Unless otherwise stated or the context otherwise requires, the terms “Laffin Acquisition Corp.,” “we,” “us,” “our” and the “Company” refer collectively to Laffin Acquisition Corp.

LAFFIN ACQUISITION CORP.

INDEX TO FINANCIAL STATEMENTS

March 31, 2021See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

LAFFIN ACQUISITION CORP.GUERRILLA RF, INC. AND SUBSIDIARIES

CONDENSED BALANCE SHEETSCONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See accompanying notesNotes to condensed financial statementsCondensed Consolidated Financial Statements (Unaudited).

LAFFIN ACQUISITION CORP.

GUERRILLA RF, INC. AND SUBSIDIARIES

CONDENSED STATEMENTCONSOLIDATED STATEMENTS OF OPERATIONSSTOCKHOLDERS' EQUITY (DEFICIT)

For the Three Months Ended March 31, 2021

(Unaudited)

See accompanying notesNotes to condensed financial statementsCondensed Consolidated Financial Statements (Unaudited).

LAFFIN ACQUISITION CORP.

GUERRILLA RF, INC. AND SUBSIDIARIES

CONDENSED STATEMENTCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ (DEFICIT)CASH FLOWS

For the Three Months Ended March 31, 2021

(Unaudited)

See accompanying notesNotes to condensed financial statementsCondensed Consolidated Financial Statements (Unaudited).

LAFFIN ACQUISITION CORP.

CONDENSED STATEMENT OF CASH FLOWSGUERRILLA RF, INC. AND SUBSIDIARIES

For the Three Months Ended March 31, 2021

(Unaudited)

See accompanying notes to condensed financial statements

LAFFIN ACQUISITION CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

Note 1.Nature of Operations ORGANIZATION AND NATURE OF BUSINESS

Guerrilla RF, Inc. (formerly known as Laffin Acquisition Corp. (the, 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 Securities Exchange Act of 1934, as amended (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 this Quarterly Report 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, there are frequent references to Guerrilla RF throughout this Quarterly Report.

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 and future 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 the accounting acquirer in the Merger.  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

In accordance with Financial Accounting Standards (“FASB”) 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 unaudited interim condensed consolidated financial statements are issued.  The accompanying unaudited interim condensed 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 issuances.

The Company has incurred recurring losses, and negative cash flows from operations in nearly every fiscal period since its inception, including a net loss of $1.9 million for the three months ended March 31, 2022.  In addition, as of March 31, 2022, the Company had an accumulated deficit of $16.9 million.  The Company expects losses and negative cash flows to continue, primarily as a result of continued sales and marketing efforts and planned investment in research and development.  The Company had a cash balance of $2.6 million at March 31, 2022.  The Company believes its cash, together with its access to other funding, including unused availability of $2.0 million under its factoring arrangement (further described in Note 5), will provide sufficient resources to support operations into the fourth quarter of 2022.  The Company anticipates it will need additional funds to promote new products and working capital necessary to support increased sales, and it is actively evaluating alternative funding sources as part of its ongoing strategic planning.  

If the Company is unable to obtain additional financing in sufficient amounts or on acceptable terms, the Company will be forced to delay, reduce, or eliminate some or all of its research and development programs and product portfolio expansion, which could adversely affect its operating results or business prospects.  Although management has chosen December 31stcontinues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all.  The precise amount and timing of the funding needs cannot be determined accurately at this time.  They will depend on many factors, including the market demand for its fiscal year end.the Company's products, the quality of product development efforts, management of working capital, and the continuation of standard payment terms and conditions for purchasing goods and services.   This requirement for additional funding raises substantial doubt about our ability to continue as a going concern.  The unaudited interim condensed consolidated financial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of liabilities that may be necessary should the Company be unable to continue as a going concern.

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

In December 2019, a novel strain of coronavirus disease (“COVID-19”) was organizedreported, and in March 2020, the World Health Organization characterized COVID-19 as a vehicleglobal pandemic.  The COVID-19 pandemic has forced international, federal, state, and local governments to investigate and, if such investigation warrants, acquire a target company or business seeking the perceived advantagesenforce prohibitions of being a publicly traded corporation. The Company’s principal business objective is to achieve long-term growth potential through a combination with a business, rather than immediate short-term earnings.non-essential activities.  The Company will not restrictfirst saw the impact of COVID-19 in the first quarter of 2020.  The extent and duration of the adverse impact of COVID-19 on the Company over the longer term remains uncertain and dependent on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of COVID-19 and its potential target companiesrelated variants, the extent and effectiveness of containment actions taken, including mobility restrictions, the timing, availability, and effectiveness of vaccines, and the impact of these and other factors on travel behavior in general and on the Company’s business.

As the impact of COVID-19 continues to any specific business, industry, or geographical location. The analysis of business opportunitiesevolve, estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require increased judgment.  These estimates and assumptions may change in future periods and will be undertaken by, or underrecognized in the supervision of,condensed consolidated financial statements as new events occur, and additional information becomes known.  To the officerextent the Company’s actual results differ materially from those estimates and directors ofassumptions, the Company.Company’s future condensed consolidated financial statements could be affected.

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Note 2. Basis of Presentation and SummaryPrinciples of Significant Accounting PoliciesConsolidation

BasisThe accompanying unaudited interim condensed consolidated financial statements are presented in U.S. dollars and prepared in conformity with GAAP.  Any reference in these Notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and as amended by Accounting Standards Updates (“ASU”) of Presentationthe Financial Accounting Standards Board (“FASB”).  The accompanying unaudited interim condensed 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.

In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements include all normal and recurring adjustments (which consist primarily of accruals, estimates, and assumptions that impact the financial statements) considered necessary to present fairly the Company’s financial position as of March 31, 2022 and its results of operations, cash flows, and changes in stockholders' equity (deficit) for the three months ended March 31, 2022 and 2021.  Operating results for the three months ended March 31, 2022, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2022.  The unaudited interim condensed consolidated financial statements, presented herein, do not contain the required disclosures under GAAP for annual consolidated financial statements.  The condensed consolidated balance sheet as of December 31, 2021, has been derived from the audited consolidated balance sheet as of that date.  The accompanying unaudited interim condensed consolidated financial statements have been preparedshould be read in accordanceconjunction with accounting principles generally acceptedthe annual audited consolidated financial statements and related notes as of and for the year ended December 31, 2021, included in the United States of America (“GAAP”Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). on April 1, 2022.

Use of Estimates

The preparation of the unaudited interim condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the unaudited interim condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period.  ActualThe 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.

Cash and Cash Equivalents

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Segment Information

CashOperating 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 March 31, 2022 and 2021 that potentially subject the Company to concentration of credit risk consist primarily of cash equivalents are reportedand 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.

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 aggregate annual revenue.  The Company had 1 major distributor customer, Richardson RFPD, Inc., during the three months ended March 31, 2022 and 2021 accounting for 85% and 80% of product shipment revenue for the three months ended March 31, 2022 and 2021, respectively.  Accounts receivable from our major distributor customer represented 80% of accounts receivable at March 31, 2022 and 2021.

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Accounts Receivable

Accounts receivable primarily relate to amounts due from customers, which are typically due within 30 to 45 days. The 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. Historically, such losses have been immaterial and within management's expectations.

The Company has a factoring agreement that provides advance payments on up to 85% of invoices issued to one customer, our largest distributor, with receivables less than 90 days outstanding secured by the remaining 15%.  As of March 31,2022 and 2021, the Company had $0 and $1,455,135 of factored invoices, respectively.  At March 31, 2022 and 2021, the Company had $0 and $218,270 due from the factoring counterparty, respectively, included in accounts receivable on the unaudited interim condensed consolidated balance sheetsheets. See Note 5 for additional discussion on the factoring agreement.

Property and Equipment

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

Impairment of Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.  The recoverability of assets held and used is measured by comparing the carrying amount of an asset to future net cash flows expected to be generated by the asset.  If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which approximatesthe carrying amount of the assets exceeds the fair value. Forvalue of the purposeassets, less costs to sell.  The Company did not record any expense related to asset impairment in the three months ended March 31, 2022 or 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 were offset against the total proceeds from the Merger in the consolidated financial statements for the year ended December 31, 2021.  At March 31, 2022, there were 0 deferred offering costs.

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Convertible Preferred Stock Warrants

Accounting standards require that freestanding warrants and similar instruments, with certain settlement features of the financial statements cash equivalentsinstruments, 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.  The Company did not have any convertible preferred stock warrants outstanding as of March 31,2022.

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 due 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 all highly liquid investments witha right of return for properly functioning products not deemed obsolete.  These warranties do not provide an original maturity of three months or less. Thereadditional distinct service to the customer and are no cash equivalentsnot deemed a separate performance obligation.  Royalty revenue is recognized at the balance sheet date.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 is satisfied.  The costs incurred by the Company for shipping and handling are classified as cost of revenue in the unaudited interim condensed consolidated statements of operations.  Any incidental items that are immaterial in the context of a sale to a customer are recognized as expense.

Income Taxes

Cost of Revenue

The Company’s cost of revenue consists 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 adoptedmeasures 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 estimate the fair value of its stock option awards.  The Company recognizes compensation expense on a straight-line basis over the requisite vesting period.  In addition, the Company accounts for forfeitures of stock options as they occur.

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

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Income taxes are accounted for under the asset and liability method as required by FASB ASC Topic 740, “Income Taxes”Taxes , at its inception. Under (“ASC 740, deferred740”).  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.bases and operating loss and tax credit carryforwards.  Deferred tax assets including tax loss and credit carry-forwards, 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 that includescorresponding to the enactment date.  Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced byUnder ASC 740, a valuation allowance is required when in the opinion of management, it is more likely than not that all or some portion or all of the deferred tax assets will not be realized.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 recognizesmay only recognize the tax benefits ofbenefit from an uncertain tax positions only when the positions are “moreposition if it is more likely than not” tonot that such tax position will be sustained assumingon examination by taxthe taxing authorities, and determined to be attributed to the Company. The determination of attribution, if any, applies for each jurisdiction where the Company is subject to income taxesbased solely on the basis of laws and regulationstechnical merits of the jurisdiction.respective tax position.  The applicationtax 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 lawsbeing realized upon ultimate settlement with the tax authority.  In accordance with the disclosure requirements of ASC 74010, the Company’s policy on income statement classification of interest and regulations is subject to legal and factual interpretation, judgement, and uncertainty. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations, and court rulings. Therefore, the actual liability of the various jurisdictions may be materially different from management’s estimate. As of March 31, 2021, the Company has no accrued interest or penalties related to uncertainincome tax positions.obligations is to include such items as part of total income tax expense.

Loss per Common

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Net Income (Loss) Per Share

The Company adopted ASC 260, “Earnings per Share”, at its inception. Basic net loss per share has been calculatedof common stock is computed by dividing the Company’s net loss available to common stockholders by the weighted average number of common sharesstock outstanding during theeach period. The diluted earnings (loss)  Diluted net income per share is calculated by dividingof common stock includes the Company’seffect of the potential exercise or conversion of securities, such as options and warrants, which results 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 available to common stockholders byand income per share, the diluted weighted average number of shares is 33,228,202 for the three months ended March 31, 2022, and 6,702,686 basic shares and 10,069,021 diluted shares for the three months ended March 31, 2021.  As such, all preferred stock, warrants, and options were excluded from the calculation of net loss per share for the three months ended March 31, 2022.

The following potentially dilutive securities have been excluded from the computation of diluted weighted-average shares of common stock outstanding for the period. three months ended March 31, 2022, as they would be anti-dilutive; however, the potentially dilutive securities have been included in the computation of diluted weighted-average shares of common stock outstanding for the three months ended March 31, 2021:

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 diluted weighted average numberCompany adopted Topic 842 in the fiscal quarter ending March 31, 2022.  See Note 8for further information related to lease obligations on the unaudited interim condensed 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 shares outstanding is this standard.  The Company does not expect this standard to have a material impact on its consolidated financial statements upon adoption.

In August 2020, the basic weighted number of shares adjusted asFASB 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 firstASC 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 ending March 31, 2022, and it did not have a material impact on its unaudited interim condensed consolidated financial statements.

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company recorded depreciation and amortization expense of $0.3 million and $0.1 million for the three months ended March 31, 2022, and 2021, respectively, and $0.4 million for the year for any potentially dilutive debt or equity.ended December 31, 2021.

5. DEBT

Emerging Growth CompanyShort-Term Debt

Factoring Arrangement

The Company has an accounts receivable factoring arrangement with a financial institution (the “Factor”).  Under the terms of the agreement, the Company, from time to time, sells to the Factor certain of its accounts receivable balances on a recourse basis for credit approved accounts.  The Factor remits 85% of the domestic accounts receivable balance to the Company (the “Advance Amount”), with the remaining balance, less fees to be paid to the Company once the Factor collects the entire accounts receivable balance from the customer.  The factoring fee is 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 is $1.50.  The Company includes the cost of factoring in interest expense.

As stated previously, the Company factors the accounts receivable on a recourse basis.  Therefore, if the Factor cannot collect the factored accounts receivable, the Company must refund the Advance Amount remitted to us for any uncollected accounts receivable.  Accordingly, the Company records the liability of having to refund the Advance Amount as short-term debt when the factoring arrangement is utilized.  As of March 31, 2022, 0 advances were outstanding under the factoring arrangement (i.e., the Company had $2.0 million of unused availability); and there was no liability.

The cost of factoring was as follows for the quarterly period ended March 31, 2022, and the year ended December 31, 2021:

Long-Term Debt

Loans Payable – EIDL

In response to COVID-19, the Small Business Administration (“SBA”) created the COVID-19 Economic Injury Disaster Loan (EIDL) program in March 2020.  The program's purpose was to help small businesses meet financial obligations that could have been met had the Covid-19 pandemic not occurred.  Unlike the Paycheck Protection Program (“PPP”) Loan Program, a loan under EIDL is not forgivable in the future but provides favorable interest and payment terms to approved applicants.  The maximum EIDL available was equivalent to six months of a business’s working capital, up to $150,000.  Businesses can use EIDL proceeds for working capital and normal operating expenses.  On June 24, 2020, the Company received loan proceeds of $150,000 under the EIDL Program.  As part of the EIDL program, the Company agreed to the SBA collateral conditions and agreed to pay annual interest of 3.75% per annum on the outstanding principal balance.  Monthly installment payments commence at the end of the anticipated deferral allowance period in June 2022 for up to a maximum of 30 years from the loan date (thus, June 24, 2050). As of  March 31, 2022, the Company had $149,900 of principal outstanding on the EIDL loan and accrued interest of  $10,648.

Long-term debt is expected to mature as follows:

Loans Payable - PPP

On April 30, 2020, Guerrilla RF received loan proceeds of $535,800 under the PPP.  PPP loans and accrued interest are forgivable after a “covered period” (24 weeks) as long as the borrower maintains its payroll levels and uses the loan proceeds for eligible purposes, including payroll, benefits, rent, and utilities.  As of December 31, 2020, Guerrilla RF had $535,800 of principal outstanding on the PPP loan together with accrued interest of $3,611 as accounts payable and accrued expenses on the consolidated balance sheet.  On February 17, 2021, Guerrilla RF received 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 confirmation from the SBA that the 2021 PPP Loan, including accrued interest, had been forgiven.

6. COMMON STOCK AND PREFERRED STOCK

Common Stock

Each share of common stock entitles the holder to 1 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.  NaN dividends have been declared through March 31, 2022.

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).

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.

7. EQUITY INCENTIVE PLAN

In 2014, the Board adopted the Long‐Term Stock Incentive Plan (the “2014 Plan”), with 568,000 shares of common stock authorized for issuance under the 2014 Plan.  Subsequently, stockholders approved an increase in the number of shares 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.  The 2014 Plan is frozen, and 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 of each of 2022 through 2031 by the number of shares equal to the lesser of 5% of the total number of outstanding shares of our common stock as of the immediately preceding December 31, or a number as may be determined by our board of directors.

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.

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 unaudited interim condensed consolidated statements of operations for the three months ended March 31, 2022 and 2021:

NaN income tax benefits have been recognized in the unaudited interim condensed consolidated statements of operations for stock-based compensation arrangements, and 0 stock-based compensation costs have been capitalized as property and equipment through March 31, 2022.

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company measures the fair value of each option award on the date of grant using the Black‐Scholes option-pricing model, which takes into account inputs such as the exercise price, the value of the underlying ordinary shares at the grant date, expected term, expected volatility, risk-free interest rate, and dividend yield. The fair value of each grant of options during the three months ended March 31, 2022 was determined using the methods and assumptions discussed below:

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the three months ended March 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:

The weighted average grant date fair value of stock option awards granted was $1.21 and $0.53 during the three months ended March 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 March 31, 2022, and 2021 amounted to $816,298 and $21,691, respectively, which are expected to be recognized over an average of three years.

Stock option activity by share is summarized as follows for the three months ended March 31, 2022:

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.

Twelve thousand seven hundred two (12,702) options were exercised during the three months ended March 31, 2022.  The options exercised during the three months ended March 31, 2022, had an intrinsic value of $20 thousand. The aggregate intrinsic value of outstanding options exercisable as of March 31, 2022, was $4.5 million.  At March 31, 2022, stock-based compensation for unvested options granted of $0.5 million will be recognized over a remaining weighted-average requisite service period of 1.6 years.

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 $2,607,618 and an operating right-of-use asset and liability of $304,079. 

The Company determines whether an arrangement is an “emergingoperating 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:

Lease cost recognized in the unaudited interim condensed consolidated financial statements is summarized as follows:

(1) Represent amounts under ASC 840.

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Other supplemental information related to leases is summarized as follows:

The Company leases its 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.

In July 2021, the Company entered into a lease agreement for additional office facilities in Greensboro, North Carolina, with an expiration date ten (10) years from the date the Company commences occupancy, which it estimates will be in early 2023.  Under the lease agreement terms, 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 not remit any scheduled lease payments until it occupies the building.  The Company anticipates approximately $4.0 million of new headquarter building asset additions, and an annual lease expense to be approximately $1.1 million upon occupancy.

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 unaudited interim condensed consolidated financial statements.  As a result, 0 liability related to any such disputes has been recorded at March 31, 2022, or December 31, 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, 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 unaudited interim condensed consolidated financial statements.  As a result, 0 liability for these agreements has been recorded at March 31, 2022, or December 31, 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 100% of the executive's monthly base salary.

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GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

9. INCOME TAXES

The Company did not have any income tax expense for the three months ended March 31, 2022 or 2021.

Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items recorded in the interim period.  The provision for income taxes for the three months ended March 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 computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year and permanent differences.  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 valuation allowance has been recorded against the Company’s net deferred tax assets as of March 31, 2022, and December 31, 2021.

Potential 382 Limitation

As disclosed in our Annual Report on Form 10-K for the year ended, December 31, 2021, the Company’s ability to utilize its net operating loss ("NOL") and research and development ("R&D") credit carryforwards may be substantially limited due to ownership changes that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue 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.

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

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

10. Related Party Transactions

We have not had any related party transactions, other than compensation arrangements in the quarter ended March 31, 2022.  Any related party transactions between January 1, 2019 and December 31, 2021 are further described below and in our Annual Report on Form 10-K for the year ended December 31, 2021.

We describe below transactions since January 1,2019, in which the amounts involved exceeded $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 could have had a direct or indirect material interest.  The following descriptions are historical and have 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.

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 related 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.

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

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 related private placement offering at the offering price ($2.00 per share).

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

2021 Promissory Notes to Warrant Holders

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

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Policies and Procedures for Related Party Transactions

The Audit Committee of our Board of Directors adopted a charter in the fourth quarter of 2021, which requires that any transaction with a related person and any other potential conflict of interest situation must be reviewed, approved, and monitored by our Audit Committee.

11. Employee Benefit Plan

The Company has a 401(k) plan to provide defined contribution retirement benefits for all eligible employees. Participants may contribute a portion of their compensation to the plan, subject to the limitations under the Internal Revenue Code.  The Company’s contributions to the plan are at the discretion of executive management with board of directors advisement.  Under the 401(k) plan, the Company may contribute up to four percent (4%) of eligible employee salaries.  The Company made $79,234 and $41,115 of contributions to the plan in the three months ended March 31, 2022 and 2021 respectively.

12. Subsequent Events

Management has evaluated subsequent events occurring after March 31, 2022, through May 12, 2022, the date the unaudited interim condensed consolidated financial statements were issued.  The following subsequent events have occurred during the period.

Coronavirus Pandemic

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

Employee Stock Option and Restricted Stock Unit Grants

On April 4, 2022, the compensation committee of the board of directors granted stock options to new employees of the Company to purchase an aggregate of 250,700 shares of the Company's common stock at an exercise price of $2.00 per share.  The granted option awards vest equally over four years (25% per year) on the anniversary of the date they started working for the Company.

On April 8, 2022, the compensation committee of the board of directors granted 348,100 restricted stock units (RSU) to various employees under which the holders have the right to receive an aggregate of 348,100 shares of the Company's common stock.  The RSU awards vest over three equal annual installments from the date of the grant subject to the recipient’s continued service through the applicable vesting date and the shares not vested are forfeited upon separation from the Company.  The share-based compensation expense to be recognized for these RSUs over the remaining vesting period subsequent to the period ending March 31, 2022 is approximately $0.7 million.  

These employee stock option and RSU grants were issued from the 2021 Plan, which is further described in Note 7.

New Headquarters Office Facilities Capital Addition Financing

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 financing arrangement related to furniture for the new office facilities in April 2022.  The total cost of the furniture financing is $1.1 million, which includes tax, freight, interim storage, and installation labor.  The Company will be 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 in August 2022.