial statements. As a result, no liability related to any such disputes has been recorded at December 31, 2022 or 2021.
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, lenders, 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, 2022 or 2021.
Employment Agreement
The Company has entered into 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 calculated as twelve monthly payments of the executive's monthly base salary.
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Guerrilla RF, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2022 and 2021
9. Income Taxes
The Company did not have any income tax expense for the years ended December 31, 2022 or 2021.
The provision for income taxes for the years ended December 31,2022 and 2021 differs from the amount that would be provided by applying the statutory U.S. federal income tax rate of 21% to pre-tax income primarily due to a valuation allowance. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is obtained, additional information becomes known, or the tax environment changes.
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 31,2022 and December 31, 2021.
On August 9, 2022, the U.S. Government enacted the U.S. CHIPS and Science Act (“CHIPS Act”). The CHIPS Act creates a 25% investment tax credit for certain investments in domestic semiconductor manufacturing. The credit is provided for qualifying property, which is placed in service after December 31, 2022, and any impact to the Company would start in fiscal 2023. On August 16, 2022, the U.S. Government enacted the Inflation Reduction Act. The Inflation Reduction Act introduces a new 15% corporate minimum tax, based on adjusted financial statement income of certain large corporations. Applicable corporations would be allowed to claim a credit for the minimum tax paid against regular tax in future years. The Inflation Reduction Act also includes an excise tax that would impose a 1% surcharge on stock repurchases. This excise tax is effective January 1, 2023. The Company is currently evaluating the effect the CHIPS Act and the Inflation Reduction Act will have on its consolidated financial statements. At present, the Company does not expect that any of the provisions included in the two aforementioned pieces of legislation will result in a material impact to the Company’s deferred tax assets, liabilities, or income taxes payable.
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, 2022 and 2021
Significant components of the Company's deferred tax assets for federal income taxes consisted of the following:
Noncurrent deferred income tax asset arising from:
Operating lease liability 48,594 -
Capitalized research and development expense 1,639,623 -
Noncurrent deferred income tax liability arising from:
Operating lease ROU asset (48,171 ) -
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, 2022, and 2021.
The Company does not have unrecognized tax benefits as of December 31, 2022, or 2021. 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, 2022, and December 31, 2021 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, 2022 and 2021
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 0.8 % 1.0 %
Other 0.7 % — %
Life insurance — % 5.0 %
Provision to return true up (0.6 )% 1.0 %
Research & development credits (2.2 )% (4.0 )%
Change in the valuation allowance 24.2 % 30.0 %
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 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 a company's outstanding stock by certain stockholders or public groups.
If the Company experiences 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. The Section 382 limitation is a limitation on the amount of a new loss corporation’s post-change year taxable income that can be offset by the old loss corporation’s pre-change NOLs. Any such limitation may result in the expiration of a portion of the Company's NOL or R&D credit carryforwards before utilization. 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 Company's deferred tax valuation allowance.
In the third quarter of 2022, the Company's tax advisors 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. It was determined that the Company has not experienced any "ownership changes" since 2014. If an "ownership change" occurs in the future, such change may result in the expiration of a portion of the Company's NOL or R&D credit carryforwards before utilization. As a result of the Section 382 study, no amounts are being considered as an uncertain tax position or disclosed as an unrecognized tax benefit under ASC-740. The Company has a full deferred tax valuation allowance as of December 31, 2022.
At December 31, 2022, the Company had federal NOL and R&D credit carryforwards of approximately $19,022,927 and $626,347, respectively, which are available to offset future taxable income subject to any future "ownership change."
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Guerrilla RF, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2022 and 2021
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, 2022 and 2021
Thompson Note
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 related 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.