UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number:
GUERRILLA RF, INC.
(Exact name of registrant as specified in its charter)
(State of Other Jurisdiction of incorporation or Organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) | (Zip code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the Registrant has submitted electronically; every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.0405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ | Smaller reporting company Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The aggregate value of the registrant's common stock as of June 30, 2023 held by those persons deemed by the registrant to be non-affiliates was approximately $
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement to be filed pursuant to Regulation 14A are incorporated herein by reference into Part III.
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Item 1. |
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Item 1A. |
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Item 1B. |
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Item 1C. | Cybersecurity | 35 |
Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
37 |
Item 7A. |
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Item 8. |
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Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
71 |
Item 9A. |
71 | |
Item 9B. |
72 | |
Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 72 |
PART III | ||
Item 10. |
Directors, Executive Officers and Corporate Governance | 73 |
Item 11. |
Executive Compensation | 73 |
Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 73 |
Item 13. |
Certain Relationships and Related Transactions, and Director Independence | 74 |
Item 14. |
Principal Accounting Fees and Services | 74 |
PART IV | ||
Item 15. | Exhibits and Consolidated Financial Statement Schedules | 74 |
Item 16. | Form 10-K Summary | 76 |
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.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K ("Annual Report"), including the exhibits hereto and the information incorporated by reference herein, sections entitled “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business”, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to risks and uncertainties. Information regarding activities, events, and developments that we expect or anticipate will or may occur in the future, including, but not limited to, information relating to our future growth and profitability targets and strategies designed to increase total shareholder value, are forward-looking statements based on management’s estimates, assumptions and projections. Forward-looking statements also include, but are not limited to, statements regarding our future economic and financial condition and results of operations, the plans and objectives of management and our assumptions regarding our performance and such plans and objectives, as well as the amount and timing of other uses of cash flows. Forward-looking statements generally can be identified through the use of words such as “guidance,” "believe,” “could,” “potential,” “continue,” “outlook,” “project,” “believe,” “target,” “predict,” “estimate,” “forecast,” “strategy,” “may,” “goal,” “expect,” “anticipate,” “intend,” “plan,” “foresee,” “likely,” “will,” “should” and other similar expressions that do not relate solely to historical matters. Forward-looking statements are based on management’s beliefs and assumptions and on information currently available to management. Although we believe that the expectations reflected in forward-looking statements are reasonable, such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by forward-looking statements.
Forward-looking statements contained in this Annual Report are predictions only, and actual results could differ materially from management’s expectations due to a variety of factors, including those described below. All forward-looking statements are expressly qualified in their entirety by such risk factors.
The forward-looking statements that we make in this Annual Report are based on management’s current views and assumptions regarding future events and speak only as of their dates. We disclaim any obligation to update developments of these risk factors or to announce publicly any revisions to any of the forward-looking statements that we make, or to make corrections to reflect future events or developments, except as required by the federal securities laws.
Forward-looking statements include, but are not limited to, statements about:
● we may not be able to generate sufficient cash to service all of our debt or meet our operating needs;
● we may not be able to achieve profitability or raise sufficient equity capital to support our operating needs and fund our strategic plans;
● those relating to fluctuations in our operating results;
● our dependence on developing new products, achieving design wins, and several large customers for a substantial portion of our revenue;
● a loss of revenue if purchase contracts are canceled or delayed;
● our dependence on third parties such as suppliers, product manufacturers, and product assemblers and testers;
● risks related to sales through independent sales representatives and distributors;
● risks associated with the operation of our third-party manufacturing providers;
● anticipated trends, growth rates, and challenges in our business and in the markets in which we operate;
● our ability to further penetrate our existing customer base;
● our estimates regarding future revenues, capital requirements, general and administrative expenses, sales and marketing expenses, research and development expenses, and our need for or ability to obtain additional financing to fund our operations;
● developments and projections relating to our competitors and our industry, including semiconductor availability, which has affected the automotive industry, impacting vehicle production and thereby demand irregularities for our business;
● business disruptions;
● poor manufacturing yields;
● increased inventory risks and costs due to the timing of customer forecasts;
● our ability to continue to innovate in a very competitive industry;
● unfavorable changes in interest rates, pricing of certain precious metals, utility rates, and shipping and freight costs;
● our strategic investments failing to achieve financial or strategic objectives;
● our ability to attract, retain, and motivate key employees;
● warranty claims, product recalls, and product liability;
● changes in our effective tax rate and the enactment of international or domestic tax legislation, or changes in regulatory guidance;
● risks associated with environmental, health and safety regulations, and climate change;
● risks from international sales and third-party vendor operations;
● the impact of, and our expectations regarding, changes in current and future laws and regulations;
● changes in government trade policies, including the imposition of tariffs and export restrictions;
● our ability to protect and enforce our intellectual property protection and the scope and duration of such protection;
● claims of infringement of third-party intellectual property rights;
● security breaches and other similar disruptions compromising our information;
● theft, loss, or misuse of personal data by or about our employees, customers, or third parties;
● if we fail to maintain effective internal control over financial reporting, we may not be able to report our financial results accurately and timely;
● provisions in our governing documents and Delaware law may discourage takeovers and business combinations that our stockholders might consider to be in their best interests; and,
● volatility in the price of our common stock.
We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, operating results, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in the section titled “Risk Factors.” 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. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this Annual Report may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should read this Annual Report and the documents that we reference in this Annual Report as exhibits with the understanding that our actual future results, performance, and events and circumstances may be materially different from what we expect.
Our common stock is currently quoted on the OTCQX, under the symbol “GUER.”
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 Annual Report. All trademarks, service marks, and trade names appearing in this Annual 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.
Overview
Guerrilla RF is a fabless semiconductor company based in Greensboro, NC. Guerrilla RF was founded in 2013 with a mission to employ RF semiconductor technology to deliver RF solutions to customers in underserved markets. Over the past several years, Guerrilla RF has become a leader in developing high-performance MMIC products for wireless connectivity. It continues to target underserved markets and customers, delivering a range of high-performance MMIC products and associated technical support to a diverse set of customers that enable a more connected world.
Guerrilla RF 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 200 million products in our portfolio of products to over 200 end customers worldwide.
Our Industry
Global demand for ubiquitous, always-on connectivity has increased over the past several years, driving data traffic over wireless and wired networks. We believe that wireless and wired markets are undergoing multi-year technology upgrade cycles to keep pace with this demand.
Cellular operators have been migrating to 5G technology to improve efficiency, increase data throughput, reduce signal latency, and enable massive machine-to-machine connectivity. Because 5G networks operate on different frequencies (low-, mid-, and high-band spectrum) and coexist with prior cellular standards, we believe 5G deployments will increase the content opportunity for Guerrilla RF’s infrastructure RF products.
As an example, over the past several years, automakers have added more entertainment and safety features to their automobiles due in part to customer demands and in part due to increased demand for electric vehicles (EV) and an increasing focus on the development of autonomous vehicle technologies. We expect this trend to continue to increase demand for RF semiconductors in modern automobiles. We believe this trend offers a growing content opportunity for Guerrilla RF’s automotive RF products.
The COVID-19 pandemic placed even more demand on the need for contactless and wireless communication in all aspects of human existence. Our technology helps meet that demand and facilitates rapid and contactless communication.
Our Markets
Our business is diversified across the following markets: Wireless Infrastructure, Automotive, and Catalog Markets.
Wireless Infrastructure
The wireless infrastructure market is characterized by the deployment of 5G networks over sub-7 GHz and millimeter wave frequencies, often with mMIMO active antenna arrays, which may significantly increase the number of RF transmit and receive channels. These 5G networks require a broad portfolio of highly efficient RF solutions that increase capacity and expand coverage in a compact form factor. We support wireless infrastructure OEMs located across the globe with a broad portfolio of RF solutions serving all major/applicable frequency bands under 7 GHz. Our Satellite Communication ('SatCom') application supports satellite to cellular infrastructure. In addition, our portfolio of devices offering a wide range of gain, linearity, and noise figure performance lend themselves to use in various demanding applications in certain product markets, including those referenced above.
Automotive
Next-generation wireless technologies are enabling new use cases in automotive wireless connectivity, including V2X applications that facilitate direct, high-speed communication. These new use cases require complex RF solutions spanning multiple protocols, including GPS, satellite radio, DAB, WiFi, 5G (sub-7 GHz), and UWB.
Catalog Markets
Other markets (which we group and refer to as ‘Catalog Markets’) include satellite navigation, cellular repeaters, point-to-point radios, RFID/asset tracking, defense, wireless audio, and test and measurement, as well as other high-performance RF applications. Our satellite navigation solutions enable precision location finding for agricultural, aviation, maritime, mining, and construction applications. Our solutions for the cellular repeater and point-to-point radio markets facilitate network densification and expanded coverage. Our offerings enable longer battery life and improved coverage for RFID/asset tracking and defense radios. In addition, our portfolio of devices offering a wide range of gain, linearity, and noise figure performance lend themselves to use in various demanding applications in certain product markets, including those referenced above.
Our Products
Guerrilla RF’s portfolio of products has been developed to improve performance, reduce complexity, enable smaller form factors, and solve other critical RF challenges.
Wireless Infrastructure
Our solutions for SatCom and mMIMO systems include LNAs, linear driver amplifiers, digital step attenuators, and discrete PAs. In addition, we are in the course of developing GaN amplifier modules and continuing to grow our wireless infrastructure product offerings.
Automotive
We provide automotive RF connectivity products, including LNAs, linear driver amplifiers, switches, PAs, and front-end solutions. Our automotive products are designed to meet or exceed AEC-Q101 quality and reliability standards, and we supply automotive OEMs, tier-1 suppliers, and chipset vendors.
Catalog Markets
We supply various standard RF catalog components to several markets. Our products’ unique combination of low noise, broad bandwidth, and high linearity suit many applications, including wireless audio equipment, defense and first responder 2-way radios, test and measurement equipment, cellular repeaters, and wireless backhaul point-to-point links.
Our Operations
Research and Development
Since our inception, Guerrilla RF has focused on under-served markets by providing industry-leading performance in discrete and integrated RF devices including ultra-low noise amplifiers (Ultra-LNAs), gain blocks, drivers, PAs, switches, mixers, power detectors, digital step attenuators, and infrastructure-class high power amplifiers.
We invest in research and development ("R&D") to develop products necessary to serve our target markets. Our R&D activities typically support competitive design win opportunities for significant programs at key customers, which require best-in-class performance, size, cost, and functional density. We also invest in R&D to develop new products for broader market applications. Our R&D efforts require us to focus on continuous improvement and innovation in fundamental areas, including software, simulation and modeling, systems architecture, circuit design, device packaging, module integration, and test-related materials and designs.
As a fabless semiconductor company, we utilize our wafer foundry manufacturing suppliers’ GaAs, GaN, and SOI CMOS process technologies. We combine these technologies with proprietary design methods, IP, and applications engineering expertise to improve performance, increase integration and reduce the size and cost of our products.
We work with our package and test suppliers to develop and qualify advanced packaging technologies to reduce component size, improve performance and reduce package costs. Our manufacturing partners’ capabilities enable us to bring these technologies to market in high volumes. R&D expenses totaled $10.3 million for the year ended December 31, 2023, and $8.1 million for the year ended December 31, 2022. R&D activities in 2023 focused on developing and releasing 12 new products to bring Guerrilla RF's product catalog to a total of 131 products at the end of 2023.
Raw Materials
We utilize an outsourced manufacturing model, and our manufacturing suppliers purchase raw materials to support our requirements. Our suppliers typically use industry-standard raw materials, which reduces supply chain risk. In addition, we purchase passive components for use in modules that include tuning components.
Between 2020 and 2022, the semiconductor industry experienced supply constraints for specific raw materials, including wafers and package lead frames. During 2023, there constraints eased and lead times began to return to pre-pandemic levels. We continue to work closely with our manufacturing partners, developing long-term strategic partnerships to forecast our product needs and achieve adequate manufacturing capacity to mitigate the risk of having limited availability of raw materials suppliers. As a result of these strategic partnerships, we can add suppliers, redesign products using alternative raw materials, qualify multiple wafer foundries, and extend or add supply commitments to provide flexibility in our supply chain.
Manufacturing
We believe that our outsourced manufacturing strategy allows us to identify the optimum semiconductor process technology for each product while ensuring we pay competitive prices for manufacturing. Our manufacturing suppliers are broadly distributed around the globe. We qualify additional manufacturing sites and sources of supply to reduce the risk of supply interruptions or price increases, and we closely monitor our suppliers’ key performance indicators. In addition, we seek to ensure that materials and manufacturing services are available from multiple sources. Our product manufacturing comprises a two-step process: (i) wafer fabrication; and (ii) packaging. Wafers are produced in wafer foundries by subcontractors and shipped to our assembly subcontractors for packaging. Most of our products are manufactured using a single die which is placed on a copper lead frame. We use bond wires to connect terminals on the package to the appropriate pads on the die. Material composition and wire length significantly affect the performance of the end product. Once a product has completed manufacturing, each device is RF-tested to ensure it meets published specifications. We transfer compliant devices to tape and reel -- the generally accepted method customers use in their downstream manufacturing processes.
We subcontract with multiple wafer foundries located in Taiwan and Singapore. We currently utilize GaAs HBT, GaAs pHEMT, and SOI process technologies; however, we are currently developing new products using those technologies and GaN technologies.
We partner with multiple test and assembly (packaging) subcontractors in Malaysia and the Philippines, each of whom we consider highly experienced and well-suited to support our new product roadmap. In addition, we believe that having multiple relationships provides us with additional capacity and flexibility, which is critical to risk mitigation.
Manufacturing yields vary significantly based on many factors, including product complexity, performance requirements, and the maturity of the chosen manufacturing processes. To maximize wafer yields and quality, parameters are measured throughout the manufacturing process to ensure the systems are in control and produce the expected outputs. Ongoing reliability monitoring and numerous quality control inspections are also conducted throughout the production flow to ensure that we deliver high-quality products to our customers. Semiconductor fabrication is a specialized field requiring highly controlled and clean environments. As a result, the die on a wafer can become defective due to minute impurities, variances in the fabrication process, or defects in the masks used to transfer circuit patterns onto the wafers.
Our subcontractors’ manufacturing facilities are certified to the ISO 9001 quality standard, and select locations are accredited to additional automotive (IATF 16949) and environmental (ISO 14001) standards. These stringent standards are audited and certified by third-party certification bodies. The ISO 9001 standard is the international standard for creating a quality management system. IATF 16949 is the highest international quality standard for the global automotive industry and incorporates specific additional requirements for the automotive industry. ISO 14001 is an internationally agreed-upon standard for an environmental management system. Many of our key vendors and suppliers are certified to be compliant with these standards.
We design, develop, manufacture, and market products for leading domestic and international original equipment manufacturers and original design manufacturers. We also collaborate with leading reference design partners and design consultants globally.
Our products serve the needs of a wide variety of customers across multiple industries including automotive, infrastructure, SatCom, cellular boosters/DAS, and general catalog components. Within general catalog components our customers purchase our products for various RF applications including wireless audio, RFID, and Internet of Things. The majority of sales are made via independent distributions accounting for 93% of all revenue in 2023 and 85% in 2022.
Governmental Regulation
The semiconductor industry in which we operate is highly regulated, and the products and solutions we provide are subject to a complex set of federal, State, and country-specific laws and regulations. We are also subject to the U.S. Foreign Corrupt Practices Act (“FCPA”), which prohibits improper payments or offers of payments to foreign governments and their officials for the purpose of obtaining or retaining business and requires companies to maintain accurate books and records and a system of internal accounting controls.
Import/Export Controls
Environmental
Guerrilla RF and our overseas manufacturing subcontractors are subject to various extensive and changing domestic and international federal, State, and local governmental laws, regulations, and ordinances related to the use, storage, discharge, and disposal of toxic, volatile, or otherwise hazardous chemicals used in the manufacturing process.
We monitor our manufacturing subcontractors and their compliance with applicable environmental laws and regulations.
We require that our suppliers certify their compliance with applicable environmental laws and regulations related to hazardous materials used in the manufacturing, assembly, and testing of our products, particularly materials retained in the final product. In addition, we have developed specific restrictions on the content of certain hazardous materials in our products and those of our suppliers and outsourced manufacturers and subcontractors. This practice helps ensure our products are compliant with the requirements of the markets into which we sell our products and with our customers’ needs.
Other Governmental Regulations
Government regulations are subject to change in the future. Accordingly, we cannot assess the possible effect of compliance with future requirements or whether our compliance with such regulations will materially impact our business, results of operations, or financial condition.
Sales and Marketing
We sell our products worldwide through a network of U.S. and foreign sales representative firms and distributors, and directly to customers. We select our domestic and foreign sales representatives based on their technical skills and sales expertise, complementary product lines, and customer bases. In addition, we provide ongoing educational training about our products to our internal and external sales representatives and distributors. We maintain an internal sales and marketing organization responsible for key account management, customer application engineering support, sales, and advertising literature, and technical presentations for industry conferences. Our direct sales personnel are located throughout the world. We handle all our technical customer support out of our headquarters in Greensboro, N.C.
Our website contains extensive product information and includes state-of-the-art parametric search tables that allow engineers to locate products quickly and easily. Customers can learn about our products, and download datasheets, product catalogs, s-parameters, application notes, and many other technical documents from our website. Our team of application engineers interacts with customers during all design and production stages, maintains regular contact with customer engineers, provides product application notes and engineering data, and assists in resolving technical problems. We maintain close relationships with our customers and provide them with technical support to help them anticipate future product needs. We actively seek their input to guide our product roadmaps.
Seasonality
Our sales are generated via standard purchase orders or specific agreements with customers. Historically, we have experienced seasonal fluctuations in the sale of our products driven by our customers' individual demands, oftentimes with the third and fourth quarters of our fiscal year experiencing stronger customer sales demands.
Competition
We operate in competitive environments across all of our market segments. Our end-user customers’ product life cycles can be relatively long compared to mobile phones or similar consumer products. For example, wireless infrastructure and automotive market product life cycles can be in the 5-10 year range compared to the 12-18 month range for mobile phones or similar products. Our ability to effectively compete is primarily determined by our ability to innovate with new products, improve existing products already on the market, maintain close relationships with our supply chain partners and key customers, and deliver new and improved products before our competitors. In addition, our competitiveness is affected by the quality of our customer service and technical support.
We compete primarily with Qorvo, Inc., NXP Semiconductors N.V., Skyworks Solutions, Inc., and MACOM Technology Solutions Inc.
Many of our current and potential competitors have entrenched market positions and customer relationships, established patents, and other intellectual property and substantial technological capabilities. The selection process for our products is highly competitive, and our end-user customers provide no guarantees that they will include our products in the next generation of their products. Additionally, many of our competitors may have significant financial, technical, manufacturing, and marketing resources, which may allow them to implement new technologies and develop new products more quickly.
Intellectual Property (IP)
Our IP, including patents, copyrights, trademarks, and trade secrets, is essential to our business, and we actively seek opportunities to leverage our IP portfolio to promote our business interests. We also actively seek to monitor and protect our global IP rights and deter unauthorized use of our IP and other assets. Such efforts can be complex because of the absence of consistent international standards and laws. Moreover, we respect the IP rights of others and strive to mitigate the risk of infringing or misappropriating third-party IP.
Patent applications are filed within the U.S. and may be filed in other countries where we have a market presence. On occasion, some applications do not mature into patents for various reasons, including rejections based on prior art. In addition, the laws of some foreign countries do not protect IP rights to the same extent as U.S. laws. We have two patents, each of which will expire in February 2034. Because of our rapid innovation and product development and the comparatively slow pace of patenting processes, our products could be obsolete before the related patents expire or are granted. However, we believe the duration and scope of our patents are sufficient to support our business, which as a whole is not significantly dependent on any one particular patent or IP right. As we expand our products and offerings, we also seek to expand our patent prosecution efforts to cover such products.
We periodically register federal trademarks, service marks, and trade names that distinguish our product brand names in the market. We also monitor these marks for their proper and intended use. Additionally, we rely on non-disclosure and confidentiality agreements to protect our interest in confidential and proprietary information that gives us a competitive advantage, including business strategies, unpatented inventions, designs, and process technology. Such information is closely monitored and made available only to those employees whose responsibilities require access to the data.
Rights in trademarks, service marks, and trade names do not have expiration dates. Of those rights, we have eight federal registrations at the United States Patent and Trademark Office (USPTO). The registrations have (and will have) technical expiration dates, but each is renewable indefinitely.
Human Capital
We believe that our employees are our greatest assets, and we must continue to attract, develop, retain, and motivate our employees to remain competitive and execute our business strategy. We strive to meet these objectives by offering competitive pay and benefits in a diverse, inclusive, and safe workplace. In addition, we provide opportunities for our employees to grow and develop their careers.
As of December 31, 2023, we had 60 employees including three international employees. By region, approximately 95% of our total employees are located in the United States and 5% in Asia. By primary job function, about 50% of our employees have engineering or technician roles, 6% are in operations, and 44% have sales, marketing, or other administrative roles. None of our employees is represented by labor unions or covered by collective bargaining agreements. We consider our relationship with our employees to be good.
Competitive Pay and Benefits
We provide compensation and benefits packages that we believe are competitive within our industry. We use a combination of compensation and other programs (which vary by region and salary grade) to attract, motivate and retain our employees, including stock option awards, retirement programs, unlimited personal time off, and health and wellness benefits and programs. In addition, we benchmark our compensation and benefits packages annually to remain competitive with our peers and attract and retain talent throughout our organization.
Employee Recruitment, Retention, and Development
We are committed to recruiting, hiring, retaining, promoting, and engaging a diverse workforce to serve our global customers. We have established relationships with professional associations and industry groups to attract talent proactively. In addition, we partner with universities to recruit undergraduate and graduate students for our internship program and entry-level positions. We also invest in employee development programs to provide employees with the training and education they need to help them achieve their career goals and build relevant skills.
We believe our unique corporate culture, competitive compensation and benefits programs, and career growth and development opportunities promote longer employee tenure and reduce turnover. We monitor employee turnover rates as our success depends upon retaining and investing in our highly skilled technical staff. As a result, our attrition rate has consistently been below the technology industry average.
Diversity, Equity, and Inclusion
We value the uniqueness that an inclusive and diverse global team brings to our company. Therefore, we are focused on creating an environment that leverages the perspectives and contributions of each employee.
Safety, Health, and Wellness
We prioritize safe working conditions. We are committed to an injury-free workplace and provide dedicated workplace training and leadership support to reduce or eliminate health and safety risks.
Facilities
Our corporate headquarters are located in Greensboro, NC, where we lease approximately 50,000 square feet of office space under a lease agreement that commenced in the first quarter of 2023 when we took possession of the building. The lease term for our headquarters is 10 years and two months. We also continue to lease our old headquarters building, consisting of approximately 10,000 square feet of office space, and this lease expires in June 2024 subject to a right to early termination upon payment of an early termination fee. In 2023 we sublet a portion of our old headquarters building for a period of six months.
Investing in our securities involves a high degree of risk. Before making your decision to invest in shares of our common stock, you should carefully consider the risks described below, together with the other information contained in this Annual Report, including our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that affect us. We cannot assure you that any of the events discussed below will not occur. These events could have a material and adverse impact on our business, financial condition, results of operations, and prospects. If that were to happen, the trading price of our common stock could decline, and you could lose all or part of your investment.
Risk Factors Summary
● | Our ability to continue as a going concern will depend on us achieving profitability or being able to raise significant additional capital to fund our operations, which may be unavailable on attractive terms, if at all, and could dilute your investment. | |
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We have incurred significant losses in the past and will experience losses in the future. Our business and stock price may be adversely affected if we cannot make consistent progress toward future profitability. |
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● | We may not generate or have sufficient cash available to fund our operations, service our debt, fund capital expenditures, or support our business growth, and we may be unable to find additional sources of capital. As a result, we may be forced to take other actions to satisfy our debt obligations and financing requirements, which may not be successful or on terms favorable to us. |
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● | Our ability to realize our deferred tax asset and deduct certain future losses could be limited if we experience, or are deemed to already have experienced, an ownership change as defined in the U.S. Internal Revenue Code. |
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We have a limited operating history upon which investors can evaluate our business and prospects. |
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If we fail to maintain effective internal control over financial reporting, we may not be able to report our financial results accurately and timely. |
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Our sales have been concentrated in a small number of customers. |
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We may require additional capital to support our business growth, and such capital may not be available. |
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We are still developing many of our products, and they may not be accepted in the market or by significant customers. |
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Our operating results are substantially dependent on developing new products and achieving design wins. Therefore, our future revenues that fund our growth in operations, continuing product development, administrative costs, and sales and marketing efforts are highly dependent on winning slots for our new product offerings. |
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We depend heavily on a single electronics distribution company to augment the reach of our field sales team and stock our products for a quick fulfillment of orders to numerous end users of our products. Therefore, any disruption of this relationship would result in a significant loss of sales to the extensive market participants with whom we place our products. Furthermore, any disruption of our relationship with this distributor could result in their default in a large portion of our accounts receivable, which can often exceed 60% of total commercial receivables due to us. |
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We depend heavily on third parties, especially in our supply chain. Therefore, any disruption in our third-party supply chain relationships, either due to their constraints or their respective decision to suspend materials delivery, would adversely affect our ability to make products and execute sales orders. We may not be able to recover from any disruption that lasts a significant period of time. |
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We sell to several large companies with considerable bargaining power, which may require us to agree to terms and conditions that could harm our business or ability to recognize revenues. |
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We face risks related to sales through independent sales representatives and distributors. |
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If we experience poor manufacturing yields, our operating results may suffer. |
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We are subject to inventory risks and costs because we build our products based on anticipated customer orders and forecasts often before receiving purchase orders for the products. |
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We operate in a very competitive industry and must continue to innovate. |
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Unfavorable changes in interest rates, pricing of certain precious metals, utility rates, and foreign currency exchange rates may adversely affect our financial condition, liquidity, and results of operations. |
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Failure to retain and recruit essential engineering, operations, sales/marketing, and administrative talent could negatively impact our business and financial results. |
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Litigation or legal proceedings could expose us to significant liabilities, occupy a considerable amount of our management’s time and attention, and damage our reputation. |
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We rely on our intellectual property and copyrighted designs. As a result, we may not be able to successfully protect against the use of our intellectual property by third parties. As a result, we may be subject to claims of infringement of third-party intellectual property rights. |
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We face risks from manufacturing and packaging our products by outside parties located in Taiwan, Singapore, the Philippines, and Malaysia. These risks may include quality failures, export and import complexities and disruptions, geopolitical issues, factory failures or closures, local or global laws violations, and sudden process manufacturing deviations. |
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Government regulation may adversely affect our business. Economic regulation in the People's Republic of China (the "PRC") and other countries where we sell products could adversely impact our business and the results of operations. Changes in government trade policies, including the imposition of tariffs and export restrictions, have limited and could continue to limit our ability to sell or provide our products and other items to specific customers and suppliers, which may materially adversely affect our sales and results of operations. |
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Security breaches and other disruptions could compromise our proprietary information and expose us to liability, which would cause our business and reputation to suffer. |
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There is currently a limited market for our common stock, and there can be no assurance that a more liquid market will ever develop. Therefore, you may be unable to resell shares of our common stock at times, and prices that you believe are appropriate. |
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We do not intend to pay dividends for the foreseeable future, and, as a result, your ability to achieve a return on your investment will depend on the appreciation of the price of our common stock. |
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Our international operations subject us to additional risks that can adversely affect our business results of operations and financial condition. |
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Our revenues are dependent on our ability to maintain and expand existing customer relationships and our ability to attract new customers. |
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If we fail to increase market awareness of our brand and products, expand our sales and marketing operations, improve our sales execution, and increase our sales channels, our business could be harmed. |
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
Our ability to continue as a going concern will depend on us achieving profitability or being able to raise significant additional capital and/or secure additional loans to fund our operations, which may be unavailable on attractive terms, if at all.
Our recurring operating losses and our current operating plans raise substantial doubt about our ability to continue as a going concern for the next twelve months. Our independent registered public accounting firm issued their audit report on our consolidated financial statements for the years ended December 31, 2023 and 2022, which included an explanatory paragraph as to our ability to continue as a going concern. While we believe that our existing cash and cash equivalents will be sufficient to fund our current operating plans through the rest of this fiscal year and beyond, we have based these estimates on assumptions that may prove to be wrong, and we could spend our available financial resources much faster than we currently expect and need to raise additional funds sooner than we anticipate.
Our ability to continue as a going concern will depend on us achieving profitability or being able to raise additional capital and/or secure additional loans to fund our operations and achieve our business objectives. Our cash balance stood at $0.8 million on December 31, 2023; and we have recorded a net loss of $16.0 million for the year ended December 31, 2023, or approximately $1.3 million per month. On March 28, 2024 , we completed a private placement offering of approximately $5 million, raising net cash proceeds of approximately $3 million, after deduction of expenses and the conversion of existing debt.
We have fully drawn down all available funds under our existing loan facility (the "Salem Loan Facility") with Salem Investment Partners V, Limited Partnership ("Salem") of $12.0 million. We continue to utilize to our fullest ability our asset based line with Spectrum Commercial Services Company, L.L.C. ("Spectrum") (the "Spectrum Loan Facility"); however, our 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 our control. We continue to focus on expense reduction and achieve profitability; however, if we are unable to become profitable or raise additional capital and/or secure additional loans when needed or on acceptable terms, we may not be able to do certain things, including but not limited to:
● develop or enhance our products;
● continue and expand our R&D activities;
● continue to expand our sales and marketing organization;
● acquire complementary technologies, products, or businesses;
● expand operations, in the United States or internationally;
● hire, train, and retain employees; or,
● respond to competitive pressures or unanticipated working capital requirements.
Our failure to do any of the aforementioned things could harm our business, financial condition and results of operations. Ultimately, if we do not become profitable or secure additional financing in a timely manner, we will be unable to fund ongoing operations and pay our obligations as they become due, affecting our ability to continue as a going concern.
We have incurred significant losses in the past and will likely experience losses in the future.
We have incurred significant losses in the past and recorded a net loss of $16.0 million for the year ended December 31, 2023, and $12.0 million for the year ended December 31, 2022. As of December 31, 2023, we had an accumulated deficit of $43.0 million and $27.1 million at December 31, 2022. Our business and stock price may be adversely affected if we cannot make consistent progress toward future profitability.
Our ability to be profitable in the future depends upon continued demand for our products from existing and new customers. Furthermore, further adoption of our products depends upon our ability to improve the quality of our products. In addition, our profitability will be affected by, among other things, our ability to execute on our business strategy, the timing and size of customer orders, the pricing and costs of our products, competitive offerings, macroeconomic conditions affecting the semiconductor industry, and the extent to which we invest in sales and marketing, research and development, and general and administrative resources.
Our ability to realize our deferred tax asset and deduct certain future losses could be limited if we experience an ownership change as defined in the U.S. Internal Revenue Code of 1986, as amended ("Code").
Under the Code, a corporation is generally allowed a deduction for net operating losses ("NOLs") carried over from prior taxable years. As of December 31, 2023, we had approximately $28.9 million of gross federal and State NOLs and $0.6 million of other carryforwards available to reduce future federal taxable income. Our ability to use our NOLs and other carryforwards will depend on the amount of taxable income generated in future periods. A corporation’s ability to deduct its federal NOL carryforwards and to utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 of the Code if it undergoes an “ownership change” as defined in Section 382 (generally, where cumulative stock ownership changes among material stockholders exceed 50% during a rolling three-year period). Accordingly, if the Company were to undergo an "ownership change", our ability to utilize our NOLs and other carryforwards would be limited, and this could have a material effect on our business, financial condition, and results of operations. The relevant calculations for Section 382 are technical and highly complex.
As of December 31, 2023, the Company does not believe that an “ownership change” has occurred. Subsequent to year-end, the Company issued additional shares of common stock in a private placement offering. The Company has not analyzed whether, as a result, it is deemed to have experienced an “ownership change”; however, if an “ownership change” is deemed to have occurred or occurs in the future, such change may result in the expiration of a portion of the Company's NOLs and other carryforwards before utilization. Any such “ownership change” could have a material adverse effect on our future business, results of operations, financial condition, and the value of our common stock.
Market and economic conditions may negatively impact our business, financial condition, and share price.
Concerns over inflation, energy costs, geopolitical issues, the U.S. mortgage market and a declining real estate market, unstable global credit markets and financial conditions, and volatile oil prices have led to periods of significant economic instability, diminished liquidity and credit availability, declines in consumer confidence and discretionary spending, diminished expectations for the global economy and expectations of slower global economic growth going forward, and increased credit defaults. Our general business strategy may be adversely affected by any such economic downturns, volatile business environments and continued unstable or unpredictable economic and market conditions. If these conditions continue to deteriorate or do not improve, it may make any necessary debt or equity financing more difficult to complete, more costly, and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance, and share price and could require us to delay or abandon development or commercialization plans.
If we fail to maintain effective internal control over financial reporting, we may not be able to report our financial results accurately and timely.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles (“GAAP”). Our management is likewise required, on a quarterly basis, to evaluate the effectiveness of our internal controls and to disclose any changes and material weaknesses identified through such evaluation in those internal controls. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the Company’s financial reporting.
We previously identified material weaknesses that have since been remediated. We have identified a significant deficiency in our internal control over financial reporting. We have implemented measures designed to address this significant deficiency and will continue to implement measures designed to improve our internal control over financial reporting and disclosure controls and procedures. However, we can offer no assurance that these remediation steps will prevent any future deficiencies in our internal control over financial reporting. Any failure to maintain adequate internal control over financial reporting could adversely impact our ability to report our financial position and results from operations on a timely and accurate basis, which in turn could harm our business, impair investor confidence in the accuracy and completeness of our financial reports, impair our access to the capital markets, cause the price of our common stock to decline and subject us to higher risk of shareholder litigation.
We have a limited operating history upon which investors can evaluate our business and prospects.
We are an emerging commercial company that began commercial operations selling products in 2014. Since we base our expectations of potential customers and future demand for our products on only limited experience, it is difficult for our management and investors to forecast and evaluate our prospects and revenues accurately. Therefore, the proposed progression of our operations is subject to the risks inherent in light of the expenses, difficulties, complications, and delays frequently encountered in connection with the growth of any new business, as well as those risks that are specific to our Company in particular. The risks include but are not limited to our reliance on third parties to complete some processes for the manufacturing and packaging of our products and the possibility that we will not be able to achieve design wins with our products. In addition, to successfully introduce and market our products at a profit, we must establish brand name recognition and competitive advantages for our products. There are no assurances that the Company can successfully address these challenges. If unsuccessful, the Company and its business, financial condition, and operating results will be materially and adversely affected.
We may not generate sufficient cash to service our current or future debt or fund capital expenditures. As a result, we may be forced to take other actions to satisfy our debt obligations and financing requirements, which may not be successful or on terms favorable to us.
Our ability to make scheduled payments on, or to refinance, our current or future debt obligations and to fund working capital, planned expenditures and expansion efforts depends on our ability to achieve profitability or raise additional funds, and on our financial condition and operating performance. However, our financial condition and operating performance are subject to prevailing economic and competitive conditions and specific financial, business, and other factors beyond our control. As a result, we cannot ensure that we will maintain a level of cash flows from operating activities sufficient to permit us to pay our debt. For example, should our cash flows and capital resources be insufficient to fund our debt service obligations, we may face liquidity issues and be forced to reduce or delay investments and capital expenditures, sell assets, seek additional capital, or restructure or refinance our debt. These alternative measures may not be successful and may not permit us to meet our scheduled debt service and other obligations.
Our operating results are substantially dependent on developing new products and achieving design wins. Therefore, our future revenues that fund our growth in operations, continuing product development, administrative costs, and sales and marketing efforts are highly dependent on winning slots for our new product offerings.
Our largest markets are characterized by high levels of competition from formidable market participants, and they are often much larger in size and have greater capacity than us. Therefore, to effectively compete in our markets, we must introduce new product solutions that satisfy customer demands for greater functionality and improved performance. However, it is possible that we may fail to provide such solutions in time for our end-user customers’ design cycles. In that case, we may experience a lack of growth that is central to our strategic plans or even suffer substantial decreases in our revenue by missing out on these design windows.
Our success depends on our ability to develop and introduce new products in a timely and cost-effective manner and secure production orders from our customers. The development of new products is a highly complex process, and we have experienced delays in completing the development and introduction of new products at times.
We participate in markets with a broad array of applications, which makes our ability to predict market requirements more challenging and consequently makes the definition and design of new products that address those requirements more difficult to ensure the future success of our business.
Our success at effective product development depends on several factors, including the following:
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our ability to design products that meet industry requirements, costs, and performance levels, including specific customer product requirements; |
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our ability to introduce new products that are competitive and that we can offer at competitive prices for the functionality and performance delivered; |
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our ability to recruit and retain qualified product design engineers; |
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our ability to supply products that are highly reliable and free of defects; |
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our ability to meet industry and customer product ramps; and, |
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the success of our customers’ products in the market, which, in turn, determines the demand for our chips. |
The industry and the markets in which we operate are highly competitive and subject to rapid technological change. Therefore, for our RF products to be competitive and achieve market acceptance, we need to keep pace with the rapid development of new process technologies.
The markets in which we compete are intensely competitive. We operate primarily in the industry that designs and produces semiconductor components for wireless communications and other wireless devices, which are subject to rapid changes in both product and process technologies based on demand and evolving industry standards. The markets for our products are characterized by:
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rapid changes in customer requirements; |
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frequent new product introductions and enhancements; |
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continuous demand for higher levels of integration, decreased size, and reduced power consumption; |
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fluctuating pricing; and, |
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evolving industry standards. |
Our R&D activity and resulting products could become obsolete or less competitive sooner than anticipated because of a faster-than-expected change in one or more of the above-noted factors. Therefore, for our products to be competitive and achieve market acceptance, we need to keep pace with the rapid development of new process technologies, which requires us to:
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respond effectively to technological advances through the timely introduction of new technologies and products; |
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successfully implement our strategies and execute our R&D plan in practice; and, |
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implement cost reductions in the manufacturing of our products. |
Many of our current and potential competitors have entrenched market positions and customer relationships, established patents, and other IP and substantial technological capabilities. Additionally, many of our competitors may have significant financial, technical, manufacturing, and marketing resources, which may allow them to implement new technologies and develop new products more quickly.
We may require additional capital to support our business growth, and such capital may not be available.
We intend to continue making investments to support business growth. We may require additional funds to respond to business challenges, including developing new solutions or enhancing existing solutions, enhancing our operating infrastructure, expanding our sales and marketing capabilities, and acquiring complementary businesses, technologies, or assets. However, equity and debt financing might not be available when needed or, if available, might not be available on terms satisfactory to us. If we raise additional funds through equity financing, our stockholders may experience dilution. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. If we are unable to obtain adequate financing or financing on terms satisfactory to us in the future, our ability to continue as a going concern, to support our business growth, and to respond to business challenges could be significantly limited as we may have to delay, reduce the scope of, or eliminate some or all of our initiatives, which could harm our operating results.
We are still developing many of our products, and they may not be accepted in the market or by significant customers.
Although we believe that our products provide advantages over existing MMIC products in the market, we cannot be sure that new products will achieve market acceptance.
The successful development and market acceptance of our MMIC products will be highly complex and will depend on the following principal competitive factors, including our ability to:
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comply with industry standards and effectively compete against current products; |
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differentiate our products from the offerings of our competitors by delivering MMICs that are higher in quality, reliability, and technical performance; |
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anticipate customer and market requirements, changes in technology and industry standards, and timely develop improved technologies that meet high levels of satisfaction among our potential customers; |
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maintain, grow and manage our internal teams to the extent we increase our operations and develop new segments of our business; |
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build and sustain successful collaborative, strategic, and other relationships with manufacturers, customers, and contractors; |
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protect, create or otherwise obtain adequate IP for our technology; and, |
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achieve strong financial, sales, marketing, technical and other resources necessary to develop, test, manufacture, and market our products. |
If we are unsuccessful in accomplishing these objectives, we may not compete successfully against current and potential competitors. As a result, the market may not accept our future MMIC products.
In addition, Tier 1 manufacturers may be less receptive to adopting solutions from smaller companies such as the Company due to their desire to limit the expansion of their approved vendor lists. The Company could also face pressure from competitors who can provide more lucrative bundling options due to the breadth of their overall portfolio.
We depend on a large distributor and several large customers in the automotive and wireless infrastructure market.
A substantial portion of our product revenue results from sales to large suppliers in the automotive industry, which requires special performance and reliability requirements and stringent volume delivery demands. In addition, we rely heavily on the wireless infrastructure market, which, similar to our automotive customers, requires we reliably meet high-volume delivery schedules. Therefore, our future operating results will be heavily affected by the success of large automotive and wireless infrastructure customers.
Our three largest end customers collectively accounted for approximately 45% and 49% of our revenue for 2023 and 2022, respectively. We often service end customers through our largest distributor, who will ship to and bill directly for product shipments. The concentration of billings to this distributor as a portion of our total revenues was 81% and 76% for fiscal years 2023 and 2022, respectively. It is possible that demand for their customers’ products decreases materially.
We depend heavily on third parties.
We partner with a limited number of external suppliers and rely on them to fulfill our customers’ orders. These third-party suppliers perform complex manufacturing processes, including die processing, packaging, and test, tape and reel. The semiconductor industry has experienced supply constraints for specific items.
If these third-party suppliers fail to deliver our products on time, we will be unable to satisfy our customers’ orders, which will negatively impact our financial results, cash flow, and our ability to fund further product development efforts.
Our key suppliers commit to being compliant with applicable ISO 9001 quality standards; however, should they experience quality and reliability issues, this may delay shipments to our customers and negatively affect our reputation directly with customers and our reputation in the market, which could negatively impact our financial results.
We sell to several large companies with considerable bargaining power, which may require us to agree to terms and conditions that could harm our business or ability to recognize revenues.
Large companies comprise a significant portion of our current and target customer base. These customers generally have greater purchasing power than smaller entities and, accordingly, often demand more favorable terms from suppliers, including us. As a result, as we seek to expand our sales to existing customers and acquire new customers, we may be required to agree to terms and conditions that are more favorable to our customers, and that may affect the timing of our ability to recognize revenue, increase our costs, and harm our business, financial condition, and results of operations. Failure to satisfy such onerous terms may result in litigation, damages, additional costs, market share loss, and reputation loss. Additionally, these large customers may require that we agree to most-favored customer or exclusivity provisions concerning specific products that restrict our ability to do business with other customers causing us to increasingly rely on such large customers.
We face risks related to sales through independent sales representatives and distributors.
We sell a significant portion of our products through third-party distributors. We depend on these distributors to help us create end-customer demand, provide technical support and other value-added services to customers, fill customer orders, and stock our products. As a result, a material change in our relationship with one or more of these distributors or their failure to perform as expected could negatively impact our financial results.
Our ability to add or replace distributors for some of our products may be limited because our end-customers may be hesitant to accept the addition or replacement of a distributor due to advantages in the incumbent distributors’ technical support and favorable business terms related to payments, discounts, and stocking of acceptable inventory levels.
Using third parties for sales representation and distribution exposes us to many risks, including competitive pressure, concentration, credit risk, and compliance risks. Other third parties may use one of our distributors or sales representatives to sell products that compete with our products. We may need to provide financial and other incentives, such as higher commission rates, to encourage them to prioritize the sale of our products. Our distributors may face financial difficulties, including bankruptcy, which could harm our collection of accounts receivable and financial results. Violations of the FCPA or similar laws by our distributors or other third-party intermediaries could have a material impact on our business.
Failure to manage risks related to our use of distributors or other third-party intermediaries may reduce sales, increase expenses, and weaken our competitive position.
Business disruptions could harm our business and adversely affect our results of operations.
Our business could be disrupted by natural disasters, industrial accidents, cybersecurity incidents, telecommunications failures, power or water shortages, extreme weather conditions, public health issues, military actions, acts of terrorism, political or regulatory issues, and other man-made disasters or catastrophic events.
We carry commercial property damage and business interruption insurance against various risks, with limits we deem adequate, for reimbursement for damage to our fixed assets and the resulting disruption of our operations. However, this coverage likely would not wholly cover the negative impact on our business for any lengthy interruption, which could harm our Company in an unanticipated way and result in significant losses, a decline in revenue, and an increase in our costs and expenses. Disruptions from these events would likely require substantial recovery time and impact profits and cash flow in a significant manner. In addition, such business disruptions would adversely impact our relationships with our customers.
If our customers independently experience comparable business disruptions, they may reduce or cancel their orders, which may adversely affect our results of operations.
If we experience poor manufacturing yields, our operating results may suffer.
Our products are unique and fabricated using semiconductor process technologies that are highly complex. In some cases, we assemble our products in customized packages. Some of our products consist of multiple components in a single module and feature enhanced levels of integration and complexity. Our customers insist that we design our products to meet their same quality, performance, and reliability specifications. Our manufacturing yield is a combination of yields across the entire supply chain, including wafer fabrication, assembly, and test yields. Due to the complexity of our products, we periodically experience difficulties in achieving acceptable yields, particularly for new products.
Our end-user customers test our products once they assemble them into their products. The number of usable products that result from our subcontractor production process can fluctuate because of many factors, including:
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design errors; |
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defects in photomasks (which are used to print circuits on a wafer); |
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minute impurities and variations in materials used; |
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contamination of the manufacturing environment; |
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equipment failure or variations in the manufacturing processes; |
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losses from broken wafers or other human error; and, |
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defects in substrates and packaging. |
Although our supply chain partners and our engineering and quality groups constantly seek to improve our manufacturing yields, such efforts may encounter significant barriers to success resulting in less-than-optimal yields or losses that would directly impact profits and increase costs and lower cash flows. For example, costs of product defects and deviations from required specifications include the following:
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disposal of inventory or financial write-offs of inventory; |
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accepting returns of products; |
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providing product replacements at no charge; |
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reimbursement of direct and indirect costs incurred by our customers in recalling or reworking their products due to defects in our products; |
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travel and personnel costs to investigate potential product quality issues and to identify or confirm the failure mechanism or root cause of product defects; and, |
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defending against litigation. |
These issues could negatively impact our market position and reputation with customers, resulting in long-term harm to our business and financial results.
We are subject to inventory risks and costs because we build our products based on anticipated customer orders and forecasts often before receiving purchase orders for the products.
To ensure the availability of our products for some of our largest end-user customers, we start manufacturing certain products in advance of receiving purchase orders based on forecasts provided by these customers. However, these forecasts do not represent binding purchase commitments, and we do not recognize sales for these products until they are shipped to our customers. As a result, we incur significant inventory and manufacturing costs in advance of anticipated sales. Because demand for our products may not materialize or may be lower than expected, manufacturing based on forecasts subjects us to heightened risks of higher inventory carrying costs, increased obsolescence, and higher operating costs. In addition, if product demand decreases or we fail to forecast demand accurately, we could be required to write off inventory, which would negatively impact our gross margin and other operating results.
We operate in a very competitive industry and must continue to innovate.
We compete with several companies primarily to design, manufacture, and sell RF solutions and discrete integrated circuits and modules. Increased competition from any source could adversely affect our operating results through lower prices for our products, reduced demand for our products, losses of existing design slots with critical customers, and a corresponding reduction in our ability to recover development, engineering, and manufacturing costs.
Many of our existing and potential competitors have entrenched market positions, historical affiliations with OEMs, considerable internal manufacturing capacity, established IP rights, and substantial technological capabilities. The semiconductor industry has experienced increased industry consolidation over the last several years, a trend we expect to continue. Many of our existing and potential competitors may have more significant financial, technical, manufacturing, or marketing resources than we do. As a result, we cannot be sure that we will compete successfully with our competitors.
Unfavorable changes in interest rates, pricing of certain precious metals, utility rates, and foreign currency exchange rates may adversely affect our financial condition, liquidity, and results of operations.
Any of these macro conditions could negatively impact our supply chain partners and the industry as a whole, which could materially decrease our profits and cash flow.
To compete, we must attract, retain, and motivate key employees, and our failure to do so could harm our business and our results of operations.
We must hire and retain qualified employees, develop leaders for essential business functions, and train and motivate our employees. Our future operating results and success depend on keeping critical technical personnel and management and expanding our sales and marketing, R&D, finance, and administration personnel. We do not have employment agreements with the vast majority of our employees.
We must attract qualified personnel. The competition for qualified personnel is intense, especially considering the size of our organization, which must compete with much larger companies for top talent. The number of people with experience, particularly in RF engineering, software engineering, integrated circuit design, and technical marketing and support, is limited. In addition, existing or new immigration laws, policies, or regulations in the U.S. may limit the pool of available talent. Changes in the interpretation and application of employment-related laws to our workforce practices may also result in increased operating costs and less flexibility in meeting our changing workforce needs. As a result, we cannot be sure that we will be able to attract and retain skilled personnel in the future, which could harm our business and our results of operations.
Litigation or legal proceedings could expose us to significant liabilities, occupy a considerable amount of our management’s time and attention, and damage our reputation.
We may, from time to time, be a party to various litigation claims and legal proceedings. We will evaluate these claims and proceedings to assess the likelihood of unfavorable outcomes and estimate, if possible, the amount of potential losses. For example, our manufacturers’ failure to successfully manufacture products that conform to our design specifications and the U.S. Federal Communications Commission's ("FCC") strict regulatory requirements may lead to product defects and substantial costs to repair or replace these parts or materials, significantly impacting our ability to develop and implement our technology and improve our products’ performance. In addition, claims made or threatened by our suppliers, distributors, end-user customers, competitors, or current or former employees could adversely affect our relationships, damage our reputation, or otherwise adversely affect our business, financial condition, or results of operations. The costs associated with defending legal claims and paying damages could be substantial. Our reputation could also be adversely affected by such claims, whether or not successful.
We may establish reserves as appropriate based upon assessments and estimates under our accounting policies in accordance with U.S. GAAP. We base our assessments, estimates, and disclosures on the information available to us at the time and rely on legal and management judgment. Actual outcomes or losses may differ materially from assessments and estimates. Actual settlements, verdicts, or resolutions of these claims or proceedings may negatively affect our business and financial performance. For example, a successful claim against us that is not covered by insurance or over our available insurance limits could require us to make significant damages payments and could materially adversely affect our financial condition, results of operations, and cash flows.
We may become subject to warranty claims, product recalls, and product liability claims that could materially and adversely affect our financial condition and results of operations.
We may become subject to warranty claims, product recalls, and product liability claims that could lead to significant expenses. In addition, although we maintain reserves for reasonably estimable liabilities and purchase product liability insurance, we may elect to self-insure concerning some issues, and our reserves may be inadequate to cover the uninsured portion of such claims.
Product liability insurance is subject to significant deductibles, and such insurance may be unavailable or inadequate to protect against all claims. If one of our end-user customers recalls a product containing one of our devices, we may incur material costs and expenses, including replacement costs, direct and indirect product recall-related costs, diversion of technical and other resources, and reputational harm. Our customer contracts typically contain warranty and indemnification provisions, and in some instances, may also have liquidated damages provisions relating to product quality issues. The potential liabilities associated with such provisions are significant, and in some cases, are included in agreements with some of our largest end customers. Any such liabilities may significantly exceed any revenue we receive from the sale of the relevant products. Costs, payments, or damages incurred or paid by us in connection with warranty and product liability claims and product recalls could materially and adversely affect our financial condition and the results of operations.
Impact of Product Demand on our Business
Our revenue, earnings, margins, and other operating results have fluctuated significantly and may fluctuate considerably in the future. If demand for our products weakens as a result of economic conditions or for other reasons, our revenue and profitability will be impacted. Our future operating results will depend on many factors, including business, political and macroeconomic changes such as trade restrictions and recession or slowing growth in the semiconductor industry and the overall global economy.
If demand for our products slows, our financial and operating results will be negatively impacted, thus impeding our ability to fund future product development efforts and, in extreme cases, negatively impacting our ability to finance normal operations without acquiring funds through credit or equity raises.
In addition, if our end customers experience spikes in demand far more than anticipated, our ability to respond effectively to such demand might be impacted. This type of demand surge could negatively impact cash flow (e.g., supply chain inventory requirements) in the short term and potential loss of credibility with the industry in the long term if we do not meet demands reasonably.
We are subject to high degrees of product demand variability. Even if we achieve a design win, our customers can delay or cancel a program without advanced warning, creating risk for inventory obsolescence, ineffective use of cash, and resources channeled to less-than-optimal business opportunities. The loss of a design win and failure to add new design wins to replace lost revenue and weakened customer demand would have a material adverse effect on our business, financial condition, and the results of operations.
We rely on our intellectual property portfolio and may not be able to successfully protect against the use of our intellectual property by third parties.
We rely on a combination of patents, trademarks, trade secret laws, confidentiality procedures, and licensing arrangements to protect our intellectual property rights. We cannot be sure that patents will be issued from any pending applications or that patents will be issued in all countries where we can sell our products. Further, we cannot be sure that any claims allowed from pending applications will be of sufficient scope or strength to provide meaningful protection against our competitors. Our competitors may also be able to design around our patents.
The laws of some countries in which we develop, manufacture, or sell our products may not protect our products or intellectual property rights to the same extent as U.S. laws. This risk increases the possibility of misappropriation or infringement of our technology and products. Although we intend to defend our intellectual property rights vigorously, we may not be able to prevent the misappropriation of our technology. Additionally, our competitors may independently develop non-infringing technologies that are substantially equivalent or superior to ours.
We may need to engage in legal actions to enforce or defend our intellectual property rights. Generally, intellectual property litigation is both expensive and unpredictable. Our involvement in intellectual property litigation could divert the attention of our management and technical personnel and have a material, adverse effect on our business.
We may be subject to claims of infringement of third-party intellectual property rights.
Our operating results may be adversely affected if third parties claim that our products infringed their patent, copyright, or other intellectual property rights. Such assertions could lead to expensive and unpredictable litigation, diverting the attention of management and technical personnel. An unsuccessful result in such litigation could adversely affect our business, including injunctions, exclusion orders, and royalty payments to third parties. In addition, if one of our customers or a supplier to one of our customers is found to have infringed on third-party intellectual property rights, such a finding could adversely affect the demand for our products.
If our products contribute to a data security breach, we may lose current or future customers, our reputation and business may be harmed, and we may incur liabilities.
Our end-user customers use our products in a wide variety of ways. Although we do not control security features surrounding the use of our products by our end-user customers, our end-user customers’ security measures may not detect or prevent hacker interceptions, break-ins, security breaches, the introduction of viruses or malicious code, such as “ransomware,” and other disruptions that may jeopardize the security of information transmitted through an electronic pathway using our products. In addition, cyber-attacks and other malicious Internet-based activity continue to increase generally. They may be directed at either the electronic transmission pathway within which our end-user customers use our products or even our own our corporate information technology software and infrastructure.
Because techniques used to obtain unauthorized access, exploit vulnerabilities, or sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques, patch vulnerabilities, or implement adequate preventative measures as we research and develop our products. In addition, certain of our end-user customers may have a greater sensitivity to security defects or breaches in electronic pathways using our products. As a result, any actual or perceived security breach or theft of the business-critical data of one or more of our end-user customers, regardless of whether the breach is attributable to the electronic transmission through one of our products, may adversely affect the market’s perception of our products. There can be no assurance that limitation of liability, indemnification, or other protective provisions in our contracts would be applicable, enforceable, or adequate in connection with a security breach, or would otherwise protect us from any such liabilities or damages concerning any particular claim. We also cannot be sure that our existing general liability insurance coverage and coverage for errors or omissions will continue to be available on acceptable terms or will be available in sufficient amounts to cover one or more large claims, or that the insurer will not deny coverage as to any future claim. As a result, one or more large claims may be asserted against us that exceed our available insurance coverage, or changes in our insurance policies may occur, including premium increases or the imposition of large deductible or co-insurance requirements.
Furthermore, a party that can circumvent security measures or exploit any vulnerabilities in end-user customer systems using our products could misappropriate our end-user customers’ proprietary or confidential information, cause an interruption in their operations, damage or misuse their computer systems, misuse any information that they misappropriate, cause termination of our sales with those end-user customers, subject us to notification and indemnity obligations, litigation, and regulatory investigation or governmental sanctions, cause us to lose existing customers, and harm our ability to attract future customers. Any such breach could cause harm to our reputation, business, financial condition, and results of operations, and we may incur significant liability. As a result, our business and financial position may be harmed.
Security breaches and other disruptions could compromise our proprietary information and expose us to liability, which would cause our business and reputation to suffer.
We rely on trade secrets, technical know-how, and other unpatented proprietary information relating to our product development and manufacturing activities to provide us with competitive advantages. We protect this information by entering into confidentiality agreements with our employees, consultants, strategic partners, and other third parties. We also design our computer systems and networks and implement various procedures to restrict unauthorized access to the dissemination of our proprietary information.
We face internal and external data security threats. For example, current, departing, or former employees or third parties could attempt to improperly use or access our computer systems and networks to copy, obtain, or misappropriate our proprietary information or otherwise interrupt our business. Like others, we are also subject to significant system or network disruptions from numerous causes, including computer viruses and other cyber-attacks, facility access issues, new system implementations, and energy blackouts.
Security breaches, computer malware, phishing, spoofing, and other cyber-attacks have become more prevalent and sophisticated in recent years. While we defend against these threats daily, we do not believe that such attacks have caused us any material damage to date. Because the techniques used by computer hackers and others to access or sabotage networks constantly evolve and generally are not recognized until launched against a target, we may be unable to anticipate, counter, or ameliorate all these techniques. As a result, our and our customers’ proprietary information may be misappropriated, and we cannot predict the impact of any future incident. Any loss of such information could harm our competitive position, result in a loss of customer confidence in the adequacy of our threat mitigation and detection processes and procedures, cause us to incur significant costs to remedy the damages caused by the incident, and divert management and other resources. We routinely implement improvements to our network security safeguards, and we are devoting increasing resources to the security of our information technology systems. However, we cannot assure you that such system improvements will be sufficient to prevent or limit damage from future cyber-attacks or network disruptions.
The costs related to cyber-attacks or other security threats, or computer systems disruptions typically would not be fully insured or indemnified by others. As a result, the occurrence of any of the events described above could result in the loss of competitive advantages derived from our R&D efforts or our IP. Moreover, these events may result in the early obsolescence of our products, product development delays, or diversion of the attention of management and critical information technology and other resources, or otherwise, adversely affect our internal operations and reputation or degrade our financial results and stock price.
Our sales have been concentrated in a small number of end-user customers.
Our revenues have been concentrated in a relatively small number of large end-user customers, and we have historically derived a significant percentage of our total product revenues from a few end-user customers. For fiscal years ended December 31, 2023, and 2022, our five largest end-user customers accounted for approximately 60% and 54% of our total product revenues, respectively. If one of our large end-user customers ceases or significantly reduces its product orders from us, or if we fail to generate additional product sales with these or similarly significant end-user customers, there could be a material adverse effect on our business, financial condition or results of operations.
We expect that we will continue to depend upon a relatively small number of end-user customers for a significant portion of our total revenues for the foreseeable future. Therefore, the loss of any of these end-user customers or industry sector groups of end-user customers for any reason or a change of relationship with any of our key end-user customers could cause a material decrease in our total revenues.
Additionally, mergers or consolidations among our end-user customers could reduce the number of our end-user customers and could adversely affect our revenues and sales. In particular, if our end-user customers are acquired by entities that are not also our end-user customers, that do not use our products or purchase products from one of our competitors, and choose to discontinue, reduce or change the volume of product purchases from us, our business and operating results could be materially and adversely affected.
We depend on many technology providers, and if we cannot source solutions from them, our business and operating results could be harmed.
Our product design and development processes incorporate multiple software components obtained from licensors on a non-exclusive basis. Our license agreements can be terminated for cause. In many cases, these license agreements specify a limited term and are only renewable beyond that term with the licensor’s consent. If a licensor terminates a license agreement for cause, objects to its renewal or conditions renewal on modified terms and conditions, we may be unable to obtain licenses for equivalent software components on reasonable terms and conditions, including licensing fees, warranties, or protection from infringement claims. In addition, some licensors may discontinue licensing their software to us or support the software version used in our product design and development processes. In such circumstances, we may need to redesign our processes with substantial cost and time investment to incorporate alternative software components or be subject to higher technology costs. Any of these circumstances could adversely affect the cost and efficiency of our product research and development.
We may not be able to keep pace with changes in technology or provide timely enhancements to our products.
The market for our products is characterized by rapid technological advancements, changes in customer requirements, frequent new product introductions and enhancements, and changing industry standards. To maintain our growth strategy, we must adapt and respond to our end-user customers’ technological advances and technological requirements. Our future success will depend on our ability to: enhance our current products; introduce new products to keep pace with products offered by our competitors; increase the performance of our internal systems, particularly our research and development systems that meet our end-user customers’ changing requirements; and adapt to technological advancements and changing industry and regulatory standards. We continue to make significant investments in the research and development of new products. If our products become outdated, it may negatively impact our ability to meet performance expectations related to quality, time to market, cost, and innovation relative to our competitors. In addition, the failure to achieve product performance requirements of our new and existing end-user customers and sustain good customer satisfaction may adversely impact our business and operating results.
Any failure to offer high-quality customer support for our products may adversely affect our relationships with our customers and harm our financial results.
Once our products are sold, our customers use our support organization to resolve technical issues relating to our products. In addition, we also believe that our success in selling our products is highly dependent on our business reputation and favorable recommendations from our existing customers. Therefore, any failure to maintain high-quality customer support, or a market perception that we do not maintain high-quality support, could harm our reputation, adversely affect our ability to maintain existing customers or sell our products to existing and prospective customers, and harm our business, operating results, and financial condition.
If we cannot attract and retain key personnel, our business could be harmed.
We must attract and retain highly qualified personnel to execute our business strategy. If any of our key employees were to leave, we could face substantial difficulty hiring qualified successors. We could experience a loss in productivity while any successor obtains the necessary training and experience. Although we have arrangements with some of our executive officers designed to promote retention, our employment relationships are generally at-will, and we have had key employees leave in the past. We cannot assure you that one or more key employees will not leave in the future. In particular, we compete with many other companies for semiconductor developers and other skilled engineering, marketing, sales, and operations professionals, and we may not be successful in attracting and retaining the professionals we need. We have, from time to time in the past, experienced, and we expect to continue to experience in the future, difficulty in hiring and difficulty in retaining highly skilled employees with appropriate qualifications. In particular, we have experienced a competitive hiring environment in the Greater Triad Area, where we are headquartered in North Carolina. Many of the companies with which we compete for experienced personnel have greater resources than we do. In addition, in making employment decisions, job candidates often consider the value of the equity incentives they are to receive in connection with their employment. If we and our third-party service providers experience difficulty recruiting and retaining qualified personnel, our business may be adversely affected. If the price of our stock declines or experiences significant volatility, our ability to attract or retain key employees will be adversely affected. We intend to continue to hire additional highly qualified personnel, including research and development and operational personnel. Still, we may not be able to attract, assimilate, or retain qualified personnel in the future. Any failure to attract, integrate, motivate, and retain these employees could harm our business.
Our revenues and operating results have fluctuated and are likely to continue to fluctuate, making our quarterly results difficult to predict, which may cause us to miss analyst expectations and may cause the price of our common stock to decline.
Our operating results have been and may continue to be difficult to predict, even in the near term, and are likely to fluctuate due to various factors, many of which are outside of our control.
Comparisons of our revenues and operating results on a period-to-period basis may not be meaningful. You should not rely on our past results to indicate our future performance. Each of the following factors, among others, could cause our operating results to fluctuate from quarter to quarter:
•the financial health of our customers;
•occurrence of technological advances and potential effects on our business and operations;
•market acceptance and adoption of our products;
•changes in the regulatory environment affecting our customers;
•our ability to expand our sales and marketing operations;
•our ability to successfully integrate any acquired businesses, technologies, or assets;
•the announcement of new significant contracts or customer relationships;
•the procurement cycles of our customers and the length of our sales cycles;
•changes in end-user customer integration of our products into their business needs;
•variations in the number of new customers booked in a prior quarter, but not delivered until later quarters;
•our mix of products and royalty revenues;
•new competitive product launches by our end-user customers that negatively impact sales or our sales cycle;
•pricing, including discounts by us or our competitors;
•our ability to successfully sell our products in a timely manner;
•our ability to forecast demand and manage lead times for the recruitment and training of required personnel;
•our ability to develop and introduce new products and features to existing products that achieve market acceptance;
•the announcement of a new product, which may cause sales cycles to lengthen;
•federal or state government shutdowns; and,
•future accounting pronouncements and changes in accounting policies.
If we fail to offer high-quality products and support for any of our products, our operating results and our ability to sell those products in the future will be harmed.
Our ability to sell our products depends on our product support team providing high-quality support. Once our products are integrated into an end-user customer’s planned use, the end-user customer typically depends on our product support team to help resolve technical issues, if they develop, and assist in optimizing the use of our products. If we do not effectively assist our end-user customers in integrating our products, succeed in helping our end-user customers quickly resolve technical and other post-integration issues, or provide effective ongoing support services, our ability to expand the use of our products within existing end-user customers and to sell our products to new customers will be harmed. If integration of our products is deemed unsatisfactory, we may incur significant costs to attain and sustain end-user customer satisfaction or, in extreme cases, our end-user customers may choose not to use our products. In addition, as we hire new engineering personnel, we may inadvertently hire underperforming people who will have to be replaced, or fail to effectively train such employees, leading in some instances to slower growth, additional costs, and poor customer relations.
As we continue to pursue opportunities for larger sales volumes that have greater technical complexity or involve the integration of our untested products, we may experience a more extended time for our products to be integrated. As a result, our product sales revenue may be delayed. Additionally, as we enter agreements with new and existing customers for larger and more complex sales, we have been, and may continue to be, required to agree to end-user customer acceptance and cancellation clauses. With acceptance clauses, delays may occur in obtaining end-user customer acceptance regardless of the quality of our products and may cause us to defer revenue recognition where such acceptance provisions are substantive in nature, or they may require us to incur additional costs to obtain such end-user customer acceptance. Cancellation clauses may result in a customer canceling an order for products, impacting our revenues.
Our sales cycles can be lengthy, and it is difficult for us to predict when or if sales will occur.
Our sales efforts are often targeted at larger end-user customers and distributors. As a result, we face higher costs, must devote greater sales support to individual customers, have longer sales cycles, and have less predictability in completing some of our sales. Also, sales to large end-user customers and distributors often require us to provide greater levels of education regarding the use and benefits of our products. Our sales cycle length could be 12 to 24 months, depending on the end-user customer’s industry base and economic factors beyond our control, as measured from the point of initial contact with a potential customer to the time a purchase order is signed.
We believe that our customers view the purchase of our products as a significant and strategic decision. As a result, customers carefully evaluate our products, often over long periods with various internal constituencies. In addition, the sales of our products may be subject to delays if the customer has lengthy internal budgeting, integration, and approval and evaluation processes. As a result, it is difficult to predict the timing of our future sales.
We depend on our management team and our key sales and development, and engineering personnel. The loss of one or more key employees or groups could harm our business and prevent us from implementing our business plan in a timely manner.
Our success depends on our executive officers’ expertise, efficacy, and continued services. We have, in the past, and may in the future, continue to experience changes in our executive management team resulting from the departure of executives or subsequent hiring of new executives, which may be disruptive to our business. Any changes in business strategies or leadership can create uncertainty, may negatively impact our ability to execute our business strategy quickly and effectively, and ultimately be unsuccessful. In addition, the impact of hiring new executives may not be immediately realized. We are also substantially dependent on the continued service of our existing research and development personnel because of their familiarity with the inherent complexities of our products.
Failure to adequately expand and train our direct sales force and distributors will impede our growth.
We rely almost exclusively on our direct sales force and distributors to sell our products. We believe that our future growth will depend significantly on the continued development of our direct sales force and distributor relationships and their ability to manage and retain our existing end-user customer base, expand the sales of our products to existing end-user customers, and obtain new end-user customers. Because our products are complex and often must interoperate with complex technological functionality, it can take longer for our sales personnel and distributors to become fully productive. Therefore, our ability to achieve significant growth in revenues in the future will depend, in large part, on our success in recruiting, training, and retaining a sufficient number of direct sales personnel and growing our distributor base. New hires require significant training and may, in some cases, take considerable time before becoming fully productive, if at all. If we are unable to hire and develop sufficient numbers of productive direct sales personnel, and if these sales personnel are unable to achieve full productivity, sales of our products will suffer, and our growth will be impeded.
If we fail to increase market awareness of our brand and products, expand our sales and marketing operations, improve our sales execution, and increase our sales channels, our business could be harmed.
We intend to continue to add personnel and resources in sales and marketing as we focus on expanding awareness of our brand and products and capitalize on sales opportunities with new and existing customers. Our efforts to improve sales of our products will increase our sales and marketing expenses and general and administrative expense, and these efforts may not be successful. Some newly hired sales and marketing personnel may become unproductive and have to be replaced, resulting in operational and sales delays and incremental costs. If we cannot significantly increase the awareness of our brand and products or effectively manage the costs associated with these efforts, our business, financial condition, and operating results could be harmed.
We must improve our sales execution to, among other things, increase the number of our sales opportunities and grow our revenues. We must enhance the market awareness of our products, expand our relationships with our distributor partners, and create new distributor partnerships to increase our revenues. Further, we must continue to develop our relationships with new and existing end-user customers and distributor partners and create additional sales opportunities to effectively and efficiently extend our geographic reach and market penetration. Our efforts to improve our sales execution could result in a material increase in our sales and marketing expenses and general and administrative expense. There can be no assurance that such efforts will be successful. Further, as we increase our efforts to target additional industry bases and leverage distributor partnerships to drive sales, we may be unable to tailor our sales efforts to these strategies. If we are unable to improve our sales execution significantly, increase the awareness of our products, create additional sales opportunities, expand our relationships with distributor partners, leverage our relationship with existing distributor partners, or effectively manage the costs associated with these efforts, our operating results and financial condition could be materially and adversely affected.
Our revenues are dependent on our ability to maintain and expand existing customer relationships and our ability to attract new customers.
The continued growth of our revenues depends partly on our ability to expand the use of our products by existing end-user customers and attract new customers. Our customers have no obligation to repeat purchases from us, and there can be no assurance that they will do so. We have had in the past, and may in the future, end-user customers discontinue using some of our products, which may impact such end-user customers’ decisions to continue to use any of our products.
If we cannot expand our end-user customers’ use of our products, maintain our repeat customer purchase rates and expand our customer base, our revenues may decline or fail to increase at historical growth rates, adversely affecting our business and operating results. In addition, if our customers experience dissatisfaction with our products in the future, we may find it more difficult to increase the use of our products within our existing end-user customer base, and it may be more difficult to attract new customers, or we may be required to grant credits or refunds, any of which could negatively impact our operating results and materially harm our business.
Our business is subject to the risks of earthquakes, fire, floods, and other natural catastrophic events and interruption by man-made problems such as power disruptions or terrorism.
Our corporate headquarters are located in the Greensboro, North Carolina area. Most of our third-party service providers are located in South Asia, a region known to suffer terrorism and natural disasters, including floods, typhoons, droughts, epidemics, or contagious diseases. A significant natural disaster, such as a fire or a flood, epidemic, or contagious disease, such as the COVID-19 pandemic, occurring at our headquarters or where our third-party service providers are located, could harm our business, operating results, and financial condition. In addition, acts of terrorism could cause disruptions in our business, the businesses of our customers and suppliers, or the economy as a whole. We also rely on information technology systems to communicate among our workforce, which is coordinated within our corporate headquarters in Greensboro, North Carolina. Any disruption to our internal communications, whether caused by a natural disaster, an epidemic or contagious disease, or by man-made problems, such as power disruptions, in the Greensboro, North Carolina area, Taiwan, Malaysia, Singapore, the Philippines, or where any of our customers are located could delay our research and development efforts, or cause delays or cancellations of customer orders.
Our use of open-source and non-commercial software components could impose risks and limitations on our ability to commercialize our products.
Our product development utilizes software modules licensed under open source and other types of non-commercial licenses. We also may incorporate open source and other licensed software into our product development in the future. However, the use and distribution of such software may entail more significant risks than third-party commercial software, as licenses of these types generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. In addition, some of these licenses require the release of our proprietary source code to the public if we combine our proprietary product development software with open-source software in certain manners. This could allow competitors to create similar products with lower development effort and time and ultimately lose sales for us.
The terms of many open sources and other non-commercial licenses have not been judicially interpreted, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products. In such event, to continue offering our products, we could be required to seek licenses from alternative licensors, which may not be available on a commercially reasonable basis or at all, to re-engineer our products or to discontinue the sale of our products in the event we cannot obtain a license or re-engineer our products on a timely basis, any of which could harm our business and operating results. In addition, if an owner of licensed software were to allege that we had not complied with the conditions of the corresponding license agreement, we could incur significant legal costs defending ourselves against such allegations. If such claims were successful, we could be subject to substantial damages, be required to disclose our source code, or be enjoined from the distribution of our products.
Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.
GAAP is subject to interpretation by the Financial Accounting Standards Board (“FASB”), the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported operating results and financial condition and could affect the reporting of transactions already completed before the announcement of a change.
If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our operating results could be adversely affected.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience, and other assumptions that we believe are reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities, and equity and the amount of revenues and expenses that are not readily apparent from other sources. Significant estimates and judgments involve deferred income tax valuation allowances, the valuation of the share-based awards, and determining our common stock’s fair value. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our common stock.
Relations between the PRC and Taiwan could negatively affect our business and financial status and, therefore, the market value of your investment.
Taiwan has a unique international political status. The PRC does not recognize the sovereignty of Taiwan. Although significant economic and cultural relations have been established in recent years between Taiwan and the PRC, relations have often been strained. The government of the PRC has threatened to use military force to gain control over Taiwan in limited circumstances. A substantial portion of our manufacturing and packaging providers are located in Taiwan, and a material amount of our revenues are derived from the sales of our products manufactured and packaged in Taiwan. Therefore, factors affecting military, political, or economic conditions in Taiwan could have a material adverse effect on our results of operations.
A significant disruption in the operations of our manufacturing and packaging service providers in Taiwan, such as a trade war or political unrest, could materially adversely affect our business, financial condition, and the results of operations.
Any disruption in the operations of our service providers in Taiwan or in their ability to meet our needs, whether as a result of a natural disaster or other causes, could impair our ability to operate our business on a day-to-day basis. Furthermore, since many of these third parties are located outside the U.S., we are exposed to the possibility of disruption and increased costs in the event of changes in the policies of the U.S. or foreign governments, political unrest, or unstable economic conditions in any of the countries where we conduct such activities. For example, a trade war could lead to higher tariffs. Any of these matters could materially and adversely affect our product sales and shipment timelines, business, and financial condition.
Risks Related to Regulatory Requirements
Government regulation may adversely affect our business.
The effects of regulation may materially and adversely impact our business. For example, the FCC’s regulatory policies relating to radio frequency emissions, consumer protection laws of the U.S. Federal Trade Commission, product safety regulatory activities of the U.S. Consumer Products Safety Commission, and environmental regulatory actions of the U.S. Environmental Protection Agency could impede sales of our products in the United States. In addition, our customers and we are also subject to various import and export laws and regulations. Should we fail to comply with these regulations, we may be unable to produce and deliver these products to specific customers, and we may become subject to investigations, sanctions, mandatory product recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties, or injunctions.
Our business is also increasingly subject to complex foreign and U.S. laws and regulations, including but not limited to anti-corruption laws, such as the FCPA and equivalent laws in other jurisdictions, antitrust or competition laws, and data privacy laws, among others. In addition, foreign governments may impose tariffs, duties, and other import restrictions on components we obtain from non-domestic suppliers and export restrictions on products that we sell internationally. These tariffs, duties, or restrictions could materially and adversely affect our business, financial condition, and the results of operations.
New or revised environmental rules and regulations or other social initiatives could also impact our product or manufacturing standards. Those rules, or similar rules adopted in other jurisdictions, could adversely affect our costs, the availability of minerals used in our products, and our relationships with customers and suppliers.
We may incur substantial expenses related to regulatory requirements, and any regulatory compliance failure could cause our business to suffer.
The wireless communications industry is subject to ongoing regulatory obligations and reviews. Maintaining compliance with these requirements may result in significant additional expense to us, and any failure to maintain such compliance could cause our business to suffer.
Noncompliance with applicable regulations or requirements could also subject us to investigations, sanctions, mandatory product recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties, or injunctions. An adverse outcome in such litigation could require paying contractual damages, compensatory damages, punitive damages, attorneys’ fees, and other costs. These enforcement actions could harm our business, financial condition, and the results of operations. If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, financial condition, and results of operations could be materially adversely affected. In addition, responding to any action will likely result in a significant diversion of management’s attention and resources and increased professional fees.
We are subject to risks from international sales and operations.
We operate globally with sales personnel in multiple countries, and some of our business activities are concentrated in Asia. As a result, we are subject to regulatory, geopolitical, and other risks associated with doing business outside the U.S., including:
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global and local economic, social and political conditions and uncertainty; |
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currency controls and fluctuations; |
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formal or informal imposition of export, import or doing-business regulations, including trade sanctions, tariffs, and other related restrictions; |
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labor market conditions and workers’ rights affecting our manufacturing operations or those of our customers or suppliers; |
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disruptions in capital and securities and commodities trading markets; |
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occurrences of geopolitical crises such as terrorist activity, armed conflict, civil or military unrest or political instability, which may disrupt manufacturing, assembly, logistics, security, and communications and result in reduced demand for our products; |
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compliance with laws and regulations that differ among jurisdictions, including those covering taxes, intellectual property ownership and infringement, imports and exports, anti-corruption and anti-bribery, antitrust and competition, data privacy, and environment, health, and safety; and, |
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pandemics and similar major health concerns, including COVID-19, could adversely affect our business and customer order patterns. |
Sales to customers located outside the U.S. accounted for approximately 14% of our revenue in 2023. We expect that revenue from international sales will continue to be a material part of our total revenue. Any weakness in these economies could decrease demand for products that contain our products, which could materially and adversely affect our business. The imposition by the U.S. of tariffs on goods imported from the PRC and potentially other countries, countermeasures imposed by the PRC in response, U.S. export restrictions on sales of products to the PRC, and other government actions that restrict or otherwise adversely affect our ability to sell our products to customers in the PRC may have a material impact on our business, including our ability to sell products and to manufacture or source components.
As a company with material sales outside of the U.S., our results may be affected by movements in currency exchange rates as we grow our sales network. In addition, our exposure may increase or decrease over time as our foreign business levels fluctuate in the countries where we may have sales or operations. These changes could have a material impact on our financial results. The functional currency for our current operations and international sales is the U.S. dollar; however, that may expand to other currencies as we grow.
Economic regulation in the PRC and other countries where we sell products could adversely impact our business and the results of operations.
A significant portion of our potential customer base is located in the PRC and other countries outside of the U.S. For many years, the Chinese economy has experienced periods of rapid growth and wide fluctuations in inflation. In response to these factors, the Chinese government has, from time to time, adopted measures to regulate growth and contain inflation, including currency controls and measures designed to restrict credit, control prices, or set currency exchange rates. Such actions in the future, as well as other changes in Chinese or other non-U.S. laws and regulations, including efforts in furtherance of reducing dependence on foreign semiconductor manufacturers, could increase the cost of doing business in other countries, foster the emergence of foreign competitors, decrease the demand for our products in those countries, or reduce the supply of necessary materials for our products, which could have a material adverse effect on our business and results of operations.
Changes in government trade policies, including the imposition of tariffs and export restrictions, have limited and could continue to limit our ability to sell or provide our products and other items to specific end-user customers, which may materially adversely affect our sales and the results of operations.
The U.S. and foreign governments have taken and may continue to take administrative, legislative, or regulatory action that could materially interfere with our ability to export, re-export, and transfer products and other items in certain countries, particularly in the PRC. For example, the imposition of tariffs has not had a direct, material adverse impact on our business; however, the direct and indirect effects of tariffs and other restrictive trade actions are difficult to measure and are only one part of economic and trade policy.
Furthermore, we have experienced and may continue to experience restrictions on our ability to export, re-export, and transfer our products and other items to specific foreign customers and suppliers where exports, re-exports, or transfers of products require export licenses or are prohibited by government action.
Even if such restrictions are lifted, any financial or other penalties or continuing export restrictions imposed on our customers could have a continuing negative impact on our future revenue and results of operations. In addition, other foreign end-user customers or suppliers affected by future U.S. government sanctions or threats of sanctions may respond by developing new solutions to replace our products or by adopting our foreign competitors’ solutions.
We cannot predict what further actions may ultimately be taken concerning tariffs or other trade measures between the U.S. and the PRC or other countries, what products or entities may be subject to such actions, or what steps may be taken by other countries in response. The loss of foreign customers or suppliers or the imposition of restrictions on our ability to sell or transfer products to such customers or suppliers due to tariffs, export restrictions, or other U.S. regulatory actions could materially and adversely affect our sales and business and the results of operations.
Due to the unknown evolution of sanctions and export controls targeting the PRC and its ability to purchase and manufacture certain semiconductor chips, our business could be adversely affected.
On October 7, 2022, the U.S. Department of Commerce’s Bureau of Industry and Security ("BIS") announced a series of regulations – issued as an interim final rule – amending the Export Administration Regulations to enhance export controls on a range of goods, software, and technology and restrict the PRC’s ability to purchase and manufacture advanced computing chips. The regulations imposed new controls on items relating to advanced computer and semiconductor manufacturing capabilities, broadened end-use restrictions, expanded the scope of foreign-produced items subject to licensing requirements, and added to Entity List prohibitions. We do not anticipate these regulations will have a material effect on our financial condition or operations. The production of our high-performance MMICs is not reliant on any manufacturing in the PRC, or, to our knowledge, on any companies that are owned by the PRC or Chinese investors. In 2023, we received only 5.5% of all our sales from customers located within the PRC. RF semiconductors, such as what we design and produce, are not currently covered under the BIS restrictions. We have taken steps to ensure our export control processes and controls observe enacted and evolving export sanctions imposed upon the PRC and all restricted entities that have been identified by the United States government. Nevertheless, if we inadvertently make any product sales or shipments to any sanctioned entities, such non-compliance may have a material effect on our financial condition or operations.
We may be subject to theft, loss, or misuse of personal data by or about our employees, customers, or other third parties, which could increase our expenses, damage our reputation, or result in legal or regulatory proceedings.
In the ordinary course of our business, we have access to sensitive, confidential, or personal data or information regarding our employees and others that is subject to privacy and security laws and regulations. Therefore, the theft, loss, or misuse of personal data collected, used, stored, or transferred by us to run our business, or by our third-party service providers, including business process software applications providers and other vendors that have access to sensitive data, could result in damage to our reputation, disruption of our business activities, significantly increased business and security costs or costs related to defending legal claims.
Global and domestic privacy legislation, enforcement, and policy activity in this area are rapidly expanding and creating a complex regulatory compliance environment. For example, the European Union adopted the General Data Protection Regulation (“GDPR”), which requires companies to comply with rules regarding the handling of personal data, including its use, protection, and the ability of persons whose data is stored to correct or delete such data about themselves. Failure to meet GDPR requirements could result in penalties of up to 4% of worldwide revenue. In addition, the interpretation and application of consumer and data protection laws in the U.S., Europe, and elsewhere are often uncertain and fluid and may be interpreted and applied in a manner that is inconsistent with our data practices. As a result, complying with these changing laws has caused, and could continue to cause, us to incur substantial costs, which could harm our business and the results of operations. Further, failure to comply with existing or new rules may result in significant penalties or orders to stop the alleged non-compliant activity. Finally, even our inadvertent failure to comply with federal, State, or international privacy-related or data protection laws and regulations could result in audits, regulatory inquiries, or proceedings against us by governmental entities or others.
The semiconductor industry is heavily regulated. Therefore, any material changes in the political, economic, or regulatory semiconductor environment that affect the purchasing business or the purchasing practices and operations of organizations that utilize semiconductor industry products, or that lead to consolidation in our end-user customer industries, could require us to modify our products available to customers for purchase.
Our ability to grow will depend upon the economic environment of our end-user customer industries and our ability to increase the number of products that we sell to our customers. Our end-user customer industry bases often have different regulatory requirements, and they are subject to changing political, economic, and regulatory influences. As a result, changes in regulations affecting our end-user customers could require us to make unplanned modifications to our products, result in delays or cancellations of orders, or reduce demand for our products.
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
The market price and trading volume of our common stock may be volatile and could decline.
The market price and trading volume of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to meet our growth projections and expectations, quarterly operating results of other companies in the same industry, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our business and the business of others in our industry. In addition, the stock market itself is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons related and unrelated to their operating performance and could have the same effect on our common stock. The market price of shares of our common stock could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:
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the realization of any of the risk factors presented in this Annual Report; |
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actual or anticipated differences in our estimates, or in the estimates of analysts, for our revenues, results of operations, level of indebtedness, liquidity, or financial condition; |
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additions and departures of key personnel; |
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failure to comply with the requirements of the OTC Markets Group, or following our potential up listing on Nasdaq or another national securities exchange; |
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failure to comply with the Sarbanes-Oxley Act or other laws or regulations; |
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changes to electronic communication and transmission laws governing the semiconductor industry; |
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future issuances, sales, resales or repurchases or anticipated issuances, sales, resales or repurchases, of our common stock; |
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publication of research reports about us, or the semiconductor industry generally; |
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the performance and market valuations of other similar companies; |
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broad disruptions in the financial markets, including sudden disruptions in the credit markets; |
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speculation in the press or investment community; |
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actual, potential or perceived control, accounting or reporting problems; and, |
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changes in accounting principles, policies and guidelines. |
In the past, securities class-action litigation has often been instituted against companies following periods of volatility in the market price of their shares. This type of litigation could result in substantial costs and divert our management’s attention and resources, which could have a material adverse effect on us.
Our common stock is quoted on an OTC Markets Group trading platform, the OTCQX, instead of a national exchange or quotation system. Accordingly, our investors may experience significant volatility in the market price of our stock and have difficulty selling their shares.
Our common stock is currently quoted on an OTC Markets Group trading platform, the OTCQX, under the ticker symbol “GUER.” The OTC Markets Group is a regulated quotation service that displays real-time quotes, last sale prices, and volume limitations in over-the-counter securities. Trading in shares quoted on an OTC Markets Group trading platform is often thin and characterized by volatility in trading prices. This volatility may be caused by a variety of factors, including the lack of readily available price quotations, the absence of consistent administrative supervision of bid and ask quotations, lower trading volume, and market conditions. As a result, there may be wide fluctuations in the market price of the shares of our common stock for reasons unrelated to operating performance, and this volatility, when it occurs, may have a negative effect on the market price for our securities. Moreover, the OTC Markets Group is not a stock exchange, and trading of securities on one of its trading platforms is often more sporadic than the trading of securities listed on a national quotation system or stock exchange. Accordingly, our stockholders may not be able to realize a fair price from their shares when they determine to sell them or may have to hold them for a substantial period of time until the market for our common stock improves.
Because we became a reporting company under the Exchange Act by means other than a traditional underwritten initial public offering, we may not be able to attract the attention of research analysts at major brokerage firms.
Because we did not become a reporting company by conducting an underwritten initial public offering of our common stock, and because we are not listed on a national securities exchange, security analysts of brokerage firms may not provide coverage of our Company. In addition, investment banks may be less likely to agree to underwrite secondary offerings on our behalf than they might if we became a public reporting company by means of an underwritten initial public offering, because they may be less familiar with our Company as a result of more limited coverage by analysts and the media, and because we became public at an early stage in our development. The failure to receive research coverage or support in the market for our shares could have an adverse effect on our ability to develop a liquid market for our common stock.
We are an emerging growth company and a smaller reporting company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies and smaller reporting companies could make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups ("JOBS") Act, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including:
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not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act; |
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reduced disclosure obligations regarding executive compensation in our periodic reports and Annual Report on Form 10-K; and, |
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exemptions from the requirements of holding non-binding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved. |
We could be an emerging growth company for up to five years. Our status as an emerging growth company will end as soon as any of the following takes place:
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the last day of the fiscal year in which we have more than $1.07 billion in annual revenues; |
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the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; |
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the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; or, |
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the last day of the fiscal year ending after the fifth anniversary of the completion of the first sale of our equity securities pursuant to a registration statement under the Securities Act. |
We cannot predict if investors will find our common stock less attractive if we choose to rely on any of the exemptions afforded emerging growth companies. If some investors find our common stock less attractive because we rely on any of these exemptions, there may be a less active trading market for our common stock and the market price of our common stock may be more volatile.
Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this provision of the JOBS Act. As a result, we will not be subject to new or revised accounting standards at the same time as other public companies that are not emerging growth companies. Therefore, our consolidated financial statements may not be comparable to those of companies that comply with new or revised accounting pronouncements as of public company effective dates.
We are also a “smaller reporting company” as defined in the Exchange Act. We may continue to be a “smaller reporting company” even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as our voting and non-voting common stock held by non-affiliates is less than $250 million measured on the last business day of our second fiscal quarter, or our annual revenues are less than $100 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700 million measured on the last business day of our second fiscal quarter.
We may face risks related to securities litigation that could result in significant legal expenses and settlement or damage awards.
We may in the future become subject to claims and litigation alleging violations of the securities laws or other related claims, which could harm our business and require us to incur significant costs. Significant litigation costs could impact our ability to comply with certain financial covenants under our credit agreement. We are generally obliged, to the extent permitted by law, to indemnify our current and former directors and officers who are named as defendants in these types of lawsuits. Regardless of the outcome, litigation may require significant attention from management and could result in significant legal expenses, settlement costs, or damage awards that could have a material impact on our financial position, results of operations, and cash flows.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Our certificate of incorporation and our bylaws contain provisions that could delay or prevent a change in control of our company. These provisions could also make it difficult for stockholders to elect directors who are not nominated by current members of our Board of Directors or take other corporate actions, including effecting changes in our management. These provisions:
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establish a classified board of directors so that not all members of our board are elected at one time; |
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permit only the board of directors to establish the number of directors and fill vacancies on the board; |
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provide that directors may only be removed “for cause” and only with the approval of two-thirds of our stockholders; |
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require super-majority voting to amend some provisions in our restated certificate of incorporation and restated bylaws; |
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authorize the issuance of “blank check” preferred stock that our board could use to implement a stockholder rights plan; |
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eliminate the ability of our stockholders to call special meetings of stockholders; |
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prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders; |
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prohibit cumulative voting; and, |
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establish advance notice requirements for nominations for election to our board or for proposing matters that can be acted upon by stockholders at annual stockholder meetings. |
In addition, our certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the exclusive forum for: any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law ("DGCL"), our certificate of incorporation, or our bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine.
Section 22 of the Securities Act creates concurrent jurisdiction for federal and State courts over all claims brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Our restated bylaws will provide that the federal district courts of the United States of America will, to the fullest extent permitted by law, be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act (“Federal Forum Provision”). Our decision to adopt a Federal Forum Provision followed a decision by the Supreme Court of the State of Delaware holding that such provisions are facially valid under Delaware law. While there can be no assurance that federal courts or state courts will follow the holding of the Delaware Supreme Court or determine that the Federal Forum Provision should be enforced in a particular case, application of the Federal Forum Provision means that suits brought by our stockholders to enforce any duty or liability created by the Securities Act must be brought in federal court and cannot be brought in state court. While neither the exclusive forum provision nor the Federal Forum Provision applies to suits brought to enforce any duty or liability created by the Exchange Act creates exclusive federal jurisdiction over all claims brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. Accordingly, actions by our stockholders to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder also must be brought in federal court. Thus, our stockholders will not be deemed to have waived our compliance with the federal securities laws and the regulations promulgated thereunder.
Any person or entity purchasing or otherwise acquiring or holding any interest in any of our securities shall be deemed to have notice of and consented to our exclusive forum provisions, including the Federal Forum Provision. These provisions may limit a stockholder’s ability to bring a claim in a judicial forum of their choosing for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers, and other employees.
In addition, Section 203 of the DGCL may discourage, delay or prevent a change in control of our company. Section 203 imposes certain restrictions on mergers, business combinations, and other transactions between us and holders of 15% or more of our common stock.
If securities or industry analysts do not publish research or publish unfavorable or inaccurate research about our business, our stock price and trading volume could decline.
Our stock price and trading volume can be heavily influenced by the way analysts and investors interpret our financial information and other disclosures. Securities and industry analysts do not currently, and may never, publish research on our business. If few securities or industry analysts commence coverage of us, our stock price could be negatively affected. If securities or industry analysts downgrade our common stock or publish negative reports about our business, our stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our stock price to decline and could decrease the trading volume of our common stock.
The designation of our common stock as “penny stock” would limit the liquidity of our common stock.
Our common stock may be deemed a “penny stock” (as that term is defined under Rule 3a51-1 of the Exchange Act). Generally, a “penny stock” is a common stock that is not listed on a securities exchange and trades for less than $5.00 a share. Prices often are not available to buyers and sellers and the market may be very limited. Penny stock in start-up companies is among the riskiest equity investments. Broker-dealers who sell penny stock must provide purchasers with a standardized risk disclosure document prepared by the SEC. The document provides information about penny stock and the nature and level of risks involved in investing in the penny stock market. A broker must also provide purchasers with bid and offer quotations and information regarding broker and salesperson compensation and make a written determination that the penny stock is a suitable investment for the purchaser and obtain the purchaser’s written agreement to the purchase. Many brokers choose not to participate in penny stock transactions. If our common stock is deemed “penny stock”, because of penny stock rules, there may be less trading activity and stockholders are likely to have difficulty selling their shares.
We do not anticipate paying dividends on our common stock, and investors may lose the entire amount of their investment.
Cash dividends have never been declared or paid on our common stock, and we do not anticipate such a declaration or payment for the foreseeable future. Any future determination about the payment of dividends will be made at the discretion of our Board of Directors and will depend upon our earnings, if any, capital requirements, operating and financial conditions, contractual restrictions, including any loan or debt financing agreements, and on such other factors as our Board of Directors deems relevant. In addition, we may enter into agreements in the future that could contain restrictions on payments of cash dividends. We expect to use future earnings, if any, to fund business growth. Therefore, stockholders will not receive any funds absent a sale of their shares of common stock. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if our stock price appreciates. We cannot assure stockholders of a positive return on their investment when they sell their shares, nor can we assure that stockholders will not lose the entire amount of their investment.
FINRA sales practice requirements may limit a stockholder’s ability to buy and sell our stock.
The Financial Industry Regulatory Authority ("FINRA") has adopted rules requiring that, in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative or low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives, and other information. Under interpretations of these rules, FINRA has indicated its belief that there is a high probability that speculative or low-priced securities will not be suitable for at least some customers. If these FINRA requirements are applicable to us or our securities, they may make it more difficult for broker-dealers to recommend that at least some of their customers buy our common stock, which may limit the ability of our stockholders to buy and sell our common stock and could have an adverse effect on the market for and price of our common stock.
Future sales and issuances of our securities could result in additional dilution of the percentage ownership of our shareholders and could cause our share price to fall.
Additional capital may be needed in the future to continue our planned operations, including research and development, increased marketing, hiring new personnel, commercializing our products, and continuing activities as a public company. To the extent we raise additional capital by issuing equity securities, our shareholders may experience substantial dilution. We may sell common stock, convertible securities, or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock, convertible securities, or other equity securities in more than one transaction, investors may be materially diluted by subsequent sales. Such sales may also result in material dilution to our existing shareholders, and new investors could gain rights superior to our existing shareholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
Cybersecurity Risk Management and Strategy
We recognize the paramount importance of cybersecurity in preserving the integrity, confidentiality, and availability of our systems, data, and operations. We are committed to maintaining a comprehensive cybersecurity posture that encompasses proactive risk management, robust defense mechanisms, and continuous monitoring. To this end, we employ a multifaceted approach to cybersecurity, which includes regular assessments of our infrastructure, applications, and processes to identify vulnerabilities and weaknesses. Furthermore, we prioritize ongoing employee education and awareness initiatives to cultivate a culture of security throughout our organization. Our workforce receives regular training on best practices, emerging threats, and incident response procedures to empower them to be active participants in our cybersecurity efforts. Additionally, we enforce strict access controls and data encryption protocols to safeguard sensitive information and mitigate the risk of unauthorized access or data breaches.
While we have implemented extensive measures to fortify our defenses against cyber threats, it is important to acknowledge that the cybersecurity landscape is constantly evolving, with threat actors employing increasingly sophisticated tactics. Despite our best efforts, we cannot guarantee that our systems will be completely immune to cyber attacks. As such, we maintain a proactive stance in monitoring for emerging threats and vulnerabilities, leveraging threat intelligence sources and collaborating with industry partners to stay abreast of evolving risks.
In the event of a cybersecurity incident, we have established incident response protocols designed to facilitate swift and effective remediation efforts. These protocols outline clear escalation procedures, delineate responsibilities among key stakeholders, and emphasize transparency and communication with internal teams, regulatory authorities, and affected parties.
In summary, while we maintain confidence in the effectiveness of our cybersecurity measures, we acknowledge the dynamic nature of the cybersecurity landscape and remain vigilant in our efforts to adapt and respond to emerging threats. Our commitment to cybersecurity extends beyond mere compliance; it is a fundamental aspect of our corporate ethos and a cornerstone of our efforts to safeguard the interests of our shareholders, customers, and stakeholders.
We enlist the support of third-party providers to bolster our cybersecurity risk management. These providers offer ongoing assistance, such as threat monitoring, mitigation strategies, updates on emerging trends and developments, and policy guidance. Additionally, we engage specific providers for targeted assistance, such as security and forensic expertise, as the need arises. Before sharing any sensitive data or integrating with a third-party provider, we conduct a thorough assessment of their security capabilities in alignment with our risk posture and request modifications as deemed necessary.
Cybersecurity Governance
Oversight for cybersecurity risk lies with the Audit Committee. Periodically the Audit Committee will work with our IT management to provide a full update to the board on continuous improvements made to our monitoring and preventative activities, as well as information on those monitoring activities itself such as attempts of unauthorized access to systems.
Our IT management team is directly responsible for cyber security and maintaining of protection, keeping abreast of latest cyber security issues and concerns, monitoring threats, and the design and updating of policies and procedures along with appropriate education for all company employees. Our IT staff and management team have been trained on current industry standards and best practices and hold degrees and have experience necessary to have the skills necessary to address such threats. IT management is also responsible for the appropriate communications regarding threats and breaches should they occur and appropriate shut down and recovery activities and have action plans in place.
As of December 31, 2023, we have not encountered any cybersecurity threats that have had a material impact on our operations, business strategy, financial results, or overall financial health.
Our corporate headquarters are located in Greensboro, NC, where we lease in excess of 50,000 square feet. We moved into and took possession of our new corporate headquarters building in the first quarter of 2023. The lease term is 10 years and two months. We continue to lease our former headquarters building, comprising approximately 10,000 square feet of office space. The prior headquarters building lease agreement expires in June 2024 subject to a right to early termination upon payment of an early termination fee.
We are not a party to any material pending legal proceedings. We may become involved in lawsuits and legal proceedings that arise in the ordinary course of business from time to time.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION AND HOLDERS OF RECORD
Our common stock is quoted on the OTCQX, an OTC Markets Group platform, under the trading symbol "GUER".
As of March 4, 2024, we had approximately 179 stockholders of record.
DIVIDEND POLICY
We currently intend to retain future earnings, if any, to maintain and expand our operations. We have never declared or paid cash dividends on our common stock, and we do not intend to pay any cash dividends on our common stock for the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our Board of Directors in light of conditions then-existing, including factors such as our results of operations, financial condition, and requirements, business conditions, and covenants under any applicable contractual arrangements.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Equity Compensation Plan Information
The following table presents information as of December 31, 2023 with respect to compensation plans under which shares of our common stock may be issued.
Number of |
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securities |
|||||||||||||
remaining |
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available for |
|||||||||||||
Number of |
future issuance |
||||||||||||
securities |
under equity |
||||||||||||
to be issued |
Weighted |
compensation |
|||||||||||
upon exercise of |
average exercise |
plans (excluding |
|||||||||||
outstanding |
price of |
securities |
|||||||||||
securities |
outstanding |
reflected in |
|||||||||||
Plan Category |
(#) |
options ($) |
column(a)) (#) |
||||||||||
(a) |
(b) |
(c) |
|||||||||||
Equity compensation plans approved by security holders(1) |
1,027,959 | 7.67 | 31,353 | (2) |
|||||||||
Equity compensation plans not approved by security holders |
— | — | — | ||||||||||
Total |
1,027,959 | 7.67 | 31,353 |
(1) | The 2014 Long Term Stock Incentive Plan (the “2014 Plan”) and the 2021 Equity Incentive Plan (the “2021 Plan”). |
(2) |
As of December 31, 2023, a total of 492,143 shares of our common stock are reserved for issuance pursuant to outstanding stock options under the 2014 Plan. No additional awards may be granted under our 2014 Plan. As of December 31, 2023, we have reserved 567,169 shares of common stock under our 2021 Plan, plus any shares of common stock reserved for issuance pursuant to stock options awarded under the 2014 Plan that expire or become unexercisable, i.e., such shares will generally become available for future awards under our 2021 Plan. In addition, the number of shares reserved for issuance under our 2021 Plan increased automatically by 5% of issued and outstanding shares of common stock on January 1, 2024 to 961,829 and will continue to automatically increase annually on January 1 through January 1, 2030 by the number of shares equal to the lesser of 5% of the total number of outstanding shares of common stock as of the immediately preceding December 31, or such number as is determined by our Board of Directors. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties as described under the heading “Cautionary Note Regarding Forward-Looking Statements” elsewhere in this Annual Report. You should review the disclosure under the heading “Risk Factors” in this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
Guerrilla RF is a fabless semiconductor company based in Greensboro, N.C. Guerrilla RF was founded in 2013 with a mission to employ RF semiconductor technology to deliver RF solutions to customers in underserved markets. Over the past several years, Guerrilla RF has become a leader in developing high-performance MMIC products for wireless connectivity. It continues to target underserved markets and customers, delivering a range of high-performance MMIC products and associated technical support to a diverse set of customers that enable a more connected world. Guerrilla RF is a wholly-owned subsidiary of the Company. Guerrilla RF holds all material assets and conducts all business activities and operations of the Company. Accordingly, throughout this discussion and analysis, there are frequent references to Guerrilla RF.
Guerrilla RF possesses in-house design, applications, sales, and customer support functions as a fabless semiconductor company. We outsource the manufacture and production of our MMIC products to subcontractors located overseas, providing access to multiple semiconductor process technologies. Guerrilla RF’s primary external wafer foundries are in Taiwan and Singapore, and our primary assembly and test suppliers are located in Malaysia and the Philippines.
● Revenue for fiscal year 2023 increased 30.0% as compared to fiscal year 2022. Revenue gains came from the acquisition of new customers, the release and ramp of new product programs and through gain of market share in automotive, wireless infrastructure, and catalog. Within catalog, wireless audio and SatCom drove revenue increases. Our automotive products experienced significant order volume increase from our OEM customer including a new direct EV automotive customer, as well as growth from our customers who are major electronics suppliers to automotive OEM’s automotive component suppliers.
● Gross profit for fiscal year 2023 was 57.1% of revenues as compared to 58.3% for fiscal year 2022. Although the Company has continued to experience supply chain price increases, we have been able to mitigate the effect of these increases by increasing the prices we charge our customers related to the raw materials and assembly/test cost increases we experienced. Product contribution margins remained relatively flat, decreasing from 71.5% in 2022 to 70.5% in 2023. Product contribution margins were partially offset by higher overhead costs, on a comparative period basis, which increased due to headcount additions in our Quality group, as well as increased facility costs.
● Operating loss was $12.9 million for 2023 as compared to $11.1 million for 2022. This increase in operating loss was due to higher operating expenses primarily in our engineering and research and development areas rising $2.2 million or 27%. Sales and marketing expenses also increased, rising $1.0 million to $5.7 million or 18%. Administration costs experienced a small increase of $0.4 million or 8%.
● Purchases of property, plant and equipment were $0.1 million for fiscal year 2023 and $0.5 million for the fiscal year 2022. The majority of capital expenditures for 2023 are related to capital additions for the Company's laboratory equipment and related facilities.
As a relatively young company in its early stages of market penetration and customer acquisition, we have historically sought funding to support our operations and our research and development efforts, in furtherance of new product introductions, market share increases, and participation in new markets. On March 28, 2024, we completed a private placement offering of approximately $5 million, raising net cash proceeds of approximately $3 million, after deduction of expenses and the conversion of existing debt. We project these funds will be adequate to fund the business for the rest of this fiscal year and beyond. However, we may seek additional funding from capital and debt markets to support new product develop efforts, take advantage of business opportunities, and expand our sales and marketing capabilities and reach.
New Headquarters
In the first quarter of 2023, we moved into a new headquarters building in Greensboro, NC to support our growing employee base and research and development and customer support laboratory space requirements. The new facility incorporates over 50,000 square feet of office and clean laboratory space, and replaced our former headquarters (also in Greensboro) of approximately 10,000 square feet of space.
Distributor and Sales Networks
We work with global distributors and sales representatives to promote and expand our sales force. Guerrilla RF leverages these ongoing business partnerships for long-term sales and market strategies. In 2022, we expanded our sales representative network in North America, Korea, Japan, and China. Currently, we work with three large electronic component distributors and over 19 sales representative organizations worldwide.
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.
Year Ended December 31, |
||||||||
2023 | 2022 | |||||||
Key Metrics |
||||||||
Number of products released |
12 | 18 | ||||||
Number of total products |
131 | 119 | ||||||
Number of products with lifetime revenue exceeding $100 thousand |
62 | 52 | ||||||
Product backlog |
$5.96 million |
$4.50 million |
Number of products released: The total quantity of distinct new products released into production (products that have completed design, quality, and supply chain readiness) for the period.
Number of total products: The cumulative number of production-released products since Guerrilla RF's inception through the end of the period.
Number of products with lifetime revenue exceeding $100 thousand: The number of products that have achieved the threshold of cumulative sales of $100,000 since 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 direct product costs 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 direct product costs 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 decrease in the near term as the Company continues to focus on expense reduction. Over the longer term we expect general and administrative expenses to grow in absolute dollars as our business grows, but we expect general and administrative expenses to decrease as a percentage of revenues in the coming years.
Research and development 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 percentage 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 moderately in absolute dollars, but as a percentage of revenues, sales and marketing expenses are expected to decrease.
Administrative expenses consist primarily of employee compensation costs related to executive management of the Company, financial management, human resources and information technology. In addition, administrative expenses include business and liability insurance, audit and legal fees as well as consulting and advising. Currently the Company is focused on limiting the growth of administrative expenses and expect such expenses to decline moderately in the coming year.
Interest Expense
Interest expense consists primarily of the interest incurred on our debt obligations, our factoring arrangement expenses, the non-cash interest expense associated with the amortization of warrants issued to certain of our equityholders and debtholders that have a contingent beneficial conversion feature related to certain convertible notes payable, and lease expense related to our capital leases.
Change in Fair Value of Derivative Liabilities
Change in fair value of derivative liabilities is fully attributable to the call and put options features of the convertible notes for the year ended December 31, 2023. There was no change in fair value derivative liability in 2022.
Other Income (Expenses)
Other income (expense) for the years ended December 31, 2022 and 2023 was immaterial in each period (no more than $31 thousand). Included in other income (expense) were small transactions related to foreign currency transactions and lease/debt closing type transactions.
The following table summarizes the results of our operations for the periods presented:
Year Ended December 31, |
||||||||
2023 |
2022 |
|||||||
Revenues |
$ | 15,078,316 | $ | 11,600,904 | ||||
Direct product costs |
6,473,477 | 4,835,632 | ||||||
Gross profit |
8,604,839 | 6,765,272 | ||||||
Operating expenses: |
||||||||
Research and development |
10,282,635 | 8,114,377 | ||||||
Sales and marketing |
5,677,141 | 4,634,012 | ||||||
General and administrative |
5,569,654 | 5,138,410 | ||||||
Total operating expenses |
21,529,430 | 17,886,799 | ||||||
Operating loss |
(12,924,591 | ) | (11,121,527 | ) | ||||
Other income (expenses): |
||||||||
Interest expense |
(2,904,454 | ) | (874,713 | ) | ||||
Change in fair value of derivative liabilities |
(142,200 | ) | — | |||||
Other income (expenses) |
4,951 | (30,526 | ) | |||||
Total other income (expenses), net |
(3,041,703 | ) | (905,239 | ) | ||||
Net loss |
$ | (15,966,294 | ) | $ | (12,026,766 | ) |
Comparison for the years ended December 31, 2023 and 2022:
Year Ended December 31, |
||||||||||||||||
2023 |
2022 |
$ Change |
% Change |
|||||||||||||
Revenues |
$ | 15,078,316 | $ | 11,600,904 | 3,477,412 | 30 | % |
Revenues increased $3.5 million to $15.1 million for the year ended December 31, 2023, as compared to $11.6 million for the year ended December 31, 2022. The increase in revenue was driven by the growth of product sales primarily in automotive. Overall, the number of products and customers continues to expand each year, driving revenue increases as we execute on our sales strategy in order to positively impact revenue through the expansion of our product choices to customers as well as the acquisition of new customers through marketing and sales activities. Royalty and non-recurring revenue have become less important to our revenue plans and have declined from 2022 levels, down 62%, to $0.4 million for 2023 compared to $1.0 million for 2022.
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, Richardson RFPD, Inc. ("RFPD"), during the years ended December 31, 2023, and December 31, 2022. RFPD, a large product distributor serving numerous end customers, generated 81% of product shipment revenue for the years ended December 31, 2023 and 2022.
Our existing product sales increased from $7.1 million for the year ended December 31, 2022 to $11.2 million for the year ended December 31, 2023, or 56%. We continued to develop and sell new products into our markets, and new product sales grew from $3.4 million for the year ended December 31, 2022 to $3.6 million for the year ended December 31, 2023, or 6%.
International shipments amounted to $2.3 million (approximately 16% of product revenue) and $1.9 million (approximately 22% of product revenue) for the years ended December 31, 2023, and December 31, 2022, respectively.
Direct Product Costs and Gross Profit
Year Ended December 31, |
||||||||||||||||
2023 |
2022 |
$ Change |
% Change |
|||||||||||||
Direct product costs |
$ | 6,473,477 | $ | 4,835,632 | 1,637,845 | 34 | % | |||||||||
Gross profit |
$ | 8,604,839 | $ | 6,765,272 | 1,839,567 | 27 | % |
Direct product costs increased $1.6 million to $6.5 million for the year ended December 31, 2023, compared to $4.8 million for the year ended December 31, 2022. The 34% increase in direct product costs was driven by a product sales volume increase of 39% (excluding royalty and non-recurring revenue). This increase was also impacted to a lesser extent by increased fixed overhead costs (Quality staffing and related costs). Year-over-year gross profit increase was due to a sales volume increase of 39% partially offset by reduced product contribution margins from product mix changes from 2022 to 2023.
Research and Development Expenses
Year Ended December 31, |
||||||||||||||||
2023 |
2022 |
$ Change |
% Change |
|||||||||||||
Research and development |
$ | 10,282,635 | $ | 8,114,377 | 2,168,258 | 27 | % |
Research and development expenses increased $2.2 million to $10.3 million for the year ended December 31, 2023, compared to $8.1 million for the year ended December 31, 2022. The increase was attributable to $0.6 million of employee additions in our engineering department, and $1.6 million of facilities and information technology costs including prototype material, software and laboratory costs.
Sales and Marketing Expenses
Year Ended December 31, |
||||||||||||||||
2023 |
2022 |
$ Change |
% Change |
|||||||||||||
Sales and marketing |
$ | 5,677,141 | $ | 4,634,012 | 1,043,129 | 23 | % |
Sales and marketing expenses increased $1.0 million to $5.7 million for the year ended December 31, 2023, compared to $4.6 million for the year ended December 31, 2022. The 23% increase year over year was driven by employee additions in customer support and inside sales of $0.4 million, facilities and information technology costs of $0.5 million and $0.1 million of sales and marketing related expenses.
General and Administrative Expenses
Year Ended December 31, |
||||||||||||||||
2023 |
2022 |
$ Change |
% Change |
|||||||||||||
General and administrative expenses |
$ | 5,569,654 | $ | 5,138,410 | 431,244 | 8 | % |
General and administrative expenses increased $0.4 million to $5.6 million for the year ended December 31, 2023, compared to $5.1 million for the year ended December 31, 2022. The increase was primarily related to increases in wages and benefits of $0.2 million, $0.1 million of legal and professional fees, and $0.1 million related to general expenses. The increase in wages, benefits, and professional fees was driven by headcount additions within our information technology and accounting departments, and expenses related to being a public company.
Other Income (Expenses)
Year Ended December 31, |
||||||||||||||||
2023 |
2022 |
$ Change |
% Change |
|||||||||||||
Interest expense |
$ | (2,904,454 | ) | $ | (874,713 | ) | $ | (2,029,741 | ) | 232 | % | |||||
Change in fair value of derivative liabilities |
$ | (142,200 | ) | $ | — | $ | (142,200 | ) | 0 | % | ||||||
Other income (loss) |
$ | 4,951 | $ | (30,526 | ) | $ | 35,477 | (116 | )% | |||||||
Total other income (expenses), net |
$ | (3,041,703 | ) | $ | (905,239 | ) | $ | (2,136,464 | ) | 236 | % |
Interest expense increased approximately $2.0 million to $2.9 million for the year ended December 31, 2023, compared to $0.9 million for the year ended December 31, 2022. The increase was attributable to greater utilization of two loan facilities Guerrilla RF entered into in 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 $3.0 million secured by inventory and accounts receivables. The second is a $12.0 million commercial line of credit which was fully drawn as of December 31, 2023. In addition, we have entered into a number of smaller notes secured by equipment and facility improvements as well as unsecured convertible promissory notes.
During the year ended December 31, 2023, we recognized a change in fair value related to embedded derivatives.
Other income and expense was insignificant in 2022 and 2023.
Liquidity and Capital Resources
Our primary source of liquidity has been cash raised from private placements and debt financing. As of December 31, 2023, we had cash resources of $0.8 million. We also have 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 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 our consolidated financial statements). As of December 31, 2023, we had drawn down $1.2 million under the Spectrum Loan Facility and $12.0 million under the Salem Loan Facility. Subsequent to our year end close on March 28, 2024 we raised approximately $3 million net in a private placement offering to support our current and future liquidity needs. The Company believes that its existing cash and cash equivalents following this raise will provide sufficient resources to support operations through the rest of this fiscal year and beyond. However, we may seek additional funding opportunities if management believes such funds can be successfully invested in business opportunities for the company.
As described in Note 1 to our consolidated financial statements, we have incurred recurring losses and negative cash flows from operations since inception and have an accumulated deficit at December 31, 2023 of $43.0 million. We expect losses and negative cash flows to continue in the near term, primarily due to continued investment in research and development, sales and marketing efforts, and increased administration expenses as our Company grows. We plan to continue to invest in the implementation of our long-term strategic plan and we anticipate that we will continue to narrow cash burn from historical levels so that cash reserves will provide the necessary working capital to conclude the company is a going concern.
The following table summarizes our sources and uses of cash for each of the periods presented.
Cash (used in) provided by:
Year Ended December 31, |
||||||||
2023 |
2022 |
|||||||
Operating activities |
$ | (13,454,990 | ) | $ | (9,248,403 | ) | ||
Investing activities |
(101,714 | ) | (549,850 | ) | ||||
Financing activities |
9,997,615 | 8,824,675 | ||||||
Net decrease in cash |
$ | (3,559,089 | ) | $ | (973,578 | ) |
Operating Activities
Cash used in operating activities was $13.4 million and $9.2 million for the years ended December 31, 2023 and 2022, respectively. Cash used in operating activities for the year ended December 31, 2023 principally resulted from our net loss of $16.0 million, with uses offset by non-cash depreciation and amortization of $1.6 million, non-cash interest expense related to debt refinancing of $0.4 million, accretion of notes payable of $1.2 million as well as $1.3 million in share-based compensation. There was also $1.0 million provided from the decrease of prepaid expenses, an increase of accounts receivable of $1.0 million, and a decrease in operating lease expense of $0.1 million. In addition, there was a $2.2 million decrease in accounts payable and accrued expenses and a $0.1 million decrease in inventory.
Cash used in operating activities for the year ended December 31, 2022, principally resulted from our net loss of $12.0 million. Moderate decreases in our accounts receivable and a moderate increase in inventories along with a $0.9 million decrease in prepaid expenses and an increase of $0.8 million in accounts payable and accrued expenses in total had an overall positive impact on cash used in operations. Depreciation and amortization of $1.4 million and share-based compensation of $0.6 million additionally positively impacted net cash used in operating activities.
Investing Activities
Cash used in investing activities was $0.1 million and $0.5 million for the years ended December 31, 2023 and 2022, respectively. Cash used in investing activities resulted from capital expenditures on property and equipment for all periods presented.
Financing Activities
Cash provided by financing activities during the year ended December 31, 2023, of $10.0 million was principally attributable to $6.1 million in net proceeds from two debt transactions noted above as well as total net proceeds from equity financing of $5.4 million. Principal payments on capital leases reduced total cash provided by financing by $1.0 million.
Contractual Obligations and Commitments
The following summarizes our significant contractual obligations as of December 31, 2023. As mentioned above associated with the move of our business headquarters in the first quarter of 2023, the Company anticipates at least another $0.7 million of excess construction costs and related interest and deferral fees for which it will be responsible, and they will become due in the first half of 2023. We anticipate an annual lease expense of approximately $1.1 million over the 10-year and two-month term of the building lease.
Payments due by period |
||||||||||||||||||||
Total |
Less than 1 year |
1 – 3 years |
4 – 5 years |
More than 5 years |
||||||||||||||||
Purchase order obligations |
$ | 740,340 | $ | 740,340 | $ | — | $ | — | $ | — | ||||||||||
Long-term debt |
698,600 | — | 466,756 | 231,844 | — | |||||||||||||||
Short-term debt |
13,356,429 | 13,356,429 | — | — | — | |||||||||||||||
Operating lease obligations |
6,922,477 | 745,969 | 1,074,223 | 1,186,858 | 3,915,427 | |||||||||||||||
Finance lease obligations |
2,572,522 | 978,543 | 1,391,939 | 191,482 | 10,558 | |||||||||||||||
Total |
$ | 24,290,368 | $ | 15,821,281 | $ | 2,932,918 | $ | 1,610,184 | $ | 3,925,985 |
Off-Balance Sheet Arrangements
As of December 31, 2023 and 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.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet date and reported amounts of revenue and expenses during the reporting period. Our most significant estimates and judgments involve the valuation of our share-based compensation, including the underlying estimated fair value of our common stock. Accordingly, actual results may differ from these estimates. To the extent that there are differences between our estimates and actual results, our future consolidated financial statement presentation, financial condition, results of operations, and cash flows will be affected.
Other than as described under Note 2 to our audited consolidated financial statements, the Critical Accounting Policies and Significant Judgments and Estimates included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the U.S. Securities and Exchange Commission on March 3, 2023, have not materially changed.
We believe that the accounting policies described below involve a greater degree of judgment and complexity. Accordingly, these are the policies we think are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.
Liquidity and Going Concern
We have fully drawn down all available funds under the Salem Loan Facility ($12.0 million). We continue to utilize to our fullest ability our asset based line with Spectrum, which we refer to as the Spectrum Loan Facility. Subsequent to December 31, 2023, on March 28, 2024 we completed a private placement offering of approximately $5 million, raising net cash proceeds of approximately $3 million, after deduction of expenses and the conversion of existing debt to further support our current and future liquidity needs. In addition, on March 28, 2024 Salem extended the maturity date of the Salem Loan Facility from April 30, 2024 to January 31, 2026.
Our recurring operating losses and operating plans have in the past raised substantial doubt about our ability to continue as a going concern for the next 12 months. With the completion of the private placement and the extension of debt terms with Salem in Q1 of 2024, combined with our projections for narrowing losses over the coming 12 months we believe that our liquidity has improved significantly. However, we recognize that our projections are subject to a number of risks, many of which are outside of our control. As a result, there remains uncertainty as to whether we have sufficient cash and cash equivalents to fund the business over the next 12 months. If not, we will require to seek additional funding, which may not be available at rates acceptable to us, or at all. This potential requirement for additional funding raises substantial doubt about our ability to continue as a going concern. Our independent registered public accounting firm issued their audit report on our consolidated financial statements for the years ended December 31, 2023 and 2022, which included an explanatory paragraph as to our ability to continue as a going concern.
Share-Based Compensation
We recognize the grant-date fair value of share-based awards issued as compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period of the award. To date, we have not issued awards where vesting is subject to performance or market conditions. The fair value of stock options is estimated at the time of grant using the Black-Scholes option pricing model, which requires the use of inputs and assumptions such as the estimated fair value of the underlying common stock, exercise price of the option, expected term, risk-free interest rate, expected volatility and dividend yield, the most critical of which is the estimated fair value of our common stock.
The estimated fair value of each grant and modification of stock options awarded during fiscal 2023 and fiscal 2022 was determined using the following methods and assumptions:
● |
Estimated fair value of common stock. Beginning mid 2022, as trading volume increased, the Company started using the market trading value. |
● |
Expected term. Due to the lack of a large public market for the trading of our common stock and the lack of sufficient company-specific historical data, the expected term of employee stock options is determined using the “simplified” method, as prescribed in SEC Staff Accounting Bulletin (“SAB”) No.107 (SAB 107), Share-Based Payment, whereby the expected life equals the arithmetic average of the vesting term and the original contractual term of the option. |
● |
Risk-free interest rate. 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. |
● |
Expected volatility. The expected volatility is based on historical volatilities of peer companies within our industry which were commensurate with the expected term assumption, as described in SAB 107. |
● |
Dividend yield. We assume a dividend yield of 0% because we have never paid, and for the foreseeable future do not expect to pay, a dividend on our common stock. |
The inputs and assumptions used to estimate the fair value of share-based payment awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different inputs and assumptions, our share-based compensation expense could be materially different for future awards.
The Option Price Method, or OPM, treats common stock as call options on a company’s enterprise value, with exercise prices based on the liquidation preferences of the preferred stock. The OPM uses the Black-Scholes option-pricing model to determine the price of the call option. The OPM is appropriate to use when the range of possible future outcomes is so difficult to predict that forecasts would be highly speculative.
Our common stock became quoted on the OTCQX, an OTC Markets Group trading platform, on May 13, 2022. We began using our quoted common stock price as a fair value estimation factor to value our common stock once it achieved sufficient trading volume during the year ended December 31, 2022.
JOBS Act Accounting Election
We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we are no longer an emerging growth company, or affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. We have not elected to early adopt certain new accounting standards, as described in Note 2 of our consolidated financial statements. As a result, our consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our audited consolidated financial statements appearing elsewhere in this Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Guerrilla RF, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Consolidated Statements of Changes in Stockholders’ Equity (Deficit) |
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Report of Independent Registered Public Accounting Firm
To the Shareholders and Audit Committee of Guerrilla RF, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Guerrilla RF, Inc. (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has an accumulated deficit that raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 1 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ FORVIS LLP
We have served as the Company’s auditor since 2021.
Raleigh, NC
March 29, 2024
Consolidated Balance Sheets
December 31, 2023 and 2022
December 31, 2023 | December 31, 2022 | |||||||
Assets | ||||||||
Cash | $ | $ | ||||||
Accounts receivable, net | ||||||||
Inventories, net | ||||||||
Prepaid expenses | ||||||||
Total Current Assets | ||||||||
Prepaid expenses and other | ||||||||
Operating lease right-of-use assets | ||||||||
Property, plant, and equipment, net | ||||||||
Total Assets | $ | $ | ||||||
Liabilities and Stockholders' Equity (Deficit) | ||||||||
Accounts payable and accrued expenses | $ | $ | ||||||
Short-term debt | ||||||||
Derivative liabilities | ||||||||
Operating lease liability, current portion | ||||||||
Finance lease liability, current portion | ||||||||
Convertible notes | ||||||||
Convertible notes - related parties | ||||||||
Notes payable, current portion, net | ||||||||
Total Current Liabilities | ||||||||
Long-term debt | ||||||||
Operating lease liability | ||||||||
Finance lease liability | ||||||||
Notes payable | ||||||||
Total Liabilities | ||||||||
Preferred stock, $ par value, shares authorized, shares issued and outstanding as of December 31, 2023 and 2022 | ||||||||
Common stock, $ par value, shares authorized, and shares issued and outstanding as of December 31, 2023 and 2022, respectively | ||||||||
Additional paid-in capital | ||||||||
Accumulated deficit | ( | ) | ( | ) | ||||
Total Stockholders' Equity (Deficit) | ( | ) | ||||||
Total Liabilities and Stockholders' Equity (Deficit) | $ | $ |
Consolidated Statements of Operations
For the Years Ended December 31, 2023 and 2022
Year Ended December 31, | ||||||||
2023 | 2022 | |||||||
Product | $ | $ | ||||||
Royalties and non-recurring engineering | ||||||||
Total | ||||||||
Direct product costs | ||||||||
Gross Profit | ||||||||
Operating Expenses: | ||||||||
Research and development | ||||||||
Sales and marketing | ||||||||
General and administrative | ||||||||
Total Operating Expenses | ||||||||
Operating Loss | ( | ) | ( | ) | ||||
Interest expense | ( | ) | ( | ) | ||||
Change in fair value of derivative liabilities | ( | ) | ||||||
Other income (expense) | ( | ) | ||||||
Total Other Expenses, net | ( | ) | ( | ) | ||||
Net Loss | $ | ( | ) | $ | ( | ) | ||
Net loss per share - basic and diluted | $ | ( | ) | $ | ( | ) | ||
Weighted average common shares outstanding - basic and diluted |
Consolidated Statements of Change in Stockholders' Equity (Deficit)
For the Years Ended December 31, 2023 and 2022
Preferred Stock | Common Stock | Additional Paid-In-Capital | Accumulated Deficit | Total Stockholders' Equity (Deficit) | ||||||||||||||||
December 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
Net loss | ( | ) | ( | ) | ||||||||||||||||
Stock options exercised | ||||||||||||||||||||
Conversion of promissory notes to common stock | ||||||||||||||||||||
Equity financing, net of issuance costs | ||||||||||||||||||||
Share-based compensation | ||||||||||||||||||||
December 31, 2022 | ( | ) | ||||||||||||||||||
Net loss | ( | ) | ( | ) | ||||||||||||||||
Net settled RSUs | ( | ) | ( | ) | ||||||||||||||||
Shares issued for prepaid services | ||||||||||||||||||||
Equity financing, net of issuance costs | ||||||||||||||||||||
Share-based compensation | ||||||||||||||||||||
December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) |
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2023 and 2022
Year Ended December 31, | ||||||||
2023 | 2022 | |||||||
Cash flows from operating activities | ||||||||
Net loss | $ | ( | ) | $ | ( | ) | ||
Adjustment to reconcile net loss to net cash used in operating activities | ||||||||
Depreciation and amortization | ||||||||
Share-based compensation | ||||||||
Non-cash interest expense related to debt financing | ||||||||
Accretion of notes payables | ||||||||
Impairment on property plant and equipment and operating lease | ||||||||
Change in fair value of derivative liabilities | ||||||||
Inventory allowance | ||||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | ( | ) | ||||||
Inventories | ( | ) | ||||||
Prepaid expenses | ||||||||
Accounts payable and accrued expenses | ( | ) | ||||||
Operating lease liability | ( | ) | ( | ) | ||||
Net cash used in operating activities | ( | ) | ( | ) | ||||
Cash flows from investing activities | ||||||||
Purchases of property, plant, and equipment | ( | ) | ( | ) | ||||
Net cash used in investing activities | ( | ) | ( | ) | ||||
Cash flows from financing activities | ||||||||
Proceeds from notes payable, derivative liabilities and factoring agreement | ||||||||
Proceeds from equity financing, net | ||||||||
Proceeds from exercise of stock options | ||||||||
Principal payments of notes payable and recourse factoring agreement | ( | ) | ( | ) | ||||
Principal payments on finance lease | ( | ) | ( | ) | ||||
Repayments of finance insurance premiums | ( | ) | ( | ) | ||||
Net cash provided by financing activities | ||||||||
Net decrease in cash | ( | ) | ( | ) | ||||
Cash, beginning of period | ||||||||
Cash, end of period | $ | $ | ||||||
Noncash investing and financing transactions: | ||||||||
Modification on operating and finance leases | $ | $ | ||||||
Shares issued for prepaid services | $ | $ | ||||||
Property and equipment financed through finance leases | $ | $ | ||||||
Property and equipment additions included in accounts payable | $ | $ | ||||||
Financing of property and equipment | $ | $ | ||||||
Financing of insurance premiums and software | $ | $ | ||||||
Financing of mask set and wafer | $ | $ | ||||||
Right-of use assets obtained through operating lease | $ | $ | ||||||
Conversion of promissory notes to common stock | $ | $ | ||||||
Other long term asset additions included in accounts payable | $ | $ |
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2023 and 2022
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”). On May 30, 2023, Guerrilla RF Operating Corporation was merged with and into Guerrilla RF, Inc.
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 Operating Corporation following the closing of the Merger.
All references in these Consolidated Financial Statements 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. together with Guerrilla RF Operating Corporation.
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.
Liquidity and Going Concern
In accordance with Financial Accounting Standards 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 consolidated financial statements are issued. The accompanying 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 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.
The Company has incurred substantial negative cash flows from operations in nearly every fiscal period since inception. For the year ended December 31, 2023, the Company incurred a net loss of $
Our primary source of liquidity has been from cash raised from private placements and debt financing. We also have two loan facilities, one of which is for up to $
Guerrilla RF, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2023 and 2022
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 Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with GAAP and with the rules and regulations for reporting the Annual Report on Form 10-K ("Form 10-K"), 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 Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board. The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Guerrilla RF Operating Corporation that was merged with and into the Company in May 2023. All intercompany accounts and transactions have been eliminated in consolidation.
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 the 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 consolidated financial statements, and reported amounts of revenue and expenses during the reporting period. In addition, the Company’s significant estimates and judgments involve the valuation of share-based compensation and the evaluation 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. The reclassifications have no impact on the Company's previously reported net loss.
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 December 31, 2023 and 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.
Guerrilla RF, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2023 and 2022
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 annual product shipment revenue. The Company had December 31, 2023 major customer during the years ended and 2022. Revenues from the major customer accounted for
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
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 $
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. The Company depreciates computer hardware, software, production and computer equipment, and lab equipment using the straight-line method over their estimated useful lives, ranging from to years. The Company depreciates furniture and fixtures using the straight-line method over their estimated useful lives of years. Leasehold improvements are amortized over the shorter of the asset’s useful life or the remaining lease term. Repairs and maintenance are expensed as incurred by the Company.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The recoverability of assets held and used is measured by comparing the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets, less costs to sell. The Company evaluated its long-lived assets for impairment in the year ended December 31, 2023, and determined IT equipment and leasehold improvements were impaired and recorded an asset impairment expense. See Note 4 for further information.
Deferred Offering Costs
The Company will capitalize legal, professional, accounting, and other third-party fees directly associated with common equity financings as deferred offering costs on the balance sheet as a non-current asset until the transaction is complete. The Company will recognize such previously deferred offering costs and any additional incurred offering costs in connection with such transaction, as a reduction of additional paid in capital. Transaction costs consisting of legal, accounting, financial advisory, and other professional fees incurred as part of the Merger mentioned in Note 1, and the private placements mentioned in Note 6 were offset against the total proceeds from the Merger and private placements in the accompanying consolidated financial statements for both the years ended December 31, 2023 and 2022.
Guerrilla RF, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2023 and 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 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.
During the years ended December 31, 2023 and 2022, the Company had $
The costs incurred by the Company for shipping and handling are classified as direct product costs in the consolidated statements of operations. Any incidental items that are immaterial in the context of a sale to a customer are recognized as expense.
Direct Product Costs
The Company’s direct product costs consist primarily of salaries and related expenses, overhead, third-party services vendors, shipping and handling, and depreciation expense related to the equipment and information technology costs incurred directly in the Company’s revenue-generating activities.
Share-Based Compensation
The Company measures and recognizes compensation expense for all stock options, shares of stock, and restricted stock units ("RSU") awarded to employees and nonemployees based on the estimated fair market value of the award on the grant date. The Company uses the Black-Scholes option-pricing model to estimate the fair value of its stock option awards. The Company estimates the fair value of shares of stock and 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.
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 years ended December 31, 2023 and 2022 were $
Guerrilla RF, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2023 and 2022
Inventories
Inventories are valued at the lower of cost and net realizable value. Cost is determined by the first‐in, first‐out (FIFO) method. The Company analyzes its product portfolio and inventory aging in determining whether an inventory allowance is needed. Historically, such allowances have been immaterial and within management's expectations.
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 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 recognize the tax benefit from an uncertain tax position only if it is more likely than not 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 the statements of operations classification of interest and penalties related to income tax obligations is to include such items as part of total income tax expense.
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.
Guerrilla RF, Inc.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2023 and 2022
Net 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 loss per 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 common stock. 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 years ended December 31, 2023 and 2022. As such, all RSUs, warrants, and options were excluded from the calculation of net loss per share for the years ended December 31, 2023 and 2022.
The following potentially dilutive securities have been excluded from the computation of diluted weighted-average shares of common stock outstanding, as they would be anti-dilutive:
Year Ended December 31, | ||||||||
2023 | 2022 | |||||||
Common stock warrants | ||||||||
Restricted stock units | ||||||||
Stock options | ||||||||
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.