Hennessy Advisors(HNNA) - 2023 Q2 - Quarterly Report

PART I: Financial Information Item 1: Unaudited Condensed Financial Statements This section presents unaudited condensed financial statements for the periods ended March 31, 2023, detailing the company's financial position, performance, and cash flows Balance Sheets As of March 31, 2023, total assets were $143.0 million, a slight decrease from $143.7 million at September 30, 2022 Condensed Balance Sheet Data (in thousands) | Account | March 31, 2023 | September 30, 2022 | | :--- | :--- | :--- | | Total Assets | $142,974 | $143,652 | | Cash and cash equivalents | $57,869 | $58,487 | | Management contracts | $81,071 | $80,868 | | Total Liabilities | $55,885 | $57,354 | | Notes payable, net | $39,014 | $38,870 | | Total Stockholders' Equity | $87,089 | $86,298 | Statements of Income For the six months ended March 31, 2023, total revenue decreased 25.9% year-over-year to $12.1 million, while net income fell 34.2% to $2.3 million Income Statement Highlights (in thousands, except per share data) | Metric | Six Months Ended Mar 31, 2023 | Six Months Ended Mar 31, 2022 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $12,061 | $16,279 | -25.9% | | Net Operating Income | $3,197 | $5,460 | -41.4% | | Net Income | $2,314 | $3,515 | -34.2% | | Diluted EPS | $0.30 | $0.46 | -34.8% | | Cash dividends declared per share | $0.28 | $0.28 | 0.0% | Statements of Changes in Stockholders' Equity Stockholders' equity increased to $87.1 million at March 31, 2023, driven by net income that was partially offset by dividend payments - For the six months ended March 31, 2023, stockholders' equity increased by $0.8 million, reflecting net income of $2.3 million less dividends paid of $2.1 million, along with contributions from stock-based compensation and dividend reinvestment plans[17] Statements of Cash Flows Net cash from operating activities decreased to $2.0 million for the six months ended March 31, 2023, resulting in a net decrease in cash of $0.6 million Summary of Cash Flows (in thousands) | Activity | Six Months Ended Mar 31, 2023 | Six Months Ended Mar 31, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,955 | $3,543 | | Net cash used in investing activities | ($526) | ($100) | | Net cash (used in) provided by financing activities | ($2,047) | $36,556 | | Net (decrease) increase in cash | ($618) | $39,999 | Notes to Unaudited Condensed Financial Statements The notes detail accounting policies and provide further information on key acquisitions, outstanding debt, and subsequent events - The company's main business is providing investment advisory services to 16 open-end mutual funds and one ETF branded as the Hennessy Funds[25] - On December 22, 2022, the company acquired assets related to the management of the Stance Equity ESG Large Cap Core ETF, which added approximately $43 million to assets under management at closing[34] - The company has $40.25 million in aggregate principal of 4.875% unsecured notes outstanding, which mature on December 31, 2026[51] - Subsequent to the quarter end, on April 26, 2023, the company signed a definitive agreement to acquire the management of two CCM Equity Funds, which will be reorganized into the Hennessy Stance ESG ETF[69] Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 25.9% revenue decrease driven by a 25.2% decline in assets under management (AUM), which impacted overall net income Overview and Business Strategy The company's strategy focuses on acquisitions and organic growth, with revenues tied to AUM in a challenging economic environment - The company's business strategy centers on (a) identification, completion, and integration of future acquisitions and (b) organic growth through asset retention and generation of inflows[77] - Revenues are derived from investment advisory and shareholder service fees, which are calculated as a percentage of the average daily net assets of each Hennessy Fund and fluctuate with market performance and fund flows[79] - Despite a challenging economic backdrop, 15 out of 17 Hennessy Funds generated positive returns for the six months ended March 31, 2023[84] Assets Under Management (AUM) Total AUM decreased by 25.2% to $2.8 billion as of March 31, 2023, from a year prior due to market depreciation and net outflows Quarterly Changes in Assets Under Management (in thousands) | Quarter Ended | Beginning AUM | Net Flows & Acquisitions | Market Appreciation (Depreciation) | Ending AUM | | :--- | :--- | :--- | :--- | :--- | | Mar 31, 2023 | $3,009,458 | ($190,441) | $24,946 | $2,843,963 | | Dec 31, 2022 | $2,895,717 | ($140,895) | $254,636 | $3,009,458 | | Sep 30, 2022 | $3,155,566 | ($94,074) | ($165,775) | $2,895,717 | | Jun 30, 2022 | $3,804,028 | ($167,894) | ($480,568) | $3,155,566 | | Mar 31, 2022 | $4,072,849 | ($136,730) | ($132,091) | $3,804,028 | - Total AUM was $2.8 billion as of March 31, 2023, a decrease of $1.0 billion, or 25.2%, compared to March 31, 2022, due to net outflows and market depreciation[88][97] Results of Operations A 25.9% revenue decrease outpaced an 18.1% reduction in operating expenses, leading to a significant drop in net operating income Revenue Comparison (in thousands) | Revenue Source | Six Months Ended Mar 31, 2023 | Six Months Ended Mar 31, 2022 | Change | | :--- | :--- | :--- | :--- | | Investment advisory fees | $11,089 | $15,124 | -26.7% | | Shareholder service fees | $972 | $1,155 | -15.8% | | Total Revenue | $12,061 | $16,279 | -25.9% | Operating Expense Comparison (in thousands) | Expense Category | Six Months Ended Mar 31, 2023 | Six Months Ended Mar 31, 2022 | Change | | :--- | :--- | :--- | :--- | | Compensation and benefits | $3,788 | $4,373 | -13.4% | | Sub-advisory fees | $1,899 | $3,447 | -44.9% | | General and administrative | $2,845 | $2,563 | +11.0% | | Total Operating Expenses | $8,864 | $10,819 | -18.1% | - The decrease in sub-advisory fees was due to lower average AUM in sub-advised funds and the termination of sub-advisory payments for two funds after January 31, 2022[114] - Net income for the six months ended March 31, 2023, decreased by 34.2% to $2.3 million, primarily due to decreased assets under management which resulted in lower revenues[122] Liquidity and Capital Resources The company maintains a solid liquidity position with $57.9 million in cash, which is deemed sufficient to meet near-term obligations - As of March 31, 2023, the company had cash and cash equivalents of $57.9 million[127] - The company's principal liability is $40.25 million in 4.875% notes, which mature on December 31, 2026[126] Cash Flow Summary (in thousands) | Activity | Six Months Ended Mar 31, 2023 | Six Months Ended Mar 31, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,955 | $3,543 | | Net cash used in investing activities | ($526) | ($100) | | Net cash (used in) provided by financing activities | ($2,047) | $36,556 | Item 4: Controls and Procedures Management evaluated and concluded that the company's disclosure controls and procedures were effective as of March 31, 2023 - Based on an evaluation, management concluded that the Company's disclosure controls and procedures are effective as of the end of the period covered by this report[132] - No changes in internal control over financial reporting occurred during the fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal controls[133] PART II: Other Information Item 6: Exhibits This section lists all exhibits filed with the report, including officer certifications and financial statements formatted in XBRL - The exhibits listed include Rule 13a-14a certifications from the Principal Executive Officer and Principal Financial Officer, statements pursuant to 18 U.S.C. § 1350, and financial statements formatted in XBRL[137]