Note 5 - Debt

9 Months Ended

Sep. 30, 2022

Notes to Financial Statements

Debt Disclosure [Text Block]

5. DEBT

Factoring Arrangement

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

As stated previously, the Company factored the accounts receivable on a recourse basis.  Therefore, if the Factor could not collect the factored accounts receivable, the Company had to refund the Advance Amount remitted to it for any uncollected accounts receivable.  Accordingly, the Company recorded the liability of having to refund the Advance Amount as short-term debt when the factoring arrangement was utilized.  The Company terminated the factoring arrangement as of June 1, 2022.  As of September 30, 2022, there were no advances or other liabilities outstanding under the factoring arrangement. 

The cost of factoring was as follows for the periods indicated:

	Year-to-Date September 30, 2022		Year-to-Date September 30, 2021		Three Months Ended September 30, 2021
Factoring Fees	$	-	$	75,661	$	24,050

Spectrum Loan Facility

As mentioned in Note 2, on June 1, 2022 (the “Spectrum Effective Date”), the Company entered into the Spectrum Loan Facility with Spectrum. 

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

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

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

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

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

The Spectrum Loan Facility contains various covenants and restrictions on the Company's financial and business operations including restrictions on the purchase or redemption of any Company shares and the declaration or payment of any dividends on the Company's stock.

The foregoing summary of the terms of the Spectrum Loan Facility does not purport to be complete and is subject to, and qualified in its entirety by, reference to the full text of the Credit Agreement and the AR Agreement, which were attached as Exhibits to the Company's Current Report on Form 8-K, filed with the SEC on June 6, 2022.

The Company has borrowed $0.2 million under the Spectrum Loan Facility as of September 30, 2022.  The Company includes the interest expense of the Spectrum Loan Facility ($20 thousand)as part of its interest expense on its unaudited interim condensed consolidated statements of operations, and the total amount of $0.2 million borrowed under the Spectrum Loan Facility is included as short-term debt on the unaudited interim condensed consolidated balance sheet as of September 30, 2022.

Salem Loan Facility

On August 11, 2022 (the “ Salem Effective Date”), the Company entered into the Salem Loan Facility with Salem.  The Salem Loan Facility provides for a loan facility in the aggregate amount of up to $8.0 million.

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

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

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

The foregoing description of the Salem Loan Facility does not purport to be complete and is qualified in its entirety by reference to the full text of the loan documents, copies of which are attached as Exhibits to the Company's Current Report on Form 8-K filed with the SEC on August 17, 2022.

The Company has borrowed $5.0 million under the Salem Loan Facility as of September 30, 2022.  As of September 30, 2022, the Company includes the interest expense of the Salem Loan Facility   ($92 thousand) as part of its interest expense on its unaudited interim condensed consolidated statements of operations, the total amount of $5.0 million borrowed as undiscounted long-term debt on its unaudited interim condensed consolidated balance sheet ($4.5 million discounted long-term debt), and the 150,000 shares of common stock issued ($0.5 million) within the unaudited interim condensed consolidated statement of stockholders' equity (deficit) .

New Headquarters Capital Addition Financing

As disclosed in the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2022, in conjunction with the Company's planned move into expanded office facilities in early 2023, which will become the Company's new headquarters, the Company entered into a financing arrangement related to furniture for the new office facilities in April 2022.  The total cost of the furniture financed was $1.1 million, which included tax, freight, interim storage, and installation labor.  The Company was responsible for paying interest-only payments to the financing company related to the furniture procurement order (interest on principal of $496 thousand) placed in April 2022 prior to the first scheduled principal financing payment, which occurred in August 2022 ($246 thousand).  The Company made interest-only payments to the financing company related to the furniture procurement order through August 2022 in the amount of $17 thousand.  Subsequent to August 2022 through September 30, 2022, the Company has paid $24 thousand in principal and $4 thousand in interest.  The total scheduled principal and interest payments to be made after September 30, 2022 are $775 thousand.

As disclosed in the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2022, the Company entered into a lease agreement in July 2021 in conjunction with the Company's planned move into its new headquarters in early 2023 (as described in Note 8 to our unaudited interim condensed consolidated financial statements).  The new headquarters are being renovated in accordance with plans agreed upon with the landlord, and the Company will take possession of the building once all improvements and renovations (the "new building asset additions") are substantially complete.  Initially, the Company anticipated the new building asset additions being completed and taking possession in September 2022; however, the landlord, as the sole improvement and renovation contractor, has experienced significant construction delays and as a result it is now expected that the new headquarters will not become available until the first quarter of 2023.  In August 2022, the Company reached an agreement with the landlord over the timing of the payments for the new building asset additions in light of the significant construction delays (see the lease agreement and amendments as Exhibits 10.7, 10.8, 10.9, and 10.10 to this Quarterly Report on Form 10-Q).  The Company anticipates the total cost of the new building asset additions will be approximately $7.5 million, with the Company being responsible for the balance in excess of the landlord's $3.5 million allowance (the "excess construction costs") plus deferral fees and interest.

As part of the aforementioned  August 2022 lease amendment, the Company made the landlord an initial payment of $1.3 million towards the excess construction costs and related financing costs.  The August 2022 lease amendment included new financing terms for the excess construction costs, which include a deferral fee (2% per annum) and interest (18% per annum).  Thus, the Company will pay the landlord a 2% deferral fee to be applied to all current and future excess construction costs as invoiced by the landlord.  The Company will also pay 18% interest on all such current and future excess construction costs and deferral fees from the date the landlord invoices them until the Company remits payment.  The initial payment of $1.3 million towards the excess construction costs was applied first to accrued interest, then to the deferral fee, and then to excess construction costs.  The Company is not required to make any additional payments towards excess construction costs until after the Company has completed an additional capital raise, but no later than December 15, 2022 (and up to December 31, 2022 at the landlord's discretion).  At that time, the Company must pay the landlord in full all unpaid excess construction costs, deferral fees, and interest then due (the "Capital Raise Payment").  After the Capital Raise Payment, the Company will resume making monthly invoiced payments related to the excess construction costs, including deferral fees and interest.

Loans Payable – EIDL

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

Loans Payable - PPP

On April 30, 2020, Guerrilla RF received loan proceeds of $535,800 under the PPP.  PPP loans and accrued interest are forgivable after a “covered period” (24 weeks) as long as the borrower maintains its payroll levels and uses the loan proceeds for eligible purposes, including payroll, benefits, rent, and utilities.  As of December 31, 2020, Guerrilla RF had $535,800 of principal outstanding on the PPP loan together with accrued interest of $3,611 as accounts payable and accrued expenses on the consolidated balance sheet.  On February 17, 2021, Guerrilla RF received notice from the SBA that the $535,800 PPP loan was forgiven, including all accrued interest.

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

Debt Maturity

Outstanding debt (as discounted) as of September 30, 2022 is expected to mature as follows:

2022	$	217,998
2023		-
2024		-
2025		-
2026		-
Thereafter		4,541,892
	$	4,759,890