On March 30, 2020, the Company entered into a Loan and Security Agreement with the Bank that provided an initial term loan (“Term Loan”) facility

of $7.0 million and a $5.0 million revolving line of credit.

The Loan Agreement was amended effective June 16, 2020 (as amended, the “Loan Agreement”). The Loan Agreement requires the Company to either (i) meet a minimum revenue covenant, or (ii) maintain a ratio of unrestricted cash at the bank to aggregate indebtedness owed to the Bank of at least 1.25 to 1.00. The Company was compliant with these covenants as of June 30, 2020, but cannot provide any assurance as to its future compliance due to, in part, the uncertainty of the effect of the

COVID-19

pandemic on the world economy and the U.S. health system.

If at any point the Company is not in compliance with certain covenants under the Loan Agreement and is unable to obtain an amendment or waiver, such noncompliance may result in an event of default under the Loan Agreement, which could permit acceleration of the outstanding indebtedness and require the Company to repay such indebtedness before the scheduled due date. The Company was required, periodically in the past, to seek modifications from its prior lender to avoid

non-compliance

with its earlier covenants.

Interest in arrears on the Term Loan began to be repaid on April 1, 2020 and will continue to be paid on the first of each successive month thereafter until the principal repayment starts. Commencing on the principal repayment date of September 1, 2021 (or March 1, 2022 if the Company achieves a specified revenue target for any trailing

six-month

period prior to December 31, 2020) and continuing on the first day of each month thereafter, the Company shall make equal monthly payments of principal, together with applicable interest in arrears, to the Bank. The interest rate is set at

above

the Prime Rate. Prime Rate is defined in the Loan Agreement as the greater of four and a quarter

percent

(4.25%)

or the Prime Rate published in the Money Rates section of the Western Edition of the Wall Street Journal. The Prime Rate as of June 30, 2020 was

3.25

The Company has the option to prepay all, but not less than all, of the Term Loan advanced by the Bank under the Loan Agreement. The Company prepayment is subject to payment of (1) all outstanding principal of the Term Loan plus accrued and unpaid interest thereon through the prepayment date, (2) the final payment

(

122,500

1.75% of the original loan amount), (3) the prepayment fee

(

principal balance if prepaid prior to first March 30, 2021,

if principal of prepaid after March 30, 2021 but before June 30, 2022, or 1% of principal if prepaid after March 30, 2022) plus (4) all other obligations that are due and payable, including Bank’s expenses and interest at the default rate with respect to any past due amounts.

The Company did not draw against its revolving line of credit as of June 30, 2020. The interest rate on such borrowings, if the Company were to take an advance, is three quarters-percent (0.75%) above the Prime Rate as defined above.

Obligations to the Bank under the Loan Agreement are secured by a first priority security interest in the Company’s assets, except for certain permitted liens that have priority to the Bank’s security interest by operation of law.

In connection with the Loan Agreement, the Company incurred approximately $141,000 of closing costs. The closing costs have been deduced from the carrying value of the debt and will be amortized through March 30, 2022, the maturity date of the Term Loan.

The maturity of the revolving loan is March 30, 2022.

(b)

Loan and Security Agreement – Silicon Valley Bank

On August 7, 2017, the Company entered into a Loan and Security Agreement, which has since been modified several times through November 1, 2019 (as amended, the “SVB Loan Agreement”) with Silicon Valley Bank that provided an initial term loan facility of

6.0

million and a

4.0

million revolving line of credit.

On March 30, 2020, the Company elected to repay all outstanding obligations (including accrued interest) and retire the SVB Loan Agreement. The Company accounted for this repayment and retirement as an extinguishment of the SVB Loan Agreement. In addition to the outstanding principal and accrued interest, the Company was required to pay

the

510,000

final payment, a termination fee of

114,000

and

other costs totaling $10,000. The Company also wrote off

unamortized

original closing costs as of the extinguishment date. The Company recorded a loss on extinguishment of approximately $341,000 related to the repayment and retirement of the SVB Loan Agreement. The loss on extinguishment was composed of approximately $185,000 for the

unaccrued

final payment, $114,000 termination fee, and $42,000 for the

unamortized

and other closing costs.

(c)

Convertible Debentures

On December 20, 2018, the Company entered into a Securities Purchase Agreement (the “SPA”) with certain institutional and accredited investors, including, but not limited to, all directors and executive officers of the Company at the time (the “Investors”), pursuant to which the Investors purchased unsecured subordinated convertible debentures (the “Convertible Debentures”) with an aggregate principal amount of approximately

7.0

million in a private placement.

On February 21, 2020 (the “Conversion Date”), the conditions permitting a forced conversion were met, and the Company elected to exercise its forced conversion right under the terms of the Convertible Debentures.

As a result of this election, all of the outstanding Convertible Debentures were converted, at a conversion price

of $

4.00

per share, into

1,742,500

shares of the Company’s common stock. In accordance with the make-whole provisions in the Debenture, the Company also issued an additional

76,966

shares of the Company’s common stock. The make-whole amount represented the total interest which would have accrued through the maturity date of the Convertible Debentures, less the amounts previously paid, totaling $

697,000

. The conversion prices related to the make-whole amount were dependent on whether the Investors were related parties or unrelated third parties.

Accounting Considerations and Fair Value Measurements Related to the Convertible Debentures

The Company had previously elected to make

a one-time, irrevocable

election to utilize the fair value option to account for the Convertible Debentures as a single hybrid instrument at its fair value, with changes in fair value from period to period being recorded either in current earnings, or as an element of other comprehensive income (loss), for the portion of the change in fair value determined to relate to the Company’s own credit risk. The Company believed that the election of the fair value option allowed for a more meaningful representation of the total fair value of its obligation under the Convertible Debentures and allowed for a better understanding of how changes in the external market environment and valuation assumptions impact such fair value.

As of the December 31, 2019 valuation and the prior measurement dates, the Company utilized a Monte Carlo simulation model to estimate the fair value of the Convertible Debentures. The simulation model was designed to capture the potential settlement features of the Convertible Debentures, in conjunction with simulated changes in the Company’s stock price and the probability of certain events occurring. The simulation utilized 100,000 trials or simulations to determine the estimated fair value.

The simulation utilized the assumptions that if the Company was able to exercise its Forced Conversion right (if the requirements to do so are met), that it would do so in 100% of such scenarios. Additionally, if an event of default occurred during the simulated trial (based on the Company’s probability of default), the Investors would opt to redeem the Convertible Debentures in 100% of such scenarios. If neither event occurs during a simulated trial, the simulation assumed that the Investor would hold the Convertible Debentures until the maturity date. The value of the cash flows associated with each potential settlement were discounted to present value in each trial based on either the risk-free rate (for an equity settlement) or the effective discount rate (for a redemption or cash settlement).

The Company also recorded a final adjustment to the Convertible Debentures based on their fair value on the Conversion Date, just prior to the forced conversion being completed. Given that the Company’s prior simulation model included the assumption that the Company would elect to force conversion in 100% of scenarios when the requirements were met, the final valuation was based on the actual results of the forced conversion. As such, the Company based the final fair value adjustment to the Convertible Debentures just prior to conversion on the number of shares of common stock that were issued to the Investors upon conversion and the fair value of the Company’s common stock as of the Conversion Date.

The Company notes that the key inputs to the valuation models that were utilized to estimate the fair value of the Convertible Debentures included:


Input	December 31, 2019			February 21, 2019
Company’s stock price	$	7.77		$	11.64
Conversion price		4.00			4.00
Remaining term (years)		1.97			0.00
Equity volatility		49.00	%		N/A
Risk free rate		1.57	%		N/A
1 Probabilty of default event		0.45	%		N/A
1 Utilization of Forced Conversion (if available)		100.00	%		100.00	%
1 Exercise of Default Redemption (if available)		100.00	%		N/A
1 Effective discount rate		18.52	%		N/A

1	Represents a Level 3 unobservable input, as defined in Note 8 - Fair Value Measurements, below.

The Company’s stock price was based on the closing stock price on the valuation date. The conversion price was based on the contractual conversion price included in the SPA.

The remaining term was determined based on the remaining time period to maturity of the Convertible Debentures, or remaining term under the expectation of the Company’s election of its forced conversion right.

The Company’s equity volatility estimate was based on the Company’s historical equity volatility, the Company’s implied and observed volatility of option pricing, and the historical equity and observed volatility of option pricing for a selection of public companies.

The risk-free rate was determined based on U.S. Treasury securities with similar terms.

The probability of the occurrence of a default event was based on Bloomberg’s

1-year

estimate of default risk for the Company (extrapolated over the remaining term).

The utilization of the forced conversion right and the default redemption right was based on management’s best estimate of both features being exercised upon the occurrence of the related contingent events.

The effective discount rate utilized at the December 31, 2019 valuation date was based on yields on

CCC-rated

debt instruments with terms equivalent to the remaining term of the Convertible Debentures. The credit rating estimate was based on the implied credit rating determined at issuance and no changes were identified by the Company that would impact this assessment.

The fair value and principal value of the Convertible Debentures as of December 31, 2019 and the Conversion Date was as follows (in thousands):


Convertible Debentures	December 31, 2019		February 21, 2020
Fair value, in accordance with fair value option	$	13,642	$	21,164

Principal value outstanding	$	6,970	$	6,970

The Company recorded a loss from the change in fair value of the Convertible Debentures of approximately $7.5 million for period through the conversion date which are described in the additional fair value disclosures related to the Convertible Debentures in Note 8.

Upon the consummation of the Forced Conversion, the Company issued 1,816,466 shares of common stock with a fair value of approximately $21.2 million, which was reclassified to stockholders’ equity.

(d)

Principal and Interest Payments Related to Financing Arrangements

Future principal, interest payments, and final payment related to the Loan Agreement are

follows

(in

thousands):


Fiscal Year	Amount Due
2020	$	188
2021		1,238
2022		2,875
2023		2,735
2024		1,004

Total	$	8,040

The following amounts are included in interest expense in our consolidated statement of operations for the three and six months ended June 30, 2020 and 2019 (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Cash interest expense	$	95	$	75	$	138	$	157
Interest on convertible debentures		—		87		49		174
Accrual of notes payable final payment		8		32		39		64
Amortization of debt costs		12		7		19		14
Interest expense capital lease		—		1		—		2

Total interest expense	$	115	$	202	$	245	$	411