Note 7 - Equity Incentive Plan

3 Months Ended

Mar. 31, 2022

Notes to Financial Statements

Share-Based Payment Arrangement [Text Block]

7. EQUITY INCENTIVE PLAN

In 2014, the Board adopted the Long‐Term Stock Incentive Plan (the “2014 Plan”), with 568,000 shares of common stock authorized for issuance under the 2014 Plan.  Subsequently, stockholders approved an increase in the number of shares available under the 2014 Plan to 1,260,000 shares.  Exercise prices range from $0.70 to $1.57 per share, depending on the date of the award.  The 2014 Plan is frozen, and no further awards may be made under the 2014 Plan.

In 2021, the Board adopted the Equity Incentive Plan (the “2021 Plan”), which authorizes the award of stock options, restricted stock awards, stock appreciation rights, restricted stock units ("RSU"), performance awards, cash awards, and stock bonus awards.  The Company initially reserved 222,991 shares of common stock, plus any reserved shares not issued or subject to outstanding grants under the 2014 Plan on the effective date of the 2021 Plan, for issuance pursuant to awards granted under the 2021 Plan.  The number of shares reserved for issuance under the 2021 Plan will increase automatically on January 1 of each of 2022 through 2031 by the number of shares equal to the lesser of 5% of the total number of outstanding shares of our common stock as of the immediately preceding December 31, or a number as may be determined by our board of directors.

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

Pursuant to awards made under the 2014 Plan and the 2021 Plan, the Company recorded stock-based compensation expense in the following expense categories in the unaudited interim condensed consolidated statements of operations for the three months ended March 31, 2022 and 2021:

(in thousands)	2022		2021
Cost of revenues	$	1.3	$	-
Research and development		8.5		-
Sales and marketing		14.2		-
Administration		8.9		6.4
	$	32.9	$	6.4

No income tax benefits have been recognized in the unaudited interim condensed consolidated statements of operations for stock-based compensation arrangements, and no stock-based compensation costs have been capitalized as property and equipment through March 31, 2022.

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

● The expected term of employee options is determined using the “simplified” method, as prescribed in SEC’s Staff Accounting Bulletin (SAB) No. 107, whereby the expected life equals the arithmetic average of the vesting term and the original contractual term of the option due to the Company’s lack of sufficient historical data.

● The expected volatility is based on the historical volatility of the publicly traded common stock of a peer group of companies.

● The risk-free interest rate is based on the interest rate payable on U.S. Treasury securities in effect at the time of grant for a period that is commensurate with the assumed expected term.

● The expected dividend yield is zero because the Company has not historically paid and does not expect to pay a dividend on its ordinary shares for the foreseeable future.

For the three months ended March 31, 2022 and 2021, the grant date fair value of all option grants was estimated at the time of grant using the Black-Scholes option-pricing model using the following weighted-average assumptions:

	2022			2021
Expected term (in years)		6.25			5.00
Expected volatility		67	%		45	%
Risk-free rate		0.11	%		0.30	%
Dividend rate		—			—

The weighted average grant date fair value of stock option awards granted was $1.21 and $0.53 during the three months ended March 31, 2022, and 2021, respectively.

The value of stock options is recognized as compensation expense by the straight-line method over the vesting period.  Unrecognized compensation costs related to non‐vested options at March 31, 2022, and 2021 amounted to $816,298 and $21,691, respectively, which are expected to be recognized over an average of three years.

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

	Number of Shares			Weighted-Average Exercise Price Per Option		Weighted- Average Remaining Contractual Life (in years)
Shares underlying outstanding awards at December 31, 2021		3,180,882		$	0.38		5.30
Granted		130,000			2.00
Exercised		(12,702	)		0.41
Shares underlying outstanding awards at March 31, 2022		3,298,180		$	0.44		5.47
Exercisable options at March 31, 2022		2,690,983		$	0.34		4.83

Each outstanding unexercised stock option at the Closing Date of the Merger ( October 22, 2021) was converted into the right to purchase approximately 2.95 shares of the Company's common stock.  Pursuant to the Merger Agreement, options to purchase 1,065,067 shares of Guerrilla RF’s common stock issued and outstanding immediately prior to the closing of the Merger under the 2014 Plan were assumed and converted into options to purchase 3,146,366 shares of the Company's common stock.  In conjunction with the modification of the number of shares issuable under the options, the exercise price of the options was also reduced by a corresponding 2.95 factor.

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