UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the Quarterly Period Ended March 31, 2021

For the transition period from                      to                     

Commission File Number 001-36423

HENNESSY ADVISORS, INC.

(Exact name of registrant as specified in its charter)

(415) 899-1555

(Registrant’s telephone number)

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

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 May 7, 2021, there were 7,364,091shares of common stock issued and outstanding.

HENNESSY ADVISORS, INC.

TABLE OF CONTENTS

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PART I:    FINANCIAL INFORMATION

Balance Sheets

(In thousands, except share and per share amounts)

See Notes to Unaudited Condensed Financial Statements

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Statements of Income

(In thousands, except share and per share amounts)

(Unaudited)

See Notes to Unaudited Condensed Financial Statements

2

Statements of Changes in Stockholders’ Equity

(In thousands, except share data)

(Unaudited)

See Notes to Unaudited Condensed Financial Statements

3

Statements of Cash Flows

(In thousands)

(Unaudited)

See Notes to Unaudited Condensed Financial Statements

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HENNESSY ADVISORS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

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 six months ended March 31, 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 March 31, 2021, the Company’s operating results for the three and six months ended March 31, 2021 and 2020, and the Company’s cash flows for the three and six months ended March 31, 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 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:

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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 Recognition.

The Company waived a portion of its fees with respect to the Hennessy Cornerstone Large Growth Fund and the Hennessy BP Energy 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 is subject to risks and uncertainties as a result of the COVID-19 pandemic, particularly risks and uncertainties related to the increased volatility in the stock market. 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.

Throughout its history, the Company has completed 10 purchases of the assets related to the management of 30 different mutual funds, some of which were reorganized into already existing Hennessy Funds. In accordance with Financial Accounting Standards Board (“FASB”) guidance, the Company periodically reviews the carrying value of its management contracts asset to determine if any impairment has occurred. The fair value of the management contracts asset was estimated as of September 30, 2020, by applying the income approach and is based on management estimates and assumptions, including third-party valuations that utilize appropriate valuation techniques. It was determined there was no impairment as of such date. As of March 31, 2021, management performed a qualitative analysis and determined it was more likely than not that there continued to be no impairment.

Under Accounting Standards Codification 350 — Intangibles – Goodwill and Other, intangible assets that have indefinite useful lives are not amortized but are tested at least annually for impairment. The Company reviews the useful life of the management contracts each reporting period to determine if they continue to have an indefinite useful life.

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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 (the “BP Funds”), which were reorganized into the Hennessy BP Energy Fund and the Hennessy BP Midstream Fund, respectively, two new series of Hennessy Funds Trust.

The Company has investment advisory agreements with Hennessy Funds Trust under which it provides investment advisory services to all classes of the 16 Hennessy Funds.

The investment advisory agreements must be renewed annually (except in limited circumstances) by (a) the Funds’ Board of Trustees or the vote of a majority of the outstanding shares of the applicable Hennessy Fund and (b) the vote of a majority of the trustees of Hennessy Funds Trust who are not interested persons of the Hennessy Funds. If an investment advisory agreement is not renewed, it terminates automatically. There are two additional circumstances in which an investment advisory agreement terminates. First, an investment advisory agreement automatically terminates if the Company assigns them to another advisor (assignment includes “indirect assignment,” which is the transfer of the Company’s common stock in sufficient quantities deemed to constitute a controlling block). Second, an investment advisory agreement may be terminated prior to its expiration upon 60 days’ written notice by either the applicable Hennessy Fund or the Company.

As provided in each investment advisory agreement, the Company receives investment advisory fees monthly based on a percentage of the applicable fund’s average daily net asset value.

The Company has entered into sub-advisory agreements for the Hennessy Focus Fund, the Hennessy Equity and Income Fund, the Hennessy 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 and reinvestments of the assets of the applicable Hennessy Fund in accordance with the terms of such agreement and the applicable Hennessy Fund’s Prospectus and Statement of Additional Information. The sub-advisors are subject to the direction, supervision, and control of the Company and the Funds’ Board of Trustees. The sub-advisory agreements must be renewed annually (except in limited circumstances) in the same manner as, and are subject to the same termination provisions as, the investment advisory agreements.

In exchange for the sub-advisory services, the Company (not the Hennessy Funds) pays sub-advisory fees to the sub-advisors out of its own assets. Sub-advisory fees are calculated as a percentage of the applicable sub-advised fund’s average daily net asset value.

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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:

Based on the definitions, the following tables represent the Company’s assets categorized in the Level 1 to Level 3 hierarchies:

There were no transfers between levels during the six months ended March 31, 2021, or the year ended September 30, 2020.

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The Company determines if an arrangement is an operating lease at inception. Operating leases are included in operating lease right-of-use assets and current and long-term operating lease liabilities on the Company’s balance sheet. There were no long-term operating leases as of September 30, 2020. During the quarter ended March 31, 2021, the Company renewed the lease for its office in Novato, California for an additional three years. The renewed lease expires on July 31, 2024. The lease renewal created a long-term operating lease as of March 31, 2021.

Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, the Company uses its incremental borrowing rate based on the information available at the lease commencement date. The Company’s lease terms may include options to extend the lease when it is reasonably certain that it will exercise any such options. For its leases, the Company concluded that it is not reasonably certain that any renewal options would be exercised, and, therefore, the amounts are not recognized as part of operating lease right-of-use assets or operating lease liabilities. Leases with initial terms of 12 months or less, and certain office equipment leases that are deemed insignificant, are not recorded on the balance sheet and are expensed as incurred and included within rent expense under general and administrative expense. Lease expense related to operating leases is recognized on a straight-line basis over the expected lease terms.

The Company’s most significant leases are real estate leases of office facilities. 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, Texas, Boston, Massachusetts, and Chapel Hill, North Carolina. Only the office lease in Novato, California has been capitalized because the other operating leases have terms of 12 months or less, including leases that are month-to-month in nature. The classification of the Company’s operating lease right-of-use assets and operating lease liabilities and other supplemental information related to the Company’s operating leases are as follows:

For the six months ended March 31, 2021, rent expense, which is recorded under general and administrative expense in the statements of income, totaled $200,574.

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The undiscounted cash flows for future maturities of the Company’s operating lease liabilities and the reconciliation to the balance of operating lease liabilities reflected on the Company’s balance sheet are as follows:

Details relating to accrued liabilities and accounts payable reflected on the Company’s balance sheet are as follows:

The Company’s effective income tax rates for the six months ended March 31, 2021 and 2020, were 26.4% and 27.8%, respectively. The effective income tax rate was lower for the six months ended March 31, 2021, due to changes in discrete items on the Company’s tax returns (mainly a reduction in disallowed executive compensation under Section 162(m) of the Internal Revenue Code).

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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:

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

The Company has no commitments and no significant contingencies with original terms in excess of one year other than operating leases, which are discussed in Note 5.

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.

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A summary of RSU activity is as follows:

Additional information related to RSUs is as follows:

Dividend Reinvestment and Stock Purchase Plan

In January 2021, the Company adopted a Dividend Reinvestment and Stock Purchase Plan (the “DRSPP”), replacing the previous Dividend Reinvestment and Stock Purchase Plan that had been in place since 2018. The DRSPP provides shareholders and new investors with a convenient and economical means of purchasing shares of the Company’s common stock and reinvesting cash dividends paid on the Company’s common stock. Under the DRSPP and its predecessor plan, the Company issued 6,259 and 5,179 shares of common stock during the six months ended March 31, 2021 and 2020, respectively. The maximum number of shares that may be issued under the DRSPP is 1,470,000, of which 1,466,864 shares remained available for issuance as of March 31, 2021.

Stock Buyback Program

In August 2010, the Company adopted a stock buyback program. The program provides that the Company may repurchase up to 1,500,000 shares of its common stock and has no expiration date. Share repurchases may be made in the open market, in privately negotiated transactions, or otherwise. A total of 596,368 shares remains available for repurchase under the stock buyback program. The Company temporarily suspended repurchases under the stock buyback program as of March 24, 2020, so the Company did not repurchase any shares of its common stock pursuant to the stock buyback program during the six months ended March 31, 2021.

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Basic earnings per share is determined by dividing net earnings by the weighted average number of shares of common stock outstanding, while diluted earnings per share is determined by dividing net earnings by the weighted average number of shares of common stock outstanding adjusted for the dilutive effect of common stock equivalents, which consist of restricted stock units (“RSUs”).

For the three and six months ended March 31, 2021, the Company excluded 74,352 and 227,410 common stock equivalents, respectively, from the diluted earnings per share calculations because they were not dilutive. For both the three and six months ended March 31, 2020, the Company excluded 184,871 common stock equivalents from the diluted earnings per share calculations because they were not dilutive. In all cases, the excluded common stock equivalents consisted of non-vested RSUs.

The Company paid a quarterly cash dividend of $0.1375 per share on March 9, 2021, to shareholders of record as of February 24, 2021.

The Company has reviewed accounting pronouncements issued between the filing date of its most recent Form 10-K, which was December 1, 2020, and the filing date of this Form 10-Q and has determined that no accounting pronouncements issued would have a material impact on the Company’s financial position, results of operations, or disclosures.

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

Forward-Looking Statements

This report contains “forward-looking statements” within the meaning of the securities laws, for which we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by terminology such as “expect,” “anticipate,” “intend,” “may,” “plan,” “will,” “should,” “could,” “would,” “assume,” “believe,” “estimate,” “predict,” “potential,” “project,” “continue,” “seek,” and similar expressions, as well as statements in the future tense. We have based these forward-looking statements on our current expectations and projections about future events, based on information currently available to us. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at which, or means by which, such performance or results will be achieved.

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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, 2020. Unforeseen developments could cause actual performance or results to differ substantially from those expressed in or suggested by the forward-looking statements. Management does not assume responsibility for the accuracy or completeness of these forward-looking statements. There is no regulation requiring an update of any of the forward-looking statements after the date of this report to conform these statements to actual results or to changes in our expectations.

Our business activities are affected by many factors, including, without limitation, redemptions by mutual fund shareholders, taxes, general economic and business conditions, including those related to the COVID-19 pandemic, 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 new 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” and elsewhere in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020. 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.

Our Continuing Response to the COVID-19 Pandemic

In mid-March 2020, in response to the COVID-19 pandemic, we invoked our business continuity plan to ensure a smooth transition to remote work for our employees. We have continued to effectively operate the Company and remain committed to providing the same high level of services to the 16 Hennessy Funds and their shareholders. Further, we have undertaken various initiatives to ensure our continuing success in the work-from-home environment and prepare for our employees’ return to the office, including the following:

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Given the dynamic nature of the COVID-19 pandemic and its effects, we will continue to revise our approach to these initiatives and take any additional actions we deem appropriate to meet the needs of our employees, our partners, and the Hennessy Funds and their shareholders. While we cannot reasonably estimate the duration and severity of the COVID-19 pandemic or its ultimate impact on our business and revenues, we believe we have positioned the Company to emerge from the current crisis prepared for long-term growth.

Overview

Our primary business activity is providing investment advisory services to a family of open-end mutual funds branded as the Hennessy Funds. We manage 10 of the 16 Hennessy Funds internally. For the remaining six funds, we have delegated the day-to-day portfolio management responsibilities to sub-advisors, subject to our oversight. We oversee the selection and continued employment of each sub-advisor, review each fund’s investment performance, and monitor each sub-advisor’s adherence to each applicable fund’s investment objectives, policies, and restrictions. In addition, we conduct ongoing reviews of the compliance programs of sub-advisors and make onsite visits to sub-advisors, as feasible. Our secondary business activity is providing shareholder services to shareholders 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 of each Hennessy Fund. The percentage amount of the investment advisory fees varies by fund. The percentage amount of the shareholder service fees is consistent across all funds, but shareholder service fees are charged on Investor Class shares only. The dollar amount of the fees we receive fluctuates with changes in the average net asset value of each Hennessy Fund, which is affected by each fund’s investment performance, purchases and redemptions of shares, general market conditions, and the success of our marketing, sales, and public relations efforts.

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On a total return basis, the Dow Jones Industrial Average was up 8.29% and 19.91% for the three and six months ended March 31, 2021, respectively. During the most recent quarter, equity prices rallied as the rollout of COVID-19 vaccination centers around the United States and in various countries around the world became a reality. The availability of the vaccine, as well as improvement in key COVID-19 metrics, gave rise to hope for a further reopening of the economy. The unemployment rate, after having peaked at 14.7% in April 2020, is at 6.0% as of March 31, 2021, as the opening of the economy has necessitated the hiring and re-hiring of personnel. With all of this promising news has come the concern that inflation may be imminent. However, while it seems inevitable that prices may rise in some instances due to temporary supply chain disruptions, the consensus among market experts is that inflation should remain relatively subdued in the near term. With interest rates remaining low and employment trends improving, we expect interest rates and inflation to be an ongoing discussion in upcoming quarters. The Federal Reserve continues to stress that it remains accommodative and will abstain from interest rate hikes during 2021.

Long-term U.S. bond yields increased during the three months ended March 31, 2021, as the economic outlook improved and the likelihood of inflation increased. While inflation trends remained muted, investors are starting to anticipate a day when the Federal Reserve may be forced to adjust rate policy.

The Japanese equity market, as measured by the Tokyo Stock Price Index, was up 2.08% and 16.02% (in U.S. dollar terms) for the three and six months ended March 31, 2021, respectively. While Japan has fared relatively well compared to the United States with respect to the number of COVID-19 cases, infection rates in Japan rose during the recent quarter. This setback, coupled with a slower vaccine rollout compared to the United States, seems to have dampened economic growth in the quarter.

In the one-year period ended March 31, 2021, each of the 16 Hennessy Funds generated double-digit or triple-digit positive returns as the market recovered quickly from the sharp pandemic-induced decline in 2020. Over the longer term, 14 of the Hennessy Funds posted positive annualized returns in each of the three-year, five-year, ten-year, and since inception periods ended March 31, 2021, the exception being the two Hennessy BP Funds, which focus exclusively on the more volatile Energy sector.

As always, we are committed to providing superior service to investors and employing a consistent and disciplined approach to investing based on a buy-and-hold philosophy that rejects the idea of market timing. Our goal is to provide products that investors can have confidence in, knowing their money is invested as promised and with their best interests in mind. Accordingly, we continually seek new and improved ways to support investors in the Hennessy Funds, including by providing thought leadership and other resources to help them navigate through this unprecedented market disruption due to the COVID-19 pandemic. We operate a robust and leading-edge marketing automation and customer relationship management (CRM) system, with a database of over 100,000 financial advisors in addition to retail investors. We utilize this technology in an effort to both retain assets and drive new purchases into the Hennessy Funds. We employ a comprehensive marketing and sales program consisting of content, digital, social media, and traditional marketing initiatives and proactive meetings. In addition, our consistent annual public relations campaign has resulted in the Hennessy brand name appearing on TV, radio, print, or online media on average once every two to three days.

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We provide service to nearly 170,000 mutual fund accounts nationwide, including accounts held by shareholders who employ financial advisors to assist them with investing as well as accounts held by retail shareholders who invest directly with us. We serve nearly 14,000 financial advisors who utilize the Hennessy Funds on behalf of their clients, including nearly 300 who purchased one of our Funds for the first time during the most recent quarter. Approximately 17% of such advisors own two or more Hennessy Funds, and over 550 advisors hold a position of over $500,000, demonstrating strong brand loyalty.

Total assets under management as of March 31, 2021, was $4.0 billion, an increase of $0.7 billion, or 21.2%, compared to March 31, 2020. The increase in total assets was attributable to market appreciation.

The following table illustrates the quarter-by-quarter changes in our assets under management since March 31, 2020:

As stated above, the fees we receive for providing investment advisory and shareholder service are based on average assets under management. The following table shows average assets under management by share class for each quarter since March 31, 2020:

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 March 31, 2021, this asset had a net balance of $80.6 million, unchanged since September 30, 2020.

The principal liability on our balance sheet is the net deferred tax liability of $12.1 million generated due to the continued write off of our management contracts asset for tax purposes, which creates a book-to-tax difference.

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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 six months ended March 31, 2021:

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Revenue – Investment Advisory Fees and Shareholder Service Fees

Total revenue comprises investment advisory fees and shareholder service fees. Comparing the three months ended March 31, 2020, to the three months ended March 31, 2021, total revenue decreased by 10.6%, from $8.9 million to $7.9 million, investment advisory fees decreased by 10.4%, from $8.2 million to $7.3 million, and shareholder service fees decreased by 13.4%, from $0.7 million to $0.6 million.

Comparing the six months ended March 31, 2020, to the six months ended March 31, 2021, total revenue decreased by 17.8%, from $19.1 million to $15.7 million, investment advisory fees decreased by 17.5%, from $17.7 million to $14.6 million, and shareholder service fees decreased by 20.7%, from $1.5 million to $1.2 million.

In both periods, the decrease in investment advisory fees was due mainly to decreased average daily net assets of the Hennessy Funds, and the decrease in shareholder service fees was due to a decrease in the average daily net assets held in Investor Class shares of the Hennessy Funds. Assets held in Investor Class shares of the Hennessy Funds are subject to a shareholder service fee, whereas assets held in Institutional Class shares of the Hennessy Funds are not subject to a shareholder service fee.

We collect investment advisory fees from each of the Hennessy Funds at differing annual rates. These annual rates range between 0.40% and 1.25% of average daily net assets. Average daily net assets of the Hennessy Funds for the three months ended March 31, 2021, was $3.9 billion, which represents a decrease of $0.5 billion, or 10.5%, compared to the three months ended March 31, 2020, and average daily net assets for the six months ended March 31, 2021, was $3.9 billion, which represents a decrease of $0.8 billion, or 17.4%, compared to the six months ended March 31, 2020. The Hennessy Fund with the largest average daily net assets for the three and six months ended March 31, 2021, was the Hennessy Focus Fund, with $1.1 billion in each period. 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 six months ended March 31, 2021, was the Hennessy Japan Fund, with $0.9 billion in each period. We collect an investment advisory fee from the Hennessy Japan Fund at an annual rate of 0.90% of average daily net assets. However, we pay a sub-advisory fee at an annual rate in the range of 0.35% to 0.42% (depending on asset level) to the fund’s sub-advisor, which reduces the net operating profit contribution of the fund to our financial operations.

Total assets under management as of March 31, 2021, was $4.0 billion, an increase of $0.7 billion, or 21.2%, compared to March 31, 2020. The increase was attributable to market appreciation.

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The Hennessy Funds with net inflows were as follows:

The Hennessy Funds with the three largest amounts of net outflows were as follows:

Redemptions as a percentage of assets under management decreased from an average of 4.9% per month during the three months ended March 31, 2020, to an average of 3.2% per month during the three months ended March 31, 2021. Redemptions as a percentage of assets under management decreased from an average of 3.6% per month during the six months ended March 31, 2020, to an average of 3.4% per month during the six months ended March 31, 2021.

Operating Expenses

Comparing the three months ended March 31, 2020, to the three months ended March 31, 2021, total operating expenses decreased by 8.7%, from $5.9 million to $5.4 million. The decrease in operating expenses was due to decreases in all expense categories other than mutual fund distribution expense and depreciation expense, which moderately increased. As a percentage of total revenue, total operating expenses increased 1.4 percentage points to 67.7%.

Comparing the six months ended March 31, 2020, to the six months ended March 31, 2021, total operating expenses decreased by 13.3%, from $12.4 million to $10.8 million. The decrease in operating expenses was due to decreases in all expense categories other than depreciation expense, which moderately increased. As a percentage of total revenue, total operating expenses increased 3.6 percentage points to 68.4%.

Although the dollar value decreased in both periods, operating expenses increased as a percentage of total revenue due to our fixed costs, which did not decrease at as high of a rate as revenue did.

Compensation and Benefits Expense: Comparing the three months ended March 31, 2020, to the three months ended March 31, 2021, compensation and benefits expense decreased by 6.7%, from $2.4 million to $2.3 million. As a percentage of total revenue, compensation and benefits expense increased 1.2 percentage points to 28.4%.

Comparing the six months ended March 31, 2020, to the six months ended March 31, 2021, compensation and benefits expense decreased by 11.6%, from $4.9 million to $4.4 million. As a percentage of total revenue, compensation and benefits expense increased 1.9 percentage points to 27.7%.

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In both periods, the decrease in compensation and benefits expense was due primarily to a decrease in incentive-based compensation. Although the dollar value decreased in both periods, compensation and benefits expense increased as a percentage of total revenue due to our fixed salary and benefits costs.

General and Administrative Expense: Comparing the three months ended March 31, 2020, to the three months ended March 31, 2021, general and administrative expense decreased by 12.1% from $1.3 million to $1.1 million. As a percentage of total revenue, general and administrative expense decreased 0.2 percentage points to 14.3%. The decrease in general and administrative expenses was due mainly to a decrease in conference and travel expense.

Comparing the six months ended March 31, 2020, to the six months ended March 31, 2021, general and administrative expense decreased by 12.2% from $2.8 million to $2.4 million. As a percentage of total revenue, general and administrative expense increased 1.0 percentage points to 15.5%. Although the dollar value decreased due to a decrease in conference and travel expense, general and administrative expenses increased as a percentage of total revenue due to our other fixed costs, such as rent and professional fees.

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. In addition, some financial institutions charge a minimum fee if the average daily net assets of a Hennessy Fund held by such an institution are less than a threshold amount. In such cases, we pay the minimum fee.

Comparing the three months ended March 31, 2020, to the three months ended March 31, 2021, mutual fund distribution expense increased by 4.3%, from $0.115 million to $0.120 million.

Comparing the six months ended March 31, 2020, to the six months ended March 31, 2021, mutual fund distribution expense decreased by 5.1%, from $0.25 million to $0.24 million.

Mutual fund distribution expenses fluctuated in both periods based on the following factors:

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For both the three and six months ended March 31, 2021, mutual fund distribution expense as a percentage of total revenue increased 0.2 percentage points to 1.5%. The increase in mutual fund distribution expense as a percentage of total revenue was due to a larger portion of the fees being attributable to fixed minimum fees, which do not fluctuate in line with revenue.

Sub-Advisory Fees Expense: Comparing the three months ended March 31, 2020, to the three months ended March 31, 2021, sub-advisory fees expense decreased by 10.2%, from $2.0 million to $1.8 million. As a percentage of total revenue, sub-advisory fees expense increased 0.1 percentage points to 22.7%.

Comparing the six months ended March 31, 2020, to the six months ended March 31, 2021, sub-advisory fees expense decreased by 17.0%, from $4.3 million to $3.6 million. As a percentage of total revenue, sub-advisory fees expense increased 0.2 percentage points to 22.8%.

In both periods, the dollar value decrease in sub-advisory fees expense was due to decreased average daily net assets held in the sub-advised Hennessy Funds. Although the dollar value decreased, sub-advisory fees expense increased as a percentage of total revenue because the decrease in average daily net assets held by the Hennessy Funds that we internally manage was larger than the decrease in average daily net assets of the sub-advised Hennessy Funds.

Depreciation Expense: Comparing the three months ended March 31, 2020, to the three months ended March 31, 2021, depreciation expense increased by 3.3%, from $0.061 million to $0.063 million. As a percentage of total revenue, depreciation expense increased 0.1 percentage points to 0.8%.

Comparing the six months ended March 31, 2020, to the six months ended March 31, 2021, depreciation expense increased by 9.6%, from $0.11 million to $0.13 million. As a percentage of total revenue, depreciation expense increased 0.3 percentage points to 0.9%.

In both periods, the increase in depreciation expense resulted from fixed asset purchases.

Interest Expense

Comparing the three and six months ended March 31, 2020, to the three and six months ended March 31, 2021, interest expense decreased by 100.0% from $0.26 million and $0.45 million to $0.

In both periods, the decrease in interest expense was due to the payoff in full of the remaining outstanding balance under our term loan agreement with U.S. Bank National Association on March 26, 2020.

Income Tax Expense

Comparing the three months ended March 31, 2020, to the three months ended March 31, 2021, income tax expense decreased by 14.8%, from $0.8 million to $0.7 million. Comparing the six months ended March 31, 2020, to the six months ended March 31, 2021, income tax expense decreased by 25.6%, from $1.8 million to $1.3 million.

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In both periods, the decrease in income tax expense was due primarily to lower net operating income in the current period and secondarily to a lower effective income tax rate as discussed above.

Net Income

Comparing the three months ended March 31, 2020, to the three months ended March 31, 2021, net income decreased by 4.3%, from $2.0 million to $1.9 million. Comparing the six months ended March 31, 2020, to the six months ended March 31, 2021, net income decreased by 20.4%, from $4.6 million to $3.7 million.

In both periods, the decrease in net income was primarily due to lower net operating income in the current period.

Critical Accounting Policies

Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States, which require the use of estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. These accounting policies, methods, and estimates are an integral part of the financial statements prepared by management and are based upon management’s current judgments. Those judgments are normally based on knowledge and experience with regard to past and current events and assumptions about future events. Certain accounting policies, methods, and estimates are particularly sensitive because of their significance to the financial statements and because future events affecting them may differ markedly from management’s current judgment. For a discussion of the accounting policies that we believe are most critical to understanding our results of operations and financial position, see the section 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, 2020.

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 March 31, 2021, 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 March 31, 2021, was $4.0 billion, an increase of $0.7 billion or 21.2%, compared to March 31, 2020. 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 six months ended March 31, 2021, was $3.9 billion, a decrease of $0.8 billion or 17.4%, compared to the six months ended March 31, 2020. As of March 31, 2021, we had cash and cash equivalents of $11.5 million.

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The following table compares the six months ended March 31, 2021, to the six months ended March 31, 2020, with respect to key financial data relating to our liquidity and use of cash:

The decrease in cash provided by operating activities of $1.7 million was due mainly to decreased operating income.

The decrease in cash used in investing activities of $0.6 million was due to a payment for the purchase of assets related to the management of the BP Funds made in the prior period that was not made in the current period.

The decrease in cash used for financing activities of $20.2 million was due primarily to the prepayment of the remaining outstanding balance payable under our term loan agreement with U.S. Bank National Association in the prior period.

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 have been no changes in the Company’s internal control over financial reporting as defined in Rules 13a-15(f) of the Exchange Act that occurred during the fiscal quarter ended March 31, 2021, and that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II:    OTHER INFORMATION

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

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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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