• Filing Date: 2020-08-03
  • Form Type: 10-Q
  • Description: Quarterly report
v3.20.2
DEBT
6 Months Ended
Jun. 30, 2020
Debt Disclosure [Abstract]  
DEBT

Long-Term Debt

 

On January 25, 2017, pursuant to the terms of its acquisition of Firestorm, the Company issued $1,000,000 in the aggregate form of four unsecured, subordinated promissory notes with interest payable over five years. The principal amount of one of the notes payable is $500,000 payable at an interest rate of 2% and the remaining three notes are evenly divided over the remaining $500,000 and payable at an interest rate of 7%. The notes mature on January 25, 2022. The aggregate balance of these notes payable was $971,000 and $961,000, net of unamortized interest, as of June 30, 2020 and December 31, 2019, respectively, to reflect the amortized fair value of the notes issued due to the difference in interest rates of $29,000 and $39,000, respectively.

 

On April 3, 2018, the Company entered into a transaction pursuant to which an institutional investor (the “2018 Lender”) loaned $2,000,000 to the Company (the “2018 Promissory Note”). On March 12, 2019, the $2,000,000 balance due on the 2018 Promissory Note was retired in its entirety in exchange for an equivalent principal amount of the 2019 Promissory Notes (see below). In addition, Rekor paid to the 2018 Lender $1,050,000 of consideration for the re-acquisition by the Company of the Lender’s Participation and $75,000 of interest due through May 1, 2019. All amounts paid were obtained from the proceeds of the 2019 Promissory Notes. The 2018 Lender consideration of $1,050,000 for the Lender’s Participation and unamortized financing costs of $63,000 are recorded as costs in connection with the loss on the extinguishment of debt of $1,113,000 for the six months ended June 30, 2019.

 

Paycheck Protection Program Loan

 

On May 26, 2020, the Company, entered into a loan agreement with Newtek Small Business Finance, LLC, which provides for a loan in the principal amount of $221,000 (the “Rekor PPP Loan”) pursuant to the Paycheck Protection Program under the CARES Act. The Rekor PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for six months after the date of disbursement.

 

On June 3, 2020, the Company’s wholly owned subsidiary, Rekor Recognition Systems, Inc., entered into a loan agreement with Newtek Small Business Finance, LLC, which provides for a loan in the principal amount of $653,000 (the “Rekor Recognition PPP Loan”) pursuant to the Paycheck Protection Program under the CARES Act. The Rekor Recognition PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for six months after the date of disbursement.

 

The Rekor PPP Loan and the Rekor Recognition PPP Loan (collectively the “Loans”) may be prepaid at any time prior to maturity with no prepayment penalties. The Loans contain events of default and other provisions customary for a loan of this type. The Paycheck Protection Program provides that the Loans may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. The Company intends to use the entire Loans amount for qualifying expenses and to apply for forgiveness of the Loans in accordance with the terms of the CARES Act. The current and long-term portion of the Loans is presented as part of loans payable current portion and loans payable, long-term, respectively, on the unaudited condensed consolidated balance sheets.

 

On May 5, 2020, TeamGlobal, entered into a loan agreement with BOKF, NA, d/b/a Bank of Oklahoma, which provides for a loan in the principal amount of $5,005,000 (the “TeamGlobal PPP Loan”) pursuant to the Paycheck Protection Program under the CARES Act. The TeamGlobal PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. The TeamGlobal PPP Loan was assumed by TeamGlobal as part of the TeamGlobal Purchase Agreement.

 

The Small Business Administration (“SBA”), in consultation with the Department of Treasury, issued new guidance that creates uncertainty regarding the qualification requirements for a PPP loan for public companies. The Company will review the new guidance at the time of issuance and determine whether it remains eligible for the PPP Loan at that time. 

 

2019 Promissory Notes

 

On March 12, 2019, the Company entered into a note purchase agreement pursuant to which investors, including OpenALPR Technology, Inc. (the “2019 Lenders”) loaned $20,000,000 to the Company (the “2019 Promissory Notes”) and the Company issued to the 2019 Lenders warrants to purchase 2,500,000 shares of Rekor common stock (the “March 2019 Warrants”). The loan bears interest at 16% per annum, of which at least 10% per annum is required to be paid in cash. Any remaining interest accrues to be paid at maturity or earlier redemption. The notes also require a $1,000,000 exit fee due at maturity, or a premium if paid before the maturity date, and compliance with affirmative, negative and financial covenants, including a fixed charge coverage ratio, minimum liquidity and maximum capital expenditures. As of June 30, 2020, the Company had a waiver in place for the financial covenants related to this note until December 31, 2021. Transaction costs included $403,000 for a work fee payable over 10 months, $290,000 in legal fees and a $200,000 closing fee. The loan is secured by a security interest in substantially all of the assets of Rekor. The March 2019 Warrants are exercisable over a period of five years, at an exercise price of $0.74 per share, and were valued at $706,000, at the time of issuance. The warrants were exercisable commencing March 12, 2019 and expire on March 12, 2024.

 

As of the anniversary date of the commencement of the 2019 Promissory Notes $1,283,000 of the paid-in kind interest had not been paid by the Company and per the purchase agreement was added to the principal balance of the 2019 Promissory Notes in March 2020.

 

Amortized financing costs for the three months ended June 30, 2020 and 2019 were $276,000 and $324,000, respectively, and for the six months ended June 30, 2020 and 2019 were $600,000 and $392,000, respectively, and are included in interest expense on the unaudited condensed consolidated statement of operations. The 2019 Promissory Notes have an effective interest rate of 24.87%.

 

2019 Promissory Note Amendments

 

On March 26, 2020, the Company entered into the First Amendment to Note Purchase Agreement which effectively extended the maturity date of the 2019 Promissory Notes from March 11, 2021 to June 12, 2021. The Company incurred $100,000 in transaction costs related to the First Amendment to the Note Purchase Agreement, these costs are financing costs and deferred over the remaining life of the loan.

 

On April 2, 2020, in connection with the sale of AOC Key Solutions, the Company transferred $2,200,000 to the holders of the 2019 Promissory Notes. $2,000,000 of the funds were used as a prepayment of principal while the other $200,000 was paid as premium percentage as the portion of the 2019 Promissory Notes were paid prior to the maturity date. The premium percentage paid in connection with this transaction is presented as part of debt extinguishment costs in the unaudited condensed consolidated statement of operations.

 

On April 2, 2020, the Company entered into a partial release and Second Amendment to Note Purchase Agreement (the “Second Amendment”), by and among the Credit Parties, the Purchasers and the Agent. Pursuant to the terms of the Second Amendment, AOC Key Solutions was released as a Credit Party and the assets related to AOC Key Solutions were released as collateral, and the Asset Disposition Proceeds terms of the Note Purchase Agreement were amended to reflect the transaction.

 

On June 29, 2020, in connection with the TeamGlobal Purchase Agreement, the Company entered into a Partial Release and Third Amendment to Note Purchase Agreement (the “Third Amendment”), by and among the Credit Parties, the Purchasers and the Agent. Pursuant to the terms of the Third Amendment, TeamGlobal was released as a credit party and the assets related to TeamGlobal were released as collateral, the mandatory prepayments provision of the 2019 Promissory Notes were waived with regard to the sale of TeamGlobal, and the maturity date of the 2019 Notes remaining outstanding was extended to December 31, 2021.

 

2019 Promissory Note Exchange Transaction

 

On June 30, 2020, the Company entered into Exchange Agreements with certain 2019 Lenders of the Company’s 2019 Promissory Notes.  Subject to the terms and conditions set forth in the Exchange Agreements, approximately $17,398,000, was redeemed in exchange for 4,349,497 shares of the Company’s common stock, at a rate of $4 per share. On July 15, 2020, the Company completed the Note Exchange. Of the amount redeemed for common stock, $14,833,000 was related to the existing principal balance, $784,000 was related to the portion of the exit fee associated with the notes subject to conversion, $279,000 was related to the PIK interest associated to the notes subject to conversion, and $1,502,000 was part of the premium percentage as the portion of the 2019 Promissory Notes were settled prior to the maturity date. The premium for redemption was not included in the balance of the 2019 Promissory Notes as of June 30. 2020. Following the Note Exchange, approximately $4,450,000 aggregate principal amount of the 2019 Promissory Notes will remain outstanding, plus an additional $216,000 related to the exit fee.

 

As of June 30, 2020, there was approximately $981,000 and $271,000 of deferred financing costs subject to the 2019 Promissory Notes which were subject to the Note Exchange and the 2019 Promissory Notes which were not subject to the Note Exchange, respectively.

 

As of June 30, 2020, the 2019 Lenders subject to the Note Exchange had not yet received their shares of the Company’s common stock. As of June 30, 2020, the Company has separately presented the 2019 Promissory Notes subject to the Note Exchange on its unaudited condensed consolidated balances sheets. On July 15, 2020, the Company settled the debt subject to the Note Exchange with shares of its common stock. See the Note 13 - Subsequent Events for additional information related to the Note Exchange Transaction.

 

The principal amounts due for long-term notes payable described above are shown below as of June 30, 2020 (dollars in thousands):

 

2020   $ 46  
2021     20,725  
2022     1,387  
2023     -  
2024     -  
Thereafter     -  
Total     22,158  
         

 

Less unamortized interest     (29 )
Less unamortized financing costs     (1,252 )
Total debt   $ 20,877  
Loans payable, current portion   $ 251  
Loans payable, long-term     623  
Notes payable, long-term     5,367  
Notes payable to be exchanged for common stock     14,636  
Total debt   $ 20,877