During 2022 the Company entered into Senior Secured Convertible Notes, as amended with AAI by which the Company received a total of $12.0 million. The notes bear interest at 10% per annum and are due on January 15, 2025 except for a $1.0 million note which bears a 12% interest and is due on June 15, 2025.

At the option of AAI, the notes are convertible into the Company’s common stock at a conversion price equal to the lesser of (i) $0.78 per share, or (ii) the VWAP Price on such date less a 20% discount to such VWAP Price, but in no event less than $0.25 per share. In addition, all principal and outstanding interest under the Exchange Note will automatically convert to the Company’s common stock upon (i) the consummation of a public offering of securities in which the Company receives net proceeds (net of underwriters’ discounts and selling commissions) of at least $25 million (“Qualified Public Offering” scenario), in which case the conversion price shall be the price at which the Common Stock is sold to the public, provided, however, that no underwriters’ discounts or selling commissions shall be imposed on such conversion, (ii) the consummation of a private or public offering of shares of Common Stock that is not a Qualified Public Offering but that results in the net proceeds (net of underwriters’ discounts and selling commissions) to the Company of at least $5 million (“Non-qualified Offering” scenario), in which case the conversion price shall be the price at which Common Stock is sold in such Non-Qualified Offering less a twenty-five percent (25%) discount or (iii) December 31, 2024, in which case the conversion price shall be the VWAP Price less a 25% discount to such VWAP Price.

With a limited exception, the Secured Note contains a most favored nations provision with respect to future financings of the Company. With limited exceptions, the Company also agreed to certain negative covenants that will require the prior approval of the holder of the Secured Note to incur indebtedness (other than permitted indebtedness), enter into variable rate transactions, incur indebtedness for borrowed money, purchase money indebtedness or lease obligations that would be required to be capitalized on a balance sheet prepared in accordance with U.S. Generally Accepted Accounting Principles, or guaranty the obligations of any other person, in an aggregate amount at any time outstanding in excess of $1,000,000 in any individual transaction or $2,500,000 in the aggregate.

The Company’s obligations under the Purchase Agreement and the Secured Note are secured by a lien on all of the assets of the Company and its wholly owned subsidiaries pursuant to a Security Agreement.

On October 11, 2023, the Company and AAI entered into an agreement pursuant to which the maturity date was extended to January 15, 2025 (“Held to Maturity” scenario) and the indebtedness is now subordinate to the Convertible Notes (see Note 13. Senior Secured Convertible Notes and Warrants).

The Company elected to account for the Senior Secured Convertible Notes using the fair value option and ascribed the following probabilities to four possible scenarios:


	December 31, 2023				December 31, 2022
Scenario description	Estimated probability			Estimated date	Estimated probability			Estimated date
Qualified Financing		25.0	%	October 11, 2024		25.0	%	June 1, 2024
Non-qualified Financing		35.0	%	October 11, 2024		35.0	%	October 1, 2023
Held to Maturity		25.0	%	January 15, 2025		15.0	%	December 31, 2024
Default/Dissolution		15.0	%	October 11, 2024		25.0	%	June 1, 2024
Total		100.0	%			100.0	%

Based on these estimates, the Company arrived at the fair values of the Notes liability as shown below:


Senior Secured Convertible Notes, related party:		December 31, 2023			December 31, 2022
Fair value (In thousands)	$		11,001	$		10,008
Face value principal payment (In thousands)	$		12,133	$		11,133
Face value at premium (In thousands)	$		15,166	$		13,916
Interest rate (weighted average)		10.10%			10.00%
Default interest rate		18.00%			18.00%
Discount rate		43.50%			45.50%
Valuation technique		PWERM			PWERM

Notes payable, related parties, net on December 31, 2023 and December 31, 2022, were comprised of the following (in thousands):


Senior Secured Convertible Notes, Related Party	Total

Fair value at December 31, 2021	$	—
Issuance of senior secured convertible notes, related party		11,365
Change in fair value of senior secured convertible notes, related party		(1,357	)
Fair value at December 31, 2022		10,008
Issuance of senior secured convertible notes, related party		1,000
Change in fair value of senior secured convertible notes, related party		(7	)
Balance at December 31, 2023	$	11,001