NOTE 8. CONVERTIBLE NOTES

Unsecured Convertible Notes

On March 24, 2024, in connection with completing certain required conditions to close the DERMAdoctor Divestiture (see Note 15, “DERMAdoctor Divestiture”), the Company and the holders of the Secured Convertible Notes (as defined below) entered into a First Amendment (the “First Amendment”) to the Company’s Security Agreement, dated April 27, 2023 (the “Security Agreement”), to remove all of the DERMAdoctor membership units and any assets of DERMAdoctor as collateral for the Company’s obligations pursuant to the Secured Convertible Notes and for DERMAdoctor to be removed as a party to the Security Agreement, and a Consent and Release (the “Subsidiary Guarantee Consent”), to terminate the Subsidiary Guarantee, dated April 7, 2023 (the “Subsidiary Guarantee”) (collectively, the “2024 Subsidiary Guarantee Termination”).

The Company issued $525 thousand aggregate principal amount of unsecured convertible notes (the “Unsecured Convertible Notes”) in conjunction with the 2024 Subsidiary Guarantee Termination. The Unsecured Convertible Notes were due March 25, 2026 and bear no stated interest. The Unsecured Convertible Notes may be converted at a conversion price equal to $24.50 per share at any time at the election of the holder up to the amount of outstanding principal at the time of conversion subject to certain limitations such as beneficial ownership limitations.

Upon issuance in March 2024, the lender’s conversion option under the Unsecured Convertible Notes represented an embedded call option requiring bifurcation as an embedded derivative liability because the common stock underlying the option required stockholder approval before the option could be exercised. The fair value of the embedded derivative was determined to be $224 thousand upon issuance in accordance with a Black Scholes valuation model. See also Note 3, “Fair Value Measurements,” subheading “Black Scholes Valuation Models and Assumptions.” Upon stockholder approval on May 28, 2024, the embedded call option no longer required liability treatment and was reclassified to equity. The fair value of the embedded derivative liability was determined to be $242 thousand as of May 28, 2024. The increase of $18 thousand in fair value between issuance and May 28, 2024 was recorded in other expense, net in the Consolidated Statements of Operations. See also Note 3, “Fair Value Measurements,” subheading “Black Scholes Valuation Models and Assumptions.”

Upon issuance, the discount to the note recorded for the embedded derivative liability and debt issuance costs were amortized to interest expense using the effective interest rate method over the term of the Unsecured Convertible Notes, assuming that the Unsecured Convertible Notes will be redeemed for cash of $525 thousand at time of maturity as of March 25, 2026. The effective interest rate on the Unsecured Convertible Notes is 144%. Interest expense recognized, including amortization of the issuance costs and debt discount, was $275 and $62 thousand, which was included in other expense, net in the Consolidated Statements of Operations for the years ended December 31, 2025 and 2024, respectively.

In December 2025, certain holders elected to convert $350 thousand aggregate principal amount of the Unsecured Convertible Notes to 14,286 shares of common stock. The conversions were accounted for as partial extinguishments of debt at carrying value in accordance with ASC 470, resulting in the reclassification of $246 thousand to stockholders’ equity during the year ended December 31, 2025, with no comparable activity during the year ended December 31, 2024. Amortization of the debt discount and issuance costs ceased for the portions of the Unsecured Convertible Notes that were converted, with interest expense recognized through the respective conversion dates. The effective interest rate and amortization methodology for the remaining outstanding balance were not modified.

As of December 31, 2025, the remaining $175 thousand aggregate principal amount of Unsecured Convertible Notes outstanding were convertible into 7,143 shares of common stock. The net carrying amount of the remaining Unsecured Convertible Notes was approximately $125 thousand, reflecting approximately $50 thousand of unamortized debt discount and issuance costs. Of this amount, approximately $67 thousand was presented as Unsecured Convertible Notes on the Consolidated Balance Sheets and approximately $58 thousand of accrued interest was included in accrued liabilities. Based on the closing price of the Company’s common stock of $28.20 per share on December 31, 2025, the aggregate if-converted value of the shares issuable upon conversion of the remaining notes exceeded the principal amount by approximately $26 thousand. The estimated fair value of the remaining Unsecured Convertible Notes as of December 31, 2025 was approximately $201 thousand, based on the market price of the Company’s common stock and the number of shares issuable upon conversion, and is classified as Level 2 within the fair value hierarchy. Subsequent to December 31, 2025, in January 2026, all remaining outstanding Unsecured Convertible Notes were converted into 7,143 shares of common stock.

Secured Convertible Notes

In May 2023, the Company issued $3.3 million aggregate principal amount Original Issue Discount Senior Secured Convertible Debentures (the “Secured Convertible Notes”) in conjunction with a May 2023 private placement (the “2023 Private Placement”). The Secured Convertible Notes were issued with a $300 thousand original issue discount.

Beginning June 1, 2023, the Company was required to start making a monthly redemption of 1/18th of the original principal amount of the Secured Convertible Notes. Each monthly redemption reduced the outstanding principle of the Secured Convertible Note by $183 thousand.

The Secured Convertible Notes also provided for a redemption equal to up to 20% of the gross proceeds received by the Company from any financing completed while the Secured Convertible Notes were outstanding. In connection with the 2024 Warrant Reprice Transaction (see Note 10, “Stockholders’ Deficit”), the Company made such a payment totaling $45 thousand in cash against the Secured Convertible Notes. In connection with the 2024 Public Offering (see Note 10, “Stockholders’ Deficit”), the Company repaid the remaining balance of the Secured Convertible Notes with a payment totaling $433 thousand in cash. Upon full repayment, the Company was released from any further obligations under the Secured Convertible Notes with the lenders.

The discounts and debt issuance costs were amortized to interest expense using the effective interest rate method over the term of the Secured Convertible Notes. The effective interest rate on the Secured Convertible Notes was 173%. During the year ended December 31, 2024, interest expense recognized, including amortization of the issuance costs and debt discount, was $0.8 million which was included in other expense, net in the Consolidated Statements of Operations.