Given how lean they were running, they probably broke the covenants on their loan(s). This would make them "technically insolvent" -- a very uncomfortable position for their (VC) Board members. Further, it's quite possible that the lender required a substantial number of Preferred shares as collateral.
So the company was probably in a bind, even if cash-flow positive.
Bankruptcy was probably not an option either. It kills any residual value in the company, as modest as that may be. And it requires Board and/or lender approval. A takeover by the lender would be more likely.
Another important dynamic to consider is that debt stands first-in-line for any proceeds. If necessary, all equity would become zero-valued if that's what's required to pay off the debt.
These are the reasons that debt is shunned in startups: if things go south, debt will make it 10X as bad. IMO, debt should only be used in healthy startups with predictable cash flows. The ability to make the payments isn't enough. The covenants are the first thing that bites.
With this as background, I would guess that management, debt, and the new equity got together and reached an accord that allows the company to try to get to a better place. Hopefully much better. The deal probably contemplates a strategic buyout within the next few years.
Disclaimers: I am a CEO -- not a lawyer, banker, or accountant. These are my opinions and analysis and I apologize to the parties involved if I got something wrong.