Hennessy Advisors Inc 10-Q for FY2022 Q3
Hennessy Advisors Inc (HNNA)
10-Q
2022-08-03
For: 2022-06-30
View Original
Added on
April 06, 2026
About this 10-Q
Hennessy Advisors Inc filed this 10-Q on August 3, 2022, covering the quarter ended June 30, 2022 (FY2022 Q3).
Headline figures
Quarter ended June 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $6.91M
- down 19.0% from $8.53M a year earlier
- Net income
- $1.3M
- down 42.0% from net income of $2.24M a year earlier
- Diluted EPS
- $0.17
- down 43.3% from $0.30 a year earlier
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 June 30, 2022
| 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
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation |
(IRS Employer Identification No.) | |
| |
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(Address of principal executive office) |
(Zip code) |
(415 ) 899-1555
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
Trading symbol |
Name of each exchange on which registered | ||
Common stock, no par value |
HNNA |
The Nasdaq Stock Market LLC | ||
4.875% Notes due 2026 |
HNNAZ |
The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation Yes ☒ No ☐
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 ☐ No As of August 2, 2022, there were 7,482,188 shares of common stock issued and outstanding.
HENNESSY ADVISORS, INC.
TABLE OF CONTENTS
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| Item 1A |
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i
PART I: FINANCIAL INFORMATION
Item 1: Unaudited Condensed Financial Statements
Balance Sheets
(In thousands, except share and per share amounts)
June 30, |
September 30, |
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2022 |
2021 |
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(Unaudited) |
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| Assets |
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| Current assets |
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| Cash and cash equivalents |
$ | $ | ||||||
| Investments in marketable securities, at fair value |
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| Investment fee income receivable |
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| Prepaid expenses |
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| Other accounts receivable |
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| Total current assets |
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| Property and equipment, net of accumulated depreciation of $ |
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| Operating lease right-of-use |
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| Management contracts |
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| Other assets |
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| Total assets |
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| Liabilities and Stockholders’ Equity |
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| Current liabilities |
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| Accrued liabilities and accounts payable |
$ | $ | ||||||
| Operating lease liability |
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| Income taxes payable |
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| Total current liabilities |
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| Notes payable, net of issuance costs |
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| Long-term operating lease liability |
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| Net deferred income tax liability |
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| Total liabilities |
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| Commitments and contingencies (Note 9) |
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| Stockholders’ equity |
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| Common stock, |
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| Retained earnings |
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| Total stockholders’ equity |
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| Total liabilities and stockholders’ equity |
$ |
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See Notes to Unaudited Condensed Financial Statements
1
Statements of Income
(In thousands, except share and per share amounts)
(Unaudited)
Three Months Ended June 30, |
Nine Months Ended June 30, |
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2022 |
2021 |
2022 |
2021 |
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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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| Mutual fund distribution |
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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 |
— | — | ||||||||||||||
| Other income |
( |
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| Income before income tax expense |
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| Income tax expense |
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| Net income |
$ | $ | $ | $ | ||||||||||||
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| Earnings per share |
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| Basic |
$ | $ | $ | $ | ||||||||||||
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| Diluted |
$ | $ | $ | $ | ||||||||||||
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| Weighted average shares outstanding |
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| Diluted |
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| Cash dividends declared per share |
$ | $ | $ | $ | ||||||||||||
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See Notes to Unaudited Condensed Financial Statements
2
Statements of Changes in Stockholders’ Equity
(In thousands, except share data)
(Unaudited)
Nine Months Ended June 30, 2022 |
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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, 2021 |
$ | $ | $ | |||||||||||||
Net income |
— | — | ||||||||||||||
Dividends paid |
— |
— |
( |
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Employee restricted stock vested |
— | |||||||||||||||
Repurchase of vested employee restricted stock for tax withholding |
( |
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( |
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( |
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( |
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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 |
— | — | ||||||||||||||
Employee restricted stock forfeiture |
— | ( |
) | — |
( |
) | ||||||||||
Balance at December 31, 2021 |
$ | $ | $ | |||||||||||||
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 |
— | — | ||||||||||||||
Employee restricted stock forfeiture |
— | ( |
) | — | ( |
) | ||||||||||
Balance at March 31, 2022 |
$ | $ | $ | |||||||||||||
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 June 30, 2022 |
$ | $ | $ | |||||||||||||
3
Nine Months Ended June 30, 2021 |
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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, 2020 |
$ | $ | $ | |||||||||||||
Net income |
— | — | ||||||||||||||
Dividends declared |
— | — | ( |
) | ( |
) | ||||||||||
Shares issued for auto-investments pursuant to the 2018 Dividend Reinvestment and Stock Purchase Plan |
— | |||||||||||||||
Shares issued for dividend reinvestment pursuant to the 2018 Dividend Reinvestment and Stock Purchase Plan |
— | |||||||||||||||
Stock-based compensation |
— | — | ||||||||||||||
Balance at December 31, 2020 |
$ | $ | $ | |||||||||||||
Net income |
— | — | ||||||||||||||
Dividends declared |
— | — | ( |
) | ( |
) | ||||||||||
Shares issued for auto-investments pursuant to the 2018 Dividend Reinvestment and Stock Purchase Plan |
— | |||||||||||||||
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 March 31, 2021 |
$ | $ | $ | |||||||||||||
Net income |
— | — | ||||||||||||||
Dividends declared |
— | — | ( |
) | ( |
) | ||||||||||
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 June 30, 2021 |
$ | $ | $ | |||||||||||||
See Notes to Unaudited Condensed Financial Statements
4
Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended June 30, |
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2022 |
2021 |
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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 |
( |
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Amortization of note issuance costs |
— | |||||||
Deferred income taxes |
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Deferred offering costs |
— | ( |
) | |||||
Employee restricted stock forfeiture |
( |
) | — | |||||
Stock-based compensation |
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Change in operating assets and liabilities |
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Investment fee income receivable |
( |
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Prepaid expenses |
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Other accounts receivable |
( |
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Other assets |
( |
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Accrued liabilities and accounts payable |
( |
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Income taxes payable |
( |
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Net cash provided by operating activities |
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Cash flows from investing activities |
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Purchases of property and equipment |
( |
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Net cash used in investing activities |
( |
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Cash flows from financing activities |
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Proceeds from issuance of notes, net of underwriting discount |
— | |||||||
Payment of issuance costs on notes |
( |
) | — | |||||
Repurchase of vested employee restricted stock for tax withholding |
( |
) | — | |||||
Proceeds from shares issued pursuant to the 2018 Dividend Reinvestment and Stock Repurchase Plan |
— | |||||||
Proceeds from shares issued pursuant to the 2021 Dividend Reinvestment and Stock Repurchase Plan |
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Dividend payments |
( |
) | ( |
) | ||||
Net cash provided by (used in) financing activities |
( |
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Net increase in cash and cash equivalents |
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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
5
HENNESSY ADVISORS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(1) Basis of Financial Statement Presentation
The accompanying condensed balance sheet as of September 30, 2021, which has been derived from audited financial statements, and the unaudited interim condensed financial statements as of and for the three and nine months ended June 30, 2022, 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 June 30, 2022, the Company’s operating results for the three and nine months ended June 30, 2022 and 2021, and the Company’s cash flows for the nine months ended June 30, 2022 and 2021. 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 2021, which are included in the Company’s Annual Report on Form 10-K
for the fiscal year ended September 30, 2021.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 Energy Transition Fund, the Hennessy Midstream Fund, the Hennessy Gas Utility Fund, the Hennessy Japan Fund, the Hennessy Japan Small Cap Fund, the Hennessy Large Cap Financial Fund, the Hennessy Small Cap Financial Fund, and the Hennessy Technology Fund. The Company also provides shareholder services to investors in 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; |
6
| • | 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 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. |
7
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 from Contracts with Customers. The Company waived a portion of its fees with respect to the Hennessy Energy Transition Fund through the expiration of the fund’s expense limitation agreement on October 25, 2020. The Company continues to waive a portion of its fees with respect to the Hennessy 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.
(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, 2021, by applying the income approach and is based on management estimates and assumptions, including no impairment as of such date. As of June 30, 2022, management performed a qualitative analysis and determined it was more likely than not that there continued to be no impairment.
third-party
valuations that utilize appropriate valuation techniques. It was determined there was 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.
8
(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 Japan Fund, and the Hennessy Japan Small Cap Fund. Prior to January 31, 2022, the Company also had a sub-advisory
agreement for the Hennessy Energy Transition Fund and the Hennessy Midstream 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. 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. Effective January 31, 2022, the Company and BP Capital Fund Services, LLC mutually agreed to terminate the
sub-advisory
agreement for the Hennessy Energy Transition Fund and the Hennessy Midstream Fund. Those funds are now managed internally by the Company. (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:
9
• |
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. |
Based on the definitions, the following tables represent the Company’s assets categorized in the Level 1 to Level 3 hierarchies:
June 30, 2022 |
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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 |
$ | $ | — | $ | — | $ | ||||||||||
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| Amounts included in: |
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| Cash and cash equivalents |
$ | $ | — | $ | — | $ | ||||||||||
| Investments in marketable securities |
— | — | ||||||||||||||
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| Total |
$ | $ | — | $ | — | $ | ||||||||||
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|
|
|||||||||
September 30, 2021 |
||||||||||||||||
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||
(In thousands) |
||||||||||||||||
| Money market fund deposits |
$ | $ | — | $ | — | $ | ||||||||||
| Mutual fund investments |
— | — | ||||||||||||||
| Total |
$ | $ | — | $ | — | $ | ||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Amounts included in: |
||||||||||||||||
| Cash and cash equivalents |
$ | $ | — | $ | — | $ | ||||||||||
| Investments in marketable securities |
— | — | ||||||||||||||
| Total |
$ | $ | — | $ | — | $ | ||||||||||
| |
|
|
|
|
|
|
|
|||||||||
There were no
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 $39.8 million as of June 30, 2022, based on the last trading price of the notes on that date (Level 1).
10
(5) Leases
The Company determines if an arrangement is an operating lease at inception. Operating leases are included in operating lease assets and current and three years , which created a asset of $1.1 million on its balance sheet. The renewed lease expires on July 31, 2024 . There were no other
right-of-use
long-term
operating lease liabilities on the Company’s balance sheet. During the quarter ended March 31, 2021, the Company renewed the lease for its office in Novato, California for an additional long-term
operating lease as of such date. Upon renewal of the lease, the Company recorded a right-of-use
long-term
operating leases as of June 30, 2022, and September 30, 2021. Right-of-use
right-of-use
right-of-use
The Company’s most significant leases are real estate leases of office facilities. The Company leases office space under in nature. The classification of the Company’s operating lease assets and operating lease liabilities and other supplemental information related to the Company’s operating leases are as follows:
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
right-of-use
June 30, 2022 |
||||
(In thousands, |
||||
except years and |
||||
percentages) |
||||
| Operating lease right-of-use |
$ | |||
| Current operating lease liability |
$ | |||
| Long-term operating lease liability |
$ | |||
| Weighted average remaining lease term |
||||
| Weighted average discount rate |
% | |||
For the nine months ended June 30, 2022, total rent expense for all offices, which is recorded under general and administrative expense in the statements of income, totaled $0.4 million.
11
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:
June 30, 2022 |
||||
(In thousands) |
||||
| Remainder of fiscal year 2022 |
$ | |||
| Fiscal year 2023 |
||||
| Fiscal year 2024 |
||||
| |
|
|||
| 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:
June 30, 2022 |
September 30, 2021 |
|||||||
(In thousands) |
||||||||
| Accrued bonus liabilities |
$ | $ | ||||||
| Accrued sub-advisor fees |
||||||||
| Other accrued expenses |
||||||||
| |
|
|
|
|||||
| Total accrued liabilities and accounts payable |
$ | $ | ||||||
| |
|
|
|
|||||
(7) Debt Outstanding
On October 20, 2021, the Company completed a public offering of 4.875 % notes due 2026 in the aggregate principal amount of $40,250,000 (the “2026 Notes”), which included the full exercise of the underwriters’ overallotment option. The initial net proceeds received were approximately $38,607,000 after considering the impact of issuance costs and underwriter discounts. The 2026 Notes bear interest at 4.875% per annum, payable on the last day of each calendar quarter and at maturity, beginning December 31, 2021. The 2026 Notes mature on December 31, 2026.
The 2026 Notes are direct unsecured obligations, rank equally in right of payment with any of the Company’s future unsecured unsubordinated indebtedness, senior to any of the Company’s future indebtedness that expressly provides that it is subordinate to the 2026 Notes, effectively subordinate to all of the Company’s existing and future secured indebtedness, and structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s future subsidiaries.
(8) Income Taxes
The Company’s effective income tax rates for the nine months ended June 30, 2022 and 2021, were 23.0 % and 26.3 %, respectively. For the nine months ended June 30, 2022, the effective income tax rate was lower than the federal statutory rate due to the recognition of a tax benefit related to a California tax refund of $0.2 million.
12
The
Company is subject to income tax in the U.S. federal jurisdiction and various state jurisdictions. As of June 30, 2022, the Company has identified 22 state tax jurisdictions in which it is subject to income tax.
(9) Commitments and Contingencies
(10) Equity
Amended and Restated 2013 Omnibus Incentive Plan
The Company has adopted, and the Company’s shareholders have approved, the Amended and Restated 25 % per year. The Company recognizes four-year vesting term of each award.
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 stock-based
compensation expense on a straight-line
basis over the A summary of RSU activity is as follows:
Nine Months Ended June 30, 2022 |
||||||||
Shares |
Weighted Average Grant Date Fair Value per Share |
|||||||
| Non-vested balance at beginning of period |
$ | |||||||
| Granted |
||||||||
| Vested (1) |
( |
) | ( |
) | ||||
| Forfeited |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Non-vested balance at end of period |
$ | |||||||
| |
|
|
|
|||||
(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:
June 30, 2022 |
||||
(In thousands, |
||||
except years) |
||||
| Total expected compensation expense related to RSUs |
$ | |||
| Recognized compensation expense related to RSUs |
( |
) | ||
| |
|
|||
| Unrecognized compensation expense related to RSUs |
$ | |||
| |
|
|||
| Weighted average remaining years to expense for RSUs |
||||
| |
|
|||
13
Dividend Reinvestment and Stock Purchase Plan
In January 2021, the Company adopted a Dividend Reinvestment and Stock Purchase Plan (the “DRSPP”), replacing the previous Dividend Reinvestment and Stock Purchase Plan that had been in place since 2018. The DRSPP provides shareholders and new investors with a convenient and economical means of purchasing shares of the Company’s common stock and reinvesting cash dividends paid on the Company’s common stock. Under the DRSPP and its predecessor plans, the Company issued 6,002 and 9,827 shares of common stock during the nine months ended June 30, 2022 and 2021, respectively. The maximum number of shares that may be issued under the DRSPP is 1,470,000 , of which 1,454,455 shares remained available for issuance as of June 30, 2022.
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 did not repurchase any shares of its common stock pursuant to the stock buyback program during the nine months ended June 30, 2022.
(11) 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 June 30, 2022 and June 30, 2021, all common stock equivalents were dilutive and therefore included in the diluted earnings per share calculation. For the nine months ended June 30, 2022 and June 30, 2021, the Company exclud
ed stock equivalents, respectively, from the diluted earnings per share calculations because they were not dilutive. In all cases, the excluded common stock equivalents consisted of non-vested RSUs.
The Company paid a quarterly cash dividend of $0.1375 per share on June 2, 2022, to shareholders of record as of May 23, 2022.
(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 November 24, 2021, 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. 14
(13) Subsequent Events
The Company has evaluated subsequent events through the date these financial statements were issued and has concluded that no material events occurred during this period that require recognition or disclosure.
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 titled “Risk Factors” and elsewhere in our Annual Report on
Form 10-K
for the fiscal year ended September 30, 2021. 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, 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 (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 titled “Risk Factors” and elsewhere in our Annual Report on
Form 10-K
for the fiscal year ended September 30, 2021. 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
Overview
Our primary business activity is providing investment advisory services to a family of portfolio management responsibilities to
open-end
mutual funds branded as the Hennessy Funds. We manage 12 of the 16 Hennessy Funds internally. For the remaining four funds, we have delegated the day-to-day
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 Funds. Prior to January 31, 2022, the management of two Hennessy Funds, the Hennessy Energy Transition Fund and the Hennessy Midstream Fund, was performed by a
day-to-day
sub-advisor,
BP Capital Fund Services, LLC. Effective as of that date, we mutually agreed with BP Capital Fund Services, LLC to terminate the sub-advisory
agreement for those funds. 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.
The Dow Jones Industrial Average (the “Dow”) posted total returns of
-10.78%
and -7.71%
for the three and nine months ended June 30, 2022, respectively. After setting a record high in early January 2022, equities have declined as the reality of persistent and elevated inflation has prompted the Federal Reserve to raise interest rates. Fears of higher interest rates and the prospect of a slowing economy have given investors pause. Yet, unemployment remains at multi-year lows as a result of both new job creation and fewer people in the workforce. While real gross domestic product (GDP) advanced 5.7% in 2021, consensus estimates for 2022 and 2023, according to Bloomberg, forecast growth of 2.4% and 1.8%, respectively. Estimated growth rates for this year have been revised down several times in recent months prompting some investors to be concerned that the economy may go into recession. As economies across the globe wrestle with high energy prices, the effects on corporate spending and consumer confidence could be meaningful, especially as the Russian and Ukrainian conflict shows no signs of abating. The uncertainty that comes with this conflict and its prospective effects on inflation could likely result in continued interest rate hikes by the Federal Reserve. Long-term U.S. bond yields increased dramatically during the three months ended June 30, 2022, with the Federal Reserve most recently increasing its benchmark federal funds rate by three quarters of a percentage point in June 2022. This was the largest Federal Reserve rate increase since 1994. The Federal Reserve continues to indicate that it will likely continue raising rates so long as inflation remains above target. Federal Funds futures, according to Bloomberg, are pricing in about seven more rate hikes by the end of 2022.
16
The Japanese equity market, as measured by the Tokyo Stock Price Index (the “TOPIX”), posted total returns of
-13.92%
and -23.12%
(in U.S. dollar terms) for the three and nine months ended June 30, 2022, respectively. Despite Japanese stocks trading at roughly 12x 2022 estimated earnings, investors continued to grapple with global inflationary pressures, the prospect of slowing growth, and continued lockdowns throughout parts of China. In the nine-month period ended June 30, 2022, six of the 16 Hennessy Funds (Investor Class shares) generated positive returns. Over the longer term, all of the Hennessy Funds posted positive annualized returns in each of the three-year, five-year,
ten-year
(where available), and since-inception
periods ended June 30, 2022, with the exception of the Hennessy Midstream Fund, which posted slightly negative annual returns of -0.41%,
-2.42%
and -2.08%
in the three-year,
five-year, and since inception periods, respectively; the Hennessy Japan Fund, with an annualized return of -4.17%
for the three-year period ended June 30, 2022; and the Hennessy Japan Small Cap Fund, with an annualized return of -1.93%
for the three-year period ended June 30, 2022. As always, we are committed to providing superior service to investors and employing a consistent and disciplined approach to investing based on a 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 mutual fund investments with confidence. We operate a robust and
buy-and-hold
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 150,000 mutual 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 12,600 financial advisors who utilize the Hennessy Funds on behalf of their clients, including over 260 who purchased one of our Funds for the first time during the most recent quarter. Approximately 17% of such advisors own two or more Hennessy Funds, and over 400 advisors hold a position of over $500,000. These numbers have been declining in recent years, but we will continue to focus significant efforts on financial advisors who own two or more Hennessy Funds or hold a position of over $500,000 in an effort to build and maintain brand loyalty among the top tier of advisors.
Total assets under management as of June 30, 2022, was $3.2 billion, a decrease of $0.96 billion, or 23.4%, compared to June 30, 2021. The decrease was attributable to net outflows of the Hennessy Funds and market depreciation.
17
The following table illustrates the changes in our assets under management since June 30, 2021:
quarter-by-quarter
Fiscal Quarter Ended |
||||||||||||||||||||
June 30, 2022 |
March 31, 2022 |
December 31, 2021 |
September 30, 2021 |
June 30, 2021 |
||||||||||||||||
(In thousands) |
||||||||||||||||||||
| Beginning assets under management |
$ |
3,804,028 |
$ |
4,072,849 |
$ |
4,065,922 |
$ |
4,117,560 |
$ |
4,023,364 |
||||||||||
| Acquisition inflows |
— |
— |
— |
— |
— |
|||||||||||||||
| Organic inflows |
183,662 |
209,842 |
147,461 |
94,871 |
301,731 |
|||||||||||||||
| Redemptions |
(351,556 |
) |
(346,572 |
) |
(240,160 |
) |
(222,467 |
) |
(351,897 |
) | ||||||||||
| Market appreciation (depreciation) |
(480,568 |
) |
(132,091 |
) |
99,626 |
75,958 |
144,362 |
|||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Ending assets under management |
$ |
3,155,566 |
$ |
3,804,028 |
$ |
4,072,849 |
$ |
4,065,922 |
$ |
4,117,560 |
||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
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 by share class for each quarter since June 30, 2021:
Fiscal Quarter Ended |
||||||||||||||||||||
June 30, 2022 |
March 31, 2022 |
December 31, 2021 |
September 30, 2021 |
June 30, 2021 |
||||||||||||||||
(In thousands) |
||||||||||||||||||||
| Investor Class |
$ |
2,141,224 |
$ |
2,265,309 |
$ |
2,365,152 |
$ |
2,385,204 |
$ |
2,505,402 |
||||||||||
| Institutional Class |
1,297,907 |
1,564,037 |
1,734,121 |
1,717,046 |
1,646,013 |
|||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
$ |
3,439,131 |
$ |
3,829,346 |
$ |
4,099,273 |
$ |
4,102,250 |
$ |
4,151,415 |
||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
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 June 30, 2022, this asset had a net balance of $80.6 million, unchanged since September 30, 2021.
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 $38.8 million, net of issuance costs.
18
Results of Operations
The following tables set forth items in the statements of income as dollar amounts and as percentages of total revenue:
Three Months Ended June 30, |
||||||||||||||||
2022 |
2021 |
|||||||||||||||
Amounts |
Percent of Total Revenue |
Amounts |
Percent of Total Revenue |
|||||||||||||
(In thousands, except percentages) |
||||||||||||||||
| Revenue |
||||||||||||||||
| Investment advisory fees |
$ |
6,375 |
92.3 |
% |
$ |
7,903 |
92.7 |
% | ||||||||
| Shareholder service fees |
534 |
7.7 |
624 |
7.3 |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total revenue |
6,909 |
100.0 |
8,527 |
100.0 |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Operating expenses |
||||||||||||||||
| Compensation and benefits |
1,987 |
28.8 |
2,330 |
27.3 |
||||||||||||
| General and administrative |
1,227 |
17.7 |
1,124 |
13.2 |
||||||||||||
| Mutual fund distribution |
117 |
1.7 |
118 |
1.4 |
||||||||||||
| Sub-advisory fees |
1,195 |
17.3 |
1,863 |
21.8 |
||||||||||||
| Depreciation |
52 |
0.8 |
56 |
0.7 |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total operating expenses |
4,578 |
66.3 |
5,491 |
64.4 |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Net operating income |
2,331 |
33.7 |
3,036 |
35.6 |
||||||||||||
| Interest expense |
562 |
8.1 |
— |
— |
||||||||||||
| Other income |
(17 |
) |
(0.2 |
) |
(1 |
) |
(0.0 |
) | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Income before income tax expense |
1,786 |
25.8 |
3,037 |
35.6 |
||||||||||||
| Income tax expense |
485 |
7.0 |
793 |
9.3 |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Net income |
$ |
1,301 |
18.8 |
% |
$ |
2,244 |
26.3 |
% | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
Nine Months Ended June 30, |
||||||||||||||||
2022 |
2021 |
|||||||||||||||
Amounts |
Percent of Total Revenue |
Amounts |
Percent of Total Revenue |
|||||||||||||
(In thousands, except percentages) |
||||||||||||||||
| Revenue |
||||||||||||||||
| Investment advisory fees |
$ |
21,499 |
92.7 |
% |
$ |
22,458 |
92.6 |
% | ||||||||
| Shareholder service fees |
1,689 |
7.3 |
1,792 |
7.4 |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total revenue |
23,188 |
100.0 |
24,250 |
100.0 |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Operating expenses |
||||||||||||||||
| Compensation and benefits |
6,360 |
27.4 |
6,686 |
27.6 |
||||||||||||
| General and administrative |
3,790 |
16.4 |
3,564 |
14.7 |
||||||||||||
| Mutual fund distribution |
450 |
1.9 |
359 |
1.5 |
||||||||||||
| Sub-advisory fees |
4,642 |
20.0 |
5,452 |
22.5 |
||||||||||||
| Depreciation |
155 |
0.7 |
181 |
0.7 |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total operating expenses |
15,397 |
66.4 |
16,242 |
67.0 |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Net operating income |
7,791 |
33.6 |
8,008 |
33.0 |
||||||||||||
| Interest expense |
1,560 |
6.7 |
— |
— |
||||||||||||
| Other income |
(20 |
) |
(0.1 |
) |
(2 |
) |
(0.0 |
) | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Income before income tax expense |
6,251 |
27.0 |
8,010 |
33.0 |
||||||||||||
| Income tax expense |
1,435 |
6.2 |
2,107 |
8.7 |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Net income |
$ |
4,816 |
20.8 |
% |
$ |
5,903 |
24.3 |
% | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
19
Revenue – Investment Advisory Fees and Shareholder Service Fees
Total revenue comprises investment advisory fees and shareholder service fees. Comparing the three months ended June 30, 2021, to the three months ended June 30, 2022, total revenue decreased by 19.0%, from $8.5 million to $6.9 million, investment advisory fees decreased by 19.3%, from $7.9 million to $6.4 million, and shareholder service fees decreased by 14.4% from $0.62 million to $0.53 million.
Comparing the nine months ended June 30, 2021, to the nine months ended June 30, 2022, total revenue decreased by 4.4%, from $24.3 million to $23.2 million, investment advisory fees decreased by 4.3%, from $22.5 million to $21.5 million, and shareholder service fees decreased by 5.7% from $1.8 million to $1.7 million.
In both the three and nine month periods ended June 30, 2022, the decrease in investment advisory fees was due mainly to decreased average daily net assets of the Hennessy Funds, and 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 June 30, 2022, was $3.4 billion, which represents a decrease of $0.7 billion, or 17.2%, compared to the three months ended June 30, 2021, and average daily net assets for the nine months ended June 30, 2022, was $3.8 billion, which represents a decrease of $0.2 billion, or 4.1%, compared to the nine months ended June 30, 2021. The Hennessy Fund with the largest average daily net assets for the three and nine months ended June 30, 2022, was the Hennessy Focus Fund, with $0.91 billion and $1.1 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. The Hennessy Fund with the second largest average daily assets for the three months ended June 30, 2022, was the Hennessy Gas Utility Fund, with $0.6 billion. We collect an investment advisory fee from the Hennessy Gas Utility Fund at an annual rate of 0.40% of average daily net assets. The Hennessy Fund with the second largest average daily assets for the nine months ended June 30, 2022, was the Hennessy Japan Fund, with $0.7 billion. We collect an investment advisory fee from the Hennessy Japan Fund at an annual rate of 0.80% 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 June 30, 2022, was $3.2 billion, a decrease of $0.96 billion, or 23.4%, compared to June 30, 2021. The decrease was attributable to net outflows of the Hennessy Funds and market depreciation.
20
The Hennessy Funds with the three largest amounts of net inflows were as follows:
| Three Months Ended June 30, 2022 |
||||
| Fund Name |
Amount |
|||
| Hennessy Cornerstone Growth Fund |
$ |
17 million |
||
| Hennessy Gas Utility Fund |
$ |
13 million |
||
| Hennessy Cornerstone Value Fund |
$ |
4 million |
||
| Nine Months Ended June 30, 2022 |
||||
| Fund Name |
Amount |
|||
| Hennessy Cornerstone Value Fund |
$ |
17 million |
||
| Hennessy Cornerstone Growth Fund |
$ |
7 million |
||
| Hennessy Midstream Fund |
$ |
3 million |
||
The Hennessy Funds with the three largest amounts of net outflows were as follows:
| Three Months Ended June 30, 2022 | ||
| Fund Name |
Amount | |
| Hennessy Japan Fund |
$(113) million | |
| Hennessy Focus Fund |
$ (37) million | |
| Hennessy Small Cap Financial Fund |
$ (36) million | |
| Nine Months Ended June 30, 2022 | ||
| Fund Name |
Amount | |
| Hennessy Japan Fund |
$(198) million | |
| Hennessy Focus Fund |
$(150) million | |
| Hennessy Small Cap Financial Fund |
$ (34) million | |
Redemptions as a percentage of assets under management increased from an average of 2.8% per month during the three months ended June 30, 2021, to an average of 3.2% per month during the three months ended June 30, 2022. Redemptions as a percentage of assets under management decreased from an average of 3.2% per month during the nine months ended June 30, 2021, to an average of 2.7% per month during the nine months ended June 30, 2022.
Operating Expenses
Comparing the three months ended June 30, 2021, to the three months ended June 30, 2022, total operating expenses decreased by 16.6%, from $5.5 million to $4.6 million. The decrease in operating expenses was due to decreases in all expense categories other than general and administrative expense, which moderately increased. Although the dollar value decreased, operating expenses as a percentage of total revenue increased 1.9 percentage points to 66.3% because fixed expenses have become a larger portion of total operating expenses.
Comparing the nine months ended June 30, 2021, to the nine months ended June 30, 2022, total operating expenses decreased by 5.2%, from $16.2 million to $15.4 million. Decreases in
sub-advisory
fees, compensation and benefits, and depreciation expense offset slight increases in other expense categories. As a percentage of total revenue, total operating expenses decreased 0.6 percentage points to 66.4%. Compensation and Benefits Expense
: Comparing the three months ended June 30, 2021, to the three months ended June 30, 2022, compensation and benefits expense decreased by 14.7%, from $2.3 million to $2.0 million. As a percentage of total revenue, compensation and benefits expense increased 1.5 percentage points to 28.8%. Comparing the nine months ended June 30, 2021, to the nine months ended June 30, 2022, compensation and benefits expense decreased by 4.9%, from $6.7 million to $6.4 million. As a percentage of total revenue, compensation and benefits expense decreased 0.2 percentage points to 27.4%.
The decrease in dollar value of compensation and benefits expense for both periods was due primarily to a decrease in incentive-based compensation.
21
General and Administrative Expense
: Comparing the three months ended June 30, 2021, to the three months ended June 30, 2022, general and administrative expense increased by 9.2% from $1.1 million to $1.2 million. As a percentage of total revenue, general and administrative expense increased 4.5 percentage points to 17.7%. Comparing the nine months ended June 30, 2021, to the nine months ended June 30, 2022, general and administrative expense increased by 6.3% from $3.6 million to $3.8 million. As a percentage of total revenue, general and administrative expense increased 1.7 percentage points to 16.4%.
In both the three and nine month periods ended June 30, 2022, the increase in general and administrative expense was primarily due to an increase in conference and other industry event attendance, as well as increased employee business travel expense (though still below
pre-pandemic
levels). 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 as mutual fund distribution expense on 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 June 30, 2021, to the three months ended June 30, 2022, mutual fund distribution expense remained flat at $0.12 million. As a percentage of total revenue, mutual fund distribution expense increased 0.3 percentage points to 1.7%.
Comparing the nine months ended June 30, 2021, to the nine months ended June 30, 2022, mutual fund distribution expense increased by 25.3% from $0.4 million to $0.5 million. As a percentage of total revenue, mutual fund distribution expense increased 0.4 percentage points to 1.9%.
Mutual fund distribution expenses are 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 Funds versus Investor Class shares of the Hennessy Funds; and |
• |
fee minimums at various financial institutions. |
In the three-month period ended June 30, 2022, mutual fund distribution expense remained flat despite lower average daily net assets held at financial institutions due to fixed expenses, such as minimum fees. In the nine-month period ended June 30, 2022, the increase in mutual fund distribution expenses was primarily due to recently expanding a relationship with a financial institution for which we pay a portion of the fees.
22
Sub-Advisory
Fees Expensesub-advisory
fees expense decreased by 35.9%, from $1.9 million to $1.2 million. As a percentage of total revenue, sub-advisory
fees expense decreased 4.5 percentage points to 17.3%. Comparing the nine months ended June 30, 2021, to the nine months ended June 30, 2022,
sub-advisory
fees expense decreased by 14.9%, from $5.5 million to $4.6 million. As a percentage of total revenue, sub-advisory
fees expense decreased 2.5 percentage points to 20.0%. In both the three and nine month periods ended June 30, 2022, the decrease in
sub-advisory
fees expense was due to decreased average daily net assets held in the sub-advised
Hennessy Funds, with a slight additional decrease as a result of the Company no longer paying sub-advisory
fees with respect to the Hennessy Energy Transition Fund and the Hennessy Midstream Fund after January 31, 2022. Depreciation Expense
: Comparing the three months ended June 30, 2021, to the three months ended June 30, 2022, depreciation expense decreased by 7.1%, from $0.06 million to $0.05 million. As a percentage of total revenue, depreciation expense remained at 0.7%. Comparing the nine months ended June 30, 2021, to the nine months ended June 30, 2022, depreciation expense decreased by 14.4%, from $0.18 million to $0.16 million. As a percentage of total revenue, depreciation expense increased 0.1 percentage points to 0.8%.
In both the three and nine month periods ended June 30, 2022, the decrease in depreciation expense resulted from fewer fixed asset purchases.
Interest Expense
Comparing the three months ended June 30, 2021, to the three months ended June 30, 2022, interest expense increased from $0 to $0.6 million. Comparing the nine months ended June 30, 2021, to the nine months ended June 30, 2022, interest expense increased from $0 to $1.6 million.
In both the three and nine month periods ended June 30, 2022, the increase in interest expense was due to our issuance of the 2026 Notes on October 20, 2021, for which we make interest payments quarterly, with the first interest payment made on December 31, 2021.
Income Tax Expense
Comparing the three months ended June 30, 2021, to the three months ended June 30, 2022, income tax expense decreased by 38.8%, from $0.8 million to $0.5 million. Comparing the nine months ended June 30, 2021, to the nine months ended June 30, 2022, income tax expense decreased by 31.9%, from $2.1 million to $1.4 million.
23
In both the three and nine month periods ended June 30, 2022, the decrease in income tax expense was due primarily to lower net operating income in the current period and secondarily to a lower effective income tax rate as previously discussed in the notes to the financial statements.
Net Income
Comparing the three months ended June 30, 2021, to the three months ended June 30, 2022, net income decreased by 42.0%, from $2.2 million to $1.3 million. Comparing the nine months ended June 30, 2021, to the nine months ended June 30, 2022, net income decreased by 18.4%, from $5.9 million to $4.8 million.
In the three-month period ended June 30, 2022, the decrease in net income was primarily due to lower net operating income in the current period and secondarily due to the interest expense related to the 2026 Notes in the current period. In the nine-month period ended June 30, 2022, the decrease in net income was primarily due to the interest expense related to the 2026 Notes in the current period.
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 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, 2021. 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 June 30, 2022, 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 seeking to increase our borrowing capacity or accessing the capital markets, or by pursuing both of these options. There can be no assurance that we will be able to raise additional capital.
24
Our total assets under management as of June 30, 2022, was $3.2 billion, a decrease of $0.96 billion, or 23.4%, compared to June 30, 2021. 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 nine months ended June 30, 2022, was $3.8 billion, a decrease of $0.2 billion, or 4.1%, compared to the nine months ended June 30, 2021. As of June 30, 2022, we had cash and cash equivalents of $57.5 million.
The following table summarizes key financial data relating to our liquidity and use of cash:
For the Nine Months Ended June 30, |
||||||||
2022 |
2021 |
|||||||
(In thousands) |
||||||||
| Net cash provided by operating activities |
$ |
6,251 |
$ |
7,214 |
||||
| Net cash used in investing activities |
(156 |
) |
(182 |
) | ||||
| Net cash provided by (used in) financing activities |
35,549 |
(2,949 |
) | |||||
| |
|
|
|
|||||
| Net increase in cash and cash equivalents |
$ |
41,644 |
$ |
4,083 |
||||
| |
|
|
|
|||||
The decrease in cash provided by operating activities of $0.9 million was primarily due to decreased operating income.
The decrease in cash used in investing activities of $0.03 million was due to decreased purchases of property and equipment in the current period.
The increase in cash provided by financing activities of $38.5 million was due to the issuance of the 2026 Notes on October 20, 2021.
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 June 30, 2022, and that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 25
PART II: OTHER INFORMATION
Item 1A. Risk Factors
There have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form
10-K
for the year ended September 30, 2021, except for the addition of the risk factor set forth below. Global or regional catastrophic events may adversely impact our business and financial performance.
Our business could be adversely affected by terrorist acts, widespread outbreaks of infectious diseases (such as the
COVID-19
pandemic), changes in trade policies, military conflicts, and disruptions in the financial markets. The occurrence of such events can adversely affect the global economy or specific markets, which could have an adverse impact on our business, financial condition, or results of operations. Item 6. Exhibits
Set forth below is a list of all exhibits to this Quarterly Report on
Form 10-Q.
31.1 |
||
31.2 |
||
32.1 |
||
32.2 |
||
101 |
Financial statements from the Quarterly Report on Form 10-Q of Hennessy Advisors, Inc. for the quarter ended June 30, 2022, filed on August 3, 2022, 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. | |
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. | |
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:
HENNESSY ADVISORS, INC. | ||||||
Date: August 3, 2022 |
By: |
/s/ Teresa M. Nilsen | ||||
Teresa M. Nilsen | ||||||
President | ||||||
27
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: August 3, 2022 |
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: August 3, 2022 |
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 June 30, 2022 (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: August 3, 2022 |
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 June 30, 2022 (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: August 3, 2022 |