Note 2 - Basis of Presentation and Significant Accounting Policies

3 Months Ended

Mar. 31, 2022

Notes to Financial Statements

Basis of Presentation and Significant Accounting Policies [Text Block]

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying unaudited interim condensed consolidated financial statements are presented in U.S. dollars and prepared in conformity with GAAP.  Any reference in these Notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and as amended by Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”).  The accompanying unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Guerrilla RF.  All intercompany accounts and transactions have been eliminated in consolidation.

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

Use of Estimates

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

Segment Information

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance.  The Company views its operations and manages its business in one segment.

Concentrations of Credit Risk and Major Customers

Financial instruments at March 31, 2022 and 2021 that potentially subject the Company to concentration of credit risk consist primarily of cash and accounts receivable.

The Company’s cash is deposited with major financial institutions in the U.S.  At times, deposits in financial institutions located in the U.S. may be in excess of the amount of insurance provided on such deposits by the Federal Deposit Insurance Corporation (FDIC).  To date, the Company has not experienced any losses on its cash deposits.

The Company’s accounts receivable are derived from revenue earned from customers located in and outside of the U.S.  Major customers are defined as those generating revenue in excess of 10% of the Company’s aggregate annual revenue.  The Company had one major distributor customer, Richardson RFPD, Inc., during the three months ended March 31, 2022 and 2021 accounting for 85% and 80% of product shipment revenue for the three months ended March 31, 2022 and 2021, respectively.  Accounts receivable from our major distributor customer represented 80% of accounts receivable at March 31, 2022 and 2021.  

Accounts Receivable

Accounts receivable primarily relate to amounts due from customers, which are typically due within 30 to 45 days. The accounts receivable also include royalty revenue from our one royalty agreement. The Company provides credit to its customers in the ordinary course of business and evaluates the need for allowances for potential credit losses. The Company does not require collateral or other security for accounts receivable. To reduce credit risk with accounts receivable, the Company performs ongoing evaluations of its customers’ financial condition. Historically, such losses have been immaterial and within management's expectations.

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

Property and Equipment

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

Impairment of Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.  The recoverability of assets held and used is measured by comparing the carrying amount of an asset to future net cash flows expected to be generated by the asset.  If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets, less costs to sell.  The Company did not record any expense related to asset impairment in the three months ended March 31, 2022 or 2021.

Deferred Offering Costs

The Company has not capitalized legal, professional, accounting, and other third-party fees directly associated with common equity financings as deferred offering costs as these acquisition costs are immaterial in relation to the financing and as a portion of our consolidated balance sheet.  Transaction costs consisting of legal, accounting, financial advisory, and other professional fees incurred as part of the Merger mentioned in Note 1 were offset against the total proceeds from the Merger in the consolidated financial statements for the year ended December 31, 2021.  At March 31, 2022, there were no deferred offering costs.

Convertible Preferred Stock Warrants

Accounting standards require that freestanding warrants and similar instruments, with certain settlement features of the financial instruments, should be accounted for as a preferred stock warrant liability even though the underlying shares of capital stock may be classified as equity.  Such warrants would be measured and recognized at fair value and subject to re-measurement at each balance sheet date.  All of the Company’s convertible preferred stock warrants were previously classified as equity.  The Company did not have any convertible preferred stock warrants outstanding as of March 31, 2022.

Revenue Recognition

The Company recognizes product revenue when it satisfies a performance obligation by transferring a product or service to its customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products and services. Sales and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue.  Shipping and handling fees charged to customers are reported within revenue.  The Company does not have any significant financing components as payment is due at or shortly after the point of sale.  The Company provides an assurance-type warranty to its customers as part of its contracts' standard terms and conditions, which does not include a right of return for properly functioning products not deemed obsolete.  These warranties do not provide an additional distinct service to the customer and are not deemed a separate performance obligation.  Royalty revenue is recognized at the later of when the subsequent sale or usage occurs, or the performance obligation to which some or all the sales-based royalties have been allocated is satisfied.  The costs incurred by the Company for shipping and handling are classified as cost of revenue in the unaudited interim condensed consolidated statements of operations.  Any incidental items that are immaterial in the context of a sale to a customer are recognized as expense.

Cost of Revenue

The Company’s cost of revenue consists primarily of salaries and related expenses, overhead, third party services vendors, shipping and handling, and depreciation expense related to the equipment and information technology costs incurred directly in the Company’s revenue-generating activities.

Share-Based Compensation

The Company measures and recognizes compensation expense for all stock options awarded to employees and nonemployees based on the estimated fair market value of the award on the grant date.  The Company uses the Black-Scholes option-pricing model to estimate the fair value of its stock option awards.  The Company recognizes compensation expense on a straight-line basis over the requisite vesting period.  In addition, the Company accounts for forfeitures of stock options as they occur.

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

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

Research and Development Costs

Research and development costs are expensed as incurred and consist primarily of personnel-related engineering and technical staff wages and benefits, prototype costs, and other direct expenses.

Advertising Costs

All advertising costs are expensed as incurred and included in sales and marketing expenses.  Advertising expenses for the three months ended March 31, 2022, and 2021 were $7,750 and $5,402, respectively.

Inventories

Inventories are valued at the lower of cost and net realizable value.  Cost is determined by the first‐in, first‐out (FIFO) method.

Income Taxes

Income taxes are accounted for under the asset and liability method as required by FASB ASC Topic 740, Income Taxes (“ASC 740”).  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period corresponding to the enactment date.  Under ASC 740, a valuation allowance is required when it is more likely than not that all or some portion of the deferred tax assets will not be realized through generating sufficient future taxable income.

FASB ASC Subtopic 740 10, Accounting for Uncertainty of Income Taxes, (“ASC 740 10”) defines the criterion upon which an individual tax position must meet for any part of the benefit of the tax position to be recognized in consolidated financial statements prepared in conformity with GAAP.  The Company may only recognize the tax benefit from an uncertain tax position if it is more likely than not that such tax position will be sustained on examination by the taxing authorities, based solely on the technical merits of the respective tax position.  The tax benefits recognized in the consolidated financial statements from such a tax position should be measured based on the largest benefit having a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority.  In accordance with the disclosure requirements of ASC 740 10, the Company’s policy on income statement classification of interest and penalties related to income tax obligations is to include such items as part of total income tax expense.

Net Income (Loss) Per Share

Basic net loss per share of common stock is computed by dividing net loss by the weighted average number of common stock outstanding during each period.  Diluted net income per share of common stock includes the effect of the potential exercise or conversion of securities, such as options and warrants, which results in the issuance of incremental common stock.  For periods prior to the Merger mentioned in Note 1, each of Guerrilla RF’s shares of capital stock issued and outstanding immediately prior to the closing of the Merger was retrospectively converted into approximately 2.95 shares of the Company's common stock.  In computing basic and diluted net loss and income per share, the weighted average number of shares is 33,228,202 for the three months ended March 31, 2022, and 6,702,686 basic shares and 10,069,021 diluted shares for the three months ended March 31, 2021.  As such, all preferred stock, warrants, and options were excluded from the calculation of net loss per share for the three months ended March 31, 2022.

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

	2022
Convertible preferred stock		-
Convertible preferred stock warrants		-
Common stock warrants		331,580
Stock options		3,298,180
		3,629,760

Recent Accounting Pronouncements

In February 2016, the FASB issued ASC Topic 842, Leases. This standard requires all entities that lease assets with terms of more than 12 months to capitalize the assets and related liabilities on the balance sheet.  In June 2020, the FASB issued ASU 2020-05, which delayed the effective date of Topic 842 until January 1, 2022.  The Company adopted Topic 842 in the fiscal quarter ending March 31, 2022.  See Note 8 for further information related to lease obligations on the unaudited interim condensed consolidated balance sheet upon adopting ASC Topic 842.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected.  This standard is effective for fiscal years beginning after December 15, 2022, and early adoption is permitted.  The Company does not intend to adopt this standard early and is currently evaluating the impact of this standard.  The Company does not expect this standard to have a material impact on its consolidated financial statements upon adoption.

In August 2020, the FASB issued ASC Update No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The goal of the ASC is to simplify the complexity associated with applying GAAP for certain financial instruments with characteristics of liabilities and equity. More specifically, the amendments focus on the guidance for convertible instruments and derivative scope exception for contracts in an entity’s own equity. The new standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company adopted this accounting guidance in the fiscal quarter ending March 31, 2022, and it did not have a material impact on its unaudited interim condensed consolidated financial statements.