Guerrilla RF, Inc. - Quarter Report: 2023 September (Form 10-Q)

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-Q100 — Automotive Electronic Council’s electronic stress qualification standard for integrated circuits.

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 or application.

Die/Chip — An individual semiconductor device on the wafer.

Distribution-customer — A customer that purchases Guerrilla RF products to sell to a third-party rather than for its own use.

DSA — Digital step attenuator.

DSRC — Dedicated short-range communications. (Typically used in electronic toll collection).

End-user customer — The ultimate customer that utilizes or incorporates our products into its own products or solutions whether it purchased our products directly from Guerrilla RF or a third party.

EAR — Export Administration Regulation.

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 than a GaAs MESFET technology.

Gain blocks, switches, power detectors, drivers, mixers, digital step attenuators, high power amplifiers — Functional building blocks of RF components in a typical radio frequency system or architecture.

GHz — Frequency of operation (in Gigahertz) in an RF system.

GPS/GNSS — Global satellite positioning technologies.

IP — Intellectual property.

LNA — Low noise amplifier.

Linear driver amplifier — An amplifier used before the final amplification stage that produces increased power levels while adding minimal distortion to the output signal.

mMIMO active antenna array — Massive multiple-input and multiple-output antenna systems that include beamforming ability.

MMIC — Monolithic microwave integrated circuit. An integrated circuit designed to utilize 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. This process choice is beneficial to reduce parasitic capacitance for a device.

Tape and reel — A method of packing surface mount devices by placing each device in an individual pocket on a carrier tape. Clear tape is applied to contain the device within the pocket. The carrier tape is wound on a reel, easing device handling and transportation.

Telematics — The convergence of telecommunications and information processing. The term is generally used for describing systems used in motor vehicles.

UWB — Ultra-wideband Radio technology using very low energy levels for short-range, high-bandwidth communications.

V2X — Vehicle-to-everything. Communication technology to allow vehicles to communicate with other vehicles, infrastructure, pedestrian devices, etc.

Wafer — Thin slice of semiconductor material used as the substrate for building electronic circuits. Wafers are the output from the semiconductor foundry process before the assembly/packaging processes.

WiFi — Wireless network protocol, based on the IEEE 802.11 family of standards.

Wireless backhaul point-to-point — A method used by communication providers to use wireless data links to connect radio towers or the core network.

Wireless infrastructure — Systems designed or used by network operators or other professionals to ensure strong communication links to consumers or customers.

PART I. FINANCIAL INFORMATION.

ITEM 1.

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 consolidated financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K filed with the SEC on March 3, 2023.  As disclosed in Note 1 in the Company's unaudited interim condensed consolidated financial statements included in the Company's Quarterly Report on Form 10-Q filed with the SEC for the period ending March 31, 2023,  the Company’s board of directors approved a reverse split of shares of the Company’s common stock on a six-for-one basis, which was effective as of 12:01 a.m. Eastern Time on April 17, 2023 (the “Effective Time”).  As a result of the reverse stock split, at the Effective Time, every six shares of issued and outstanding common stock were automatically converted into one share of common stock, but without any change in the par value per share.  No fractional shares were issued as a result of the reverse stock split.  Any fractional shares that would otherwise have resulted from the reverse stock split were rounded up to the next whole number.  The number of authorized shares of common stock remained unchanged at 300,000,000 shares.   Proportionate adjustments were made to the per share exercise price and the number of shares of common stock issuable upon the exercise of all outstanding stock options and warrants granted by the Company.  The number of shares of common stock deliverable vesting of restricted stock units were similarly adjusted.  Concurrently, the number of shares of common stock reserved for future issuance under the Company’s 2014 and 2021 Equity Incentive Plans immediately prior to the Effective Time were reduced proportionately.   All common stock and equity related share information included in the Company’s latest Annual Report on Form 10-K filed with the SEC on March 3, 2023 are pre-split.

GUERRILLA RF, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

GUERRILLA RF, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

GUERRILLA RF, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

GUERRILLA RF, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. ORGANIZATION AND NATURE OF BUSINESS

Guerrilla RF, Inc. (formerly known as Laffin Acquisition Corp., the “Company”) was incorporated in the State of Delaware on  November 9, 2020.  On  October 22, 2021, the Company's wholly-owned subsidiary, Guerrilla RF Acquisition Corp., a corporation formed in the State of Delaware on  October 20, 2021 (“Acquisition Sub”) and privately held Guerrilla RF Operating Corporation (formerly known as Guerrilla RF, Inc.) entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”).  Pursuant to the terms of the Merger Agreement, on  October 22, 2021 (the “Closing Date”), Acquisition Sub merged with and into Guerrilla RF Operating Corporation with Guerrilla RF Operating Corporation continuing as the surviving corporation and a wholly-owned subsidiary of the Company (the “Merger”).  Prior to the Merger, Laffin Acquisition Corp. was a “shell” company registered under the Securities Exchange Act of 1934, as amended (“the Exchange Act”), with no specific business plan or purpose until it began operating the business of Guerrilla RF Operating Corporation following the closing of the Merger.  On May 30, 2023, Guerrilla RF Operating Corporation was merged with and into the Company.

All references in these unaudited interim condensed consolidated financial statements and related Quarterly Report to “Guerrilla RF” refer to:  (i) for periods prior to May 30, 2023, Guerrilla RF Operating Corporation; and (ii) for subsequent periods, Guerrilla RF, Inc.  Unless otherwise stated or the context otherwise indicates, references to the “Company”, “we”, “our”, “us” or similar terms refer to Guerrilla RF, Inc.

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

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

Liquidity and Going Concern

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 through a combination of commercial loans and the proceeds of debt and equity issuances.  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)

The Company has incurred substantial negative cash flows from operations in nearly every fiscal period since inception, including a net loss of $4.5 million for the three months ended September 30, 2023.  As of September 30, 2023, the Company had an accumulated deficit of $39.4 million, a significant portion of which is attributable to the Company’s ongoing investment in research and development, investment in its facilities to support plans for business expansion and growth, and expenses associated with its sales and marketing efforts in support of new product offerings.  Management has recently introduced a series of cost-cutting measures, including voluntary salary reductions by the executive management team, which are expected to ultimately reduce annualized expenses between $3.0 million and $5.0 million over the next several quarters.  As a result, the Company expects to break even on an operating basis, i.e., excluding interest expense, and other non-operating and non-recurring expenses, by mid-2024 when revenues are projected to grow to a level that are in excess of operating expenses.  In the meantime and until the Company consistently realizes positive net income, it will continue to require additional funding.

The Company had a cash balance of $877 thousand at  September 30, 2023. 

In June 2022, the Company established a loan facility with Spectrum Commercial Services Company, L.L.C. ("Spectrum") providing for advances of up to $3.0 million (the "Spectrum Loan Facility" further described in Note 5).  As of September 30, 2023, the outstanding balance under the Spectrum Loan Facility was $1.0 million. 

In August 2022, the Company established a loan facility with Salem Investment Partners V, Limited Partnership ("Salem") providing for aggregate advances of up to $8.0 million (the "Salem Loan Facility", further described in Note 5).  As of June 30, 2023, Salem had advanced $6.5 million to the Company. On August 14, 2023, Salem advanced the remaining $1.5 million to the Company. On September 5, 2023, the Company entered into an amended and restated loan agreement with Salem (the “A&R Loan Agreement”) in order to provide for additional advances of up to $4.0 million (the “Additional Advances”).  The Additional Advances have an interest rate of 14.0% per annum, with payment of interest deferred until the April 30, 2024 maturity date, i.e., "paid-in-kind".  On September 6, 2023, the Company drew down $1.75 million of the Additional Advances. Accordingly, as of September 30, 2023, the undiscounted outstanding balance under the Salem Loan Facility was $9.75 million.  As discussed in Note 13, subsequent to September 30, 2023, the Company drew down an additional $1.25 million under the Salem Loan Facility, leaving up to $1.0 million available for future draws. 

In July 2023, the Company issued unsecured convertible promissory notes in the aggregate amount of $790,000.

As noted above, the Company will continue to require additional funding until it consistently realizes positive net income. Potentially, the Company could draw down additional funds under the Spectrum Loan Facility; however, its ability to do so is dependent upon the value of eligible accounts receivable assigned to Spectrum as security for advances under the Spectrum Loan Facility, which value fluctuates from time to time and is ultimately outside of the Company’s control. The Company may also draw down the remaining $1.0 million in Additional Advances under the Salem Loan Facility; however, Salem has discretion to withhold any further Additional Advances and there is no assurance that it will agree to provide access to the remaining $1.0 million under the Salem Loan Facility.

The Spectrum Loan Facility expires in June 2024, and automatically renews annually thereafter unless either party elects to terminate the facility upon not less than 60 days prior notice. The Company anticipates that the Spectrum Loan Facility will renew and be extended through June 2025, at a minimum. The Salem Loan Facility matures on April 30, 2024. The Company is currently exploring options for the renewal and extension of the Salem Loan Facility, as well as alternative financing and other strategic opportunities to support the Company's business.

The Company believes that its existing cash and cash equivalents, together with additional financing under the Salem Loan Facility, will provide sufficient resources to support operations through mid- February 2024, with additional funding being required in early 2024 to finance the Company until it consistently achieves positive net income. In the event the Company is unable to draw down the remaining $1.0 million under the Salem Loan Facility or secure alternative funding sources, it  may be unable to fund ongoing operations and pay its obligations as they become due before the end of fiscal 2023. Additionally, if the Company is unable to secure additional funding in early 2024, it may be unable to fund ongoing operations and pay its obligations as they become due before the end of February 2024. The Company must also make arrangements to renew or replace the Spectrum and Salem Loan Facilities before they mature. There is no assurance that appropriate additional funding (or in the case of the Spectrum and Salem Loan Facilities, the renewal of existing loan facilities) will be available on terms, which are acceptable to us, or at all.  This requirement for additional funding and the renewal of existing loan facilities raises substantial doubt about our ability 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 including the current macro-economic conditions impacting the banking and financial markets.

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the rules and regulations for reporting the Quarterly Report on Form 10-Q ("Form 10-Q"), and are presented in U.S. dollars.  Accordingly, they do not include all of the information and notes required by GAAP for annual consolidated financial statements.  Any reference in these Notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and as amended by ASUs of the FASB.  The accompanying unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Guerrilla RF Operating Corporation, which was merged with and into the Company on May 30, 2023.  All intercompany accounts and transactions have been eliminated in consolidation.

The condensed consolidated balance sheet at December 31, 2022 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements.  These financial statements have been prepared on a basis that is substantially consistent with the accounting principles applied in our Annual Report on Form 10-K for the fiscal year ended  December 31, 2022 ("2022 Form 10-K").  This report should be read in conjunction with our 2022 Form 10-K filed with the SEC on March 3, 2023.  In 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 September 30, 2023 and its results of operations, cash flows, and changes in stockholders' equity (deficit) for the three and nine months ended September 30, 2023 and 2022.  The results for the three and/or nine months ended September 30, 2023 are not necessarily indicative of the results expected for any future period or the full year.

Emerging Growth Company

The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended (the "Securities Act"), as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable.  The Company has elected not to opt out of the extended transition period, which means that when a standard is issued or revised and it has different application dates for public and private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard.  This may make comparison of the Company’s financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.

Use of Estimates

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

Reclassifications

Certain prior period income statement and balance sheets amounts have been reclassified to conform to the Company's fiscal 2023 presentation.  These reclassifications have no impact on the Company's previously reported net loss.

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 September 30, 2023, and December 31, 2022 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 inside 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 hadone major distributor customer, Richardson RFPD, Inc. ("RFPD").  RFPD, a large product distributor serving numerous end-user customers, accounted for 81% of product shipment revenue for the nine months ended September 30, 2023 and 2022.  Accounts receivable from RFPD represented 78% and 76% of accounts receivable at September 30, 2023 and December 31, 2022, respectively.

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 a provision to be added to its allowance for expected credit losses.  The allowance represents the Company’s best estimate of expected credit losses it may experience in the Company’s accounts receivable portfolio.  Management estimates the allowance for expected credit losses based on an ongoing review of existing economic conditions, the financial conditions of the customers, historical trends in credit losses, and the amount and age of past due accounts. The Company does not require collateral or other security for accounts receivable. To reduce credit risk with accounts receivable, the Company performs ongoing evaluations of its customers’ financial condition. The Company establishes an allowance for expected credit losses and other customer claims.  Historically, such losses have been immaterial and within management's expectations; therefore, the Company does not currently have an allowance for expected credit losses.

The Company had a factoring agreement that provided advance payments on up to 85% of invoices issued to RFPD, its largest distributor, with receivables less than 90 days outstanding secured by the remaining 15%.  The Company terminated this factoring agreement in the second quarter of 2022.

On  June 1, 2022, the Company established a new loan facility (the Spectrum Loan Facility) with Spectrum.  The Spectrum Loan Facility provides for advance payments up to $3 million, calculated, in part, based on the value of eligible accounts receivable assigned to Spectrum as security for advances under the Spectrum Loan Facility.  As of September 30, 2023, there were $1.0 million of advances outstanding under the Spectrum Loan Facility.  At September 30, 2023, $48.5 thousand of excess collateral was due from Spectrum, which is included in accounts receivable on the unaudited interim condensed consolidated balance sheets.  See Note 5 for additional discussion on the Spectrum Loan Facility.

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. Any shipping and handling fees charged to customers in conjunction with product distribution are reported within revenue. The Company does not have any significant financing components as payment is received at or shortly after the point of sale. The Company provides an assurance-type warranty to its customers as part of its contracts' standard terms and conditions, which does not include a right of return for properly functioning products not deemed obsolete. These warranties do not provide an additional distinct service to the customer and are not deemed a separate performance obligation. Royalty revenue is recognized at the later of when the subsequent sale or usage occurs, or the performance obligation to which some or all the sales-based royalties have been allocated are satisfied.

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of September 30, 2023 and 2022, the Company had $250 thousand and $0, respectively, of revenue from contracts with customers to be recognized over time as the services are delivered to the customer.  Certain nonrecurring engineering service revenues are recognized over time as the services are delivered to the customer.  During the quarter ended September 30, 2023, the Company recognized $0 of revenue that was deferred as of  December 31, 2022. As of September 30, 2023 and 2022, the Company did not have any contractual liabilities where performance obligations have not yet been satisfied. During the quarters ended September 30, 2023 and 2022, there was no revenue recognized from performance obligations satisfied (or partially satisfied) in previous periods.

The costs incurred by the Company for shipping and handling of materials used in its products are classified as cost of revenue in the unaudited interim condensed consolidated statements of operations. Any incidental items that are immaterial in the context of a sale to a customer are recognized as expense.

Share-Based Compensation

The Company measures and recognizes compensation expense for all stock options, shares of stock, and restricted stock units ("RSU") awarded to employees and nonemployees based on the estimated fair market value of the award on the grant date.  The Company uses the Black-Scholes option-pricing model to estimate the fair value of its stock option awards.  The Company estimates the fair value of RSUs awarded based upon the known fair market value of the underlying shares on the grant date.  The Company recognizes compensation expense on a straight-line basis over the applicable vesting period.  In addition, the Company accounts for forfeitures of awards as they occur.

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

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 non-employees are no longer required to be revalued at each reporting period.

Net Income (Loss) Per Share

Basic net loss per share of common stock is computed by dividing net loss by the weighted average number of shares of common stock outstanding during each period. Diluted net loss per share of common stock includes the effect, if any, from the potential exercise or conversion of securities, such as options and warrants, which would result in the issuance of incremental shares of common stock. For periods prior to the Merger mentioned in Note 1, each of Guerrilla RF’s shares of capital stock issued and outstanding immediately prior to the closing of the Merger was retrospectively converted into approximately 2.95 shares of the Company's common stock. 

As disclosed in Note 1, the Company’s board of directors approved a reverse split of shares of the Company’s common stock on a six-for-one basis, which was effective as of 12:01 a.m. Eastern Time on April 17, 2023 (the “Effective Time”).  As a result of the reverse stock split, at the Effective Time, every six shares of the issued and outstanding common stock were automatically converted into one share of common stock, but without any change in the par value per share.  No fractional shares were issued as a result of the reverse stock split.  Any fractional shares that would otherwise have resulted from the reverse stock split were rounded up to the next whole number.  The number of authorized shares of common stock remains unchanged at 300,000,000 shares.   Proportionate adjustments were made to the per share exercise price and the number of shares of common stock issuable upon the exercise of all outstanding stock options and warrants granted by the Company.  The number of shares of common stock deliverable upon vesting of restricted stock units were similarly adjusted.  Concurrently, the number of shares of common stock reserved for future issuance under the Company’s 2014 and 2021 Equity Incentive Plans immediately prior to the Effective Time were reduced proportionately.

In computing basic and diluted net loss per share, the weighted average number of shares is the same for both calculations because a net loss existed for the three and nine months ended September 30, 2023 and 2022.  There were 7,211,095 and 5,552,736 weighted average shares outstanding for the three months ended September 30, 2023 and 2022, respectively.  All warrants, options and unvested restricted stock units were excluded from the calculation of net loss per share for the periods presented.

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following potentially dilutive securities have been excluded from the computation of basic shares for the three months ended September 30, 2023 and 2022 (unaudited), as they would be anti-dilutive, and all share counts presented are on a post-split basis:

The table above excludes convertible notes that are contingently convertible upon future events that have not occurred.  See Note 5 – Debt – Convertible Notes for terms of conversion of the convertible notes. 

Convertible Debt Instruments

The Company evaluates agreements, including any convertible debt instruments to determine if those agreements or any embedded components of those agreements qualify as derivative financial instruments to be separately accounted for in accordance with FASB ASC Topic 815 “Derivatives and Hedging” (“ASC 815”).  The accounting treatment of derivative financial instruments requires that the Company record any bifurcated embedded features at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded in earnings as non-operating, non-cash income or expense. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the agreement is reclassified as of the date of the event that caused the reclassification. Bifurcated embedded features are recorded at their initial fair values which create additional debt discount to the host instrument.  The Company amortizes the respective debt discount over the term of the notes, using the effective interest method.

Fair Value of Financial Instruments 

The Company measures the fair value of financial assets and liabilities based on ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:

Level 1 — quoted prices in active markets for identical assets or liabilities;

Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable; and

Level 3 — inputs that are unobservable (for example, cash flow modeling inputs based on assumptions).

The carrying amounts of the Company’s financial instruments, such as cash and accounts payable approximate fair values due to the short-term nature of these instruments.

See Note 8 – Derivative Liabilities for additional details regarding the valuation technique and assumptions used in valuing Level 3 inputs.

Recent Accounting Pronouncements

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 adopted ASU 2016-13 effective January 1, 2023.  Its adoption did not have a material impact on the Company’s unaudited interim condensed consolidated financial statements.

In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to the recognition of an acquired contract liability and to payment terms and their effect on subsequent revenue recognized by the acquirer.  The amendments in ASU 2021-08 require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606.  At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. The amendments in ASU 2021-08 will become effective for us as of the beginning of our 2024 fiscal year. Early adoption is permitted, including adoption in any interim period.  We do not expect that this guidance will have a material impact upon our financial position and results of operations.

In September 2022, the FASB issued ASU No. 2022-04, Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations.  This guidance requires annual and interim disclosures for entities that use supplier finance programs in connection with the purchase of goods and services.  These amendments are effective for fiscal years beginning after December 15, 2022, except for the amendment on roll-forward information, which is effective for fiscal years beginning after December 15, 2023.  The Company adopted this accounting guidance effective January 1, 2023.  It did not have a material impact on its unaudited interim condensed consolidated financial statements.

The Company has reviewed all other recently issued accounting pronouncements and concluded they were either not applicable or not expected to have a material impact on its unaudited interim condensed consolidated financial statements.

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

3. INVENTORIES

Inventories are summarized as follows:

As of September 30, 2023 and December 31, 2022, there was no inventory allowance of potential scrap and obsolete inventory.

4. PROPERTY AND EQUIPMENT

Property and equipment is summarized as follows:

Depreciation and amortization expense was $1,244,394 and $900,637 for the nine months ended September 30, 2023 and 2022, respectively.

Impairment of Long-Lived Assets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount  may not be recoverable.  The Company conducts its long-lived asset impairment analyses in accordance with ASC 360-10, Property, Plant, and Equipment.  ASC 360-10 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows.  If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.

In fiscal 2022, the Company concluded the undiscounted future cash flows associated with certain of its long-lived assets, specifically mask sets used in the production of a small subset of Company products and information technology equipment, indicated the carrying amount of those items was not recoverable.  As a result, the Company reviewed the long-lived assets for impairment and recorded $20 thousand of total impairment charges in the second half of fiscal 2022, which was included in general and administrative expenses on the consolidated statement of operations for the year ending  December 31, 2022.  The impairment was measured under an income approach utilizing forecasted discounted cash flows to determine fair values of the impairment assets.  The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, Fair Value Measurement.

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5. DEBT

Spectrum Loan Facility

Under the terms of the AR Agreement, Spectrum has agreed to advance funds equal to approximately 85% of eligible accounts receivable that are collected by Spectrum under a “lock box” arrangement.  The maximum amount that  may be advanced under the AR Agreement is $3,000,000 less any amounts loaned under the Credit Agreement.

The scheduled term of the Spectrum Loan Facility is 24 months from the Spectrum Effective Date, unless earlier terminated as per the terms of the Spectrum Loan Facility.  The term of the facility will automatically renew unless either party provides at least 60 days’ notice prior to the scheduled expiration date.  In the event of an early termination of the AR Agreement by the Company or resulting from the Company’s default or other circumstances impacting the Company (including bankruptcy, reorganization, sale of assets, and cessation of business), the Company will be required to pay a prepayment fee.

The Company’s obligations under the Spectrum Loan Facility are secured by first-priority liens on essentially all of the Company’s assets; provided, however, that the Company is permitted to grant purchase money security interests on certain equipment, furniture and similar tangible assets financed by a third party.

In addition to annual facility fees of $30,000 and other quarterly and transaction fees payable to Spectrum, interest accrues on amounts owed under the Spectrum Loan Facility at the prime rate as quoted by the Wall Street Journal plus 3.5%, but in no event lower than 7.0%.

The Spectrum Loan Facility contains various covenants and restrictions on the Company's financial and business operations including restrictions on the purchase or redemption of any Company shares and the declaration or payment of any dividends on the Company's stock.  As of September 30, 2023, the Company was in compliance with these covenants and restrictions.

The Company has borrowed $1.0 million under the Spectrum Loan Facility as of September 30, 2023.  The Company includes the interest expense of the Spectrum Loan Facility as part of its interest expense on its unaudited interim condensed consolidated statements of operations, and the total amount of $1.0 million borrowed under the Spectrum Loan Facility is classified as short-term debt on the unaudited condensed consolidated balance sheets.

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Salem Loan Facility

On  August 11, 2022 (the “Salem Effective Date”), the Company entered into the Salem Loan Facility with Salem. The Salem Loan Facility provided financing to the Company in the aggregate amount of up to $8.0 million, with an initial advance of $5.0 million.  In addition to a 2.0% closing fee, the Company issued Salem 25,000 shares (post split) of common stock as consideration for the Salem Loan Facility.  The Company agreed to issue up to an additional 25,000 shares (post split) of common stock in the event Salem advanced the additional $3.0 million.  

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Debt Maturity

As of September 30, 2023, debt (as discounted) is expected to mature as follows:

6. COMMON STOCK AND PREFERRED STOCK

Common Stock

The Company is authorized to issue 300,000,000 shares of common stock with a par value of $ 0.0001.  Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Subject to preferences that  may apply to any outstanding preferred stock, holders of common stock are entitled to receive ratably any dividends that the Company’s Board of Directors  may declare out of funds legally available for that purpose on a non-cumulative basis. No dividends had been declared through September 30, 2023.

On  December 30, 2022, the Company completed the initial closing of a private placement (the “Offering”) as it entered into a Unit Purchase Agreement (the “Unit Purchase Agreement”) with investors (the “Purchasers”) pursuant to which the Company sold 647,057 units (the “Units”), on a post-split basis, each Unit consisting of one share of the Company’s common stock and one warrant to purchase one-half of a share of common stock (the “Warrant”).  The purchase price of each Unit was $7.80 per Unit, on a post-split basis, resulting in gross proceeds at this initial closing of approximately $5.0 million before the deduction of estimated Offering expenses of approximately $700,200.  Pursuant to the terms of the Offering, the Company continued to accept subscriptions for Units and had additional closings through  February 28, 2023.  Altogether, the Company sold 1,183,192 Units, on a post-split basis, resulting in gross proceeds of approximately $9.2 million before the deduction of estimated Offering expenses of approximately $1.2 million.

Each full Warrant has an exercise price of $12.00 per whole share of common stock, on a post-split basis, subject to adjustment, and is exercisable for a period of five years beginning six (6) months from the date of the final closing of the Offering. 

In connection with the Offering, the Company also entered into a registration rights agreement (the “Registration Rights Agreement”) with the Purchasers, pursuant to which the Company was required to prepare and file a registration statement with the SEC covering the resale of (i) the shares of common stock issued to the Purchasers in the Offering, and (ii) the shares of common stock issuable upon exercise of the Warrants (the “Warrant Shares”) within 30 days following the final closing of the Offering.  The Company filed the registration statement with the SEC on March 30, 2023, and it was declared effective on April 13, 2023.

Laidlaw & Company (UK), Ltd. served as the exclusive placement agent and GP Nurmenkari, Inc. served as a selected dealer for the Offering (collectively, the “Placement Agents”).  In addition to an aggregate cash fee of approximately $931 thousand representing 10% of the gross proceeds from the Offering, the Placement Agents received warrants (the “Placement Agent Warrants”) to purchase 177,490 shares of Common Stock (the “Placement Agent Warrant Shares”), on a post-split basis.  The Placement Agent Warrants are exercisable for a period of five years and have an exercise price of $7.80 per share.

The aforementioned Units and Warrants were offered and sold by the Company pursuant to an exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.

See Note 5 – Debt – Salem Loan Facility for details regarding common stock issued in connection with debt.

Reverse Stock Split

As disclosed in the Quarterly Report on Form 10-Q for the period ended  March 31, 2023, the Company’s board of directors approved a reverse split of shares of the Company’s common stock on a six-for-one basis, which was effective as of 12:01 a.m. Eastern Time on April 17, 2023 (the “Effective Time”).  As a result of the reverse stock split, at the Effective Time, every six shares of the issued and outstanding common stock were automatically converted into one share of common stock, but without any change in the par value per share.  No fractional shares were issued as a result of the reverse stock split.  Any fractional shares that would otherwise have resulted from the reverse stock split were rounded up to the next whole number.  The number of authorized shares of common stock remains unchanged at 300,000,000 shares.   Proportionate adjustments were made to the per share exercise price and the number of shares of common stock issuable upon the exercise of all outstanding stock options and warrants granted by the Company.  The number of shares of common stock deliverable upon vesting of restricted stock units were similarly adjusted.  Concurrently, the number of shares of common stock reserved for future issuance under the Company’s 2014 and 2021 Equity Incentive Plans immediately prior to the Effective Time were reduced proportionately.

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Common Stock Warrants

As mentioned above, on February 28, 2023, the Company completed the Offering.  Each Unit sold in the Offering included one warrant to purchase one-half of a share of common stock.  Thus, Units sold in the Offering included warrants to purchase 769,146 shares, on a post-split basis, which warrants were issued upon the final closing of the Offering.  The 769,146 Warrant Shares comprise 591,656 Purchaser Warrant Shares and 177,490 Placement Agent Warrant Shares, each exercisable for a period of five years beginning six months following the final closing of the Offering.  As of September 30, 2023, the total amount of outstanding common stock warrants is 824,340, on a post-split basis.  

Preferred Stock

The Company’s Board of Directors is authorized, subject to limitations prescribed by Delaware law, to issue preferred stock in one or more series, to establish from time to time the number of shares to be included in each series, and to fix the designation, powers, preferences, and rights of the shares of each series.

Prior to the Merger, Guerrilla RF had utilized convertible preferred share issuances, convertible debt issuances, and convertible warrants from private investors to fund its business operations and growth. No dividend was payable on shares of Guerrilla RF common stock or its classes of preferred stock.  At the closing of the Merger, all Guerrilla RF preferred stock was converted into shares of the Company's common stock.  There is no issued or outstanding preferred stock as of September 30, 2023 or December 31, 2022.

7. SHARE-BASED COMPENSATION

In 2014, the Company adopted the Long‐Term Stock Incentive Plan (the “2014 Plan”), with 94,667 shares of common stock authorized for issuance under the 2014 Plan, on a post-split basis.  Subsequently, stockholders approved an increase in the number of shares available under the 2014 Plan to 210,000 shares, on a post-split basis.  Exercise prices range from $4.20 to $9.42 per share, depending on the date of the award, on a post-split basis.  No further awards  may be made under the 2014 Plan.

In 2021, the Board adopted the Equity Incentive Plan (the “2021 Plan”), which authorizes the award of stock options, restricted stock awards, stock appreciation rights, RSUs, performance awards, cash awards, and stock bonus awards.  The Company initially reserved 37,166 shares of common stock, on a post-split basis, plus any reserved shares not issued or subject to outstanding grants under the 2014 Plan on the effective date of the 2021 Plan, for issuance pursuant to awards granted under the 2021 Plan.  The number of shares reserved for issuance under the 2021 Plan will increase automatically on  January 1 each year until 2031 by the number of shares equal to the lesser of 5% of the total number of outstanding shares of our common stock as of the immediately preceding   December 31, or a number as   may be determined by our Board.

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

Stock 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 September 30, 2023 was determined using the methods and assumptions discussed below:

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the three and nine month periods ended September 30, 2023 and 2022, 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:

No stock options were granted in the three months ended September 30, 2023.  The weighted average grant date fair value of stock options granted during the three months ended September 30, 2022 was $8.40, calculated on a post-split basis.

The value of stock options is recognized as compensation expense using the straight-line method over the vesting period.  Unrecognized compensation costs related to unvested options at September 30, 2023, and 2022 amounted to$395,753 and $538,812 respectively, which are expected to be recognized over an average of three years.

Stock option activity by share is summarized as follows for the three and nine months ended September 30, 2023 (unaudited) on a post-split basis:

No options were exercised during the three and nine months ended September 30, 2023.  The aggregate intrinsic value of outstanding options exercisable as of September 30, 2023was $0.6 million.  As of September 30, 2023, stock-based compensation of $0.4 million for unvested options will be recognized over a remaining weighted-average requisite service period of 2.3 years.

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

RSU Awards

In the three months ended September 30, 2023, the Compensation Committee of the Board granted 273,750 RSUs (post-split) to various employees pursuant to the 2021 Plan.  No RSU awards have been made under the 2014 Plan.  The RSU awards made to non-employees in the year ended December 31, 2022 (25,000, post-split, net of cancellations/forfeitures) vested 100% on the earliest of (i) June 2, 2023, subject to the recipient's continued service to the Company, (ii) the recipient's death, or (iii) the recipient's disability. The RSUs awarded to employees during the year ended December 31, 2022 (120,637, post-split, net of cancellations/forfeitures) vest over three equal annual installments from the date of the grant.  The RSUs awarded are subject to the recipient’s continued service through the applicable vesting date and the shares not vested are forfeited upon separation from or discontinuation of services to the Company.  The share-based compensation expense to be recognized for these RSUs over the remaining vesting period subsequent to September 30, 2023 is approximately $2.2 million.

The RSU grants during the three months ended September 30, 2023 (unaudited) were issued from the 2021 Plan.  The fair value of each RSU was estimated on the date of grant, based on the weighted average price of the Company's stock.  The Company will issue new shares of common stock to satisfy RSUs upon vesting.  The following table summarizes the RSU activity and weighted averages for share-based awards granted under the terms of the 2021 Plan on a post-split basis (unaudited):

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 thenine months ended September 30, 2023 and 2022:

No income tax benefits have been recognized in the unaudited interim condensed consolidated statements of operations for stock-based compensation arrangements, and no stock-based compensation costs have been capitalized as property and equipment through September 30, 2023.

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

8. DERIVATIVE LIABILITIES 

As of September 30, 2023, the Company had Level 3 derivative liabilities that were measured at fair value at issuance, related to the put options of the Convertible Notes.  See Note 5 – Debt – Convertible Notes for additional details.  The put options were valued using a discounted cash flow valuation technique.

The following table sets forth a summary of the changes in the fair value of Level 3 derivative liabilities that are measured at fair value on a recurring basis:

There are derivative liabilities of $63,200 as of September 30, 2023. For the derivative liabilities valuation, as of the issuance dates of the Convertible Notes between July 12, 2023 and July 21, 2023, the significant unobservable inputs used in the discounted cash flow were a discount rate between 8% to 16% and the probability of a change of control occurring of 10%. For the derivative liabilities valuation, as of September 30, 2023, the significant unobservable inputs used in the discounted cash flow were a discount rate between 8% to 16% and the probability of a change of control occurring of 40%.

9. COMMITMENTS AND CONTINGENCIES

Lease Commitments

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:

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

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Other supplemental information related to leases is summarized as follows:

The Company leases its former headquarters, located in Greensboro, North Carolina under a lease agreement which expires in June 2024.  The lease agreement allows for early cancellation, subject to payment of an early cancellation penalty.  Under the lease agreement, the Company is responsible for certain insurance and maintenance expenses.  In addition, the lease agreement contains scheduled rent increases.  The related rent expense for the lease is calculated on a straight-line basis according to the rental terms of the lease.  In July 2023, the Company entered into a sub-lease for 4,800 square feet of its former headquarters at a monthly rent of $5,540, which is the same monthly rental due under the lease on a per square foot basis.  As a result of this sub-lease, the Company recorded a $95 thousand impairment charge, which is included in general and administrative expenses on the unaudited interim condensed consolidated statement of operations for the quarter ended September 30, 2023.

New Headquarters and Design Center

In  July 2021, the Company entered into a lease agreement for its new headquarters and design center (also in Greensboro, North Carolina), with a lease term of ten years and two months from the date the Company commences occupancy, which occurred in the first quarter of 2023.  Under the lease agreement, the Company is responsible for certain insurance and maintenance expenses, which are not part of the minimum lease payments.  In addition, the lease agreement contains scheduled rent increases.  Upon taking control of the building, the related rent expense for the lease is calculated on a straight-line basis according to the lease's rental terms.  The Company commenced remitting scheduled lease payments in the second quarter of 2023.  The Company anticipates an annual lease expense of approximately $1.5 million over the term of the lease.  Lease expense recognition commenced in the first quarter of 2023.  The initial lease payment was made in the second quarter of 2023.

In conjunction with the Company's move into the new headquarters and design center in early 2023, the Company entered into a financing lease arrangement related to furniture for the new office facilities in  April 2022.  The total cost of the furniture financed was$1.1 million, which included tax, freight, interim storage, and installation labor.  The Company was responsible for paying interest-only payments to the financing company related to the furniture procurement order (interest on principal of $496 thousand) placed in April 2022 prior to the first scheduled principal financing payment, which occurred in August 2022 ($246 thousand).  The Company made interest-only payments to the financing company related to the furniture procurement order through August 2022 in the amount of $17 thousand.  The total scheduled principal and interest payments to be made after September 30, 2023 related to the furniture financing are $443 thousand.

As disclosed in Note 5, the Company entered into a lease agreement in July 2021 in conjunction with the Company's move into its new headquarters and design center in early 2023.  The total cost of the new building asset additions were $7.7 million, with the Company being responsible for the balance in excess of the landlord's $3.5 million allowance (the "excess construction costs") plus deferral fees and interest.

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company recorded advanced rent amounts paid and payable to the landlord as long-term prepaid expenses and other on the consolidated balance sheet as of  December 31, 2022.  These amounts were reclassified to the operating lease right-of-use asset upon lease commencement in the first quarter of 2023.  

Legal

In the ordinary course of business, the Company may become involved in legal disputes.  In the opinion of management, any potential liabilities resulting from any disputes would not have a material adverse effect on the Company’s unaudited interim condensed consolidated financial statements.  As a result, no liability related to any such disputes has been recorded at September 30, 2023, or December 31, 2022.

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, no liability for these agreements has been recorded at September 30, 2023, or December 31, 2022.

Employment Agreement

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

Salary Deferral Program

The Company introduced a voluntary salary deferral program in order to facilitate increased employee ownership in the Company, whereby all employees were offered the opportunity to defer a portion of their salaries, in anticipation of some or all of the deferred payments being invested in a future capital raise.  Beginning June 28, 2023, Ryan Pratt, CEO and Chairman of the Company, Mark Mason, the Company’s Chief Operating Officer, John Berg, the Company’s Chief Financial Officer, and Kellie Chong, Chief Business Officer, elected to defer approximately 68%, 68%, 52%, and 25%, respectively, of their salaries as participants in the program along with a number of other employees.  The Company subsequently terminated this program and effective September 4, 2023, the Company’s entire executive management team, including Ryan Pratt, CEO and Chairman of the Company, John Berg, the Company’s Chief Financial Officer, Mark Mason, the Company’s Chief Operating Officer, and Kellie Chong, the Company’s Chief Business Officer, voluntarily reduced their salaries by 20% as part of a plan by the Company to reduce expenses.

10. INCOME TAXES

The Company did not have any income tax expense for the three months ended September 30, 2023 or 2022.

Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items recorded in the interim period.  The provision for income taxes for the three months ended September 30, 2023 and 2022 differs from the amount that would be provided by applying the statutory U.S. federal income tax rate of 21% to pre-tax income primarily due to a valuation allowance.

The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year and permanent differences.  The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is obtained, additional information becomes known, or the tax environment changes.

In assessing the need for a valuation allowance, management must determine that there will be sufficient taxable income to realize deferred tax assets.  Based upon the historical and anticipated future losses, management has determined that the deferred tax assets do not meet the more likely than not threshold for realizability.  Accordingly, a full valuation allowance has been recorded against the Company’s net deferred tax assets as of September 30, 2023, and December 31, 2022.

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On August 9, 2022, the U.S. government enacted the U.S. CHIPS and Science Act (“CHIPS Act”).  The CHIPS Act creates a 25% investment tax credit for certain investments in domestic semiconductor manufacturing.  The credit is provided for qualifying property, which is placed in service after December 31, 2022, and any impact to the Company would start in fiscal 2023.  On August 16, 2022, the U.S. government enacted the Inflation Reduction Act.  The Inflation Reduction Act introduces a new 15% corporate minimum tax, based on adjusted financial statement income of certain large corporations.  Applicable corporations would be allowed to claim a credit for the minimum tax paid against regular tax in future years.  The Inflation Reduction Act also includes an excise tax that would impose a 1% surcharge on stock repurchases.  This excise tax is effective January 1, 2023.  The Company is currently evaluating the effect the CHIPS Act and the Inflation Reduction Act will have on its condensed consolidated financial statements.  At present, the Company does not expect that any of the provisions included in the two aforementioned pieces of legislation will result in a material impact to the Company’s deferred tax assets, liabilities, or income taxes payable.

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

Potential 382 Limitation

The Company’s ability to utilize its net operating loss ("NOL") and research and development ("R&D") credit carryforwards   may be substantially limited due to ownership changes that could occur in the future, as required by Section 382 of the U.S. Internal Revenue Code of 1986, as amended (the "Code"), as well as similar State provisions.  These ownership changes  may limit the amount of NOL and R&D credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively.  In general, an “ownership change,” as defined by Section 382 of the Code, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percent of a company's outstanding stock by certain stockholders or public groups.

If the Company experiences an ownership change, utilization of the NOL or R&D credit carryforwards would be subject to an annual limitation, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments, as required.  The Section 382 limitation is a limitation on the amount of a new loss corporation’s post-change year taxable income that can be offset by the old loss corporation’s pre-change NOLs.  Any such limitation  may result in the expiration of a portion of the Company's NOL or R&D credit carryforwards before utilization.  Any carryforwards that expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the Company's deferred tax valuation allowance.

In the third quarter of 2022, the Company's tax advisors completed a study to assess whether one or more ownership changes have occurred since the Company became a loss corporation under the definition of Section 382.  At that time, it was determined that the Company has not experienced any "ownership changes" since 2014.  If an "ownership change" were to occur, such change  may result in the expiration of a portion of the Company's NOL or R&D credit carryforwards before utilization.  As a result of the Section 382 study, no amounts are being considered as an uncertain tax position or disclosed as an unrecognized tax benefit under ASC-740.  The Company has a full deferred tax valuation allowance as of September 30, 2023.

At  December 31, 2022, the Company had federal NOL and R&D credit carryforwards of approximately $19,022,927 and $626,347, respectively, which are available to offset future taxable income subject to any future "ownership change."

11. Related Party Transactions

See Note 5 – Debt – Convertible Notes for details regarding convertible notes issued to related parties during the nine months ended September 30, 2023.

GUERRILLA RF, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

12. 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 Code.  The Company’s contributions to the plan are at the discretion of executive management with board of directors advisement.  Under the 401(k) plan, the Company may contribute up to four percent (4%) of eligible employee salaries.  The Company made $87,205 and $93,728 of contributions to the plan in the three months ended September 30, 2023 and 2022, respectively.

13. Subsequent Events

Management has evaluated subsequent events occurring after September 30, 2023, through November 13, 2023, the date the unaudited interim condensed consolidated financial statements were issued, and concluded the following subsequent events have occurred during that period but were not recognized in the unaudited interim condensed financial statements.  Except as described below, the Company has concluded that no subsequent event has occurred that requires disclosure.

Additional Borrowings Under Salem Loan Facility

On October 27, 2023, the Company drew down an additional $1.25 million under the Salem Loan Facility. 

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, 2022 as filed with the SEC on March 3, 2023.

These and other risks and uncertainties, which are described in more detail in our most recent Annual Report on Form 10-K that we filed with the SEC and those listed under the caption "Risk Factors" within this Quarterly Report on Form 10-Q, could cause actual results and developments to be materially different from those expressed or implied by any of these forward-looking statements.  Moreover, we operate in a very competitive and rapidly changing environment.  New risks emerge from time to time.  It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make.

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. We undertake no obligation to update any of these forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q or to conform these statements to actual results or revised expectations, except as required by law.

You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q as exhibits with the understanding that our actual future results, performance, and events and circumstances may be materially different from what we expect.

Overview

Prior to the Merger, Laffin Acquisition Corp. was a “shell” company registered under the Exchange Act, with no specific business plan or purpose until it began operating the business of Guerrilla RF following the closing of the Merger.  All references in these unaudited interim condensed consolidated financial statements and related Quarterly Report to “Guerrilla RF” refer to: (i) for periods prior to May 30, 2023, Guerrilla RF Operating Corporation; and (ii) for subsequent periods, Guerrilla RF, Inc.  Unless otherwise stated or the context otherwise indicates, references to the “Company”, “we”, “our”, “us” or similar terms refer to Guerrilla RF, Inc.

Our common stock is currently quoted on the OTCQX, under the symbol “GUER.” 

As disclosed in Note 1, the Company’s board of directors approved a reverse split of shares of the Company’s common stock on a six-for-one basis, which was effective as of 12:01 a.m. Eastern Time on April 17, 2023 (the “Effective Time”).  As a result of the reverse stock split, at the Effective Time, every six (6) shares of the issued and outstanding common stock were automatically converted into one (1) share of common stock, but without any change in the par value per share.  No fractional shares were issued as a result of the reverse stock split.  Any fractional shares that would otherwise have resulted from the reverse stock split were rounded up to the next whole number.  The number of authorized shares of common stock under the Company's Delaware Certificate of Incorporation remained unchanged at 300,000,000 shares.   Proportionate adjustments were made to the per share exercise price and the number of shares of common stock issuable upon the exercise of all outstanding stock options and warrants granted by the Company.  The number of shares of common stock deliverable upon settlement or vesting of restricted stock units were similarly adjusted.  Concurrently, the number of shares of common stock reserved for future issuance under the Company’s 2014 and 2021 Equity Incentive Plans immediately prior to the Effective Time were reduced proportionately.

Our principal executive offices are located at 2000 Pisgah Church Road, Greensboro, North Carolina 27455.  Our telephone number is (336) 510-7840.  Our website address is www.guerrilla-rf.com.  Information contained on, or that can be accessed through, our website is not a part of this Quarterly Report.  All trademarks, service marks, and trade names appearing in this Quarterly Report are the property of their respective holders.  Use or display by us of other parties’ trademarks, trade dress, or products is not intended to, and does not, imply a relationship with, or endorsements or sponsorship of, us by the trademark or trade dress owners.

Over the past several years, Guerrilla RF has become a leader in developing high-performance MMIC products for wireless connectivity.  It continues to target underserved markets and customers, delivering a range of high-performance MMIC products and associated technical support to a diverse set of customers that enable a more connected world.

Guerrilla RF possesses in-house design, applications, sales, and customer support functions as a fabless semiconductor company.  It outsources the manufacture and production of its 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 its primary assembly and test suppliers are located in Malaysia and the Philippines.  We have produced and distributed in excess of 150 million products in our portfolio of products to over 500 end customers worldwide.

THIRD QUARTER FISCAL 2023 FINANCIAL HIGHLIGHTS

● Revenue for the third quarter of fiscal 2023 increased 51.6% as compared to the third quarter of fiscal 2022, primarily due to higher demand for our automotive products, for which revenue increased 145% compared to the prior year period.  In the third quarter of 2023, the Company experienced a significant increase in automotive based sales, as compared to the third quarter of 2022 which suffered from poor supply chain conditions, and the addition of important customers in the space expanding Guerrilla RF’s reach in the automotive market.  In the third quarter of 2023, new customer sales as well as existing customer sales both contributed to the increased demand for our products with new customer sales up 500+% from a very low base in the third quarter of 2022 of less than $0.1 million and existing customer sales up 42%.

● Gross profit for the third quarter of fiscal 2023 was 55.7% of revenues as compared to 57.2% for the third quarter of fiscal 2022.  The Company's contribution margin decreased to 71.5% in the third quarter 2023, from 74.1% in the third quarter 2022, as product mix and a shift to higher automotive sales relative to all sales impacted overall contribution margins.  Over these same periods, overhead spending increased slightly in dollar terms of $0.1 million, but as a percentage of sales it decreased from 20.2% in the third quarter of 2022 to 15.7% in the third quarter of 2023.  Quarter-over-quarter gross profit margin decreased to 55.7% in the third quarter of 2023 from 59.0% in the second quarter of 2023 driven by lower overall contribution margins.

● Operating loss was $3.7 million for the third quarter of 2023, as compared to $3.3 million for the third quarter of 2022. This increase was primarily due to higher operating expenses primarily driven by increased R&D investments. Relative to sales, operating expenses decreased as a percentage (166% in the third quarter of 2023 vs. 208% in the third quarter of 2022).  Operating expenses increased $1.0M from $4.6 million for the three months ended September 30, 2022, to $5.6 million for the three months ended September 30, 2023.  R&D costs rose 32% when compared to the prior year period.  Sales and marketing increased 21% from $1.2 million to $1.45 million while administrative costs remained relatively flat at $1.4 million.

● Net loss per share was $0.62 and $0.66 for the third quarter of fiscal 2023 and 2022, respectively.

Key Metrics (Non-GAAP Measures)

These non-GAAP measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of Company results as reported under GAAP.  The Company compensates for such limitations by relying primarily on GAAP results and using non-GAAP measures only as supplemental data.  In addition, because these non-GAAP measures are not measures of financial performance under GAAP and are susceptible to varying calculations, these measures, as defined by us, may differ from and may not be comparable to similarly titled measures used by other companies.

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

Number of products released:  The total number 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 our inception through the end of the period.

Number of products with lifetime revenue exceeding $100 thousand:  The number of products that have achieved the threshold of cumulative sales of $100,000 since our inception through the end of the period.

Product backlog:  The amount of product sales that have been committed to by customers, but have not yet been completed, shipped, or invoiced.  The Company's product backlog can be materially impacted by supply chain constraints, a shift in customer ordering patterns whereby customers place orders in anticipation of extended product delivery lead times, or other customer order delivery request modifications.  Furthermore, because the Company partners closely with a number of its customers to produce high-performance, quality components that are often designed into customers’ end products, immediate substitution of the Company’s products is neither typically desired by customers nor necessarily feasible.  As such, the Company has not historically experienced significant order cancellations, and the Company does not expect significant order cancellations in the future.  The Company closely monitors product backlog and its potential impact on the Company’s financial performance.

Components of Results of Operations

Revenues

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

Direct Product Costs and Gross Profit

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

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

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

Operating Expenses

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

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.  As we expand our sales and marketing efforts, we expect our sales and marketing expenses will increase in absolute dollars.

Non-income taxes include excise taxes, sales and use taxes, capital stock and franchise taxes, and property taxes.  Capital stock and franchise taxes are taxes that states charge the Company for the privilege of incorporating or doing business in a state.

Interest Expense

Interest expense consists primarily of the interest incurred on our debt obligations, our factoring arrangement expense, the non-cash interest expense associated with the amortization of common shares issued to certain of our debtholders, and lease expense related to our capital leases.

Results of Operations

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

Comparison of the three months ended September 30, 2023 and 2022 (unaudited):

Revenues increased $1.1 million to $3.4 million for the three months ended September 30, 2023, as compared to $2.2 million for the three months ended September 30, 2022.  The increase in revenues was attributable to a $1.0 million increase in automotive product shipments to major automotive suppliers as well as to automotive OEM’s.  Automotive markets are benefiting from improved supply chain conditions, which had negatively impacted volumes since early 2022.  The Company has also enjoyed increased volumes due to the addition of new customers as the Company has won slots and increased its share of business in automotive in-cabin Wi-Fi, amplification of signal, GPS, and satellite radio antennae applications.  Revenues were also impacted by an increase of $0.2 million in our repeaters/digital step attenuators products which we attribute to the sales of a new product category to a key automotive supplier.  Revenues from white label royalty programs continued to decline, with revenues decreasing from $0.2 million for the three months ended September 30, 2022 to $11 thousand for the three months ended September 30, 2023.

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 September 30, 2023, and September 30, 2022.  RFPD, a large product distributor serving numerous end-user customers, generated 79% and 81% of product shipment revenue for the three months ended September 30, 2023 and 2022, respectively.

Nonproduct (royalty and non-recurring engineering ("NRE")) revenues were down $0.2 million for the three months ended September 30, 2023, compared to September 30, 2022, at $11 thousand compared to September 30, 2022 at $0.2 million.  New product sales increased significantly for the three months ended September 30, 2023 at $0.8 million versus $0.2 million for the three months ended September 30, 2022, driven by our automotive and repeaters/DAS products.  Our existing product sales increased from $1.9 million for the three months ended September 30, 2022 to $2.6 million for the three months ended September 30, 2023, as a result of a rebound in automotive product demand due to the normalization of the supply chain.  We also continue to grow our business through the acquisition of new customers. 

International shipments remained flat at $0.4 million (approximately 13% of Q3 223 sales) for the three months ended September 30, 2023 and 2022.

Direct Product Costs and Gross Profit

Direct product costs increased $0.5 million to $1.5 million for the three months ended September 30, 2023, compared to $1.0 million for the three months ended September 30, 2022.  The 57% increase in direct product cost was driven by a sales volume increase of 66%.  This increase was further built upon at the gross profit line (48% increase) due to better absorption of fixed overhead costs (including quality department staffing, facilities costs, and equipment costs).  Gross profit as a percentage of sales decreased from 57.2% for the third quarter of 2022, to 55.7% for third quarter of 2023 driven by lower contribution margins from product mix shifts.

Research and Development Expenses

Research and development expenses increased almost $0.7 million to $2.8 million for the three months ended September 30, 2023, compared to $2.1 million for the three months ended September 30, 2022.  The increase was attributable to increases of $0.6 million in facilities, information technology support and lab expenses, and $0.1 million of staffing additions in our engineering department.

Sales and Marketing Expenses

Sales and marketing expenses increased $0.25 million to $1.45 million for the three months ended September 30, 2023, compared to $1.2 million for the three months ended September 30, 2022.  The increase year over year was driven by increases of $0.1 million in staffing costs, and $0.15 million in various sales and marketing related facilities and information technology support as we continue to invest in our sales and marketing efforts to drive sales growth.

General and Administrative Expenses

General and administrative expenses increased $0.1 million to $1.4 million for the three months ended September 30, 2023, compared to $1.3 million for the three months ended September 30, 2022.  The increase was primarily related to an increase of $0.1 million in share-based compensation.

Other Income (Expenses)

Interest expense increased approximately $0.4 million to $0.7 million for the three months ended September 30, 2023, compared to $0.3 million for the three months ended September 30, 2022.  The increase was attributable to two debt facilities the Company originally entered into during fiscal 2022, one of which was extended in the third quarter of 2023.  The first is an asset-based loan with a total available draw of up to $3 million secured by inventory and accounts receivables, established in June 2022.  The second is a $12 million commercial line of credit of which the Company has drawn $9.75 million as of September 30, 2023, which line was initially established in the third quarter of 2022.  In addition, we have entered into a number of smaller notes secured by equipment and facility improvements which account for a smaller portion of interest expense increases in 2023.

Comparison of the nine months ended September 30, 2023 and 2022 (unaudited):

Revenues increased $1.2 million to $10.4 million for the nine months ended September 30, 2023, as compared to $9.2 million for the nine months ended September 30, 2022.  The 13% increase in revenues was attributable to an increase of nearly $2.0 million for our automotive products, partially offset by a decrease of $0.8 million in Repeaters/DAS business due to overstock inventory corrections at a key customer. The automotive market has benefitted from better supply chain conditions, thus improving shipment volumes.  In addition, we have acquired new customers for our products which have experienced increasing sales throughout 2023.  For the nine months ended September 30, 2023 new customer sales were $1.7 million or 16% of all product sales compared to $0.3 million or 3% of all product sales for the nine months ended September 30, 2022. New customers in the automotive product category drove the increase of 520% year over year for the nine months ended September 30.

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 nine months ended September 30, 2023, and September 30, 2022.  RFPD, a large product distributor serving numerous end-user customers, generated 81% of product shipment revenue for each of the nine month periods ended September 30, 2023 and 2022.

Nonproduct (royalty and non-recurring engineering ("NRE")) revenues decreased 42% for the nine months ended September 30, 2023, compared to September 30, 2022, from $0.7 million to $0.4 million, as our royalty revenues decreased.  New product sales increased 8% from $1.2 million for the nine months ended September 30, 2022 to $1.3 million for the nine months ended September 30, 2023.  The third fiscal quarter has historically been a moderate new product sales period as our customers calibrate the introduction of our products into their new products and solutions.  Our existing product sales increased from $7.3 million for the nine months ended September 30, 2022 to $8.7 million for the nine months ended September 30, 2023, due to a rebound in automotive product demand.

International shipments amounted to $1.4 million (approximately 14% of product revenue) for the nine months ended September 30, 2023 and 2022.

Direct Product Costs and Gross Profit

Direct product costs increased $0.6 million to $4.4 million for the nine months ended September 30, 2023, compared to $3.8 million for the nine months ended September 30, 2022.  The 18% increase in direct product cost was driven by a product sales volume increase of 18% (excluding royalty and NRE revenue).  In addition to volume driven increases, there was a small increase in fixed overhead costs (quality department staffing, facilities costs, and equipment costs).  Year-over-year gross profit, taking into account overhead spending increases, increased 10% from the nine months ended September 30, 2022 to the nine months ended September 30, 2023 on a comparative period basis, and as a percentage of revenue decreased from 57.2% to 55.7%.

Research and Development Expenses

Research and development expenses increased $2.1 million to $8.0 million for the nine months ended September 30, 2023, compared to $5.9 million for the nine months ended September 30, 2022.  The increase was attributable to increases of $1.5 million in facilities, information technology support and lab expenses, and $0.6 million of staffing additions in our engineering department.

Sales and Marketing Expenses

Sales and marketing expenses increased $1.0 million to $4.4 million for the nine months ended September 30, 2023, compared to $3.4 million for the nine months ended September 30, 2022.  The increase year over year was driven by increases of $0.4 million in staffing costs and $0.4 million in various sales and marketing expenses including sales commissions, trade shows, travel, and customer support, and $0.2 million for facilities and information technologies support. 

General and Administrative Expenses

General and administrative expenses increased $0.5 million to $4.3 million for the nine months ended September 30, 2023, compared to $3.8 million for the nine months ended September 30, 2022.  The increase was related to an increase of $0.4 million in wages and benefits driven primarily from share-based compensation.  The remaining increase of $0.1 million in legal, audit, and consulting fees was driven by activities associated with general legal and administration.

Other Income (Expenses)

Interest expense increased approximately $1.0 million to $1.5 million for the nine months ended September 30, 2023, compared to $0.4 million for the nine months ended September 30, 2022.  The increase was attributable to two debt facilities the Company originally entered into during fiscal 2022, one of which was extended in the third quarter of 2023.  The first is an asset-based loan with a total available draw of up to $3 million secured by inventory and accounts receivables, established in June 2022.  The second is a $12 million commercial line of credit of which the Company has drawn $9.75 million as of September 30, 2023, which line was initially established in the third quarter of 2022.  In addition, we have entered into a number of smaller notes secured by equipment and facility improvements as well as unsecured convertible promissory notes, which account for a smaller portion of interest expense increases in 2023.

During the nine months ended September 30, 2023, we recognized a change in fair value related to embedded derivatives.

Other income was insignificant in both the first nine months of 2022 and 2023.

Liquidity and Capital Resources

The Company has incurred substantial negative cash flows from operations in nearly every fiscal period since inception, including a net loss of $4.5 million for the three months ended September 30, 2023.  As of September 30, 2023, the Company had an accumulated deficit of $39.4 million, a significant portion of which is attributable to the Company’s ongoing investment in research and development, investment in its facilities to support plans for business expansion and growth, and expenses associated with its sales and marketing efforts in support of new product offerings.  Management has recently introduced a series of cost-cutting measures, including voluntary salary reductions by the executive management team, which are expected to ultimately reduce annualized expenses between $3.0 million and $5.0 million over the next several quarters.  As a result, the Company expects to break even on an operating basis, i.e., excluding interest expense, and other non-operating and non-recurring expenses, by mid-2024 when revenues are projected to grow to a level that are in excess of operating expenses.  In the meantime and until the Company consistently realizes positive net income, it will continue to require additional funding. 

As of September 30, 2023, the Company had cash resources of $0.9 million.  It has two loan facilities, one of which is for up to $3.0 million with a specialty lender (referred to as the Spectrum Loan Facility, described in Note 5 to our unaudited interim condensed consolidated financial statements), and the other of which is for up to $12.0 million with a different lender (referred to as the Salem Loan Facility, also described in Note 5 to the unaudited condensed consolidated financial statements).  As of September 30, 2023, the Company had drawn down $1.0 million under the Spectrum Loan Facility and $9.75 million under the Salem Loan Facility.  In addition, the Company entered into several smaller secured and unsecured loans to finance specific equipment and furnishing needs in the first nine months of 2023.  These smaller financing agreements totaled approximately $1.0 million as of September 30, 2023, and are largely long-term in nature.  As discussed in Note 5, the Company has also issued unsecured convertible promissory notes in the aggregate amount of $790,000.  As discussed in Note 13, subsequent to September 30, 2023, the Company drew down an additional $1.25 million under the Salem Loan Facility, leaving up to $1.0 million available for future draws. 

As noted above, the Company will continue to require additional funding until it consistently realizes positive net income. Potentially, the Company could draw down additional funds under the Spectrum Loan Facility; however, its ability to do so is dependent upon the value of eligible accounts receivable assigned to Spectrum as security for advances under the Spectrum Loan Facility, which value fluctuates from time to time and is ultimately outside of the Company’s control. The Company may also draw down the remaining $1.0 million in Additional Advances under the Salem Loan Facility; however, Salem has discretion to withhold any further Additional Advances and there is no assurance that it will agree to provide access to the remaining $1.0 million under the Salem Loan Facility.

The Spectrum Loan Facility expires in June 2024, and automatically renews annually thereafter unless either party elects to terminate the facility upon not less than 60 days prior notice. The Company anticipates that the Spectrum Loan Facility will renew and be extended through June 2025, at a minimum. The Salem Loan Facility matures on April 30, 2024. The Company is currently exploring options for the renewal and extension of the Salem Loan Facility, as well as alternative financing and other strategic opportunities to support the Company's business.

The Company believes that its existing cash and cash equivalents, together with additional financing under the Salem Loan Facility, will provide sufficient resources to support operations through mid-February 2024, with additional funding being required in early 2024 to finance the Company until it consistently achieves positive net income. In the event the Company is unable to draw down the remaining $1.0 million under the Salem Loan Facility or secure alternative funding sources, it may be unable to fund ongoing operations and pay its obligations as they become due before the end of fiscal 2023. Additionally, if the Company is unable to secure additional funding in early 2024, it may be unable to fund ongoing operations and pay its obligations as they become due before the end of February 2024. The Company must also make arrangements to renew or replace the Spectrum and Salem Loan Facilities before they mature. There is no assurance that appropriate additional funding (or in the case of the Spectrum and Salem Loan Facilities, the renewal of existing loan facilities) will be available on terms, which are acceptable to the Company, or at all.  This requirement for additional funding and the renewal of existing loan facilities raises substantial doubt about the Company’s ability to continue as a going concern.

The Company moved into its new corporate headquarters and design center, located in Greensboro, North Carolina, in the first quarter of 2023.  As of September 30, 2023, the Company does not anticipate additional excess construction

Cash (used in) provided by:

Operating Activities

Cash used in operating activities was $11.2 million and $6.0 million for the nine months ended September 30, 2023 and 2022, respectively.  Cash used in operating activities for the nine months ended September 30, 2023 was principally due to our net loss of $12.3 million.  For the nine months ended September 30, 2023, non-cash items that were a part of the net operating loss included depreciation and amortization of $1.2 million and stock-based compensation of $0.9 million.  During the nine months ended September 30, 2023, increases in trade accounts receivable of $0.4 million and decreases to accounts payable and accrued expenses of $1.8 million also contributed to the net cash used in operating cash flows as noted above.

Cash used in operating activities for the nine months ended September 30, 2022, primarily resulted from our net loss of $8.3 million.  During the nine months ended September 30, 2022, there was a moderate increase in inventory of $0.3 million, a decrease to accounts receivable of $0.8 million and a decrease to prepaid expenses of $0.8 million.  For the nine months ended September 30, 2022, non-cash items that were a part of the net operating loss included depreciation and amortization of $0.9 million and stock-based compensation of $0.4 million. 

Investing Activities

Cash used in investing activities was $0.1 million and $1.6 million for the nine months ended September 30, 2023 and 2022, respectively.  Cash used in investing activities resulted from capital expenditures on property and equipment for all periods presented.  Cash used in investing activities resulted from capital expenditures on property and equipment for all periods presented.  In 2022 such expenditures were greater than normal due to outlays for building improvements and upfit related to Guerrilla RF’s new headquarters building which were put into construction in progress until the headquarters was occupied in early 2023.

Financing Activities

Cash provided by financing activities for the nine months ended September 30, 2023 of $7.9 million was primarily attributable to net proceeds of $5.4 million from private placement equity financing, $3.8 million of additional net debt financing, and $1.3 million of payments related to deferred offering costs, finance leases and insurance premiums.

Cash provided by financing activities during the nine months ended September 30, 2022 of $4.3 million principally resulted from net debt financing of $4.6 million, from the Spectrum and Salem Loan Facilities.

Contractual Obligations and Commitments

The following summarizes our significant contractual obligations as of September 30, 2023 (unaudited).  As mentioned above, associated with the move into our new business headquarters and design center in the first quarter of 2023, the Company paid what it anticipates was its final payment of $66 thousand of excess construction costs and related interest and deferral fees for which it will be responsible in April 2023.  The Company does not anticipate any further excess construction costs and related interest and deferral fees subsequent to September 30, 2023 that would be material to the Company's reported financial results.

Off-Balance Sheet Arrangements

As of September 30, 2023 and December 31, 2022, we do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.