Hennessy Advisors Inc 10-Q for FY2021 Q1
Hennessy Advisors Inc (HNNA)
About this 10-Q
Hennessy Advisors Inc filed this 10-Q on February 11, 2021, covering the quarter ended December 31, 2020 (FY2021 Q1).
Headline figures
Quarter ended December 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $7.79M
- Net income
- $1.77M
- down 32.5% from net income of $2.63M a year earlier
- Diluted EPS
- $0.24
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, 2020
| ☐ | 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)
| California | 68-0176227 | |
| (State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) | |
| 7250 Redwood Boulevard, Suite 200 Novato, California |
94945 | |
| (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 |
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 filer | ☐ | Accelerated filer | ☐ | |||
| Non-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 ☐ No ☒
As of February 8, 2021, there were 7,360,342 shares of common stock issued and outstanding.
Table of Contents
HENNESSY ADVISORS, INC.
i
Table of Contents
| Item 1: | Unaudited Condensed Financial Statements |
(In thousands, except share and per share amounts)
| December 31, | September 30, | |||||||
| 2020 | 2020 | |||||||
| (Unaudited) | ||||||||
| Assets |
||||||||
| Current assets |
||||||||
| Cash and cash equivalents |
$ | 9,954 | $ | 9,955 | ||||
| Investments in marketable securities, at fair value |
9 | 9 | ||||||
| Investment fee income receivable |
2,688 | 2,403 | ||||||
| Prepaid expenses |
427 | 637 | ||||||
| Other accounts receivable |
324 | 378 | ||||||
|
|
|
|
|
|||||
| Total current assets |
13,402 | 13,382 | ||||||
|
|
|
|
|
|||||
| Property and equipment, net of accumulated depreciation |
||||||||
| of $1,680 and $1,618, respectively |
298 | 294 | ||||||
| Operating lease right-of-use asset |
183 | 276 | ||||||
| Management contracts |
80,643 | 80,643 | ||||||
| Other assets |
192 | 191 | ||||||
|
|
|
|
|
|||||
| Total assets |
$ | 94,718 | $ | 94,786 | ||||
|
|
|
|
|
|||||
| Liabilities and stockholders’ equity |
||||||||
| Current liabilities |
||||||||
| Accrued liabilities and accounts payable |
$ | 2,080 | $ | 3,813 | ||||
| Operating lease liability |
220 | 330 | ||||||
| Income taxes payable |
1,272 | 949 | ||||||
|
|
|
|
|
|||||
| Total current liabilities |
3,572 | 5,092 | ||||||
|
|
|
|
|
|||||
| Deferred income tax liability, net |
11,829 | 11,516 | ||||||
|
|
|
|
|
|||||
| Total liabilities |
15,401 | 16,608 | ||||||
|
|
|
|
|
|||||
| Commitments and contingencies (Note 8) |
||||||||
| Stockholders’ equity |
||||||||
| Common stock, no par value, 22,500,000 shares authorized; 7,359,639 shares issued and outstanding as of December 31, 2020, and 7,356,822 as of September 30, 2020 |
19,082 | 18,705 | ||||||
| Retained earnings |
60,235 | 59,473 | ||||||
|
|
|
|
|
|||||
| Total stockholders’ equity |
79,317 | 78,178 | ||||||
|
|
|
|
|
|||||
| Total liabilities and stockholders’ equity |
$ | 94,718 | $ | 94,786 | ||||
|
|
|
|
|
|||||
See Notes to Unaudited Condensed Financial Statements
1
Table of Contents
(In thousands, except share and per share amounts)
(Unaudited)
| Three Months Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Revenue |
||||||||
| Investment advisory fees |
$ | 7,208 | $ | 9,449 | ||||
| Shareholder service fees |
581 | 795 | ||||||
|
|
|
|
|
|||||
| Total revenue |
7,789 | 10,244 | ||||||
|
|
|
|
|
|||||
| Operating expenses |
||||||||
| Compensation and benefits |
2,104 | 2,513 | ||||||
| General and administrative |
1,308 | 1,492 | ||||||
| Mutual fund distribution |
121 | 139 | ||||||
| Sub-advisory fees |
1,785 | 2,316 | ||||||
| Depreciation |
62 | 53 | ||||||
|
|
|
|
|
|||||
| Total operating expenses |
5,380 | 6,513 | ||||||
|
|
|
|
|
|||||
| Net operating income |
2,409 | 3,731 | ||||||
| Interest expense |
— | 187 | ||||||
| Other income |
(1 | ) | (56 | ) | ||||
|
|
|
|
|
|||||
| Income before income tax expense |
2,410 | 3,600 | ||||||
| Income tax expense |
637 | 972 | ||||||
|
|
|
|
|
|||||
| Net income |
$ | 1,773 | $ | 2,628 | ||||
|
|
|
|
|
|||||
| Earnings per share |
||||||||
| Basic |
$ | 0.24 | $ | 0.35 | ||||
|
|
|
|
|
|||||
| Diluted |
$ | 0.24 | $ | 0.35 | ||||
|
|
|
|
|
|||||
| Weighted average shares outstanding |
||||||||
| Basic |
7,357,883 | 7,501,147 | ||||||
|
|
|
|
|
|||||
| Diluted |
7,367,128 | 7,537,716 | ||||||
|
|
|
|
|
|||||
| Cash dividends declared per share |
$ | 0.14 | $ | 0.14 | ||||
|
|
|
|
|
|||||
See Notes to Unaudited Condensed Financial Statements
2
Table of Contents
Statements of Changes in Stockholders’ Equity
(In thousands, except share data)
(Unaudited)
| Three Months Ended December 31, 2020 | ||||||||||||||||
| Total | ||||||||||||||||
| Common Stock | Retained | Stockholders’ | ||||||||||||||
| Shares | Amount | Earnings | Equity | |||||||||||||
| Balance at September 30, 2020 |
7,356,822 | $ | 18,705 | $ | 59,473 | $ | 78,178 | |||||||||
| Net income |
— | — | 1,773 | 1,773 | ||||||||||||
| Dividends declared |
— | — | (1,011 | ) | (1,011 | ) | ||||||||||
| Shares issued for auto-investments pursuant to the 2018 Dividend Reinvestment and Stock Purchase Plan |
652 | 6 | — | 5 | ||||||||||||
| Shares issued for dividend reinvestment pursuant to the 2018 Dividend Reinvestment and Stock Purchase Plan |
2,165 | 19 | — | 20 | ||||||||||||
| Stock-based compensation |
— | 352 | — | 352 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Balance at December 31, 2020 |
7,359,639 | $ | 19,082 | $ | 60,235 | $ | 79,317 | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Three Months Ended December 31, 2019 | ||||||||||||||||
| Total | ||||||||||||||||
| Common Stock | Retained | Stockholders’ | ||||||||||||||
| Shares | Amount | Earnings | Equity | |||||||||||||
| Balance at September 30, 2019 |
7,527,040 | $ | 17,673 | $ | 57,855 | $ | 75,528 | |||||||||
| Net income |
— | — | 2,628 | 2,628 | ||||||||||||
| Dividends declared |
— | — | (1,032 | ) | (1,032 | ) | ||||||||||
| Shares issued for auto-investments pursuant to the 2018 Dividend Reinvestment and Stock Purchase Plan |
1,702 | 20 | — | 20 | ||||||||||||
| Shares issued for dividend reinvestment pursuant to the 2018 Dividend Reinvestment and Stock Purchase Plan |
1,596 | 18 | — | 18 | ||||||||||||
| Shares repurchased pursuant to stock buyback program |
(64,787 | ) | (128 | ) | (557 | ) | (685 | ) | ||||||||
| Stock-based compensation |
— | 447 | — | 447 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Balance at December 31, 2019 |
7,465,551 | $ | 18,030 | $ | 58,894 | $ | 76,924 | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
See Notes to Unaudited Condensed Financial Statements
3
Table of Contents
(In thousands)
(Unaudited)
| Three Months Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Cash flows from operating activities |
||||||||
| Net income |
$ | 1,773 | $ | 2,628 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation |
62 | 53 | ||||||
| Change in right-of-use asset and operating lease liability |
(17 | ) | (14 | ) | ||||
| Deferred income taxes |
313 | 403 | ||||||
| Stock-based compensation |
352 | 447 | ||||||
| Interest expense associated with debt issuance cost |
— | 13 | ||||||
| Change in operating assets and liabilities: |
||||||||
| Investment fee income receivable |
(285 | ) | (193 | ) | ||||
| Prepaid expenses |
210 | 105 | ||||||
| Other accounts receivable |
54 | (57 | ) | |||||
| Other assets |
(1 | ) | — | |||||
| Accrued liabilities and accounts payable |
(1,733 | ) | (2,796 | ) | ||||
| Income taxes payable |
323 | 696 | ||||||
|
|
|
|
|
|||||
| Net cash provided by operating activities |
1,051 | 1,285 | ||||||
|
|
|
|
|
|||||
| Cash flows from investing activities |
||||||||
| Purchases of property and equipment |
(66 | ) | (34 | ) | ||||
| Payments related to management contracts |
— | (710 | ) | |||||
|
|
|
|
|
|||||
| Net cash used in investing activities |
(66 | ) | (744 | ) | ||||
|
|
|
|
|
|||||
| Cash flows from financing activities |
||||||||
| Principal payments on bank loan |
— | (1,094 | ) | |||||
| Shares repurchased pursuant to stock buyback program |
— | (685 | ) | |||||
| Proceeds from shares issued pursuant to the 2018 Dividend Reinvestment and Stock Repurchase Plan |
6 | 38 | ||||||
| Dividend payments |
(992 | ) | (1,032 | ) | ||||
|
|
|
|
|
|||||
| Net cash used in financing activities |
(986 | ) | (2,773 | ) | ||||
|
|
|
|
|
|||||
| Net decrease in cash and cash equivalents |
(1 | ) | (2,232 | ) | ||||
| Cash and cash equivalents at the beginning of the period |
9,955 | 24,687 | ||||||
|
|
|
|
|
|||||
| Cash and cash equivalents at the end of the period |
$ | 9,954 | $ | 22,455 | ||||
|
|
|
|
|
|||||
| Supplemental disclosures of cash flow information: |
||||||||
| Cash paid for interest |
$ | — | $ | 182 | ||||
See Notes to Unaudited Condensed Financial Statements
4
Table of Contents
HENNESSY ADVISORS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
| (1) | Basis of Financial Statement Presentation |
The accompanying condensed balance sheet as of September 30, 2020, 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, 2020, 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, 2020, the Company’s operating results for the three months ended December 31, 2020 and 2019, and the Company’s cash flows for the three months ended December 31, 2020 and 2019. 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 2020, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2020.
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 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 BP Energy Fund, the Hennessy BP 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. The Company also provides shareholder services to shareholders of the Hennessy Funds.
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; |
5
Table of Contents
| • | 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; |
| • | monitoring compliance with 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), conducting on site 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, D&O/E&O 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; |
| • | preparing or reviewing a written summary of the fund’s performance during the most recent 12-month period for each annual report of the fund; |
| • | monitoring and overseeing the accessibility of the fund on third-party platforms; |
| • | paying the incentive compensation of the fund’s compliance officers 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
Table of Contents
The Company earns shareholder service fees from Investor Class shares of the Hennessy 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 or the funds or to get help with processing exchange and redemption requests or changing account options. These 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 fees are computed and billed monthly, at which time they are recognized in accordance with Accounting Standards Codification 606 — Revenue Recognition.
The Company waived a portion of its fees with respect to the Hennessy Cornerstone Large Growth Fund and the Hennessy BP Energy Fund through the expiration of each fund’s expense limitation agreement on November 30, 2019, and October 25, 2020, respectively. The Company continues to waive a portion of its fees with respect to the Hennessy BP Midstream Fund and the Hennessy Technology Fund to comply with contractual expense ratio limitations. The fee waivers are calculated daily by the Hennessy Funds’ accountants at U.S. Bank Global Fund Services, reviewed by management, and then charged to expense monthly as offsets to the Company’s revenues. Each waived fee is then deducted from investment advisory fee income and reduces the aggregate amount of advisory fees the Company receives from such fund in the subsequent month. To date, the Company has only waived fees based on contractual obligations, but the Company has the ability to waive fees at its discretion. Any decision to waive fees would apply only on a going-forward basis.
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.
The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic, particularly risks and uncertainties related to the increased volatility in the stock market. The Company cannot reasonably estimate the continued extent of the impact of the COVID-19 pandemic on its business. As of the date of issuance of the Company’s financial statements, the extent to which the COVID-19 pandemic may materially impact the Company’s financial condition, liquidity, or results of operations remains uncertain.
| (2) | Management Contracts Purchased |
Throughout its history, the Company has completed 10 purchases of the assets related to the management of 30 different mutual 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, 2020, 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, 2020, management performed a qualitative analysis and determined it was more likely than not that there continued to be no impairment.
7
Table of Contents
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 reviews the useful life of the management contracts each reporting period to determine if they continue to have an indefinite useful life.
The Company completed its most recent asset purchase on October 26, 2018, when it purchased the assets related to the management of the BP Capital TwinLine Energy Fund and the BP Capital TwinLine MLP Fund (the “BP Funds”), which were reorganized into the Hennessy BP Energy Fund and the Hennessy BP Midstream Fund, respectively, two new series of Hennessy Funds Trust.
| (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 Funds.
The investment advisory agreements must be renewed annually (except in limited circumstances) by (a) the Funds’ Board of Trustees or the vote of a majority of the outstanding shares of the applicable Hennessy Fund and (b) 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.
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 BP Energy Fund, the Hennessy BP Midstream Fund, the Hennessy Japan Fund, and the Hennessy Japan Small Cap Fund. 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.
8
Table of Contents
In exchange for the 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 sub-advised 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
Table of Contents
Based on the definitions, the following tables represent the Company’s assets categorized in the Level 1 to Level 3 hierarchies:
| December 31, 2020 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
| Money market fund deposits |
$ | 6,054 | $ | — | $ | — | $ | 6,054 | ||||||||
| Mutual fund investments |
9 | — | — | 9 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 6,063 | $ | — | $ | — | $ | 6,063 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Amounts included in |
||||||||||||||||
| Cash and cash equivalents |
$ | 6,054 | $ | — | $ | — | $ | 6,054 | ||||||||
| Investments in marketable securities |
9 | — | — | 9 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 6,063 | $ | — | $ | — | $ | 6,063 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| September 30, 2020 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
| Money market fund deposits |
$ | 6,053 | $ | — | $ | — | $ | 6,053 | ||||||||
| Mutual fund investments |
9 | — | — | 9 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 6,062 | $ | — | $ | — | $ | 6,062 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Amounts included in |
||||||||||||||||
| Cash and cash equivalents |
$ | 6,053 | $ | — | $ | — | $ | 6,053 | ||||||||
| Investments in marketable securities |
9 | — | — | 9 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 6,062 | $ | — | $ | — | $ | 6,062 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
There were no transfers between levels during the three months ended December 31, 2020, or the year ended September 30, 2020.
| (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 no long-term operating leases as of December 31, 2020, and September 30, 2020.
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.
10
Table of Contents
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, 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, 2020 | ||||
| (In thousands, | ||||
| except years | ||||
| and percentages) | ||||
| Operating lease right-of-use assets |
$ | 183 | ||
| Operating lease liability |
$ | 220 | ||
| Weighted average remaining lease term years |
0.5 | |||
| Weighted average discount rate |
2.28 | % | ||
For the three months ended December 31, 2020, the Company’s lease payments related to its operating lease right-of-use assets totaled $112,432 and rent expense, which is recorded under general and administrative expense in the statements of income, totaled $95,360.
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, 2020 | ||||
| (In thousands) | ||||
| Remainder of fiscal year 2021 undiscounted cash flows |
$ | 227 | ||
| Present value discount |
(7 | ) | ||
|
|
|
|||
| Total operating lease liabilities |
$ | 220 | ||
|
|
|
|||
| (6) | Accrued Liabilities and Accounts Payable |
Details relating to accrued expenses reflected on the Company’s balance sheet are as follows:
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| (In thousands) | ||||||||
| Accrued bonus liabilities |
$ | 901 | $ | 1,388 | ||||
| Accrued sub-advisor fees |
617 | 793 | ||||||
| Other accrued expenses |
562 | 561 | ||||||
|
|
|
|
|
|||||
| Total accrued liabilities and accounts payable |
$ | 2,080 | $ | 2,742 | ||||
|
|
|
|
|
|||||
11
Table of Contents
| (7) | Income Taxes |
The Company’s effective income tax rates for the three months ended December 31, 2020 and 2019, were 26.4% and 27.0%, respectively. The effective income tax rate was lower for the three months ended December 31, 2020, due to changes in discrete items on the Company’s tax returns (mainly a reduction in disallowed executive compensation under Section 162(m) of the Internal Revenue Code).
The Company is subject to income tax in the U.S. federal jurisdiction and multiple state jurisdictions. Following is a list of jurisdictions that the Company has identified as its major tax jurisdictions with the tax years that remain open and subject to examination by the appropriate governmental agencies marked:
| Tax Jurisdiction |
2021 | 2020 | 2019 | 2018 | 2017 | |||||
| Federal |
||||||||||
| United States |
X | X | X | X | X | |||||
| State |
||||||||||
| California |
X | X | X | X | X | |||||
| Colorado |
X | X | X | |||||||
| Connecticut |
X | X | X | X | X | |||||
| District of Columbia |
X | X | X | X | X | |||||
| Florida |
X | X | X | X | X | |||||
| Georgia |
X | X | X | X | X | |||||
| Illinois |
X | X | X | X | X | |||||
| Indiana |
X | X | ||||||||
| Iowa |
X | X | X | X | ||||||
| Louisiana |
X | X | X | |||||||
| Maryland |
X | X | X | X | X | |||||
| Massachusetts |
X | X | X | X | X | |||||
| Michigan |
X | X | X | X | X | |||||
| Minnesota |
X | X | X | X | X | |||||
| New Hampshire |
X | X | X | X | X | |||||
| New Jersey |
X | X | ||||||||
| New York |
X | X | X | X | X | |||||
| North Carolina |
X | X | X | X | X | |||||
| Oregon |
X | X | X | |||||||
| Pennsylvania |
X | X | X | X | ||||||
| Texas |
X | X | X | X | X | |||||
| Wisconsin |
X | X | X | X | X | |||||
|
|
|
|
|
| ||||||
| Total State Jurisdictions |
22 | 22 | 19 | 17 | 16 | |||||
|
|
|
|
|
|
For state tax jurisdictions with unfiled tax returns, the statutes of limitations remains open indefinitely.
| (8) | Commitments and Contingencies |
The Company has no commitments and no significant contingencies with original terms in excess of one year other than operating leases, which are discussed in Note 5.
12
Table of Contents
| (9) | 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 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, 2020 | ||||||||
| Shares | Weighted Average Grant Date Fair Value per Share |
|||||||
| Non-vested balance at beginning of period |
322,181 | $ | 9.76 | |||||
| Granted |
— | — | ||||||
| Vested (1) |
(32,267 | ) | (10.89 | ) | ||||
| Forfeited |
— | — | ||||||
|
|
|
|
|
|||||
| Non-vested balance at end of period |
289,914 | $ | 9.64 | |||||
|
|
|
|
|
|||||
| (1) Represents partially vested RSUs for which the Company already has recognized the associated compensation expense but has not yet issued to employees the related shares of common stock. |
| |||||||
Additional information related to RSUs is as follows:
| December 31, 2020 | ||||
| (In thousands, except years) | ||||
| Total expected compensation expense related to RSUs |
$ | 16,056 | ||
| Recognized compensation expense related to RSUs |
(13,262 | ) | ||
|
|
|
|||
| Unrecognized compensation expense related to RSUs |
$ | 2,794 | ||
|
|
|
|||
| Weighted average remaining years to expense for RSUs |
2.8 | |||
Dividend Reinvestment and Stock Purchase Plan
In January 2018, the Company adopted a Dividend Reinvestment and Stock Purchase Plan (the “DRSPP”) to provide 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 2,817 and 3,298 shares of common stock during the three months ended December 31, 2020 and 2019, respectively. The maximum number of shares that may be issued under the DRSPP was 1,550,000, of which 1,526,712 shares remained available for issuance as of December 31, 2020.
As discussed in Note 12, in January 2021, the Company began offering to investors an updated Dividend Reinvestment and Stock Purchase Plan that replaced the DRSPP.
13
Table of Contents
Stock Buyback Program
In August 2010, the Company adopted a stock buyback program. The program provides that the Company may repurchase up to 1,500,000 shares of its common stock and has no expiration date. Share repurchases may be made in the open market, in privately negotiated transactions, or otherwise. A total of 596,368 shares remains available for repurchase under the stock buyback program. The Company temporarily suspended repurchases under the stock buyback program as of March 24, 2020, so the Company did not repurchase any shares of its common stock pursuant to the stock buyback program during the three months ended December 31, 2020.
| (10) | Earnings per Share and Dividends per Share |
Basic earnings per share is determined by dividing net earnings by the weighted average number of shares of common stock outstanding, while diluted earnings per share is determined by dividing net earnings by the weighted average number of shares of common stock outstanding adjusted for the dilutive effect of common stock equivalents, which consist of restricted stock units (“RSUs”).
For the three months ended December 31, 2020 and 2019, the Company excluded 227,410 and 184,871 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 December 2, 2020, to shareholders of record as of November 12, 2020.
| (11) | Recently Issued and Adopted Accounting Standards |
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” This update eliminates such disclosures as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and adds new disclosure requirements for Level 3 measurements. It is effective for fiscal years beginning after December 15, 2019 (the Company’s fiscal year 2021), with early adoption permitted for any eliminated or modified disclosures. The Company is currently evaluating the impact of adopting this update but does not expect it to have a material impact on the Company’s financial condition, results of operations, cash flows, or related disclosures.
See Note 5 for additional disclosure regarding the Company’s leases.
| (12) | Subsequent Events |
In January 2021, the Company began offering to investors an updated Dividend Reinvestment and Stock Purchase Plan. The maximum number of shares that may be issued under the updated plan is 1,470,000 shares, of which 1,469,603 remain available for issuance.
14
Table of Contents
| 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 the section entitled “Risk Factors” and elsewhere in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020. 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 mutual fund shareholders, taxes, general economic and business conditions, including those related to the COVID-19 pandemic, movement of interest rates, 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. In addition, while current domestic economic conditions are relatively favorable, changes in short-term interest rates, policy changes by the new administration in Washington, D.C., and developments in international financial markets could influence economic and financial conditions significantly. 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 (a) the identification, completion, and integration of future acquisitions and (b) organic growth, through both the retention of the mutual fund assets we currently manage and the generation of inflows into the mutual funds we manage. The success of our business strategy may be influenced by the factors discussed in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020. 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.
15
Table of Contents
Our Continuing Response to the COVID-19 Pandemic
In mid-March 2020, in response to the COVID-19 pandemic, we invoked our business continuity plan to ensure a smooth transition to remote work for our employees. We have continued to effectively operate the Company and remain committed to providing the same high level of services to the 16 Hennessy Funds and their shareholders. Further, we have undertaken various initiatives to ensure our continuing success in the work-from-home environment and prepare for our employees’ return to the office, including the following:
| • | Regularly engaging with key partners and service providers to garner assurance regarding their ability to continue to provide high-quality services to us and to the Hennessy Funds; |
| • | Strengthening our digital marketing and public relations, including by expanding our online presence and speaking on and moderating panels at virtual industry-related conferences; |
| • | Keeping open lines of communication with our employees as they work from home to help ensure seamless operations, productive interactions, and early identification of issues; |
| • | Maintaining effective governance and internal controls in a remote work setting; and |
| • | Establishing a “return-to-work committee” to manage the following: |
| • | Creating and updating a thorough return-to-work plan; |
| • | Training all employees on such plan to prepare for their eventual return to in-office work; and |
| • | Interpreting and communicating ongoing changes to pandemic-related governmental mandates. |
Given the dynamic nature of the COVID-19 pandemic and its effects, we will continue to revise our approach to these initiatives and take any additional actions we deem appropriate to meet the needs of our employees, our partners, and the Hennessy Funds and their shareholders. While we cannot reasonably estimate the duration and severity of the COVID-19 pandemic or its ultimate impact on our business and revenues, we believe we have positioned the Company to emerge from the current crisis prepared for long-term growth.
Overview
Our primary business activity is providing investment advisory services to a family of open-end mutual funds branded as the Hennessy Funds. We manage 10 of the 16 Hennessy Funds internally. For the remaining six 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 on-site visits to sub-advisors, as feasible. Our secondary business activity is providing shareholder services to shareholders of the Hennessy Funds.
16
Table of Contents
We derive our operating revenues from investment advisory fees and shareholder service fees paid to us by the Hennessy 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 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 is 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 10.73% for the three months ended December 31, 2020. During the most recent quarter, equity prices rallied as the emergency use authorizations of two COVID-19 vaccines gave investors hope that vaccinations would start in the United States before year end. With vaccinations underway, attention has turned to the prospect of life starting to slowly return to pre-pandemic norms. While certain segments of the economy, such as information technology, have performed quite well during the pandemic, other segments, such as travel and leisure, have been adversely affected. With the possibility of a return to pre-pandemic levels of economic activity comes the potential for those industries to recover as restaurants reopen and people start to travel again. In addition to encouraging vaccine news, the Federal Reserve continues to stress that it does not expect to raise short-term interest rates during 2021. The prospect of low interest rates and a strengthening economy has given investors reason to be constructive on the market.
Long-term U.S. bond yields increased during the three months ended December 31, 2020, as the economic outlook improved and the prospect of inflation became a topic of discussion. While inflation trends remained muted, investors are starting to anticipate a day when the Federal Reserve may be forced to adjust rate policy.
The Japanese equity market was up 13.65% in U.S. dollar terms over the three months ended December 31, 2020, as measured by the Tokyo Stock Price Index. During the period, Japan benefitted from China’s strong economic rebound as the two countries are strong trade partners. With the prospect of healthy corporate earnings growth in the first half of 2021and a consensus that demand for Japanese products will accelerate in the second half of 2021, equities rallied during the period despite subdued domestic consumption and the continuation of pandemic restrictions throughout the country.
Against this backdrop, 14 of the Hennessy Funds posted positive annualized returns in each of the three-year, five-year, ten-year, and since inception periods ended December 31, 2020, the exception being the two BP Funds, which focus exclusively on the more volatile Energy sector. In the one-year period ended December 31, 2020, 10 of the 16 Hennessy Funds generated positive returns.
17
Table of Contents
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 thought leadership and other resources to help them navigate through this unprecedented market disruption due to the pandemic. 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 in an effort to both to retain assets and to 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 nearly 175,000 mutual fund accounts nationwide, including accounts held by shareholders who employ financial advisors to assist them with investing and accounts held by retail shareholders who invest directly with us. We serve over 15,500 financial advisors who utilize the Hennessy Funds on behalf of their clients, including over 1,000 who purchased one of our Funds for the first time during calendar year 2020. Approximately 18% of such advisors own two or more Hennessy Funds, and nearly 550 advisors hold a position of over $500,000, demonstrating strong brand loyalty.
Total assets under management as of December 31, 2020, was $3.8 billion, a decrease of $1.1 billion, or 23.0%, compared to December 31, 2019. The decrease in total assets was attributable to net outflows from the Hennessy Funds.
The following table illustrates the changes quarter by quarter in our assets under management since December 31, 2019:
| Fiscal Quarters Ended | ||||||||||||||||||||
| December 31, | September 30, | June 30, | March 31, | December 31, | ||||||||||||||||
| 2020 | 2020 | 2020 | 2020 | 2019 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Beginning assets under management |
$ | 3,564,597 | $ | 3,491,768 | $ | 3,319,932 | $ | 4,978,502 | $ | 4,873,839 | ||||||||||
| Acquisition inflows |
— | — | — | — | — | |||||||||||||||
| Organic inflows |
213,502 | 118,027 | 104,742 | 161,368 | 187,057 | |||||||||||||||
| Redemptions |
(401,160 | ) | (280,273 | ) | (471,129 | ) | (685,621 | ) | (334,103 | ) | ||||||||||
| Market appreciation (depreciation) |
455,612 | 235,075 | 538,223 | (1,134,317 | ) | 251,709 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Ending assets under management |
$ | 3,832,551 | $ | 3,564,597 | $ | 3,491,768 | $ | 3,319,932 | $ | 4,978,502 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
18
Table of Contents
As stated above, the fees we receive for providing investment advisory and shareholder service are based on average assets under management. The following table shows average assets under management by share class for each quarter since December 31, 2019:
| Fiscal Quarters Ended | ||||||||||||||||||||
| December 31, | September 30, | June 30, | March 31, | December 31, | ||||||||||||||||
| 2020 | 2020 | 2020 | 2020 | 2019 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Investor Class |
$ | 2,308,369 | $ | 2,209,305 | $ | 2,130,287 | $ | 2,724,261 | $ | 3,160,832 | ||||||||||
| Institutional Class |
1,477,001 | 1,405,683 | 1,318,522 | 1,653,242 | 1,787,459 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
$ | 3,785,370 | $ | 3,614,988 | $ | 3,448,809 | $ | 4,377,503 | $ | 4,948,291 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
The principal asset on our balance sheet, management contracts, represents the capitalized costs incurred in connection with the purchase of the assets related to the management of mutual funds. As of December 31, 2020, this asset had a net balance of $80.6 million, unchanged since September 30, 2020.
The principal liability on our balance sheet is the net deferred tax liability of $11.8 million generated due to the continued write off of our management contracts asset for tax purposes, which creates a book-to-tax difference.
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, | ||||||||||||||||
| 2020 | 2019 | |||||||||||||||
| Amounts | Percent of Total Revenue |
Amounts | Percent of Total Revenue |
|||||||||||||
| (In thousands, except percentages) | ||||||||||||||||
| Revenue |
||||||||||||||||
| Investment advisory fees |
$ | 7,208 | 92.5 | % | $ | 9,449 | 92.2 | % | ||||||||
| Shareholder service fees |
581 | 7.5 | 795 | 7.8 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total revenue |
7,789 | 100.0 | 10,244 | 100.0 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Operating expenses |
||||||||||||||||
| Compensation and benefits |
2,104 | 27.0 | 2,513 | 24.5 | ||||||||||||
| General and administrative |
1,308 | 16.8 | 1,492 | 14.6 | ||||||||||||
| Mutual fund distribution |
121 | 1.6 | 139 | 1.4 | ||||||||||||
| Sub-advisory fees |
1,785 | 22.9 | 2,316 | 22.6 | ||||||||||||
| Depreciation |
62 | 0.8 | 53 | 0.5 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total operating expenses |
5,380 | 69.1 | 6,513 | 63.6 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Operating income |
2,409 | 30.9 | 3,731 | 36.4 | ||||||||||||
| Interest expense |
— | — | 187 | 1.8 | ||||||||||||
| Other income |
(1 | ) | (0.0 | ) | (56 | ) | (0.6 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Income before income tax expense |
2,410 | 30.9 | 3,600 | 35.2 | ||||||||||||
| Income tax expense |
637 | 8.1 | 972 | 9.5 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net income |
$ | 1,773 | 22.8 | % | $ | 2,628 | 25.7 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
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, 2019, to the three months ended December 31, 2020, total revenue decreased by 24.0%, from $10.2 million to $7.8 million, investment advisory fees decreased by 23.7%, from $9.4 million to $7.2 million, and shareholder service fees decreased by 26.9%, from $0.8 million to $0.6 million.
19
Table of Contents
The decrease in investment advisory fees was due mainly to decreased average daily net assets of the Hennessy Funds. 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 Funds. Assets held in Investor Class shares of the Hennessy Funds are subject to a shareholder service fee, whereas assets held in Institutional Class shares of the Hennessy 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 December 31, 2020, was $3.8 billion, which represents a decrease of $1.2 billion, or 23.5%, compared to the three months ended December 31, 2019. The Hennessy Fund with the largest average daily net assets for the three months ended December 31, 2020, was the Hennessy Focus Fund, with $1.2 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. The Hennessy Fund with the second largest average daily assets for the three months ended December 31, 2020, was the Hennessy Japan Fund, with $0.8 billion. We collect an investment advisory fee from the Japan Fund at an annual rate of 0.90% of average daily net assets. However, we pay a sub-advisory fee at an annual rate in the range of 0.35% to 0.42% (depending on asset level) 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, 2020, was $3.8 billion, a decrease of $1.1 billion, or 23.0%, compared to December 31, 2019. The decrease was attributable to net outflows from the Hennessy Funds.
The Hennessy Funds with net inflows were as follows:
| Three Months Ended December 31, 2020 |
||||
| Fund Name |
Amount | |||
| Hennessy Japan Fund |
$ | 99 million | ||
| Hennessy Large Cap Financial Fund |
$ | 7 million | ||
The Hennessy Funds with the three largest amounts of net outflows were as follows:
| Three Months Ended December 31, 2020 |
||||
| Fund Name |
Amount | |||
| Hennessy Focus Fund |
$ | (182) million | ||
| Hennessy Gas Utility Fund |
$ | (55) million | ||
| Hennessy Cornerstone Mid Cap 30 Fund |
$ | (26) million | ||
Redemptions as a percentage of assets under management increased from an average of 2.2% per month during the three months ended December 31, 2019, to an average of 3.5% per month during the three months ended December 31, 2020.
20
Table of Contents
Operating Expenses
Comparing the three months ended December 31, 2019, to the three months ended December 31, 2020, total operating expenses decreased by 17.4%, from $6.5 million to $5.4 million. Although the dollar value decreased, operating expenses as a percentage of total revenue increased 5.5 percentage points to 69.1% because fixed expenses have become a larger portion of total operating expense.
Compensation and Benefits Expense: Comparing the three months ended December 31, 2019, to the three months ended December 31, 2020, compensation and benefits expense decreased by 16.3%, from $2.5 million to $2.1 million. Although the dollar value decreased, compensation and benefits expense as a percentage of total revenue increased 2.5 percentage points to 27.0% because fixed expenses, such as salaries, have become a larger portion of total compensation and benefit expense. The dollar value decrease is mainly due to a decrease in incentive-based compensation.
General and Administrative Expense: Comparing the three months ended December 31, 2019, to the three months ended December 31, 2020, general and administrative expense decreased by 12.3%, from $1.5 million to $1.3 million. Although the dollar value decreased, general and administrative expense as a percentage of total revenue increased 2.2 percentage points to 16.8% because fixed expenses, such as office rent and professional services, have become a larger portion of total general and administrative expense. The dollar value decrease is mainly to a decrease in conference and travel expense.
Mutual Fund Distribution Expense: Mutual fund distribution 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 in “mutual fund distribution expense” in our statement of operations to the extent paid by us. When the Hennessy Funds are 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.
Comparing the three months ended December 31, 2019, to the three months ended December 31, 2020, mutual fund distribution expense decreased by 12.9%, from $0.14 million to $0.12 million. Although the dollar value decreased, mutual fund distribution expense as a percentage of total revenue increased 0.2 percentage points to 1.6% because fixed expenses, such as minimum fees, have become a larger portion of the total. The dollar value decrease is due to lower average daily net assets held at financial institutions.
Sub-Advisory Fees Expense: Comparing the three months ended December 31, 2019, to the three months ended December 31, 2020, sub-advisory fees expense decreased by 22.9%, from $2.3 million to $1.8 million. Although the dollar value decreased, sub-advisory fees expense as a percentage of total revenue increased 0.3 percentage points to 22.9% because assets held in our sub-advised funds have become a larger percent of our total assets under management. The dollar value decrease is due to a decrease in assets under management held in our sub-advised funds.
21
Table of Contents
Depreciation Expense: Comparing the three months ended December 31, 2019, to the three months ended December 31, 2020, depreciation expense increased by 17.0%, from $0.05 million to $0.06 million. As a percentage of total revenue, depreciation expense increased 0.3 percentage points to 0.8%.
Interest Expense
Comparing the three months ended December 31, 2019, to the three months ended December 31, 2020, interest expense decreased by 100.0% from $0.2 million to $0, due to a repayment in full on the principal balance on March 26, 2020.
Income Tax Expense
Comparing the three months ended December 31, 2019, to the three months ended December 31, 2020, income tax expense decreased by 34.5%, from $1.0 million to $0.6 million, due primarily to lower net operating income for the current period, and secondarily to a lower effective income tax rate that resulted from changes in discrete items on our tax returns (mainly a reduction in disallowed executive compensation under Section 162(m) of the Internal Revenue Code).
Net Income
Comparing the three months ended December 31, 2019, to the three months ended December 31, 2020, net income decreased by 32.5%, from $2.6 million to $1.8 million. The decrease in net income was due to lower net operating income in the current period, partially offset by the lower effective income tax rate discussed above.
Critical Accounting Policies
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 that we believe are most critical to understanding our results of operations and financial position, see the section entitled “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, 2020.
22
Table of Contents
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, 2020, will be sufficient to meet our capital requirements for at least 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 to increase our borrowing capacity or accessing the capital markets. There can be no assurance that we will be able to raise additional capital.
Our total assets under management as of December 31, 2020, was $3.8 billion, a decrease of $1.1 billion or 23.0%, compared to December 31, 2019. 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 three months ended December 31, 2020, was $3.8 billion, a decrease of $1.2 billion or 23.5%, compared to the three months ended December 31, 2019. As of December 31, 2020, we had cash and cash equivalents of $10.0 million.
The following table summarizes key financial data relating to our liquidity and use of cash:
| For the Three Months Ended December 31, |
||||||||
| 2020 | 2019 | |||||||
| (In thousands) | ||||||||
| Net cash provided by operating activities |
$ | 1,051 | $ | 1,285 | ||||
| Net cash used in investing activities |
(66 | ) | (744 | ) | ||||
| Net cash used in financing activities |
(986 | ) | (2,773 | ) | ||||
|
|
|
|
|
|||||
| Net decrease in cash and cash equivalents |
$ | (1 | ) | $ | (2,232 | ) | ||
|
|
|
|
|
|||||
Comparing the three months ended December 31, 2019, to the three months ended December 31, 2020, cash provided by operating activities decreased $0.1 million due mainly to decreased operating income.
Comparing the three months ended December 31, 2019, to the three months ended December 31, 2020, cash used in investing activities decreased $0.7 million due to a payment for the purchase of assets related to the management of the BP Funds made in the prior period.
Comparing the three months ended December 31, 2019, to the three months ended December 31, 2020, cash used for financing activities decreased $1.8 million due primarily to not having any principal payments due on our term loan (which we paid off in full in March 2020) and secondarily to not repurchasing any shares pursuant to our buyback plan in the current period (whereas we did repurchase shares in the prior period).
23
Table of Contents
| 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 Controls 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, 2020, and that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
24
Table of Contents
| Item 6. | Exhibits |
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. | |
| 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, 2020, filed on February 11, 2021, formatted in 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. | |
25
Table of Contents
Exhibit 31.1
Rule 13a – 14a Certification of the Principal Executive Officer
I, Teresa M. Nilsen, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Hennessy Advisors, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| /s/ Teresa M. Nilsen |
| Teresa M. Nilsen, President |
| Hennessy Advisors, Inc. |
| Date: February 11, 2021 |
Exhibit 31.2
Rule 13a – 14a Certification of the Principal Financial Officer
I, Kathryn R. Fahy, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Hennessy Advisors, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| /s/ Kathryn R. Fahy |
| Kathryn R. Fahy, Chief Financial Officer |
| Hennessy Advisors, Inc. |
| Date: February 11, 2021 |
Exhibit 32.1
Written Statement of the Principal Executive Officer
Pursuant to 18 U.S.C. § 1350
Solely for the purposes of complying with 18 U.S.C. § 1350, I, the undersigned President of Hennessy Advisors, Inc. (the “Company”), hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended December 31, 2020 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Teresa M. Nilsen |
| Teresa M. Nilsen, President |
| Hennessy Advisors, Inc. |
| Date: February 11, 2021 |
Exhibit 32.2
Written Statement of the Principal Financial Officer
Pursuant to 18 U.S.C. § 1350
Solely for the purposes of complying with 18 U.S.C. § 1350, I, the undersigned Chief Financial Officer of Hennessy Advisors, Inc. (the “Company”), hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended December 31, 2020 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Kathryn R. Fahy |
| Kathryn R. Fahy, Chief Financial Officer |
| Hennessy Advisors, Inc. |
| Date: February 11, 2021 |