Note 5 - Financial Instruments and Fair Value Measurements

3 Months Ended

Mar. 31, 2026

5.	Financial Instruments and Fair Value Measurements

The Company’s financial instruments consist of money market funds and a derivative liability. The following tables show the Company’s financial instruments' carrying value and fair value at March 31, 2026 and December 31, 2025 (in thousands):

	*As of March 31, 2026 (unaudited)*
	*Carrying Amount*		*Fair Value*		*Quoted Priced in active markets (Level 1)*		*Significant other observable inputs (Level 2)*		*Significant unobservable inputs (Level 3)*
Assets
Money market funds	$	7,021	$	7,021	$	7,021	$	—	$	—
Total assets	$	7,021	$	7,021	$	7,021	$	—	$	—

Liabilities
Derivative liability	$	259	$	259	$	—	$	—	$	259
Total liabilities	$	259	$	259	$	—	$	—	$	259

	*As of December 31, 2025*
	*Carrying Amount*		*Fair Value*		*Quoted Priced in active markets (Level 1)*		*Significant other observable inputs (Level 2)*		*Significant unobservable inputs (Level 3)*
Assets
Money market funds	$	12,191	$	12,191	$	12,191	$	—	$	—
Total assets	$	12,191	$	12,191	$	12,191	$	—	$	—

Liabilities
Derivative liability	$	292	$	292	$	—	$	—	$	292
Total liabilities	$	292	$	292	$	—	$	—	$	292

Cash equivalents - Cash equivalents of $7.0 million as of March 31, 2026 and $12.2 million as of December 31, 2025, consisted of money market funds. Money market funds are classified as Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets. Of the $7.0 million of cash equivalents as of March 31, 2026, $368 thousand is classified as restricted stock on the balance sheet as it serves as collateral for one of the Company's facility leases.

Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

Recurring Fair Value Measurements

The Company’s derivative liability embedded in the Financing Agreement is measured at fair value using a probability-weighted discounted cash flow model and is classified as a Level 3 liability of the fair value hierarchy due to the use of significant unobservable inputs. The liability is presented as an embedded derivative liability on the consolidated balance sheets and is subject to remeasurement to fair value at the end of each reporting period, with the change in fair value recognized as a component of other income (expense) in its consolidated statements of operations. The assumptions used in the discounted cash flow model include: (1) management's estimates of the probability and timing of future cash flows and related events; (2) the Company's risk-adjusted discount rate that includes a company-specific risk premium; and (3) the Company's cost of debt.

The following table provides a reconciliation for the opening and closing balance of the derivative liability for the three months ended March 31, 2026 (in thousands):

	*Amount*
Balance as of January 1, 2026	$	292
Issuances		—
Adjustment for net change in fair value		(33	)
Balance as of March 31, 2026	$	259

The following table provides a reconciliation for the opening and closing balance of the derivative liability for the year ended December 31, 2025 (in thousands):

	*Amount*
Balance as of January 1, 2025	$	—
Issuances		320
Adjustment for net change in fair value		(28	)
Balance as of December 31, 2025	$	292

There have been no changes to the valuation methodologies utilized by the Company during the three months ended March 31, 2026 compared to the year ended December 31, 2025. The Company evaluates transfers between levels at the end of each reporting period. There were no transfers of financial instruments between levels during the three months ended March 31, 2026 and the year ended December 31, 2025.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

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+ Details

Valion Bio, Inc. 10-Q