Non-Controlling Interests and Redeemable Preferred Stock of Subsidiaries

6 Months Ended

Dec. 31, 2022

Non-Controlling Interests and Redeemable Preferred Stock of Subsidiaries

10. Non-Controlling Interests and Redeemable Preferred Stock of Subsidiaries

Non-Controlling Interests

Holders of non-controlling interests in a subsidiary of the Company hold certain rights, which result in the classification of the securities as either liability, temporary equity, or permanent equity. The following table summarizes the non-controlling interest balances on the condensed consolidated balance sheets:


(in thousands)	December 31, 2022		June 30, 2022
HC LLC
Temporary equity		2,977		2,225
Permanent equity		2,977		2,225
Total HC LLC		5,954		4,450
Consolidated Fund
Permanent equity		-		642
Forest
Permanent equity		-		3,666
Total non-controlling interests	$	5,954	$	8,758

The following table summarizes the net income (loss) attributable to the non-controlling interests on the condensed consolidated statements of operations:


	For the three months ended December 31,					For the six months ended December 31,
(in thousands)	2022		2021			2022			2021
HC LLC
Temporary equity		90		104			752			309
Permanent equity		90		104			752			309
Total HC LLC		180		208			1,504			618
GEC GP
Permanent equity		-		(2	)		-			(4	)
Consolidated Fund
Permanent equity		-		34			(8	)		(51	)
Forest
Permanent equity		18		(161	)		(1,546	)		(178	)
Total net income (loss) attributable to non-controlling interest	$	198	$	79		$	(50	)	$	385

HC LLC – Non-controlling interest classified as temporary equity

The Company issued a 9.95% common stock equity ownership in HC LLC. The holder of the interest has board observer rights for the HC LLC board of directors, but no voting rights. HC LLC has the right of first offer if the holder desires to sell the security and in the event of a sale of HC LLC, the holder must sell their securities (drag along rights) and has the right to participate in sales of HC LLC securities (tag along rights). In addition, upon the seventh anniversary of issuance date, if (i) the holder owns at least 50% of the common shares issued to it at the closing of the transaction, (ii) an initial public offering of HC LLC has not commenced and (iii) the holder has not had an earlier opportunity to sell its shares at their fair market value, the holder has the right to request a marketing process for a sale of HC LLC and has the right to put its common shares to HC LLC at the price for such shares implied by such marketing process. The Company also has the right to call the holder’s common shares at such price. The holder of the non-controlling interest is entitled to participate in earnings of HC LLC and is not required to fund losses. As the redemption is contingent upon future events outside of the Company’s control which are not probable, the Company has classified the non-controlling interest as temporary equity and its fair value on the date of issuance, adjusted for any earnings in HC LLC. Refer to Note 14 - Subsequent Events for details on the Sale of HC LLC to Quipt on January 3, 2023.

HC LLC – Non-controlling interest classified as permanent equity

The Company issued a 9.95% common stock equity ownership in HC LLC. The rights are consistent with the non-controlling interest classified as temporary equity, other than the holder not having a contingent put right. Accordingly, the Company classified the non-controlling interest as permanent equity at its fair value on the date of issuance, adjusted for any earnings in HC LLC. Refer to Note 14 - Subsequent Events for details on the Sale of HC LLC to Quipt on January 3, 2023.

GEC GP – Non-controlling interest classified as permanent equity

GEC GP owned the rights to the profit sharing agreement with GECM as well as an intercompany obligation under a senior secured note payable issued by Great Elm GECC GP Corp (the GP Corp. Note) in consideration for the assets acquired from MAST Capital Management, LLC. During the three months ended March 31, 2022, the Company purchased the remaining shares of GEC GP. As of December 31, 2022, no non-controlling interest was outstanding.

Forest – Non-controlling interest classified as permanent equity

In December 2020, the Company sold to JPM a 20.0% common stock interest in Forest in exchange for $2.7 million. As of December 31, 2022, no non-controlling interest was outstanding following the Sale of Controlling Interest in Forest. See Note 3 - Forest Note and Transactions with JPM.

Consolidated Fund – Non-controlling interest classified as permanent equity

As of June 30, 2022, the Company held 73.4% of the capital in the Consolidated Fund. The remaining capital in the Consolidated Fund was recorded as a non-controlling interest that included affiliated individuals and entities. In July 2022, the Consolidated Fund ceased operations and distributed its remaining assets to non-controlling interests in the total amount of $0.6 million.

Redeemable Preferred Stock of Subsidiaries

Forest Preferred Stock classified as a liability

On December 29, 2020, Forest issued 35,010 shares of preferred stock in Forest with a face value of $1,000 per share at issuance (Forest Preferred Stock). The preferred shares provided for a 9% annual dividend, which was payable quarterly. As the preferred shares were mandatorily redeemable by the Company at their face value of $1,000 per share on December 29, 2027, or at a 0-3% premium decreasing over time based upon the occurrence of certain redemption events prior to December 29, 2027, the security was classified as a liability in the condensed consolidated balance sheet as of June 30, 2022. Following the Sale of Controlling Interest in Forest, there was no outstanding balance in respect to Forest Preferred Stock as of December 31, 2022. See Note 3 - Forest Note and Transactions with JPM.

The dividends on Forest Preferred Stock were included in interest expense in the condensed consolidated statements of operations. During the three and six months ended December 31, 2022, the Company recorded interest expense, inclusive of non-cash interest related to amortization of discounts and debt issuance costs, of $0.8 million and $1.7 million, respectively, related to Forest Preferred Stock. During the three and six months ended December 31, 2021, the Company recorded interest expense, inclusive of non-cash interest related to amortization of discounts and debt issuance costs, of $0.8 million and $1.7 million, respectively, related to Forest Preferred Stock.