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Fair Value Measurements
 6 Months Ended
Dec. 31, 2020
Fair Value Disclosures [Abstract]  
Fair Value Measurements

6. 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 December 31, 2020

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in GECC

 

$

19,532

 

 

$

-

 

 

$

-

 

 

$

19,532

 

 

Equity investments of Consolidated Fund

 

$

3,417

 

 

$

-

 

 

$

-

 

 

$

3,417

 

 

Total assets

 

$

22,949

 

 

$

-

 

 

$

-

 

 

$

22,949

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Participation feature of HC LLC Series A-2 Preferred Stock

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

Total liabilities

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

 

Fair Value as of June 30, 2020

 

 

(in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in GECC

 

$

8,705

 

 

$

-

 

 

$

-

 

 

$

8,705

 

 

Total assets

 

$

8,705

 

 

$

-

 

 

$

-

 

 

$

8,705

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration liability

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

Total liabilities

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

The following is a reconciliation of changes in contingent consideration, a Level 3 liability, for the three and six months ended December 31, 2020:

 

 

For the six months ended December 31,

 

(in thousands)

 

2020

 

 

2019

 

Beginning balance

 

$

-

 

 

$

1,135

 

Additions

 

 

-

 

 

 

-

 

Payments

 

 

-

 

 

 

-

 

Change in fair value

 

 

-

 

 

 

(1,135

)

Ending balance

 

$

-

 

 

$

-

 

There were no transfers between levels of the fair value hierarchy during the six months ended December 31, 2020 and 2019.

The contingent consideration arrangement required the Company to pay up to $2.1 million of additional consideration to the former shareholders of the durable medical equipment businesses if certain earnings before interest, taxes, depreciation and amortization (EBITDA) thresholds, as adjusted per the terms of the purchase agreement, were achieved for the 12 months ended December 31, 2019.   The Company determined that the EBITDA achieved, as adjusted per terms of the contract, for the 12 months ended December 31, 2019 was below the earnout threshold for payout. As such, during the year ended June 30, 2020, the fair value of the contingent consideration was updated to zero.  This determination of the earnout was finalized and agreed to with the former shareholders of the durable medical equipment businesses during the quarter ended December 31, 2020.

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 14 – 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 the issuance date, the fair value was determined using an option pricing model based on the transaction price.  The key assumption used in the option pricing model is a volatility rate of 72.7% and an option term of 3 years.  Subsequent to the issuance date, fair value of this derivative is determined using a discounted cash flow income approach and a guideline public company market approach.  The key assumptions in applying the valuation approach as of December 31, 2020 include financial forecasts of the durable medical equipment business, a discount rate of 17% and a discount for lack of marketability of 33% (level 3 inputs in accordance with the GAAP fair value hierarchy).  The fair value of the embedded derivative as of both the issuance date and December 31, 2020 was $6.5 million.  However, as 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.

The Company is the owner of approximately 23.6% (or 5,425,644 shares) of the outstanding shares of GECC and values its ownership based on the NASDAQ-listed market price of GECC common stock (a Level 1 input in accordance with the GAAP fair value hierarchy).