HH&L Acquisition Co. Registration of securities issued in business combination transactions

Registration of securities issued in business combination transactions

Fair Value Measurements

Fair Value Measurements

6 Months Ended

12 Months Ended

Jun. 30, 2022

Dec. 31, 2021

Fair Value Measurements

Fair Value Measurements

Note 9 — Fair Value Measurements

The following table presents information about the Company’s financial assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021 and indicates the fair value hierarchy of the valuation techniques that the Company utilized to determine such fair value.

June 30, 2022


					Significant Other
	Quoted Prices in		Significant Other		Unobservable
	Active Markets		Observable Inputs		Inputs
Description	(Level 1)		(Level 2)		(Level 3)
Assets:
Investments held in Trust Account	$	414,645,708	$	—	$	—
Liabilities:
Derivative warrant liabilities - Public Warrant	$	3,519,000	$	—	$	—
Derivative warrant liabilities - Private Placement Warrant	$	—	$	—	$	1,747,600

December 31, 2021


					Significant Other
	Quoted Prices in		Significant Other		Unobservable
	Active Markets		Observable Inputs		Inputs
Description	(Level 1)		(Level 2)		(Level 3)
Assets:
Investments held in Trust Account	$	414,023,891	$	—	$	—
Liabilities:
Derivative warrant liabilities - Public Warrant	$	11,592,000	$	—	$	—
Derivative warrant liabilities - Private Placement Warrant	$	—	$	—	$	5,756,800

Transfers to/from Levels 1, 2, and 3 are recognized at the beginning of the reporting period. The estimated fair value of the Public Warrants transferred from a Level 3 measurement to a Level 1 measurement in March 2021, as the Public Warrants starting trading on March 30, 2021.

Level 1 assets include investment in money market funds that invest solely in U.S. Treasury Securities. The Company uses inputs such as actual trade data, benchmark yields, quoted market prices from dealers or brokers or similar sources to determine fair value of its investments.

The Company utilized a Monte-Carlo simulation to estimate the fair value of the warrants initially and subsequently for the Private Warrants, with changes in fair value recognized in the statements of operations. On June 30, 2022 and December 31, 2021, the fair value of the Public Warrants was measured using the public trading price. For the three months ended June 30, 2022 and 2021, the Company recognized a gain (loss) from a decrease (increase) in the fair value of liabilities of approximately $2.5 million and approximately $(2.5) million, respectively, presented as change in fair value of derivative warrant liabilities on the accompanying unaudited condensed statements of operations. For the six months ended June 30, 2022 and 2021, the Company recognized a gain (loss) from a decrease (increase) in the fair value of liabilities of approximately $12.1 million and approximately $(5.8) million, respectively, presented as change in fair value of derivative warrant liabilities on the accompanying unaudited condensed statements of operations.

The change in the fair value of the derivative warrant liabilities measured with Level 3 inputs as of June 30, 2022 and 2021 are summarized as follows:


Derivative warrant liabilities at December 31, 2021 - Level 3	$	5,756,800
Change in fair value of derivative warrant liabilities - Level 3		(3,186,800)
Derivative warrant liabilities at June 30, 2022 - Level 3	$	2,570,000
Change in fair value of derivative warrant liabilities - Level 3		(822,400)
Derivative warrant liabilities at June 30, 2022 - Level 3	$	1,747,600


Derivative warrant liabilities at January 1, 2021	$	—
Issuance of Public and Private Warrants - Level 3		21,272,000
Transfer of Public Warrants to Level 1 Measurement		(14,076,000)
Change in fair value of derivative warrant liabilities - Level 3		1,028,000
Derivative warrant liabilities at March 31, 2021 - Level 3		8,224,000
Change in fair value of derivative warrant liabilities - Level 3		822,400
Derivative warrant liabilities at June 30, 2021 - Level 3	$	9,046,400

The estimated fair value of the derivative warrant liabilities has been determined using Level 3 inputs. Inherent in a Monte-Carlo simulation are assumptions related to expected stock-price volatility, expected life and risk-free interest rate. The Company estimates the volatility of its ordinary shares based on historical volatility of select peer companies 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 following table provides quantitative information regarding the Level 3 fair value measurements inputs at their measurement dates:


	June 30, 2022			December 31, 2021
Exercise price	$	11.50		$	11.50
Volatility		1.7	%		10.00	%
Stock price	$	9.82		$	9.73
Expected life of the options to convert		5.45			5.61
Risk-free rate		2.97	%		1.31	%
Dividend yield		0	%		0	%

The primary significant unobservable input used in the fair value measurement of the Company’s Private Placement Warrants is the expected volatility of the ordinary shares. Significant increases (decreases) in the expected volatility in isolation would result in a significantly higher (lower) fair value measurement.

Note 9 — Fair Value Measurements

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


	Fair Value Measured as of December 31, 2021
					Significant Other
	Quoted Prices in		Significant Other		Unobservable
	Active Markets		Observable Inputs		Inputs
Description	(Level 1)		(Level 2)		(Level 3)
Assets:
Investments held in Trust Account	$	414,023,891	$	—	$	—
Liabilities:
Derivative warrant liabilities - Public warrant	$	11,592,000	$	—	$	—
Derivative warrant liabilities - Private warrant	$	—	$	—	$	5,756,800

As of December 31, 2020, there were no assets or liabilities that were measured at fair value on a recurring basis.

Transfers to/from Levels 1, 2, and 3 are recognized at the beginning of the reporting period. The estimated fair value of the Public Warrants transferred from a Level 3 measurement to a Level 1 measurement in January 1, 2021, as the Public Warrants starting trading on March 30, 2021.

The change in the fair value of the derivative warrant liabilities measured with Level 3 inputs for the year ended December 31, 2021, is summarized as follows:


Derivative warrant liabilities at January 1, 2021	$	—
Issuance of Public and Private Warrants - Level 3		21,272,000
Transfer of Public Warrants to Level 1 Measurement		(14,076,000)
Change in fair value of derivative warrant liabilities - Level 3		(1,439,200)
Derivative warrant liabilities at December 31, 2021 - Level 3	$	5,756,800

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


	As of December 31, 2021
Volatility		10.00	%
Stock price	$	9.73
Expected life of the options to convert		5.61
Risk-free rate		1.31	%
Dividend yield		0	%
Probability of business combination		90	%

The primary significant unobservable input used in the fair value measurement of the Company’s private warrants is the expected volatility of the ordinary shares. Significant increases (decreases) in the expected volatility in isolation would result in a significantly higher (lower) fair value measurement.

- 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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