During Fiscal 2023 the Company entered into a Securities Purchase Agreement (“SPA”) pursuant to which the Company issued $3.3 million 10% original issue discount Senior Secured Convertible Notes (the “Convertible Notes”) and 1.7 million five-year common stock purchase warrants, for total gross proceeds of $3,000,000. In connection with the financing the Company issued 1.2 million placement agent warrants.

The Notes and warrants issued pursuant to the SPA were amended during Fiscal 2023 modified to extend the maturity date to October 11, 2024. In exchange, the principal was increased to $4.6 million and an additional 1.7 million common stock purchase warrants were issued.

The Notes accrue interest at a rate of 7% per annum payable monthly, which increased to 18% upon the event of default as of December 31, 2023. Due to the default the Company is required to pay 20% of consolidated revenues monthly on each interest payment date in reduction of

the principal amount. In addition, the holders have the right to require us to prepay the Convertible Notes at a 125% of principal. Further, upon a bankruptcy event of default or a change of control event amounts owed would be 125% of the principal remaining.

The Convertible Notes are secured by the assets of the Company pursuant to a Security Agreement entered into for such purpose, and are senior to the indebtedness payable to AAI, pursuant to a subordination agreement entered into in connection with the SPA.

The Convertible Notes contain customary restrictive covenants including covenants against incurring new indebtedness or liens, changing the nature of its business, transfers of assets, transactions with affiliates, and issuances of securities, subject to certain exceptions and limitations.

The Convertible Notes have a working capital covenant pursuant to which the Company’s working capital, excluding any debt owed to AAI Lending or any of its affiliates and the modified Notes, shall increase from the Company’s working capital as of September 30, 2023, by a minimum of $250,000 per quarter for the quarters ending December 31, 2023 and March 31, 2024 and $500,000 per quarter thereafter while either of the modified Notes remain outstanding.

The Convertible Notes are convertible at a conversion price equal to the greater of (a) 90% of the VWAP for the 10 trading days prior to the conversion date and (b) $0.25 per share, subject to adjustment including downward adjustment upon any dilutive issuance of securities.

The Company elected the fair value option with respect to the Convertible Notes. The fair value of the liability was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The Company used the probability-weighted expected return method (“PWERM”) to arrive at a fair value. This approach involved the estimation of future potential outcomes for the Convertible Notes, as well as values and probabilities associated with each respective potential outcome.

The Company arrived at the fair value of the Notes liability as shown below:


Senior Secured Convertible Notes:	December 31, 2023				Modification date				Issuance date
Fair value (In thousands)	$		5,544		$		4,296			$		1,803
Face value principal payment (In thousands)	$		4,600		$		4,600			$		3,333
Face value at premium (In thousands)	$		5,750		$		5,750			$		4,166
Conversion discount			10	%			10	%				10	%
Maturity date		October 11, 2024				October 11, 2024					October 11, 2023
Interest rate			7.00	%			7.00	%				6.00	%
Default interest rate			18.00	%			18.00	%				18.00	%
Discount rate			23.50	%			25.60	%				92.50	%
Valuation technique		PWERM				PWERM					PWERM

The rollforward of the Convertible notes is as follows (in thousands):


Fair value	Total
Balance as of December 31, 2022	$	—
Issuance of Senior Secured Convertible Notes		1,803
Change in fair value of Senior Secured Convertible Notes		2,493
Balance upon modification of senior secured convertible note		4,296
Change in fair value of Senior Secured Convertible Notes		1,248
Balance as of December 31, 2023	$	5,544

The change in fair value was recorded within Other (expense) income on the consolidated statements of operations and comprehensive loss.

The warrants issued in connection with the initial issuance and modification issuance (collectively the “Warrants”) entitle the holders to purchase shares of common stock for a five-year period from issuance. The Warrants are exercisable as follows: the lower of (A) $0.78 and (B) 90% of the lowest VWAP for the 10 trading days prior to the date of the exercise, subject to adjustment including downward adjustment upon any dilutive issuance of securities.

The warrant liability on December 31, 2023 and December 31, 2022, were comprised of the following (in thousands):


Fair value	Total
Balance as of December 31, 2022	$	—
Issuance of initial warrants with senior secured convertible notes		2,388
Issuance of warrants with modification of senior secured convertible notes		726
Change in fair value of warrants		(2,437	)
Balance as of December 31, 2023	$	677

The change in fair value was recorded within Other (expense) income on the consolidated statements of operations and comprehensive loss.

The Warrants are liability classified and the following assumptions were used to fair value the warrants:


Warrant liability, current:	December 31, 2023			Modification date			Issuance date
Volatility		153	%		139	%		134	%
Risk-free discount rate		4	%		5	%		4	%
Term (weighted average)	4.4 years			4.6 years			5 years
Valuation technique	Monte Carlo simulation			Monte Carlo simulation			Monte Carlo simulation