FORM 10-Q

PART I:         FINANCIAL INFORMATION

Item 1:          Unaudited Condensed Financial Statements

Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)

See Notes to Unaudited Condensed Financial Statements

Statements of Income

(In thousands, except share and per share amounts)

(Unaudited)

See Notes to Unaudited Condensed Financial Statements

Statements of Changes in Stockholders' Equity

(In thousands, except share data)

(Unaudited)

Statements of Changes in Stockholders' Equity

(In thousands, except share data)

(Unaudited)

See Notes to Unaudited Condensed Financial Statements

Statements of Cash Flows

(In thousands)

(Unaudited)

See Notes to Unaudited Condensed Financial Statements

HENNESSY ADVISORS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

The accompanying unaudited condensed balance sheet as of September 30, 20222023, which has been derived from audited financial statements, and the unaudited interim condensed financial statements as of and for the three and ninemonths ended June 30,December 31, 2023, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and include the accounts of Hennessy Advisors, Inc. (the “Company,” “we,” “us,” or “our”). Certain information and footnote disclosures in these unaudited interim condensed financial statements, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission for Quarterly Reports on Form 10-Q. In the opinion of management, the unaudited interim condensed financial statements reflect all adjustments necessary for a fair statement of the Company’s financial position at June 30,December 31, 2023, the Company’s operating results for the three and ninemonths ended June 30,December 31, 2023 and 2022, and the Company’s cash flows for the ninethree months ended June 30,December 31, 2023 and 2022. 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 2022,2023, which are included in the Company’s Annual Report on Form 10‑K for the fiscal year ended September 30, 2022.2023.

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 and one exchange‑traded fund (“ETF”) branded as the Hennessy Funds. The Company serves as the investment advisor to all classes of the Hennessy Cornerstone Growth Fund, the Hennessy Focus Fund, the Hennessy Cornerstone Mid Cap 30 Fund, the Hennessy Cornerstone Large Growth Fund, the Hennessy Cornerstone Value Fund, the Hennessy Total Return Fund, the Hennessy Equity and Income Fund, the Hennessy Balanced Fund, the Hennessy Energy Transition Fund, the Hennessy Midstream Fund, the Hennessy Gas Utility Fund, the Hennessy Japan Fund, the Hennessy Japan Small Cap Fund, the Hennessy Large Cap Financial Fund, the Hennessy Small Cap Financial Fund, and the Hennessy Technology Fund (collectively, the “Hennessy Mutual Funds”), as well as to the Hennessy Stance ESG ETF. The Company also provides shareholder services to investors in the Hennessy Mutual Funds.

          The employee retention credit (“ERC”), as originally enacted on March 27, 2020, by the CARES Act, was a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer paid to employees and allowed claims through December 31, 2021, by eligible employers who retained employees during the Covid-COVID-19 pandemic. The Company filed Form 941-X to request an ERC from the Internal Revenue Service. In May 2023, the Company received an ERC of approximately $0.3 million plus accrued interest. For-profit entities do not have specific guidance to apply under accounting principles generally accepted in the United States to account for ERCs and therefore follow guidance in accordance with Accounting for Government Grants and Disclosure of Government Assistance (IAS("IAS 2020"). In accordance with IAS 20, the Company is nettingnetted the credit against related payroll expense in the current period.period received.

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:

The Company earns shareholder service fees from Investor Class shares of the Hennessy Mutual Funds by, among other things, maintaining a toll‑toll free number that the current investors in the Hennessy Funds may call to ask questions about their accounts or the funds and actively participating as a liaison between investors in the Hennessy Funds and U.S. Bank Global Fund Services. These

Investment advisory and shareholder service 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 Company recognizes revenues when its obligations related to the investment advisory and shareholder services are satisfied, and it is probable that a significant reversal of the revenue amount would not occur in future periods. Management judgment is required in assessing the probability of significant revenue reversal and in identification of distinct services. Investment advisory and shareholder services are performed over time because investors in the Hennessy Funds are receiving and consuming the benefits as they are provided by the Company. Fees are based on contractual percentages of net asset values and recognized for services provided during the period, which are distinct from services provided in other periods. Such fees are affected by changes in net asset values, including market appreciation or depreciation, foreign exchange translation, and net inflows or outflows. Assets under management represent the broad range of financial assets the Company manages for the Hennessy Funds on a discretionary basis pursuant to investment management and shareholder servicing agreements that are expected to continue for at least 12 months. In general, reported assets under management reflect the valuation methodology that corresponds to the basis used for determining revenue. The fees are computed and billed monthly, at which time they are recognized in accordance with Accounting Standards Codification 606 — Revenue from Contracts with Customers.

The Company waives a portion of its fees with respect to the Hennessy Midstream Fund, the Hennessy Technology Fund, and the Hennessy Stance ESG ETF 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.

Throughout its history, the Company has completed 1112 purchases of the assets related to the management of 3132 investment 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, 2022,2023, by applying the income approach and is based on management estimates and assumptions, including third‑party valuations that utilize appropriate valuation techniques. It was determined there was no impairment as of such date. As of June 30,December 31, 2023, 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 reviewsconsidered various factors, such as likelihood of continued renewal, whether there are foreseeable limits on net cash flows, and whether the Company is dependent on a limited number of investors, in determining the useful life of the management contracts each reporting periodcontracts. Based on analysis, the Company considers the management contract asset to determine if they continue to havebe an intangible asset with an indefinite useful life.life and no impairment as of the end of the current period. 

The Company completed its most recent asset purchase on DecemberNovember 22,10, 2022,2023, when it purchased certain assets related to the management of the Stance Equity ESG Large Cap Core ETF (the “Stance ETF”).CCM Small/Mid-Cap Impact Value Fund. This asset purchase added approximately $43$12 million to the Company’s assets under management at the time of closing. The purchase was consummated in accordance with the terms and conditions of thethat certain Transaction Agreement, dated as of AugustApril 26, 2023, 29,2022, amongbetween the Company Stanceand Community Capital Management, LLC and Red Gate Advisers, LLC, among others.(the “CCM Transaction Agreement”). Upon completion of the transaction, the assets related to the management of the Stance ETFCCM Small/Mid-Cap Impact Value Fund were reorganized into a newly formed series of Hennessy Funds Trust named the Hennessy Stance ESG ETF. In connection with the transaction, Stance Capital, LLC and Vident Investment Advisory, LLC became sub-advisors to the Hennessy Stance ESG ETF.

OnAs of AprilDecember 31, 2023, there was a 26,second 2023,asset purchase pending under the Company announced that it has signed a definitive agreement with Community Capital Management, LLC (“CCM”)CCM Transaction Agreement, which is for the purchase of assets related to the management of the CCM Core Impact Equity Fund. The purchase is subject to customary closing conditions, including the approval of the shareholders of the CCM Core Impact Equity Fund. At the Special Meeting of Shareholders of the CCM Core Impact Equity Fund on January 31, 2024, shareholders approved the purchase of assets related to the management of the CCM Core Impact Equity Fund and the CCM Small/Mid-Cap Impact Value Fund (the “CCM Equity Funds”). The definitive agreement includes customary representations, warranties, and covenants of the parties to the agreement. It provides for payment by the Company to be made upon closing equal to 1.25% of the aggregate current net asset value of the CCM Equity Funds measured as of the close of businessCompany. See Note two13, trading days prior to the closing date of the transaction. The Company expects to complete the transaction during calendar 2023."Subsequent Events," for additional information.

In the current period, the Company capitalized $0.1$0.2 million in legal costs related to the transaction. Upon completion of the transaction, the CCM Equity Funds will be reorganized into the Hennessy Stance ESG ETF. The transaction is subject to customary closing conditions, including the approval of the CCM Equity Funds’ shareholders.

Transaction Agreement. 

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

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

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

The Company has entered into sub-advisory agreements for the Hennessy Focus Fund, the Hennessy Equity and Income Fund, the Hennessy Japan Fund, the Hennessy Japan Small Cap Fund, and the Hennessy Stance ESG ETF. 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.

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 three months ended June 30,December 31, 2023, or the year ended September 30, 2022.2023.

The fair values of receivables, payables, and accrued liabilities approximate their book values given the short-term nature of those instruments.

The fair value of the 2026 Notes (see Note 7) was approximately $36.93$38.2 million as of June 30,December 31, 2023, based on the last trading price of the notes on that date (Level 1).

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. During the quarter ended March 31, 2021, the Company renewed the lease for its office in Novato, California for an additional three years, which created a long‑term operating lease as of such date. Upon renewal of the lease, the Company recorded a right‑of‑use asset of $1.1 million on its balance sheet. The renewed lease expires on July 31, 2024.2024, and is therefore a short-term operating lease as of December 31,2023. There were no other long‑term operating leases as of June 30,December 31, 2023, and September 30, 2022.2023.

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, Dallas, 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 ninethree months ended June 30,December 31, 2023, rent expense for all offices, which is recorded under general and administrative expense in the statements of income, totaled $0.4$0.1 million.

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:

On October 20, 2021, the Company completed a public offering of 4.875% notes due 2026 in the aggregate principal amount of $40,250,000 (the “2026 Notes”), which included the full exercise of the underwriters’ overallotment option. The initial net proceeds received were approximately $38,607,000 after considering the impact of issuance costs and underwriter discounts. The 2026 Notes bear interest at 4.875% per annum, payable on the last day of each calendar quarter and at maturity, beginning December 31, 2021. The 2026 Notes mature on December 31, 2026.

The 2026 Notes are direct unsecured obligations, rank equally in right of payment with any of the Company’s future unsecured unsubordinated indebtedness, senior to any of the Company’s future indebtedness that expressly provides that it is subordinate to the 2026 Notes, effectively subordinate to all of the Company’s existing and future secured indebtedness, and structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s future subsidiaries.

The Company’s effective income tax rates for the ninethree months ended June 30,December 31, 2023 and 2022, were 26.2%27.0% and 23.0%25.8%, respectively. For the nine months ended June 30, 2022, the effective income tax rate was lower than the federal statutory rate due to the recognition of a tax benefit related to a California tax refund of $0.2 million.

The Company is subject to income tax in the U.S. federal jurisdiction and various state jurisdictions. As of June 30,December 31, 2023, the Company has identified 22 state tax jurisdictions in which it is subject to income tax.

In addition to the operating leases discussed in Note 5, the Company has contractual expense ratio limitations in place with respect to the Hennessy Midstream Fund, the Hennessy Technology Fund, and the Hennessy Stance ESG ETF. The contractual expense ratio limitations with respect to the Hennessy Midstream Fund and the Hennessy Technology Fund will expire February 28, 2024.2024, unless extended. The contractual expense ratio limitation with respect to the Hennessy Stance ESG ETF expireswill expire December 31, 2024.2024, unless extended. Total fees waived during the ninethree months ended June 30,December 31, 2023 and June 30,December 31, 2022, were $0.11$0.04 million and $0.08$0.03 million, respectively. To date, the Company has only waived fees based on contractual obligations but has the ability to waive fees at its discretion. Any decision to waive fees would apply only on a going forward basis.

The Company has no other commitments and no significant contingencies with original terms in excess of one year.

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 restricted stock units (“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.

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, the Company issued 6,6912,770 and 6,0021,965 shares of common stock during the ninethree months ended June 30,December 31, 2023 and 2022, respectively. The maximum number of shares of common stock that may be issued under the DRSPP is 1,470,000, of which 1,446,154 shares1,440,540 remained available for issuance as of June 30, 2023December .31,2023.

As discussed in Note 13, the Company began offering to investors an updated Dividend Reinvestment and Stock Purchase Plan in January 2024 that replaced the DRSPP.

Stock Buyback Program

In August 2010, the Company’s Board of Directors adopted a stock buyback program pursuant to which the Company was authorized to repurchase up to 1,500,000 shares of its common stock in the open market, in privately negotiated transactions, or otherwise. The program has no expiration date. In August 2022, the Board of Directors increased the number of shares that may be repurchased under the program to 2,000,000 shares. As a result, a total of 1,096,368 shares remains available for repurchase under the stock buyback program. The Company did not repurchase any shares of its common stock pursuant to the stock buyback program during the ninethree months ended June 30,December 31, 2023.

Basic The weighted average common shares outstanding used in the calculation of basic earnings per share is determined by dividing net earnings by theand weighted average number ofcommon shares ofoutstanding, adjusted for common stock outstanding, whileequivalents, used in the computation of 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 RSUs.were as follows:

For the ninethree months ended June 30,December 31, 2023 and 2022, the Company excluded 99,869244,051 and 241165,868 common stock equivalents, respectively, from the diluted earnings per share calculations 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 $0.1375 per share on June 5,November 27, 2023, to shareholders of record as of May 23,November 13, 2023.

The Company has reviewed accounting pronouncements issued between the filing date of its most recent Form 10-K, which was December 7, 2022,2023, 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.disclosures, except as disclosed below.

In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which requires more detailed income tax disclosures. The guidance requires entities to disclose disaggregated information about their effective tax rate reconciliation as well as expanded information on income taxes paid by jurisdiction. The guidance is effective for financial statements issued for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is required to adopt this standard prospectively in fiscal year 2026. The Company is currently in the process of evaluating the impact of adoption on its financial statements.

OnThe Company has evaluated subsequent events through the date these financial statements were issued and has concluded that July 14,no material events occurred during this period that require recognition or disclosure, other than as discussed below.

In 2023,January 2024, the Company began offering to investors an updated Dividend Reinvestment and Stock Purchase Plan. The maximum number of shares of common stock that onemay be issued under the updated plan is 1,530,000 shares.

At the Special Meeting of Shareholders of the sub‑advisorsCCM Core Impact Equity Fund on January 31, 2024, shareholders approved the purchase of assets related to the management of the CCM Core Impact Equity Fund by the Company. It is anticipated that the assets of the CCM Core Impact Equity Fund will be reorganized into the Hennessy Stance ESG ETF Vident Investment Advisory, LLC (“VIA”), completed an acquisition transaction that resulted in a change of control of VIA and an automatic termination of our sub‑advisory agreement with VIA. As a result of the transaction, VIA ceased to exist and Vident Advisory, LLC (“Vident Advisory”) is now the sole Vident enterprise carrying out Vident’s business and operations. On the same date, the Company entered into a new sub‑advisory agreement with Vident Advisory pursuant to which Vident Advisory now provides sub‑advisory services to the Hennessy Stance ESG ETF. The new sub‑advisory agreement has been approved by the Funds’ Board of Trustees and the shareholders of the Hennessy Stance ESG ETF.

In addition, at the same special meeting of shareholders of the Hennessy Stance ESG ETF at which the new sub‑advisory agreement with Vident Advisory was approved, the shareholders of the Hennessy Stance ESG ETF approved the implementation of a manager of managers structure for the Fund. In the absence of a manager of managers structure, a sub‑advisory agreement automatically terminates if it is assigned. Assignment is generally defined under the Investment Company Act of 1940 (the “1940 Act”) and the Investment Advisers Act of 1940 (the “Advisers Act”) to include direct assignments as well as assignments that are deemed to occur due to the change in control of the investment advisor, which includes the Company or one of the sub‑advisors that the Company has engaged on behalf of certain of the Hennessy Funds. However, a transaction is notFebruary 23, 2024. an assignment under the 1940 Act or the Advisers Act if it does not result in a change of actual control or management of the Company or, in the context of a sub-advisor, a change of actual control or management of the sub-advisor.

Upon the occurrence of an assignment due to a change of control of a sub-advisor, but not a change of control of the Company, the Company can continue acting as an advisor to the impacted Hennessy Fund, but the shareholders of such Fund would have to approve a new sub‑advisory agreement for the sub‑advisor. Because obtaining shareholder approval for a new sub‑advisor can be costly, both in terms of expense and time, the Company recently sought and received an exemptive order from the SEC to operate under a manager of managers structure. The manager of managers structure permits the Company to appoint and replace unaffiliated sub-advisors and to enter into and make material amendments to the related sub-advisory contracts on behalf of the Hennessy Funds without shareholder approval, but subject in each case to the approval of the Funds’ Board of Trustees. Under the manager of managers structure, the Company has ultimate responsibility, subject to oversight by the Funds’ Board of Trustees, for overseeing the Hennessy Funds’ unaffiliated sub-advisors and recommending their hiring, termination, or replacement. The manager of managers structure cannot be implemented on behalf of a particular Hennessy Fund until the shareholders of such Fund approve its implementation. As stated above, the shareholders of the Hennessy Stance ESG ETF recently approved this arrangement. The Company is evaluating the timing and process for implementing a manager of managers structure for the Hennessy Funds that have sub-advisors other than the Hennessy Stance ESG ETF.

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 which, 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 this Quarterly Report on Form 10-Q and in our Annual Report on Form 10‑K for the fiscal year ended September 30, 2022,2023, including under the section entitled “Risk Factors” in each such report. 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 investors in the Hennessy Funds, taxes, general economic and business conditions, interest rate movements, inflation, the personal savings rate, 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. 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)(i) the identification, completion, and integration of future acquisitions and (b)(ii) organic growth, through both the retention of the fund assets we currently manage and the generation of inflows into the funds we manage. The success of our business strategy may be influenced by the factors discussed in the section titled “Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.2023. 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 business activity is providing investment advisory services to a family of 16 open-end mutual funds and one ETF branded as the Hennessy Funds. We manage 12 of the 17 Hennessy Funds internally. For the remaining five 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 investors in the Hennessy Mutual Funds.

We derive our operating revenues from investment advisory fees paid to us by the Hennessy Funds and shareholder service fees paid to us by the Hennessy Mutual 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 of the Hennessy Mutual 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 isare 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 21.73%13.09% for the ninethree months ended June 30,December 31, 2023. During the most recent quarter, equity prices advanced as investors appearedreacted positively to continue to focus on a resilient, albeit slowing economy.encouraging signs that inflation is moderating. While the rate of inflation continues to moderate inbe above the United States, in other countries it remains stubbornly high. The consensus expectationFederal Reserve’s stated 2% target, the market increasingly seems to believe that the Federal Reserve would startpotential for slowing economic growth could bring inflation close to lower the Federal Funds RateReserve's stated goal. Notwithstanding this past quarter’s anemic revenue and earnings growth for S&P 500 companies, earnings broadly came in higher than consensus estimates, which may speak to the fall has been put on hold as Federal Reserve officials continue to insistidea that theycompanies are not likely done with raising rates. The market’s strong advance this year, especiallyreining in technology-related shares, continues to defy expectations that higher interest rates would depress equity valuations.expenses, which may in turn bolster margins in 2024.

Long-term U.S. bond yields increaseddecreased meaningfully during the three months ended June 30,December 31, 2023, as encouraging inflation remained abovedata pointed to the potential that the Federal Reserve’s target of 2%. Although inflation has moderated,Reserve could be done raising rates for the Fedforeseeable future. While the Federal Reserve continues to be vigilantindicate that it reserves the right to raise rates, the market believes that the Federal Reserve is more likely to cut rates in signaling that more rate hikes could come2024 rather than raise them. According to Bloomberg, the market is pricing in the back half of 2023.six rates cuts in 2024. With the labor market continuing to show signs of strength, there iswe expect investors to focus on any weakness as a beliefsignal that consumer demandinflation could keep upward pressure on prices. According to estimates compiled by Bloomberg, the consumer price indexmoderate further. Economic growth in 2024 is expected to rise 4.1%be 1.3% versus an expectation of 2.4% in 2023, with an expectationaccording to Bloomberg. Any unexpected strength in either the labor market or the economy at large could pose a risk to the market’s belief that it will moderate to 2.6% in 2024. We believe that investors will continue to monitor expectations for economic growth to get a gaugelower rates are on how many more rate hikes could be forthcoming.the horizon.

The Japanese equity market was up 26.87%8.00% in U.S. dollar terms over the ninethree months ended June 30,December 31, 2023, as measured by the Tokyo Stock Price Index. During the period, Japanese equities traded higher as robust domestic consumer demand coupled with increased foreign demand for Japanese equities propelled shares higher.an emphasis on increasing shareholder value has taken root in Japan. Investors have applauded an increasing focus on corporate governance, capital allocation, and shareholder returns.

For the ninetwelve months ended June 30,December 31, 2023, 15 out ofall 17 Hennessy Funds generated positive returns. For the three‑year period ended June 30,December 31, 2023, 1513 of the Hennessy Funds with at least three years of operating history posted positive annualized returns, with the exception of the Hennessy Japan Fund, the Hennessy Japan Small Cap Fund, and the Hennessy Large Cap Financial Fund. Over the longer term, all Hennessy Funds with at least 10ten years of operating history posted positive returns in each of the five-year and ten-year periods ended June 30, 2022.December 31, 2023.

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 market insights, sector highlights, and other resources to help them manage their fund investments with confidence. 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 both to help 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.

We provide service to over 138,500147,500 fund accounts nationwide, including accounts held by investors who employ financial advisors to assist them with investing as well as accounts held by retail investors who invest directly with us. We serve approximately 11,50011,400 financial advisors who utilize the Hennessy Funds on behalf of their clients, including approximately 210300 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 400 advisors hold a position of over $500,000. While numbers have declined in recent years, we continue to focus significant efforts on financial advisors who own two or more Hennessy Funds or hold a position of over $500,000 in an effort to build and maintain brand loyalty among our top tier of advisors.

Total assets under management as of June 30,December 31, 2023, was $3.0$3.3 billion, a decreasean increase of $0.2$0.3 billion, or 6.1%9.0%, compared to June 30,December 31, 2022. The decreaseincrease in total assets was attributable to market appreciation and the purchase of the assets related to the CCM Small/Mid-Cap Impact Value Fund, partly offset by net outflows of the Hennessy Funds, partly offset by market appreciation.

Funds.

The following table illustrates the quarter‑by‑quarter changes in our assets under management since June 30,December 31, 2022:

As stated above, the fees we receive for providing investment advisory and shareholder services are based on average assets under management. The following table shows average assets under management for each quarter since June 30,December 31, 2022:

The principal asset on our balance sheet, the management contracts,contract asset, represents the capitalized costs incurred in connection with the purchase of the assets related to the management of investment funds. As of June 30,December 31, 2023, this asset had a net balance of $81.2$81.5 million, compared to $80.9$81.3 million as of September 30, 2022.2023. The increase was due to the purchase of assetsis related to the management of the Stance ETF and the ongoing acquisition ofcosts associated with the CCM Equity Funds.Transaction Agreement.

On October 20, 2021, we completed a public offering of the 2026 Notes in the aggregate principal amount of $40.25 million, which included the full exercise of the underwriters’ overallotment option. The 2026 Notes mature on December 31, 2026, and may be redeemed in whole or in part at any time or from time to time at our option on or after December 31, 2023. The 2026 Notes bear interest at 4.875% per annum, payable on the last day of each calendar quarter and at maturity, beginning December 31, 2021. The 2026 Notes are direct unsecured obligations, rank equally in right of payment with any of our future unsecured unsubordinated indebtedness, senior to any of our future indebtedness that expressly provides that it is subordinate to the 2026 Notes, effectively subordinate to all of our existing and future secured indebtedness, and structurally subordinated to all existing and future indebtedness and other obligations of any future subsidiaries of ours.

The 2026 Notes are the principal liability on our balance sheet at $39.1$39.2 million, net of issuance costs.

Results of Operations

The following table sets forth items in the statements of income as dollar amounts and as percentages of total revenue:

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,December 31, 2022, to the three months ended June 30,December 31, 2023, total revenue decreased by 17.5%, from $6.9 million to $5.7remained flat at $6.1 million, investment advisory fees decreased by 17.9%, from $6.4 million to $5.2remained flat at $5.7 million, and shareholder service fees decreased by 12.9%2.4%, from $0.53$0.49 million to $0.47$0.48 million. Comparing the nine months ended June 30, 2022, to the nine months ended June 30, 2023, total revenue decreased by 23.4%, from $23.2 million to $17.8 million, investment advisory fees decreased by 24.1%, from $21.5 million to $16.3 million, and shareholder service fees decreased by 14.9%, from $1.7 million to $1.4 million.

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

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 both the three months ended June 30,December 31, 2023 and 2022, was $2.9 billion, which represents a decrease of $0.6 billion, or 17.1%, compared to the three months ended June 30, 2022, and average daily net assets for the nine months ended June 30, 2023, wasunchanged at $3.0 billion, which represents a decrease of $0.8 billion, or 21.9%, compared to the nine months ended June 30, 2022.billion. The Hennessy Fund with the largest average daily net assets for the three and nine months ended JuneDecember 31, 2023, was the Hennessy Cornerstone Mid Cap 30 Fund, with $0.64 billion. We collect an investment advisory fee from the Hennessy Cornerstone Mid Cap 30 Fund at an annual rate of 0.74% of average daily net assets. The Hennessy Fund with the second largest average daily assets for the three months ended December 31, 2023, was the Hennessy Focus Fund, with $0.7 billion in each period.$0.61 billion. 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, 2023, was the Hennessy Gas Utility Fund, with $0.5 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,December 31, 2023, was $3.0$3.3 billion, a decreasean increase of $0.2$0.3 billion, or 6.1%9.0%, compared to June 30,December 31, 2022. The decreaseincrease in total assets was attributable to market appreciation and the purchase of the assets related to the CCM Small/Mid Cap Impact Value Fund, partly offset by net outflows of the Hennessy Funds, partly offset by market appreciation.Funds.

The Hennessy Funds with the three largest amounts of 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 3.2%3.4% per month during the three months ended June 30, 2022, to an average of 2.1% per month during the three months ended June 30, 2023. Redemptions as a percentage of assets under management increased from an average of 2.7% per month during the nine months ended June 30,December 31, 2022, to an average of 2.8% per month during the ninethree months ended June 30,December 31, 2023.

Operating Expenses

Comparing the three months ended June 30,December 31, 2022, to the three months ended June 30,December 31, 2023, total operating expenses decreasedincreased by 5.7%3.9%, from $4.6$4.5 million to $4.3$4.7 million. As a percentage of total revenue, total operating expenses increased 9.52.9 percentage points to 75.8%76.8%.

Comparing the nine months ended June 30, 2022, to the nine months ended June 30, 2023, total operating expenses decreased by 14.4%, from $15.4 million to $13.2 million. As a percentage of total revenue, total operating expenses increased 7.8 percentage points to 74.2%.

In both periods, the dollar value decreaseThe increase in operating expenses was due to decreasesincreases in all expense categories other than generalsub-advisory fees, which decreased, and administrative expensecompensation and depreciation expense,benefits, which moderately increased.remained flat.