Form 10-Q

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

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
4.875% Notes due 2026	HNNAZ	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation

S-T

during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a

non-accelerated

filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule

12b-2

of the Exchange Act.



Large accelerated 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 August 2, 2022, there were 7,482,188 shares of common stock issued and outstanding.

Table of Contents

HENNESSY ADVISORS, INC.

TABLE OF CONTENTS


PART I Financial Information

Item 1	Unaudited Condensed Financial Statements	1

	Balance Sheets	1

	Statements of Income	2

	Statements of Changes in Stockholders’ Equity	3

	Statements of Cash Flows	5

	Notes to Unaudited Condensed Financial Statements	6

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 4	Controls and Procedures	25

PART II Other Information

Item 1A	Risk Factors	26

Item 6	Exhibits	26

	Signatures	27

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PART I: FINANCIAL INFORMATION

Item 1: Unaudited Condensed Financial Statements

Balance Sheets

(In thousands, except share and per share amounts)


	June 30,		September 30,
	2022		2021
	(Unaudited)

Assets
Current assets
Cash and cash equivalents	$	57,480	$	15,836
Investments in marketable securities, at fair value		10		10
Investment fee income receivable		2,168		2,795
Prepaid expenses		536		788
Other accounts receivable		283		277

Total current assets		60,477		19,706

Property and equipment, net of accumulated depreciation of $2,005 and $1,850, respectively		312		311
Operating lease right-of-use asset		740		1,010
Management contracts		80,643		80,643
Other assets		200		235

Total assets	$	142,372	$	101,905

Liabilities and Stockholders’ Equity
Current liabilities
Accrued liabilities and accounts payable	$	2,743	$	4,151
Operating lease liability		365		359
Income taxes payable		424		1,050

Total current liabilities		3,532		5,560

Notes payable, net of issuance costs		38,799		—
Long-term operating lease liability		372		646
Net deferred income tax liability		13,690		12,437

Total liabilities		56,393		18,643

Commitments and contingencies (Note 9)
Stockholders’ equity
Common stock, no par value, 22,500,000 shares authorized; 7,482,128 shares issued and outstanding as of June 30, 2022, and 7,469,584 as of September 30, 2021		20,954		19,964
Retained earnings		65,025		63,298

Total stockholders’ equity		85,979		83,262

Total liabilities and stockholders’ equity	$	142,372	$	101,905

See Notes to Unaudited Condensed Financial Statements

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Statements of Income

(In thousands, except share and per share amounts)

(Unaudited)


	Three Months Ended June 30,						Nine Months Ended June 30,
	2022			2021			2022			2021

Revenue
Investment advisory fees	$	6,375		$	7,903		$	21,499		$	22,458
Shareholder service fees		534			624			1,689			1,792

Total revenue		6,909			8,527			23,188			24,250

Operating expenses
Compensation and benefits		1,987			2,330			6,360			6,686
General and administrative		1,227			1,124			3,790			3,564
Mutual fund distribution		117			118			450			359
Sub-advisory fees		1,195			1,863			4,642			5,452
Depreciation		52			56			155			181

Total operating expenses		4,578			5,491			15,397			16,242

Net operating income		2,331			3,036			7,791			8,008
Interest expense		562			—			1,560			—
Other income		(17	)		(1	)		(20	)		(2	)

Income before income tax expense		1,786			3,037			6,251			8,010
Income tax expense		485			793			1,435			2,107

Net income	$	1,301		$	2,244		$	4,816		$	5,903

Earnings per share
Basic	$	0.17		$	0.30		$	0.64		$	0.80

Diluted	$	0.17		$	0.30		$	0.63		$	0.80

Weighted average shares outstanding
Basic		7,480,796			7,364,716			7,477,372			7,361,165

Diluted		7,577,134			7,431,925			7,548,851			7,387,356

Cash dividends declared per share	$	0.14		$	0.14		$	0.41		$	0.41

See Notes to Unaudited Condensed Financial Statements

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Statements of Changes in Stockholders’ Equity

(In thousands, except share data)

(Unaudited)


	Nine Months Ended June 30, 2022
										Total
	Common Stock						Retained			Stockholders’
	Shares			Amount			Earnings			Equity

Balance at September 30, 2021		7,469,584		$	19,964		$	63,298		$	83,262
Net income		—			—			1,913			1,913
Dividends paid		—			—			(1,027	)		(1,027	)
Employee restricted stock vested		10,000			—			—			—
Repurchase of vested employee restricted stock for tax withholding		(3,458	)		(31	)		(6	)		(37	)
Shares issued for auto-investments pursuant to the 2021 Dividend Reinvestment and Stock Purchase Plan		193			2			—			2
Shares issued for dividend reinvestment pursuant to the 2021 Dividend Reinvestment and Stock Purchase Plan		1,729			19			—			19
Stock-based compensation		—			388			—			388
Employee restricted stock forfeiture		—			(3	)		—			(3	)

Balance at December 31, 2021		7,478,048		$	20,339		$	64,178		$	84,517

Net income		—			—			1,602			1,602
Dividends paid		—			—			(1,028	)		(1,028	)
Shares issued for auto-investments pursuant to the 2021 Dividend Reinvestment and Stock Purchase Plan		64			1			—			1
Shares issued for dividend reinvestment pursuant to the 2021 Dividend Reinvestment and Stock Purchase Plan		1,952			19			—			19
Stock-based compensation		—			295			—			295
Employee restricted stock forfeiture		—			(12	)		—			(12	)

Balance at March 31, 2022		7,480,064		$	20,642		$	64,752		$	85,394

Net income		—			—			1,301			1,301
Dividends paid		—			—			(1,028	)		(1,028	)
Shares issued for auto-investments pursuant to the 2021 Dividend Reinvestment and Stock Purchase Plan		145			1			—			1
Shares issued for dividend reinvestment pursuant to the 2021 Dividend Reinvestment and Stock Purchase Plan		1,919			20			—			20
Stock-based compensation		—			291			—			291

Balance at June 30, 2022		7,482,128		$	20,954		$	65,025		$	85,979

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	Nine Months Ended June 30, 2021
								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		—			6
Shares issued for dividend reinvestment pursuant to the 2018 Dividend Reinvestment and Stock Purchase Plan		2,165		19		—			19
Stock-based compensation		—		352		—			352

Balance at December 31, 2020		7,359,639	$	19,082	$	60,235		$	79,317

Net income		—		—		1,886			1,886
Dividends declared		—		—		(1,012	)		(1,012	)
Shares issued for auto-investments pursuant to the 2018 Dividend Reinvestment and Stock Purchase Plan		306		3		—			3
Shares issued for auto-investments pursuant to the 2021 Dividend Reinvestment and Stock Purchase Plan		838		7		—			7
Shares issued for dividend reinvestment pursuant to the 2021 Dividend Reinvestment and Stock Purchase Plan		2,298		19		—			19
Stock-based compensation		—		351		—			351

Balance at March 31, 2021		7,363,081	$	19,462	$	61,109		$	80,571

Net income		—		—		2,244			2,244
Dividends declared		—		—		(1,013	)		(1,013	)
Shares issued for auto-investments pursuant to the 2021 Dividend Reinvestment and Stock Purchase Plan		1,424		13		—			13
Shares issued for dividend reinvestment pursuant to the 2021 Dividend Reinvestment and Stock Purchase Plan		2,144		20		—			20
Stock-based compensation		—		351		—			351

Balance at June 30, 2021		7,366,649	$	19,846	$	62,340		$	82,186

See Notes to Unaudited Condensed Financial Statements

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Statements of Cash Flows

(In thousands)

(Unaudited)


	Nine Months Ended June 30,
	2022			2021
Cash flows from operating activities
Net income	$	4,816		$	5,903
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		155			181
Unrealized gain on marketable securities		—			(1	)
Change in right-of-use asset and operating lease liability		2			(60	)
Amortization of note issuance costs		192			—
Deferred income taxes		1,253			882
Deferred offering costs		—			(7	)
Employee restricted stock forfeiture		(15	)		—
Stock-based compensation		974			1,054
Change in operating assets and liabilities
Investment fee income receivable		627			(418	)
Prepaid expenses		252			309
Other accounts receivable		(6	)		18
Other assets		35			(10	)
Accrued liabilities and accounts payable		(1,408	)		(435	)
Income taxes payable		(626	)		(202	)

Net cash provided by operating activities		6,251			7,214

Cash flows from investing activities
Purchases of property and equipment		(156	)		(182	)

Net cash used in investing activities		(156	)		(182	)

Cash flows from financing activities
Proceeds from issuance of notes, net of underwriting discount		39,042			—
Payment of issuance costs on notes		(435	)		—
Repurchase of vested employee restricted stock for tax withholding		(37	)		—
Proceeds from shares issued pursuant to the 2018 Dividend Reinvestment and Stock Repurchase Plan		—			9
Proceeds from shares issued pursuant to the 2021 Dividend Reinvestment and Stock Repurchase Plan		4			20
Dividend payments		(3,025	)		(2,978	)

Net cash provided by (used in) financing activities		35,549			(2,949	)

Net increase in cash and cash equivalents		41,644			4,083
Cash and cash equivalents at the beginning of the period		15,836			9,955

Cash and cash equivalents at the end of the period	$	57,480		$	14,038

Supplemental disclosures of cash flow information
Cash paid for income taxes	$	810		$	1,427
Cash paid for interest	$	1,368		$	—
Dividend reinvestment issued in shares	$	58		$	58

See Notes to Unaudited Condensed Financial Statements

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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;

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•

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.

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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

third-party

valuations that utilize appropriate valuation techniques. It was determined there was 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.

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.

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(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:

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•

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

Level 1

Level 2

Level 3

SEC Form 10-Q filed by Hennessy Advisors Inc.