Note 5 - Debt

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

Debt Disclosure [Text Block]

5. Debt

Factoring Arrangement

The Company previously had an accounts receivable factoring arrangement with a financial institution (the “Factor”), which ended in the second quarter of 2022.  Under the terms of the agreement, the Company, from time to time, sold to the Factor certain of its accounts receivable balances on a recourse basis for credit-approved accounts.  The Factor remitted 85% of the domestic accounts receivable balance to the Company (the “Advance Amount”), with the remaining balance, less fees to be paid to the Company once the Factor collected the entire accounts receivable balance from the customer.  The factoring fee was 0.98 % of the invoice’s face value factored for the first 30 days required to collect the invoice and prorated on a per diem basis at 0.0327 % each day thereafter.  The minimum invoice fee for any factored invoices was $1.50.  The Company included the cost of factoring in interest expense.

As stated previously, the Company factored the accounts receivable on a recourse basis.  Therefore, if the Factor could not collect the factored accounts receivable, the Company had to refund the Advance Amount remitted to it for any uncollected accounts receivable.  Accordingly, the Company recorded the liability of having to refund the Advance Amount as short-term debt when the factoring arrangement was utilized.  The Company terminated the factoring arrangement as of  June 1, 2022.  As of December 31, 2022, and 2021 there were no advances or other liabilities outstanding under the factoring arrangement. 

The cost of factoring was as follows:

	Year Ended December 31, 2022		Year Ended December 31, 2021
Factoring Fees	$	-	$	87,122

Spectrum Loan Facility

The Company entered into the Spectrum Loan Facility with Spectrum pursuant to the terms of the General Credit and Security Agreement (the "Credit Agreement"), the Company  may borrow monies to purchase eligible equipment in an amount equal to the lesser of (i) 75% of the cost of such eligible equipment and (ii) $500,000; provided that this maximum eligibility will automatically be reduced by 1/48^th each month during the term of the facility. The Credit Agreement also allows for additional borrowing in an amount equal to the lesser of (i) 50% of the net amount of eligible inventory (as defined in the Credit Agreement), (ii) $350,000, and (iii) 50% of the purchased accounts receivable outstanding under the related Assignment of Accounts and Security Agreement (the “AR Agreement”).

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.  For the year ended December 31, 2022, the Company maintained compliance with these covenants and restrictions.

The Company has borrowed $0.7 million under the Spectrum Loan Facility as of December 31, 2022.  The Company includes the interest expense of the Spectrum Loan Facility ($66 thousand) as part of its interest expense on its consolidated statements of operations, and the total amount of $0.7 million borrowed under the Spectrum Loan Facility is included as short-term debt on the consolidated balance sheet as of December 31, 2022.

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 provides for a loan facility in the aggregate amount of up to $8.0 million.

The Salem Loan Facility provided for an initial advance of $5.0 million, and additional advances over the next twelve months from the Salem Effective Date of up to $3.0 million at Salem’s discretion.  The Salem Loan Facility has a five-year term, is secured by a second-priority lien on essentially all of the Company’s assets and provides for aggregate interest payments of 13.0% per annum, with 11.0% payable in cash and 2.0% paid-in-kind, with the principal and outstanding interest due in   August 2027.  In addition to a 2.0% fee paid prior to closing on the Salem Loan Facility, the Company issued Salem 150,000 shares of common stock as consideration for the Salem Loan Facility.  The Company will issue up to an additional 150,000 shares in the event that Salem advances the additional $3.0 million.

The Salem Loan Facility contains various covenants and restrictions on the Company's financial and business operations including restrictions on the purchase or redemption of any Company shares and the declaration or payment of any dividends on the Company's stock.  For the year ended December 31, 2022, the Company maintained compliance with these covenants and restrictions.

Should the Company repay the Salem loan during the first three years of the five-year term, it  may be required to pay a prepayment premium equal to (i) 3.0% of the prepaid principal during year 1, (ii) 2.0% of the prepaid principal during year 2, and (iii) 1.0% of the prepaid principal during year 3.  The Salem Loan Facility contains customary affirmative and negative covenants that impose restrictions on the Company’s financial and business operations, including limitations on liens, indebtedness, and fundamental changes in the nature of the Company’s business.  In addition, the Salem Loan Facility provides that the Company must maintain compliance with a maximum leverage ratio and a minimum liquidity covenant.

On  August 11, 2022, in connection with the closing of the Salem Loan Facility, the Company paid off its obligations under its Economic Injury Disaster Loan ("EIDL") loan from the Small Business Administration (see further discussion of the EIDL loan below). 

The Company has borrowed $5.0 million under the Salem Loan Facility as of December 31, 2022.  As of December 31, 2022, the Company includes the interest expense of the Salem Loan Facility ($172 thousand) as part of its interest expense on its consolidated statements of operations, the total amount of $5.0 million borrowed as undiscounted long-term debt on its consolidated balance sheets ($4.6 million discounted long-term debt), and the 150,000 shares of common stock issued ($0.5 million) within the consolidated statements of stockholders' equity (deficit) .

Loans Payable – EIDL

In response to COVID-19, the SBA created the EIDL program in  March 2020.  The program's purpose was to help small businesses meet financial obligations that could have been met had the COVID-19 pandemic not occurred.  Unlike the Paycheck Protection Program ("PPP"), an EIDL loan is not forgivable in the future but provides favorable interest and payment terms.  The maximum EIDL available was equivalent to six months of a business’s working capital, up to $150,000.  Businesses could use EIDL proceeds for working capital and normal operating expenses.  On  June 24, 2020, the Company received loan proceeds of $150,000 under the EIDL program.  As part of the EIDL program, the Company agreed to the SBA collateral conditions and agreed to pay annual interest of 3.75% per annum on the outstanding principal balance.  Monthly installment payments were to commence at the end of the anticipated deferral allowance period in  December 2022 for up to a maximum of 30 years from the loan date (thus, 2050).  As mentioned above, in conjunction with closing the Salem Loan Facility on  August 11, 2022, the Company repaid the entire outstanding principal ($149,900) and accrued interest ($12 thousand) of the EIDL loan.

Loans Payable – PPP

On April 30, 2020, Guerrilla RF received loan proceeds of $535,800 under the PPP.  Established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) administered by the SBA. PPP loans and accrued interest are forgivable after a “covered period” (24 weeks) as long as the borrower maintains its payroll levels and uses the loan proceeds for eligible purposes, including payroll, benefits, rent, and utilities. As of December 31, 2020, Guerrilla RF had $535,800 of principal outstanding on the PPP loan together with accrued interest of $3,611 as accounts payable and accrued expenses less $90,000 shown as long-term liability on the consolidated balance sheet.  On February 17, 2021, Guerrilla RF received approval from the SBA that the $535,800 PPP loan was forgiven, including all accrued interest.

On February 19, 2021, Guerrilla RF received loan proceeds of $833,300 (the “2021 PPP Loan”) also under the same CARES Act. Guerrilla RF used the 2021 PPP Loan to retain current employees, maintain payroll, and make lease and utility payments.  On August 18, 2021, Guerrilla RF received confirmation from the SBA that the 2021 PPP Loan, including accrued interest, had been forgiven.

The Company recorded the forgiveness of both PPP loans and the related accrued interest as a gain in other income (expense) on the consolidated statements of operations.  Accordingly, as of December 31, 2022, the Company had no principal outstanding on the PPP loans or accrued interest.

Notes Payable

Since its founding, the Company has utilized privately placed funding through equity and unsecured debt instruments.  See Note 6 for details on equity funding.

The Company entered into several debt arrangements from capital raise events and bridge loans from existing investors.  These debt arrangements were characterized by interest-only quarterly payments paid in arrears. Per the terms of the debt arrangements, the principal was paid in its entirety at the respective maturity date. In addition, all such debt agreements could be prepaid by the Company without any penalty.

From March 2017 through July 2020, the Company entered into debt financings with multiple investors for a total of $4,000,000 in promissory notes with various maturity dates from March 2022 to December 31, 2023.  The debt instruments had interest rates from 8% to 12% per annum.  The outstanding balances of the promissory notes were converted to common stock at the closing of the Merger.

On  June 1, 2018, the Company entered into a promissory note with an investor for $1,000,000 with a maturity date of  May 31, 2020.  In connection with this promissory note and the terms of the related loan agreement, the Company issued two warrants for the purchase of Series E preferred stock of the Company.  On  April 15, 2020, the note and warrants were transferred to a related party of the lender.  Following that transfer, the new warrant holder exercised these warrants and purchased shares of preferred stock for a total cash consideration of $500,001 to satisfy $500,000 of the $1,000,000 note payable.  In addition, this new holder of the note payable agreed to refinance the remaining $500,000 of the $1,000,000 note payable, which then had a maturity date of  May 31, 2022.  The outstanding balance of this promissory note was converted to common stock at the closing of the Merger.

Convertible Promissory Notes 

As further described in Note 1, the Company entered into a Merger Agreement effective October 22, 2021.  On October 22, 2021, pursuant to the terms of the Merger Agreement, all of the common stock of Guerrilla RF (including common stock issued upon the conversion of preferred stock and $4.5 million of pre-2021 convertible notes) held by accredited investors was converted into an aggregate of 24,130,642 shares of Company common stock.  These pre-2021 convertible notes were converted into 2,647,059 shares of the Company’s common stock at a price of $1.70 per share.  In addition, in connection with the Merger, the Company issued 744,300 shares of common stock in exchange for $1,488,600 of convertible notes that were issued by Guerrilla RF in contemplation of the Merger.

Per the terms of several debt arrangements entered into with new and existing investors prior to the Merger, the principal was to be paid in its entirety at the respective maturity date or upon conversion as a result of the Merger without any penalty.  Upon successful closing of the aforementioned Merger and related financing, all of the outstanding principal amounts of the new notes payable issued just prior to the Merger ($1,488,600) and the above-described existing notes payable ($4.5 million), automatically, without the necessity of any action by the noteholder or the Company, converted into securities of the Company.  All accrued but unpaid interest on the existing and new notes payable as of the effective date of the Merger were paid in cash to the noteholder within fifteen (15) business days following the Merger ($51,627).

Warrants

In connection with some of the debt described above, certain lenders were issued warrants to purchase up to 116,733 pre-Merger shares of Series D and E preferred stock at $2.57 per share.  In April 2018, Guerrilla RF completed a Series E preferred stock convertible note private offering in which 898,542 pre-Merger shares of Series E Preferred Stock were issued at $2.57 per share together with warrants to purchase an additional 77,821 pre-Merger shares of Series E preferred stock.  In consideration of funds advanced pursuant to a $1,000,000 promissory note accruing interest at 8% per annum from an existing investor, Guerrilla RF issued warrants on June 1, 2018, for the purchase of 38,911 pre-Merger shares of Series E Preferred Stock (in total) at $2.57 per share with different termination dates.  All outstanding warrants immediately prior to the October 22, 2021 closing date of the Merger were converted into Company common stock (as further described in Note 1).

Long‐term debt is summarized as follows:

	2022			2021
Note payable with monthly interest-only payments at 11%, maturing in August 2027, unsecured, net of loan origination fees		4,408,187			-
Note payable with monthly payments beginning in June 2022 at 3.75% interest, maturing in June 2050, secured by all tangible and intangible property		-			149,900
Finance agreement for directors and officers insurance premium with monthly payments at 4.95% interest, maturing in August 2023		216,886
Finance agreement for software, with monthly payments at various interest rates, and maturity dates		216,217
Recourse factoring		727,356			-
Total notes payable		5,568,646			149,900
Less current portion		(959,803	)		5,117
	$	4,608,843		$	144,783

Debt Maturity

Debt is expected to mature as follows:

2023	$	959,803
2024		18,360
2025		18,861
2026		6,092
2027		4,565,530
Thereafter		-
	$	5,568,646