10-Q 1 hnna20231231_10q.htm FORM 10-Q hnna20231231_10q.htm
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FORM 10-Q

 

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended December 31, 2023

 

   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____ to _____

 

Commission File Number 001-36423

 


 

HENNESSY ADVISORS, INC.

(Exact name of registrant as specified in its charter)

 


 

California68-0176227
(State or other jurisdiction of(IRS Employer
incorporation or organization)Identification No.)
  
7250 Redwood Boulevard, Suite 200 
Novato, California94945
(Address of principal executive office)(Zip code)

 

(415) 899-1555

(Registrant’s telephone number)

 


 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading symbol

Name of each exchange
on which registered

Common stock, no par value

HNNA

The Nasdaq Stock Market LLC

4.875% Notes due 2026

HNNAZ

The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ☒         No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes ☒         No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filerAccelerated filer
    
Non-accelerated filer  
    
Smaller reporting companyEmerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes          No ☒

 

As of February 5, 2024, there were 7,675,363 shares of common stock issued and outstanding.

 

 

 

HENNESSY ADVISORS, INC.

 

 

TABLE OF CONTENTS

 

     

PART I

Financial Information

 
     

Item 1

Unaudited Condensed Financial Statements

1

     
 

Balance Sheets

1

     
 

Statements of Income

2

     
 

Statements of Changes in Stockholders’ Equity

3

     
 

Statements of Cash Flows

4

     
 

Notes to Unaudited Condensed Financial Statements

5

     

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

     

Item 4

Controls and Procedures

24

     

PART II

Other Information

 
     
Item 1A Risk Factors 24
     
Item 5 Other Information 24
     

Item 6

Exhibits

25

     
 

Signatures

26

 

 

 

 
 

PART I:         FINANCIAL INFORMATION

 

Item 1:          Unaudited Condensed Financial Statements

 

Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)

 

  

December 31,

  

September 30,

 
  

2023

  

2023

 

Assets

        

Current assets

        

Cash and cash equivalents

 $59,605  $60,476 

Investments in marketable securities, at fair value

  11   10 

Investment fee income receivable

  2,155   2,046 

Interest income receivable

  264   253 

Prepaid expenses

  603   669 

Other accounts receivable

  251   247 

Total current assets

  62,889   63,701 

Property and equipment, net of accumulated depreciation of $2,356 and $2,287, respectively

  282   305 

Operating lease right-of-use asset

  206   295 

Management contracts

  81,466   81,262 

Other assets

  163   156 

Total assets

 $145,006  $145,719 

Liabilities and Stockholders' Equity

        

Current liabilities

        

Accrued liabilities and accounts payable

 $1,616  $3,165 

Operating lease liability

  186   279 

Income taxes payable

  978   748 

Total current liabilities

  2,780   4,192 

Notes payable, net of issuance costs

  39,240   39,164 

Net deferred income tax liability

  14,825   14,611 

Total liabilities

  56,845   57,967 

Commitments and contingencies (Note 9)

          

Stockholders' equity

        

Common stock, no par value, 22,500,000 shares authorized; 7,673,869 shares issued and outstanding as of December 31, 2023, and 7,671,099 as of September 30, 2023

  22,064   21,800 

Retained earnings

  66,097   65,952 

Total stockholders' equity

  88,161   87,752 

Total liabilities and stockholders' equity

 $145,006  $145,719 

 

See Notes to Unaudited Condensed Financial Statements

 

 

 

 

Statements of Income

(In thousands, except share and per share amounts)

(Unaudited)

 

    Three Months Ended December 31,  
   

2023

   

2022

 

Revenue

               

Investment advisory fees

  $ 5,665     $ 5,654  

Shareholder service fees

    479       491  

Total revenue

    6,144       6,145  

Operating expenses

               

Compensation and benefits

    1,866       1,858  

General and administrative

    1,724       1,569  

Fund distribution and other

    149       95  

Sub-advisory fees

    911       969  

Depreciation

    69       49  

Total operating expenses

    4,719       4,540  

Net operating income

    1,425       1,605  

Interest expense

    567       563  

Interest income

    (786 )     (467 )

Income before income tax expense

    1,644       1,509  

Income tax expense

    444       390  

Net income

  $ 1,200     $ 1,119  

Earnings per share

               

Basic

  $ 0.16     $ 0.15  

Diluted

  $ 0.16     $ 0.15  

Weighted average shares outstanding

               

Basic

    7,672,191       7,572,454  

Diluted

    7,673,688       7,581,157  

Cash dividends declared per share

  $ 0.14     $ 0.14  

 

See Notes to Unaudited Condensed Financial Statements

 

 

 

 

Statements of Changes in Stockholders' Equity

(In thousands, except share data)

(Unaudited)

 

   

Three Months Ended December 31, 2023

 
                           

Total

 
   

Common Stock

   

Retained

   

Stockholders'

 
   

Shares

   

Amount

   

Earnings

   

Equity

 

Balance at September 30, 2023

    7,671,099     $ 21,800     $ 65,952     $ 87,752  

Net income

    -       -       1,200       1,200  

Dividends paid

    -       -       (1,055 )     (1,055 )

Shares issued for auto-investments pursuant to the 2021 Dividend Reinvestment and Stock Purchase Plan

    145       1       -       1  

Shares issued for dividend reinvestment pursuant to the 2021 Dividend Reinvestment and Stock Purchase Plan

    2,625       17       -       17  

Stock-based compensation

    -       246       -       246  

Balance at December 31, 2023

    7,673,869     $ 22,064     $ 66,097     $ 88,161  

 

 

Statements of Changes in Stockholders' Equity

(In thousands, except share data)

(Unaudited)

 

   

Three Months Ended December 31, 2022

 
                           

Total

 
   

Common Stock

   

Retained

   

Stockholders'

 
   

Shares

   

Amount

   

Earnings

   

Equity

 

Balance at September 30, 2022

    7,571,741     $ 20,951     $ 65,347     $ 86,298  

Net income

    -       -       1,119       1,119  

Dividends paid

    -       -       (1,041 )     (1,041 )

Shares issued for auto-investments pursuant to the 2021 Dividend Reinvestment and Stock Purchase Plan

    215       2       -       2  

Shares issued for dividend reinvestment pursuant to the 2021 Dividend Reinvestment and Stock Purchase Plan

    1,750       15       -       15  

Stock-based compensation

    -       262       -       262  

Balance at December 31, 2022

    7,573,706     $ 21,230     $ 65,425     $ 86,655  

 

See Notes to Unaudited Condensed Financial Statements

 

 

 

 

Statements of Cash Flows

(In thousands)

(Unaudited)

 

    Three Months Ended December 31,  
   

2023

   

2022

 

Cash flows from operating activities

               

Net income

  $ 1,200     $ 1,119  

Adjustments to reconcile net income to net cash provided by operating activities

               

Depreciation

    69       49  

Unrealized gain on marketable securities

    (1 )     (1 )

Change in right-of-use asset and operating lease liability

    (4 )     (1 )

Amortization of note issuance costs

    76       73  

Deferred income taxes

    214       262  

Stock-based compensation

    246       262  

Change in operating assets and liabilities

               

Investment fee income receivable

    (109 )     (24 )

Interest income receivable

    (11 )     (78 )

Prepaid expenses

    66       169  

Other accounts receivable

    (4 )     -  

Other assets

    (7 )     (1 )

Accrued liabilities and accounts payable

    (1,549 )     (1,989 )

Income taxes payable

    230       128  

Net cash provided by (used in) operating activities

    416       (32 )

Cash flows from investing activities

               

Purchases of property and equipment

    (46 )     (64 )

Payments related to management contracts

    (204 )     (317 )

Net cash used in investing activities

    (250 )     (381 )

Cash flows from financing activities

               

Proceeds from shares issued pursuant to the 2021 Dividend Reinvestment and Stock Repurchase Plan

    1       2  

Dividend payments

    (1,038 )     (1,026 )

Net cash used in financing activities

    (1,037 )     (1,024 )

Net decrease in cash and cash equivalents

    (871 )     (1,437 )

Cash and cash equivalents at the beginning of the period

    60,476       58,487  

Cash and cash equivalents at the end of the period

  $ 59,605     $ 57,050  

Supplemental disclosures of cash flow information

               

Cash paid for interest

  $ 491     $ 491  

Dividend reinvestment issued in shares

  $ 17     $ 15  

 

See Notes to Unaudited Condensed Financial Statements

 

 

 

HENNESSY ADVISORS, INC.

 

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

 

(1)

Basis of Financial Statement Presentation

 

The accompanying unaudited condensed balance sheet as of September 30, 2023, which has been derived from audited financial statements, and the unaudited interim condensed financial statements as of and for the three months ended December 31, 2023, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and include the accounts of Hennessy Advisors, Inc. (the “Company,” “we,” “us,” or “our”). Certain information and footnote disclosures in these unaudited interim condensed financial statements, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission for Quarterly Reports on Form 10-Q. In the opinion of management, the unaudited interim condensed financial statements reflect all adjustments necessary for a fair statement of the Company’s financial position at December 31, 2023, the Company’s operating results for the three months ended December 31, 2023 and 2022, and the Company’s cash flows for the three months ended December 31, 2023 and 2022. These unaudited interim condensed financial statements and notes should be read in conjunction with the Company’s audited financial statements and notes thereto for fiscal year 2023, which are included in the Company’s Annual Report on Form 10‑K for the fiscal year ended September 30, 2023.

 

The preparation of financial statements requires management to make estimates and assumptions. Making estimates requires management to exercise significant judgment. Accordingly, the actual results could differ substantially from those estimates.

 

The Company’s operating activities consist primarily of providing investment advisory services to 16 open-end mutual funds and one exchange‑traded fund (“ETF”) branded as the Hennessy Funds. The Company serves as the investment advisor to all classes of the Hennessy Cornerstone Growth Fund, the Hennessy Focus Fund, the Hennessy Cornerstone Mid Cap 30 Fund, the Hennessy Cornerstone Large Growth Fund, the Hennessy Cornerstone Value Fund, the Hennessy Total Return Fund, the Hennessy Equity and Income Fund, the Hennessy Balanced Fund, the Hennessy Energy Transition Fund, the Hennessy Midstream Fund, the Hennessy Gas Utility Fund, the Hennessy Japan Fund, the Hennessy Japan Small Cap Fund, the Hennessy Large Cap Financial Fund, the Hennessy Small Cap Financial Fund, and the Hennessy Technology Fund (collectively, the “Hennessy Mutual Funds”), as well as to the Hennessy Stance ESG ETF. The Company also provides shareholder services to investors in the Hennessy Mutual Funds.

 

          The employee retention credit (“ERC”), as originally enacted on March 27, 2020, by the CARES Act, was a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer paid to employees and allowed claims through December 31, 2021, by eligible employers who retained employees during the COVID-19 pandemic. The Company filed Form 941-X to request an ERC from the Internal Revenue Service. In May 2023, the Company received an ERC of approximately $0.3 million plus accrued interest. For-profit entities do not have specific guidance to apply under accounting principles generally accepted in the United States to account for ERCs and therefore follow guidance in accordance with Accounting for Government Grants and Disclosure of Government Assistance ("IAS 20"). In accordance with IAS 20, the Company netted the credit against related payroll expense in the period received.

  

 

5

 

 

The Company’s operating revenues consist of contractual investment advisory and shareholder service fees paid to it by the Hennessy Funds. The Company earns investment advisory fees from each Hennessy Fund by, among other things:

 

 

acting as portfolio manager for the fund or overseeing the sub‑advisor acting as portfolio manager for the fund, which includes managing the composition of the fund’s portfolio (including the purchase, retention, and disposition of portfolio securities in accordance with the fund’s investment objectives, policies, and restrictions), seeking best execution for the fund’s portfolio, managing the use of soft dollars for the fund, and managing proxy voting for the fund;

 

 

performing a daily reconciliation of portfolio positions and cash for the fund;

 

 

monitoring the liquidity of the fund;

 

 

monitoring the fund’s compliance with its investment objectives and restrictions and federal securities laws;

 

 

maintaining a compliance program (including a code of ethics), conducting ongoing reviews of the compliance programs of the fund’s service providers (including any sub‑advisor), including their codes of ethics, as appropriate, conducting onsite visits to the fund’s service providers (including any sub-advisor) as feasible, monitoring incidents of abusive trading practices, reviewing fund expense accruals, payments, and fixed expense ratios, evaluating insurance providers for fidelity bond, directors and officers and errors and omissions insurance, and cybersecurity insurance coverage, managing regulatory examination compliance and responses, conducting employee compliance training, reviewing reports provided by service providers, and maintaining books and records;

 

 

if applicable, overseeing the selection and continued employment of the fund’s sub‑advisor, reviewing the fund’s investment performance, and monitoring the sub‑advisor’s adherence to the fund’s investment objectives, policies, and restrictions;

 

 

overseeing service providers that provide accounting, administration, distribution, transfer agency, custodial, sales, marketing, public relations, audit, information technology, and legal services to the fund;

 

 

maintaining in‑house marketing and distribution departments on behalf of the fund;

 

 

preparing or directing the preparation of all regulatory filings for the fund, including writing and annually updating the fund’s prospectus and related documents;

 

 

for each annual report of the fund, preparing or reviewing a written summary of the fund’s performance during the most recent 12‑month period;

 

 

monitoring and overseeing the accessibility of the fund on financial institution platforms;

 

 

paying the incentive compensation of the fund’s compliance officer and employing other staff such as legal, marketing, national accounts, distribution, sales, administrative, and trading oversight personnel, as well as management executives;

 

 

providing a quarterly compliance certification to the Board of Trustees of Hennessy Funds Trust (the “Funds’ Board of Trustees”); and

 

 

preparing or reviewing materials for the Funds’ Board of Trustees, presenting to or leading discussions with the Funds’ Board of Trustees, preparing or reviewing all meeting minutes, and arranging for training and education of the Funds’ Board of Trustees.

 

6

 

The Company earns shareholder service fees from Investor Class shares of the Hennessy Mutual Funds by, among other things, maintaining a toll free number that the current investors in the Hennessy Funds may call to ask questions about their accounts and actively participating as a liaison between investors in the Hennessy Funds and U.S. Bank Global Fund Services.

 

Investment advisory and shareholder service fee revenues are earned and calculated daily by the Hennessy Funds’ accountants at U.S. Bank Global Fund Services and are subsequently reviewed by management.

 

The Company recognizes revenues when its obligations related to the investment advisory and shareholder services are satisfied, and it is probable that a significant reversal of the revenue amount would not occur in future periods. Management judgment is required in assessing the probability of significant revenue reversal and in identification of distinct services. Investment advisory and shareholder services are performed over time because investors in the Hennessy Funds are receiving and consuming the benefits as they are provided by the Company. Fees are based on contractual percentages of net asset values and recognized for services provided during the period, which are distinct from services provided in other periods. Such fees are affected by changes in net asset values, including market appreciation or depreciation, foreign exchange translation, and net inflows or outflows. Assets under management represent the broad range of financial assets the Company manages for the Hennessy Funds on a discretionary basis pursuant to investment management and shareholder servicing agreements that are expected to continue for at least 12 months. In general, reported assets under management reflect the valuation methodology that corresponds to the basis used for determining revenue. The fees are computed and billed monthly, at which time they are recognized in accordance with Accounting Standards Codification 606 — Revenue from Contracts with Customers.

 

The Company’s contractual agreements for investment advisory and shareholder services prove that a contract exists with fixed and determinable fees, and the services are rendered daily. The collectability is deemed probable because the fees are received from the Hennessy Funds in the month subsequent to the month in which the services are provided.

 

 

(2)

Management Contracts Purchased

 

Throughout its history, the Company has completed 12 purchases of the assets related to the management of 32 investment funds, some of which were reorganized into already existing Hennessy Funds. In accordance with Financial Accounting Standards Board (“FASB”) guidance, the Company periodically reviews the carrying value of its management contracts asset to determine if any impairment has occurred. The fair value of the management contracts asset was estimated as of September 30, 2023, by applying the income approach and is based on management estimates and assumptions, including third‑party valuations that utilize appropriate valuation techniques. It was determined there was no impairment as of such date. As of December 31, 2023, management performed a qualitative analysis and determined it was more likely than not that there continued to be no impairment.

 

Under Accounting Standards Codification 350 — Intangibles - Goodwill and Other, intangible assets that have indefinite useful lives are not amortized but are tested at least annually for impairment. The Company considered various factors, such as likelihood of continued renewal, whether there are foreseeable limits on net cash flows, and whether the Company is dependent on a limited number of investors, in determining the useful life of the management contracts. Based on analysis, the Company considers the management contract asset to be an intangible asset with an indefinite useful life and no impairment as of the end of the current period. 

 

 

7

 

The Company completed its most recent asset purchase on  November 10, 2023, when it purchased assets related to the management of the CCM Small/Mid-Cap Impact Value Fund. This asset purchase added approximately $12 million to the Company’s assets under management at the time of closing. The purchase was consummated in accordance with the terms and conditions of that certain Transaction Agreement, dated as of April 26, 2023, between the Company and Community Capital Management, LLC (the “CCM Transaction Agreement”). Upon completion of the transaction, the assets of CCM Small/Mid-Cap Impact Value Fund were reorganized into the Hennessy Stance ESG ETF.

 

As of December 31, 2023, there was a second asset purchase pending under the CCM Transaction Agreement, which is for the purchase of assets related to the management of the CCM Core Impact Equity Fund. The purchase is subject to customary closing conditions, including the approval of the shareholders of the CCM Core Impact Equity Fund. At the Special Meeting of Shareholders of the CCM Core Impact Equity Fund on  January 31, 2024, shareholders approved the purchase of assets related to the management of the CCM Core Impact Equity Fund by the Company. See Note 13, "Subsequent Events," for additional information.

 

In the current period, the Company capitalized $0.2 million in legal costs related to the CCM Transaction Agreement. 

 

(3)

Investment Advisory Agreements

 

The Company has investment advisory agreements with Hennessy Funds Trust under which it provides investment advisory services to all classes of the 16 Hennessy Mutual Funds and the Hennessy Stance ESG ETF.

 

The investment advisory agreements must be renewed annually (except in limited circumstances) by (i) the Funds’ Board of Trustees or the vote of a majority of the outstanding shares of the applicable Hennessy Fund and (ii) the vote of a majority of the trustees of Hennessy Funds Trust who are not interested persons of the Hennessy Funds. If an investment advisory agreement is not renewed, it terminates automatically. There are two additional circumstances in which an investment advisory agreement terminates. First, an investment advisory agreement automatically terminates if the Company assigns them to another advisor (assignment includes “indirect assignment,” which is the transfer of the Company’s common stock in sufficient quantities deemed to constitute a controlling block). Second, an investment advisory agreement may be terminated prior to its expiration upon 60 days’ written notice by either the applicable Hennessy Fund or the Company.

 

8

 

As provided in each investment advisory agreement, the Company receives investment advisory fees monthly based on a percentage of the applicable fund’s average daily net asset value.

 

The Company has entered into sub-advisory agreements for the Hennessy Focus Fund, the Hennessy Equity and Income Fund, the Hennessy Japan Fund, the Hennessy Japan Small Cap Fund, and the Hennessy Stance ESG ETF. Under each of these sub-advisory agreements, the sub‑advisor is responsible for the investment and reinvestments of the assets of the applicable Hennessy Fund in accordance with the terms of such agreement and the applicable Hennessy Fund’s Prospectus and Statement of Additional Information. The sub‑advisors are subject to the direction, supervision, and control of the Company and the Funds’ Board of Trustees. The sub‑advisory agreements must be renewed annually (except in limited circumstances) in the same manner as, and are subject to the same termination provisions as, the investment advisory agreements.

 

In exchange for sub-advisory services, the Company (not the Hennessy Funds) pays sub-advisory fees to the sub-advisors out of its own assets. Sub‑advisory fees are calculated as a percentage of the applicable fund’s average daily net asset value.

 

 

(4)

Fair Value Measurements

 

The Company applies Accounting Standards Codification 820 — Fair Value Measurement for all financial assets and liabilities, which establishes a framework for measuring fair value and expands disclosures about fair value measurements. The standard defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” It also establishes a fair value hierarchy consisting of the following three levels that prioritize the inputs to the valuation techniques used to measure fair value:

 

 

Level 1 – Unadjusted, quoted prices in active markets for identical assets or liabilities that an entity has the ability to access at the measurement date;

 

 

Level 2 – Other significant observable inputs (including, but not limited to, quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, and model‑derived valuations in which all significant inputs and significant value drivers are observable in active markets); and

 

 

Level 3 – Significant unobservable inputs (including the entity’s own assumptions about what market participants would use to price the asset or liability based on the best available information) when observable inputs are not available.

 

 

9

 

Based on the definitions, the following tables represent the Company’s assets categorized in the Level 1 to Level 3 hierarchies:

 

  

December 31, 2023

 
  

Level 1

  

Level 2

  

Level 3

  

Total

 
  

(In thousands)

 

Money market fund deposits

 $59,406  $-  $-  $59,406 

Mutual fund investments

  11   -   -   11 

Total

 $59,417  $-  $-  $59,417 

Amounts included in:

                

Cash and cash equivalents

 $59,406  $-  $-  $59,406 

Investments in marketable securities

  11   -   -   11 

Total

 $59,417  $-  $-  $59,417 

 

  

September 30, 2023

 
  

Level 1

  

Level 2

  

Level 3

  

Total

 
  

(In thousands)

 

Money market fund deposits

 $59,382  $-  $-  $59,382 

Mutual fund investments

  10   -   -   10 

Total

 $59,392  $-  $-  $59,392 

Amounts included in:

                

Cash and cash equivalents

 $59,382  $-  $-  $59,382 

Investments in marketable securities

  10   -   -   10 

Total

 $59,392  $-  $-  $59,392 

 

There were no transfers between levels during the three months ended December 31, 2023, or the year ended September 30, 2023.

 

The fair values of receivables, payables, and accrued liabilities approximate their book values given the short-term nature of those instruments.

 

The fair value of the 2026 Notes (see Note 7) was approximately $38.2 million as of December 31, 2023, based on the last trading price of the notes on that date (Level 1).

 

 

(5)

Leases

 

The Company determines if an arrangement is an operating lease at inception. Operating leases are included in operating lease right‑of‑use assets and current and long‑term operating lease liabilities on the Company’s balance sheet. During the quarter ended March 31, 2021, the Company renewed the lease for its office in Novato, California for an additional three years, which created a long‑term operating lease as of such date. Upon renewal of the lease, the Company recorded a right‑of‑use asset of $1.1 million on its balance sheet. The renewed lease expires on July 31, 2024, and is therefore a short-term operating lease as of December 31, 2023. There were no long‑term operating leases as of December 31, 2023, and September 30, 2023.

 

10

 

Right‑of‑use assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease right‑of‑use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, the Company uses its incremental borrowing rate based on the information available at the lease commencement date. The Company’s lease terms may include options to extend the lease when it is reasonably certain that it will exercise any such options. For its leases, the Company concluded that it is not reasonably certain that any renewal options would be exercised, and, therefore, the amounts are not recognized as part of operating lease right‑of‑use assets or operating lease liabilities. Leases with initial terms of 12 months or less, and certain office equipment leases that are deemed insignificant, are not recorded on the balance sheet and are expensed as incurred and included within rent expense under general and administrative expense. Lease expense related to operating leases is recognized on a straight-line basis over the expected lease terms.

 

The Company’s most significant leases are real estate leases of office facilities. The Company leases office space under non-cancelable operating leases. Its principal executive office is located in Novato, California, and it has additional offices in Austin, Texas, Dallas, Texas, Boston, Massachusetts, and Chapel Hill, North Carolina. Only the office lease in Novato, California has been capitalized because the other operating leases have terms of 12 months or less, including leases that are month‑to‑month in nature. The classification of the Company’s operating lease right-of-use assets and operating lease liabilities and other supplemental information related to the Company’s operating leases are as follows:

 

  

December 31, 2023

 
  

(In thousands, except years and percentages)

 

Operating lease right-of-use assets

 $206 

Current operating lease liability

 $186 

Long-term operating lease liability

 $- 

Weighted average remaining lease term

  0.6 

Weighted average discount rate

  0.90%

 

For the three months ended December 31, 2023, rent expense for all offices, which is recorded under general and administrative expense in the statements of income, totaled $0.1 million.

 

The undiscounted cash flows for future maturities of the Company’s operating lease liabilities and the reconciliation to the balance of operating lease liabilities reflected on the Company’s balance sheet are as follows:

 

  

December 31, 2023

 
  

(In thousands)

 

Remainder of fiscal year 2024

 $191 

Total undiscounted cash flows

  191 

Present value discount

  (5)

Total operating lease liabilities

  186 

 

 

 

(6)

Accrued Liabilities and Accounts Payable

 

Details relating to accrued liabilities and accounts payable reflected on the Company’s balance sheet are as follows:

 

  

December 31, 2023

  

September 30, 2023

 
  

(In thousands)

 

Accrued bonus liabilities

 $554  $2,260 

Accrued sub-advisor fees

  317   310 

Other accrued expenses

  745   595 

Total accrued liabilities and accounts payable

 $1,616  $3,165 

 

11

 
 

(7)

Debt Outstanding

 

On October 20, 2021, the Company completed a public offering of 4.875% notes due 2026 in the aggregate principal amount of $40,250,000 (the “2026 Notes”), which included the full exercise of the underwriters’ overallotment option. The initial net proceeds received were approximately $38,607,000 after considering the impact of issuance costs and underwriter discounts. The 2026 Notes bear interest at 4.875% per annum, payable on the last day of each calendar quarter and at maturity, beginning December 31, 2021. The 2026 Notes mature on December 31, 2026.

 

The 2026 Notes are direct unsecured obligations, rank equally in right of payment with any of the Company’s future unsecured unsubordinated indebtedness, senior to any of the Company’s future indebtedness that expressly provides that it is subordinate to the 2026 Notes, effectively subordinate to all of the Company’s existing and future secured indebtedness, and structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s future subsidiaries.

 

 

(8)

Income Taxes

 

The Company’s effective income tax rates for the three months ended December 31, 2023 and 2022, were 27.0% and 25.8%, respectively. 

 

The Company is subject to income tax in the U.S. federal jurisdiction and various state jurisdictions. As of December 31, 2023, the Company has identified 22 state tax jurisdictions in which it is subject to income tax.

 

 

(9)

Commitments and Contingencies

 

In addition to the operating leases discussed in Note 5, the Company has contractual expense ratio limitations in place with respect to the Hennessy Midstream Fund, the Hennessy Technology Fund, and the Hennessy Stance ESG ETF. The contractual expense ratio limitations with respect to the Hennessy Midstream Fund and the Hennessy Technology Fund will expire February 28, 2024, unless extended. The contractual expense ratio limitation with respect to the Hennessy Stance ESG ETF will expire  December 31, 2024, unless extended. Total fees waived during the three months ended December 31, 2023 and December 31, 2022, were $0.04 million and $0.03 million, respectively. To date, the Company has only waived fees based on contractual obligations but has the ability to waive fees at its discretion. Any decision to waive fees would apply only on a going forward basis.

 

The Company has no other commitments and no significant contingencies with original terms in excess of one year.

 

12

 
 

(10)

Equity

 

Amended and Restated 2013 Omnibus Incentive Plan

 

The Company has adopted, and the Company’s shareholders have approved, the Amended and Restated 2013 Omnibus Incentive Plan (the “Omnibus Plan”). Under the Omnibus Plan, participants may be granted restricted stock units (“RSUs”), each of which represents an unfunded, unsecured right to receive a share of the Company’s common stock on the date specified in the recipient’s award. The Company issues new shares of its common stock when it is required to deliver shares to an RSU recipient. The RSUs granted under the Omnibus Plan vest over four years at a rate of 25% per year. The Company recognizes stock‑based compensation expense on a straight‑line basis over the four-year vesting term of each award.

 

A summary of RSU activity is as follows:

 

  

Three Months Ended December 31, 2023

 
  

Shares

  

Weighted Average Grant Date Fair Value per Share

 

Non-vested balance at beginning of period

  349,613  $6.92 

Granted

  -   - 

Vested

  -   - 

Forfeited

  -   - 

Non-vested balance at end of period

  349,613  $6.92 

 

 

Additional information related to RSUs is as follows:

 

  

December 31, 2023

 
  

(In thousands, except years)

 

Unrecognized compensation expense related to RSUs

 $2,140 

Weighted average remaining years to expense for RSUs

  2.9 

 

 

13

 

Dividend Reinvestment and Stock Purchase Plan

 

In January 2021, the Company adopted a Dividend Reinvestment and Stock Purchase Plan (the “DRSPP”), replacing the previous Dividend Reinvestment and Stock Purchase Plan that had been in place since 2018. The DRSPP provides shareholders and new investors with a convenient and economical means of purchasing shares of the Company’s common stock and reinvesting cash dividends paid on the Company’s common stock. Under the DRSPP, the Company issued 2,770 and 1,965 shares of common stock during the three months ended December 31, 2023 and 2022, respectively. The maximum number of shares of common stock that may be issued under the DRSPP is 1,470,000, of which 1,440,540 remained available for issuance as of December 31, 2023.

 

As discussed in Note 13, the Company began offering to investors an updated Dividend Reinvestment and Stock Purchase Plan in January 2024 that replaced the DRSPP.

 

Stock Buyback Program

 

In August 2010, the Company’s Board of Directors adopted a stock buyback program pursuant to which the Company was authorized to repurchase up to 1,500,000 shares of its common stock in the open market, in privately negotiated transactions, or otherwise. The program has no expiration date. In August 2022, the Board of Directors increased the number of shares that may be repurchased under the program to 2,000,000 shares. As a result, a total of 1,096,368 shares remains available for repurchase under the stock buyback program. The Company did not repurchase any shares of its common stock pursuant to the stock buyback program during the three months ended December 31, 2023.

 

 

(11)

Earnings per Share and Dividends per Share

 

 The weighted average common shares outstanding used in the calculation of basic earnings per share and weighted average common shares outstanding, adjusted for common stock equivalents, used in the computation of diluted earnings per share were as follows:

 

  

December 31,

 
  

2023

  

2022

 

Weighted average common stock outstanding, basic

  7,672,191   7,572,454 

Dilutive impact of RSUs

  1,497   8,703 

Weighted average common stock outstanding, diluted

  7,673,688   7,581,157 

 

For the three months ended December 31, 2023 and 2022, the Company excluded 244,051 and 165,868 common stock equivalents, respectively, from the diluted earnings per share calculations because they were not dilutive. In each case, the excluded common stock equivalents consisted of non‑vested RSUs.

 

The Company paid a quarterly cash dividend of $0.1375 per share on November 27, 2023, to shareholders of record as of November 13, 2023.

 

 

(12)

Recently Issued and Adopted Accounting Standards

 

The Company has reviewed accounting pronouncements issued between the filing date of its most recent Form 10-K, which was December 7, 2023, and the filing date of this Form 10-Q and has determined that no accounting pronouncements issued would have a material impact on the Company’s financial position, results of operations, or disclosures, except as disclosed below.

 

In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which requires more detailed income tax disclosures. The guidance requires entities to disclose disaggregated information about their effective tax rate reconciliation as well as expanded information on income taxes paid by jurisdiction. The guidance is effective for financial statements issued for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is required to adopt this standard prospectively in fiscal year 2026. The Company is currently in the process of evaluating the impact of adoption on its financial statements.

 

14

 
 

(13)

Subsequent Events

 

The Company has evaluated subsequent events through the date these financial statements were issued and has concluded that no material events occurred during this period that require recognition or disclosure, other than as discussed below.

 

In January 2024, the Company began offering to investors an updated Dividend Reinvestment and Stock Purchase Plan. The maximum number of shares of common stock that may be issued under the updated plan is 1,530,000 shares.

 

At the Special Meeting of Shareholders of the CCM Core Impact Equity Fund on January 31, 2024, shareholders approved the purchase of assets related to the management of the CCM Core Impact Equity Fund by the Company. It is anticipated that the assets of the CCM Core Impact Equity Fund will be reorganized into the Hennessy Stance ESG ETF on February 23, 2024.

 

Item 2.            Managements Discussion and Analysis of Financial Condition and Results of Operations

 

ForwardLooking Statements

 

This report contains “forward-looking statements” within the meaning of the securities laws, for which we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. In some cases, forward‑looking statements can be identified by terminology such as “expect,” “anticipate,” “intend,” “may,” “plan,” “will,” “should,” “could,” “would,” “assume,” “believe,” “estimate,” “predict,” “potential,” “project,” “continue,” “seek,” and similar expressions, as well as statements in the future tense. We have based these forward-looking statements on our current expectations and projections about future events, based on information currently available to us. Forward‑looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at which, or means by which, such performance or results will be achieved.

 

Forward-looking statements are subject to risks, uncertainties, and assumptions, including those described in our Annual Report on Form 10‑K for the fiscal year ended September 30, 2023, including under the section entitled “Risk Factors” in such report. Unforeseen developments could cause actual performance or results to differ substantially from those expressed in or suggested by the forward-looking statements. Management does not assume responsibility for the accuracy or completeness of these forward-looking statements. There is no regulation requiring an update of any of the forward-looking statements after the date of this report to conform these statements to actual results or to changes in our expectations.

 

Our business activities are affected by many factors, including, without limitation, redemptions by investors in the Hennessy Funds, taxes, general economic and business conditions, interest rate movements, inflation, the personal savings rate, competitive conditions, industry regulation, and fluctuations in the stock market, many of which are beyond the control of our management. Further, the business and regulatory environments in which we operate remain complex, uncertain, and subject to change. We expect that regulatory requirements and developments will cause us to incur additional administrative and compliance costs. Notwithstanding the variability in our economic and regulatory environments, we remain focused on the investment performance of the Hennessy Funds and on providing high‑quality customer service to investors.

 

Our business strategy centers on (i) the identification, completion, and integration of future acquisitions and (ii) organic growth, through both the retention of the fund assets we currently manage and the generation of inflows into the funds we manage. The success of our business strategy may be influenced by the factors discussed in the section titled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023. All statements regarding our business strategy, as well as statements regarding market trends and risks and assumptions about changes in the marketplace, are forward-looking by their nature.

 

 

Overview

 

Our primary business activity is providing investment advisory services to a family of 16 open-end mutual funds and one ETF branded as the Hennessy Funds. We manage 12 of the 17 Hennessy Funds internally. For the remaining five funds, we have delegated the day‐to‑day portfolio management responsibilities to sub‑advisors, subject to our oversight. We oversee the selection and continued employment of each sub‑advisor, review each fund’s investment performance, and monitor each sub‑advisor’s adherence to each applicable fund’s investment objectives, policies, and restrictions. In addition, we conduct ongoing reviews of the compliance programs of sub‑advisors and make onsite visits to sub‑advisors, as feasible. Our secondary business activity is providing shareholder services to investors in the Hennessy Mutual Funds.

 

We derive our operating revenues from investment advisory fees paid to us by the Hennessy Funds and shareholder service fees paid to us by the Hennessy Mutual Funds. These fees are calculated as a percentage of the average daily net assets of each Hennessy Fund. The percentage amount of the investment advisory fees varies by fund. The percentage amount of the shareholder service fees is consistent across all Hennessy Mutual Funds, but shareholder service fees are charged on Investor Class shares only. The dollar amount of the fees we receive fluctuates with changes in the average net asset value of each Hennessy Fund, which are affected by each fund’s investment performance, purchases and redemptions of shares, general market conditions, and the success of our marketing, sales, and public relations efforts.

 

On a total return basis, the Dow Jones Industrial Average was up 13.09% for the three months ended December 31, 2023. During the most recent quarter, equity prices advanced as investors reacted positively to encouraging signs that inflation is moderating. While the rate of inflation continues to be above the Federal Reserve’s stated 2% target, the market increasingly seems to believe that the potential for slowing economic growth could bring inflation close to the Federal Reserve's stated goal. Notwithstanding this past quarter’s anemic revenue and earnings growth for S&P 500 companies, earnings broadly came in higher than consensus estimates, which may speak to the idea that companies are reining in expenses, which may in turn bolster margins in 2024.

 

Long-term U.S. bond yields decreased meaningfully during the three months ended December 31, 2023, as encouraging inflation data pointed to the potential that the Federal Reserve could be done raising rates for the foreseeable future. While the Federal Reserve continues to indicate that it reserves the right to raise rates, the market believes that the Federal Reserve is more likely to cut rates in 2024 rather than raise them. According to Bloomberg, the market is pricing in six rates cuts in 2024. With the labor market continuing to show signs of strength, we expect investors to focus on any weakness as a signal that inflation could moderate further. Economic growth in 2024 is expected to be 1.3% versus an expectation of 2.4% in 2023, according to Bloomberg. Any unexpected strength in either the labor market or the economy at large could pose a risk to the market’s belief that lower rates are on the horizon.

 

The Japanese equity market was up 8.00% in U.S. dollar terms over the three months ended December 31, 2023, as measured by the Tokyo Stock Price Index. During the period, Japanese equities traded higher as an emphasis on increasing shareholder value has taken root in Japan. Investors have applauded an increasing focus on corporate governance, capital allocation, and shareholder returns.

 

For the twelve months ended December 31, 2023, all 17 Hennessy Funds generated positive returns. For the three‑year period ended December 31, 2023, 13 of the Hennessy Funds with at least three years of operating history posted positive annualized returns, with the exception of the Hennessy Japan Fund, the Hennessy Japan Small Cap Fund, and the Hennessy Large Cap Financial Fund. Over the longer term, all Hennessy Funds with at least ten years of operating history posted positive returns in each of the five-year and ten-year periods ended December 31, 2023.

 

As always, we are committed to providing superior service to investors and employing a consistent and disciplined approach to investing based on a buy‑and‑hold philosophy that rejects the idea of market timing. Our goal is to provide products that investors can have confidence in, knowing their money is invested as promised and with their best interests in mind. Accordingly, we continually seek new and improved ways to support investors in the Hennessy Funds, including by providing market insights, sector highlights, and other resources to help them manage their fund investments with confidence. We operate a robust and leading‑edge marketing automation and customer relationship management (CRM) system, with a database of over 100,000 financial advisors, in addition to retail investors. We utilize this technology both to help retain assets and drive new purchases into the Hennessy Funds. We employ a comprehensive marketing and sales program consisting of content, digital, social media, and traditional marketing initiatives and proactive meetings. In addition, our consistent annual public relations campaign has resulted in the Hennessy brand name appearing on TV, radio, print, or online media on average once every two to three days.

 

16

 

We provide service to over 147,500 fund accounts nationwide, including accounts held by investors who employ financial advisors to assist them with investing as well as accounts held by retail investors who invest directly with us. We serve approximately 11,400 financial advisors who utilize the Hennessy Funds on behalf of their clients, including approximately 300 who purchased one of our Funds for the first time during the most recent quarter. Approximately 17% of such advisors own two or more Hennessy Funds, and over 400 advisors hold a position of over $500,000. While numbers have declined in recent years, we continue to focus significant efforts on financial advisors who own two or more Hennessy Funds or hold a position of over $500,000 in an effort to build and maintain brand loyalty among our top tier of advisors.

 

Total assets under management as of December 31, 2023, was $3.3 billion, an increase of $0.3 billion, or 9.0%, compared to December 31, 2022. The increase in total assets was attributable to market appreciation and the purchase of the assets related to the CCM Small/Mid-Cap Impact Value Fund, partly offset by net outflows of the Hennessy Funds.

 

The following table illustrates the quarter‑by‑quarter changes in our assets under management since December 31, 2022:

 

   

Fiscal Quarter Ended

 
   

December 31,
2023

    September 30,
2023
    June 30,
2023
    March 31,
2023
    December 31,
2022
 
   

(In thousands)

 

Beginning assets under management

  $ 3,032,042     $ 2,964,013     $ 2,843,963     $ 3,009,458     $ 2,895,717  

Acquisition inflows

    12,436       -       -       -       43,088  

Organic inflows

    226,617       247,311       134,137       85,950       130,721  

Redemptions

    (253,058 )     (146,614 )     (177,687 )     (276,391 )     (314,704 )

Market appreciation (depreciation)

    262,335       (32,668 )     163,600       24,946       254,636  

Ending assets under management

  $ 3,280,372     $ 3,032,042     $ 2,964,013     $ 2,843,963     $ 3,009,458  

 

As stated above, the fees we receive for providing investment advisory and shareholder services are based on average assets under management. The following table shows average assets under management for each quarter since December 31, 2022:

 

   

Fiscal Quarter Ended

 
    December 31,
2023
    September 30,
2023
    June 30,
2023
    March 31,
2023
    December 31,
2022
 
   

(In thousands)

 

Hennessy Mutual Funds

                                       

Investor Class

  $ 1,904,504     $ 1,957,980     $ 1,864,583     $ 1,949,124     $ 1,949,185  

Institutional Class

    1,082,938       1,081,288       941,683       993,086       1,090,937  

Hennessy Stance ESG ETF

    50,800       44,774       44,647       43,692       4,125  

Average assets under management

  $ 3,038,242     $ 3,084,042     $ 2,850,913     $ 2,985,902     $ 3,044,247  

 

The principal asset on our balance sheet, the management contract asset, represents the capitalized costs incurred in connection with the purchase of the assets related to the management of investment funds. As of December 31, 2023, this asset had a net balance of $81.5 million, compared to $81.3 million as of September 30, 2023. The increase is related to costs associated with the CCM Transaction Agreement.

 

On October 20, 2021, we completed a public offering of the 2026 Notes in the aggregate principal amount of $40.25 million, which included the full exercise of the underwriters’ overallotment option. The 2026 Notes mature on December 31, 2026, and may be redeemed in whole or in part at any time or from time to time at our option on or after December 31, 2023. The 2026 Notes bear interest at 4.875% per annum, payable on the last day of each calendar quarter and at maturity, beginning December 31, 2021. The 2026 Notes are direct unsecured obligations, rank equally in right of payment with any of our future unsecured unsubordinated indebtedness, senior to any of our future indebtedness that expressly provides that it is subordinate to the 2026 Notes, effectively subordinate to all of our existing and future secured indebtedness, and structurally subordinated to all existing and future indebtedness and other obligations of any future subsidiaries of ours.

 

The 2026 Notes are the principal liability on our balance sheet at $39.2 million, net of issuance costs.

 

 

Results of Operations

 

The following table sets forth items in the statements of income as dollar amounts and as percentages of total revenue:

 

   

Three Months Ended December 31,

 
   

2023

   

2022

 
   

Amount

   

Percent of Total Revenue

   

Amount

   

Percent of Total Revenue

 
   

(In thousands, except percentages)

 

Revenue

                               

Investment advisory fees

  $ 5,665       92.2 %   $ 5,654       92.0 %

Shareholder service fees

    479       7.8       491       8.0  

Total revenue

    6,144       100.0       6,145       100.0  

Operating expenses

                               

Compensation and benefits

    1,866       30.4       1,858       30.2  

General and administrative

    1,724       28.1       1,569       25.5  

Fund distribution and other

    149       2.4       95       1.5  

Sub-advisory fees

    911       14.8       969       15.8  

Depreciation

    69       1.1       49       0.9  

Total operating expenses

    4,719       76.8       4,540       73.9  

Net operating income

    1,425       23.2       1,605       26.1  

Interest expense

    567       9.2       563       9.2  

Interest income

    (786 )     (12.8 )     (467 )     (7.6 )

Income before income tax expense

    1,644       26.8       1,509       24.5  

Income tax expense

    444       7.3       390       6.3  

Net income

  $ 1,200       19.5 %   $ 1,119       18.2 %

 

 

Revenue Investment Advisory Fees and Shareholder Service Fees

 

Total revenue comprises investment advisory fees and shareholder service fees. Comparing the three months ended December 31, 2022, to the three months ended December 31, 2023, total revenue remained flat at $6.1 million, investment advisory fees remained flat at $5.7 million, and shareholder service fees decreased by 2.4%, from $0.49 million to $0.48 million. 

 

The decrease in shareholder service fees was due to a decrease in the average daily net assets held in Investor Class shares of the Hennessy Mutual Funds. Assets held in Investor Class shares of the Hennessy Mutual Funds are subject to a shareholder service fee, whereas assets held in Institutional Class shares of the Hennessy Mutual Funds are not subject to a shareholder service fee. 

 

We collect investment advisory fees from each of the Hennessy Funds at differing annual rates. These annual rates range between 0.40% and 1.25% of average daily net assets. Average daily net assets of the Hennessy Funds for both the three months ended December 31, 2023 and 2022, was unchanged at $3.0 billion. The Hennessy Fund with the largest average daily net assets for the three months ended December 31, 2023, was the Hennessy Cornerstone Mid Cap 30 Fund, with $0.64 billion. We collect an investment advisory fee from the Hennessy Cornerstone Mid Cap 30 Fund at an annual rate of 0.74% of average daily net assets. The Hennessy Fund with the second largest average daily assets for the three months ended December 31, 2023, was the Hennessy Focus Fund, with $0.61 billion. We collect an investment advisory fee from the Hennessy Focus Fund at an annual rate of 0.90% of average daily net assets. However, we pay a sub‑advisory fee at an annual rate of 0.29% to the fund’s sub-advisor, which reduces the net operating profit contribution of the fund to our financial operations.

 

Total assets under management as of December 31, 2023, was $3.3 billion, an increase of $0.3 billion, or 9.0%, compared to December 31, 2022. The increase in total assets was attributable to market appreciation and the purchase of the assets related to the CCM Small/Mid Cap Impact Value Fund, partly offset by net outflows of the Hennessy Funds.

 

The Hennessy Funds with the three largest amounts of net inflows were as follows:

 

Three Months Ended December 31, 2023

Fund Name

 

Amount

Hennessy Cornerstone Mid Cap 30 Fund

 

$81 million

Hennessy Japan Fund

 

$5 million

Hennessy Cornerstone Growth Fund

 

$2 million

 

The Hennessy Funds with the three largest amounts of net outflows were as follows:

 

Three Months Ended December 31, 2023

Fund Name

 

Amount

Hennessy Focus Fund

 

$(49) million

Hennessy Gas Utility Fund

 

$(21) million

Hennessy Japan Small Cap Fund

 

$(9) million

 

Redemptions as a percentage of assets under management decreased from an average of 3.4% per month during the three months ended December 31, 2022, to an average of 2.8% per month during the three months ended December 31, 2023.

 

 

Operating Expenses

 

Comparing the three months ended December 31, 2022, to the three months ended December 31, 2023, total operating expenses increased by 3.9%, from $4.5 million to $4.7 million. As a percentage of total revenue, total operating expenses increased 2.9 percentage points to 76.8%.

 

The increase in operating expenses was due to increases in all expense categories other than sub-advisory fees, which decreased, and compensation and benefits, which remained flat.

 

Compensation and Benefits Expense: Comparing the three months ended December 31, 2022, to the three months ended December 31, 2023, compensation and benefits expense remained flat at $1.9 million. As a percentage of total revenue, compensation and benefits expense increased 0.2 percentage points to 30.4%.

 

General and Administrative Expense: Comparing the three months ended December 31, 2022, to the three months ended December 31, 2023, general and administrative expense increased by 9.9%, from $1.6 million to $1.7 million. As a percentage of total revenue, general and administrative expense increased 2.6 percentage points to 28.1%.

 

The increase in general and administrative expense was primarily due to increased professional services expense.

 

 

Fund Distribution and Other Expense: Fund distribution and other expense consists primarily of financial institution fees incurred by us for distribution of the Hennessy Funds and also for the operations of the Hennessy Stance ESG ETF. Fund distribution and other expense does not include sub‑advisory fees, which are shown separately.

 

The distribution component of fund distribution and other expense consists of fees paid to various financial institutions that offer the Hennessy Funds as potential investments to their clients. When the Hennessy Funds are purchased through one of these financial institutions, the institution typically charges an asset‑based fee, which is recorded as a fund distribution expense on our statement of operations to the extent paid by us. The Hennessy Mutual Funds, but not the Hennessy Stance ESG ETF, may be purchased directly and when purchased directly, we do not incur any such expense. These fees generally increase or decrease in line with the net assets of the Hennessy Funds held through these financial institutions, which are affected by inflows, outflows, and fund performance. In addition, some financial institutions charge a minimum fee if the average daily net assets of a Hennessy Fund held by such an institution are less than a threshold amount. In such cases, we pay the minimum fee.

 

The distribution component of fund distribution and other expenses is affected by many factors, including the following:

 

 

average daily net assets held by financial institutions;

 

 

the split of average daily net assets held by financial institutions in Institutional Class shares of the Hennessy Mutual Funds versus Investor Class shares of the Hennessy Mutual Funds; and

 

 

fee minimums at various financial institutions.

 

The other component of fund distribution and other expense consists of fees incurred by us for the operations of the Hennessy Stance ESG ETF. We receive a unitary investment advisory fee from the Hennessy Stance ESG ETF and then pay all of its operating expenses (with limited exceptions), including fund administration, fund accounting, transfer agency, custody, licensing, audit, and tax services.

 

Comparing the three months ended December 31, 2022, to the three months ended December 31, 2023, fund distribution and other expense increased by 56.8%, from $0.10 million to $0.15 million. As a percentage of total revenue, fund distribution and other expense increased 0.9 percentage points to 2.4%.

 

The increase in fund distribution and other expense was primarily due to a full period of fees incurred by us for the operations of the Hennessy Stance ESG ETF in the current period. We began advising the Hennessy Stance ESG ETF on December 22, 2022, and therefore only a partial period of expenses related to its operations were incurred in the prior comparable period.

 

Sub-Advisory Fees Expense: Comparing the three months ended December 31, 2022, to the three months ended December 31, 2023, sub-advisory fees expense decreased by 6.0%, from $1.0 million to $0.9 million. As a percentage of total revenue, sub-advisory fees expense decreased 1.0 percentage point to 14.8%. The decrease in sub-advisory fees expense was due to decreased average daily net assets of the sub‑advised Hennessy Funds, partly offset by the expense associated with new sub-advisory relationships relating to the Hennessy Stance ESG ETF that became effective on December 22, 2022.

 

Depreciation Expense: Comparing the three months ended December 31, 2022, to the three months ended December 31, 2023, depreciation expense increased by 40.8%, from $0.05 million to $0.07 million. As a percentage of total revenue, depreciation expense increased 0.2 percentage points to 1.1%.

 

The increase in depreciation expense resulted from new fixed asset purchases, partially offset by the write-off of fully depreciated assets.

 

Interest Expense

 

Comparing the three months ended December 31, 2022, to the three months ended December 31, 2023, interest expense increased from $0.56 million to $0.57 million. The increase in interest expense was due to the manner in which interest expense is calculated under accounting principles generally accepted in the United States. The issuance costs related to the 2026 Notes that have been capitalized are amortized over time and therefore increase the carrying amount of the 2026 Notes. As the carrying amount of the 2026 Notes increases, the interest expense on the 2026 Notes for financial statement purposes also increases.

 

 

Interest Income

 

Interest income consists of interest earned on cash and cash equivalents. Comparing the three months ended December 31, 2022, to the three months ended December 31, 2023, interest income increased from $0.47 million to $0.79 million.

 

The increase in interest income resulted from increased interest rates, as well as an increased cash balance.

 

Income Tax Expense

 

Comparing the three months ended December 31, 2022, to the three months ended December 31, 2023, income tax expense remained flat at $0.4 million.

 

Net Income

 

Comparing the three months ended December 31, 2022, to the three months ended December 31, 2023, net income increased by 7.2%, from $1.1 million to $1.2 million.

 

The increase in net income was primarily due to increased interest income in the current period.

 

Critical Accounting Policies and Estimates

 

Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States, which require the use of estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. These accounting policies, methods, and estimates are an integral part of the financial statements prepared by management and are based upon management’s current judgments. Those judgments are normally based on knowledge and experience with regard to past and current events and assumptions about future events. Certain accounting policies, methods, and estimates are particularly sensitive because of their significance to the financial statements and because future events affecting them may differ markedly from management’s current judgment. For a discussion of the accounting policies and estimates that we believe are most critical to understanding our results of operations and financial position, see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10‑K for the fiscal year ended September 30, 2023.

 

 

 

Liquidity and Capital Resources

 

We continually review our capital requirements to ensure that we have funding available to support our business model. Management anticipates that cash and other liquid assets on hand as of December 31, 2023, will be sufficient to meet our capital requirements for one year from the issuance date of this report, as well as our longer-term capital requirements for periods beyond one year from the issuance date of this report. To the extent that liquid resources and cash provided by operations are not adequate to meet long-term capital requirements, management plans to raise additional capital by either, or both, seeking bank financing or accessing the capital markets. There can be no assurance that we will be able to raise additional capital.

 

On October 20, 2021, we completed a public offering of our 2026 Notes in the aggregate principal amount of $40.25 million, which included the full exercise of the underwriters’ overallotment option. The 2026 Notes mature on December 31, 2026, and may be redeemed in whole or in part at any time or from time to time at our option on or after December 31, 2023. The 2026 Notes bear interest at 4.875% per annum, payable on the last day of each calendar quarter and at maturity, beginning December 31, 2021. The 2026 Notes are direct unsecured obligations, rank equally in right of payment with any of our future unsecured unsubordinated indebtedness, senior to any of our future indebtedness that expressly provides that it is subordinate to the 2026 Notes, effectively subordinate to all of our existing and future secured indebtedness, and structurally subordinated to all existing and future indebtedness and other obligations of any future subsidiaries of ours.

 

Our total assets under management as of December 31, 2023, was $3.3 billion, an increase of $0.3 billion, or 9.0%, compared to December 31, 2022. The primary sources of our revenue, liquidity, and cash flow are our investment advisory fees and shareholder service fees, which are based on and generated by our average assets under management. Our average assets under management for both the three months ended December 31, 2023 and 2022, was unchanged at $3.0 billion. As of December 31, 2023, we had cash and cash equivalents of $59.6 million.

 

The following table summarizes key financial data relating to our liquidity and use of cash:

 

   

For the Three Months

 
   

Ended December 31,

 
   

2023

   

2022

 
   

(In thousands)

 

Net cash provided by (used in) operating activities

  $ 416     $ (32 )

Net cash used in investing activities

    (250 )     (381 )

Net cash used in financing activities

    (1,037 )     (1,024 )

Net decrease in cash and cash equivalents

  $ (871 )   $ (1,437 )

 

The increase in cash provided by operating activities of $0.4 million was primarily due to timing of cash payments and also due to increased net income in the current period.

 

The decrease in cash used in investing activities of $0.1 million was due to the costs associated with the purchase of assets related to the management of an ETF that was reorganized into the Hennessy Stance ESG ETF in the prior comparable period. 

 

The increase in cash used in financing activities of $0.01 million was due the increased dollar amount of dividends paid as a result of having more shares outstanding in the current period than in the prior comparable period.

 

 

Item 4.            Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Management performed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on such evaluation, management, including the Company’s principal executive officer and principal financial officer, concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in the Company’s internal control over financial reporting as defined in Rules 13a-15(f) of the Exchange Act that occurred during the fiscal quarter ended December 31, 2023, and that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II:  OTHER INFORMATION

 

Item 1A.            Risk Factors

 

There have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended September 30, 2023.

 

 

Item 5.            Other Information

 

Rule 10b5-1 Trading Plans

 

During the three months ended December 31, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement,” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

 

 

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Item 6.            Exhibits

 

Set forth below is a list of all exhibits to this Quarterly Report on Form 10-Q.

 

10.1

Hennessy Advisors, Inc. 2024 Omnibus Incentive Plan (1)

 

 

10.2

Form of Restricted Stock Unit Award Agreement for Employees (2)

 

 

10.3

Form of Restricted Stock Unit Award Agreement for Directors and Advisory Committee Members (2)

 

 

10.4 First Amendment to Fourth Amended and Restated Employment Agreement, dated as of February 8, 2024, between the registrant and Neil J. Hennessy (2)
   
10.5 First Amendment to Employment Agreement, dated as of February 8, 2024, between the registrant and Teresa M. Nilsen (2)
   

31.1

Rule 13a-14a Certification of the Principal Executive Officer.

 

 

31.2

Rule 13a-14a Certification of the Principal Financial Officer.

 

 

32.1

Written Statement of the Principal Executive Officer, Pursuant to 18 U.S.C. § 1350.

 

 

32.2

Written Statement of the Principal Financial Officer, Pursuant to 18 U.S.C. § 1350.

 

 

101

Financial statements from the Quarterly Report on Form 10‑Q of Hennessy Advisors, Inc. for the quarter ended December 31, 2023, filed on February 8, 2024, formatted in Inline XBRL: (i) the Condensed Balance Sheets; (ii) the Condensed Statements of Income; (iii) the Condensed Statements of Changes in Stockholders’ Equity; (iv) the Condensed Statements of Cash Flows; and (v) the Notes to Unaudited Condensed Financial Statements.

 

 

104

The cover page for the Company’s Quarterly Report on Form 10-Q has been formatted in Inline XBRL and contained in Exhibit 101.

 

Notes:

 

(1)

Incorporated by reference to Annex A of the Company’s definitive proxy statement on Schedule 14A (SEC File No. 001-36423) filed December 13, 2023.

(2)

Management contract or compensatory plan or arrangement.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:

 

  HENNESSY ADVISORS, INC.
     
Date: February 8, 2024 By: /s/ Teresa M. Nilsen
    Teresa M. Nilsen
    President

 

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