Fair Value Measurements

9 Months Ended

Mar. 31, 2022

Fair Value Disclosures [Abstract]

Fair Value Measurements

7. 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.

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 March 31, 2022
	Level 1		Level 2		Level 3		Total
Assets:
Equity investments	$	13,419	$	-	$	-	$	13,419
Equity investments of Consolidated Funds		11,340		-		-		11,340
Total assets within the fair value hierarchy	$	24,759	$	-	$	-	$	24,759
Investments valued at net asset value								5,741
Total assets							$	30,500
Liabilities:
Participation feature of HC LLC Series A-2 Preferred Stock	$	-	$	-	*		*
Contingent consideration liability		-		-		388		388
Total liabilities	$	-	$	-	$	388	$	388

	Fair Value as of June 30, 2021
(in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Equity investments	$	19,444	$	-	$	-	$	19,444
Equity investments of Consolidated Funds		26,490		-		-		26,490
Total assets within the fair value hierarchy	$	45,934	$	-	$	-	$	45,934
Investments valued at net asset value								4,600
Total assets							$	50,534
Liabilities:
Participation feature of HC LLC Series A-2 Preferred Stock	$	-	$	-	*		*
Contingent consideration liability		-		-		271		271
Total liabilities	$	-	$	-	$	271	$	271

*Balance eliminates in consolidation.

There were no transfers between levels of the fair value hierarchy during the nine months ended March 31, 2022 and 2021.

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

	For the nine months ended March 31,
(in thousands)	2022			2021
Beginning balance	$	271		$	-
Additions		497			397
Change in fair value		(380	)		-
Ending balance	$	388		$	397

The valuation techniques applied to investments held by the Company and by the Consolidated Funds vary 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 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 March 31, 2022 investments in private funds consist of our investment in Monomoy Properties, an industrial real estate-focused fund, and Sharp Alpha Fund I, LP (Sharp Alpha), a closed-end limited partnership focused on gaming technologies. Monomoy Properties allows redemptions annually with 90 days’ notice subject to a one-year lockup from the date of initial investment. Sharp Alpha does not allow for redemptions. Distributions will be received as the underlying assets are liquidated over the life of the fund, which is expected to be approximately 10 years.

Contingent consideration

In conjunction with the acquisition of AMPM 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. 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 the acquisition date include volatility of 40.0% and a discount rate of 10.3%. The key assumptions in applying the Monte Carlo simulation model as of March 31, 2022 include volatility of 26.8% and a discount rate of 10.3%.

In conjunction with the acquisition of MedOne 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. 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 the acquisition date include revenue forecasts, volatility of 23.3% and a discount rate of 10.3%. The key assumptions in applying the Monte Carlo simulation model as of March 31, 2022 include volatility of 25.0% and a discount rate of 10.3%.

The contingent consideration is included within the other liabilities in the consolidated balance sheets.

Participation feature of HC LLC Series A-2 Preferred Stock

On December 29, 2020, in conjunction with the JPM Transactions, the Company issued HC LLC Series A-2 Preferred Stock to our consolidated subsidiary, Forest. See Note 15 – 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 March 31, 2022 include financial forecasts of the durable medical equipment business and a volatility rate of 63.4% (level 3 inputs in accordance with the GAAP fair value hierarchy). The key assumptions in applying the valuation approach as of June 30, 2021 include financial forecasts of the durable medical equipment business, a discount rate of 14.5% and a volatility rate of 50.4%. The fair value of the embedded derivative as of March 31, 2022 and June 30, 2021, was $9.3 million and $5.8 million respectively. Since the HC LLC Series A-2 Preferred Stock are 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.