LB PHARMACEUTICALS INC Fair Value Disclosure
3. Fair Value Measurements
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy (in thousands):
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As of December 31, 2025 |
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Fair Value Measurement Using |
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Level 1 |
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Level 2 |
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|
Level 3 |
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|
Total |
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||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
||||
Cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
||||
Money market funds |
$ |
249,393 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
249,393 |
|
Total cash equivalents |
|
249,393 |
|
|
|
— |
|
|
|
— |
|
|
|
249,393 |
|
Marketable securities |
|
|
|
|
|
|
|
|
|
|
|
||||
Government securities |
|
— |
|
|
|
45,040 |
|
|
|
— |
|
|
|
45,040 |
|
Total marketable securities |
|
— |
|
|
|
45,040 |
|
|
|
— |
|
|
|
45,040 |
|
Restricted cash |
|
|
|
|
|
|
|
|
|
|
|
||||
Certificate of deposit |
|
— |
|
|
|
770 |
|
|
|
— |
|
|
|
770 |
|
Total restricted cash |
|
— |
|
|
|
770 |
|
|
|
— |
|
|
|
770 |
|
Total assets |
$ |
249,393 |
|
|
$ |
45,810 |
|
|
$ |
— |
|
|
$ |
295,203 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
||||
Derivative liability - warrants |
|
— |
|
|
|
1,305 |
|
|
|
38 |
|
|
|
1,343 |
|
Total liabilities |
$ |
— |
|
|
$ |
1,305 |
|
|
$ |
38 |
|
|
$ |
1,343 |
|
|
As of December 31, 2024 |
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|
Fair Value Measurement Using |
|
|||||||||||||
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
||||
Cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
||||
Money market funds |
$ |
19,926 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
19,926 |
|
Total cash equivalents |
|
19,926 |
|
|
|
— |
|
|
|
— |
|
|
|
19,926 |
|
Marketable securities |
|
|
|
|
|
|
|
|
|
|
|
||||
Government securities |
|
— |
|
|
|
5,021 |
|
|
|
— |
|
|
|
5,021 |
|
Total marketable securities |
|
— |
|
|
|
5,021 |
|
|
|
— |
|
|
|
5,021 |
|
Restricted cash |
|
|
|
|
|
|
|
|
|
|
|
||||
Certificate of deposit |
|
— |
|
|
|
498 |
|
|
|
— |
|
|
|
498 |
|
Total restricted cash |
|
— |
|
|
|
498 |
|
|
|
— |
|
|
|
498 |
|
Total assets |
$ |
19,926 |
|
|
$ |
5,519 |
|
|
$ |
— |
|
|
$ |
25,445 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
||||
Derivative liability - warrants |
|
— |
|
|
|
— |
|
|
|
2,504 |
|
|
|
2,504 |
|
Total liabilities |
$ |
— |
|
|
$ |
— |
|
|
$ |
2,504 |
|
|
$ |
2,504 |
|
Marketable Securities
The Company accounts for marketable securities held as “available-for-sale” in accordance with ASC 320, Investments-Debt Securities. The Company classifies these investments as current assets and carries them at fair value.
The fair value of the Company’s marketable securities classified within Level 2 is based upon observable inputs that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications.
Certificate of Deposit
The Company’s certificates of deposit are Level 2 instruments. The fair value of such instruments is estimated based on valuations obtained from third-party pricing services that utilize industry standard valuation models, including both income-based and market-based approaches, for which all significant inputs are observable either directly or indirectly. These inputs include interest rate curves, foreign exchange rates, and credit ratings.
Warrants
The Company has issued warrants to investors in connection with prior equity financings. These warrants are required to be measured at fair value and presented as liabilities in the accompanying balance sheets. As of December 31, 2025, the warrant liabilities include (i) nominal exercise price warrants, which are marked-to-market based on the period-end closing price of the Company's common stock and (ii) the New Series B Warrant, which has an exercise price of $41.83 and is valued using the Black‑Scholes option pricing model, which includes unobservable inputs. The nominal exercise price warrants are classified within Level 2 of the fair value hierarchy. The New Series B Warrant is classified within Level 3. See Note 8 Redeemable Convertible Preferred Stock and Equity for additional information on the warrants.
For the years ended December 31, 2025 and 2024, the change in the fair value of the Level 3 warrant liability resulted in the recording of a gain (loss) on change in fair value of derivative instruments of $0.04 million and ($0.9) million, respectively, in the accompanying statements of operations.
The following are the assumptions used in the Black-Scholes valuation model in order to determine the fair value of the Level 3 derivative liabilities for the warrant liabilities for the years ended December 31, 2025 and 2024:
|
|
December 31, |
|
|
December 31, |
|
|
|
2025 |
|
|
2024 |
|
Term |
|
2.66 |
|
|
0.58 - 2.00 |
|
Volatility |
|
|
103.4 |
% |
|
49.0% - 70.0 % |
Exercise price |
|
$ |
41.83 |
|
|
$ 0.28 - $41.83 |
Risk-free rate |
|
|
3.52 |
% |
|
4.23% - 4.25 % |
If the significant unobservable inputs of volatility and discount rate were to change, this may result in a significantly higher or lower fair value measurement at the reporting dates. The changes in Level 3 derivative liabilities for the years ended December 31, 2025 and 2024 were as follows (in thousands):
|
|
Warrants |
|
|
Balance, December 31, 2023 |
|
$ |
1,557 |
|
Loss due to change in fair value |
|
|
947 |
|
Balance, December 31, 2024 |
|
$ |
2,504 |
|
Transfer of nominal exercise price warrants out of Level 3 into Level 2 |
|
|
(2,426 |
) |
Gain due to change in fair value |
|
|
(40 |
) |
Balance, December 31, 2025 |
|
$ |
38 |
|
The change in the total warrant liabilities for the years ended December 31, 2025 and 2024 was (in thousands):
|
|
Warrants |
|
|
Balance, December 31, 2023 |
|
$ |
1,557 |
|
Loss due to change in fair value |
|
|
947 |
|
Balance, December 31, 2024 |
|
$ |
2,504 |
|
Gain due to change in fair value |
|
|
(1,161 |
) |
Balance, December 31, 2025 |
|
$ |
1,343 |
|
During the year ended December 31, 2025, the Company transferred certain warrant liabilities from Level 3 to Level 2 within the fair value hierarchy. Transfers between levels are recognized at the beginning of the reporting period in which the transfer occurs.
There are uncertainties on the fair value measurement of the instruments classified under Level 3 due to the use of unobservable inputs and interrelationships between these unobservable inputs, which could result in higher or lower fair value measurements.
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.