NOTE 5 — DEBT

Outstanding principal balances on debt consisted of the following at:

Term Loan Agreement

On August 26, 2021, the Company and its subsidiaries entered into the Loan Agreement with WAB. Pursuant to the Loan Agreement, WAB agreed to provide the Company and its subsidiaries with a term loan facility in the maximum principal amount of $10,000,000. Amounts outstanding under the term loan portion of the Loan Agreement bear interest at a per annum rate equal to the Prime Rate (as published in The Wall Street Journal) plus 1.5%, with a Prime “floor” rate of 3.25%.

The Loan Agreement has a five-year term, and the maximum principal amount was advanced in a single-cash advance on or about the closing date. Interest accrued under the Loan Agreement is due monthly, and the Company is required to make monthly interest-only payments through the one-year anniversary of the closing date. From the first anniversary of the closing date through the maturity date, the Company is required to make monthly payments of principal and interest that increase over the term of the agreement. The Loan Agreement requires principal repayments on the anniversary date of the closing of the debt agreement of $500,000 in the second year, $1,000,000 in the third year, $2,000,000 in the fourth year, and $3,000,000 in the fifth year, respectively, with the remaining outstanding principal balance and all accrued but unpaid interest due in full on the maturity date. The Loan Agreement may also require early repayments if certain conditions are met.

The Company recorded $130,000 in deferred financing costs related to the Loan Agreement. These deferred financing costs are being amortized over the term of the loan. The Company will also incur $200,000 in financing costs at the earlier of the term date of the loan, or pre-payment. These costs are being accreted, through interest expense, to the full value of the $200,000 over the term of the loan.

Debt Modification and Revolving Line of Credit

On November 29, 2022, the Company executed the Second Modification (the “Second Modification”) to the Loan Agreement. The Second Modification expanded the Company’s total borrowing to include a $2,000,000 revolving line of credit. The revolving line of credit is co-terminus with the term loan and matures on August 26, 2026. There are no requirements to draw on the line of credit. Amounts outstanding under the line of credit portion of the Loan Agreement bear interest at a per annum rate equal to the Prime Rate (as published in The Wall Street Journal) plus 1.5%, with a Prime “floor” rate of 3.25%. The Second Modification also amended the covenants of the Company under the Loan Agreement. At January 31, 2025 and 2024, there was a $1,000,000 and $1,500,000 balance, respectively, outstanding on the revolving line of credit.

The Company executed a Third Modification and Waiver to Second Amended and Restated Loan Agreement (the “Third Modification”) and a Fourth Modification to Second Amended and Restated Loan Agreement (the “Fourth Modification”) on  February 7, 2024 and  April 5, 2024, respectively (collectively, the “Third and Fourth Modifications”). The Third and Fourth Modifications reestablished the customary financial covenants for the Loan Agreement.

On  November 13, 2024, the Company executed the Fifth Modification to Second Amended and Restated Loan and Security Agreement (the “Fifth Modification”) that amended, among other things, the Minimum Adjusted EBITDA and Maximum ARR Net Leverage Ratio covenants. 

The Fifth Modification updated the definition of "Adjusted EBITDA" and amended certain financial covenants as follows:

The Company recorded $20,000 in deferred financing costs related to the Second Modification. These deferred financing costs are being amortized over the remaining term of the loan. The Company also incurred $50,000 in financing costs related to the Second Modification and $300,000 related to the Fifth Modification at the earlier of the term date of the loan, or pre-payment. These costs are being accreted, through interest expense, to the full value of the $550,000 over the remaining term of the loan. The full value of 550,000 includes the $200,000 costs incurred in connection with the Loan Agreement.

Debt Private Placement

On  February 1, 2024, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with certain accredited investors, including certain directors and officers of the Company (collectively, the “Investors”), pursuant to which the Company agreed to sell to the Investors unsecured subordinated promissory notes (the “Notes”) in the aggregate principal amount of $4.4 million and warrants (the “Warrants”) to purchase up to an aggregate of 267,728 shares of the Company’s common stock in a private placement (the “Debt Private Placement”). The closing of the Debt Private Placement occurred on  February 7, 2024 (the “Closing Date”).

Notes Payable

The Notes bear interest at a rate of 15% per annum and mature on  August 7, 2026 (the “Maturity Date”). All accrued and unpaid interest on the Notes will be capitalized and added to the outstanding principal balance of the Notes and will be payable in cash on the Maturity Date. The Company  may redeem the Notes, in whole or in part, prior to the Maturity Date without any premium or penalty. In the event the Company prepays any portion of the then outstanding principal balance of the Notes on or before the twelve (12) month anniversary of the Closing Date, in addition to such prepayment of the principal balance, the Company must pay to the Investors a prepayment fee (in accordance with the each Investor’s pro-rata share of the Notes) in an amount equal to the amount of interest that would have accrued but for the prepayment from the date of such prepayment through such twelve (12) month anniversary of the Closing Date.

The Notes also include customary negative covenants, subject to exceptions, which limit dispositions of assets and the business activities of the Company, as well as customary representations and warranties, affirmative covenants and events of default, including a cross-default provision with the Loan Agreement and a change of control default provision. The Company has determined that it is probable that a covenant under the Loan Agreement may not be achieved in the next 12 months and as such it has reclassified the Notes Payable balance as current as of January 31, 2025.

The rights of each Investor to receive payments under the Notes are subordinate to the rights of Western Alliance Bank (“WAB”), pursuant to a subordination agreement which the Investors entered into with WAB concurrently with the Debt Private Placement.

The Company allocated the original total proceeds at inception from the Debt Private Placement and Common Stock Private Placement (refer to Note 7 – Equity) across the securities issued in connection with the offerings. The Company has recorded the Notes at a relevant residual fair value of $3,538,000, consisting of the $4,400,000 face value of the notes and $862,000 discount. The Company allocated $183,000 in issuance costs. The discount is being accreted and the financing costs amortized as interest expense over the term of the Notes using the effective interest method. 

Warrants

The Warrants have an exercise price of $5.70 (except for Warrants issued to the Company’s directors and officers which have an exercise price of $5.85), are immediately exercisable, and will expire on the fourth anniversary of the Closing Date. The Warrants are subject to customary adjustments for certain transactions affecting the Company’s capitalization. The terms of the Warrants preclude a holder thereof from exercising such holder’s Warrants, and the Company from giving effect to such exercise, if after giving effect to the issuance of common stock upon such exercise, the holder (together with the holder’s affiliates and any other persons acting as a group together with the holder or any of the holder’s affiliates) would beneficially own in excess of 9.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of common stock upon such exercise.

The Notes and the Warrants described above were offered in a private placement under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and/or Regulation D promulgated thereunder and, along with the common stock underlying the Warrants, were "restricted securities" under the Securities Act or applicable state securities laws. Accordingly, the Notes, the Warrants and the common stock underlying the Warrants  may not be offered or sold in the United States absent registration with the SEC or an applicable exemption from such registration requirements and in accordance with applicable state securities laws. The securities were offered and sold to “accredited investors” as that term is defined in Rule 501(a) under the Securities Act. 

 The Warrants contain a registration rights provision for the Company to provide the Warrant holder with registered common stock upon their exercise of a Warrant. If the Company is not able to deliver registered common stock for exercised Warrants that results in the Warrant holder acquiring registered common stock, then the Warrant holder has the discretion to request the Company remit cash compensation up to the corresponding purchase price. Accordingly, the Company determined the feature required liability accounting treatment upon issuance. On  May 7, 2024, the Company filed a Registration Statement on Form S-3 (Registration No. 333-279190), as amended by that certain Pre-Effective Amendment No. 1 to Form S-3 filed on  May 24, 2024 (collectively, the “Registration Statement”), for purpose of registering for resale 267,728 shares of common stock underlying the Warrants. The Registration Statement was declared effective by the SEC on  June 10, 2024. The filing of the Registration Statement eliminated the potential cash settlement feature that caused liability accounting ensuring the Warrants will be settled with shares, and accordingly, the Warrants met the criteria for equity classification and reclassified them to paid-in capital after a final re-measurement. 

 The Company allocated the total proceeds from the Debt Private Placement and Common Stock Private Placement (refer to Note 8 – Equity) across the securities issued in connection with offerings. The Company recorded an initial liability of $881,000 for the Warrants at fair value using a Black-Scholes model. The Company immediately recognized $46,000 in issuance costs as expense related to the agreements for the Warrants. During the second fiscal quarter, the Company reclassified the $837,000 remeasured value of the Warrants as additional paid-in capital on the consolidated Balance Sheet. Refer to Note 2 - Significant Accounting Policies regarding the Warrant valuation inputs.