FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For the Quarterly Period Ended
For the transition period from _____ to _____
Commission File Number
HENNESSY ADVISORS, INC.
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (IRS Employer |
| incorporation or organization) | Identification No.) |
| (Address of principal executive office) | (Zip code) |
(
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol | Name of each exchange |
| | | The |
| | | The |
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.
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).
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 filer | ☐ | Accelerated filer | ☐ |
| ☒ | |||
| Smaller reporting company | Emerging 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
As of May 6, 2024, there were
HENNESSY ADVISORS, INC.
| PART I |
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| Item 1 |
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| Item 2 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 4 |
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| PART II |
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| Item 1A | Risk Factors | 24 |
| Item 5 | Other Information | 24 |
| Item 6 |
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Item 1: Unaudited Condensed Financial Statements
(In thousands, except share and per share amounts)
(Unaudited)
| March 31, | September 30, | |||||||
| 2024 | 2023 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Investments in marketable securities, at fair value | ||||||||
| Investment fee income receivable | ||||||||
| Interest income receivable | ||||||||
| Prepaid expenses | ||||||||
| Other accounts receivable | ||||||||
| Total current assets | ||||||||
| Property and equipment, net of accumulated depreciation of $ and $, respectively | ||||||||
| Operating lease right-of-use asset | ||||||||
| Management contracts | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders' Equity | ||||||||
| Current liabilities | ||||||||
| Accrued liabilities and accounts payable | $ | $ | ||||||
| Operating lease liability | ||||||||
| Income taxes payable | ||||||||
| Total current liabilities | ||||||||
| Notes payable, net of issuance costs | ||||||||
| Long-term operating lease liability | ||||||||
| Net deferred income tax liability | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 9) | ||||||||
| Stockholders' equity | ||||||||
| Common stock, par value, shares authorized; shares issued and outstanding as of March 31, 2024, and as of September 30, 2023 | ||||||||
| Retained earnings | ||||||||
| Total stockholders' equity | ||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||
See Notes to Unaudited Condensed Financial Statements
(In thousands, except share and per share amounts)
(Unaudited)
| Three Months Ended March 31, |
Six Months Ended March 31, |
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| 2024 |
2023 |
2024 |
2023 |
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| Revenue |
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| Investment advisory fees |
$ | $ | $ | $ | ||||||||||||
| Shareholder service fees |
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| Total revenue |
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| Operating expenses |
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| Compensation and benefits |
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| General and administrative |
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| Fund distribution and other |
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| Sub-advisory fees |
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| Depreciation |
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| Total operating expenses |
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| Net operating income |
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| Interest expense |
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| Interest income |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Income before income tax expense |
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| Income tax expense |
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| Net income |
$ | $ | $ | $ | ||||||||||||
| Earnings per share |
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| Basic |
$ | $ | $ | $ | ||||||||||||
| Diluted |
$ | $ | $ | $ | ||||||||||||
| Weighted average shares outstanding |
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| Basic |
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| Diluted |
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| Cash dividends declared per share |
$ | $ | $ | $ | ||||||||||||
See Notes to Unaudited Condensed Financial Statements
Statements of Changes in Stockholders' Equity
(In thousands, except share data)
(Unaudited)
| Six Months Ended March 31, 2024 | ||||||||||||||||
| Total | ||||||||||||||||
| Common Stock | Retained | Stockholders' | ||||||||||||||
| Shares | Amount | Earnings | Equity | |||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | |||||||||||||
| Net income | - | |||||||||||||||
| Dividends paid | - | ( | ) | ( | ) | |||||||||||
| Shares issued for auto-investments pursuant to the 2021 Dividend Reinvestment and Stock Purchase Plan | ||||||||||||||||
| Shares issued for dividend reinvestment pursuant to the 2021 Dividend Reinvestment and Stock Purchase Plan | ||||||||||||||||
| Stock-based compensation | - | |||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | |||||||||||||
| Net income | - | |||||||||||||||
| Dividends paid | - | ( | ) | ( | ) | |||||||||||
| Shares issued for auto-investments pursuant to the 2021 Dividend Reinvestment and Stock Purchase Plan | ||||||||||||||||
| Shares issued for dividend reinvestment pursuant to the 2024 Dividend Reinvestment and Stock Purchase Plan | ||||||||||||||||
| Shares issued for auto-investments pursuant to the 2024 Dividend Reinvestment and Stock Purchase Plan | ||||||||||||||||
| Stock-based compensation | - | |||||||||||||||
| Balance at March 31, 2024 | $ | $ | $ | |||||||||||||
Statements of Changes in Stockholders' Equity
(In thousands, except share data)
(Unaudited)
| Six Months Ended March 31, 2023 |
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| Total |
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| Common Stock |
Retained |
Stockholders' |
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| Shares |
Amount |
Earnings |
Equity |
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| Balance at September 30, 2022 |
$ | $ | $ | |||||||||||||
| Net income |
- | |||||||||||||||
| Dividends paid |
- | ( |
) | ( |
) | |||||||||||
| Shares issued for auto-investments pursuant to the 2021 Dividend Reinvestment and Stock Purchase Plan |
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| Shares issued for dividend reinvestment pursuant to the 2021 Dividend Reinvestment and Stock Purchase Plan |
||||||||||||||||
| Stock-based compensation |
- | |||||||||||||||
| Balance at December 31, 2022 |
$ | $ | $ | |||||||||||||
| Net income |
- | |||||||||||||||
| Dividends paid |
- | ( |
) | ( |
) | |||||||||||
| Shares issued for auto-investments pursuant to the 2021 Dividend Reinvestment and Stock Purchase Plan |
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| Shares issued for dividend reinvestment pursuant to the 2021 Dividend Reinvestment and Stock Purchase Plan |
||||||||||||||||
| Stock-based compensation |
- | |||||||||||||||
| Balance at March 31, 2023 |
$ | $ | $ | |||||||||||||
See Notes to Unaudited Condensed Financial Statements
(In thousands)
(Unaudited)
| Six Months Ended March 31, | ||||||||
| 2024 |
2023 |
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| Cash flows from operating activities |
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| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities |
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| Depreciation |
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| Unrealized gain on marketable securities |
( |
) | ( |
) | ||||
| Change in right-of-use asset and operating lease liability |
( |
) | ( |
) | ||||
| Amortization of note issuance costs |
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| Deferred income taxes |
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| Stock-based compensation |
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| Change in operating assets and liabilities |
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| Investment fee income receivable |
( |
) | ||||||
| Interest income receivable |
( |
) | ||||||
| Prepaid expenses |
( |
) | ( |
) | ||||
| Other accounts receivable |
( |
) | ||||||
| Other assets |
( |
) | ( |
) | ||||
| Accrued liabilities and accounts payable |
( |
) | ( |
) | ||||
| Income taxes payable |
( |
) | ( |
) | ||||
| Net cash provided by operating activities |
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| Cash flows from investing activities |
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| Purchases of property and equipment |
( |
) | ( |
) | ||||
| Payments related to management contracts |
( |
) | ( |
) | ||||
| Net cash used in investing activities |
( |
) | ( |
) | ||||
| Cash flows from financing activities |
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| Proceeds from shares issued pursuant to the 2021 Dividend Reinvestment and Stock Repurchase Plan |
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| Proceeds from shares issued pursuant to the 2024 Dividend Reinvestment and Stock Repurchase Plan |
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| Dividend payments |
( |
) | ( |
) | ||||
| Net cash used in financing activities |
( |
) | ( |
) | ||||
| Net decrease in cash and cash equivalents |
( |
) | ( |
) | ||||
| Cash and cash equivalents at the beginning of the period |
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| Cash and cash equivalents at the end of the period |
$ | $ | ||||||
| Supplemental disclosures of cash flow information |
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| Cash paid for income taxes |
$ | $ | ||||||
| Cash paid for interest |
$ | $ | ||||||
| Dividend reinvestment issued in shares |
$ | $ | ||||||
See Notes to Unaudited Condensed Financial Statements
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 and six months ended March 31, 2024, 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 March 31, 2024, the Company’s operating results for the three and six months ended March 31, 2024 and 2023, and the Company’s cash flows for the six months ended March 31, 2024 and 2023. 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
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 $
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. |
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
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.
The Company completed its most recent asset purchases on November 10, 2023, and February 23, 2024, when it purchased assets related to the management of the CCM Small/Mid-Cap Impact Value Fund and the CCM Core Impact Equity Fund (each, a “CCM Fund,” and together, the “CCM Funds”), respectively. These asset purchases added approximately $
In the six months ended March 31, 2024, the Company capitalized $
| (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
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
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 other than quoted prices included in Level 1 (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. |
Based on the definitions, the following tables represent the Company’s assets categorized in the Level 1 to Level 3 hierarchies:
| March 31, 2024 |
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| Level 1 |
Level 2 |
Level 3 |
Total |
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| (In thousands) |
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| Money market fund deposits |
$ | $ | $ | $ | ||||||||||||
| Mutual fund investments |
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| Total |
$ | $ | $ | $ | ||||||||||||
| Amounts included in: |
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| Cash and cash equivalents |
$ | $ | $ | $ | ||||||||||||
| Investments in marketable securities |
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| Total |
$ | $ | $ | $ | ||||||||||||
| September 30, 2023 |
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| Level 1 |
Level 2 |
Level 3 |
Total |
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| (In thousands) |
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| Money market fund deposits |
$ | $ | $ | $ | ||||||||||||
| Mutual fund investments |
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| Total |
$ | $ | $ | $ | ||||||||||||
| Amounts included in: |
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| Cash and cash equivalents |
$ | $ | $ | $ | ||||||||||||
| Investments in marketable securities |
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| Total |
$ | $ | $ | $ | ||||||||||||
There were no transfers between levels during the three months ended March 31, 2024, 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 $
| (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. There were
Upon renewal of the lease for its office in Novato, California, the Company recorded a right‑of‑use asset of $
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:
| March 31, 2024 | ||||
| (In thousands, except years and percentages) | ||||
| Operating lease right-of-use assets | $ | |||
| Current operating lease liability | $ | |||
| Long-term operating lease liability | $ | |||
| Weighted average remaining lease term | ||||
| Weighted average discount rate | % | |||
| Operating lease liabilities arising from obtaining right-of-use assets | $ | |||
For the six months ended March 31, 2024, rent expense for all offices, which is recorded under general and administrative expense in the statements of income, totaled $
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:
| March 31, 2024 | ||||
| (In thousands) | ||||
| Remainder of fiscal year 2024 | $ | |||
| Fiscal year 2025 | ||||
| Fiscal year 2026 | ||||
| Fiscal year 2027 | ||||
| Total undiscounted cash flows | ||||
| Present value discount | ( | ) | ||
| Total operating lease liabilities | ||||
| (6) |
Accrued Liabilities and Accounts Payable |
Details relating to accrued liabilities and accounts payable reflected on the Company’s balance sheet are as follows:
| March 31, 2024 |
September 30, 2023 |
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| (In thousands) |
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| Accrued bonus liabilities |
$ | $ | ||||||
| Accrued sub-advisor fees |
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| Other accrued expenses |
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| Total accrued liabilities and accounts payable |
$ | $ | ||||||
| (7) | Debt Outstanding |
On October 20, 2021, the Company completed a public offering of
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 six months ended March 31, 2024 and 2023, were
The Company is subject to income tax in the U.S. federal jurisdiction and various state jurisdictions. As of March 31, 2024, 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. Such contractual expense ratio limitations will expire February 28, 2025, unless extended. Total fees waived during the six months ended March 31, 2024 and March 31, 2023, were $
The Company has
| (10) | Equity |
2024 Omnibus Incentive Plan
Effective as of February 8, 2024, the Company adopted, and the Company’s shareholders approved, the 2024 Omnibus Incentive Plan (the “Omnibus Plan”). The Omnibus Plan replaced the Amended and Restated 2013 Omnibus Incentive 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 years at a rate of
A summary of RSU activity is as follows:
| Six Months Ended March 31, 2024 | ||||||||
| Shares | Weighted Average Grant Date Fair Value per Share | |||||||
| Non-vested balance at beginning of period | $ | |||||||
| Granted | ||||||||
| Vested | ||||||||
| Forfeited | ||||||||
| Non-vested balance at end of period | $ | |||||||
Additional information related to RSUs is as follows:
| March 31, 2024 | ||||
| (In thousands, except years) | ||||
| Unrecognized compensation expense related to RSUs | $ | |||
| Weighted average remaining years to expense for RSUs | ||||
Dividend Reinvestment and Stock Purchase Plan
In January 2024, 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 2021. 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 and its predecessor plan, the Company issued
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
| (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:
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Weighted average common stock outstanding, basic | ||||||||
| Dilutive impact of RSUs | ||||||||
| Weighted average common stock outstanding, diluted | ||||||||
| Six Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Weighted average common stock outstanding, basic | ||||||||
| Dilutive impact of RSUs | ||||||||
| Weighted average common stock outstanding, diluted | ||||||||
For the three months ended March 31, 2024 and 2023, the Company excluded
The Company paid a quarterly cash dividend of $
| (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.
| (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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward‑Looking 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 applicable 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 20.03% for the six months ended March 31, 2024. During the most recent quarter, equity prices advanced as investors increasingly felt that inflation would continue to moderate, the economy would continue to expand, and the employment outlook would remain strong. While the rate of inflation continues to be above the Federal Reserve’s stated 2% target, the market continues to anticipate that the Federal Reserve will cut rates during this calendar year, although at a slower pace compared to expectations at the end of 2023. Further, the prospect of rate cuts while the economy continues to expand has provided comfort to those who believed rate cuts would only occur once the economy started to contract. While revenue growth has outpaced earnings growth in recent quarters, consensus estimates for the quarter ended March 31, 2024, suggest the opposite. If the estimates hold true, strengthened earnings growth is an indicator that profit margins are stabilizing and, perhaps, even expanding.
Long-term U.S. bond yields increased during the three months ended March 31, 2024, as estimates for economic growth continued to be adjusted upward, albeit slightly. In addition, the unemployment rate, while higher than at the end of 2023, continued to demonstrate an economy that is stronger than many expected. The result of stronger economic data has been a ratcheting down of expectations regarding Federal Reserve interest rate cuts. While a few months ago, the market anticipated six rates cuts in 2024, the market is now pricing in fewer than two, according to Bloomberg. The market’s ability to rally in the face of higher 10-year rates and fewer short-term rate cuts suggests that a “soft landing” could be expected. The prospect of lower short-term rates while the economy continues to grow has likely fueled the recent rally. While investors had at one point anticipated more rate cuts in the near term, that was likely predicated on the fear of an economic recession.
The Japanese equity market was up 18.86% in U.S. dollar terms over the six months ended March 31, 2024, as measured by the Tokyo Stock Price Index. During the period, Japanese equities traded higher as investors cheered stronger corporate earnings, a weaker yen, and more shareholder friendly corporate governance.
For the twelve months ended March 31, 2024, all 17 Hennessy Funds generated positive total returns. For the three‑year period ended March 31, 2024, nearly all of the 17 Hennessy Funds posted positive annualized total returns, with the exceptions of the Hennessy Japan Small Cap Fund, the Hennessy Small Cap Financial Fund, and the Hennessy Large Cap Financial Fund. Over the longer term, all of the Hennessy Funds with at least five or ten years of operating history posted positive returns in each of the five- and ten-year periods ended March 31, 2024.
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.
We provide service to over 170,000 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 11,000 financial advisors who utilize the Hennessy Funds on behalf of their clients, including nearly 400 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 nearly 500 advisors hold a position of over $500,000. While numbers have declined in recent years, we continue to focus significant efforts on building and maintaining brand loyalty among our top tier of advisors.
Total assets under management as of March 31, 2024, was $3.9 billion, an increase of $1.0 billion, or 35.5%, compared to March 31, 2023. The increase in total assets was attributable to market appreciation, net inflows into the Hennessy Funds, and the purchase of the assets related to the CCM Funds.
The following table illustrates the quarter‑by‑quarter changes in our assets under management since March 31, 2023:
| Fiscal Quarter Ended |
||||||||||||||||||||
| March 31, 2024 |
December 31, 2023 | September 30, 2023 | June 30, 2023 | March 31, 2023 | ||||||||||||||||
| (In thousands) |
||||||||||||||||||||
| Beginning assets under management |
$ | 3,280,372 | $ | 3,032,042 | $ | 2,964,013 | $ | 2,843,963 | $ | 3,009,458 | ||||||||||
| Acquisition inflows |
59,220 | 12,436 | - | - | - | |||||||||||||||
| Organic inflows |
434,435 | 226,617 | 247,311 | 134,137 | 85,950 | |||||||||||||||
| Redemptions |
(222,001 | ) | (253,058 | ) | (146,614 | ) | (177,687 | ) | (276,391 | ) | ||||||||||
| Market appreciation (depreciation) |
300,576 | 262,335 | (32,668 | ) | 163,600 | 24,946 | ||||||||||||||
| Ending assets under management |
$ | 3,852,602 | $ | 3,280,372 | $ | 3,032,042 | $ | 2,964,013 | $ | 2,843,963 | ||||||||||
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 March 31, 2023:
| Fiscal Quarter Ended |
||||||||||||||||||||
| March 31, 2024 | December 31, 2023 | September 30, 2023 | June 30, 2023 | March 31, 2023 | ||||||||||||||||
| (In thousands) |
||||||||||||||||||||
| Hennessy Mutual Funds |
||||||||||||||||||||
| Investor Class |
$ | 2,026,028 | $ | 1,904,504 | $ | 1,957,980 | $ | 1,864,583 | $ | 1,949,124 | ||||||||||
| Institutional Class |
1,347,491 | 1,082,938 | 1,081,288 | 941,683 | 993,086 | |||||||||||||||
| Hennessy Stance ESG ETF |
86,377 | 50,800 | 44,774 | 44,647 | 43,692 | |||||||||||||||
| Average assets under management |
$ | 3,459,896 | $ | 3,038,242 | $ | 3,084,042 | $ | 2,850,913 | $ | 2,985,902 | ||||||||||
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 March 31, 2024, this asset had a net balance of $82.3 million, compared to $81.3 million as of September 30, 2023. The increase was due to the purchase of assets related to the management of the CCM Funds.
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 $39.3 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 March 31, |
||||||||||||||||
| 2024 |
2023 |
|||||||||||||||
| Amount |
Percent of Total Revenue |
Amount |
Percent of Total Revenue |
|||||||||||||
| (In thousands, except percentages) |
||||||||||||||||
| Revenue |
||||||||||||||||
| Investment advisory fees |
$ | 6,436 | 92.7 | % | $ | 5,435 | 91.9 | % | ||||||||
| Shareholder service fees |
504 | 7.3 | 481 | 8.1 | ||||||||||||
| Total revenue |
6,940 | 100.0 | 5,916 | 100.0 | ||||||||||||
| Operating expenses |
||||||||||||||||
| Compensation and benefits |
2,253 | 32.5 | 1,930 | 32.6 | ||||||||||||
| General and administrative |
1,464 | 21.1 | 1,276 | 21.6 | ||||||||||||
| Fund distribution and other |
201 | 2.9 | 132 | 2.2 | ||||||||||||
| Sub-advisory fees |
1,046 | 15.1 | 930 | 15.7 | ||||||||||||
| Depreciation |
57 | 0.7 | 56 | 1.0 | ||||||||||||
| Total operating expenses |
5,021 | 72.3 | 4,324 | 73.1 | ||||||||||||
| Net operating income |
1,919 | 27.7 | 1,592 | 26.9 | ||||||||||||
| Interest expense |
568 | 8.2 | 562 | 9.5 | ||||||||||||
| Interest income |
(771 | ) | (11.1 | ) | (580 | ) | (9.8 | ) | ||||||||
| Income before income tax expense |
2,122 | 30.6 | 1,610 | 27.2 | ||||||||||||
| Income tax expense |
582 | 8.4 | 415 | 7.0 | ||||||||||||
| Net income |
$ | 1,540 | 22.2 | % | $ | 1,195 | 20.2 | % | ||||||||
| Six Months Ended March 31, |
||||||||||||||||
| 2024 |
2023 |
|||||||||||||||
| Amount |
Percent of Total Revenue |
Amount |
Percent of Total Revenue |
|||||||||||||
| (In thousands, except percentages) |
||||||||||||||||
| Revenue |
||||||||||||||||
| Investment advisory fees |
$ | 12,101 | 92.5 | % | $ | 11,089 | 91.9 | % | ||||||||
| Shareholder service fees |
983 | 7.5 | 972 | 8.1 | ||||||||||||
| Total revenue |
13,084 | 100.0 | 12,061 | 100.0 | ||||||||||||
| Operating expenses |
||||||||||||||||
| Compensation and benefits |
4,119 | 31.4 | 3,788 | 31.4 | ||||||||||||
| General and administrative |
3,188 | 24.4 | 2,845 | 23.6 | ||||||||||||
| Fund distribution and other |
350 | 2.7 | 227 | 1.9 | ||||||||||||
| Sub-advisory fees |
1,957 | 15.0 | 1,899 | 15.7 | ||||||||||||
| Depreciation |
126 | 0.9 | 105 | 0.9 | ||||||||||||
| Total operating expenses |
9,740 | 74.4 | 8,864 | 73.5 | ||||||||||||
| Net operating income |
3,344 | 25.6 | 3,197 | 26.5 | ||||||||||||
| Interest expense |
1,135 | 8.7 | 1,125 | 9.3 | ||||||||||||
| Interest income |
(1,557 | ) | (11.9 | ) | (1,047 | ) | (8.7 | ) | ||||||||
| Income before income tax expense |
3,766 | 28.8 | 3,119 | 25.9 | ||||||||||||
| Income tax expense |
1,026 | 7.9 | 805 | 6.7 | ||||||||||||
| Net income |
$ | 2,740 | 20.9 | % | $ | 2,314 | 19.2 | % | ||||||||
Revenue – Investment Advisory Fees and Shareholder Service Fees
Total revenue comprises investment advisory fees and shareholder service fees. Comparing the three months ended March 31, 2023, to the three months ended March 31, 2024, total revenue increased by 17.3%, from $5.9 million to $6.9 million, investment advisory fees increased by 18.4%, from $5.4 million to $6.4 million, and shareholder service fees increased by 4.8%, from $0.48 million to $0.50 million. Comparing the six months ended March 31, 2023, to the six months ended March 31, 2024, total revenue increased by 8.5% from $12.1 million to $13.1 million, investment advisory fees increased by 9.1%, from $11.1 million to $12.1 million, and shareholder service fees increased by 1.1%, from $0.97 million to $0.98 million.
In both periods, the increase in investment advisory fees was due mainly to increased average daily net assets of the Hennessy Funds, and the increase in shareholder service fees was due to an increase 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 the three months ended March 31, 2024, was $3.5 billion, which represents an increase of $0.5 billion, or 15.9%, compared to the three months ended March 31, 2023, and average daily net assets for the six months ended March 31, 2024, was $3.2 billion, which represents an increase of $0.2 billion, or 7.7%, compared to the six months ended March 31, 2023. The Hennessy Fund with the largest average daily net assets for the three and six months ended March 31, 2024, was the Hennessy Cornerstone Mid Cap 30 Fund, with $0.83 billion and $0.74 billion, respectively. 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 and six months ended March 31, 2024, was the Hennessy Focus Fund, with $0.66 billion and $0.63 billion, respectively. 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 March 31, 2024, was $3.9 billion, an increase of $1.0 billion, or 35.5%, compared to March 31, 2023. The increase in total assets was attributable to market appreciation, net inflows into the Hennessy Funds, and the purchase of the assets related to the CCM Funds.
The Hennessy Funds with the three largest amounts of net inflows were as follows:
| Three Months Ended March 31, 2024 |
Six Months Ended March 31, 2024 |
|||||
| Fund Name |
Amount |
Fund Name |
Amount |
|||
| Hennessy Cornerstone Mid Cap 30 Fund |
$106 million |
Hennessy Cornerstone Mid Cap 30 Fund |
$188 million |
|||
| Hennessy Cornerstone Growth Fund |
$104 million |
Hennessy Cornerstone Growth Fund |
$106 million |
|||
| Hennessy Focus Fund |
$36 million |
Hennessy Japan Fund |
$29 million |
|||
The Hennessy Funds with the three largest amounts of net outflows were as follows:
| Three Months Ended March 31, 2024 |
Six Months Ended March 31, 2024 |
|||||
| Fund Name |
Amount |
Fund Name |
Amount |
|||
| Hennessy Gas Utility Fund |
$(30) million |
Hennessy Gas Utility Fund |
$(51) million |
|||
| Hennessy Cornerstone Value Fund |
$(9) million |
Hennessy Cornerstone Value Fund |
$(17) million |
|||
| Hennessy Balanced Fund |
$(5) million |
Hennessy Focus Fund |
$(13) million |
|||
Redemptions as a percentage of assets under management decreased from an average of 3.0% per month during the three months ended March 31, 2023, to an average of 2.2% per month during the three months ended March 31, 2024. Redemptions as a percentage of assets under management decreased from an average of 3.2% per month during the six months ended March 31, 2023, to an average of 2.5% per month during the six months ended March 31, 2024.
Operating Expenses
Comparing the three months ended March 31, 2023, to the three months ended March 31, 2024, total operating expenses increased by 16.1%, from $4.3 million to $5.0 million. As a percentage of total revenue, total operating expenses decreased 0.8 percentage points to 72.3%.
Comparing the six months ended March 31, 2023, to the six months ended March 31, 2024, total operating expenses increased by 9.9%, from $8.9 million to $9.7 million. As a percentage of total revenue, total operating expenses increased 0.9 percentage points to 74.4%.
In both periods, the dollar value increase in operating expense was due to increases in all expense categories.
Compensation and Benefits Expense: Comparing the three months ended March 31, 2023, to the three months ended March 31, 2024, compensation and benefits expense increased by 16.7%, from $1.9 million to $2.3 million. As a percentage of total revenue, compensation and benefits expense decreased 0.1 percentage points to 32.5%.
Comparing the six months ended March 31, 2023, to the six months ended March 31, 2024, compensation and benefits expense increased by 8.7%, from $3.8 million to $4.1 million. As a percentage of total revenue, compensation and benefits expense remained flat at 31.4%.
In both periods, the dollar value increase in compensation and benefit expense was due to an increase in incentive-based compensation.
General and Administrative Expense: Comparing the three months ended March 31, 2023, to the three months ended March 31, 2024, general and administrative expense increased by 14.7%, from $1.3 million to $1.5 million. As a percentage of total revenue, general and administrative expense decreased 0.5 percentage points to 21.1%.
Comparing the six months ended March 31, 2023, to the six months ended March 31, 2024, general and administrative expense increased by 12.1%, from $2.8 million to $3.2 million. As a percentage of total revenue, general and administrative expense increased 0.8 percentage points to 24.4%.
In both periods, the increase in general and administrative expense was primarily due to increased commission expense on sales of our investment products.
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 March 31, 2023, to the three months ended March 31, 2024, fund distribution and other expense increased by 52.3%, from $0.1 million to $0.2 million. As a percentage of total revenue, fund distribution and other expense increased 0.7 percentage points to 2.9%. The increase in fund distribution and other expense was primarily due to increased average daily net assets of the Hennessy Funds. Additionally, there was an increase in operating expenses relating to the Hennessy Stance ESG ETF, which had greater average daily net assets resulting from the purchase of assets related to the CCM Core Impact Fund in the current period.
Comparing the six months ended March 31, 2023, to the six months ended March 31, 2024, fund distribution and other expense increased by 54.2%, from $0.2 million to $0.4 million. As a percentage of total revenue, fund distribution and other expense increased 0.8 percentage points to 2.7%. The increase in fund distribution and other expense was primarily due to the additional expenses relating to the Hennessy Stance ESG ETF resulting from the purchase of assets related to the CCM Funds in the current period, and also due to increased average daily net assets of the Hennessy Funds. The increase can also be attributed 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 March 31, 2023, to the three months ended March 31, 2024, sub-advisory fees expense increased by 12.5%, from $0.9 million to $1.0 million. As a percentage of total revenue, sub-advisory fees expense decreased 0.6 percentage points to 15.1%.
Comparing the six months ended March 31, 2023, to the six months ended March 31, 2024, sub-advisory fees expense increased by 3.1%, from $1.9 million to $2.0 million. As a percentage of total revenue, sub-advisory fees expense decreased 0.7 percentage points to 15.0%.
In both periods, the dollar value increase in sub-advisory fees expense was due to increased average daily net assets of the sub‑advised Hennessy Funds, the expense associated with new sub-advisory relationships relating to the Hennessy Stance ESG ETF that became effective on December 22, 2022, and the increase in assets of the Hennessy Stance ESG ETF as a result of the purchase of assets related to the management of the CCM Funds and subsequent reorganization of such assets into the Hennessy Stance ESG ETF.
Depreciation Expense: Comparing the three months ended March 31, 2023, to the three months ended March 31, 2024, depreciation expense increased by 1.8%, from $0.056 million to $0.057 million. As a percentage of total revenue, depreciation expense decreased 0.3 percentage points to 0.7%.
Comparing the six months ended March 31, 2023, to the six months ended March 31, 2024, depreciation expense increased by 20.0%, from $0.11 million to $0.13 million. As a percentage of total revenue, depreciation expense remained the same at 0.9%.
In both periods, the dollar value 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 March 31, 2023, to the three months ended March 31, 2024, interest expense increased from $0.56 million to $0.57 million. Comparing the six months ended March 31, 2023, to the six months ended March 31, 2024, interest expense increased from $1.13 million to $1.14 million.
In both periods, 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 March 31, 2023, to the three months ended March 31, 2024, interest income increased from $0.58 million to $0.77 million. Comparing the six months ended March 31, 2023, to the six months ended March 31, 2024, interest income increased from $1.0 million to $1.6 million.
In both periods, the increase in interest income resulted from increased interest rates.
Income Tax Expense
Comparing the three months ended March 31, 2023, to the three months ended March 31, 2024, income tax expense increased by 40.2%, from $0.4 million to $0.6 million. Comparing the six months ended March 31, 2023, to the six months ended March 31, 2024, income tax expense increased by 27.5%, from $0.8 million to $1.0 million.
In both periods, the increase in income tax expense was due to increased net operating income, as well as a higher effective income tax rate in the current period due to a greater exposure to state income tax liability based on the location of our fund shareholders.
Net Income
Comparing the three months ended March 31, 2023, to the three months ended March 31, 2024, net income increased by 28.9%, from $1.2 million to $1.5 million. Comparing the six months ended March 31, 2023, to the six months ended March 31, 2024, net income increased by 18.4%, from $2.3 million to $2.7 million.
In both periods, the increase in net income was primarily due to increased revenue, and additionally 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 March 31, 2024, 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 March 31, 2024, was $3.9 billion, an increase of $1.0 billion, or 35.5%, compared to March 31, 2023. 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 the six months ended March 31, 2024, was $3.2 billion, an increase of $0.2 billion, or 7.7%, compared to the six months ended March 31, 2023. As of March 31, 2024, 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 Six Months |
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| Ended March 31, |
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| 2024 |
2023 |
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| (In thousands) |
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| Net cash provided by operating activities |
$ | 2,289 | $ | 1,955 | ||||
| Net cash used in investing activities |
(1,110 | ) | (526 | ) | ||||
| Net cash used in financing activities |
(2,062 | ) | (2,047 | ) | ||||
| Net decrease in cash and cash equivalents |
$ | (883 | ) | $ | (618 | ) | ||
The increase in cash provided by operating activities of $0.3 million was primarily due to timing of cash payments and also due to increased net income in the current period.
The increase in cash used in investing activities of $0.6 million was due to the costs associated with the purchase of assets related to the management of the CCM Funds in the current period.
The increase in cash used in financing activities of $0.02 million was due to 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 March 31, 2024, and that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 1A. Risk Factors
There have been 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
(c) Rule 10b5-1 Trading Plans
During the three months ended March 31, 2024, 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.
Set forth below is a list of all exhibits to this Quarterly Report on Form 10-Q.
| 31.1 |
Rule 13a-14a Certification of the Principal Executive Officer. |
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| 31.2 |
Rule 13a-14a Certification of the Principal Financial Officer. |
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| 32.1 |
Written Statement of the Principal Executive Officer, Pursuant to 18 U.S.C. § 1350. |
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| 32.2 |
Written Statement of the Principal Financial Officer, Pursuant to 18 U.S.C. § 1350. |
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| 101 |
Financial statements from the Quarterly Report on Form 10‑Q of Hennessy Advisors, Inc. for the quarter ended March 31, 2024, filed on May 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; (v) the Notes to Unaudited Condensed Financial Statements; and (vi) the information included in Part II, Item 5(c). |
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| 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. |
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: May 8, 2024 | By: | /s/ Teresa M. Nilsen |
| Teresa M. Nilsen | ||
| President | ||