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10-Q 1 d734115d10q.htm 10-Q 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, 2019

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From to

Commission File Number 001-36423

HENNESSY ADVISORS, INC.

(Exact name of registrant as specified in its charter)


California		68-0176227
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

7250 Redwood Boulevard, Suite 200 Novato, California		94945
(Address of principal executive office)		(Zip code)

(415) 899-1555

(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

symbol(s)

Name of each exchange

on which registered

Common stock, no par value

HNNA

The NASDAQ Stock Market LLC

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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 29, 2019, there were 7,499,033 shares of common stock issued and outstanding.

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 2	Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 6	Exhibits	28

	Signatures	29

PART I: FINANCIAL INFORMATION

Item 1:

Unaudited Condensed Financial Statements

Hennessy Advisors, Inc.

Balance Sheets

(In thousands, except share and per share amounts)


	June 30,		September 30,
	2019		2018
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	23,748	$	25,395
Investments in marketable securities, at fair value		9		9
Investment fee income receivable		3,376		4,259
Prepaid expenses		524		668
Other accounts receivable		435		413

Total current assets		28,092		30,744

Property and equipment, net of accumulated depreciation of $1,319 and $1,154, respectively		394		382
Management contracts		79,932		78,163
Other assets		191		191

Total assets	$	108,609	$	109,480

Liabilities and Stockholders’ Equity
Current liabilities:
Accrued liabilities and accounts payable	$	4,617	$	7,083
Income taxes payable		553		558
Deferred rent		129		166
Current portion of long-term debt, net of debt issuance costs		4,234		4,228

Total current liabilities		9,533		12,035

Long-term debt, net of debt issuance costs and current portion		14,228		17,500
Deferred income tax liability, net		10,166		8,965

Total liabilities		33,927		38,500

Commitments and Contingencies (Note 8)
Stockholders’ equity:
Common stock, no par value, 22,500,000 shares authorized; 7,498,932 shares issued and outstanding at June 30, 2019, and 7,897,145 at September 30, 2018		17,614		16,783
Retained earnings		57,068		54,197

Total stockholders’ equity		74,682		70,980

Total liabilities and stockholders’ equity	$	108,609	$	109,480

See accompanying notes to unaudited condensed financial statements

Hennessy Advisors, Inc.

Statements of Income

(In thousands, except share and per share amounts)

(Unaudited)


	Three Months Ended June 30,						Nine Months Ended June 30,
	2019			2018			2019			2018
Revenue:
Investment advisory fees	$	9,617		$	12,503		$	29,986		$	38,068
Shareholder service fees		825			1,064			2,556			3,318

Total revenue		10,442			13,567			32,542			41,386

Operating expenses:
Compensation and benefits		2,676			3,219			8,328			9,872
General and administrative		1,360			1,357			4,212			4,302
Mutual fund distribution		126			140			355			383
Sub-advisory fees		2,285			2,662			6,980			7,842
Depreciation		56			62			165			166

Total operating expenses		6,503			7,440			20,040			22,565

Net operating income		3,939			6,127			12,502			18,821
Interest expense		257			315			866			918
Other income		(93	)		(44	)		(255	)		(79	)

Income before income tax expense		3,775			5,856			11,891			17,982
Income tax expense		1,118			1,638			3,267			1,022

Net income	$	2,657		$	4,218		$	8,624		$	16,960

Earnings per share:
Basic	$	0.34		$	0.54		$	1.10		$	2.17

Diluted	$	0.34		$	0.53		$	1.10		$	2.15

Weighted average shares outstanding:
Basic		7,706,654			7,807,972			7,846,257			7,804,733

Diluted		7,725,079			7,924,510			7,852,352			7,883,733

Cash dividends declared per share:	$	0.11		$	0.10		$	0.33		$	0.30

See accompanying notes to unaudited condensed financial statements

Hennessy Advisors, Inc.

Statements of Changes in Stockholders’ Equity

Nine Months Ended June 30, 2019

(In thousands, except share data)

(Unaudited)


										Total
	Common Stock						Retained			Stockholders’
	Shares			Amount			Earnings			Equity
Balance at September 30, 2018		7,897,145		$	16,783		$	54,197		$	70,980
Net income		—			—			3,067			3,067
Dividends declared		—			—			(871	)		(871	)
Employee and director restricted stock vested		21,563			—			—			—
Repurchase of vested employee restricted stock for tax withholding		(2,685	)		(31	)		(5	)		(36	)
Shares issued for auto-investments pursuant to the 2018 Dividend Reinvestment and Stock Purchase Plan		296			4			—			4
Shares issued for dividend reinvestment pursuant to the 2018 Dividend Reinvestment and Stock Purchase Plan		1,207			13			—			13
Stock-based compensation		—			568			—			568

Balance at December 31, 2018		7,917,526		$	17,337		$	56,388		$	73,725

Net income		—			—			2,900			2,900
Dividends declared		—			—			(871	)		(871	)
Shares issued for auto-investments pursuant to the 2018 Dividend Reinvestment and Stock Purchase Plan		534			6			—			6
Shares issued for dividend reinvestment pursuant to the 2018 Dividend Reinvestment and Stock Purchase Plan		1,334			14			—			14
Stock-based compensation		—			557			—			557
Employee restricted stock forfeiture		—			(14	)		—			(14	)

Balance at March 31, 2019		7,919,394		$	17,900		$	58,417		$	76,317

Net income		—			—			2,657			2,657
Dividends declared		—			—			(825	)		(825	)
Shares issued for auto-investments pursuant to the 2018 Dividend Reinvestment and Stock Purchase Plan		724			7			—			7
Shares issued for dividend reinvestment pursuant to the 2018 Dividend Reinvestment and Stock Purchase Plan		1,506			14			—			14
Shares repurchased pursuant to a stock buyback program		(422,692	)		(835	)		(3,181	)		(4,016	)
Stock-based compensation		—			542			—			542
Employee restricted stock forfeiture		—			(14	)		—			(14	)

Balance at June 30, 2019		7,498,932		$	17,614		$	57,068		$	74,682

See accompanying notes to unaudited condensed financial statements

Hennessy Advisors, Inc.

Statements of Changes in Stockholders’ Equity

Nine Months Ended June 30, 2018

(In thousands, except share data)

(Unaudited)


										Total
	Common Stock						Retained			Stockholders’
	Shares			Amount			Earnings			Equity
Balance at September 30, 2017		7,776,563		$	14,943		$	36,587		$	51,530
Net income		—			—			8,187			8,187
Dividends declared		—			—			(585	)		(585	)
Employee and director restricted stock vested		33,750			—			—			—
Repurchase of vested employee restricted stock for tax withholding		(7,329	)		(66	)		(51	)		(117	)
Shares issued for auto-investments pursuant to the 2015 Dividend Reinvestment and Stock Purchase Plan		16			—			—			—
Shares issued for dividend reinvestment pursuant to the 2015 Dividend Reinvestment and Stock Purchase Plan		530			9			—			9
Stock-based compensation		—			598			—			598

Balance at December 31, 2017		7,803,530		$	15,484		$	44,138		$	59,622

Net income		—			—			4,555			4,555
Dividends declared		—			—			(780	)		(780	)
Employee and director restricted stock vested		4,950			—			—			—
Repurchase of vested employee restricted stock for tax withholding		(1,987	)		(28	)		(6	)		(34	)
Shares issued for auto-investments pursuant to the 2015 and 2018 Dividend Reinvestment and Stock Purchase Plan		457			8			—			8
Shares issued for dividend reinvestment pursuant to the 2018 Dividend Reinvestment and Stock Purchase Plan		644			12			—			12
Stock-based compensation		—			649			—			649

Balance at March 31, 2018		7,807,594		$	16,125		$	47,907		$	64,032

Net income		—			—			4,218			4,218
Dividends declared		—			—			(782	)		(782	)
Employee and director restricted stock vested		—			—			—			—
Repurchase of vested employee restricted stock for tax withholding		—			—			—			—
Shares issued for auto-investments pursuant to the 2018 Dividend Reinvestment and Stock Purchase Plan		260			5			—			5
Shares issued for dividend reinvestment pursuant to the 2018 Dividend Reinvestment and Stock Purchase Plan		642			12			—			12
Stock-based compensation		—			581			—			581
Employee restricted stock forfeiture					(51	)					(51	)

Balance at June 30, 2018		7,808,496		$	16,672		$	51,343		$	68,015

See accompanying notes to unaudited condensed financial statements

Hennessy Advisors, Inc.

Statements of Cash Flows

(In thousands)

(Unaudited)


	Nine Months Ended June 30,
	2019			2018
Cash flows from operating activities:
Net income	$	8,624		$	16,960
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		165			166
Deferred income taxes		1,201			(3,486	)
Stock-based compensation		1,667			1,828
Interest expense associated with debt issuance cost		94			110
Employee restricted stock forfeiture		(28	)		(51	)
Change in operating assets and liabilities:
Investment fee income receivable		883			(132	)
Prepaid expenses		144			1,007
Other accounts receivable		(22	)		100
Other assets		—			(43	)
Accrued liabilities and accounts payable		(2,466	)		(1,514	)
Income taxes payable		(5	)		(258	)
Deferred rent		(37	)		(25	)

Net cash provided by operating activities		10,220			14,662

Cash flows from investing activities:
Purchases of property and equipment		(177	)		(277	)
Payments related to management contracts		(1,769	)		(3,410	)

Net cash used in investing activities		(1,946	)		(3,687	)

Cash flows from financing activities:
Principal payments on bank loan		(3,281	)		(3,281	)
Payment of debt issuance costs on bank loan amendment		(79	)		—
Restricted stock units repurchased for employee tax withholding		(36	)		(151	)
Proceeds from shares issued pursuant to the 2015 and 2018 Dividend Reinvestment and Stock Repurchase Plans		58			46
Shares repurchased pursuant to a stock buyback program		(4,016	)		—
Dividend payments		(2,567	)		(2,147	)

Net cash used in financing activities		(9,921	)		(5,533	)

Net (decrease) increase in cash and cash equivalents		(1,647	)		5,442
Cash and cash equivalents at the beginning of the period		25,395			15,700

Cash and cash equivalents at the end of the period	$	23,748		$	21,142

Supplemental disclosures of cash flow information:
Cash paid for:
Income taxes	$	2,258		$	3,698

Interest	$	785		$	810

See accompanying notes to unaudited condensed financial statements

HENNESSY ADVISORS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

(1) Basis of Financial Statement Presentation

The accompanying condensed balance sheet as of September 30, 2018, 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, 2019, 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 presentation of the Company’s financial position at June 30, 2019, the Company’s operating results for the three and nine months ended June 30, 2019 and 2018, and the Company’s cash flows for the nine months ended June 30, 2019 and 2018. 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 2018, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2018.

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

The Company’s operating activities consist primarily of providing investment advisory services to 16 open-end mutual funds branded as the Hennessy Funds. The Company serves as the investment advisor to all classes of the Hennessy Cornerstone Growth Fund, the Hennessy Focus Fund, the Hennessy Cornerstone Mid Cap 30 Fund, the Hennessy Cornerstone Large Growth Fund, the Hennessy Cornerstone Value Fund, the Hennessy Total Return Fund, the Hennessy Equity and Income Fund, the Hennessy Balanced Fund, the Hennessy BP Energy Fund, the Hennessy BP Midstream Fund, the Hennessy Gas Utility Fund, the Hennessy Japan Fund, the Hennessy Japan Small Cap Fund, the Hennessy Large Cap Financial Fund, the Hennessy Small Cap Financial Fund, and the Hennessy Technology Fund. The Company also provides shareholder services to the entire family of 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;

•

performing a daily reconciliation of portfolio positions and cash for the fund;

•

monitoring the fund’s compliance with its investment objectives and restrictions and federal securities laws;

•

performing activities such as maintaining a compliance program, conducting ongoing reviews of the compliance programs of the fund’s service providers (including its sub-advisor, as applicable), conducting on-site visits to the fund’s service providers (including its sub-advisor, as applicable), monitoring incidents of abusive trading practices, reviewing fund expense accruals, payments, and fixed expense ratios, evaluating insurance providers for fidelity bond, D&O/E&O, and cybersecurity insurance coverage, conducting employee compliance training, reviewing reports provided by service providers, and maintaining books and records;

•

if applicable, overseeing the selection and continued employment of the fund’s sub-advisor, reviewing the fund’s investment performance, and monitoring the sub-advisor’s adherence to the fund’s investment objectives, policies, and restrictions;

•

overseeing service providers that provide accounting, administration, distribution, transfer agency, custodial, sales, marketing, public relations, audit, information technology, and legal services to the fund;

•

maintaining in-house marketing and distribution departments on behalf of the fund;

•

preparing or directing the preparation of all regulatory filings for the fund, including writing and annually updating the fund’s prospectus and related documents;

•

preparing or reviewing a written summary of the fund’s performance for the most recent 12-month period for each annual report of the fund;

•

monitoring and overseeing the accessibility of the fund on third-party platforms;

•

paying the incentive compensation of the fund’s compliance officers and employing other staff such as legal, marketing, national accounts, distribution, sales, administrative, and trading oversight personnel, as well as management executives;

•

providing a quarterly compliance certification to Hennessy Funds Trust; and

•

preparing or reviewing materials for the Board of Trustees of Hennessy Funds Trust (the “Funds’ Board of Trustees”), presenting or leading discussions to or with the Funds’ Board of Trustees, preparing or reviewing meeting minutes, and arranging for training and education of the Funds’ Board of Trustees.

The Company earns shareholder service fees from Investor Class shares of the Hennessy Funds by, among other things, maintaining an “800” number that the current investors in the Hennessy Funds may call to ask questions about the Hennessy Funds or their accounts, or to get help with processing exchange and redemption requests or changing account options. These fee revenues are earned and calculated daily by the Hennessy Funds’ accountants at U.S. Bank Global Fund Services and are subsequently reviewed by management. The fees are computed and billed monthly, at which time they are recognized in accordance with Accounting Standards Codification 606 — Revenue Recognition.

The Company waives 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 by the Company as offsets to revenue. The waived fees are deducted from investment advisory fee income and reduce the aggregate amount of advisory fees received by the Company 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 voluntarily would apply only on a going-forward basis.

The Company’s contractual agreements for investment advisory and shareholder services provide persuasive evidence that an arrangement 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 purchased management contracts to determine if any impairment has occurred. The fair value of management contracts is based on management estimates and assumptions, including third-party valuations that utilize appropriate valuation techniques. The fair value of the management contracts was estimated by applying the income approach. It is the opinion of the Company’s management that there was no impairment as of June 30, 2019, or September 30, 2018.

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 life of the management contracts each reporting period to determine if they continue to have an indefinite useful life.

The Company completed its most recent asset purchase on October 26, 2018, when it purchased the assets related to the management of the BP Capital TwinLine Energy Fund and the BP Capital TwinLine MLP Fund (together, the “BP Funds”). This asset purchase added nearly $200 million to the Company’s assets under management. The purchase was consummated in accordance with the terms and conditions of the Transaction Agreement, dated as of July 10, 2018, between the Company and BP Capital Fund Advisors, LLC (“BP Capital”). Upon completion of the transaction, the assets related to the management of the BP Funds were reorganized into two new series of Hennessy Funds Trust called the Hennessy BP Energy Fund and the Hennessy BP Midstream Fund, respectively. In connection with the transaction, BP Capital became the sub-advisor to the Hennessy BP Energy Fund and the Hennessy BP Midstream Fund.

The initial portion of the purchase price of $1.6 million was funded with available cash and was based on the aggregate net asset value of the BP Funds measured as of the close of business on October 25, 2018, the trading day immediately preceding the closing date of the transaction, plus $100,000. In accordance with the Transaction Agreement, the Company will make a subsequent payment on October 28, 2019, the business day immediately following the one-year anniversary of the closing date, based on the aggregate net asset value of the Hennessy BP Energy Fund and the Hennessy BP Midstream Fund (the successor funds to the BP Funds) measured as of the close of business on October 25, 2019, the trading day immediately preceding the one-year anniversary of the closing date. The Company is not able to reasonably estimate what the aggregate net asset value of the Hennessy BP Energy Fund and the Hennessy BP Midstream Fund will be as of October 25, 2019, and therefore has not booked a contingent liability for the second payment as of June 30, 2019.

(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 the investment advisory agreements are not renewed annually as described above, they terminate automatically. There are two additional circumstances in which the investment advisory agreements terminate. First, the investment advisory agreements automatically terminate 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, each investment advisory agreement may be terminated prior to its expiration upon 60 days’ notice by either the Company or the applicable Hennessy Fund.

As provided in the investment advisory agreements with the 16 Hennessy Funds, the Company receives investment advisory fees monthly based on a percentage of each fund’s average daily net assets.

The Company has entered into sub-advisory agreements for the Hennessy Focus Fund, the Hennessy Equity and Income Fund, the Hennessy BP Energy Fund, the Hennessy BP Midstream Fund, the Hennessy Japan Fund, and the Hennessy Japan Small Cap Fund. Under each of these sub-advisory agreements, the sub-advisor is responsible for the investment 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.

(4) Bank Loan

The Company has an outstanding bank loan with U.S. Bank National Association (“U.S. Bank”). On September 17, 2015, the Company entered into a term loan agreement with U.S. Bank and another lender for an original principal amount of $35.0 million. The Company and its lenders subsequently amended the term loan agreement several times, including (a) on September 19, 2016, to allow the Company to purchase the assets related to the management of the Westport Fund and the Westport Select Cap Fund (which subsequently were merged into existing Hennessy Funds), (b) on November 16, 2017, to revise the excess cash flow prepayment requirements, (c) on November 30, 2017, to allow the Company to purchase the assets related to the management of the Rainier Large Cap Equity Fund, the Rainier Mid Cap Equity Fund, and the Rainier Small/Mid Cap Equity Fund (collectively, the “Rainier Funds”) (which subsequently were merged into existing Hennessy Funds), (d) on September 20, 2018, to allow the Company to purchase the assets related to the management of the BP Funds (which subsequently were merged into newly created Hennessy Funds), and (e) on May 9, 2019, to (i) lower the applicable LIBOR margins used to calculate loan interest rates, (ii) extend the maturity date of the loan to May 9, 2022, (iii) add a covenant requiring that the Company’s assets under management remain at or above $3.75 billion, and (iv) allocate the full remaining loan amount to U.S. Bank, canceling the note payable to the other lender.

The term loan agreement requires monthly payments in the amount of $364,583 plus interest calculated based on one of the following, at the Company’s option:

(1) the sum of (a) a margin that ranges from 2.25% to 2.75%, depending on the Company’s ratio of consolidated debt to consolidated earnings before interest, taxes, depreciation, and amortization (excluding, among other things, certain non-cash gains and losses) (“EBITDA”), plus (b) the LIBOR rate; or

(2) the sum of (a) a margin that ranges from 0.25% to 0.75%, depending on the Company’s ratio of consolidated debt to consolidated EBITDA, plus (b) the highest rate out of the following three rates: (i) the prime rate set by U.S. Bank from time to time; (ii) the Federal Funds Rate plus 0.50%; or (iii) the one-month LIBOR rate plus 1.00%.

The Company currently uses a one-month LIBOR rate contract, which must be renewed monthly. As of June 30, 2019, the effective rate was 4.690%, which comprised the one-month LIBOR rate of 2.440% as of June 1, 2019, plus a margin of 2.25% based on the Company’s ratio of consolidated debt to consolidated EBITDA as of March 31, 2019. The Company intends to renew the LIBOR rate contract on a monthly basis as long as it remains the most favorable option.

All borrowings under the term loan agreement are secured by substantially all of the Company’s assets. The final installment of the then-outstanding principal plus accrued interest is due May 9, 2022. As of June 30, 2019, the Company had $18.6 million outstanding under its term loan ($18.5 million net of debt issuance costs).

The term loan agreement includes certain reporting requirements and loan covenants requiring the maintenance of certain financial ratios. The Company was in compliance for the periods ended June 30, 2019 and 2018.

In connection with securing the financings discussed above, the Company incurred $0.49 million in loan costs. The balance is being amortized on a straight-line basis, which approximates the effective interest basis, over 36 months. Amortization expense during the nine months ended June 30, 2019 and 2018, was $0.09 million and $0.10 million, respectively. The unamortized balance of the loan fees was $0.15 million as of June 30, 2019.

In accordance with Accounting Standards Update 2015-03, the amortization expense of the debt issuance cost is included in interest expense, and the prior period has been reclassified for consistency.

(5) Income Taxes

On December 22, 2017, during the Company’s first fiscal quarter of 2018, the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) was enacted into law. Among other changes to various corporate income tax provisions within the existing Internal Revenue Code, the 2017 Tax Act reduced the federal corporate income tax rate from 35% to 21%, effective January 1, 2018.

Also on December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 to provide guidance to companies whose accounting for the income tax effects of the 2017 Tax Act would be incomplete by the time financial statements were issued for the reporting period in which the 2017 Tax Act was enacted. In such a circumstance, Staff Accounting Bulletin No. 118 directed companies to include a reasonable estimate of any required adjustment in “net earnings from continuing operations” as an adjustment to income tax expense in the reporting period during which the reasonable estimate was determined. In the Company’s first fiscal quarter of 2018, based on available information, it reasonably estimated the impact of the reduced corporate income tax rate and remeasured its deferred tax liability. As a result, the Company recorded a one-time non-cash benefit to income tax expense of approximately $4.2 million, or $0.54 in diluted earnings per share, during its first fiscal quarter of 2018 to account for the future impact of the reduced federal corporate income tax rate.

The Company’s effective income tax rates for the nine months ended June 30, 2019 and 2018, were 27.5% and 5.7%, respectively. The effective income tax rate was higher for the nine months ended June 30, 2019, due to the significant impact of the one-time benefit to income tax expense for the prior period, as described above. Excluding the impact of this one-time benefit, the Company’s effective income tax rate for the nine months ended June 30, 2019, would have been lower than the effective income tax rate for the nine months ended June 30, 2018, because the Company only benefited from the reduced federal income tax rate, which was effective January 1, 2018, for six of the nine months in such prior period.

The Company is subject to income tax in the U.S. federal jurisdiction and multiple state jurisdictions. Following is a list of jurisdictions that the Company has identified as its major tax jurisdictions with the tax years that remain open and subject to examination by the appropriate governmental agencies marked:

Tax Jurisdiction

2014

2015

2016

2017

2018

United States

California

Connecticut

District of Columbia

Florida

Georgia

Illinois

Louisiana

Maryland

Massachusetts

Michigan

Minnesota

New Hampshire

New York

North Carolina

Oregon

Texas

Wisconsin

For state tax jurisdictions with unfiled tax returns, the statutes of limitations will remain open indefinitely.

(6) 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 both the three and nine months ended June 30, 2019, the Company excluded 276,970 common stock equivalents from the diluted earnings per share calculations because they were not dilutive. For the three and nine months ended June 30, 2018, the Company excluded 0 and 94,493 common stock equivalents, respectively, from the diluted earnings per share calculation because they were not dilutive. In each case, the excluded common stock equivalents consisted of non-vested RSUs.

The Company paid a quarterly cash dividend of $0.11 per share on June 11, 2019, to shareholders of record as of May 20, 2019.

(7) Equity

Amended and Restated 2013 Omnibus Incentive Plan

The Company has adopted, and the Company’s shareholders have approved, the Amended and Restated 2013 Omnibus Incentive Plan (the “Omnibus Plan”). Under the Omnibus Plan, participants may be granted RSUs, each of which represents an unfunded, unsecured right to receive a share of the Company’s common stock on the date specified in the recipient’s award. The Company issues new shares of its common stock when it is required to deliver shares to an RSU recipient. The RSUs granted under the Omnibus Plan vest over four years at a rate of 25% per year. The Company recognizes stock-based compensation expense on a straight-line basis over the four-year vesting term of each award.

RSU activity for the nine months ended June 30, 2019, was as follows:


RSU Activity
Nine Months Ended June 30, 2019
	Number of RSUs			Weighted Average Fair Value
Non-vested balance at September 30, 2018		324,771		$	15.43
Granted		—			—
Vested (1)		(101,334	)		(16.18	)
Forfeited		(9,450	)		(15.68	)

Non-vested balance at June 30, 2019		213,987		$	15.06

(1)

The Company issued 18,878 net shares of common stock for vested RSUs. The remainder of the vested RSUs relate to partially vested RSUs. While the Company already has recognized the compensation expense related to these partially vested RSUs, it has not yet issued to employees the shares of common stock represented by such partially vested RSUs.


RSU Compensation
Nine Months Ended June 30, 2019
	(In thousands)
Total expected compensation expense related to RSUs	$	13,807
Recognized compensation expense related to RSUs at reporting date		(10,584	)

Unrecognized compensation expense related to RSUs at reporting date	$	3,223

As of June 30, 2019, the Company had not yet recognized $3.2 million in compensation expense related to non-vested RSUs. Such RSUs have a remaining weighted-average vesting period of 2.4 years.

Dividend Reinvestment and Stock Purchase Plan

In January 2018, the Company adopted an updated Dividend Reinvestment and Stock Purchase Plan (the “DRSPP”), replacing the previous Dividend Reinvestment and Stock Purchase Plan established in March 2015, to provide shareholders and new investors with a convenient and economical means of purchasing shares of the Company’s common stock and reinvesting cash dividends paid on the Company’s common stock. Under the DRSPP and its predecessor, the Company issued 5,601 and 2,549 shares of common stock during the nine months ended June 30, 2019 and 2018, respectively. The maximum number of shares that may be issued under the current DRSPP is 1,550,000, of which 1,541,362 shares remain available for issuance.

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. The Company repurchased 422,692 shares of its common stock pursuant to the stock buyback program during the nine months ended June 30, 2019. After that repurchase and aggregate repurchases of 136,789 shares in 2010, a total of 940,519 shares remains available for repurchase under the stock buyback program.

(8) Commitments and Contingencies

The Company leases office space under non-cancelable operating leases. Its principal executive office is located in Novato, California, and it has additional offices in Austin, Boston, and Chapel Hill. Certain leases provide for renewal options.

Total rent expense for the three and nine months ended June 30, 2019, were $0.1 million and $0.4 million, respectively. As of June 30, 2019, there were no material changes in the leasing arrangements that would have a significant effect on the future minimum lease payments reported in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2018.

(9) Fair Value Measurements

The Company applies Accounting Standards Codification 820 — Fair Value Measurement for all financial assets and liabilities, which establishes a framework for measuring fair value and expands disclosures about fair value measurements. The standard defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” It also establishes a fair value hierarchy consisting of the following three levels that prioritize the inputs to the valuation techniques used to measure fair value:

•

Level 1 – Unadjusted, quoted prices in active markets for identical assets or liabilities that an entity has the ability to access at the measurement date;

•

Level 2 – Other significant observable inputs (including, but not limited to, quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets); and

•

Level 3 – Significant unobservable inputs (including the entity’s own assumptions about what market participants would use to price the asset or liability based on the best available information) when observable inputs are not available.

Based on the definitions, the following table represents the Company’s assets categorized in the Level 1 to 3 hierarchies as of June 30, 2019, and September 30, 2018:


	Fair Value Measurements as of June 30, 2019
	Level 1		Level 2		Level 3		Total
	(In thousands)
Money market fund deposits	$	21,733	$	—	$	—	$	21,733
Mutual fund investments		9		—		—		9

Total	$	21,742	$	—	$	—	$	21,742

Amounts included in:
Cash and cash equivalents	$	21,733	$	—	$	—	$	21,733
Investments in marketable securities		9		—		—		9

Total	$	21,742	$	—	$	—	$	21,742


	Fair Value Measurements as of September 30, 2018
	Level 1		Level 2		Level 3		Total
	(In thousands)
Money market fund deposits	$	22,978	$	—	$	—	$	22,978
Mutual fund investments		9		—		—		9

Total	$	22,987	$	—	$	—	$	22,987

Amounts included in:
Cash and cash equivalents	$	22,978	$	—	$	—	$	22,978
Investments in marketable securities		9		—		—		9

Total	$	22,987	$	—	$	—	$	22,987

There were no transfers between levels during the nine months ended June 30, 2019, or the year ended September 30, 2018.

(10) New Accounting Standards

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) which was subsequently amended by: ASU 2017-13, ASU 2018-10, ASU 2018-11, ASU 2018-20, and ASU 2019-01 (collectively, “Topic 842”). Topic 842 establishes a right-of-use model that requires a lessee to record an asset and liability on the balance sheet for all leases with terms longer than 12 months. Topic 842 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Upon its adoption of Topic 842, the Company expects that its finance and operating lease commitments will be subject to the new standard and recognized as finance and operating lease liabilities and right-of-use assets, which will increase the Company’s total assets and total liabilities relative to amounts reported prior to adoption of Topic 842.

(11) Subsequent Events

The Company has evaluated subsequent events through the date these financial statements were issued and has concluded that no material subsequent events occurred during this period that would require recognition or disclosure, other than disclosed below.

On July 17, 2019, the Company entered into an amendment to its term loan agreement with U.S. Bank. The amendment increased the number of shares of the Company’s common stock that the Company may repurchase from 1,000,000 to 1,500,000.

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, or means by, which such performance or results will be achieved.

Forward-looking statements are subject to risks, uncertainties, and assumptions, including those described in the section entitled “Risk Factors” and elsewhere in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018, filed with the Securities and Exchange Commission. 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 financial conditions, movement of interest rates, competitive conditions, industry regulation, and fluctuations in the stock market, many of which are beyond the control of our management. Further, the business and regulatory environments in which we operate remain complex, uncertain, and subject to change. We expect that regulatory requirements and developments will cause us to incur additional administrative and compliance costs. In addition, while current domestic economic conditions are relatively favorable, changes in short-term interest rates, policy changes by the administration in Washington, D.C., and developments in international financial markets could influence economic and financial conditions significantly. Notwithstanding the variability in our economic and regulatory environments, we remain focused on the investment performance of the Hennessy Funds and on providing high-quality customer service to investors.

Our business strategy centers on (a) the identification, completion, and integration of future acquisitions and (b) organic growth, through both the retention of the mutual fund assets we currently manage and the generation of inflows into the mutual funds we manage. The success of our business strategy may be influenced by the factors discussed in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018. All statements regarding our business strategy, as well as statements regarding market trends and risks and assumptions about changes in the marketplace, are forward-looking by their nature.

Overview

Our primary operating activity is providing investment advisory services to a family of open-end mutual funds branded as the Hennessy Funds. We have delegated the day-to-day portfolio management responsibilities to sub-advisors, subject to our oversight, for some of the Hennessy Funds. We oversee the selection and continued employment of each sub-advisor, review each sub-advisor’s investment performance, and monitor each sub-advisor’s adherence to each applicable fund’s investment objectives, policies, and restrictions. In addition, we conduct ongoing reviews of the compliance programs of sub-advisors and make on-site visits to sub-advisors. Our secondary operating activity is providing shareholder services to Investor Class shares of each of the Hennessy 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 in each of the Hennessy Funds. The percentage amount of the investment advisory fees varies from fund to fund, but the percentage amount of the shareholder service fees is consistent across all funds. The dollar amount of the fees we receive fluctuates with changes in the average net asset value of each of the Hennessy Funds, which is affected by each fund’s investment performance, purchases and redemptions of shares, general market conditions, and the success of our marketing, sales, and public relations efforts.

On a total return basis, the Dow Jones Industrial Average was up 3.1% for the nine months ended June 30, 2019. During the most recent quarter, equity prices rose as investors started to price in the likelihood that the Federal Reserve would lower interest rates in the coming months. While economic data in the United States continues to point toward strong job growth and low unemployment, inflation remains subdued, further bolstering hopes of an interest rate cut. According to the Bureau of Labor Statistics, the Consumer Price Index increased 1.8% during the 12 months ending May 31, 2019. Uncertainty around trade negotiations with China persisted throughout the quarter, although investors appeared to largely shrug off the rhetoric from both sides and instead focused on the prospect of a more dovish Federal Reserve.

Long-term U.S. bonds rallied strongly during the nine months ended June 30, 2019, as investors increasingly anticipated an interest rate cut this calendar year. While the unemployment rate in the U.S. remained low at 3.7% and U.S. real GDP growth remained relatively robust, investors seemed increasingly concerned about the prospect for economic growth in the Eurozone and parts of Asia.

The Japanese equity market fell over 8% in U.S. dollar terms over the nine months ended June 30, 2019, as measured by the Tokyo Stock Price Index. Uncertainty around a U.S./China trade accord continued to weigh on Japanese equities. There is some encouraging news, with political stability, stringent corporate governance, and 12-month forward price-to-earnings ratios currently near historic lows.

We strive to provide positive returns for investors in the Hennessy Funds over market cycles. Fourteen Hennessy Funds posted positive annualized returns in each of the three-year, five-year, 10-year, and since inception periods ended June 30, 2019. In the one-year period ended June 30, 2019, nine of the 16 Hennessy Funds generated positive returns.

To help drive inflows into the Hennessy Funds, we maintain a marketing database of over 100,000 financial advisors in addition to retail investors. We employ robust marketing and sales efforts consisting of content, digital, and traditional marketing initiatives and proactive phone and in-person meetings. In addition, we maintain an active annual public relations campaign that 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 250,000 mutual fund accounts nationwide, which comprise shareholders who employ financial advisors to assist them with investing and retail shareholders who invest directly with us. We serve approximately 18,500 financial advisors who utilize the Hennessy Funds on behalf of their clients. Approximately one in five of those advisors owns two or more Hennessy Funds, demonstrating strong brand loyalty.

Total assets under management as of June 30, 2019, was $5.0 billion, a decrease of $1.4 billion, or 21.6%, compared to June 30, 2018. The decrease in total assets from June 30, 2018, to June 30, 2019, was attributable to net outflows from the Hennessy Funds, partially offset by market appreciation and the purchase of the assets related to the management of the BP Funds.

The following table illustrates the changes quarter by quarter in our assets under management since June 30, 2018:


	6/30/2019			3/31/2019			12/31/2018			9/30/2018			6/30/2018
	(In thousands)
Beginning assets under management	$	5,135,937		$	4,887,547		$	6,197,617		$	6,395,217		$	6,577,379
Acquisition inflows					—			194,948			—			—
Organic inflows		142,155			242,566			310,468			193,954			214,236
Redemptions		(458,197	)		(516,592	)		(1,048,642	)		(500,398	)		(694,271	)
Market appreciation (depreciation)		193,180			522,416			(766,844	)		108,844			297,873

Ending assets under management	$	5,013,075		$	5,135,937		$	4,887,547		$	6,197,617		$	6,395,217

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, 2019, this asset had a net balance of $79.9 million, compared to $78.2 million as of September 30, 2018. The increase was due to the purchase of the assets related to the management of the BP Funds.

The principal liability on our balance sheet is the bank debt incurred in connection with the purchase of the assets related to the management of mutual funds and the repurchase of shares of our common stock pursuant to the completion of our self-tender offer in September 2015. As of June 30, 2019, this liability had a balance of $18.6 million ($18.5 million net of debt issuance costs), compared to $21.9 million ($21.7 million net of debt issuance costs) as of September 30, 2018. The decrease was the result of making monthly loan payments on our bank debt.

2017 Corporate Tax Reform

On December 22, 2017, during our first fiscal quarter of 2018, the 2017 Tax Act was enacted into law. Among other changes to various corporate income tax provisions within the existing Internal Revenue Code, the 2017 Tax Act reduced the federal corporate income tax rate from 35% to 21%, effective January 1, 2018. Although the 2017 Tax Act did not become effective until January 1, 2018, the start of our second fiscal quarter of 2018, we were required to recognize a reasonable estimate of the effect of the reduced federal corporate income tax rate on our deferred tax liability in the period of enactment. As a result, we recorded a one-time non-cash benefit to income taxes of approximately $4.2 million during our first fiscal quarter of 2018, or $0.54 in diluted earnings per share. We were also able to blend in the reduced federal corporate income tax rate beginning January 1, 2018, and began to get the full benefit of the reduced rate beginning October 1, 2018.

Results of Operations

The following tables set forth items in the statements of income as dollar amounts and as percentages of total revenue for the three and nine months ended June 30, 2019 and 2018:


	Three Months Ended June 30,
	2019						2018
	Amounts			Percent of Total Revenue			Amounts			Percent of Total Revenue
	(In thousands, except percentages)
Revenue:
Investment advisory fees	$	9,617			92.1	%	$	12,503			92.2	%
Shareholder service fees		825			7.9			1,064			7.8

Total revenue		10,442			100.0			13,567			100.0

Operating expenses:
Compensation and benefits		2,676			25.6			3,219			23.7
General and administrative		1,360			13.0			1,357			10.0
Mutual fund distribution		126			1.2			140			1.0
Sub-advisory fees		2,285			22.0			2,662			19.6
Depreciation		56			0.5			62			0.5

Total operating expenses		6,503			62.3			7,440			54.8

Net operating income		3,939			37.7			6,127			45.2
Interest expense		257			2.5			315			2.3
Other income		(93	)		(0.9	)		(44	)		(0.3	)

Income before income tax expense		3,775			36.1			5,856			43.2
Income tax expense		1,118			10.7			1,638			12.1

Net income	$	2,657			25.4	%	$	4,218			31.1	%


	Nine Months Ended June 30,
	2019						2018
	Amounts			Percent of Total Revenue			Amounts			Percent of Total Revenue
	(In thousands, except percentages)
Revenue:
Investment advisory fees	$	29,986			92.1	%	$	38,068			92.0	%
Shareholder service fees		2,556			7.9			3,318			8.0

Total revenue		32,542			100.0			41,386			100.0

Operating expenses:
Compensation and benefits		8,328			25.6			9,872			23.9
General and administrative		4,212			12.9			4,302			10.4
Mutual fund distribution		355			1.1			383			0.9
Sub-advisory fees		6,980			21.4			7,842			18.9
Depreciation		165			0.6			166			0.4

Total operating expenses		20,040			61.6			22,565			54.5

Net operating income		12,502			38.4			18,821			45.5
Interest expense		866			2.7			918			2.2
Other income		(255	)		(0.8	)		(79	)		(0.1	)

Income before income tax expense		11,891			36.5			17,982			43.4
Income tax expense		3,267			10.0			1,022			2.4

Net income	$	8,624			26.5	%	$	16,960			41.0	%

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, 2018, to the three months ended June 30, 2019, total revenue decreased by 23.0%, from $13.6 million to $10.4 million, investment advisory fees decreased by 23.1%, from $12.5 million to $9.6 million, and shareholder service fees decreased by 22.5%, from $1.1 million to $0.8 million.

Comparing the nine months ended June 30, 2018, to the nine months ended June 30, 2019, total revenue decreased by 21.4%, from $41.4 million to $32.5 million, investment advisory fees decreased by 21.2%, from $38.1 million to $30.0 million, and shareholder service fees decreased by 23.0%, from $3.3 million to $2.6 million.

The decrease in investment advisory fees for each period was due mainly to decreased average daily net assets of the Hennessy Funds. Average daily net assets of the Hennessy Funds for the three months ended June 30, 2019, was $5.1 billion, which represents a decrease of $1.5 billion, or 22.8%, compared to the three months ended June 30, 2018, and average daily net assets for the nine months ended June 30, 2019, was $5.3 billion, which represents a decrease of $1.5 billion, or 21.9%, compared to the nine months ended June 30, 2019.

The decrease in shareholder service fees in each period 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. The Hennessy Fund with the largest average daily net assets for the three and nine months ended June 30, 2019, was the Hennessy Focus Fund, with $1.80 billion and $1.90 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 and nine months ended June 30, 2019, was the Hennessy Gas Utility Fund, with $0.91 billion in each period. We collect an investment advisory fee from the Hennessy Gas Utility Fund at an annual rate of 0.40% of average daily net assets.

Total assets under management as of June 30, 2019, was $5.0 billion, a decrease of $1.4 billion, or 21.6%, compared to June 30, 2018. The decrease in total assets under management over was attributable to net outflows from the Hennessy Funds, partially offset by market appreciation and the purchase of the assets related to the management of the BP Funds.

The Hennessy Funds, like many actively managed U.S. mutual funds, experienced net outflows again this quarter. However, two of the Hennessy Funds had net inflows for the nine months ended June 30, 2019, which were the Hennessy Japan Fund at $149 million of net inflows and the Hennessy Total Return Fund with $2 million of net inflows.

The Hennessy Funds with the three largest amounts of net outflows for the three and nine months ended June 30, 2019, were as follows:


Three Months Ended June 30, 2019		Nine Months Ended June 30, 2019
Fund Name	Net Outflows	Fund Name	Net Outflows
Hennessy Focus Fund	$(132) million	Hennessy Focus Fund	$(675) million
Hennessy Mid Cap 30 Fund	$(49) million	Hennessy Mid Cap 30 Fund	$(348) million
Hennessy Gas Utility Fund	$(36) million	Hennessy Gas Utility Fund	$(152) million

Comparing the three months ended June 30, 2018, to the three months ended June 30, 2019, redemptions as a percentage of assets under management decreased from an average of 3.5% per month to an average of 3.0% per month. Comparing the nine months ended June 30, 2018, to the nine months ended June 30, 2019, redemptions as a percentage of assets under management increased from an average of 3.1% per month to an average of 4.1% per month.

Operating Expenses

Comparing the three months ended June 30, 2018, to the three months ended June 30, 2019, total operating expenses decreased by 12.6%, from $7.4 million to $6.5 million. Although the dollar value of operating expense decreased, as a percentage of total revenue, operating expense increased 7.5 percentage points to 62.3%.

Comparing the nine months ended June 30, 2018, to the nine months ended June 30, 2019, total operating expenses decreased by 11.2%, from $22.6 million to $20.0 million. Although the dollar value of operating expense decreased, as a percentage of total revenue, operating expense increased 7.1 percentage points to 61.6%.

In both periods, the dollar value decrease was due mainly to decreases in all expense categories other than general and administrative expense, which remained the same in the three months ending June 30, 2019, compared to the three months ending June 30, 2018.

Compensation and Benefits Expense: Comparing the three months ended June 30, 2018, to the three months ended June 30, 2019, compensation and benefits expense decreased by 16.9%, from $3.2 million to $2.7 million. Although the dollar value of compensation expense decreased, as a percentage of total revenue, compensation and benefits expense increased 1.9 percentage points to 25.6%.

Comparing the nine months ended June 30, 2019, to the nine months ended June 30, 2018, compensation and benefits expense decreased by 15.6%, from $9.9 million to $8.3 million. Although the dollar value of compensation and benefits expense decreased, as a percentage of total revenue, compensation and benefits expense increased 1.7 percentage points to 25.6%.

In both periods, the dollar value decrease was due primarily to a decrease in incentive-based compensation.

General and Administrative Expense: Comparing the three months ended June 30, 2018, to the three months ended June 30, 2019, general and administrative expense remained the same at $1.4 million. Although the dollar value of general and administrative expense remained the same, as a percentage of total revenue, general and administrative expense increased 3.0 percentage points to 13.0%.

Comparing the nine months ended June 30, 2018, to the nine months ended June 30, 2019, general and administrative expense decreased by 2.1%, from $4.3 million to $4.2 million. Although the dollar value of general and administrative expense decreased, as a percentage of total revenue, general and administrative expense increased 2.5 percentage points to 12.9%. The dollar value decrease resulted primarily from decreased professional service fees, variable sales-related costs, and business development-related expenses.

Mutual Fund Distribution Expense: Mutual fund distribution expense consists of fees paid to various financial institutions that offer the Hennessy Funds as potential investments to their clients. When the Hennessy Funds are purchased through one of these financial institutions, the institution typically charges an asset-based fee, which is recorded in “mutual fund distribution expense” in our statement of operations to the extent paid by us. When the Hennessy Funds are purchased directly, we do not incur any such expense. These fees generally increase or decrease in line with the net assets of the Hennessy Funds held through these financial institutions, which are affected by inflows, outflows, and fund performance.

Comparing the three months ended June 30, 2018, to the three months ended June 30, 2019, mutual fund distribution expense decreased by 10.0%, from $0.14 million to $0.13 million. Although the dollar value of mutual fund distribution expense decreased, as a percentage of total revenue, mutual fund distribution expense increased 0.2 percentage points to 1.2%.

Comparing the nine months ended June 30, 2018, to the nine months ended June 30, 2019, mutual fund distribution expense decreased by 7.3%, from $0.38 million to $0.36 million. Although the dollar value of mutual fund distribution expense decreased, as a percentage of total revenue, mutual fund distribution expense increased 0.2 percentage points to 1.1%.

In both periods, the dollar value decrease was due to lower average daily net assets held by financial institutions.

Sub-Advisory Fees Expense: Comparing the three months ended June 30, 2018, to the three months ended June 30, 2019, sub-advisory fees expense decreased by 14.2%, from $2.7 million to $2.3 million. Although the dollar value of sub-advisory fees expense decreased, as a percentage of total revenue, sub-advisory fees expense increased 2.4 percentage points to 22%.

Comparing the nine months ended June 30, 2018, to the nine months ended June 30, 2019, sub-advisory fees expense decreased by 11.0%, from $7.8 million to $7.0 million. Although the dollar value of sub-advisory fees expense decreased, as a percentage of total revenue, sub-advisory fees expense increased 2.5 percentage points to 21.4%.

In both periods, the dollar value decrease resulted from decreased average daily net assets of the sub-advised Hennessy Funds, partially offset by fee increases resulting from the amendment to the sub-advisory agreement for the Japan Fund and the Japan Small Cap Fund that became effective February 28, 2018, and the new sub-advisory relationship with BP Capital for the BP Funds that became effective October 26, 2018.

Depreciation Expense: Comparing the three months ended June 30, 2018, to the three months ended June 30, 2019, depreciation expense remained the same at $0.06 million. As a percentage of total revenue, depreciation expense also remained the same at 0.5%.

Comparing the nine months ended June 30, 2018, to the nine months ended June 30, 2019, depreciation expense remained the same at $0.17 million. Although the dollar value of depreciation expense remained the same, as a percentage of total revenue, depreciation expense increased 0.2 percentage points to 0.6%.

Interest Expense

Comparing both the three and nine months ended June 30, 2018, to the three and nine months ended June 30, 2019, interest expense remained the same at $0.3 million and $0.9 million, respectively.

Income Tax Expense

Comparing the three months ended June 30, 2018, to the three months ended June 30, 2019, income tax expense decreased by 31.7%, from $1.6 million to $1.1 million. This decrease was due primarily to lower net operating income for the current period.

Comparing the nine months ended June 30, 2018, to the nine months ended June 30, 2019, the provision for income tax expense increased by 219.7% from $1.0 million to $3.3 million. The increase reflects the significant impact of the 2017 Tax Act on our income tax expense for the nine months ended June 30, 2018. During such period, the 2017 Tax Act required us to record a one-time non-cash benefit to income taxes for the accounting remeasurement of our deferred tax liability based on the reduced federal corporate income tax rate. The resulting income tax expense was reduced by approximately $4.2 million. Excluding the impact of this one-time benefit, our income tax expense would have decreased for the nine months ended June 30, 2019, as compared to the prior period, due primarily to the decrease in our net operating income and secondarily to the decrease in the federal corporate income tax rate.

Net Income

Comparing the three months ended June 30, 2018, to the three months ended June 30, 2019, net income decreased by 37.0%, from $4.2 million to $2.7 million. The decrease was due primarily to the decrease in our net operating income.

Comparing the nine months ended June 30, 2018, to the nine months ended June 30, 2019, net income decreased by 49.2%, from $17.0 million to $8.6 million. The decrease was primarily a result of the decrease in our net operating income and secondarily a result of the increase in income tax expense discussed above.

Critical Accounting Policies

Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States, which require the use of estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. These accounting policies, methods, and estimates are an integral part of the financial statements prepared by management and are based upon management’s current judgments. Those judgments are normally based on knowledge and experience with regard to past and current events and assumptions about future events. Certain accounting policies, methods, and estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ markedly from management’s current judgment. For a discussion of the accounting policies that we believe are most critical to understanding our results of operations and financial position, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018.

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, 2019, will be sufficient to meet our capital requirements for at least one year from the issuance date of this report. To the extent that liquid resources and cash provided by operations are not adequate to meet long-term capital requirements, management plans to raise additional capital by either, or both, seeking to increase our borrowing capacity or accessing the capital markets. There can be no assurance that we will be able to raise additional capital.

Our total assets under management as of June 30, 2019, was $5.0 billion, a decrease of $1.4 billion, or 21.6%, compared to June 30, 2018. 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, 2019, was $5.3 billion. As of June 30, 2019, we had cash and cash equivalents of $23.7 million.

The following table summarizes key financial data relating to our liquidity and use of cash for the nine months ended June 30, 2019 and 2018:


	For the Nine Months Ended June 30,
	2019			2018
	(Unaudited, in thousands)
Cash flow data:
Operating cash flows	$	10,220		$	14,662
Investing cash outflows		(1,946	)		(3,687	)
Financing cash outflows		(9,921	)		(5,533	)

Net (decrease) increase in cash and cash equivalents	$	(1,647	)	$	5,442

The decrease in cash provided by operating activities of $4.4 million was due mainly to decreased operating income.

The decrease in cash used for investing activities of $1.8 million was due to the purchase of the assets related to the management of the Rainier Funds in the prior period, which was larger than the purchase of the assets related to the management of the BP Funds in the current period.

The increase in cash used for financing activities of $4.4 million was due to shares repurchased in May 2019 and an increased dividend rate.

We have an outstanding bank loan with U.S. Bank. On September 17, 2015, we entered into a term loan agreement with U.S. Bank and another lender for an original principal amount of $35.0 million. We and our lenders subsequently amended the term loan agreement several times, including (a) on September 19, 2016, to allow us to purchase the assets related to the management of the Westport Fund and the Westport Select Cap Fund (which subsequently were merged into existing Hennessy Funds), (b) on November 16, 2017, to revise the excess cash flow prepayment requirements, (c) on November 30, 2017, to allow us to purchase the assets related to the management of the Rainier Funds (which subsequently were merged into existing Hennessy Funds), (d) on September 20, 2018, to allow us to purchase the assets related to the management of the BP Funds (which subsequently were merged into newly created Hennessy Funds), (e) on May 9, 2019, to (i) lower the applicable LIBOR margins used to calculate loan interest rates, (ii) extend the maturity date of the loan to May 9, 2022, (iii) add a covenant requiring that our assets under management remain at or above $3.75 billion, and (iv) allocate the full remaining loan amount to U.S. Bank, canceling the note payable to the other lender, and (f) on July 17, 2019, to increase the number of shares of our common stock that we may repurchase from 1,000,000 to 1,500,000.

Our term loan agreement requires monthly payments of $364,583 plus interest calculated based on one of the following, at our option:

(1) the sum of (a) a margin that ranges from 2.25% to 2.75%, depending on our ratio of consolidated debt to consolidated EBITDA, plus (b) the LIBOR rate; or

(2) the sum of (a) a margin that ranges from 0.25% to 0.75%, depending on our ratio of consolidated debt to consolidated EBITDA, plus (b) the highest rate out of the following three rates: (i) the prime rate set by U.S. Bank from time to time; (ii) the Federal Funds Rate plus 0.50%; or (iii) the one-month LIBOR rate plus 1.00%.

We currently use a one-month LIBOR rate contract, which must be renewed monthly. As of June 30, 2019, the effective rate was 4.690%, which comprised the one-month LIBOR rate of 2.440% as of June 1, 2019, plus a margin of 2.25% based on our ratio of consolidated debt to consolidated EBITDA as of March 31, 2019. We intend to renew the LIBOR rate contract on a monthly basis as long as it remains the most favorable option.

All borrowings under the term loan agreement are secured by substantially all of our assets. The final installment of the then-outstanding principal plus accrued interest is due May 9, 2022. As of June 30, 2019, we had $18.6 million outstanding under the term loan ($18.5 million net of debt issuance costs).

The term loan agreement includes certain reporting requirements and loan covenants requiring the maintenance of certain financial ratios. We were in compliance for the periods ended June 30, 2019 and 2018.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management performed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on such evaluation, management, including the Company’s principal executive officer and principal financial officer, concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report.

Changes in Internal Controls over Financial Reporting

There were no changes in the Company’s internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II: OTHER INFORMATION

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The Company repurchased shares during the three months ended June 30, 2019, as follows:


Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs




April 1-30, 2019		0	$	0.00		0		1,363,211
May 1-31, 2019 (1)		422,692	$	9.50		422,692		940,519
June 1-30, 2019		0	$	0.00		0		940,519

Total		422,692	$	9.50		422,692		940,519

(1)

The shares repurchased in May 2019 were purchased in a privately negotiated transaction pursuant to the Company’s stock buyback program, which was announced in August 2010. The Company is authorized to repurchase a maximum of 1,500,000 shares under the stock buyback program. The program has no expiration date.

Item 6.

Exhibits

Set forth below is a list of all exhibits to this Quarterly Report on Form 10-Q.



10.1		Fifth Amendment to Term Loan Agreement, dated May 9, 2019, by and between Hennessy Advisors, Inc. and U.S. Bank National Association. (1)

10.2		Sixth Amendment to Term Loan Agreement, dated July 17, 2019, by and between Hennessy Advisors, Inc. and U.S. Bank National Association. (2)

31.1		Rule 13a-14a Certification of the Principal Executive Officer.

31.2		Rule 13a-14a Certification of the Principal Financial Officer.

32.1		Written Statement of the Principal Executive Officer, Pursuant to 18 U.S.C. § 1350.

32.2		Written Statement of the Principal Financial Officer, Pursuant to 18 U.S.C. § 1350.

101		Financial statements from the Quarterly Report on Form 10-Q of Hennessy Advisors, Inc. for the quarter ended June 30, 2019, filed on August 7, 2019, 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.

(1)	Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 001-36423) filed May 9, 2019.

(2)	Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 001-36423) filed July 19, 2019.

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:

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