UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 20222023
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 000-56238
GUERRILLA RF, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 85-3837067 | |
| (State of Other Jurisdiction of incorporation or Organization) | (I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip code) |
Registrant’s telephone number, including area code: (336) 510-7840
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically; every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.0405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | Non-accelerated filer ☒ | Smaller reporting company ☒ Emerging growth company ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Class | Outstanding as of May | |||||||
Common Stock, $0.0001 par value |
| |||||||
GUERRILLA RF, INC.
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 20222023
GLOSSARY OF TERMS AND ABBREVIATIONS
The following is a glossary of technical terms used in this Report:
64T64R, 32T32R, 16T16R, 8T8R systems — Describes the number of transmit and receive paths in a 5G system architecture.
5G — A technology standard to increase the speed or amount of data communicated in a cellular network relative to 3G or LTE networks.
AEC-Q101AEC-Q100 — Automotive Electronic Council’s electronic components stress qualification standard.
standard for integrated circuits.
Cellular booster/DAS — System which extends and distributes a cellular signal within buildings such as below ground,below-ground, large-area, or high-rise structures.
Cellular Compensator — Improves a cellular link inside a motorized vehicle by using an antenna outside the vehicle in combination with amplifiers to boost the signal in both the transmit and receive paths.
Cellular Repeater — Improves poor cellular service by boosting signal strength inside a building or structure.
C-V2X — Cellular-technology-based vehicle-to-everything communication standard.
CMOS — Complementary MOS (metal oxide semiconductor), widely used semiconductor transistor architecture.
Copper lead frame — Copper-based substrate used as a foundation for semiconductor packages.
DAB — Digital audio broadcasting. A terrestrial-based digital radio standard (HD Radio).
Design win — Acknowledgment by an end-user customer that a product has been chosen or finalized for use in the customer’s system.
system or application.
Die/Chip — An individual semiconductor device on the wafer.
Distribution-customer — A customer that purchases Guerrilla RF products for the purpose of sellingto sell to a third-party rather than for its own use.
DSA — Digital step attenuator.
DSRC — Dedicated short-range communications. (Typically used in electronic toll collection).
End-user customer — The ultimate customer that utilizes or incorporates our products into its own products or solutions whether it purchased our products directly from Guerrilla RF or a third party.
EAR — Export Administration Regulation
Regulation.
Fab — Fabrication, generally refers to a semiconductor wafer fabrication facility.
Fabless — Semiconductor company that utilizes pure-play or outsourced wafer fabrication partners rather than owning and operating their own wafer foundry.
FM/DAB — Terrestrial-based radio broadcast standards.
GaN — Gallium nitride Semiconductorsemiconductor process used in high powerhigh-power amplifier applications.
GaAs HBT — Gallium arsenide heterojunction bipolar transistor. A semiconductor process allowing higher efficiency and improved linearity compared to GaAs MESFET processes.
GaAs pHEMT — Gallium Arsenide pseudomorphic high electron mobility transistor. A semiconductor process that allows larger bandgap differences, thus providing higher performance.
performance than a GaAs MESFET technology.
Gain blocks, switches, power detectors, drivers, mixers, digital step attenuators, high power amplifiers — Functional building blocks of RF components in a typical radio frequency system or architecture.
GHz — Frequency bands of operation (in Gigahertz).
in an RF system.
GPS/GNSS — Global satellite positioning technologies.
IP — Intellectual property.
LNA — Low noise amplifier.
Linear driver amplifier — An amplifier used before the final amplification stage that produces increased power levels while adding minimal distortion to the output signal.
mMIMO active antenna array — Massive multiple-input and multiple-output antenna systems that include beamforming ability.
MMIC — Monolithic microwave integrated circuit. An integrated circuit designed to utilize the microwave frequency bands. (300MHz to 300GHz).
MESFET — Metal-semiconductor field-effect transistor, a type of transistor.
OEM — Original equipment manufacturers.
PA — Power Amplifier.
Package lead frame — Substrate (typically copper) used as a foundation to mount and package semiconductor devices.
pHEMT — Pseudomorphic high electron mobility transistor, a type of transistor.
Point-to-point radio — Radio link used between two communication endpoints or devices.
RF — Radio frequency.
RFIC — Radio frequency integrated circuit.
RFID — Radio frequency identification.
SDARS — Satellite Digital Audio Radio Service (e.g., Sirius XM Satellite Radio).
Si — Silicon — Standard fabrication process used for semiconductor processing.
SOI — Silicon on insulator. Fabrication process used for semiconductor manufacturing. BeneficialThis process choice is beneficial to reduce parasitic capacitance for a device.
Tape and reel — A method of packing surface mount devices by placing each device in an individual pocket on a carrier tape. Clear tape is applied to contain the device within the pocket. The carrier tape is wound on a reel, easing device handling and transportation.
Telematics — The convergence of telecommunications and information processing. The term is generally used for describing systems used in motor vehicles.
UWB — Ultra-wideband Radio technology using very low energy levels for short-range, high-bandwidth communications.
V2X — Vehicle-to-everything. Communication technology to allow vehicles to communicate with other vehicles, infrastructure, pedestrian devices, etc.
Wafer — Thin slice of semiconductor material used as the substrate for building electronic circuits. Wafers are the output from the semiconductor foundry process before the assembly/packaging processes.
WiFi — Wireless network protocol, based on the IEEE 802.11 family of standards.
Wireless backhaul point-to-point — A method used by communication providers to use wireless data links to connect radio towers or the core network.
Wireless infrastructure — Systems designed or used by network operators or other professionals to ensure strong communication links to consumers or customers.
PART I. FINANCIAL INFORMATION.
The following unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.Commission (the "SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although the CompanyGuerrilla RF, Inc. (the "Company") believes that the disclosures made are adequate to make the information not misleading.
These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K filed with the SecuritiesSEC on March 3, 2023. As disclosed in Note 1 and Exchange Commission (the "SEC")Note 12 in the Company's unaudited interim condensed consolidated financial statements included herein, the Company’s board of directors approved a reverse split of shares of the Company’s common stock on a six-for-one basis, which was effective as of 12:01 a.m. Eastern Time on April 1, 2022.17, 2023 (the “Effective Time”). As a result of the reverse stock split, at the Effective Time, every six shares of issued and outstanding common stock were automatically converted into one share of common stock, but without any change in the par value per share. No fractional shares were issued as a result of the reverse stock split. Any fractional shares that would otherwise have resulted from the reverse stock split were rounded up to the next whole number. The number of authorized shares of common stock remained unchanged at 300,000,000 shares. Proportionate adjustments were made to the per share exercise price and the number of shares of common stock issuable upon the exercise of all outstanding stock options and warrants granted by the Company. The number of shares of common stock deliverable vesting of restricted stock units were similarly adjusted. Concurrently, the number of shares of common stock reserved for future issuance under the Company’s 2014 and 2021 Equity Incentive Plans immediately prior to the Effective Time were reduced proportionately. All common stock and equity related share information included in the Company’s latest Annual Report on Form 10-K filed with the SEC on March 3, 2023 are pre-split.
GUERRILLA RF, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| March 31, 2023 (Unaudited) | December 31, 2022 | |||||||||||||||
March 31, 2022 | December 31, 2021 | |||||||||||||||
Assets | ||||||||||||||||
Cash | $ | 2,590,646 | $ | 5,313,985 | $ | 1,877,568 | $ | 4,340,407 | ||||||||
Accounts receivable, net | 2,609,055 | 1,667,006 | 1,595,906 | 1,124,971 | ||||||||||||
Inventories, net | 1,639,042 | 1,439,014 | 1,583,915 | 1,672,925 | ||||||||||||
Prepaid expense | 1,041,328 | 1,187,418 | ||||||||||||||
Prepaid expenses | 770,232 | 643,401 | ||||||||||||||
Total Current Assets | 7,880,071 | 9,607,423 | 5,827,621 | 7,781,704 | ||||||||||||
Prepaid expenses and other | - | 3,574,746 | ||||||||||||||
Deferred offering costs | 90,081 | - | ||||||||||||||
Operating lease right-of-use assets | 275,984 | 0 | 10,896,388 | 209,669 | ||||||||||||
Property, plant, and equipment, net | 4,130,590 | 1,027,312 | 4,983,918 | 5,098,097 | ||||||||||||
Total Assets | $ | 12,286,645 | $ | 10,634,735 | $ | 21,798,008 | $ | 16,664,216 | ||||||||
Liabilities and Stockholders' Equity | ||||||||||||||||
Accounts payable and accrued expenses | $ | 2,374,131 | $ | 4,466,045 | ||||||||||||
Short-term debt | $ | 7,310 | $ | 5,117 | 1,363,186 | 959,803 | ||||||||||
Operating lease, current portion | 116,128 | 0 | ||||||||||||||
Finance lease, current portion | 669,309 | 118,420 | ||||||||||||||
Accounts payable and accrued expenses | 1,408,676 | 1,186,443 | ||||||||||||||
Operating lease liability, current portion | 568,000 | 139,794 | ||||||||||||||
Finance lease liability, current portion | 1,092,101 | 1,078,506 | ||||||||||||||
Total Current Liabilities | 2,201,423 | 1,309,980 | 5,397,418 | 6,644,148 | ||||||||||||
Operating lease | 160,640 | 0 | ||||||||||||||
Finance lease | 2,694,369 | 264,347 | ||||||||||||||
Long-term debt | 306,511 | 44,279 | ||||||||||||||
Operating lease liability | 6,388,970 | 71,714 | ||||||||||||||
Finance lease liability | 2,737,467 | 2,984,618 | ||||||||||||||
Notes payable | 142,590 | 144,783 | 4,586,852 | 4,564,564 | ||||||||||||
Total Liabilities | 5,199,022 | 1,719,110 | 19,417,218 | 14,309,323 | ||||||||||||
Preferred stock, $.0001 par value, 10,000,000 shares authorized, no shares issued and outstanding as of March 31, 2022 and December 31, 2021 | $ | 0 | $ | 0 | ||||||||||||
Common stock, $.0001 par value, 300,000,000 shares authorized, 33,234,894 and 33,222,192 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively | 3,323 | 3,322 | ||||||||||||||
Additional paid-in-capital | 23,996,792 | 23,958,705 | ||||||||||||||
Preferred stock, $0.0001 par value, 10,000,000 shares authorized, no shares issued and outstanding as of March 31, 2023 and December 31, 2022 | - | - | ||||||||||||||
Common stock, $0.0001 par value, 300,000,000 shares authorized, 6,784,721 and 6,211,206 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively | 678 | 621 | ||||||||||||||
Additional paid-in capital | 33,454,698 | 29,427,440 | ||||||||||||||
Accumulated deficit | (16,912,492 | ) | (15,046,402 | ) | (31,074,586 | ) | (27,073,168 | ) | ||||||||
Total Stockholders' Equity | 7,087,623 | 8,915,625 | 2,380,790 | 2,354,893 | ||||||||||||
Total Liabilities and Stockholders' Equity | $ | 12,286,645 | $ | 10,634,735 | $ | 21,798,008 | $ | 16,664,216 | ||||||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
GUERRILLA RF, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Product shipments | $ | 3,586,267 | $ | 2,583,388 | ||||||||||||
Royalties | 279,644 | 197,634 | ||||||||||||||
Product | $ | 3,040,409 | $ | 3,586,267 | ||||||||||||
Royalties and non-recurring engineering | 190,479 | 279,644 | ||||||||||||||
Total | 3,865,911 | 2,781,022 | 3,230,888 | 3,865,911 | ||||||||||||
Direct product costs | 1,547,281 | 1,092,692 | 1,403,345 | 1,547,281 | ||||||||||||
Gross Profit | 2,318,630 | 1,688,330 | 1,827,543 | 2,318,630 | ||||||||||||
Operating Expenses: | ||||||||||||||||
Research and development | 1,802,006 | 1,063,106 | 2,586,169 | 1,802,006 | ||||||||||||
Sales and marketing | 1,085,843 | 576,650 | 1,361,949 | 1,085,843 | ||||||||||||
Administration | 1,239,650 | 305,314 | ||||||||||||||
General and administrative | 1,546,163 | 1,239,650 | ||||||||||||||
Total Operating Expenses | 4,127,499 | 1,945,070 | 5,494,281 | 4,127,499 | ||||||||||||
Operating Loss | (1,808,869 | ) | (256,740 | ) | (3,666,738 | ) | (1,808,869 | ) | ||||||||
Interest expense | (57,221 | ) | (148,825 | ) | (341,857 | ) | (57,221 | ) | ||||||||
Other income | 0 | 535,800 | 7,177 | - | ||||||||||||
Total other income (expenses), net | (57,221 | ) | 386,975 | |||||||||||||
Net income (loss) | $ | (1,866,090 | ) | $ | 130,235 | |||||||||||
Total Other Expenses, net | (334,680 | ) | (57,221 | ) | ||||||||||||
Net Loss | $ | (4,001,418 | ) | $ | (1,866,090 | ) | ||||||||||
Net income (loss) per share, basic | $ | (0.06 | ) | $ | 0.02 | |||||||||||
Net income (loss) per share, diluted | $ | (0.06 | ) | $ | 0.01 | |||||||||||
Net loss per share - basic and diluted | $ | (0.62 | ) | $ | (0.34 | ) | ||||||||||
Weighted average common shares outstanding - basic and diluted | 6,502,845 | 5,538,034 | ||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
GUERRILLA RF, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Unaudited)
Preferred Stock | Common Stock | Additional Paid-In-Capital | Accumulated Deficit | Total Stockholders' Equity (Deficit) | ||||||||||||||||
December 31, 2021 | $ | 0 | $ | 3,322 | $ | 23,958,705 | $ | (15,046,402 | ) | $ | 8,915,625 | |||||||||
Net loss | 0 | 0 | 0 | (1,866,090 | ) | (1,866,090 | ) | |||||||||||||
Stock options exercised | 0 | 1 | 5,231 | 0 | 5,232 | |||||||||||||||
Share-based compensation | 0 | 0 | 32,856 | 0 | 32,856 | |||||||||||||||
March 31, 2022 | $ | 0 | $ | 3,323 | $ | 23,996,792 | $ | (16,912,492 | ) | $ | 7,087,623 | |||||||||
Preferred Stock | Common Stock | Additional Paid-In-Capital | Accumulated Deficit | Total Stockholders' Equity | ||||||||||||||||
January 1, 2023 | $ | - | $ | 621 | 29,427,440 | $ | (27,073,168 | ) | $ | 2,354,893 | ||||||||||
Net loss | - | - | - | (4,001,418 | ) | (4,001,418 | ) | |||||||||||||
Equity financing, net of issuance costs | - | 53 | 3,658,622 | - | 3,658,675 | |||||||||||||||
Shares issued for prepaid services | - | 1 | 99,999 | - | 100,000 | |||||||||||||||
Share-based compensation | - | 3 | 268,637 | - | 268,640 | |||||||||||||||
March 31, 2023 | $ | - | $ | 678 | $ | 33,454,698 | $ | (31,074,586 | ) | $ | 2,380,790 | |||||||||
Preferred Stock | Common Stock | Additional Paid-In-Capital | Accumulated Deficit | Total Stockholders' Equity (Deficit) | ||||||||||||||||
December 31, 2020 | $ | 4,852 | $ | 2,261 | $ | 9,076,840 | $ | (12,209,247 | ) | $ | (3,125,294 | ) | ||||||||
Net income | 0 | 0 | 0 | 130,235 | 130,235 | |||||||||||||||
Stock options exercised | 0 | 4 | 12,663 | 0 | 12,667 | |||||||||||||||
Share-based compensation | 0 | 0 | 6,352 | 0 | 6,352 | |||||||||||||||
March 31, 2021 | $ | 4,852 | $ | 2,265 | $ | 9,095,855 | $ | (12,079,012 | ) | $ | (2,976,040 | ) | ||||||||
Preferred Stock | Common Stock | Additional Paid-In-Capital | Accumulated Deficit | Total Stockholders' Equity | ||||||||||||||||
January 1, 2022 | $ | - | $ | 554 | $ | 23,961,473 | $ | (15,046,402 | ) | $ | 8,915,625 | |||||||||
Net loss | - | - | - | (1,866,090 | ) | (1,866,090 | ) | |||||||||||||
Stock options exercised | - | - | 5,232 | - | 5,232 | |||||||||||||||
Share-based compensation | - | - | 32,856 | - | 32,856 | |||||||||||||||
March 31, 2022 | $ | - | $ | 554 | $ | 23,999,561 | $ | (16,912,492 | ) | $ | 7,087,623 | |||||||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
GUERRILLA RF, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Cash flows from operating activities | ||||||||||||||||
Net income (loss) | $ | (1,866,090 | ) | $ | 130,235 | |||||||||||
Net loss | $ | (4,001,418 | ) | $ | (1,866,090 | ) | ||||||||||
Adjustment to reconcile net loss to net cash used in operating activities | ||||||||||||||||
Depreciation and amortization | 250,937 | 79,419 | 398,321 | 250,937 | ||||||||||||
Share-based compensation | 32,856 | 6,352 | 268,640 | 32,856 | ||||||||||||
Warrant amortization | 0 | 6,208 | ||||||||||||||
PPP loan forgiveness | 0 | (535,800 | ) | |||||||||||||
Accretion of notes payables | 30,763 | - | ||||||||||||||
Shares issued for prepaid services | 20,833 | - | ||||||||||||||
Changes in assets and liabilities: | ||||||||||||||||
Accounts receivable | (942,049 | ) | (107,678 | ) | (470,935 | ) | (942,049 | ) | ||||||||
Inventories | (200,028 | ) | 95,511 | 89,010 | (200,028 | ) | ||||||||||
Prepaid expenses | 146,090 | (129,567 | ) | 42,005 | 146,090 | |||||||||||
Accounts payable and accrued expenses | 148,423 | (193,307 | ) | (1,929,785 | ) | 148,423 | ||||||||||
Operating lease liability | (282,820 | ) | - | |||||||||||||
Net cash used in operating activities | (2,429,861 | ) | (648,627 | ) | (5,835,386 | ) | (2,429,861 | ) | ||||||||
Cash flows from investing activities | ||||||||||||||||
Purchases of property, plant, and equipment | (152,464 | ) | (11,000 | ) | (117,799 | ) | (152,464 | ) | ||||||||
Net cash used in investing activities | (152,464 | ) | (11,000 | ) | (117,799 | ) | (152,464 | ) | ||||||||
Cash flows from financing activities | ||||||||||||||||
Proceeds from notes payable and factoring agreement | 2,239,320 | - | ||||||||||||||
Proceeds from equity financing, net | 3,658,675 | - | ||||||||||||||
Proceeds from exercise of stock options | 5,232 | 12,667 | - | 5,232 | ||||||||||||
Proceeds from notes payable and factoring agreement | 0 | 1,236,865 | ||||||||||||||
Proceeds from PPP loan | 0 | 833,300 | ||||||||||||||
Principal payment of notes payable and recourse factoring agreement | 0 | (850,000 | ) | (1,968,784 | ) | - | ||||||||||
Principal payment on finance lease | (146,246 | ) | (13,934 | ) | (266,862 | ) | (146,246 | ) | ||||||||
Net cash provided (used) by financing activities | (141,014 | ) | 1,218,898 | |||||||||||||
Repayment of finance insurance premiums | (122,003 | ) | - | |||||||||||||
Payment of deferred offering costs | (50,000 | ) | ||||||||||||||
Net cash provided by (used in) financing activities | 3,490,346 | (141,014 | ) | |||||||||||||
Net increase (decrease) in cash | (2,723,339 | ) | 559,271 | |||||||||||||
Net decrease in cash | (2,462,839 | ) | (2,723,339 | ) | ||||||||||||
Cash, beginning of period | 5,313,985 | 427,269 | 4,340,407 | 5,313,985 | ||||||||||||
Cash, end of period | $ | 2,590,646 | $ | 986,540 | $ | 1,877,568 | $ | 2,590,646 | ||||||||
Noncash transactions: | ||||||||||||||||
Property and equipment financed through finance leases | $ | 3,127,940 | $ | 0 | ||||||||||||
Shares issued for prepaid services | $ | 100,000 | $ | - | ||||||||||||
Financing of property and equipment | $ | 165,825 | $ | 3,127,940 | ||||||||||||
Financing of insurance premiums and software | $ | 173,360 | $ | - | ||||||||||||
Right-of-use assets obtained through operating lease | $ | 7,235,222 | $ | - | ||||||||||||
Financing of mask set | $ | 112,728 | $ | - | ||||||||||||
Property and equipment additions included in accounts payable | $ | 73,810 | $ | 11,000 | $ | 518 | $ | 73,810 | ||||||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
GUERRILLA RF, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 Securities Exchange Act of 1934, as amended (the "Exchange Act"(“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 thisthese unaudited interim condensed consolidated financial statements and related 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, throughout these unaudited interim consolidated financial statements and related Quarterly Report, there are frequent references to Guerrilla RF throughout this Quarterly Report.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 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 to be the accounting acquirer in the Merger. Consequently,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
In accordance with Financial Accounting Standards (“FASB”) Accounting Standards Update (“ASU”) No.2014-15, Disclosure of Uncertainties about an Entity’sEntity’s Ability to Continue as a Going Concern (Subtopic205-40), 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.
GUERRILLA RF, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The accompanying unaudited interim 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 incurred recurring losses,historically financed its activities principally from common 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 lossespreferred equity securities 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 continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all. The precise amount and timing of the funding needs cannot be determined accurately at this time. They will depend on many factors, including the market demand for the Company's products, the quality of product development efforts, management of working capital, and the continuation of standard payment terms and conditions for purchasing goods and services. This requirement for additional funding raises substantial doubt about our ability to continue as a going concern. debt issuance. 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.
The Company has incurred substantial negative cash flows from operations in nearly every fiscal period since inception, including a net loss of $4.0 million for the three months ended March 31, 2023. In addition, as of March 31, 2023, the Company had an accumulated deficit of $31.1 million. The Company expects losses and negative cash flows to continue, primarily as a result of continued investment in research and development, capital additions supporting our planned business expansion and growth, 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 will require additional funding in 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.
The Company had a cash balance of $1.9 million at March 31, 2023. In June 2022, the Company established a loan facility with Spectrum Commercial Services Company, L.L.C. ("Spectrum") providing for advances of up to $3.0 million (the "Spectrum Loan Facility" further described in Note 5). As of March 31, 2023, the outstanding balance under the Spectrum Loan Facility was $1.0 million. In August 2022, the Company established a loan facility with Salem Investment Partners V, Limited Partnership ("Salem") providing for advances of up to $8.0 million (the "Salem Loan Facility" further described in Note 5). As of March 31, 2023, the undiscounted outstanding balance under the Salem Loan Facility was $5.0 million.
The Company raised gross proceeds of approximately $9.2 million in a private placement offering from December 2022 through February 2023 with the final closing on February 28, 2023. The Company believes that its existing cash and cash equivalents and financing availability 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. As disclosed in Note 12, subsequent to March 31, 2023, the Company drew down an additional $1.5 million under the Salem Loan Facility. 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 Stock Market LLC (“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 disclosed in Note 12, in conjunction with the above-noted planned uplisting to the Nasdaq or another national securities exchange, the Company’s board of directors approved a reverse split of shares of the Company’s common stock on a six-for-one basis, which was effective as of 12:01 a.m. Eastern Time on April 17, 2023 (the “Effective Time”). As a result of the reverse stock split, at the Effective Time, every six shares of the issued and outstanding common stock were automatically converted into one share of common stock, but without any change in the par value per share. No fractional shares were issued as a result of the reverse stock split. Any fractional shares that would otherwise have resulted from the reverse stock split were rounded up to the next whole number. The number of authorized shares of common stock remains unchanged at 300,000,000 shares. Proportionate adjustments were made to the per share exercise price and the number of shares of common stock issuable upon the exercise of all outstanding stock options and warrants granted by the Company. The number of shares of common stock deliverable upon vesting of restricted stock units were similarly adjusted. Concurrently, the number of shares of common stock reserved for future issuance under the Company’s 2014 and 2021 Equity Incentive Plans immediately prior to the Effective Time were reduced proportionately.
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.
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 reported,conditions including the current macro economic conditions impacting the banking and in March 2020, the World Health Organization characterized COVID-19 as a global pandemic. The COVID-19 pandemic has forced international, federal, state, and local governments to enforce prohibitions of non-essential activities. The Company first 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 related 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 evolve, 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 recognized in the condensed consolidated financial statements as new events occur, and additional information becomes known. To the extent the Company’s actual results differ materially from those estimates and assumptions, the Company’s future condensed consolidated financial statements could be affected.markets.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the rules and regulations for reporting the Quarterly Report on Form 10-Q ("Form 10-Q"), and are presented in U.S. dollarsdollars. Accordingly, they do not include all of the information and prepared in conformity with GAAP.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”)ASUs of the Financial Accounting Standards Board (“FASB”).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.
The condensed consolidated balance sheet at December 31, 2022 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements. These financial statements have been prepared on a basis that is substantially consistent with the accounting principles applied in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 ("2022 Form 10-K"). This report should be read in conjunction with our 2022 Form 10-K filed with the SEC on March 3, 2023. In theour 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, 20222023 and its results of operations, cash flows, and changes in stockholders' equity (deficit) for the three months ended March 31, 20222023 and 2021.2022. OperatingThe results for the three months ended March 31, 2022,2023 are not necessarily indicative of the results thatexpected for any future period or the full year.
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 be expected fortake 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 full year endingauditor attestation requirements of Section December 31, 2022. 404The unaudited interim condensed consolidated 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 statements, presented herein,accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not containhave a class of securities registered under the Exchange Act) are required disclosures under GAAPto 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 annual consolidated financial statements. The condensed consolidated balance sheetpublic 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 December 31, 2021, has been derived from the audited consolidated balance sheet as of that date. The accompanying unaudited interim condensed consolidatedCompany’s financial statements should be readwith 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 conjunction with the annual audited consolidated financial statements and related notes as of and for the year ended December 31, 2021, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on April 1, 2022.
accounting standards used.
Use of Estimates
The preparation of our unaudited interim condensed consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and related disclosures. 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, disclosure of contingent assets and liabilities at the date of the unaudited interim condensed consolidated financial statements, and reported amounts of revenue and expenses during the reporting period. The Company’s significant estimates and judgments involve the identification of performance obligations in revenue recognition, the valuation of share-based compensation, and the valuation of share-based compensation,financing, including the underlying fair value of the common stock. Accordingly, actual results could differ from those estimates.
GUERRILLA RF, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 March 31, 20222023 and 20212022 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.
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 1one major distributor customer, Richardson RFPD, Inc., during the three months ("RFPD") ended March 31, 2022 accounting for 84% and 2021 accounting for 85% and 80% of product shipment revenue for the three months ended March 31, 20222023 and 2021,2022, respectively. Accounts receivable from our major distributor customerRFPD represented 80%74% and 76% of accounts receivable at March 31, 20222023 and 2021.December 31, 2022, respectively.
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 accountsAccounts 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 allowancesa provision to be added to its allowance for potentialexpected credit losses. The allowance represents the Company’s best estimate of expected credit losses it may experience in the Company’s accounts receivable portfolio. Management estimates the allowance for expected credit losses based on an ongoing review of existing economic conditions, the financial conditions of the customers, historical trends in credit losses, and the amount and age of past due accounts. 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.expectations; therefore, the Company does not currently have an allowance for expected credit losses.
The Company has had a factoring agreement that providesprovided advance payments on up to 85% of invoices issued to one customer, ourRFPD, its largest distributor, with receivables less than 90 days outstanding secured by the remaining 15%. 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 March 31, 20222023, and 2021,there were $1.0 million of advances under the Company had $0 and $1,455,135 of factored invoices, respectively.Spectrum Loan Facility. At March 31, 2022 and 2021, the Company had $0 and $218,270 d2023,$0.1 million ueof excess collateral was due from the factoring counterparty, respectively,Spectrum, which is included in accounts receivable on the unaudited interim condensed consolidated balance sheets. SeeSee Note 5 for additional discussion on the factoring agreement.
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 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 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. 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. ShippingAny shipping and handling fees charged to customers in conjunction with product distributon are reported within revenue. The Company does not have any significant financing components as payment is duereceived 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 isare satisfied.
As of March 31,2023 and 2022, the Company had $100 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 quarter ended March 31,2023, the Company recognized $0 of revenue that was deferred as of December 31, 2022. As of March 31,2023 and 2022, the Company did not have any contractual liabilities where performance obligations have not yet been satisfied. During the quarters ended March 31,2023 and 2022, 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 of materials used in its products 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.
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 measures and recognizes compensation expense for all stock options, shares of stock, and restricted stock units ("RSU") 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 estimates the fair value of RSUs awarded based upon the known fair market value of the underlying shares on the grant date. The Company recognizes compensation expense on a straight-line basis over the requisiteapplicable vesting period. In addition, the Company accounts for forfeitures of stock options asawards 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)
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.
ResearchThe 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 Development Costs
Research and development costsservices. Share-based awards issued to non-employees 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 threeno months ended March 31, 2022, and 2021 were $7,750 and $5,402, respectively.
Inventories
Inventories are valued at the lower of cost and net realizable value. Cost is determined by the first‐in, first‐out (FIFO) method.
Income Taxes
Income taxes are accounted for under the asset and liability method aslonger 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 that 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 only recognize the tax benefit from an uncertain tax position if it is more likely than not that such tax position will be sustained on examination by the taxing authorities, based solely on the technical merits of the respective tax position. The tax benefits recognized in the consolidated financial statements from such a tax position should be measured based on the largest benefit having a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority. In accordance with the disclosure requirements of ASC 74010, the Company’s policy on income statement classification of interest and penalties related to income tax obligations is to include such items as part of total income tax expense.revalued at each reporting period.
GUERRILLA RF, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Net Income (Loss) Per Share
Basic net loss per share of common stock is computed by dividing net loss by the weighted average number of shares of common stock outstanding during each period. Diluted net incomeloss per share of common stock includes the effect, ofif any, from the potential exercise or conversion of securities, such as options and warrants, which resultswould result in the issuance of incremental shares of common stock. ForFor 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.
As disclosed in Note 1 and Note 12, in conjunction with the above-noted planned uplisting to the Nasdaq or another national securities exchange, the Company’s board of directors approved a reverse split of shares of the Company’s common stock on a six-for-one basis, which was effective as of 12:01 a.m. Eastern Time on April 17, 2023 (the “Effective Time”). As a result of the reverse stock split, at the Effective Time, every six shares of the issued and outstanding common stock were automatically converted into one share of common stock, but without any change in the par value per share. No fractional shares were issued as a result of the reverse stock split. Any fractional shares that would otherwise have resulted from the reverse stock split were rounded up to the next whole number. The number of authorized shares of common stock remains unchanged at 300,000,000 shares. Proportionate adjustments were made to the per share exercise price and the number of shares of common stock issuable upon the exercise of all outstanding stock options and warrants granted by the Company. The number of shares of common stock deliverable upon vesting of restricted stock units were similarly adjusted. Concurrently, the number of shares of common stock reserved for future issuance under the Company’s 2014 and 2021 Equity Incentive Plans immediately prior to the Effective Time were reduced proportionately.
In computing basic and diluted net loss and income per share, the weighted average number of shares is 33,228,202 forthe same for both calculations because a net loss existed for the three months ended March 31, 2022, 2023and 6,702,686 basic 2022.There were 6,502,845 and 5,538,034 shares and 10,069,021outstanding diluted shares for the three months ended March 31, 2021.2023 Aand 2022, respectively. s such, allAll preferred stock, warrants, and options were excluded from the calculation of net loss per share for the three months ended March 31, 2022.periods presented.
The following potentially dilutive securities have been excluded from the computation of diluted weighted-averagebasic shares of common stock outstanding for thethe three months ended March 31, 2023 and 2022 (unaudited), as theythey 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:anti-dilutive, and all share counts presented are on a post-split basis:
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Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Common stock warrants | 824,340 | 55,263 | ||||||
Restricted stock units | 178,945 | 29,167 | ||||||
Stock options | 607,690 | 549,697 | ||||||
| 1,610,975 | 634,127 | |||||||
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 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 doesadopted ASU 2016-13 effective January 1, 2023. Its adoption did not intend to adopt this standard early and is currently evaluating the impact of this standard. The Company does not expect this standard to have a material impact on itsthe Company’s unaudited interim condensed consolidated financial statements upon adoption.statements.
In August 2020,September 2022, the FASB issued ASC UpdateASU No. 20202022-06,04, DebtLiabilities - Debt with Conversion and Other Options Supplier Finance Programs(Subtopic (Subtopic 470405-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-4050): AccountingDisclosure of Supplier Finance Program Obligations. This guidance requires annual and interim disclosures for Convertible Instrumentsentities that use supplier finance programs in connection with the purchase of goods and Contracts in an Entity’s Own Equity. The goal ofservices. These amendments are effective for fiscal years beginning after December 15, 2022, except for 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 focusamendment on the guidance for convertible instruments and derivative scope exception for contracts in an entity’s own equity. The new standardroll-forward information, which is effective for fiscal years beginning after December 15, 2021,2023. 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 endingended March 31, 2022,2023. and itIt did not have a material impact on its unaudited interim condensed consolidated financial statements.
The Company has reviewed all other recently issued accounting pronouncements and concluded they were either not applicable or not expected to have a material impact on its unaudited interim condensed consolidated financial statements.
GUERRILLA RF, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. INVENTORIES
Inventories are summarized as follows:
| March 31, 2023 | ||||||||
(unaudited) | December 31, 2022 | |||||||
Raw materials | $ | 557,604 | $ | 696,409 | ||||
Work-in-process | 105,260 | 44,037 | ||||||
Finished goods | 921,051 | 932,479 | ||||||
Inventory, net | $ | 1,583,915 | $ | 1,672,925 | ||||
As of March 31,2023 and December 31, 2022, there was no inventory allowance of potential scrap and obsolete inventory.
4. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
| March 31, 2023 | ||||||||
| (unaudited) | December 31, 2022 | |||||||
Production assets | $ | 1,851,808 | $ | 1,849,808 | ||||
Computer equipment and software | 876,277 | 809,038 | ||||||
Lab equipment | 4,060,293 | 3,965,189 | ||||||
Office furniture and fixtures | 1,142,001 | 1,044,858 | ||||||
Leasehold improvements | 285,397 | 123,109 | ||||||
Construction work in progress | 67,395 | 207,027 | ||||||
| 8,283,171 | 7,999,029 | |||||||
Less accumulated depreciation | (3,299,253 | ) | (2,900,932 | ) | ||||
| $ | 4,983,918 | $ | 5,098,097 | |||||
Depreciation and amortization expense was $398,321 and $250,937 for thethree months ended March 31, 2023 and 2022, 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 may not 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 $20 thousand of total impairment charges in the second half of fiscal 2022, which was included in General and Administrative expenses on the consolidated statement of operations in the year ended December 31, 2022. 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 March 31,2023, the Company concluded it did not have any other triggering events requiring assessment of impairment of its long-lived assets.
GUERRILLA RF, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. DEBT
Spectrum Loan Facility
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. During the three months ended March 31,2023, the Company was in compliance with these covenants and restrictions.
The foregoing summary of the terms of the Spectrum Loan Facility does not purport to be complete and is subject to, and qualified in its entirety by, reference to the full text of the Credit Agreement and the AR Agreement, which were attached as Exhibits to the Company's Current Report on Form 8-K, filed with the SEC on June 6, 2022.
The Company has borrowed $1.0 million under the Spectrum Loan Facility as of March 31,2023. The Company includes the interest expense of the Spectrum Loan Facility ($45 thousand) as part of its interest expense on its unaudited interim condensed consolidated statements of operations, and the total amount of $1.0 million borrowed under the Spectrum Loan Facility is included as short-term debt on the unaudited interim condensed consolidated balance sheet as of March 31,2023.
GUERRILLA RF, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On 3.August 11, INVENTORIES2022 (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.
Inventories are summarizedThe 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 initially provided 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 25,000 shares (post-split) of common stock as follows:
| March 31, 2022 | ||||||||
(unaudited) | December 31, 2021 | |||||||
Raw materials | $ | 656,525 | $ | 629,090 | ||||
Work-in-process | 317,494 | 339,746 | ||||||
Finished goods | 674,735 | 482,972 | ||||||
Inventory allowance | (9,712 | ) | (12,794 | ) | ||||
Inventory, net | $ | 1,639,042 | $ | 1,439,014 | ||||
consideration for the Salem Loan Facility. The Company agreed to issue up to an additional 25,000 shares (post-split) 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 stock and the declaration or payment of any dividends on the Company's stock. During the three months ended March 31,2023, the Company was in 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.
The foregoing description of the Salem Loan Facility does not purport to be complete and is qualified in its entirety by reference to the full text of the loan documents, copies of which are attached as Exhibits to the Company's Current Report on Form 8-K filed with the SEC on August 17, 2022.
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 loan from the Small Business Administration.
The Company has borrowed $5.0 million under the Salem Loan Facility as of March 31,2023.As of March 31, 20222023, the Company includes the interest expense of the Salem Loan Facility ($164 thousand) as part of its interest expense on its unaudited interim condensed consolidated statements of operations, the total amount of $5.0 million borrowed as long-term debt on its unaudited interim condensed consolidated balance sheets ($4.6 million discounted long-term debt), and the 25,000 post-split shares of common stock issued ($0.5 million) within the unaudited interim condensed consolidated statements of stockholders' equity (deficit). As disclosed in Note December12, subsequent to March 31, 20212023, there wasSalem approved the Company's request to draw down an inventory allowance additional $1.5 million on May 1,2023. In conjunction with the additional $1.5 million draw, the Company issued Salem 12,500 shares of $9,712common stock (post-split). Accordingly, the Company has now borrowed a total of $6.5 million from Salem and $12,794, respectively, for pissued 37,500 shares of common stock to Salem. otential obsolete inventory.
4. PROPERTYGUERRILLA RF, INC. AND EQUIPMENTSUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Property and equipment is summarized as follows:
| March 31, 2022 | ||||||||
| (unaudited) | December 31, 2021 | |||||||
Production assets | $ | 1,802,749 | $ | 1,616,308 | ||||
Computer equipment and software | 650,552 | 647,852 | ||||||
Lab equipment | 3,240,462 | 103,427 | ||||||
Office furniture and fixtures | 51,354 | 51,354 | ||||||
Leasehold improvements | 123,109 | 123,109 | ||||||
Construction work in progress | 91,790 | 63,750 | ||||||
| 5,960,016 | 2,605,800 | |||||||
Less accumulated depreciation | (1,829,426 | ) | (1,578,488 | ) | ||||
| $ | 4,130,590 | $ | 1,027,312 | |||||
New Headquarters and Design Center Capital Addition Financing
In conjunction with the Company's planned move into expanded office facilities in early 2023, the Company entered into a 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 recorded depreciation and amortization expense of $0.3 million and $0.1 millionwas responsible for the three months ended March 31, 2022, and 2021, respectively, and $0.4 million for the year ended December 31, 2021.
5. DEBT
Short-Term Debt
Factoring Arrangement
The Company has an accounts receivable factoring arrangement with a financial institution (the “Factor”). Under the terms of the agreement, the Company, from time to time, sellspaying interest-only payments 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 balancefinancing company related to the Company (the “Advance Amount”), with the remaining balance, less feesfurniture procurement order (interest on principal of $496 thousand) placed in April 2022 prior 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 first scheduled principal financing payment, which occurred in 30August 2022 ( 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.$246 thousand). The Company includesmade interest-only payments to the financing company related to the furniture procurement order through August 2022 in the amount of $17 thousand. The total scheduled principal and interest payments to be made after March 31, 2023 related to the April 2022 furniture financing are $609 thousand.
The Company entered into a lease agreement in July 2021 in conjunction with the Company's planned move into its new headquarters and design center in early 2023 (as described in Note 8 to our unaudited interim condensed consolidated financial statements). The new headquarters and design center were renovated in accordance with plans agreed upon with the landlord. The Company took possession of the building once 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 and as a result the new headquarters and design center did not become available until the first quarter of 2023. 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 (see the lease agreement and amendments as Exhibits 10.7,10.8,10.9, and 10.10 to this Form 10-Q. The total cost of factoringthe new building asset additions were $7.7 million, with the Company being responsible for the balance in interest expense.excess of the landlord's $3.5 million allowance (the "excess construction costs") plus deferral fees and interest.
As stated previously,part of the aforementioned August 2022 lease amendment, the Company factorsmade the accounts receivable onlandlord 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 included a recourse basis. Therefore, if the Factor cannot collect the factored accounts receivable,deferral fee (2% per annum) and interest (18% per annum). Thus, the Company must refundpaid the Advance Amount remittedlandlord a 2% deferral fee which was applied to us for any uncollected accounts receivable. Accordingly,all excess construction costs as invoiced by the landlord. The Company also paid 18% interest on all excess construction costs and deferral fees from the date the landlord invoiced them until the Company recordsremitted payment. The initial payment of $1.3 million towards the liabilityexcess construction costs was applied first to accrued interest, then to the deferral fee, and then to excess construction costs. The Company has made additional payments towards excess construction costs of having$3.1 million subsequent to refund the Advance Amount as short-term debt wheninitial $1.3 million payment, through the factoring arrangement is utilized. period ending March 31, 2023 also applied first to accrued interest, then to the deferral fee, and then to excess construction costs. The Company made one final invoice payment related to the excess construction costs, including deferral fees and interest, of $66 thousand in April 2023.
GUERRILLA RF, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Debt Maturity
As of March 31, 20222023, , 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:
| March 31, 2022 | December 31, 2021 | |||||||
Factoring Fees | $ | 0 | $ | 87,122 | ||||
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 (as discounted) is expected to mature as follows:
2022 | $ | 5,117 | ||
2023 | 8,772 | |||
2024 | 8,772 | |||
2025 | 8,772 | |||
2026 | 8,772 | |||
Thereafter | 109,695 | |||
| $ | 149,900 |
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.
2023 | $ | 1,303,176 | ||
2024 | 123,082 | |||
2025 | 88,198 | |||
2026 | 80,389 | |||
2027 | 4,651,988 | |||
Thereafter | 9,716 | |||
| $ | 6,256,549 |
6. COMMON STOCK AND PREFERRED STOCK
Common Stock
Common Stock
The Company is authorized to issue 300,000,000 shares of common stock with a par value of $ 0.0001. Each share of common stock entitles the holder to 1one 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 boardBoard of directorsDirectors may declare out of funds legally available for that purpose on a non-cumulative basis. NaNNo dividends havehad been declared through March 31, 2022.2023.
On December 30,2022, the Company completed the initial closing of a private placement (the “Offering”) as it entered into a Unit Purchase Agreement (the “Unit Purchase Agreement”) with investors (the “Purchasers”) pursuant to which the Company sold 647,057 units (the “Units”), on a post-split basis, 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 $7.80 per Unit, on a post-split basis, 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. Altogether, the Company sold 1,183,192 Units, on a post-split basis, resulting in gross proceeds of approximately $9.2 million before the deduction of estimated Offering expenses of approximately $1.2 million.
Each full Warrant has an exercise price of $12.00 per whole share of common stock, on a post-split basis, 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 was required to prepare and file a registration statement with 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 filed the registration statement with the SEC on March 30, 2023, and it was declared effective on April 13, 2023.
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 $931 thousand representing 10% of the gross proceeds from the Offering, the Placement Agents received warrants (the “Placement Agent Warrants”) to purchase 177,490 shares of Common Stock (the “Placement Agent Warrant Shares”), on a post-split basis. The Placement Agent Warrants are exercisable for a period of five years and have an exercise price of $7.80 per share.
The aforementioned Units and Warrants were offered and sold by the Company pursuant to an exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.
Reverse Stock Split
As disclosed in Note 1 and Note 12, in conjunction with a planned uplisting to the Nasdaq or another national securities exchange, the Company’s board of directors approved a reverse split of shares of the Company’s common stock on a six-for-one basis, which was effective as of 12:01 a.m. Eastern Time on April 17, 2023 (the “Effective Time”). As a result of the reverse stock split, at the Effective Time, every six shares of the issued and outstanding common stock were automatically converted into one share of common stock, but without any change in the par value per share. No fractional shares were issued as a result of the reverse stock split. Any fractional shares that would otherwise have resulted from the reverse stock split were rounded up to the next whole number. The number of authorized shares of common stock remains unchanged at 300,000,000 shares. Proportionate adjustments were made to the per share exercise price and the number of shares of common stock issuable upon the exercise of all outstanding stock options and warrants granted by the Company. The number of shares of common stock deliverable upon vesting of restricted stock units were similarly adjusted. Concurrently, the number of shares of common stock reserved for future issuance under the Company’s 2014 and 2021 Equity Incentive Plans immediately prior to the Effective Time were reduced proportionately.
GUERRILLA RF, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Common Stock Warrants
InAs mentioned above, on OctoberFebruary 28, 2023, the Company completed the Offering. Each Unit sold in the Offering included one warrant to purchase one-half of a share of common stock. Thus, as of March 31,2023, Units sold in the Offering include warrants to purchase 769,146 shares, on a post-split basis, which warrants were issued upon the final closing of the Offering. The 769,146 Warrant Shares comprise 591,656 Purchaser Warrant Shares and 177,490 Placement Agent Warrant Shares, each exercisable for a period of November 2021,five years beginning six months following the final closing of the Offering. As of March 31, 2023, the Company issued warrants to nonemployees to purchase 183,100 and 148,480 sharestotal amount of outstanding 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).is 824,416, on a post-split basis.
Preferred Stock
The Company’s boardBoard of directorsDirectors 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 shares of the Company's common stock. There is no issued or outstanding preferred stock as of March 31,2023 or December 31, 2022.
7. EQUITY INCENTIVE PLANSHARE-BASED COMPENSATION
In 2014, the BoardCompany adopted the Long‐Term Stock Incentive Plan (the “2014 Plan”), with 568,00094,667 shares of common stock authorized for issuance under the 2014 Plan.Plan, on a post-split basis. Subsequently, stockholders approved an increase in the number of shares available under the 2014 Plan to 1,260,000 shares.210,000 shares, on a post-split basis. Exercise prices range from $0.70$4.20 to $1.57$9.42 per share, depending on the date of the award. Theaward, on a post-split basis. 2014 Plan is frozen, and noNo 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"),RSUs, performance awards, cash awards, and stock bonus awards. The Company initially reserved 222,99137,166 shares of common stock, on a post-split basis, 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 throughyear 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 of directors.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.
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:Stock Option Awards
(in thousands) | 2022 | 2021 | ||||||
Cost of revenues | $ | 1.3 | $ | 0 | ||||
Research and development | 8.5 | 0 | ||||||
Sales and marketing | 14.2 | 0 | ||||||
Administration | 8.9 | 6.4 | ||||||
| $ | 32.9 | $ | 6.4 | |||||
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, 20222023 was determined using the methods and assumptions discussed below:
● | The expected term of employee options is determined using the “simplified” method, as prescribed in the SEC’s Staff Accounting Bulletin (SAB) No. 107, whereby the expected life equals the arithmetic average of the vesting term and the original contractual term of the option due to the Company’s lack of sufficient historical data. |
● | The expected volatility is based on the historical volatility of the publicly traded common stock of a peer group of companies. |
● | The risk-free interest rate is based on the interest rate payable on U.S. Treasury securities in effect at the time of grant for a period that is commensurate with the assumed expected term. |
● | The expected dividend yield is |
GUERRILLA RF, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the three months ended March 31, 20222023 and 2021,2022, the grant date fair value of all option grants was estimated at thethe time of grant using the Black-Scholes option-pricing model using the following weighted-average assumptions:
Three Months Ended March 31, | ||||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Expected term (in years) | 6.25 | 5.00 | 6.25 | 6.25 | ||||||||||||
Expected volatility | 67 | % | 45 | % | 52 | % | 67 | % | ||||||||
Risk-free rate | 0.11 | % | 0.30 | % | 3.55 | % | 3.96 | % | ||||||||
Dividend rate | — | — | — | — | ||||||||||||
The weighted average grant date fair value of stock option awards granted was$4.74 and $7.58, on a post-split basis, $1.21 and $0.53 duringduring the three months ended March 31, 2022,2023, and 20212022, 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‐vestedunvested options at March 31, 20222023, and 20212022 amounted toamounted to$488,721 and $816,298 and $21,691, respectively, which are expected to be recognized over an average of three years.years.
Stock option activity by share is summarized as follows for the three months ended March 31, 2022:2023 (unaudited) on a post-split basis:
Number of Shares | Weighted-Average Exercise Price Per Option | Weighted- Average Remaining Contractual Life (in years) | ||||||||||
Shares underlying outstanding awards at December 31, 2021 | 3,180,882 | $ | 0.38 | 5.30 | ||||||||
Granted | 130,000 | 2.00 | ||||||||||
Exercised | (12,702 | ) | 0.41 | |||||||||
Shares underlying outstanding awards at March 31, 2022 | 3,298,180 | $ | 0.44 | 5.47 | ||||||||
Exercisable options at March 31, 2022 | 2,690,983 | $ | 0.34 | 4.83 | ||||||||
Number of Shares | Weighted-Average Exercise Price Per Option | Weighted- Average Remaining Contractual Life (in years) | ||||||||||
Shares underlying outstanding awards at December 31, 2022 | 601,220 | $ | 3.54 | 4.85 | ||||||||
Granted | 9,333 | 8.97 | ||||||||||
Exercised | - | |||||||||||
Cancelled/Forfeited | (2,863 | ) | 11.41 | |||||||||
Shares underlying outstanding awards at March 31, 2023 | 607,690 | $ | 3.60 | 5.18 | ||||||||
Exercisable options at March 31, 2023 | 503,445 | $ | 2.40 | 4.47 | ||||||||
Each outstanding unexercised stock option at the Closing Dateclosing 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 1,065,067177,512 (post-split) 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 3,146,366524,395 (post-split) 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.adjusted accordingly.
Twelve thousandIn seven hundred twoApril 2022, the Compensation Committee of the Board granted 41,417 (post-split) stock options to new employees at an exercise price of $12.00 per share on a post-split basis. 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 15,584 (post-split) stock options to new employees at multiple exercise prices between $12.00 and $24.90 per share on a post-split basis. These option awards vest equally over 12,702) ofourptions years (25% per year) on the anniversary of the date the recipient started working for the Company.
No options were exercised duringexercised during the three months ended March 31, 2022. The options exercised during the three months ended March 31, 2022, 2023had an intrinsic value of $20 thousand.. The aggregate intrinsic value of outstanding options exercisable as of March 31, 2022, 2023was $4.5 $3.2 million. AtAs of March 31, 2022, 2023,stock-based compensation of $0.5 million for unvested options granted of $0.5 million will be recognized over a remaining weighted-average requisite service period of 1.62.8 years.
GUERRILLA RF, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
RSU Awards
In the three months ended March 31,2023, the Compensation Committee of the Board granted 62,500 RSUs (post-split) to various employees and directors pursuant to the 2021 Plan. No RSU awards have been made under the 2014 Plan. The RSU awards made to non-employees in the year ended December 31, 2022 (25,000, post-split, 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 during the year ended December 31, 2022 (120,637, post-split, 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 March 31,2023 is approximately $1.4 million.
The employee stock option and RSU grants during the three months ended March 31,2023 (unaudited) 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 following table summarizes the RSU activity and weighted averages for share-based awards granted under the terms of the 2021 Plan on a post-split basis:
Three Months Ended March 31, 2023 | ||||||||
Number of RSUs | Weighted Average Grant Date Fair Value | |||||||
Outstanding at December 31, 2022 | 145,637 | $ | 10.68 | |||||
Granted | 62,500 | 8.94 | ||||||
Vested | (26,284 | ) | 11.16 | |||||
Cancelled/Forfeited | (2,908 | ) | 8.94 | |||||
Outstanding at March 31, 2023 | 178,945 | $ | 10.04 | |||||
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 endedMarch 31, 2023 and 2022:
| Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Direct product costs | $ | 17,665 | $ | 1,321 | ||||
Research and development | 65,731 | 8,432 | ||||||
Sales and marketing | 45,459 | 14,211 | ||||||
General and administrative | 139,785 | 8,892 | ||||||
| $ | 268,640 | $ | 32,856 | |||||
No income tax benefits have been recognized in the unaudited interim condensed consolidated statements of operations for stock-based compensation arrangements, and no stock-based compensation costs have been capitalized as property and equipment through March 31, 2023.
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 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 | March 31, 2022 | Balance Sheet Location | March 31, 2023 | |||||||
Operating Leases: | ||||||||||
Operating lease right-of-use assets | Operating lease right-of-use assets | $ | 275,984 | Operating lease right-of-use assets | $ | 10,896,388 | ||||
Current portion of operating lease liabilities | Operating lease, current portion | 116,128 | Operating lease, current portion | 568,000 | ||||||
Noncurrent portion of operating lease liabilities | Operating lease | 160,640 | Operating lease | 6,388,970 | ||||||
Total operating lease liabilities | Total operating lease liabilities | $ | 276,768 | Total operating lease liabilities | $ | 6,956,970 | ||||
Finance Leases: | ||||||||||
Finance lease right-of-use assets | Property, plant, and equipment | $ | 2,964,182 | Property, plant, and equipment | $ | 3,851,759 | ||||
Current portion of finance lease liabilities | Finance lease, current portion | 669,309 | Finance lease, current portion | 1,092,101 | ||||||
Noncurrent portion of finance lease liabilities | Finance lease | 2,694,369 | Finance lease | 2,737,467 | ||||||
Total finance lease liabilities | Total finance lease liabilities | $ | 3,363,678 | Total finance lease liabilities | $ | 3,829,568 | ||||
Lease cost recognized in the unaudited interim condensed consolidated financial statements is summarized as follows:
March 31, 2022 | March 31, 2021(1) | |||
Operating lease cost | $ 33,257 | $ 31,836 | ||
Finance lease cost: | ||||
Amortization of lease assets | 163,758 | 16,446 | ||
Interest on lease liabilities | 54,905 | 3,789 | ||
Total finance lease costs | $ 218,663 | $ 20,235 |
(1) Represent amounts under ASC 840.
| For the Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Operating lease cost | $ | 296,498 | $ | 33,257 | ||||
Finance lease cost: | ||||||||
Amortization of lease assets | 314,428 | 163,758 | ||||||
Interest on lease liabilities | 68,918 | 54,905 | ||||||
Total finance lease costs | $ | 383,346 | $ | 218,663 | ||||
GUERRILLA RF, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Other supplemental information related to leases is summarized as follows:
March 31, 2022 | March 31, 2023 | |||||||
Weighted average remaining lease term (in years): | ||||||||
Operating leases | 2.25 | 9.61 | ||||||
Finance leases | 4.63 | 3.52 | ||||||
Weighted average discount rate: | ||||||||
Operating leases | 7.00 | % | 10.94 | % | ||||
Finance leases | 6.93 | % | 7.09 | % | ||||
Cash paid for amounts included in the measurement of lease liabilities for the three months ended March 31, 2022: | ||||||||
Cash paid for amounts included in the measurement of lease liabilities for the year ended March 31, 2023: | ||||||||
Operating cash flows from operating leases | $ | 32,473 | $ | 613,050 | ||||
Operating cash flows from finance leases | $ | 54,070 | $ | 68,600 | ||||
Financing cash flows from finance leases | $ | 146,246 | $ | 266,862 | ||||
Payments Due by Period | Payments Due by Period | |||||||||||||||||||||||||||||||||||||||||
2022(1) | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | Total | |||||||||||||||||||||||||||||
Finance leases | $ 659,740 | $ 851,233 | $ 830,311 | $ 817,920 | $ 753,840 | $ 20,585 | $ 3,933,629 | $ | 997,782 | $ | 1,314,740 | $ | 993,973 | $ | 912,046 | $ | 121,289 | $ | 1,520 | $ | 4,341,350 | |||||||||||||||||||||
Less interest | 162,340 | 171,400 | 127,959 | 79,063 | 29,009 | 180 | 569,951 | 183,118 | 177,031 | 105,622 | 43,237 | 2,768 | 6 | 511,782 | ||||||||||||||||||||||||||||
Finance lease liabilities | $ 497,400 | $ 679,833 | $ 702,352 | $ 738,857 | $ 724,831 | $ 20,405 | $ 3,363,678 | $ | 814,664 | $ | 1,137,709 | $ | 888,351 | $ | 868,809 | $ | 118,521 | $ | 1,514 | $ | 3,829,568 | |||||||||||||||||||||
Operating leases | $ 98,718 | $ 133,814 | $ 67,569 | $ - | $ - | $ - | $ 300,101 | $ | 981,111 | $ | 1,168,440 | $ | 1,087,090 | $ | 1,060,174 | $ | 1,076,140 | $ | 5,986,355 | $ | 11,359,310 | |||||||||||||||||||||
Less present value adjustment | 12,550 | 9,425 | 1,358 | - | - | - | 23,333 | 546,854 | 682,657 | 631,798 | 580,821 | 524,555 | 1,435,655 | 4,402,340 | ||||||||||||||||||||||||||||
Operating lease liabilities | $ 86,168 | $ 124,389 | $ 66,211 | $ - | $ - | $ - | $ 276,768 | $ | 434,257 | $ | 485,783 | $ | 455,292 | $ | 479,353 | $ | 551,585 | $ | 4,550,700 | $ | 6,956,970 | |||||||||||||||||||||
The Company leases its office facilitiesformer headquarters, located 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 and Design Center
In July 2021, the Company entered into a lease agreement for additional office facilitiesits new headquarters and design center (also in Greensboro, North Carolina,Carolina), with an expiration datea lease term of ten (years and 10two) years months from the date the Company commences occupancy, which it estimates will beoccurred in earlythe first quarter of 2023. Under the lease agreement, terms, the Company is responsible for certain insuranceinsurance 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 beis calculated on a straight-line basis according to the lease's rental terms. The Company will not remit anycommence remitting scheduled lease payments until it occupiesin the building. second quarter of 2023.The Company anticipates approximately $4.0 million of new headquarter building asset additions, and an annual lease expense of approximately $1.5 million over the term of the lease. Lease expense recognition commenced 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 move into the new headquarters and design center in early 2023, 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. The total scheduled principal and interest payments to be approximately $1.1made after March 31, 2023 related to the furniture financing are $609 thousand.
As disclosed in Note 5, the Company entered into a lease agreement in July 2021 in conjunction with the Company's planned move into its new headquarters and design center in early 2023.The total cost of the new building asset additions were $7.7 million, upon occupancy.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.
GUERRILLA RF, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company recorded advanced rent amounts paid and payable to the landlord as long-term prepaid expenses and other on the consolidated balance sheet as of December 31, 2022. These amounts were reclassified to the operating lease right-of-use asset upon lease commencement in the first quarter of 2023.
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, 0no liability related to any such disputes has been recorded at March 31, 20222023, or December 31, 20212022.
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 unaudited interim condensed consolidated financial statements. As a result, 0no liability for these agreements has been recorded at March 31, 20222023, or December 31, 20212022.
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.
.
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 2023or 2021.2022.
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 2023and 20212022 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 full valuation allowance has been recorded against the Company’s net deferred tax assets as of March 31, 2022,2023, and December 31, 2021.2022.
GUERRILLA RF, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 condensed 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 unaudited interim condensed 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.
Potential 382 Limitation
As disclosed in our Annual Report on Form 10-K for the year ended, December 31, 2021, theThe 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 U.S. Internal Revenue Code of 1986, as amended (the "Code"), as well as similar stateState 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 experiencedexperiences 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. 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 Company's deferred tax valuation allowance. Due
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 existenceCompany 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 it isas of notMarch 31, expected that any possible limitation will have an impact on the results of operations of the Company.2023.
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."
10. Related Party Transactions
We have not had any related party transactions, beyond participation in the Offering and compensation arrangements in the quarter ended March 31, 2023. Any related party transactions between January 1, 2019 and December 31, 2022 are further described in our Annual Report on Form 10-K for the year ended December 31, 2022.
Certain existing shareholders, including investors affiliated with certain of our directors and officers, purchased an aggregate of 45,383 Units (on a post-split basis) in conjunction with the Offering through all closings.
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.
Principal | Number of Shares of Common Stock Issued Upon Mandatory | |||||||
Name of Stockholder | Amount | Conversion | ||||||
AMB Investments, LLC | $ | 575,000 | 338,235 | |||||
Jeanne Pratt | $ | 250,000 | 147,059 | |||||
Samuel W. Funchess | $ | 100,000 | 58,824 | |||||
William H. Pratt | $ | 50,000 | 29,412 | |||||
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.
Name of Stockholder | Principal | Number of Shares of | ||||||
William J. Pratt | $ | 100,000 | 50,000 | |||||
Jeanne Pratt | $ | 100,000 | 50,000 | |||||
William H. Pratt | $ | 100,000 | 50,000 | |||||
2021 Promissory Notes to Warrant Holders
In August 2021, Guerrilla RF issued promissory notes for an aggregate principal amount of approximately $300,000 to the holders of its outstanding warrants (the “2021 Notes”). The 2021 Notes accrued interest at the rate of 6% per annum until November 30,2021 and at the rate of 12% per annum thereafter. Immediately prior to the closing of the Merger, the warrants were exercised and the warrant exercise price paid in exchange for the cancelation of the 2021 Notes. The following table sets forth the principal amount of the 2021 Notes.
Name of Stockholder | Principal | |||
AMB Investments LLC | $ | 233,333 | ||
David Reich | $ | 50,000 | ||
Jason Bodford | $ | 16,666 | ||
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 CompanyCompany made $79,234$89,636 and $41,115 $79,234of contributionscontributions to the plan in the three months ended March 31, 20222023 and 20212022, respectively.
12. Subsequent Events
Management has evaluated subsequent events occurring after March 31, 2022,2023, through through May 12, 202210,2023, the date the unaudited interim condensed consolidated financial statements were issued. Theissued, and concluded the following subsequent events have occurred during that period but were not recognized in the period.unaudited interim condensed financial statements other than the effect of the reverse stock split, which is reflected in the unaudited interim condensed financial statements. Except as described below, the Company has concluded that no subsequent event has occurred that requires disclosure.
Coronavirus PandemicReverse Stock Split
On The Company’s board of directors approved a reverse split of shares of the Company’s common stock on a six-for-March 11, 2020, one basis, which was effective as of 12:01 a.m. Eastern Time on April 17, 2023 (the World Health Organization characterized“Effective Time”). As a result of the novel COVID-reverse stock split, at the Effective Time, every 19six virusshares of common stock were automatically converted into one share of common stock, but without any change in the par value per share. No fractional shares were issued as a global pandemic.result of the reverse stock split. Any fractional shares that would otherwise have resulted from the reverse stock split were rounded up to the next whole number. The pandemic has affectednumber of authorized shares of common stock remains unchanged at 300,000,000 shares. Proportionate adjustments were made to the per share exercise price and the number of shares of common stock issuable upon the exercise of all outstanding stock options and warrants. The number of shares of common stock deliverable upon vesting of RSUs were similarly adjusted. Concurrently, the number of shares of common stock reserved for future issuance under the Company’s business operations to a limited extent, most of which impacted its customers' ordering patterns due2014 and 2021 Equity Incentive Plans immediately prior 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.Effective Time were reduced proportionately.
Employee Stock Option and Restricted Stock Unit GrantsInitial Public Offering
On April 4, 2022,3, 2023, the compensation committeeCompany disclosed in a Form S-1 registration statement, its intent to issue additional shares of common stock in an initial public offering to be conducted in conjunction with its application to list its common stock on the Nasdaq Capital Market operated by Nasdaq upon satisfaction of the board of directors granted stock options to new employees of the Company to purchase an aggregate of 250,700 shares ofexchange’s initial listing criteria. If 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)is not approved for listing on the anniversary ofNasdaq Capital Market, it will not consummate the date they started working for the Company.
Onoffering. April 8, 2022, Nothe 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 assurance can be given that the Company's common stock. The RSU awards vest over three equal annual installments fromNasdaq application will be approved or 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.offering completed.
New Headquarters Office Facilities Capital Addition FinancingSalem Loan Facility
As disclosed in Note 5, the Company has a Loan Agreement with Salem. The Loan Agreement provides for Salem making aggregate advances of up to $8.0 million under the Loan Facility. An initial advance of $5.0 million was made in August 2022, with additional advances of up to $3.0 million available at Salem’s discretion. On May 1, 2023, Salem made an additional discretionary advance of $1.5 million to the Company of the remaining $3.0 million available under the Loan Facility. At the same time, the Company agreed to increase the interest rate for the Loan Facility to 14.0% per annum, with 11.0% payable in cash and 3.0% payable-in-kind, with the principal and outstanding interest due in August 2027. The terms of the May 1, 2023 advance are set forth in an amendment to the Loan Agreement, a copy of which is attached to this Form 10-Q as Exhibit 10.1.
In conjunction with the Company's planned move into expanded office facilities in early 2023, which will become the Company's new headquarters, additional advance, the Company entered intopaid Salem a financing arrangement related to furnitureclosing fee of $60 thousand and has issued Salem 12,500 shares of common stock (post-split) as consideration for the new office facilities in$1.5 million advance. Accordingly, as of April 2022.May 1, 2023, the Company has received total advances of $6.5 million under the Salem Loan Facility and has issued 37,500 shares (post-split) of common stock to Salem. The total cost ofLoan Facility has a five-year term. Should 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 torepay the financing company related to the furniture procurement order (interest on principal of $496 thousand) placed in April 2022 prior toloan during the first scheduledthree years of the term, it may be required to pay a prepayment premium equal to (i) 3.0% of the prepaid principal financing paymentduring year 1, (ii) 2.0% of the prepaid principal during year 2, and (iii) 1.0% of the prepaid principal during year 3. The Loan Facility contains customary affirmative and negative covenants that impose restrictions on the Company’s financial and business operations, including limitations on liens, indebtedness, fundamental changes and changes in August 2022.the nature of the Company’s business. In addition, the Loan Facility provides that the Company must maintain compliance with a maximum leverage ratio and a minimum liquidity covenant. The Loan Facility also contains customary representations and warranties.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and results of operations, as well as other sections in this Quarterly Report on Form 10-Q, should be read together with the unaudited interim condensed consolidated financial statements and related notes included elsewhere in Item 1 of Part I of this Quarterly Report on Form 10-Q and with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 20212022 as filed with the SEC on April 1, 2022.March 3, 2023.
Forward-looking statements contained in this Quarterly Report on Form 10-Q are predictions only, and actual results could differ materially from management’s expectations due to a variety of factors, including those described below. All forward-looking statements are expressly qualified in their entirety by such risk factors.
The forward-looking statements that we make in this Quarterly Report on Form 10-Q are based on management’s current views and assumptions regarding future events and speak only as of their dates. We do not intenddisclaim any obligation to update anydevelopments of these forward-looking statementsrisk factors or publiclyto announce the results ofpublicly any revisions to theseany of the forward-looking statements other thanthat we make, or to make corrections to reflect future events or developments, except as is required under U.S.by the federal securities laws.
Our business is subject to numerous risks and uncertainties, including:
● those relating to fluctuations in our operating results;
● our dependence on developing new products, achieving design wins, and several large customers for a substantial portion of our revenue;
● the COVID-19 pandemic materially and adversely affecting our financial condition and results of operations;
● a loss of revenue if purchase contracts are canceled or delayed;
● our dependence on third parties such as suppliers, product manufacturers, and product assemblers and testers;
● risks related to sales through independent sales representatives and distributors;
● risks associated with the operation of our third-party manufacturing providers;
● business disruptions;
● poor manufacturing yields;
● increased inventory risks and costs due to timing of customer forecasts;
● our ability to continue to innovate in a very competitive industry;
● unfavorable changes in interest rates, pricing of certain precious metals, and utility rates;
● our strategic investments failing to achieve financial or strategic objectives;
● our ability to attract, retain, and motivate key employees;
● warranty claims, product recalls, and product liability;
● changes in our effective tax rate and the enactment of international or domestic tax legislation, or changes in regulatory guidance;
● risks associated with environmental, health and safety regulations, and climate change;
● risks from international sales and third-party vendor operations;
● the impact of, and our expectations regarding, changes in current and future laws and regulations;
● changes in government trade policies, including the imposition of tariffs and export restrictions;following:
● we may not be able to generate sufficient cash to service all of our debt or meet our operating needs;
● we may not be able to raise sufficient equity capital to support our operating needs and fund our strategic plans;
● risks relating to fluctuations in our operating results;
● our dependence on developing new products, achieving design wins, and several large customers for a substantial portion of our revenue;
● a loss of revenue if purchase contracts are canceled or delayed;
● our dependence on third parties such as suppliers, product manufacturers, and product assemblers and testers;
● risks related to sales through independent sales representatives and distributors;
● risks associated with the operation of our third-party manufacturing providers;
● anticipated trends, growth rates, and challenges in our business and in the markets in which we operate;
● our ability to further penetrate our existing customer base;
● our estimates regarding future revenues, capital requirements, general and administrative expenses, sales and marketing expenses, research and development expenses, and our need for or ability to obtain additional financing to fund our operations;
● developments and projections relating to our competitors and our industry, including semiconductor availability, which has affected the automotive industry, impacting vehicle production and thereby demand irregularities for our business;
● business disruptions;
● poor manufacturing yields;
● increased inventory risks and costs due to the timing of customer forecasts;
● our ability to continue to innovate in a very competitive industry;
● unfavorable changes in interest rates, pricing of certain precious metals, utility rates, and shipping and freight costs;
● our strategic investments failing to achieve financial or strategic objectives;
● our ability to attract, retain, and motivate key employees;
● warranty claims, product recalls, and product liability;
● changes in our effective tax rate and the enactment of international or domestic tax legislation, or changes in regulatory guidance;
● risks associated with environmental, health and safety regulations, and climate change;
● risks from international sales and third-party vendor operations;
● the impact of, and our expectations regarding, changes in current and future laws and regulations;
● changes in government trade policies, including the imposition of tariffs and export restrictions;
● our ability to protect and enforce our intellectual property protection and the scope and duration of such protection;
● claims of infringement of third-party intellectual property rights;
● security breaches and other similar disruptions compromising our information;
● theft, loss, or misuse of personal data by or about our employees, customers, or third parties;
● our inability to remediate the material weaknesses identified in internal controls over financial reporting relating to certain control processes;
● provisions in our governing documents and Delaware law may discourage takeovers and business combinations that our stockholders might consider to be in their best interests; and,
● volatility in the price of our common stock.
These and other risks and uncertainties, which are described in more detail in our most recent Annual Report on Form 10-K that we filed with the SEC and those listed under the caption "Risk Factors" within this Quarterly Report on Form 10-Q, could cause actual results and developments to be materially different from those expressed or implied by any of these forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make.
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. We undertake no obligation to update any of these forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q or to conform these statements to actual results or revised expectations, except as required by law.
You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q as exhibits with the understanding that our actual future results, performance, and events and circumstances may be materially different from what we expect.
Overview
Prior to employthe 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 semiconductor technologyfollowing the closing of the Merger. All references in this Quarterly Report to deliver“Guerrilla RF” refer to Guerrilla RF solutionsOperating Corporation, a privately held Delaware corporation, and our direct, wholly-owned subsidiary. Unless otherwise stated or the context otherwise indicates, references to customersthe “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 this Form 10-Q, there are frequent references to Guerrilla RF.
Our common stock is currently quoted on the OTCQX, under the symbol “GUER.”
As disclosed in underserved markets. Note 1 and Note 12, in conjunction with the above-noted planned uplisting to the Nasdaq or another national securities exchange, the Company’s board of directors approved a reverse split of shares of the Company’s common stock on a six-for-one basis, which was effective as of 12:01 a.m. Eastern Time on April 17, 2023 (the “Effective Time”). As a result of the reverse stock split, at the Effective Time, every six (6) shares of the issued and outstanding common stock were automatically converted into one (1) share of common stock, but without any change in the par value per share. No fractional shares were issued as a result of the reverse stock split. Any fractional shares that would otherwise have resulted from the reverse stock split were rounded up to the next whole number. The number of authorized shares of common stock under the Company's Delaware Certificate of Incorporation remained unchanged at 300,000,000 shares. Proportionate adjustments were made to the per share exercise price and the number of shares of common stock issuable upon the exercise of all outstanding stock options and warrants granted by the Company. The number of shares of common stock deliverable upon settlement or vesting of restricted stock units were similarly adjusted. Concurrently, the number of shares of common stock reserved for future issuance under the Company’s 2014 and 2021 Equity Incentive Plans immediately prior to the Effective Time were reduced proportionately.
Our principal executive offices are located at 2000 Pisgah Church Road, Greensboro, North Carolina 27455. Our telephone number is (336) 510-7840. Our website address is www.guerrilla-rf.com. Information contained on, or that can be accessed through, our website is not a part of this Quarterly Report. All trademarks, service marks, and trade names appearing in this Quarterly Report are the property of their respective holders. Use or display by us of other parties’ trademarks, trade dress, or products is not intended to, and does not, imply a relationship with, or endorsements or sponsorship of, us by the trademark or trade dress owners.
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, there are frequent references to Guerrilla RF throughout this discussion and analysis.
Guerrilla RF possesses in-house design, applications, sales, and customer support functions as a fabless semiconductor company. We outsourceIt outsources the manufacture and production of ourits 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 ourits primary assembly and test suppliers are located in Malaysia and the Philippines. We have produced and distributed in excess of 100 million products in our portfolio of products to over 500 end customers worldwide.
Merger Agreement
On October 22, 2021, the Company (formerly known as Laffin Acquisition Corp.), Guerrilla RF Acquisition Corp., and Guerrilla RF entered into a merger agreement (the 'Merger Agreement') pursuant to which Guerrilla RF Acquisition Corp. merged with and into Guerrilla RF, with Guerrilla RF continuing as the surviving corporation and a wholly-owned subsidiary of the Company (the 'Merger').
COVID-19 Pandemic and Supply Chain Update
In light of the uncertain and rapidly evolving situation relating to the spread of the COVID-19 pandemic and in compliance with government orders, we have taken measures intended to help minimize the risk of transmitting the virus to our employees, our customers, and the communities in which we participate, which could negatively impact our business. While we have a distributed workforce and our employees are accustomed to working remotely or with other remote employees, our workforce is not fully remote. Under normal conditions, our employees frequently travel to establish and maintain relationships with one another and with our customers, partners, and investors.
The COVID-19 pandemic negatively impacted revenue for six months for the year ended December 31, 2021, as we experienced lower revenues due to a significant number of customers experiencing supply chain challenges during 2021. 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 quarter 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, we anticipate that further supply chain disruptions through the end of 2022 will negatively impact 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 workforce. The extent to which the COVID-19 pandemic and our precautionary measures may impact our business will depend on future developments, which remain uncertain and cannot be predicted at this time.
FIRST QUARTER FISCAL 20222023 FINANCIAL HIGHLIGHTS
● Revenue for the first quarter of fiscal 2022 increased 39.0%2023 decreased 16.4% as compared to the first quarter of fiscal 2021, which was driven2022, primarily by higher demand for our automotive product solutions, higher royalties of our 5G wireless infrastructure products, and higherdue to lower demand for our catalog, products forrepeaters, and digital step attenuators products. In Q1 2022, the Company experienced unusually high order patterns driven by supply chain and market dynamics, which was not repeated in Q1 2023. Partially offsetting the decrease in these product categories was a wide variety ofrebound in automotive product revenues driven by improving supply chain conditions and newly acquired customer applications.slots. The Company added these customer slots by being awarded business with both direct OEMs as well as major automotive electronic supply companies.
● Gross profit for the first quarter of fiscal 20222023 was 60.0%56.6% of revenues as compared to 60.7%60.0% for the first quarter of fiscal 2021. Although the Company did experience across the board supply chain price increases, we were able to increase prices we charge our customers related to raw materials and assembly/test cost increases we experienced. Changes in product2022. The Company's contribution margins were negligibleincreased from 71.9% in Q1 2022 to 73.1%, in Q1 2023 as was the impact of lesser royalty revenues as a percentage of overall revenue. The biggest driver of lower gross margins wasproduct mix and pricing both contributed to improved profitability. Over these same compartive periods, overhead spending increased 15% primarily attributable to an increase in fixed overhead costs relative to sales year over yearspending. Overhead spending increased due to costs associated withheadcount additions in our Operations and Quality group, as well as increased costs of production mask amortization.facility costs.
● Operating loss was $1.81$3.7 million for the first quarter of fiscal 2022Q1 2023 as compared to $0.26$1.8 million for the first quarter of fiscal 2021.Q1 2022. This operating loss increase was primarily due to higher operating expenses relative to sales (106.8%(170.0% in Q1 20222023 vs. 70.0%106.8% in Q1 2021)2022). Increased operating expenses were primarily attributable to increased investment in research and development (which grew 44% when compared to the prior year period), sales and marketing headcount additions, and new employees, as well as additional costs associated with becoming a public company. The Company increased its investment in research and development year over year by 47.1% as we focused on new product development.company filings. Selling, general, and administrative costs increased year over year by 190.7%.25.1% from 2022 to 2023 on a year-to-date basis.
● Net loss per diluted share was $0.06$0.62 and $0.34 for the first quarter of fiscal 2023 and 2022, as compared to net income per diluted share of $0.01respectively.
● Capital expenditures were $0.1 million for the first quarter of fiscal 2021. A key contributing factor2023 as compared to the net income in the first quarter of 2021 was the forgiveness of a PPP loan in that period.
● Capital expenditures were $0.2 million for the first quarter of fiscal 2022 as compared to $0.01 million2022. The majority of capital expenditures for the first quarter of fiscal 2021.2023 are related to capital additions for the Company's lab space and related equipment.
Key metricsMetrics (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.
Three Months Ended March 31, | ||||||||
2022 | 2021 | |||||||
(unaudited) | (unaudited) | |||||||
Key Metrics | ||||||||
Number of products released | 2 | 1 | ||||||
Number of total products | 103 | 88 | ||||||
Number of products with lifetime revenue exceeding $100 thousand | 45 | 26 | ||||||
Three Months Ended March 31, | ||||||||
2023 (unaudited) | 2022 (unaudited) | |||||||
Key Metrics | ||||||||
Number of products released | 2 | 2 | ||||||
Number of total products | 121 | 103 | ||||||
Number of products with lifetime revenue exceeding $100 thousand | 54 | 45 | ||||||
Product backlog | $6.50 million | $4.98 million | ||||||
Number of products released:The total quantitynumber of distinct new products released into production (products that have completed design, quality, and supply chain readiness) during the period.
Number of total products:The cumulative number of production-released products since Guerrilla RF'sour 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 Guerrilla RF'sour inception through the end of the period.
Product backlog: The amount of product sales that have been committed to by customers, but have not yet been completed, shipped, or invoiced. The Company's product backlog can be materially impacted by supply chain constraints, a shift in customer ordering patterns whereby customers place orders in anticipation of extended product delivery lead times, or other customer order delivery request modifications. Furthermore, because the Company partners closely with a number of its customers to produce high-performance, quality components that are often designed into customers’ end products, immediate substitution of the Company’s products is neither typically desired by customers nor necessarily feasible. As such, the Company has not historically experienced significant order cancellations, and the Company does not expect significant order cancellations in the future. The Company closely monitors product backlog and its potential impact on the Company’s financial perfomance.
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, oura network of independent sales representatives, and our distributors. We generate revenue from customers located within and outside the U.S. In addition to sales to customers, we generate royalty revenue under a royalty agreement with one semiconductor manufacturer.
Direct Product Costs and Gross Profit
Direct Product Costs.Our direct product costs primarily consist of actual direct product expenses, salaries and related expenses, overhead, third partythird-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 drivesdrive our research and development efforts and, in turn, drivesdrive additional revenue streams and enablesenable 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.
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 ("
R&D")&D 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 personnelpersonnel. 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. WeAs we expand our sales and marketing efforts, we expect our sales and marketing expenses will increase in absolute dollars as we expand ourdollars.
Non-income taxes include excise taxes, sales and marketing efforts.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 common stock warrants,shares issued to certain of our debtholders, and lease expense related to our capital leases.
Other Income (Expenses)Results of Operations
On April 30, 2020, Guerrilla RF received loan proceeds of $535,800 under the Paycheck Protection Program (“PPP”) established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) administered by the Small Business Administration (“SBA”). PPP loans and accrued interest are forgivable after a “covered period” (24 weeks) as long as the borrower 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.
The following table summarizes the results of our operations for the periods presented:
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
| 2022 | 2021 | 2023 | 2022 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
Revenues | $ | 3,865,911 | $ | 2,781,022 | $ | 3,230,888 | $ | 3,865,911 | ||||||||
Cost of revenues | 1,547,281 | 1,092,692 | ||||||||||||||
Direct product costs | 1,403,345 | 1,547,281 | ||||||||||||||
Gross profit | 2,318,630 | 1,688,330 | 1,827,543 | 2,318,630 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 1,802,006 | 1,063,106 | 2,586,169 | 1,802,006 | ||||||||||||
Sales and marketing | 1,085,843 | 576,650 | 1,361,949 | 1,085,843 | ||||||||||||
General and administrative | 1,239,650 | 305,314 | 1,546,163 | 1,239,650 | ||||||||||||
Total operating expenses | 4,127,499 | 1,945,070 | 5,494,281 | 4,127,499 | ||||||||||||
Loss from operations | (1,808,869 | ) | (256,740 | ) | ||||||||||||
Operating loss | (3,666,738 | ) | (1,808,869 | ) | ||||||||||||
Other income (expenses): | ||||||||||||||||
Interest expense | (57,221 | ) | (148,825 | ) | (341,857 | ) | (57,221 | ) | ||||||||
Other income (expenses) | — | 535,800 | 7,177 | — | ||||||||||||
Total other income (expenses), net | (57,221 | ) | 386,975 | (334,680 | ) | (57,221 | ) | |||||||||
Net income (loss) | $ | (1,866,090 | ) | $ | 130,235 | |||||||||||
Net loss | $ | (4,001,418 | ) | $ | (1,866,090 | ) | ||||||||||
Comparison of the three months ended March 31, 2023 and 2022 and 2021:(unaudited):
Three Months Ended March 31, | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
Revenues | $ | 3,865,911 | $ | 2,781,022 | 1,084,889 | 39 | % | |||||||||
Three Months Ended March 31, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
Revenues | $ | 3,230,888 | $ | 3,865,911 | (635,023 | ) | (16 | )% | ||||||||
Revenues increased $1.1decreased $0.64 million to $3.9$3.23 million for the three months ended March 31, 2022,2023, as compared to $2.8$3.87 million for the three months ended March 31, 2021.2022. The increasedecrease in revenues was drivenattributable to a $0.09 million decrease in royalty/non-recurring engineering income, while product revenue decreased $0.55 million. The small decline in royalty revenues was the result of a gradual decline in a long-running program for a wireless infrastructure application. Within product revenues, catalog products, repeaters, and attenuators drove the decline. These products categories, and to a lesser degree others, experienced high order patterns as the market anticipated supply chain shortages in the semi-conductor space during early 2022. In Q1 2023, supply chains are no longer characterized by extreme lead times and shortages, thus, order patterns are not being impacted by these concerns to the growth ofdegree they were a year ago. Offsetting these product sales tocategory order declines was a rebound in our automotive supplier customers and our catalog customers over a wide breadth of applications and customers. Salesmarket revenues ($0.3 million) in Q1 2023 as compared to our large automotive supplier customers grew approximately 44% from the prior year period. Fifty-eight percent (58%) of the growth in revenues over the periods presented is attributable to new catalog products. 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 rebounding volumes in markets recovering from supply chain difficulties that have impacted the timing of our customers' orders of our products; however, we anticipate that further supply chain disruptions through the end of 2022 will negatively impact customer order patterns, resulting in reduced sales growth.Q1 2022.
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 three months ended March 31, 2022,2023, and March 31, 2021.2022. RFPD, a large product distributor serving numerous end-user customers, generatedgenerated 84% and 85% and 80% of product shipment revenue for the three months ended March 31, 2023 and 2022, respectively.
Nonproduct (royalty and non-recurring engineering ("NRE")) revenues decreased 32% for the three months ended March 31, 2023, compared to March 31, 2022, from $0.28 million to $0.19 million, as our royalty revenues decreased while NRE revenues grew. We continued to develop and 2021 respectively.
Royalty revenues increased 41%sell new products into our markets, and new product sales grew 104% from $0.26 million for the three months ended March 31, 2022 compared to $0.53 million for the three months ended March 31, 2021, as our customer with whom we have a royalty agreement experienced an increase in2023. Our existing product sales decreased from $3.3 million for the three months ended March 31, 2022 to $2.5 million for the three months ended March 31, 2023, due to the normalization of wireless infrastructure products licensed under our proprietary designs.the supply chain, discussed above.
International shipments amountedamounted to $0.5 million (approximately 15% of product revenue) and $0.5 million (approximately 19% of product revenue) forfor the three months ended March 31, 2022,2023, and March 31, 2021, respectively.2022.
Direct Product Costs and Gross Profit
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | 2023 | 2022 | $ Change | % Change | |||||||||||||||||||||||||
Direct product costs | $ | 1,547,281 | $ | 1,092,692 | 454,589 | 42 | % | $ | 1,403,345 | $ | 1,547,281 | (143,936 | ) | (9 | )% | |||||||||||||||||
Gross profit | $ | 2,318,630 | $ | 1,688,330 | 630,300 | 37 | % | $ | 1,827,543 | $ | 2,318,630 | (491,087 | ) | (21 | )% | |||||||||||||||||
Direct product costs increased $0.5decreased $0.14 million to $1.4 million for the three months ended March 31, 2023, compared to $1.5 million for the three months ended March 31, 2022, compared to $1.1 million for the three months ended March 31, 2021.2022. The 42% increase9% decrease in direct product cost was primarily driven by a product sales volume increasedecrease of 39%15% (excluding royalty and NRE revenue). Direct productThis decrease was partially offset by increased fixed overhead costs relative(Quality staffing, facilities costs, and equipment costs). Year-over-year gross profit, taking into account overhead spending increases, decreased 21% from Q1 2022 to sales increased slightly due2023 on a comparative period basis, and as a percentage of revenue decreased from 60.0% to increases in Operations and Quality support and staffing. Year over year, royalties grew in concert with product sales increasing 41% from the year ago period, thus having no impact on overall gross margin percentage year over year due to the shift in our overall revenue mix. Royalty revenues were $0.28 million for the three months ended March 31, 2022, and $0.2 million for the three months ended March 31, 2021.56.6%.
Research and Development Expenses
Three Months Ended March 31, | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
Research and development | $ | 1,802,006 | $ | 1,063,106 | 738,900 | 70 | % | |||||||||
| Three Months Ended March 31, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
Research and development | $ | 2,586,169 | $ | 1,802,006 | 784,163 | 44 | % | |||||||||
Research and development expenses increased $0.7$0.8 million to $2.6 million for the three months ended March 31, 2023, compared to $1.8 million for the three months ended March 31, 2022, compared to $1.1 million for the three months ended March 31, 2021.2022. The increase was attributable to $0.3$0.6 million in facilities, information technology support and lab expenses, $0.1 million of staffing additions in our engineeringEngineering department, and $0.4$0.1 million was attributableof research lab and equipment and prototype expenses.costs.
Sales and Marketing Expenses
Three Months Ended March 31, | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
Sales and marketing | $ | 1,085,843 | $ | 576,650 | 509,193 | 88 | % | |||||||||
| Three Months Ended March 31, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
Sales and marketing | $ | 1,361,949 | $ | 1,085,843 | 276,106 | 25 | % | |||||||||
Sales and marketing expenses increased $0.5$0.3 million to $1.1$1.4 million for the three months ended March 31, 2023, compared to $1.1 million for the three months ended March 31, 2022 compared to $0.6 million for the three months ended March 31, 2021. . The increase year over year was driven by increases of $0.4$0.1 million in staffing costs and $0.1$0.2 million in various sales and marketing expenses including sales commissions, information technology support, and customer support.
General and Administrative Expenses
| Three Months Ended March 31, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
General and administrative expenses | $ | 1,546,163 | $ | 1,239,650 | 306,513 | 25 | % | |||||||||
General and administrative expenses increased $0.3 million to $1.5 million for the three months ended March 31, 2023, compared to $1.2 million for the three months ended March 31, 2022. The increase was primarily related to an increase of $0.2 million in legal, audit, and consulting fees, and $0.1 million in wages and benefits. The increase of $0.2 million in legal, audit, and consulting fees was driven by activities associated with accounting advisory services and general legal and administration.
General and Administrative ExpensesOther Income (Expenses)
Three Months Ended March 31, | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
General and administration expenses | $ | 1,239,650 | $ | 305,314 | 934,336 | 306 | % | |||||||||
| Three Months Ended March 31, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
Interest expense | $ | (341,857 | ) | $ | (57,221 | ) | $ | (284,636 | ) | 497 | % | |||||
Other income (expense) | 7,177 | — | $ | 7,177 | - | |||||||||||
Total other income (expenses), net | $ | (334,680 | ) | $ | (57,221 | ) | $ | (277,459 | ) | 485 | % | |||||
General and administrative expensesInterest expense increased $0.9approximately $0.28 million to $1.2$0.34 million for the three months ended March 31, 2022,2023, compared to $0.3$0.06 million for the three months ended March 31, 2021.2022. The increase was primarily related to increases in wages and benefits ($0.6 million) and $0.3 million of directors and officers insurance and professional fees. The increase in wages, benefits, and professional fees was driven by headcount additions within our information technology and accounting departments, and expenses incurred to support our public company structure.
Other Income (Expenses)
| Three Months Ended March 31, | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
Interest expense | $ | (57,221 | ) | $ | (148,825 | ) | $ | 91,604 | (62 | )% | ||||||
Other income | — | 535,800 | $ | (535,800 | ) | - | ||||||||||
Total other income (expenses), net | $ | (57,221 | ) | $ | 386,975 | $ | (444,196 | ) | (115 | )% | ||||||
Interest expense decreased approximately $0.1 million to $0.05 million for the three months ended March 31, 2022, compared to $0.15 million for the three months ended March 31, 2021. The decrease was attributable to decreased factoring fees.two debt facilities the Company entered into during fiscal 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 the Company has drawn $5 million, which occurred in the 2nd half of 2022 and did not impact Q1 2022.
Other income decreased $0.5 million for the three months ended March 31,was zero or insignificant in both Q1 2022 compared to the three months ended March 31, 2021. The decrease was entirely due to PPP loan forgiveness in the three months ended March 31, 2021.and Q1 2023.
Liquidity and Capital Resources
Our primary source of liquidity is cash raised from private placements.placements and debt financing. As of March 31, 2022,2023, we had cash resources oof $2.6f $1.9 million. WeWe also have an accounts receivable factoring arrangementtwo loan facilities, one of which is for up to $3.0 million with a financial institution (asspecialty lender (referred to as the Spectrum Loan Facility, described in Note 5 ofto our unauditedunaudited interim condensed consolidated financial statements). Under, and the termsother of the factoring agreement, we have access towhich is for up to $2.0$8.0 million of advances.with a different lender (referred to as the Salem Loan Facility, also described in Note 5 to our unaudited condensed consolidated financial statements). As of March 31, 2022, no advances were outstanding, meaning that2023, we had unused availabilitydrawn down $1.0 million under the Spectrum Loan Facility and $5.0 million under the Salem Loan Facility. In addition, the Company entered into several smaller secured and unsecured loans to finance specific equipment and furnishing needs in Q1 2023. These smaller financing agreements totaled approximately $0.5 million and are largely long-term in nature. The Company raised gross proceeds of $2.0 million. Based upon ourapproximately $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 financial projection models, we anticipateand future liquidity needs. The Company believes that ourits existing cash and $2.0cash 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. Subsequent to March 31, 2023, the Company drew down an additional $1.5 million of advances availablethe Salem Loan Facility. The Company has now borrowed a total of $6.5 million from Salem under our factoring arrangement willthe Salem Loan Facility. 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 sufficientunable to fund our ongoing operations intoand pay its obligations as they become due after the fourthsecond quarter of 2022.2023.
As described in Note 1 ofto our unauditedunaudited interim condensed consolidated financial statements, we have incurred recurring losses and negative cash flows from operations since inception and have an accumulated deficit at March 31, 2022 of $16.92023 of $31.1 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 Companycompany grows. As our fiscal 2022 progresses, and weWe plan to continue to invest in the implementation of our long-term strategic plan, we anticipate thatfor which we will require additional debt and/or equity funding.funding in fiscal 2023. We are actively evaluatingpursuing additional funding sources as part of our ongoing strategic planning. There is no assurance that appropriate financingfunding 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 and design center, located in Greensboro, North Carolina, in the first quarter of 2023. As mentionedof March 31, 2023, the Company owed the new landlord $66 thousand related to agreed-upon excess construction costs, deferral fees, and interest for the new facilities as construction-in-progress. The Company does not anticipate additional excess construction costs and related interest and deferral fees for which it will be responsible.
Initial building asset addition financing related to furniture for the new headquarter and design center facilities was completed in April 2022 and is further discussed in Note 85 to our unaudited interim condensed consolidated financial statements as of March 31, 2022, the Company has entered into a lease agreement for additional office facilities in Greensboro, North Carolina.2023. The Company will not remitmake any scheduled lease payments for the new headquarter and design center building until the second quarter of 2023, but it occupiesbegan recognizing associated lease expense in the building, which it anticipates will occur in earlyfirst quarter of 2023. Initial building asset addition financing related to the additional office facilities was completed in April 2022 and is further discussed in Note 12 to our unaudited interim condensed consolidated financial statements as of March 31, 2022. The Company anticipates annual building lease payments of approximately $4.0$1.5 million, of new headquarter building asset additions, and anwith the first annual lease expensepayment period commencing in the second quarter of approximately $1.1 million upon occupancy.2023.
The following table summarizes our sources and uses of cash for each of the periods presented:
Cash (used in) provided by:
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
| 2022 | 2021 | 2023 | 2022 | |||||||||||||
Operating activities | $ | (2,429,861 | ) | $ | (648,627 | ) | $ | (5,835,386 | ) | $ | (2,429,861 | ) | ||||
Investing activities | (152,464 | ) | (11,000 | ) | (117,799 | ) | (152,464 | ) | ||||||||
Financing activities | (141,014 | ) | 1,218,898 | 3,490,346 | (141,014 | ) | ||||||||||
Net increase (decrease) in cash | $ | (2,723,339 | ) | $ | 559,271 | |||||||||||
Net decrease in cash | $ | (2,462,839 | ) | $ | (2,723,339 | ) | ||||||||||
Operating Activities
Cash used in operating activities was $2.4$5.8 million and $0.6$2.4 million for the three months ended March 31, 20222023 and 2021,2022, respectively. Cash used in operating activities for the three months ended March 31, 20222023 was principally resulted fromdue to our net loss of $1.9$4.0 million. In addition, $0.9For the three months ended March 31, 2023, non-cash items that were a part of the net operating loss included depreciation of $0.4 million was attributable to increasedand stock-based compensation of $0.3 million. During the three months ended March 31, 2023, increases in trade accounts receivable partially offset by $0.1of $0.5 million attributableand decreases to the increase in our accounts payable and accrued expenses. expenses of $1.9 million partially contributed to the net loss for operating cash flow as noted above.
Cash used in operating activities for the three months ended March 31, 2021, principally2022, primarily resulted from our net incomeloss of $0.1 million, which$1.9 million. During the three months ended March 31, 2022, there was offset by the non-cash component of net income for the PPP loan forgiveness of $0.5 million. A smalla moderate increase in ourinventory of $0.2 million, but a much larger increase to accounts receivable and prepaid expenses wereboth of which reduced cash available from operations, partially offset by a moderate increasesmall decrease in accounts payable.payable and accrued expenses of $0.15 million
Investing Activities
Cash used in investing activities was $0.15$0.1 million and $0.01$0.2 million for the three months ended March 31, 20222023 and 2021,2022, respectively. Cash used in investing activities resulted from capital expenditures on property and equipment for all periods presented.
Financing Activities
Cash usedprovided by financing activities for the three months ended March 31, 20222023 of $0.1$3.5 million was primarily attributable to net private placement offering proceeds of $3.7 million, partially offset by principal payments on capital leases.
Cash providedused by financing activities during the three months ended March 31, 2021,2022 of $1.2$0.1 million principally resulted from the issuance of notes payable and factoring proceeds totaling $1.2 million, and proceeds from a second PPP loan of $0.8 million. These were partially offset by principal payments of notes payable and our factoring arrangement of $0.8 million.on capital leases.
Contractual Obligations and Commitments
The following summarizes our significant contractual obligations as of March 31, 2022; however, the following table does not include any contractual obligations or commitments that will develop as we continue the preparation, planning, and asset financing negotiations2023(unaudited). As mentioned above, associated with the planned move of our business headquarters and design center in earlythe first quarter of 2023, the Company paid what it anticipates was its final payment of $66 thousand of excess construction costs and related interest and deferral fees for which it will be responsible in April 2023. We anticipate approximately $4.0 million of new headquarter building asset additions, and an annual lease expense of approximately $1.1 million upon occupancy.
Payments due by period | Payments due by period | |||||||||||||||||||||||||||||||||||||||
Total | Less than 1 year | 1 – 3 years | 4 – 5 years | More than 5 years | Total | Less than 1 year | 1 – 3 years | 4 – 5 years | More than 5 years | |||||||||||||||||||||||||||||||
Purchase order obligations | $ | 808,225 | $ | 808,225 | $ | — | $ | — | $ | — | $ | 763,358 | $ | 763,358 | $ | — | $ | — | $ | — | ||||||||||||||||||||
Short-term debt obligations (excluding interest) | 7,310 | 7,310 | — | — | — | |||||||||||||||||||||||||||||||||||
Long-term debt obligations (excluding interest) | 142,590 | — | 17,544 | 17,544 | 107,502 | |||||||||||||||||||||||||||||||||||
Long-term notes (excluding interest) | 4,586,852 | — | — | 4,586,852 | — | |||||||||||||||||||||||||||||||||||
Long-term debt | 306,511 | 151,270 | 145,525 | 9,716 | ||||||||||||||||||||||||||||||||||||
Short-term debt | 1,363,186 | 1,363,186 | — | — | — | |||||||||||||||||||||||||||||||||||
Operating lease obligations | 276,768 | 116,128 | 160,640 | — | — | 6,956,970 | 434,257 | 941,075 | 1,030,938 | 4,550,700 | ||||||||||||||||||||||||||||||
Finance lease obligations | 3,363,678 | 669,309 | 1,393,378 | 1,300,991 | — | 3,829,568 | 814,664 | 2,026,060 | 987,330 | 1,514 | ||||||||||||||||||||||||||||||
Total | $ | 4,598,571 | $ | 1,600,972 | $ | 1,571,562 | $ | 1,318,535 | $ | 107,502 | $ | 17,806,445 | $ | 3,375,465 | $ | 3,118,405 | $ | 6,750,645 | $ | 4,561,930 | ||||||||||||||||||||
Off-Balance Sheet Arrangements
As of March 31, 2023 and December 31, 2022, 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 condensed consolidated financial statements in conformity with 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 in the preparation of our unaudited interim condensed consolidated financial statements involve revenue recognition, the valuation of our stock-based compensation, including the underlying estimated fair value of our common stock, lease accounting, income taxes including the valuation allowance for deferred tax assets, and going concern considerations. 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 unaudited interim condensedaudited 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, 2021,2022, filed with the SEC on April 1, 2022,March 3, 2023, have not materially changed.
Our criticalWe believe that the accounting policies described below involve a greater degree of judgment and complexity. Accordingly, these are thosethe policies that requirewe think are the most significant judgmentscritical 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 $1.9 million on March 31, 2023; however, we have recorded a net loss of $4.0 million for the quarter ended March 31, 2023. 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. As disclosed in Note 12, subsequent to March 31, 2023, Salem approved the Company's request to draw down an additional $1.5 million on May 1, 2023. In conjunction with the additional $1.5 million draw, the Company issued Salem 12,500 shares of common stock (post-split). Accordingly, the Company has now borrowed a total of $6.5 million from Salem under the Loan Facility and issued 37,500 shares of common stock to Salem. We are also pursuing additional funding opportunities, including planning for a further capital raise in the preparationsecond quarter of 2023 in connection with our unaudited interim condensed consolidatedplanned 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 statements. Management has determined thatcondition, and liquidity. Our failure to do any of the aforementioned things could harm our most critical accounting policies are those relatingbusiness, financial condition and results of operations. Ultimately, if we do not secure additional financing in a timely manner, we will be unable to revenue recognition, stock-based compensation, lease accounting, income taxes including the valuation allowance for deferred tax assets,fund ongoing operations and pay our obligations as they become due, creating substantial doubt about our ability to continue as a going concern considerations.concern.
Recently adopted accounting standardsShare-Based Compensation
In February 2016,We recognize the Financial Accounting Standards Board, or FASB,grant-date fair value of share-based awards issued Accounting Standards Update, or ASU, No. 2016-02, Leases (Topic 842), or ASU 2016-02. ASU 2016-02 addresses the financial reporting of leasing transactions. Under past guidance for lessees, leases are only included on the balance sheet if certain criteria, classifying the agreement as a capital lease, are met. This update requires the recognition of a right-of-use asset and a corresponding lease liability, discounted to the present value, for all leases that extend beyond 12 months. For operating leases, the asset and liability are expensed over the lease termcompensation expense on a straight-line basis with all cash flows included inover the operating sectionrequisite service period, which is generally the vesting period of the consolidated statementaward. To date, we have not issued awards where vesting is subject to performance or market conditions. The fair value of cash flows. For finance leases, interest onstock options is estimated at the lease liability is recognized separately fromtime of grant using the amortizationBlack-Scholes option pricing model, which requires the use of inputs and assumptions such as the estimated fair value of the right-of-use asset in the consolidated statement of operations and the repaymentunderlying common stock, exercise price of the principal portionoption, expected term, risk-free interest rate, expected volatility and dividend yield, the most critical of which is the lease liability is classified as a financing activity while the interest component is included in the operating sectionestimated fair value of the consolidated statementour common stock.
The estimated fair value of cash flows. In June 2020, the FASB issued ASU 2020-05, which delayed the effective dateeach grant and modification of Topic 842 until January 1, 2022. We adopted ASC 842stock options awarded during fiscal 2023 and 2022 was determined using the optional transition method outlined in ASU 2018-11. The Company adopted Topic 842 in the fiscal quarter ending March 31, 2022. The adoption of ASC 842 resulted in the recognition of operating lease right-of-use assets of approximately $304,000following methods and corresponding lease liabilities of approximately $304,000. The adoption of these ASUs did not have a material impact on our results of operations, however, the adoption resulted in significant changes to our financial statement disclosures. See Note 8 for further information related to lease obligations on the unaudited interim condensed consolidated balance sheet upon adopting ASC Topic 842.assumptions:
● | Estimated fair value of common stock. As our common stock was not publicly traded prior to May 13, 2022, and subsequently has experienced limited trading volumes, our Board of Directors periodically estimated the fair value of our common stock considering, among other things, contemporaneous valuations of our preferred and common stock prepared by an independent third-party valuation firm prior to fiscal 2023 in accordance with the guidance provided by the American Institute of Certified Public Accountants 2013 Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. |
● | Expected term. Due to the lack of a large public market for the trading of our common stock and the lack of sufficient company-specific historical data, the expected term of employee stock options is determined using the “simplified” method, as prescribed in SAB No.107 ("SAB 107"), Share-Based Payment, whereby the expected life equals the arithmetic average of the vesting term and the original contractual term of the option. |
● | Risk-free interest rate. The risk-free interest rate is based on the interest rate payable on U.S. Treasury securities in effect at the time of grant for a period that is commensurate with the assumed expected term. |
● | Expected volatility. The expected volatility is based on historical volatilities of peer companies within our industry which were commensurate with the expected term assumption, as described in SAB 107. |
● | Dividend yield. We assume a dividend yield of 0% because we have never paid, and for the foreseeable future do not expect to pay, a dividend on our common stock. |
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.
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 and this trading volume sufficiency has continued through the quarter ending March 31, 2023. 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 no preferred stock has been outstanding since October 2021.
Recently Adopted Accounting Standards
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 unaudited interim condensed consolidated financial statements appearing elsewhere in this Quarterly Report.
JOBS Act Accounting Election
We are an emerging growth company, as defined in the Jumpstart Our Business Startups ("JOBS")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 ofto our unaudited interim condensed consolidated financial statements. As a result, our unaudited interim condensed 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
ITEM 3. 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.
ITEM 4. CONTROLS AND PROCEDURES.
Management’s Evaluation of our Disclosure Controls and Procedures
Under the supervision of and with the participation of our management, including our principal executive officer and our principal financial officer, we evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2022,2023, the end of the period covered by this Form 10-Q. The term “disclosure controls and procedures,” as set forth in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’sCompany’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.
Based on this evaluation, as a result of our material weaknesses onweakness in internal controls over financial reporting disclosed within our Annual Report on Form 10-K for the year ended December 31, 2021,2022, management concluded that our disclosure controls and procedures were not effective as of March 31, 2022.2023. While the existence of the material weaknessesweakness did not result in a material misstatement to the financial statements, it presented a reasonable possibility that a material misstatement toin the financial statements could have occurred.
Status of Remediation of Previously Identified Material Weaknesses in Internal Control Over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis.
To respond to the material weaknessesweakness disclosed within our Annual Report on Form 10-K for the year ended December 31, 2021,2022, we have devoted, and plan to continue to devote, significant effort and resources to the remediation and improvement of our internal control over financial reporting. Our remediation efforts are in processhave been implemented and we have designed control procedures to address the material weaknesses.weakness. The actions taken by management include, but are not limited to:
• We have retainedthe retention of a public accounting firm to assist us with our tax accounting and tax provision calculations;
• We have enhancedthe retention of an accounting advisory services consulting firm to assist us with evaluating and documenting the accounting treatment of significant unusual transactions;
• the enhancement of our procedures to evaluate and document the accounting treatment overof significant unusual transactions, including the utilization of an accounting research tool to which we have subscribed;tool;
• We have enhancedthe enhancement of our segregation of duties through a review and revision of information technology access rights;
• We have enhancedthe enhancement and formalizedformalization of our financial reporting scheduling and closing calendar; and
• We have enhancedthe enhancement of our secondary review process during our financial reporting process.
While we believe the steps taken to date and those planned for future implementation will improve the effectiveness of our internal control over financial reporting, we have not completed all remediation efforts and cannot conclude the material weaknesses have been remediated. The elements of our remediation plans can only be accomplished over time, and weWe can offer no assurance that these initiativesremediation steps will ultimatelyprevent any future deficiencies in our internal control over financial reporting. Any failure to maintain adequate internal control over financial reporting could adversely impact our ability to report our financial position and results from operations on a timely and accurate basis. Furthermore, we can give no assurance that the measures we have taken will remediate the intended effects. Theoutstanding material weakness, or will prevent any future material weaknesses, cannot be considered remediated until applicableor restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of these controls. In addition, our strengthened controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We will document policies and procedures for, and testmay not be adequate to prevent or identify irregularities or errors, which could affect the implementation and operating effectivenessfair presentation of the newly-designed controls in future periods. our consolidated financial statements.
Changes in Internal Control over Financial Reporting
During the quarter ended March 31, 2022,2023, there have been changes in our internal control over financial reporting as such term is defined in Rule 13a-15(f) and 15(d)-15(f) promulgated under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. These changes are a result of our above-noted actions taken to remedy the material weaknesses onweakness in internal controls over financial reporting disclosed withinin our Annual Report on Form 10-K for the year ended December 31, 2021.2022.
We are not a party to any material pending legal proceedings. From time to time, we may become involved in lawsuits and legal proceedings that arise in the ordinary course of business.
The risks set out below represent updates to risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 20212022 filed with the SEC on April 1, 2022.March 3, 2023. The information in this Quarterly Report on Form 10-Q should be read in conjunction with the other factors described in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021.2022.
Risks Related to Our Business and Industry
We have incurred significant losses in the past and will experience losses in the future.
We have incurred significant losses in the past and recordedrecorded a net loss of $12.0 million for the year ended December 31, 2022, $2.8 million for the year ended December 31, 2021, $2.0 million for the year ended December 31, 2020, and $1.9and $4.0 million for the three months ended March 31, 2022.2023. As of March 31, 2022,2023, we had an accumulated deficitof $16.9 $31.1 million.If we cannot make consistent progress toward future profitability, our business and stock price may be adversely affected.
Our ability to be profitable in the future depends upon continued demand for our products from existing and new customers. Further sales of our products depend upon our ability to improve the quality of our products, enhance customer satisfaction, and increase efficiency and productivity. In addition, our profitability will be affected by, among other things, our ability to execute our business strategy, the timing and size of customer sales, the pricing and costs of our products, competitive products, macroeconomic conditions affecting the semiconductor industry, the COVID-19 pandemic, and the extent to which we invest in sales and marketing, research and development, and general and administrative resources.
We may not have sufficient cash available to fund our operations and make interest or principal payments onpay our indebtedness when obligations as they become due, and we may be unable to find additional sources of capital.
Our cash balance stood at $2.6at $1.9 million on March 31, 2022.2023. In addition, we have unusedfurther cash availability under the Spectrum Loan Facility, which provides a maximum line of credit of up to $2.0$3.0 million depending on the amount of our eligible accounts receivable and inventory, and the Salem Loan Facility, which provides for additional funding of up to $3.0 million at the lender's discretion. As disclosed in Note 12, subsequent to March 31, 2023, Salem approved the Company's request to draw down an additional $1.5 million on May 1, 2023. In conjunction with the additional $1.5 million draw, the Company issued Salem 12,500 shares of common stock (post-split). Accordingly, the Company has now borrowed a total of $6.5 million from Salem under our factoring arrangement. the Loan Facility and issued 37,500 shares of common stock to Salem. However, as we currently do not generate positive cash flow from operations, we cannot guarantee that we will have sufficient cash available to fund our operations and service our obligations when due. We expect losses and negative cash flows to continue, primarily due to continued research, development, and marketing efforts as well as increased administration expenses as our Company grows. Therefore, we anticipateWe are actively pursuing an equity capital raise of up to $15 million in order to support our current and future liquidity needs beyond fiscal 2023. We believe that we will require additional funding later this yearhave sufficient cash resources and we are actively evaluating alternative funding sources as partavailability under our two loan facilities to fund operations through the second quarter of our ongoing strategic planning.2023. There can be no assurance that we will be able to secure additional funding on favorable terms,complete the proposed equity raise in a timely manner, or at all. Our failure toIf we do not secure additional funding on favorable terms, or at all, may cause usfinancing in a timely manner, we will be unable to reduce or delay planned investments and capital expenditures, harm our business, financial condition and results offund ongoing operations and affectpay our obligations as they become due, affecting our ability to continue as a going concern.
Our business could be affected by new sanctions and export controls targeting Russia and other responses to Russia’s invasion of Ukraine.
The Russia-Ukraine conflict may adversely affect Guerrilla RF’s business. Currently, we do not have any supply chain partners located in Russia or Ukraine. Nor do we have any pending product sales or product shipments to Russian customers or, to our knowledge, any entities listed on the U.S. Department of the Treasury Office of Foreign Assets Control Sectoral Sanctions Identifications ListList dated April 29, 2022. HoweMarch 8, 2023. However, the related sanctions and other measures imposed by the European Union, the U.S., and other countries and organizations in response have led, and may continue to lead, to disruption and instability in global markets, supply chains, and industries that could negatively impact our businesses,business, financial condition, and results of operations. We have taken steps to ensure our export control processes and controls observe enacted and evolving export sanctions imposed upon Russia, Belarus, and all restricted entities that have been identified by the United States government. Nevertheless, if we inadvertently make any product sales or shipments to Russian customers or any sanctioned entities, such non-compliance may have a material effect on our financial condition or operations.
Due to the unknown evolution of new sanctions and export controls targeting the People's Republic of China ("PRC") and its ability to purchase and manufacture certain semiconductor chips, our business could be adversely affected.
On October 7, 2022, the U.S. Department of Commerce’s Bureau of Industry and Security ("BIS") announced a series of regulations – issued as an interim final rule – amending the Export Administration Regulations to enhance export controls on a range of goods, software, and technology and restrict the PRC’s ability to purchase and manufacture advanced computing chips. The regulations impose new controls on items relating to advanced computer and semiconductor manufacturing capabilities, broaden end-use restrictions, expand the scope of foreign-produced items subject to licensing requirements, and add to Entity List prohibitions. We do not anticipate the new regulations will have a material effect on our financial condition or operations. The production of our high-performance MMICs is not reliant on any manufacturing in the PRC, or, to our knowledge, on any companies that are owned by the PRC or Chinese investors. Through the three months ended March 31, 2023, we received less than five percent of all our sales from customers located within the PRC. RF semiconductors such as what we design and produce are not currently covered under the new BIS restrictions. We have taken steps to ensure our export control processes and controls observe enacted and evolving export sanctions imposed upon the PRC and all restricted entities that have been identified by the United States government. Nevertheless, if we inadvertently make any product sales or shipments to any sanctioned entities, such non-compliance may have a material effect on our financial condition or operations.
Our ability to realize our deferred tax asset and deduct certain future losses could be limited if we experience an ownership change as defined in the Code.
Under the Code, a corporation is generally allowed a deduction for NOLs carried over from prior taxable years. As of December 31, 2022, we had approximately $28.9 million of gross federal and State NOLs and $0.6 million of other carryforwards available to reduce future federal taxable income. Our ability to use our NOLs and other carryforwards will depend on the amount of taxable income generated in future periods. A corporation’s ability to deduct its federal NOL carryforwards and to utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 of the Code if it undergoes an “ownership change” as defined in Section 382 (generally, where cumulative stock ownership changes among material stockholders exceed 50% during a rolling three-year period). Accordingly, if the Company were to undergo an "ownership change", our ability to utilize our NOLs and other carryforwards would be limited, and this could have a material effect on our business, financial condition, and results of operations. The relevant calculations for Section 382 are technical and highly complex. Whether an “ownership change” occurs is largely outside of our control, and there can be no assurance that such a change will not occur in the future. If an “ownership change” occurs in the future it is possible that the limitations imposed could cause a net increase in our federal income tax liability and cause federal income taxes to be paid earlier than if such limitations were not in effect. An ownership change could also eliminate a portion of the federal tax loss carryforward if the limitation is low and causes our NOLs to expire unutilized. Any such “ownership change” could have a material adverse effect on our future business, results of operations, financial condition, and the value of our common stock.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
None.
The following is a list of exhibits filed as part of this Quarterly Report on Form 10-Q. Where so indicated, exhibits that were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated.
Exhibit | Description | Form | File No. | Exhibit | Filing Date | Filed Herewith |
2.1 | 8-K | 000-56238 | 2.1 | October 27, 2021 | ||
3.1 | 8-K | 000-56238 | 3.2 | October 27, 2021 | ||
3.2 | 8-K | 000-56238 | 3.3 | October 27, 2021 | ||
4.1 | 8-K | 000-56238 | 4.1 | October 27, 2021 | ||
4.2 | 8-K | 000-56238 | 4.2 | October 27, 2021 | ||
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Exhibit | Description | Form | File No. | Exhibit | Filing Date | Filed Herewith |
2.1 | 8-K | 000-56238 | 2.1 | October 27, 2021 | ||
3.1 | 8-K | 000-56238 | 3.2 | October 27, 2021 | ||
3.2 | 8-K | 000-56238 | 3.3 | October 27, 2021 | ||
4.1 | 8-K | 000-56238 | 4.1 | October 27, 2021 | ||
4.2 | 8-K | 000-56238 | 4.2 | October 27, 2021 | ||
| 10.1 | Amendment No. 1 to Loan Agreement by and among Guerrilla RF, Inc., Guerrilla RF Operating Corporation, and Salem Investment Partners, LP, dated May 1, 2023. | 10-Q | 000-56238 | 10.1 | X |
31.1 | X | |
31.2 | X | |
32.1 | X | |
32.2 | Certification of John Berg, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of | X |
101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | X |
101.SCH | Inline XBRL Taxonomy Extension Schema Document. | X |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | X |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | X |
101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase Document. | X |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | X |
104 | Cover Page Interactive Data File - the cover page from the Registrant’s from Quarterly Report on Form 10-Q for the quarter ended March 31, | X |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| GUERRILLA RF, INC. | |
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| By: | /s/ Ryan Pratt |
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| Ryan Pratt Chief Executive Officer (principal executive officer) |
| GUERRILLA RF, INC. | ||
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| By: | /s/ John Berg |
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| John Berg Chief Financial Officer (principal financial officer) |