Fair Value Measurements

3 Months Ended

Mar. 31, 2022

Note 10 — Fair Value Measurements

The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021, and indicates the fair value hierarchy of the valuation techniques that the Company utilized to determine such fair value.

March 31, 2022
Description	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
Assets:
Investments held in Trust Account - money market funds	$	575,098,560	$	-	$	-

Liabilities:
Derivative liabilities - Public warrants	$	8,970,000	$	-	$	-
Derivative liabilities - Private placement warrants	$	-	$	-	$	7,452,916
Derivative liabilities - Forward purchase agreement	$	-	$	-	$	730,392

December 31, 2021
Description	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
Assets:
Investments held in Trust Account - money market funds	$	575,040,654	$	-	$	-

Liabilities:
Derivative liabilities - Public warrants	$	13,800,000	$	-	$	-
Derivative liabilities - Private placement warrants	$	-	$	-	$	11,265,333
Derivative liabilities - Forward purchase agreement	$	-	$	-	$	731,302

Transfers to/from Levels 1, 2, and 3 are recognized at the beginning of the reporting period. The estimated fair value of Public Warrants for $12,995,000 was transferred from a Level 3 fair value measurement to a Level 1 measurement, when the Public Warrants were separately listed and traded in May 2021. There were no transfers to/from Levels 1, 2, and 3 during the three months ended March 31, 2022, or for the period from February 5, 2021 (inception ) through March 31, 2021.

Level 1 instruments include investments in money market funds invested in US government securities and derivative warrant liabilities (Public Warrants). The Company uses inputs such as actual trade data, quoted market prices from dealers or brokers, and other similar sources to determine the fair value of its investments.

The initial estimated fair value of the Public Warrants was measured at fair value using a Monte Carlo simulation. Since the Public Warrants were being traded in an active market, the fair value of Public Warrants have been measured using the publicly observable trading price. As of March 31, 2022, and December 31, 2021, the fair value of the Private Placement Warrants and forward purchase agreement are measured using a Black-Scholes option pricing model. The estimated fair value of the Public Warrants, Private Placement Warrants, and forward purchase agreement, prior to the Public Warrants being traded in an active market, is determined using Level 3 inputs. Inherent in a Monte Carlo simulation and a Black-Scholes model are assumptions related to expected stock-price volatility, expected life, risk-free interest rate and dividend yield. The Company estimates the volatility of its warrants based on implied volatility from the Company’s traded warrants, once the Public Warrants were traded in active market, and from historical volatility of select peer company’s shares that matches the expected remaining life of the warrants. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the warrants. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on the historical rate, which the Company anticipates remaining at zero. Any changes in these assumptions can change the valuation significantly.

The following table provides quantitative information regarding Level 3 fair value measurements inputs at their measurement dates:

	March 31, 2022			December 31, 2021
Exercise price	$	11.50		$	11.50
Unit price	$	9.80		$	10.00
Volatility		5.0% - 10.5	%		5.0% - 16.3	%
Term (years)		5.00			5.62
Risk-free rate		1.06% -2.42	%		0.24% - 1.32	%

The change in the fair value of derivative liabilities, measured using Level 3 inputs, for the three months ended March 31, 2022 and from the period from February 5, 2021, (inception) through March 31, 2021, is summarized as follows:

Derivative liabilities at December 31, 2021	$	11,996,635
Change in fair value of derivative liabilities		(3,813,327	)
Derivative liabilities at March 31, 2022	$	8,183,308

Derivative liabilities at February 5, 2021 (inception)	$	-
Issuance of derivative liabilities - Warrant Liabilities		22,262,530
Issuance of derivative liabilities - FPA		791,800
Change in fair value of derivative liabilities		1,341,670
Derivative liabilities at March 31, 2021	$	24,396,000

- 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.

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MSD ACQUISITION CORP. / NEW 10-Q