Fair Value Measurements

3 Months Ended

Sep. 30, 2022

Fair Value Disclosures [Abstract]

Fair Value Measurements

5. Fair Value Measurements

Fair value is defined as the 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.

US GAAP provides a framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. The following are the hierarchical levels of inputs to measure fair value:

▪Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

▪Level 2: Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

▪Level 3: Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

All financial assets or liabilities that are measured at fair value on a recurring and non-recurring basis have been segregated into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date. The assets and liabilities measured at fair value on a recurring and non-recurring basis are summarized in the tables below:

	Fair Value as of September 30, 2022
(in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Equity investments	$	20,075	$	-	$	-	$	20,075
Total assets within the fair value hierarchy	$	20,075	$	-	$	-	$	20,075
Investments valued at net asset value							$	20,549
Total assets							$	40,624
Liabilities:
Participation feature of Series A-2 Preferred Stock	$	-	$	-	*		*
Contingent consideration liability		-		-		1,709		1,709
Total liabilities	$	-	$	-	$	1,709	$	1,709

	Fair Value as of June 30, 2022
(in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Equity investments	$	27,678	$	-	$	-	$	27,678
Equity investments of Consolidated Fund		1,797		-		-		1,797
Total assets within the fair value hierarchy	$	29,475	$	-	$	-	$	29,475
Investments valued at net asset value							$	20,363
Total assets							$	49,838
Liabilities:
Participation feature of Series A-2 Preferred Stock	$	-	$	-	*		*
Contingent consideration liability		-		-		1,767		1,767
Total liabilities	$	-	$	-	$	1,767	$	1,767

*Balance eliminates in consolidation.

There were no transfers between levels of the fair value hierarchy during the three months ended September 30, 2022 and 2021.

The following is a reconciliation of changes in contingent consideration, a Level 3 liability:

	For the three months ended September 30,
(in thousands)	2022			2021
Beginning balance	$	1,767		$	271
Additions		-			497
Change in fair value		(58	)		(163	)
Ending balance	$	1,709		$	605

The valuation techniques applied to investments held by the Company and by the Consolidated Fund varied depending on the nature of the investment.

Equity and equity-related securities

Securities traded on a national securities exchange are stated at the close price on the valuation date. To the extent these securities are actively traded and valuation adjustments are not applied, they are classified as Level 1.

Investments in private funds

The Company values investments in private funds using net asset value (NAV) as reported by each fund’s investment manager. The private funds calculate NAV in a manner consistent with the measurement principles of FASB Accounting Standards Codification Topic 946, Financial Services – Investment Companies, as of the valuation date. Investments valued using NAV as a practical expedient are not categorized within the fair value hierarchy.

As of September 30, 2022 and June 30, 2022, investments in private funds primarily consisted of our investment in Monomoy Properties UpREIT, LLC, the operating partnership of Monomoy Properties REIT, LLC (Monomoy UpREIT). Monomoy UpREIT allows redemptions annually with 90 days’ notice subject to a one-year lockup from the date of initial investment. As of September 30, 2022, there were no unfunded commitments.

Contingent consideration

In conjunction with the acquisition of Advanced Medical DME, LLC and PM Sleep Lab, LLC on March 1, 2021, the Company entered into a contingent consideration agreement that requires the Company to pay up to $2.1 million if certain revenue thresholds of the acquired business are achieved for the 12 months ending September 1, 2022. As these revenue thresholds were not expected to be achieved, the fair value of the contingent consideration was zero as of June 30, 2022. As of September 30, 2022, the Company made a preliminary determination that the target was not met, subject to agreement with the seller.

In conjunction with the acquisition of MedOne Healthcare, LLC on August 31, 2021, the Company entered into a separate contingent consideration agreement that requires the Company to pay up to $1.0 million if certain revenue thresholds of the acquired business are achieved for the 12 months ending September 1, 2022 and September 1, 2023. As of September 30, 2022, the Company made a preliminary determination that, based on the performance to date, the amount of contingent consideration earned under the agreement was $0.7 million (included within the accrued expenses and other liabilities), subject to agreement with the seller.

In conjunction with the acquisition of the Monomoy UpREIT investment management agreement, the Company entered into a contingent consideration agreement that requires the Company to pay up to $2.0 million if certain fee revenue thresholds are achieved during fiscal years ending June 30, 2023 and 2024. The Company estimated the fair value of the contingent consideration using a Monte Carlo simulation model. The key assumptions in applying the Monte Carlo simulation model as of September 30, 2022 include revenue forecasts, volatility of 19.2% and a discount rate of 8.75%. The contingent consideration of $1.1 million is included within the related party payables in the condensed consolidated balance sheets as of September 30, 2022 and June 30, 2022.

Participation feature of Series A-2 Preferred Stock

On December 29, 2020, HC LLC issued Series A-2 Preferred Stock to our consolidated subsidiary, Forest. See Note 12 – Non-Controlling Interests and Preferred Stock of Subsidiaries. An embedded derivative was identified in the instrument requiring bifurcation from the host instrument as a derivative to be carried at fair value. The value of the derivative related to a participation feature upon the sale of the durable medical equipment business. As of period end, the fair value of this derivative is determined using an option pricing model based on the estimated value of HC LLC derived from a discounted cash flow income approach and a guideline public company market approach. The key assumptions in applying the valuation approach as of September 30, 2022 include financial forecasts of the durable medical equipment business and a volatility rate of 63.5% (level 3 inputs in accordance with the US GAAP fair value hierarchy). The key assumptions in applying the valuation approach as of June 30, 2022 include financial forecasts of the durable medical equipment business and a volatility rate of 59.1%. The fair value of the embedded derivative as of September 30, 2022 and June 30, 2022, was $0.9 million and $7.9 million, respectively. Since Series A-2 Preferred Stock was issued to Forest, a consolidated subsidiary, the instruments and their effects on our operations have been eliminated in consolidation and therefore the valuation of the participation feature is reflected as zero within the table above. However, this valuation does impact our segment results and non-controlling interest accounts.

See Note 10 - Borrowings for additional discussion related to the fair value of our notes payable and other long-term debt. The carrying value of all other financial assets and liabilities approximate their fair values.