10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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, 2021

☐	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)		(I.R.S. 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 M a rket 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.

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 July 30, 2021, there were

7,367,149

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	16

Item 4	Controls and Procedures	27

PART II	Other Information

Item 6	Exhibits	28

	Signatures	29

Table of Contents

PART I: FINANCIAL INFORMATION

Item

Unaudited Condensed Financial Statements

Balance Sheets

(In thousands, except share and per share amounts)


	June 30, 2021		September 30, 2020
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	14,038	$	9,955
Investments in marketable securities, at fair value		10		9
Investment fee income receivable		2,821		2,403
Prepaid expenses		328		637
Other accounts receivable		360		378

Total current assets		17,557		13,382

Property and equipment, net of accumulated depreciation of $1,799 and $1,618, respectively		295		294
Operating lease right-of-use asset		1,100		276
Management contracts		80,643		80,643
Other assets		208		191

Total assets	$	99,803	$	94,786

Liabilities and Stockholders’ Equity
Current liabilities
Accrued liabilities and accounts payable	$	3,378	$	3,813
Operating lease liability		357		330
Income taxes payable		747		949

Total current liabilities		4,482		5,092

Long-term operating lease liability		737		—
Net deferred income tax liability		12,398		11,516

Total liabilities		17,617		16,608

Commitments and contingencies (Note 8)
Stockholders’ equity
Common stock, no par value, 22,500,000 shares authorized; 7,366,649 shares issued and outstanding as of June 30, 2021, and 7,356,822 as of September 30, 2020		19,846		18,705
Retained earnings		62,340		59,473

Total stockholders’ equity		82,186		78,178

Total liabilities and stockholders’ equity	$	99,803	$	94,786

See Notes to Unaudited Condensed Financial Statements

Table of Contents

Statements of Income

(In thousands, except share and per share amounts)

(Unaudited)


	Three Months Ended June 30,						Nine Months Ended June 30,
	2021			2020			2021			2020
Revenue
Investment advisory fees	$	7,903		$	6,366		$	22,458		$	24,016
Shareholder service fees		624			529			1,792			2,002

Total revenue		8,527			6,895			24,250			26,018

Operating expenses
Compensation and benefits		2,330			1,797			6,686			6,724
General and administrative		1,124			1,074			3,564			3,854
Mutual fund distribution		118			109			359			363
Sub-advisory fees		1,863			1,569			5,452			5,893
Depreciation		56			63			181			177

Total operating expenses		5,491			4,612			16,242			17,011

Net operating income		3,036			2,283			8,008			9,007
Interest expense		—			—			—			447
Other income		(1	)		(1	)		(2	)		(89	)

Income before income tax expense		3,037			2,284			8,010			8,649
Income tax expense		793			509			2,107			2,276

Net income	$	2,244		$	1,775		$	5,903		$	6,373

Earnings per share
Basic	$	0.30		$	0.24		$	0.80		$	0.86

Diluted	$	0.30		$	0.24		$	0.80		$	0.86

Weighted average shares outstanding
Basic		7,364,716			7,262,042			7,361,165			7,376,167

Diluted		7,431,925			7,279,294			7,387,356			7,404,578

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, 2021
	Common Stock				Retained Earnings			Total Stockholders’ Equity
	Shares		Amount		Retained Earnings			Total Stockholders’ 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 Changes in Stockholders’ Equity

(In thousands, except share data)

(Unaudited)


	Nine Months Ended June 30, 2020
	Common Stock						Retained Earnings			Total Stockholders’ Equity
	Shares			Amount			Retained Earnings			Total Stockholders’ Equity

Balance at September 30, 2019		7,527,040		$	17,673		$	57,855		$	75,528
Net income		—			—			2,628			2,628
Dividends declared		—			—			(1,032	)		(1,032	)
Shares issued for auto-investments pursuant to the 2018 Dividend Reinvestment and Stock Purchase Plan		1,702			20			—			20
Shares issued for dividend reinvestment pursuant to the 2018 Dividend Reinvestment and Stock Purchase Plan		1,596			18			—			18
Stock-based compensation		—			447			—			447
Shares repurchased pursuant to stock buyback program		(64,787	)		(128	)		(557	)		(685	)

Balance at December 31, 2019		7,465,551		$	18,030		$	58,894		$	76,924

Net income		—			—			1,970			1,970
Dividends declared		—			—			(1,011	)		(1,011	)
Shares issued for auto-investments pursuant to the 2018 Dividend Reinvestment and Stock Purchase Plan		46			—			—			—
Shares issued for dividend reinvestment pursuant to the 2018 Dividend Reinvestment and Stock Purchase Plan		1,835			18			—			18
Stock-based compensation		—			447			—			447
Shares repurchased pursuant to stock buyback program		(206,109	)		(406	)		(1,622	)		(2,028	)

Balance at March 31, 2020		7,261,323		$	18,089		$	58,231		$	76,320

Net income		—			—			1,775			1,775
Dividends declared		—			—			(998	)		(998	)
Shares issued for auto-investments pursuant to the 2018 Dividend Reinvestment and Stock Purchase Plan		187			2			—			2
Shares issued for dividend reinvestment pursuant to the 2018 Dividend Reinvestment and Stock Purchase Plan		2,271			19			—			19
Stock-based compensation		—			447			—			447

Balance at June 30, 2020		7,263,781		$	18,557		$	59,008		$	77,565

See Notes to Unaudited Condensed Financial Statements

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Statements of Cash Flows

(In thousands)

(Unaudited)


	Nine Months Ended June 30,
	2021			2020
Cash flows from operating activities
Net income	$	5,903		$	6,373
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		181			177
Unrealized gain on marketable securities		(1	)		—
Change in right-of-use asset and operating lease liability		(60	)		(44	)
Deferred income taxes		882			1,007
Deferred offering costs		(7	)		—
Stock-based compensation		1,054			1,341
Interest expense associated with debt issuance cost		—			125
Change in operating assets and liabilities:
Investment fee income receivable		(418	)		897
Prepaid expenses		309			212
Other accounts receivable		18			106
Other assets		(10	)		—
Accrued liabilities and accounts payable		(435	)		(2,325	)
Income taxes payable		(202	)		143

Net cash provided by operating activities		7,214			8,012

Cash flows from investing activities
Purchases of property and equipment		(182	)		(104	)
Payments related to management contracts		—			(710	)

Net cash used in investing activities		(182	)		(814	)

Cash flows from financing activities
Principal payments on bank loan		—			(17,500	)
Shares repurchased pursuant to stock buyback program		—			(2,713	)
Proceeds from shares issued pursuant to the 2018 Dividend Reinvestment and Stock Repurchase Plan		9			22
Proceeds from shares issued pursuant to the 2021 Dividend Reinvestment and Stock Repurchase Plan		20			—
Dividend payments		(2,978	)		(2,986	)

Net cash used in financing activities		(2,949	)		(23,177	)

Net increase (decrease) in cash and cash equivalents		4,083			(15,979	)
Cash and cash equivalents at the beginning of the period		9,955			24,687

Cash and cash equivalents at the end of the period	$	14,038		$	8,708

Supplemental disclosures of cash flow information
Cash paid for income taxes	$	1,427		$	1,152
Cash paid for interest	$	—		$	381

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, 2020, 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, 2021, 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, 2021, the Company’s operating results for the three and nine months ended June 30, 2021 and 2020, and the Company’s cash flows for the nine months ended June 30, 2021 and 2020. These unaudited interim condensed financial statements and notes should be read in conjunction with the Company’s audited financial statements and notes thereto for fiscal year 2020, which are included in the Company’s Annual Report on

Form 10-K

for the fiscal year ended September 30, 2020.

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

The Company’s operating activities consist primarily of providing investment advisory services to 16

open-end

mutual funds branded as the Hennessy Funds. The Company serves as the investment advisor to all classes of the Hennessy Cornerstone Growth Fund, the Hennessy Focus Fund, the Hennessy Cornerstone Mid Cap 30 Fund, the Hennessy Cornerstone Large Growth Fund, the Hennessy Cornerstone Value Fund, the Hennessy Total Return Fund, the Hennessy Equity and Income Fund, the Hennessy Balanced Fund, the Hennessy BP Energy Transition Fund, the Hennessy BP Midstream Fund, the Hennessy Gas Utility Fund, the Hennessy Japan Fund, the Hennessy Japan Small Cap Fund, the Hennessy Large Cap Financial Fund, the Hennessy Small Cap Financial Fund, and the Hennessy Technology Fund. The Company also provides shareholder services to shareholders of the Hennessy Funds.

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

•

acting as portfolio manager for the fund or overseeing the

sub-advisor

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

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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 Cornerstone Large Growth Fund and the Hennessy BP Energy Transition Fund through the expiration of each fund’s expense limitation agreement on November 30, 2019, and October 25, 2020, respectively. The Company continues to waive a portion of its fees with respect to the Hennessy BP Midstream Fund and the Hennessy Technology Fund to comply with contractual expense ratio limitations. The fee waivers are calculated daily by the Hennessy Funds’ accountants at U.S. Bank Global Fund Services, reviewed by management, and then charged to expense monthly as offsets to the Company’s revenues. Each waived fee is then deducted from investment advisory fee income and reduces the aggregate amount of advisory fees the Company receives from such fund in the subsequent month. To date, the Company has only waived fees based on contractual obligations, but the Company has the ability to waive fees at its discretion. Any decision to waive fees would apply only on a

going-forward

basis.

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

The Company continues to be subject to risks and uncertainties resulting from the

COVID-19

pandemic. The Company cannot reasonably estimate the continued extent of the impact of the

COVID-19

pandemic on its business. As of the date of issuance of the Company’s financial statements, the extent to which the

COVID-19

pandemic may materially impact the Company’s financial condition, liquidity, or results of operations remains uncertain.

(2)	Management Contracts Purchased

SEC Form 10-Q filed by Hennessy Advisors, Inc.