Form 10-Q Guerrilla RF, Inc. For: Jun 30
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number:
GUERRILLA RF, INC.
(Exact name of registrant as specified in its charter)
| (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: (
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.
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).
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 ☐ | 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
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 August 12, 2022 | |||||||
| Common Stock, $0.0001 par value | |
GUERRILLA RF, INC.
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2022
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Condensed Consolidated Statements of Stockholders' Equity (Deficit) |
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| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 22 |
| Item 3. |
Quantitative and Qualitative Disclosures About Market Risk. | 34 |
| Item 4. |
Controls and Procedures. | 34 |
| PART II - OTHER INFORMATION | ||
| Item 1. | Legal Proceedings. | 35 |
| Item 1A. |
Risk Factors. | 35 |
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds. | 37 |
| Item 3. | Defaults Upon Senior Securities. | 37 |
| Item 4. | Mine Safety Disclosure. | 37 |
| Item 5. | Other Information. | 37 |
| Item 6. |
Exhibits | 38 |
| SIGNATURES | ||
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-Q101 — Automotive Electronic Council’s electronic components stress qualification standard.
Cellular booster/DAS — System which extends and distributes a cellular signal within buildings such as 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.
Die/Chip — An individual semiconductor device on the wafer.
Distribution-customer — A customer that purchases Guerrilla RF products for the purpose of selling to a third-party rather than for its own use.
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
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 Semiconductor process used in high 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.
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).
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. 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 (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 Guerrilla 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 financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K filed with the SEC on April 1, 2022.
GUERRILLA RF, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, 2022 (unaudited) | December 31, 2021 | |||||||
| Assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Prepaid expense | ||||||||
| Total Current Assets | ||||||||
| Operating lease right-of-use assets | ||||||||
| Property, plant, and equipment, net | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders' Equity | ||||||||
| Short-term debt | $ | $ | ||||||
| Operating lease, current portion | ||||||||
| Finance lease, current portion | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Loan agreements | ||||||||
| Total Current Liabilities | ||||||||
| Operating lease | ||||||||
| Finance lease | ||||||||
| Notes payable | ||||||||
| Total Liabilities | ||||||||
| Preferred stock, par value, shares authorized, shares issued and outstanding as of June 30, 2022 and December 31, 2021 | $ | $ | ||||||
| Common stock, par value, shares authorized, and shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in-capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders' Equity | ||||||||
| Total Liabilities and Stockholders' Equity | $ | $ | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
GUERRILLA RF, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Product shipments | $ | $ | $ | $ | ||||||||||||
| Royalties | ||||||||||||||||
| Total | ||||||||||||||||
| Direct product costs | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Operating Expenses: | ||||||||||||||||
| Research and development | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Operating Loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expenses) | ( | ) | ( | ) | ||||||||||||
| Total other income (expenses), net | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
GUERRILLA RF, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
| Preferred Stock | Common Stock | Additional Paid-In-Capital | Accumulated Deficit | Total Stockholders' Equity | ||||||||||||||||
| December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||
| Stock options exercised | ||||||||||||||||||||
| Share-based compensation | ||||||||||||||||||||
| March 31, 2022 (unaudited) | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||
| Share-based compensation | ||||||||||||||||||||
| June 30, 2022 (unaudited) | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Preferred Stock | Common Stock | Additional Paid-In-Capital | Accumulated Deficit | Total Stockholders' Equity (Deficit) | ||||||||||||||||
| December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||
| Net income | ||||||||||||||||||||
| Stock options exercised | ||||||||||||||||||||
| Share-based compensation | ||||||||||||||||||||
| March 31, 2021 (unaudited) | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||
| Stock options exercised | ||||||||||||||||||||
| Share-based compensation | ||||||||||||||||||||
| June 30, 2021 (unaudited) | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
GUERRILLA RF, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustment to reconcile net loss to net cash used in operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Share-based compensation | ||||||||
| Warrant amortization | ||||||||
| PPP loan forgiveness | ( | ) | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities | ||||||||
| Purchases of property, plant, and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from exercise of stock options | ||||||||
| Proceeds from notes payable and factoring agreement | ||||||||
| Principal payment of notes payable and recourse factoring agreement | ( | ) | ( | ) | ||||
| Principal payment on finance lease | ( | ) | ( | ) | ||||
| Proceeds from PPP loan | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Noncash transactions: | ||||||||
| Property and equipment financed through finance leases | $ | $ | ||||||
| Property and equipment additions included in accounts payable | $ | $ | ||||||
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
All references in this Quarterly Report to “Guerrilla RF” refer to Guerrilla RF Operating Corporation, our direct, wholly-owned subsidiary. Unless otherwise stated or the context otherwise indicates, references to the “Company”, “we”, “our”, “us” or similar terms refer to Guerrilla RF, Inc. (formerly known as Laffin Acquisition Corp.) together with its wholly-owned subsidiary, Guerrilla RF. Guerrilla RF holds all material assets and conducts all business activities and operations of the Company. Accordingly, there are frequent references to Guerrilla RF throughout this Quarterly Report.
Guerrilla RF, Inc. was incorporated in the State of Delaware on November 9, 2020. On October 22, 2021, the Company's wholly-owned subsidiary, Guerrilla RF Acquisition Corp., a corporation formed in the State of Delaware on October 20, 2021 (“Acquisition Sub”) and privately held Guerrilla RF Operating Corporation (formerly known as Guerrilla RF, Inc.) entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, on October 22, 2021 (the “Closing Date”), Acquisition Sub merged with and into Guerrilla RF Operating Corporation with Guerrilla RF Operating Corporation continuing as the surviving corporation and a wholly-owned subsidiary of the Company (the “Merger”).
Prior to the Merger, Laffin Acquisition Corp. was a “shell” company registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with no specific business plan or purpose until it began operating the business of Guerrilla RF Operating Corporation following the closing of the Merger.
Guerrilla RF designs and manufactures high‐performance Monolithic Microwave Integrated Circuits (MMICs) for the wireless infrastructure market. Guerrilla RF primarily focuses on researching and developing its existing and future products and building an infrastructure to handle a global distribution network; therefore, it has incurred significant start‐up losses.
The Merger was accounted for as a “reverse acquisition” since, immediately following the consummation of the Merger, Guerrilla RF effectively controlled the Company. For accounting purposes, Guerrilla RF was deemed the accounting acquirer in the Merger. Consequently, the Merger is treated as a recapitalization of Guerrilla RF (i.e., a capital transaction involving the issuance of shares by the Company for the shares of Guerrilla RF). Accordingly, the assets, liabilities, and results of operations of Guerrilla RF became the historical consolidated financial statements of the Company, and the Company’s assets, liabilities, and results of operations were consolidated with Guerrilla RF beginning at the Closing Date. No step-up in basis or intangible assets or goodwill were recorded in the Merger.
Liquidity and Going Concern
In accordance with Financial Accounting Standards (“FASB”) Accounting Standards Update (“ASU”) No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the unaudited interim condensed consolidated financial statements are issued. The accompanying unaudited interim condensed consolidated financial statements have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the ordinary course of business. The Company has historically financed its activities principally from common and preferred equity securities and debt issuances.
The Company has incurred recurring losses, and negative cash flows from operations in nearly every fiscal period since its inception, including a net loss of $
If the Company is unable to secure further 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 plans, which could adversely affect its future operating results or business prospects. Although management continues to pursue additional financing 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. The unaudited interim condensed consolidated financial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of liabilities that may be necessary should the Company be unable to continue as a going concern.
GUERRILLA RF, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Risks and Uncertainties
The Company is subject to several risks associated with companies at a similar stage, including dependence on key individuals, competition from similar products and larger companies, volatility of the industry, ability to obtain adequate financing to support growth, the ability to attract and retain additional qualified personnel to manage the anticipated growth of the Company, and general economic conditions.
In December 2019, a novel strain of coronavirus disease (“COVID-19”) was reported, 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.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying unaudited 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. dollars. Accordingly, they do not include all of the information and footnotes required by GAAP for annual consolidated financial statements. Any reference in these Notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and as amended by Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”). The accompanying 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, 2021 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes 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, 2021 ("2021 Form 10-K"). This report should be read in conjunction with our 2021 Form 10-K filed with the SEC on April 1, 2022. In our opinion, 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 June 30, 2022 and its results of operations, cash flows, and changes in stockholders' equity (deficit) for the six months ended June, 2022 and 2021. The results for the three and six months ended June 30, 2022 are not necessarily indicative of the results expected for any future period or the full year.
Use of Estimates
The preparation of our 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. Additionally, the business and economic uncertainty resulting from the novel coronavirus (COVID-19) pandemic and the Russia-Ukraine conflict has made such estimates and assumptions more difficult to calculate. 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 and the valuation of share-based compensation, 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 June 30, 2022 and 2021 that potentially subject the Company to concentration of credit risk consist primarily of cash and accounts receivable.
The Company’s cash is deposited with major financial institutions in the U.S. At times, deposits in financial institutions located in the U.S. may be in excess of the amount of insurance provided on such deposits by the Federal Deposit Insurance Corporation (FDIC). To date, the Company has not experienced any losses on its cash deposits.
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
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. Accounts receivable also include royalty revenue from our one royalty agreement. The Company provides credit to its customers in the ordinary course of business and evaluates the need for allowances for potential credit losses. The Company does not require collateral or other security for accounts receivable. To reduce credit risk with accounts receivable, the Company performs ongoing evaluations of its customers’ financial condition. Historically, such losses have been immaterial and within management's expectations.
The Company had a factoring agreement that provided advance payments on up to
On June 1, 2022, the Company established a new loan facility with Spectrum. The Spectrum Loan Facility provides for advance payments up to $
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 to years. The Company depreciates furniture and fixtures using the straight-line method over their estimated useful lives of 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. Because the Company has not experienced any potential impairment triggering events, the Company did record any expense related to asset impairment in the three or six months ended June 30, 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 condensed 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 condensed consolidated financial statements for the year ended December 31, 2021. At June 30, 2022, there were
GUERRILLA RF, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revenue Recognition
The Company recognizes product revenue when it satisfies a performance obligation by transferring a product or service to its customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products and services. Sales and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. Shipping and handling fees charged to customers are reported within revenue. The Company does not have any significant financing components as payment is due at or shortly after the point of sale. The Company provides an assurance-type warranty to its customers as part of its contracts' standard terms and conditions, which does not include 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 is satisfied. The costs incurred by the Company for shipping and handling are classified as cost of revenue in the unaudited interim condensed consolidated statements of operations. Any incidental items that are immaterial in the context of a sale to a customer are recognized as expense.
Direct Product Costs
The Company’s direct product costs consist primarily of salaries and related expenses, overhead, third party services vendors, shipping and handling, and depreciation expense related to the equipment and information technology costs incurred directly in the Company’s revenue-generating activities.
Share-Based Compensation
The Company measures and recognizes compensation expense for all stock options, 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 Company stock on the grant date. The Company recognizes compensation expense on a straight-line basis over the requisite vesting period. In addition, the Company accounts for forfeitures of awards 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. 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, assumptions, and the application of management’s judgment, as they are inherently subjective.
Research and Development Costs
Research and development costs are expensed as incurred and consist primarily of personnel-related engineering and technical staff wages and benefits, prototype costs, and other direct expenses.
Advertising Costs
All advertising costs are expensed as incurred and included in sales and marketing expenses. Advertising expenses for the six months ended June 30, 2022, and 2021 were$
Inventories
Inventories are valued at the lower of cost and net realizable value. Cost is determined by the first‐in, first‐out (FIFO) method.
Income Taxes
Income taxes are accounted for under the asset and liability method as required by FASB ASC Topic 740, Income Taxes (“ASC 740”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period corresponding to the enactment date. Under ASC 740, a valuation allowance is required when it is more likely than not that all or some portion of the deferred tax assets will not be realized through generating sufficient future taxable income.
FASB ASC Subtopic 740 10, Accounting for Uncertainty of Income Taxes, (“ASC 740 10”) 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 740 10, 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. See further information about the Company's income taxes in Note 9.
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 common stock outstanding during each period. Diluted net income per share of common stock includes the effect of the potential exercise or conversion of securities, such as options and warrants, which results in the issuance of incremental common stock. For periods prior to the Merger mentioned in Note 1, each of Guerrilla RF’s shares of capital stock issued and outstanding immediately prior to the closing of the Merger was retrospectively converted into approximately
The following potentially dilutive securities have been excluded from the computation of diluted weighted-average shares of common stock outstanding for the three and six months ended June 30, 2022 and 2021, as they would be anti-dilutive:
| 2022 | 2021 | |||||||
| Convertible preferred stock | ||||||||
| Convertible preferred stock warrants | ||||||||
| Common stock warrants | ||||||||
| Stock options | ||||||||
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 8 for further information related to lease obligations on the unaudited interim condensed consolidated balance sheet upon adopting ASC Topic 842.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. This standard is effective for fiscal years beginning after December 15, 2022, and early adoption is permitted. The Company does not intend to adopt this standard early and is currently evaluating the impact of this standard. The Company does not expect this standard to have a material impact on its condensed consolidated financial statements upon adoption.
In August 2020, the FASB issued ASC Update No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The goal of the ASC is to simplify the complexity associated with applying GAAP for certain financial instruments with characteristics of liabilities and equity. More specifically, the amendments focus on the guidance for convertible instruments and derivative scope exception for contracts in an entity’s own equity. The new standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company adopted this accounting guidance in the fiscal quarter ending March 31, 2022, and it did not have a material impact on its unaudited interim condensed consolidated financial statements.
GUERRILLA RF, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. INVENTORIES
Inventories are summarized as follows:
| June 30, 2022 | ||||||||
| (unaudited) | December 31, 2021 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Inventory allowance | ( | ) | ( | ) | ||||
| Inventory, net | $ | $ | ||||||
4. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
| June 30, 2022 | ||||||||
| (unaudited) | December 31, 2021 | |||||||
| Production assets | $ | $ | ||||||
| Computer equipment and software | ||||||||
| Lab equipment | ||||||||
| Office furniture and fixtures | ||||||||
| Leasehold improvements | ||||||||
| Construction work in progress | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| $ | $ | |||||||
The Company recorded depreciation and amortization expense of million and million for the six months ended June 30, 2022, and 2021, respectively.
5. DEBT
Factoring Arrangement
The Company previously had an accounts receivable factoring arrangement with a financial institution (the “Factor”). Under the terms of the agreement, the Company, from time to time, sold to the Factor certain of its accounts receivable balances on a recourse basis for credit approved accounts. The Factor remitted
As stated previously, the Company factored the accounts receivable on a recourse basis. Therefore, if the Factor could not collect the factored accounts receivable, the Company had to refund the Advance Amount remitted to it for any uncollected accounts receivable. Accordingly, the Company recorded the liability of having to refund the Advance Amount as short-term debt when the factoring arrangement was utilized. The Company terminated the factoring arrangement as of June 1, 2022. As of June 30, 2022, there were
The cost of factoring was as follows for the periods indicated:
| Year-to-Date | Year-to-Date | Three Months Ended June 30, 2021 | ||||||||||
| Factoring Fees | $ | $ | $ | |||||||||
As mentioned in Note 2, on June 1, 2022 (the “Effective Date”), the Company entered into the Spectrum Loan Facility with Spectrum.
Pursuant to the terms of the General Credit and Security Agreement (the "Credit Agreement"), part of the Spectrum Loan Facility, the Company may borrow monies to purchase eligible equipment in an amount equal to the lesser of (i)
Under the terms of the AR Agreement, Spectrum has agreed to advance funds equal to approximately
The scheduled term of the Spectrum Loan Facility is 24 months from the Effective Date, unless earlier terminated as per the terms of the Spectrum Loan Facility. The Spectrum may terminate the facilities prior to the scheduled term. In addition, the term may 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 $
The Spectrum Loan Facility has default covenants, some of which are affirmative and some of which are negative requiring written consent from Spectrum including restrictions on the purchase or redemption of any shares of the Company's capital equity and the declaration or payment of any dividends other than dividends payable in capital equity of the Company. The Spectrum Loan Facility contains covenant default remedies including default acceleration clauses.
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 $
As disclosed in the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2022, in conjunction with the Company's planned move into expanded office facilities in early 2023, which will become the Company's new headquarters, the Company entered into a financing arrangement related to furniture for the new office facilities in April 2022. The total cost of the furniture financing was $
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”), 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 $
Loans Payable - PPP
On April 30, 2020, Guerrilla RF received loan proceeds of $
On February 19, 2021, Guerrilla RF received a second PPP loan of $
Debt Maturity
Outstanding debt as of June 30, 2022 is expected to mature as follows:
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| $ |
6. COMMON STOCK AND PREFERRED STOCK
Common Stock
Each share of common stock entitles the holder to
Common Stock Warrants
In October and November 2021, the Company issued warrants to nonemployees to purchase
Preferred Stock
The Company’s board of directors is authorized, subject to limitations prescribed by Delaware law, to issue preferred stock in one or more series, to establish from time to time the number of shares to be included in each series, and to fix the designation, powers, preferences, and rights of the shares of each series.
7. SHARE-BASED COMPENSATION
In 2014, the Company adopted the Long‐Term Stock Incentive Plan (the “2014 Plan”), with
In 2021, the Board adopted the Equity Incentive Plan (the “2021 Plan”), which authorizes the award of stock options, restricted stock awards, stock appreciation rights, restricted stock units ("RSU"), performance awards, cash awards, and stock bonus awards. The Company initially reserved
The general purpose of the 2014 Plan and the 2021 Plan is to allow the Company to attract and motivate key employees and directors to align their interests with those of the Company’s shareholders.
Stock Performance Awards
On January 1, 2022, the compensation committee of the board of directors awarded
GUERRILLA RF, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Stock Option Awards
The Company measures the fair value of each option award on the date of grant using the Black‐Scholes option-pricing model, which takes into account inputs such as the exercise price, the value of the underlying ordinary shares at the grant date, expected term, expected volatility, risk-free interest rate, and dividend yield. The fair value of each grant of options during the three months ended June 30, 2022 was determined using the methods and assumptions discussed below:
| ● | The expected term of employee options is determined using the “simplified” method, as prescribed in 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 and six months ended June 30, 2022 and 2021, the grant date fair value of all option grants was estimated at the time of grant using the Black-Scholes option-pricing model using the following weighted-average assumptions:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Expected term (in years) | ||||||||||||||||
| Expected volatility | % | % | % | % | ||||||||||||
| Risk-free rate | % | % | % | % | ||||||||||||
| Dividend rate | ||||||||||||||||
The weighted average grant date fair value of stock option awards granted was$
The value of stock options is recognized as compensation expense by the straight-line method over the vesting period. Unrecognized compensation costs related to non‐vested options at June 30, 2022, and 2021 amounted to$
Stock option activity by share is summarized as follows for the three and six months ended June 30, 2022:
| Number of Shares | Weighted-Average Exercise Price Per Option | Weighted- Average Remaining Contractual Life (in years) | ||||||||||
| Shares underlying outstanding awards at December 31, 2021 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ( | ) | ||||||||||
| Shares underlying outstanding awards at March 31, 2022 | $ | |||||||||||
| Granted | $ | |||||||||||
| Exercised | ||||||||||||
| Shares underlying outstanding awards at June 30, 2022 | $ | |||||||||||
| Exercisable options at June 30, 2022 | $ | |||||||||||
Each outstanding unexercised stock option at the closing date of the Merger ( October 22, 2021) was converted into the right to purchase approximately
On April 4, 2022, the compensation committee of the board of directors granted stock options to new employees of the Company to purchase an aggregate of
In the three months ended June 30, 2022, the compensation committee of the board of directors granted
| 2022 | ||||||||
| Number of RSUs | Weighted Average Grant Date Fair Value | |||||||
| Outstanding at March 31, 2022 | ||||||||
| Granted | $ | |||||||
| Vested | ||||||||
| Forfeited | ||||||||
| Outstanding at June 30, 2022 | ||||||||
The following table summarizes share-based awards granted under the terms of the 2021 Plan:
| Three Months Ended 6/30/2022 | Three Months Ended 6/30/2021 | |||||||||||||||
| Granted | Weighted Average Grant Price | Granted | Weighted Average Grant Price | |||||||||||||
| Stock options | $ | $ | ||||||||||||||
| RSUs | $ | $ | ||||||||||||||
| Six Months Ended 6/30/2022 | Six Months Ended 6/30/2021 | |||||||||||||||
| Granted | Weighted Average Grant Price | Granted | Weighted Average Grant Price | |||||||||||||
| Stock options | $ | $ | ||||||||||||||
| RSUs | $ | $ | ||||||||||||||
| Common stock | $ | $ | ||||||||||||||
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 six months ended June 30, 2022 and 2021:
| (in thousands) | 2022 | 2021 | ||||||
| Cost of revenues | $ | $ | ||||||
| Research and development | ||||||||
| Sales and marketing | ||||||||
| Administration | ||||||||
| $ | $ | |||||||
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 $
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 | June 30, 2022 | ||||
| Operating Leases: | |||||
| Operating lease right-of-use assets | Operating lease right-of-use assets | $ | |||
| Current portion of operating lease liabilities | Operating lease, current portion | ||||
| Noncurrent portion of operating lease liabilities | Operating lease | ||||
| Total operating lease liabilities | $ | ||||
| Finance Leases: | |||||
| Finance lease right-of-use assets | Property, plant, and equipment | $ | |||
| Current portion of finance lease liabilities | Finance lease, current portion | ||||
| Noncurrent portion of finance lease liabilities | Finance lease | ||||
| Total finance lease liabilities | $ | ||||
Lease cost recognized in the unaudited interim condensed consolidated financial statements is summarized as follows:
| June 30, 2022 | June 30, 2021(1) | |||||||
| Operating lease cost | $ | $ | ||||||
| Finance lease cost: | ||||||||
| Amortization of lease assets | ||||||||
| Interest on lease liabilities | ||||||||
| Total finance lease costs | $ | $ | ||||||
(1) Represent amounts under ASC 840.
GUERRILLA RF, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Other supplemental information related to leases is summarized as follows:
| June 30, 2022 | ||||
| Weighted average remaining lease term (in years): | ||||
| Operating leases | ||||
| Finance leases | ||||
| Weighted average discount rate: | ||||
| Operating leases | % | |||
| Finance leases | % | |||
| Cash paid for amounts included in the measurement of lease liabilities for the six months ended June 30, 2022: | ||||
| Operating cash flows from operating leases | $ | |||
| Operating cash flows from finance leases | $ | |||
| Financing cash flows from finance leases | $ | |||
| Payments Due by Period | ||||||||||||||||||||||||||||
| 2022(1) | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | ||||||||||||||||||||||
| Finance leases | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Less interest | ||||||||||||||||||||||||||||
| Finance lease liabilities | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Operating leases | $ | $ | $ | $ | - | $ | - | $ | - | $ | ||||||||||||||||||
| Less present value adjustment | - | - | - | |||||||||||||||||||||||||
| Operating lease liabilities | $ | $ | $ | $ | - | $ | - | $ | - | $ | ||||||||||||||||||
The Company leases its office facilities in Greensboro, North Carolina under a lease agreement, which expires in June 2024. The lease agreement allows for early cancellation, subject to payment of an early cancellation penalty. Under the lease agreement, the Company is responsible for certain insurance and maintenance expenses. In addition, the lease agreement contains scheduled rent increases. The related rent expense for the lease is calculated on a straight-line basis according to the rental terms of the lease.
In July 2021, the Company entered into a lease agreement for additional office facilities in Greensboro, North Carolina, with an expiration date ten (10) years from the date the Company commences occupancy, which it estimates will be in early 2023. Under the lease agreement, the Company is responsible for certain insurance and maintenance expenses, which are not part of the minimum lease payments. In addition, the lease agreement contains scheduled rent increases. Upon taking control of the building, the related rent expense for the lease will be calculated on a straight-line basis according to the lease's rental terms. The Company will not remit any scheduled lease payments until it occupies the building. The Company anticipates approximately $
GUERRILLA RF, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Legal
In the ordinary course of business, the Company may become involved in legal disputes. In the opinion of management, any potential liabilities resulting from any disputes would not have a material adverse effect on the Company’s unaudited interim condensed consolidated financial statements. As a result,
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,
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
GUERRILLA RF, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. INCOME TAXES
The Company did have any income tax expense for the three months ended June 30, 2022 or 2021.
Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items recorded in the interim period. The provision for income taxes for the three and six months ended June 30, 2022 and 2021 differs from the amount that would be provided by applying the statutory U.S. federal income tax rate of
The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year and permanent differences. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is obtained, additional information becomes known, or the tax environment changes.
In assessing the need for a valuation allowance, management must determine that there will be sufficient taxable income to realize deferred tax assets. Based upon the historical and anticipated future losses, management has determined that the deferred tax assets do not meet the more likely than not threshold for realizability. Accordingly, a valuation allowance has been recorded against the Company’s net deferred tax assets as of June 30, 2022, and December 31, 2021.
Potential 382 Limitation
As disclosed in our Annual Report on Form 10-K for the year ended, December 31, 2021, the Company’s ability to utilize its net operating loss ("NOL") and research and development ("R&D") credit carryforwards may be substantially limited due to ownership changes that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code (the "Code"), as well as similar State provisions. These ownership changes may limit the amount of NOL and R&D credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change,” as defined by Section 382 of the Code, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percent of a company's outstanding stock by certain stockholders or public groups.
If the Company has experienced an ownership change, utilization of the NOL or R&D credit carryforwards would be subject to an annual limitation, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments, as required. Any such limitation may result in the expiration of a portion of the NOL or R&D credit carryforwards before utilization. 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 to the existence of a full deferred tax valuation allowance, it is not expected that any possible limitation will have an impact on the results of operations of the Company.
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 third quarter of 2022. Any carryforward limitations may result in the expiration of a portion of the NOL or R&D credit carryforwards before utilization. Until the Section 382 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 to the existence of the Company's full deferred tax valuation allowance, it is not expected that any possible limitation will have an impact on the financial position or the results of operations of the Company
At December 31, 2021, the Company had federal NOL and R&D credit carryforwards of approximately $
GUERRILLA RF, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. Related Party Transactions
We have had any related party transactions, other than compensation arrangements in the quarter ended June 30, 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 $
2019 Notes
In March 2019, Guerrilla RF sold in a private placement an aggregate of $
| Principal | Number of Shares of Common Stock Issued Upon Mandatory | |||||||
| Name of Stockholder | Amount | Conversion | ||||||
| AMB Investments, LLC | $ | |||||||
| Jeanne Pratt | $ | |||||||
| Samuel W. Funchess | $ | |||||||
| William H. Pratt | $ | |||||||
AMB Notes
Guerrilla RF previously issued several promissory notes (the “AMB Notes”) to AMB Investments LLC (“AMB Investments”), which holds more than
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 $
2021 Convertible Debt Financing
Between July 15, 2021 and October 1, 2021, Guerrilla RF sold an aggregate of $
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
| Name of Stockholder | Principal | Number of Shares of | ||||||
| William J. Pratt | $ | |||||||
| Jeanne Pratt | $ | |||||||
| William H. Pratt | $ | |||||||
2021 Promissory Notes to Warrant Holders
In August 2021, Guerrilla RF issued promissory notes for an aggregate principal amount of approximately $
| Name of Stockholder | Principal | |||
| AMB Investments LLC | $ | |||
| David Reich | $ | |||
| Jason Bodford | $ | |||
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
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 (
12. Subsequent Events
Management has evaluated subsequent events occurring after June 30, 2022, through August 12, 2022, the date the unaudited interim condensed consolidated financial statements were issued. The following subsequent events have occurred during the period.
Subordinated Debt Financing
On August 11, 2022, the Company established a new loan facility (the “Salem Loan Facility”) with Salem Investment Partners V, Limited Partnership (“Salem”) providing for an initial advance of $
Loans Payable – EIDL Payoff
As further discussed in Note 5, the Company had an outstanding EIDL loan as of June 30, 2022. Upon closing of the Salem Loan Facility, the Company repaid the outstanding balance of $
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, 2021 as filed with the SEC on April 1, 2022.
This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our plans, objectives, representations and contentions, and are not historical facts and typically are identified by use of terms such as "may," "will," "should," "could," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," "continue" and similar words, although some forward-looking statements are expressed differently. You should be aware that the forward-looking statements included herein represent management's current judgment and expectations, but our actual results, events and performance could differ materially from those expressed or implied by forward-looking statements. We do not intend to update any of these forward-looking statements or publicly announce the results of any revisions to these forward-looking statements, other than as is required under U.S. federal securities laws.
Our business is subject to numerous risks and uncertainties including:
● those relating to fluctuations in our operating results;
● we may not be able to generate sufficient cash to service all of our debt or meet our operating needs;
● 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, 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;
● 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
Guerrilla RF is a fabless semiconductor company based in Greensboro, N.C. Guerrilla RF was founded in 2013 with a mission to employ RF semiconductor technology to deliver RF solutions to customers in underserved markets. Over the past several years, Guerrilla RF has become a leader in developing high-performance MMIC products for wireless connectivity. It continues to target underserved markets and customers, delivering a range of high-performance MMIC products and associated technical support to a diverse set of customers that enable a more connected world. Guerrilla RF is a wholly-owned subsidiary of the Company. Guerrilla RF holds all material assets and conducts all business activities and operations of the Company. Accordingly, 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 outsource the manufacture and production of our MMIC products to subcontractors located overseas, providing access to multiple semiconductor process technologies. Guerrilla RF’s primary external wafer foundries are in Taiwan and Singapore, and our primary assembly and test suppliers are located in Malaysia and the Philippines.
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 the year ended December 31, 2021, as we experienced lower revenues due to a significant number of customers experiencing supply chain challenges. Consequently, we implemented cost reduction actions across our functional disciplines to assist us in navigating through what continues to be an uncertain environment. We experienced increased sales during the first half of 2022, driven by rebounding volumes in markets recovering from supply chain difficulties that impacted the timing of our customers' orders of our products; however, 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.
SECOND QUARTER FISCAL 2022 FINANCIAL HIGHLIGHTS
● Revenue for the second quarter of fiscal 2022 increased 10.4% as compared to the second quarter of fiscal 2021, which was driven primarily by higher demand for our automotive product solutions, higher royalties of our 5G wireless infrastructure products, and higher demand for our catalog products for a wide variety of customer applications.
● In conjunction with the increased revenues as highlighted above, direct product costs also increased resulting in gross profit for the second quarter of fiscal 2022 of 57.6% of revenues as compared to 60.7% for the second quarter of fiscal 2021. Although the Company has continued to experience supply chain price increases, we have been able to mitigate the effect of these increases by increasing prices we charge our customers related to the raw materials and assembly/test cost increases we experienced. Product contribution margins increased from 67.7% to 71.3%, in Q2 2021 to Q2 2022, mostly due to product mix as we experienced success on new power amplifiers being sold into the market. The higher product contribution margins were marginally offset by higher overhead costs, on a comparative period basis, which increased due to headcount additions in our Quality group, as well as increased costs of production mask amortization.
● Operating loss was $2.64 million for Q2 2022 as compared to $0.39 million for Q2 2021. This operating loss increase was primarily due to higher operating expenses relative to sales (144.1% in Q2 2022 vs. 74.6% in Q2 2021). Increased operating expenses were primarily attributable to increased investment in research and development (which grew 90%), sales and marketing, headcount additions, and additional costs associated with becoming a public company. Selling, general, and administrative costs increased year over year by 137.0% from 2021 to 2022 on a year to date basis.
● Net loss per share was $0.08 for the second quarter of fiscal 2022 and 2021, as compared to $0.14 and $0.06 for the six months ended June 30, 2022 and 2021, respectively.
● Capital expenditures were $0.2 million for the second quarter of fiscal 2022 as compared to $0.1 million for the second quarter of fiscal 2021.
Key metrics
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 our 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 June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2022 |
2021 |
2022 |
2021 |
|||||||||||||
| (unaudited) |
(unaudited) |
(unaudited) |
(unaudited) |
|||||||||||||
| Key Metrics |
||||||||||||||||
| Number of products released |
2 | 9 | 7 | 11 | ||||||||||||
| Number of total products |
108 | 98 | 108 | 98 | ||||||||||||
| Number of products with lifetime revenue exceeding $100 thousand |
47 | 33 | 47 | 33 | ||||||||||||
Number of products released: The total quantity 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's inception through the end of the period.
Number of products with lifetime revenue exceeding $100 thousand: The number of products that have achieved the threshold of cumulative sales of $100,000 since Guerrilla RF's inception through the end of the period.
Components of Results of Operations
Revenues
We derive our revenue from sales of high-performance RF semiconductor products. We design, integrate, and package differentiated, semiconductor-based products that we sell to customers through our direct sales organization, our network of independent sales representatives, and our distributors. We generate revenue from customers located within and outside the U.S. In addition to sales to customers, we generate royalty revenue under a royalty agreement with one semiconductor manufacturer.
Direct Product Costs and Gross Profit
Direct Product Costs. Our direct product costs primarily consist of salaries and related expenses, overhead, third party services vendors, and depreciation expense related to the equipment and information technology costs incurred directly in the Company’s revenue-generating activities.
Gross Profit. Our gross profit is calculated by subtracting our cost of revenues from revenues. Gross margin is expressed as a percentage of total revenues. Our gross profit may fluctuate from period to period as revenues fluctuate due to the mix of products we sell to customers, royalty revenue volume, operational efficiencies, and changes to our technology expenses and customer support.
We plan to focus on and grow the sales volume of new and existing products with the highest gross margin. We intend to continue investing additional resources in our engineering and design capabilities, which drives our research and development efforts and, in turn, drives additional revenue streams and enables us to improve our gross margin over time. The level and timing of investment in these areas could affect our cost of revenues in the future.
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, non-income taxes, 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") expenses consist of costs for the design, development, testing, and enhancement of our products and are generally expensed as incurred. These costs consist primarily of personnel costs, including salaries, benefits, bonuses, and share-based compensation for our product development personnel Research and development expenses also include training costs, product management, third-party partner fees, and third-party consulting fees. We expect our research and development expenses to increase in absolute dollars as our business grows, but as a percent of revenues, R&D expenses are expected to decrease.
Sales and marketing expenses consist primarily of employee compensation costs related to sales and marketing, including salaries, benefits, bonuses, and share-based compensation, costs of general marketing activities and promotional activities, travel-related expenses, and allocated overhead. Sales and marketing expenses also include costs for advertising and other marketing activities. Advertising is expensed as incurred. We expect our sales and marketing expenses will increase in absolute dollars as we expand our sales and marketing efforts.
Non-income taxes include excise taxes, sales and use taxes, capital stock and franchise taxes, and property taxes. Capital stock and franchise taxes are taxes that States charge the Company for the privilege of incorporating or doing business in a State.
Interest Expense
Interest expense consists primarily of the interest incurred on our debt obligations, our prior factoring arrangement expense, the non-cash interest expense associated with the amortization of common stock warrants, and lease expense related to our capital leases.
Other Income (Expenses)
On April 30, 2020, Guerrilla RF received loan proceeds of $535,800 under the Paycheck Protection Program (“PPP”) established as part of the Coronavirus Aid, Relief and Economic Security Act (“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 June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2022 |
2021 |
2022 |
2021 |
|||||||||||||
| (unaudited) |
(unaudited) |
(unaudited) |
(unaudited) |
|||||||||||||
| Revenues |
$ | 3,087,350 | $ | 2,797,420 | $ | 6,953,261 | $ | 5,578,442 | ||||||||
| Direct product costs |
1,277,759 | 1,100,118 | 2,825,040 | 2,192,810 | ||||||||||||
| Gross profit |
1,809,591 | 1,697,302 | 4,128,221 | 3,385,632 | ||||||||||||
| Operating expenses: |
||||||||||||||||
| Research and development |
2,016,934 | 1,060,532 | 3,818,940 | 2,123,638 | ||||||||||||
| Sales and marketing |
1,169,435 | 649,071 | 2,255,278 | 1,225,721 | ||||||||||||
| General and administrative |
1,263,730 | 377,641 | 2,503,380 | 682,955 | ||||||||||||
| Total operating expenses |
4,450,099 | 2,087,244 | 8,577,598 | 4,032,314 | ||||||||||||
| Loss from operations |
(2,640,508 | ) | (389,942 | ) | (4,449,377 | ) | (646,682 | ) | ||||||||
| Other income (expenses): |
||||||||||||||||
| Interest expense |
(70,853 | ) | (160,828 | ) | (128,074 | ) | (309,653 | ) | ||||||||
| Other income (expenses) |
(30,251 | ) | — | (30,251 | ) | 535,800 | ||||||||||
| Total other income (expenses), net |
(101,104 | ) | (160,828 | ) | (158,325 | ) | 226,147 | |||||||||
| Net loss |
$ | (2,741,612 | ) | $ | (550,770 | ) | $ | (4,607,702 | ) | $ | (420,535 | ) | ||||
Comparison of the three months ended June 30, 2022 and 2021:
| Three Months Ended June 30, |
||||||||||||||||
| 2022 | 2021 | $ Change |
% Change |
|||||||||||||
| Revenues |
$ | 3,087,350 | $ | 2,797,420 | 289,930 | 10 | % | |||||||||
Revenues increased $0.3 million to $3.1 million for the three months ended June 30, 2022, as compared to $2.8 million for the three months ended June 30, 2021. The increase in revenues was attributable to a variety of products in both our automotive and catalog product purchasing customer bases. Sales to our large automotive supplier customers are being impacted by macro-economic conditions beyond our control. As we indicated in our Quarterly Report on Form 10-Q for Q1 2022, we anticipate further supply chain disruptions through the end of 2022. We further anticipate that we will likely see increased volatility in customer order patterns, resulting in reduced sales growth in some quarters and increased sales growth in others.
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, RFPD, during the three months ended June 30, 2022, and June 30, 2021. RFPD, a large product distributor serving numerous end-user customers, generated 80% of product shipment revenue for the three months ended June 30, 2022 and 2021
International shipments amounted to $0.6 million (approximately 21% of product revenue) and $0.4 million (approximately 16% of product revenue) for the three months ended June 30, 2022, and June 30, 2021, respectively.
Direct Product Costs and Gross Profit
| Three Months Ended June 30, |
||||||||||||||||
| 2022 | 2021 | $ Change |
% Change |
|||||||||||||
| Direct product costs |
$ | 1,277,759 | $ | 1,100,118 | 177,641 | 16 | % | |||||||||
| Gross profit |
$ | 1,809,591 | $ | 1,697,302 | 112,289 | 7 | % | |||||||||
Direct product costs remained relatively flat for the three months ended June 30, 2022, compared to the three months ended June 30, 2021. The lack of change in direct product cost compares to a slight increase in product sales of 7%. This resulted in improved contribution margins of 3.6% reflecting improved direct margins from our product mix sales coming largely from our new power amplifier products, which enjoy higher margins relative to other products we offer. Overhead costs relative to sales increased from 11.0% to 15.2%, from Q1 2021 to Q2 2022, due to increases in Operations and Quality support and staffing. From 2021 to 2022 on a comparative period basis, royalties and non-recurring engineering revenue grew from $0.13 million to $0.23 million having an impact on our overall gross profit.
Research and Development Expenses
| Three Months Ended June 30, |
||||||||||||||||
| 2022 | 2021 | $ Change |
% Change |
|||||||||||||
| Research and development |
$ | 2,016,934 | $ | 1,060,532 | 956,402 | 90 | % | |||||||||
Research and development expenses increased $1.0 million to $2.0 million for the three months ended June 30, 2022, compared to $1.1 million for the three months ended June 30, 2021. The increase was attributable to $0.4 million of staffing additions in our engineering department, $0.6 million of research lab and equipment, and engineering support and prototype expenses.
Sales and Marketing Expenses
| Three Months Ended June 30, |
||||||||||||||||
| 2022 | 2021 | $ Change |
% Change |
|||||||||||||
| Sales and marketing |
$ | 1,169,435 | $ | 649,071 | 520,364 | 80 | % | |||||||||
Sales and marketing expenses increased $0.5 million to $1.2 million for the three months ended June 30, 2022, compared to $0.6 million for the three months ended June 30, 2021. The increase year over year was driven by increases of $0.4 million in staffing costs and $0.1 million in various sales and marketing expenses including sales commissions, information technology support, and customer support.
General and Administrative Expenses
| Three Months Ended June 30, |
||||||||||||||||
| 2022 | 2021 | $ Change |
% Change |
|||||||||||||
| General and administrative expenses |
$ | 1,263,730 | $ | 377,641 | 886,089 | 235 | % | |||||||||
General and administrative expenses increased $0.9 million to $1.3 million for the three months ended June 30, 2022, compared to $0.4 million for the three months ended June 30, 2021. The increase was primarily related to an increase of $0.6 million in wages and benefits 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 June 30, | ||||||||||||||||
| 2022 | 2021 | $ Change |
% Change |
|||||||||||||
| Interest expense |
$ | (70,853 | ) | $ | (160,828 | ) | $ | 89,975 | (56 | )% | ||||||
| Other income |
(30,251 | ) | — | $ | (30,251 | ) | - | |||||||||
| Total other income (expenses), net |
$ | (101,104 | ) | $ | (160,828 | ) | $ | 59,724 | (37 | )% | ||||||
Interest expense decreased approximately $0.1 million to $0.07 million for the three months ended June 30, 2022, compared to $0.16 million for the three months ended June 30, 2021. The decrease was attributable to decreased factoring fees.
Other income (expense) was zero in Q2 2021 compared to $(0.03) million for the three months ended June 30, 2022. Other expense in Q2 2022 was attributable to closing costs on our ABL closed in the quarter.
Comparison of the six months ended June 30, 2022 and 2021:
| Six Months Ended June 30, |
||||||||||||||||
| 2022 |
2021 |
$ Change |
% Change |
|||||||||||||
| Revenues |
$ | 6,953,261 | $ | 5,578,442 | 1,374,819 | 25 | % | |||||||||
Revenues increased $1.4 million to $7.0 million for the six months ended June 30, 2022, as compared to $5.6 million for the six months ended June 30, 2021. The increase in revenues was driven by the growth of product sales to our automotive supplier customers and our catalog customers over a wide breadth of applications and customers. Sales to our large automotive supplier customers grew approximately 27% from the prior year period. Forty-two percent (42%) 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.
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, RFPD, during the six months ended June 30, 2022, and June 30, 2021. RFPD, a large product distributor serving numerous end-user customers, generated 83% and 80% of product shipment revenue for the six months ended June 30, 2022 and 2021 respectively.
Royalty revenues increased 54% for the six months ended June 30, 2022, compared to the six months ended June 30, 2021, as our customer with whom we have a royalty agreement experienced an increase in sales of wireless infrastructure products licensed under our proprietary designs.
International shipments amounted to $0.9 million (approximately 18% of product revenue) and $1.1 million (approximately 18% of product revenue) for the six months ended June 30, 2022, and June 30, 2021, respectively.
Direct Product Costs and Gross Profit
| Six Months Ended June 30, |
||||||||||||||||
| 2022 |
2021 |
$ Change |
% Change |
|||||||||||||
| Direct product costs |
$ | 2,825,040 | $ | 2,192,810 | 632,230 | 29 | % | |||||||||
| Gross profit |
$ | 4,128,221 | $ | 3,385,632 | 742,589 | 22 | % | |||||||||
Direct product costs increased $0.6 million to $2.8 million for the six months ended June 30, 2022, compared to $2.2 million for the six months ended June 30, 2021. The 29% increase in direct product cost was primarily driven by a product sales volume increase of 23% (excluding royalty revenue). Direct product costs relative to sales increased due to increases in Operations and Quality support and staffing. Year over year, royalties grew in concert with product sales increasing 31% 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 $0.5 million for the six months ended June 30, 2022, and $0.3 million for the six months ended June 30, 2021.
Research and Development Expenses
| Six Months Ended June 30, |
||||||||||||||||
| 2022 |
2021 |
$ Change |
% Change |
|||||||||||||
| Research and development |
$ | 3,818,940 | $ | 2,123,638 | 1,695,302 | 80 | % | |||||||||
Research and development expenses increased $1.7 million to $3.8 million for the six months ended June 30, 2022, compared to $2.1 million for the six months ended June 30, 2021. The increase was attributable to $0.7 million of staffing additions in our engineering department, and $0.3 million was attributable to research lab and equipment, and $0.7 million attributable to engineering tools and support as well as prototype expenses.
Sales and Marketing Expenses
| Six Months Ended June 30, |
||||||||||||||||
| 2022 |
2021 |
$ Change |
% Change |
|||||||||||||
| Sales and marketing |
$ | 2,255,278 | $ | 1,225,721 | 1,029,557 | 84 | % | |||||||||
Sales and marketing expenses increased $1.0 million to $2.3 million for the six months ended June 30, 2022, compared to $1.2 million for the six months ended June 30, 2021. The increase year over year was driven by increases of $0.9 million in staffing costs and $0.3 million in various sales and marketing expenses including sales commissions, information technology support, and customer support.
General and Administrative Expenses
| Six Months Ended June 30, |
||||||||||||||||
| 2022 |
2021 |
$ Change |
% Change |
|||||||||||||
| General and administrative expenses |
$ | 2,503,380 | $ | 682,955 | 1,820,425 | 267 | % | |||||||||
General and administrative expenses increased $1.8 million to $2.5 million for the six months ended June 30, 2022, compared to $0.7 million for the six months ended June 30, 2021. The increase was primarily related to increases in wages and benefits ($1.3 million) and $0.5 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)
| Six Months Ended June 30, |
||||||||||||||||
| 2022 |
2021 |
$ Change |
% Change |
|||||||||||||
| Interest expense |
$ | (128,074 | ) | $ | (309,653 | ) | $ | 181,579 | (59 | )% | ||||||
| Other income (loss) |
$ | (30,251 | ) | $ | 535,800 | $ | (566,051 | ) | (106 | )% | ||||||
| Total other income (expenses), net |
$ | (158,325 | ) | $ | 226,147 | $ | (384,472 | ) | (170 | )% | ||||||
Interest expense decreased approximately $0.2 million to $0.1 million for the six months ended June 30, 2022, compared to $0.3 million for the six months ended June 30, 2021. The decrease was attributable to decreased factoring fees.
Other income decreased $0.6 million for the six months ended June 30, 2022, compared to the six months ended June 30, 2021. The decrease was mostly due to PPP loan forgiveness in the six months ended June 30, 2021, of $0.5 million.
Liquidity and Capital Resources
Our primary source of liquidity is cash raised from private placements and debt financing. As of June 30, 2022, we had cash of $1.7 million. We also have a loan facility of up to a $3.0 million with a specialty lender (referred to as the Spectrum Loan Facility as described in Note 5 of our unaudited interim condensed consolidated financial statements). As of June 30, 2022, we have drawn $1.2 million under the Spectrum Loan Facility. As of June 30, 2022, the Company was actively pursuing an additional loan facility to support its current and future liquidity needs and that additional loan facility was successfully closed in August 2022 (see Note 12 about the Salem Loan Facility). The Company believes that its cash, the Spectrum Loan Facility, and the Salem Loan Facility will provide sufficient resources to support operations into 2023.
As described in Note 1 of our unaudited interim condensed consolidated financial statements, we have incurred recurring losses and negative cash flows from operations since inception and have an accumulated deficit at June 30, 2022 of $19.7 million. We expect losses and negative cash flows to continue beyond 2022, primarily due to continued investment in research and development, sales and marketing efforts, and increased administration expenses as our Company grows. As our fiscal 2022 progresses, and we continue to invest in the implementation of our long-term strategic plan, we anticipate that we will require additional funding. We are actively pursuing such additional funding as part of our ongoing strategic planning. There is no assurance that appropriate funding will be available on terms, which are acceptable to us, or at all. This requirement for additional funding raises substantial doubt about our ability to continue as a going concern.
The Company’s current corporate headquarters are located in Greensboro, North Carolina, where it leases approximately 10,800 square feet of office space. The Company recognized that substantial additional space will be required to execute its business strategy and facilitate projected growth. As described in Note 8 of our unaudited interim condensed consolidated financial statements, in July 2021, the Company entered into a lease agreement for new headquarters, also located in Greensboro, that would provide in excess of 50,000 square feet of office space. The new headquarters are being renovated in accordance with plans agreed upon with the landlord, and the Company will take possession of the building once all improvements and renovations are substantially complete. Initially, the Company anticipated the renovations being completed and taking possession in September 2022; however, the landlord has experienced significant delays and as a result it is now expected that the new headquarters will not become available until March 2023, at the earliest. This delay has caused the Company to delay hiring additional employees, negatively impacting its ability to timely execute on its business strategy and achieve planned growth, adversely affecting the Company’s future operations and financial performance until occupancy occurs. The Company is in ongoing discussions with the new building landlord over the timing of the payments for the new building asset additions in light of the significant delays the landlord has experienced. If there is a further delay in the renovations beyond March 2023, the impact on the Company and its future business will be exacerbated. The Company will not make any scheduled lease payments until it occupies the building and will not recognize any associated lease payment expense until it remits scheduled lease payments.
Initial building asset addition financing related to the new headquarter facilities was completed in April 2022 and is further discussed in Note 5 to our unaudited interim condensed consolidated financial statements as of June 30, 2022. The Company anticipates approximately $4.0 million of new headquarter building asset additions, and an annual lease expense of approximately $1.1 million upon occupancy.
The following table summarizes our sources and uses of cash for each of the periods presented:
Cash (used in) provided by:
| Six Months Ended June 30, |
||||||||
| 2022 | 2021 | |||||||
| Operating activities |
$ | (4,197,437 | ) | $ | (848,847 | ) | ||
| Investing activities |
(299,608 | ) | (114,835 | ) | ||||
| Financing activities |
887,790 | 979,136 | ||||||
| Net increase (decrease) in cash |
$ | (3,609,255 | ) | $ | 15,454 | |||
Operating Activities
Cash used in operating activities was $4.2 million and $0.8 million for the six months ended June 30, 2022 and 2021, respectively. Cash used in operating activities for the six months ended June 30, 2022 principally resulted from our net loss of $4.7 million. For the six months ended June 30, 2022, non-cash items that were a part of the net operating loss included depreciation of $0.5 million, stock-based compensation of $0.2 million, and the amortization of prepaid insurance of $.4 million. During the six months ended June 30, 2022, the use of prepaid prototype wafers used in R&D activities offset the impact of net operating losses with prepaid expenses decreasing by $0.1 million as a result. In addition during the six months ended June 30, 2022, moderate increases in trade accounts receivable of $0.3 million and inventory of $0.4 million partially offset the non-cash impacts to the operating activities of the Company.
Cash used in operating activities for the six months ended June 30, 2021, primarily resulted from our net loss of $0.4 million. A key non-cash component of the net loss was the forgiveness of a PPP loan of $0.5 million in that same period. During the six months ended June 30, 2021, moderate increases in prepaid expenses of $0.1 million and inventory of $0.1 million, which decreased cash from operations, were offset by a small decrease in accounts receivable of $0.1 million.
Investing Activities
Cash used in investing activities was $0.3 million and $0.1 million for the six months ended June 30, 2022 and 2021, respectively. Cash used in investing activities resulted from capital expenditures on property and equipment for all periods presented.
Financing Activities
Cash provided by financing activities for the six months ended June 30, 2022 of $0.9 million was primarily attributable to our Spectrum Loan Facility and principal payments on capital leases.
Cash provided by financing activities during the six months ended June 30, 2021, of $1.0 million principally resulted from the issuance of notes payable and factoring proceeds totaling $1.0 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.
Contractual Obligations and Commitments
The following summarizes our significant contractual obligations as of June 30, 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 negotiations associated with the planned move of our business headquarters in 2023. We anticipate approximately $4.0 million of new headquarter building asset additions, and an annual lease expense of approximately $1.1 million commencing upon occupancy.
| Payments due by period |
||||||||||||||||||||
| Total |
Less than 1 year |
1 – 3 years |
4 – 5 years |
More than 5 years |
||||||||||||||||
| Purchase order obligations |
$ | 382,199 | $ | 382,199 | $ | — | $ | — | $ | — | ||||||||||
| Short-term debt obligations (excluding interest) |
5,117 | 5,117 | — | — | — | |||||||||||||||
| Long-term debt obligations (excluding interest) |
144,783 | — | 17,544 | 17,544 | 109,695 | |||||||||||||||
| Loan agreements |
1,190,638 | 1,190,638 | — | — | — | |||||||||||||||
| Operating lease obligations |
248,977 | 118,826 | 130,151 | — | — | |||||||||||||||
| Finance lease obligations |
3,389,156 | 713,158 | 1,875,542 | 800,456 | — | |||||||||||||||
| Total |
$ | 5,360,870 | $ | 2,409,938 | $ | 2,023,237 | $ | 818,000 | $ | 109,695 | ||||||||||
Critical Accounting Policies and Estimates
Other than as described under Note 2 to our unaudited interim condensed consolidated financial statements, the Critical Accounting Policies and Significant Judgments and Estimates included in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on April 1, 2022, have not materially changed.
Our critical accounting policies are those policies that require the most significant judgments and estimates in the preparation of our unaudited interim condensed consolidated financial statements. Management has determined that our most critical accounting policies are those relating to revenue recognition, stock-based compensation, lease accounting, income taxes including the valuation allowance for deferred tax assets, and going concern considerations.
Recently adopted accounting standards
In February 2016, the Financial Accounting Standards Board, or FASB, 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 term on a straight-line basis, with all cash flows included in the operating section of the consolidated statement of cash flows. For finance leases, interest on the lease liability is recognized separately from the amortization of the right-of-use asset in the consolidated statement of operations and the repayment of the principal portion of the lease liability is classified as a financing activity while the interest component is included in the operating section of the consolidated statement of cash flows. In June 2020, the FASB issued ASU 2020-05, which delayed the effective date of Topic 842 until January 1, 2022. We adopted ASC 842 using the optional transition method outlined in ASU 2018-11. The Company adopted Topic 842 in the fiscal quarter ending March 31, 2022. See Note 8 for further information related to lease obligations on the unaudited interim condensed consolidated balance sheet upon adopting ASC Topic 842.
JOBS Act Accounting Election
We are an emerging growth company, as defined in the Jumpstart Our Business Startups ("JOBS") Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we are no longer an emerging growth company, or affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. We have not elected to early adopt certain new accounting standards, as described in Note 2 of our 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 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.
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 June 30, 2022, 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’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 on internal controls over financial reporting disclosed within our Annual Report on Form 10-K for the year ended December 31, 2021, management concluded that our disclosure controls and procedures were not effective as of June 30, 2022. While the existence of the material weaknesses did not result in a material misstatement to the financial statements, it presented a reasonable possibility that a material misstatement in 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 weaknesses disclosed within our Annual Report on Form 10-K for the year ended December 31, 2021, 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 process and we have designed control procedures to address the material weaknesses. The actions taken by management include, but are not limited to:
• We have retained a public accounting firm to assist us with our tax accounting and tax provision calculations;
• We have enhanced our procedures to evaluate and document the accounting treatment over significant unusual transactions including the utilization of an accounting research tool to which we have subscribed;
• We have enhanced our segregation of duties through a review and revision of information technology access rights;
• We have enhanced and formalized our financial reporting scheduling and closing calendar; and
• We have enhanced 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 we can offer no assurance that these initiatives will ultimately have the intended effects. The material weaknesses cannot be considered remediated until applicable 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 test the implementation and operating effectiveness of, the newly-designed controls in future periods.
Changes in Internal Control over Financial Reporting
During the quarter ended June 30, 2022, 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 on internal controls over financial reporting disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
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, 2021 filed with the SEC on April 1, 2022. 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.
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 recorded a net loss of $2.8 million for the year ended December 31, 2021, $2.0 million for the year ended December 31, 2020, and $4.7 million for the six months ended June 30, 2022. As of June 30, 2022, we had an accumulated deficit of $19.7 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 on our indebtedness when due, and we may be unable to find additional sources of capital.
Our cash balance stood at $1.7 millionon June 30, 2022. In addition, we have further cash availability under the Spectrum Loan Facility, which provides a maximum line of credit of up to $3.0 million, depending on the amount of eligible accounts receivable and inventory. 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. As of June 30, 2022 we were actively pursuing an additional loan facility and we successfully closed that loan facility in August 2022 (see Note 12 about the Salem Loan Facility). We anticipate that we will require further funding later this year and we are actively evaluating alternative funding sources as part of our ongoing strategic planning. There can be no assurance that we will be able to secure additional funding on favorable terms, or at all. Our failure to secure additional funding on favorable terms, or at all, may cause us to reduce or delay planned investments and capital expenditures, harm our business, financial condition and results of operations, and affect 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 List dated August 8, 2022. 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, 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.
Our business could be adversely affected by a further delay in the renovation of our new headquarter office facilities.
The Company’s current corporate headquarters are located in Greensboro, North Carolina, where it leases approximately 10,800 square feet of office space. The Company recognized that substantial additional space will be required to execute its business strategy and facilitate projected growth. Accordingly, in July 2021, the Company entered into a lease agreement for new headquarters, also located in Greensboro, that would provide in excess of 50,000 square feet of office space. The new headquarters are being renovated in accordance with plans agreed upon with the landlord, and the Company will take possession of the building once all improvements and renovations are substantially complete. Initially, the Company anticipated the renovations being completed and taking possession in September 2022; however, the landlord has experienced significant delays and as a result it is now expected that the new headquarters will not become available until March 2023, at the earliest. This delay has caused the Company to delay hiring additional employees, negatively impacting its ability to timely execute on its business strategy and achieve planned growth, adversely affecting the Company’s future operations and financial performance. The Company is in ongoing discussions with the new building landlord over the timing of the payments for the new building asset additions in light of the significant delays the landlord has experienced. If there is a further delay in the renovations beyond March 2023, the impact on the Company and its business will be exacerbated.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
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 |
||
| 10.1 | General Credit and Security Agreement, dated as of June 1, 2022, between Guerrilla RF, Inc. and SPECTRUM Commercial Services Company, L.L.C. | 8-K | 000-56238 | 10.1 | June 6, 2022 | |
| 10.2 | Assignment of Accounts and Security Agreement, dated as of June 1, 2022, by and between Guerrilla RF, Inc. and SPECTRUM Commercial Services Company, L.L.C. | 8-K | 000-56238 | 10.2 | June 6, 2022 |
| 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 2002 | 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 June 30, 2022, formatted in Inline XBRL and contained in Exhibit 101. |
X |
|
|
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. |
|
|
|
|
|
| Date: August 12, 2022 |
By: |
/s/ Ryan Pratt |
|
|
|
Ryan Pratt Chief Executive Officer (principal executive officer) |
| GUERRILLA RF, INC. | ||
|
|
|
|
| Date: August 12, 2022 |
By: |
/s/ John Berg |
|
|
|
John Berg Chief Financial Officer (principal financial officer) |
Exhibit 31.1
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ryan Pratt, certify that:
|
1. |
I have reviewed this Quarterly Report on Form 10-Q of Guerrilla RF, Inc. for the quarter ended June 30, 2022; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a- 15(e) and 15d-15(e)) and internal control over financial reporting ( as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
|
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
Date: August 12, 2022 |
By: |
/s/ Ryan Pratt |
|
Ryan Pratt Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John Berg, certify that:
|
1. |
I have reviewed this Quarterly Report on Form 10-Q of Guerrilla RF, Inc. for the quarter ended June 30, 2022; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a- 15(e) and 15d-15(e)) and internal control over financial reporting ( as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
Date: August 12, 2022 |
By: |
/s/ John Berg |
|
John Berg Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Guerrilla RF, Inc. (the "Company") for the quarter ended June 30, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
|
(1) |
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. |
|
Date: August 12, 2022 |
By: |
/s/ Ryan Pratt |
|
Ryan Pratt President, Chief Executive Officer (Principal Executive Officer) |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Guerrilla RF, Inc. (the "Company") for the quarter ended June 30, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
|
(1) |
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. |
|
Date: August 12, 2022 |
By: |
/s/ John Berg |
|
John Berg Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
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