Hennessy Advisors Inc 10-K for FY2022
Hennessy Advisors Inc (HNNA)
About this 10-K
Hennessy Advisors Inc filed this 10-K on December 7, 2022, covering the fiscal year ended September 30, 2022 (FY2022).
Headline figures
Fiscal year ended September 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $29.67M
- down 9.4% from $32.76M a year earlier
- Net income
- $6.19M
- down 21.7% from net income of $7.9M a year earlier
- Diluted EPS
- $0.82
- down 23.4% from $1.07 a year earlier
Table of Contents
| A NNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| (State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) | |
| |
||
(Address of principal executive office) |
(Zip code) | |
| Title of each class |
Trading symbol |
Name of each exchange on which registered | ||
Large accelerated filer |
☐ |
Accelerated filer |
☐ | |||
| ☒ | Smaller reporting company | |||||
| Emerging growth company | ||||||
Table of Contents
HENNESSY ADVISORS, INC.
TABLE OF CONTENTS
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PART I
| ITEM 1. | BUSINESS |
GENERAL
Hennessy Advisors, Inc. (the “Company,” “we,” “us,” or “our”) is a publicly traded investment management firm whose primary business activity is managing, servicing, and marketing a family of open-end mutual funds branded as the Hennessy Funds. 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. Our firm was founded on these principles over 30 years ago, and the same principles guide us today.
We earn revenues primarily by providing investment advisory services to the Hennessy Funds and secondarily by providing shareholder services to investors in the Hennessy Funds. Investment advisory services include managing the composition of each fund’s portfolio (including the purchase, retention, and disposition of portfolio securities in accordance with each fund’s investment objectives, policies, and restrictions), monitoring each fund’s compliance with its investment objectives and restrictions and federal securities laws, monitoring the liquidity of each fund, reviewing each fund’s investment performance, overseeing the selection and continued employment of sub-advisors and monitoring such sub-advisors’ adherence to the fund’s investment objectives, policies, and restrictions, overseeing other service providers, maintaining in-house marketing and distribution departments, preparing and distributing regulatory reports, and overseeing distribution of the funds through third-party financial intermediaries. Shareholder services include 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. The fees we receive for investment advisory and shareholder services are calculated as a percentage of the average daily net asset values of the Hennessy Funds. Accordingly, our total revenue increases or decreases as our average assets under management rises or falls. The percentage amount of the investment advisory fees varies from fund to fund, but the percentage amount of the shareholder service fees is consistent across all funds.
We have delegated the day-to-day portfolio management responsibilities to sub-advisors, subject to our oversight, for some of the Hennessy Funds. In exchange for these sub-advisory services, we pay each sub-advisor a fee out of our own assets, which is calculated as a percentage of the average daily net asset values of the sub-advised funds. Accordingly, the sub-advisory fees we pay increase or decrease as our average assets under management in our sub-advised funds increases or decreases, respectively.
Our average assets under management for fiscal year 2022 was $3.6 billion, and our total assets under management as of the end of fiscal year 2022 was $2.9 billion. Our business strategy centers on (i) organic growth through our marketing, sales, and distribution efforts and (ii) growth through strategic purchases of management-related assets.
HISTORICAL CALENDAR YEAR TIMELINE
| 1989 | In February, we were founded as a California corporation under our previous name, Edward J. Hennessy, Inc., and registered as a broker-dealer with the Financial Industry Regulatory Authority. | |
| 1996 | In March, we launched our first mutual fund, the Hennessy Balanced Fund. | |
| 1998 | In October, we launched our second mutual fund, the Hennessy Total Return Fund. | |
| 2000 | In June, we successfully completed our first asset purchase by purchasing the assets related to the management of two funds previously managed by Netfolio, Inc. (“Netfolio”) and changed the fund names to the Hennessy Cornerstone Growth Fund and the Hennessy Cornerstone Value Fund. The amount of the purchased assets as of the closing date totaled approximately $197 million. | |
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| 2002 | In May, we successfully completed a self-underwritten initial public offering of our stock by raising $5.7 million at an offering price of $1.98 (HNNA.OB) and changed our firm name to Hennessy Advisors, Inc. Our total assets under management at the time of our initial public offering was approximately $358 million. | |
| 2003 | In September, we purchased the assets related to the management of a fund previously managed by SYM Financial Corporation and reorganized the assets of such fund into the newly created Hennessy Cornerstone Mid Cap 30 Fund. The amount of the purchased assets as of the closing date was approximately $35 million. | |
| 2004 | In March, we purchased the assets related to the management of five funds previously managed by Lindner Asset Management, Inc. and reorganized the assets of such funds into four of our existing Hennessy Funds. The amount of the purchased assets as of the closing date totaled approximately $301 million. | |
| 2005 | In July, we purchased the assets related to the management of a fund previously managed by Landis Associates LLC and changed the fund name to the Hennessy Cornerstone Growth, Series II Fund. The amount of the purchased assets as of the closing date was approximately $299 million. | |
| 2007 | In November, we launched the Hennessy Micro Cap Growth Fund, LLC, a non-registered private pooled investment fund. | |
| 2009 | In March, we purchased the assets related to the management of two funds previously managed by RBC Global Asset Management (U.S.) Inc. and reorganized the assets of such funds into the newly created Hennessy Cornerstone Large Growth Fund and the Hennessy Large Value Fund. In conjunction with the completion of the transaction, RBC Global Asset Management (U.S.) Inc. became the sub-advisor to the Hennessy Large Value Fund. The amount of the purchased assets as of the closing date totaled approximately $158 million.
In September, we purchased the assets related to the management of two funds previously managed by SPARX Investment & Research, USA, Inc. and sub-advised by SPARX Asset Management Co., Ltd. and changed the fund names to the Hennessy Japan Fund and the Hennessy Japan Small Cap Fund. In conjunction with the completion of the transaction, SPARX Asset Management Co., Ltd. became the sub-advisor to both funds. The amount of the purchased assets as of the closing date totaled approximately $74 million. | |
| 2011 | In October, we reorganized the assets of the Hennessy Cornerstone Growth, Series II Fund into the Hennessy Cornerstone Growth Fund. | |
| 2012 | In October, we purchased the assets related to the management of 10 funds previously managed by FBR Fund Advisers (the “FBR Funds”). We reorganized the assets of three of the FBR Funds into existing Hennessy Funds and reorganized the assets of the seven other FBR Funds into newly created series of the Hennessy Funds. In conjunction with the completion of the transaction, Broad Run Investment Management, LLC became the sub-advisor to the Hennessy Focus Fund, FCI Advisors became the sub-advisor to the Hennessy Equity and Income Fund (fixed income allocation) and the Hennessy Core Bond Fund, and The London Company of Virginia, LLC became the sub-advisor to the Hennessy Equity and Income Fund (equity allocation). The amount of the purchased assets as of the closing date was approximately $2.2 billion.
In December, we closed the Hennessy Micro Cap Growth Fund, LLC. | |
| 2014 | In April, our common stock began trading on The Nasdaq Capital Market. | |
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| 2015 | In September, we completed a self-tender offer, under which we repurchased 1,500,000 shares of our common stock at $16.67 per share.
In June, we launched Institutional Class shares for the Hennessy Japan Small Cap Fund and the Hennessy Large Cap Financial Fund. | |
| 2016 | In September, we purchased the assets related to the management of two funds previously managed by Westport Advisers, LLC and reorganized the assets of such funds into the Hennessy Cornerstone Mid Cap 30 Fund. The amount of the purchased assets as of the closing date totaled approximately $435 million. | |
| 2017 | In February, we liquidated the Hennessy Core Bond Fund and reorganized the Hennessy Large Value Fund into the Hennessy Cornerstone Value Fund. Additionally, for the Hennessy Technology Fund, we implemented changes to the investment strategy and the portfolio management team.
In March, we launched Institutional Class shares for the Hennessy Gas Utility Fund.
In December, we purchased the assets related to the management of two funds previously managed by Rainier Investment Management, LLC (“Rainier”) and reorganized the assets of such funds into the Hennessy Cornerstone Large Growth Fund and the Hennessy Cornerstone Mid Cap 30 Fund. The amount of the purchased assets as of the closing date totaled approximately $122 million. | |
| 2018 | In January, we purchased the assets related to the management of a third fund previously managed by Rainier and reorganized the assets of such fund into the Hennessy Cornerstone Mid Cap 30 Fund. The amount of the purchased assets as of the closing date totaled approximately $253 million.
In October, we purchased the assets related to the management of the two funds previously managed by BP Capital Fund Services, LLC and reorganized the assets of such funds into the newly created Hennessy Energy Transition Fund and the Hennessy Midstream Fund. In connection with the transaction, BP Capital Fund Services, LLC became the sub-adviser to both funds. The amount of the purchased assets as of the closing date totaled approximately $200 million. | |
| 2019 | During the year, we repurchased an aggregate of 560,734 shares of our common stock pursuant to our stock buyback program. | |
| 2020 | In the first three months of the year, we repurchased an aggregate of 206,109 shares of our common stock pursuant to our stock buyback program. | |
| 2021 | In October, we transferred listing of our common stock from The Nasdaq Capital Market to The Nasdaq Global Market. Also in October, we completed a public offering of 4.875% notes due 2026 (the “2026 Notes”) in the aggregate principal amount of $40.25 million, which included the full exercise of the underwriters’ overallotment option. | |
| 2022 | In August, we signed a definitive agreement with Stance Capital, LLC (“Stance Capital”) and Red Gate Advisers, LLC, among others, to purchase the assets related to the management of the Stance Equity ESG Large Cap Core ETF. Upon completion of the transaction, which is subject to the approval of the shareholders of the Stance Equity ESG Large Cap Core ETF, the assets related to the Stance Equity ESG Large Cap Core ETF will be reorganized to become a series of Hennessy Funds Trust named the Hennessy Stance ESG Large Cap ETF. (See Note 16 in Item 8, “Financial Statements and Supplementary Data.”) | |
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PRODUCT INFORMATION
Investment Strategies of the Hennessy Funds
We manage 16 mutual funds, each of which is categorized as a Domestic Equity, Multi-Asset, or Sector and Specialty product. Shares of the funds generally are available for purchase only by U.S. residents and, in certain circumstances, U.S. citizens living abroad.
The Hennessy Funds Family
| Domestic Equity |
Multi-Asset |
Sector and Specialty | ||
| Hennessy Cornerstone Growth Fund | Hennessy Total Return Fund | Hennessy Energy Transition Fund | ||
| Hennessy Focus Fund | Hennessy Equity and Income Fund | Hennessy Midstream Fund | ||
| Hennessy Cornerstone Mid Cap 30 Fund | Hennessy Balanced Fund | Hennessy Gas Utility Fund | ||
| Hennessy Cornerstone Large Growth Fund | Hennessy Japan Fund | |||
| Hennessy Cornerstone Value Fund | Hennessy Japan Small Cap Fund | |||
| Hennessy Large Cap Financial Fund | ||||
| Hennessy Small Cap Financial Fund | ||||
| Hennessy Technology Fund | ||||
Domestic Equity Funds
Five of the Hennessy Funds are categorized as Domestic Equity products. Of those five funds, four utilize a quantitative investment strategy and one is actively managed, and they all employ consistent and disciplined approaches to investing. Following is a brief description of the investment objectives and principal investment strategies of the Hennessy Funds in the Domestic Equity product category:
| • | Hennessy Cornerstone Growth Fund (Investor Class symbol HFCGX; Institutional Class symbol HICGX). The Hennessy Cornerstone Growth Fund seeks long-term growth of capital by investing in growth-oriented common stocks using a quantitative formula. From the investable common stocks of public companies in the S&P Capital IQ Database with market capitalizations exceeding $175 million, this fund invests in the 50 common stocks with the highest one-year price appreciation that also have price-to-sales ratios below 1.5, higher annual earnings than in the previous year, and positive stock price appreciation over the prior three-month and six-month periods. |
| • | Hennessy Focus Fund (Investor Class symbol HFCSX; Institutional Class symbol HFCIX). The Hennessy Focus Fund seeks capital appreciation through a concentrated portfolio of approximately 20 companies that the portfolio managers believe are high-quality businesses with large growth opportunities, excellent management, low tail risk, and discount valuations. This fund’s holdings are conviction-weighted, with the top ten positions comprising approximately 60-80% of the fund’s assets. |
| • | Hennessy Cornerstone Mid Cap 30 Fund (Investor Class symbol HFMDX; Institutional Class symbol HIMDX). The Hennessy Cornerstone Mid Cap 30 Fund seeks long-term growth of capital by investing in mid-cap growth-oriented common stocks using a quantitative formula. From the investable common stocks of public companies in the S&P Capital IQ Database with market capitalizations between $1 billion and $10 billion, this fund invests in the 30 common stocks with the highest one-year price appreciation that also have price-to-sales ratios below 1.5, higher annual earnings than in the previous year, and positive stock price appreciation over the prior three-month and six-month periods. |
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| • | Hennessy Cornerstone Large Growth Fund (Investor Class symbol HFLGX; Institutional Class symbol HILGX). The Hennessy Cornerstone Large Growth Fund seeks long-term growth of capital by investing in growth-oriented common stocks of larger companies using a quantitative formula. From the investable common stocks of public companies in the S&P Capital IQ Database, this fund invests in the 50 stocks that meet the following criteria, in the specified order: (1) above-average market capitalization; (2) a price-to-cash-flow ratio less than the median of the remaining securities; (3) positive total capital; and (4) the highest one-year return on total capital. |
| • | Hennessy Cornerstone Value Fund (Investor Class symbol HFCVX; Institutional Class symbol HICVX). The Hennessy Cornerstone Value Fund seeks total return, consisting of capital appreciation and current income, by investing in larger, dividend-paying common stocks using a quantitative formula. From the investable common stocks of public companies in the S&P Capital IQ Database, this fund invests in the 50 stocks with the highest dividend yield that also have above-average market capitalizations, above-average number of shares outstanding, 12-month sales that are 50% greater than the average, and above-average cash flows. |
Multi-Asset Funds
Three of the Hennessy Funds are categorized as Multi-Asset products. Of those three funds, two utilize a quantitative investment strategy and one is actively managed. These funds follow a more conservative investment strategy focused on generating income and providing an alternative to funds containing only equity stocks. Following is a brief description of the investment objectives and principal investment strategies of the Hennessy Funds in the Multi-Asset product category:
| • | Hennessy Total Return Fund (Investor Class symbol HDOGX). The Hennessy Total Return Fund seeks total return, consisting of capital appreciation and current income, by investing approximately 50% of its assets in the 10 highest dividend-yielding common stocks of the Dow Jones Industrial Average (known as the “Dogs of the Dow”) in roughly equal dollar amounts and the remaining 50% of its assets in U.S. Treasury securities with a maturity of less than one year. This fund then utilizes a borrowing strategy that allows the fund’s performance to approximate what it would be if the fund had an asset allocation of roughly 75% Dogs of the Dow stocks and 25% U.S. Treasury securities. |
| • | Hennessy Equity and Income Fund (Investor Class symbol HEIFX; Institutional Class symbol HEIIX). The Hennessy Equity and Income Fund seeks income and long-term capital appreciation with reduced volatility of returns by investing up to 70% of its assets in common stock, preferred stock, and equity-like instruments and its remaining assets in asset-backed and mortgage-backed securities and debt instruments, including high-yield bonds. |
| • | Hennessy Balanced Fund (Investor Class symbol HBFBX). The Hennessy Balanced Fund seeks a combination of capital appreciation and current income by investing approximately 50% of its assets in roughly equal dollar amounts in the Dogs of the Dow stocks but limits exposure to market risk and volatility by investing approximately 50% of its assets in U.S. Treasury securities with a maturity of less than one year. |
Sector and Specialty Funds
Eight of the Hennessy Funds are categorized as Sector and Specialty products. Of those eight funds, one is designed as an index fund and the other seven are actively managed, and each focuses on a niche sector of the stock market. Following is a brief description of the investment objectives and principal investment strategies of the Hennessy Funds in the Sector and Specialty product category:
| • | Hennessy Energy Transition Fund (Investor Class symbol HNRGX; Institutional Class symbol HNRIX). The Hennessy Energy Transition Fund seeks total return by investing in companies operating in the United States across the full spectrum of the energy supply/demand value chain, including traditional upstream, midstream, and downstream energy companies, as well as renewable energy companies and energy end users. The portfolio managers use a proprietary research and investment process that involves fundamental and quantitative analysis of various macroeconomic and commodity price and other factors to select this fund’s investments and determine the weighting of each investment. |
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| • | Hennessy Midstream Fund (Investor Class symbol HMSFX; Institutional Class symbol HMSIX). The Hennessy Midstream Fund seeks capital appreciation through distribution growth and current income by investing in midstream energy infrastructure companies, including master limited partnerships, that own and operate assets used in the transporting, storing, gathering, processing, distributing, or marketing of natural gas, natural gas liquids, crude oil, refined products, coal, or electricity or that provide energy-related equipment and services. The portfolio managers combine a top-down deductive reasoning approach with a detailed bottom-up analysis of individual companies. |
| • | Hennessy Gas Utility Fund (Investor Class symbol GASFX; Institutional Class symbol HGASX). The Hennessy Gas Utility Fund seeks income and capital appreciation by investing in companies that are members of the American Gas Association (“AGA”) in approximately the same percentage as the percentage weighting of such company in the AGA Stock Index. The AGA Stock Index is a capitalization-weighted index that consists of all member companies of the AGA whose securities are traded on a U.S. stock exchange. The index is adjusted monthly for the percentage of natural gas assets on each company’s balance sheet. |
| • | Hennessy Japan Fund (Investor Class symbol HJPNX; Institutional Class symbol HJPIX). The Hennessy Japan Fund seeks long-term capital appreciation by investing in equity securities of Japanese companies. Using in-depth analysis and on-site research, the portfolio managers focus on stocks with a potential “value gap” by screening for companies that they believe have strong businesses and management and are trading at attractive prices. The portfolio managers limit the portfolio to what they consider to be their best ideas and maintain a concentrated number of holdings. |
| • | Hennessy Japan Small Cap Fund (Investor Class symbol HJPSX; Institutional Class symbol HJSIX). The Hennessy Japan Small Cap Fund seeks long-term capital appreciation by investing in equity securities of smaller Japanese companies, typically considered to be companies with market capitalizations in the bottom 20% of all publicly traded Japanese companies. Using in-depth analysis and on-site research, the portfolio managers focus on stocks with a potential “value gap” by screening for small-cap companies that the portfolio managers believe have strong businesses and management and are trading at attractive prices. The portfolio managers limit the portfolio to what they consider to be their best ideas and is unconstrained by its benchmarks. |
| • | Hennessy Large Cap Financial Fund (Investor Class symbol HLFNX; Institutional Class symbol HILFX). The Hennessy Large Cap Financial Fund seeks capital appreciation by investing in securities of large-cap companies principally engaged in the business of providing financial services, including information technology companies that are primarily engaged in providing products or services to financial services companies. |
| • | Hennessy Small Cap Financial Fund (Investor Class symbol HSFNX; Institutional Class symbol HISFX). The Hennessy Small Cap Financial Fund seeks capital appreciation by investing in securities of small-cap companies principally engaged in the business of providing financial services. |
| • | Hennessy Technology Fund (Investor Class symbol HTECX; Institutional Class symbol HTCIX). The Hennessy Technology Fund seeks long-term capital appreciation by investing in securities of companies principally engaged in the research, design, development, manufacturing, or distributing of products or services in the technology industry. From the investable common stocks of public companies in the S&P Capital IQ Database with market capitalizations exceeding $175 million, this fund invests in approximately 60 stocks (weighted equally by dollar amount) that the portfolio managers believe demonstrate sector-leading cash flows and profits, a history of delivering returns in excess of cost of capital, attractive relative valuations, ability to generate cash, attractive balance sheet risk profiles, and prospects for sustainable profitability. |
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Historical Investment Performance of the Hennessy Funds
The following table presents the average annualized returns for each Hennessy Fund and its relevant benchmark indices for the one-year, three-year, five-year, and ten-year (or since inception for Hennessy Funds that commenced operations less than ten years ago) periods ended September 30, 2022.
Returns are presented net of all expenses borne by fund investors, but not net of fees waived or expenses borne by the Company. The past investment performance of the Hennessy Funds is not a guarantee of future performance, and all of the Hennessy Funds have experienced negative performance over various periods in the past and may do so again in the future.
| Hennessy Cornerstone Growth Fund |
One Year | Three Years | Five Years | Ten Years | ||||||||||||
| Institutional Class Share - HICGX |
-8.11 | % | 11.97 | % | 4.71 | % | 9.19 | % | ||||||||
| Investor Class Share - HFCGX |
-8.38 | % | 11.64 | % | 4.37 | % | 8.86 | % | ||||||||
| Russell 2000® Index (1) |
-23.50 | % | 4.29 | % | 3.55 | % | 8.55 | % | ||||||||
| S&P 500® Index (2) |
-15.47 | % | 8.16 | % | 9.24 | % | 11.70 | % | ||||||||
| Hennessy Focus Fund* |
One Year | Three Years | Five Years | Ten Years | ||||||||||||
| Institutional Class Share - HFCIX |
-24.73 | % | 1.03 | % | 4.73 | % | 9.72 | % | ||||||||
| Investor Class Share - HFCSX |
-25.01 | % | 0.66 | % | 4.34 | % | 9.33 | % | ||||||||
| Russell 3000® Index (3) |
-17.63 | % | 7.70 | % | 8.62 | % | 11.39 | % | ||||||||
| Russell Midcap® Growth Index (4) |
-29.50 | % | 4.26 | % | 7.62 | % | 10.85 | % | ||||||||
| Hennessy Cornerstone Mid Cap 30 Fund |
One Year | Three Years | Five Years | Ten Years | ||||||||||||
| Institutional Class Share - HIMDX |
-0.39 | % | 16.40 | % | 7.35 | % | 10.17 | % | ||||||||
| Investor Class Share - HFMDX |
-0.73 | % | 15.60 | % | 6.97 | % | 9.80 | % | ||||||||
| Russell Midcap® Index (5) |
-19.39 | % | 5.19 | % | 6.48 | % | 10.30 | % | ||||||||
| S&P 500® Index (2) |
-15.47 | % | 8.16 | % | 9.24 | % | 11.70 | % | ||||||||
| Hennessy Cornerstone Large Growth Fund |
One Year | Three Years | Five Years | Ten Years | ||||||||||||
| Institutional Class Share - HILGX |
-17.68 | % | 5.63 | % | 6.22 | % | 9.50 | % | ||||||||
| Investor Class Share - HFLGX |
-17.96 | % | 5.33 | % | 5.90 | % | 9.22 | % | ||||||||
| Russell 1000® Index (6) |
-17.22 | % | 7.95 | % | 9.00 | % | 11.60 | % | ||||||||
| S&P 500® Index (2) |
-15.47 | % | 8.16 | % | 9.24 | % | 11.70 | % | ||||||||
| Hennessy Cornerstone Value Fund |
One Year | Three Years | Five Years | Ten Years | ||||||||||||
| Institutional Class Share - HICVX |
-0.17 | % | 6.31 | % | 5.53 | % | 8.50 | % | ||||||||
| Investor Class Share - HFCVX |
-0.40 | % | 6.08 | % | 5.32 | % | 8.28 | % | ||||||||
| Russell 1000® Value Index (7) |
-11.36 | % | 4.36 | % | 5.29 | % | 9.17 | % | ||||||||
| S&P 500® Index (2) |
-15.47 | % | 8.16 | % | 9.24 | % | 11.70 | % | ||||||||
| Hennessy Total Return Fund |
One Year | Three Years | Five Years | Ten Years | ||||||||||||
| Investor Class Share - HDOGX |
-6.09 | % | -0.49 | % | 2.27 | % | 5.24 | % | ||||||||
| 75/25 Blended DJIA/Treasury Index (8) |
-9.82 | % | 3.77 | % | 6.12 | % | 8.14 | % | ||||||||
| Dow Jones Industrial Average (9) |
-13.40 | % | 4.36 | % | 7.42 | % | 10.45 | % | ||||||||
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| Hennessy Equity and Income Fund* |
One Year | Three Years | Five Years | Ten Years | ||||||||||||
| Institutional Class Share - HEIIX |
-12.86 | % | 2.47 | % | 3.90 | % | 5.93 | % | ||||||||
| Investor Class Share - HEIFX |
-13.15 | % | 2.11 | % | 3.52 | % | 5.56 | % | ||||||||
| S&P 500® Index (2) |
-15.47 | % | 8.16 | % | 9.24 | % | 11.70 | % | ||||||||
| Hennessy Balanced Fund |
One Year | Three Years | Five Years | Ten Years | ||||||||||||
| Investor Class Share - HBFBX |
-5.34 | % | -0.27 | % | 1.67 | % | 3.41 | % | ||||||||
| 50/50 Blended DJIA/Treasury Index (10) |
-7.50 | % | 2.74 | % | 4.54 | % | 5.73 | % | ||||||||
| Dow Jones Industrial Average (9) |
-13.40 | % | 4.36 | % | 7.42 | % | 10.45 | % | ||||||||
| Hennessy Energy Transition Fund* |
One Year | Three Years | Five Years | Since Inception (12/31/13) |
||||||||||||
| Institutional Class Share - HNRIX |
30.92 | % | 15.53 | % | 3.24 | % | 1.74 | % | ||||||||
| Investor Class Share - HNRGX |
30.50 | % | 15.19 | % | 2.93 | % | 1.48 | % | ||||||||
| S&P 500® Energy Index (11) |
45.69 | % | 13.44 | % | 6.09 | % | 1.73 | % | ||||||||
| S&P 500® Index (2) |
-15.47 | % | 8.16 | % | 9.24 | % | 9.95 | % | ||||||||
| Hennessy Midstream Fund* |
One Year | Three Years | Five Years | Since Inception (12/31/13) |
||||||||||||
| Institutional Class Share - HMSIX** |
15.31 | % | 2.57 | % | -1.00 | % | -1.25 | % | ||||||||
| Investor Class Share - HMSFX |
15.13 | % | 2.33 | % | -1.23 | % | -1.49 | % | ||||||||
| Alerian US Midstream Energy Index (12) |
18.18 | % | 8.23 | % | 5.62 | % | 2.10 | % | ||||||||
| S&P 500® Index (2) |
-15.47 | % | 8.16 | % | 9.24 | % | 9.95 | % | ||||||||
| Hennessy Gas Utility Fund* |
One Year | Three Years | Five Years | Ten Years | ||||||||||||
| Institutional Class Share - HGASX** |
9.70 | % | 3.09 | % | 4.81 | % | 7.70 | % | ||||||||
| Investor Class Share - GASFX |
9.35 | % | 2.77 | % | 4.47 | % | 7.50 | % | ||||||||
| AGA Stock Index (13) |
10.60 | % | 3.87 | % | 5.67 | % | 8.69 | % | ||||||||
| S&P 500® Index (2) |
-15.47 | % | 8.16 | % | 9.24 | % | 11.70 | % | ||||||||
| Hennessy Japan Fund |
One Year | Three Years | Five Years | Ten Years | ||||||||||||
| Institutional Class Share - HJPIX |
-40.28 | % | -6.08 | % | -0.93 | % | 6.90 | % | ||||||||
| Investor Class Share - HJPNX |
-40.50 | % | -6.45 | % | -1.33 | % | 6.53 | % | ||||||||
| Russell/Nomura Total MarketTM Index (14) |
-28.19 | % | -2.36 | % | -0.68 | % | 5.32 | % | ||||||||
| Tokyo Stock Price Index (TOPIX) (15) |
-28.41 | % | -2.49 | % | -0.82 | % | 5.24 | % | ||||||||
| Hennessy Japan Small Cap Fund |
One Year | Three Years | Five Years | Ten Years | ||||||||||||
| Institutional Class Share - HJSIX** |
-27.40 | % | -2.53 | % | -0.04 | % | 9.90 | % | ||||||||
| Investor Class Share - HJPSX |
-27.70 | % | -2.94 | % | -0.46 | % | 9.60 | % | ||||||||
| Russell/Nomura Small CapTM Index (16) |
-26.93 | % | -4.07 | % | -3.07 | % | 5.32 | % | ||||||||
| Tokyo Stock Price Index (TOPIX) (15) |
-28.41 | % | -2.49 | % | -0.82 | % | 5.24 | % | ||||||||
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| Hennessy Large Cap Financial Fund* |
One Year | Three Years | Five Years | Ten Years | ||||||||||||
| Institutional Class Share - HILFX** |
-29.71 | % | 2.19 | % | 3.96 | % | 8.81 | % | ||||||||
| Investor Class Share - HLFNX |
-29.95 | % | 1.85 | % | 3.61 | % | 8.51 | % | ||||||||
| Russell 1000® Index Financials (17) |
-16.76 | % | 7.21 | % | 8.60 | % | 12.55 | % | ||||||||
| Russell 1000® Index (6) |
-17.22 | % | 7.95 | % | 9.00 | % | 11.60 | % | ||||||||
| Hennessy Small Cap Financial Fund* |
One Year | Three Years | Five Years | Ten Years | ||||||||||||
| Institutional Class Share - HISFX |
-10.84 | % | 11.41 | % | 5.17 | % | 10.32 | % | ||||||||
| Investor Class Share - HSFNX |
-11.16 | % | 11.02 | % | 4.79 | % | 9.93 | % | ||||||||
| Russell 2000® Index Financials (18) |
-15.23 | % | 2.66 | % | 2.65 | % | 8.71 | % | ||||||||
| Russell 2000® Index (1) |
-23.50 | % | 4.29 | % | 3.55 | % | 8.55 | % | ||||||||
| Hennessy Technology Fund* |
One Year | Three Years | Five Years | Ten Years | ||||||||||||
| Institutional Class Share - HTCIX** |
-30.15 | % | 4.33 | % | 7.89 | % | 9.00 | % | ||||||||
| Investor Class Share - HTECX |
-30.30 | % | 4.06 | % | 7.63 | % | 8.70 | % | ||||||||
| NASDAQ Composite Index (19) |
-26.25 | % | 10.63 | % | 11.25 | % | 14.24 | % | ||||||||
| S&P 500® Index (2) |
-15.47 | % | 8.16 | % | 9.24 | % | 11.70 | % | ||||||||
| * | Performance information from prior to the date that we acquired the assets related to the management of the fund is included because the previous investment manager managed the fund using a similar investment strategy. |
| ** | Performance shown for periods prior to the inception of Institutional Class shares represents the performance of Investor Class shares of the fund and includes expenses that are not applicable to, and are higher than, those of Institutional Class shares. |
| (1) | The Russell 2000® Index comprises the smallest 2,000 companies in the Russell 3000® Index based on market capitalization and current index membership, representing approximately 7% of the total market capitalization of the Russell 3000® Index. |
| (2) | The S&P 500® Index is a capitalization-weighted index that is designed to represent the broad domestic economy through changes in the aggregate market value of 500 stocks across all major industries. |
| (3) | The Russell 3000® Index comprises the 3,000 largest U.S. companies based on market capitalization, representing approximately 96% of the investable U.S. equities market. |
| (4) | The Russell Midcap® Growth Index comprises those companies in the Russell Midcap® Index with relatively higher price-to-book ratio, higher forecasted growth values, and higher sales per share historical growth. |
| (5) | The Russell Midcap® Index comprises approximately 800 of the smallest securities in the Russell 1000® Index, representing approximately 27% of the total market capitalization of the Russell 1000® Index. |
| (6) | The Russell 1000® Index comprises the 1,000 largest companies in the Russell 3000® Index based on market capitalization and current index membership, representing approximately 93% of the total market capitalization of the Russell 3000® Index. |
| (7) | The Russell 1000® Value Index comprises those companies in the Russell 1000® Index with relatively lower price-to-book ratios, lower forecasted growth value, and lower sales per share historical growth. |
| (8) | The 75/25 Blended DJIA/Treasury Index consists of 75% common stocks represented by the Dow Jones Industrial Average and 25% short-duration Treasury securities represented by the ICE BofAML U.S. 3-Month Treasury Bill Index, which comprises U.S. Treasury securities maturing in three months. |
| (9) | The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the NYSE or The Nasdaq Stock Market LLC. |
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| (10) | The 50/50 Blended DJIA/Treasury Index consists of 50% common stocks represented by the Dow Jones Industrial Average and 50% short-duration Treasury securities represented by the ICE BofAML 1-Year U.S. Treasury Note Index, which comprises U.S. Treasury securities maturing in approximately one year. |
| (11) | The S&P 500® Energy Index comprises those companies included in the S&P 500® that are classified in the Energy sector. |
| (12) | The Alerian US Midstream Energy Index comprises companies that earn a majority of their cash flow from midstream activities involving energy commodities. |
| (13) | The AGA Stock Index is a capitalization-weighted index consisting of members of the American Gas Association whose securities are traded on a U.S. stock exchange. |
| (14) | The Russell/Nomura Total Market™ Index represents approximately 98% of the investable Japan equity market. |
| (15) | The Tokyo Stock Price Index (TOPIX) is a capitalization-weighted index of all of the companies listed on the First Section of the Tokyo Stock Exchange. |
| (16) | The Russell/Nomura Small Cap™ Index comprises the bottom 15% of the Russell/Nomura Total Market™ Index based on market capitalization. |
| (17) | The Russell 1000® Index Financials is a subset of the Russell 1000® Index that measures the performance of securities classified in the Financials sector of the large-cap U.S. equity market. |
| (18) | The Russell 2000® Index Financials is a subset of the Russell 2000® Index that measures the performance of securities classified in the Financials sector of the small-cap U.S. equity market. |
| (19) | The NASDAQ Composite Index is a broad-based capitalization-weighted index of all common stocks listed on The Nasdaq Stock Market LLC. |
Investors cannot invest directly in an index. Performance data for an index does not reflect any deductions for fees, expenses, or taxes.
Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes or Russell ratings or underlying data, and no party may rely on any Russell Indexes or Russell ratings or underlying data contained in this communication. No further distribution of Russell data is permitted without Russell’s express written consent. Russell does not promote, sponsor, or endorse the content of this communication.
Standard & Poor’s Financial Services LLC is the source and owner of the S&P® and S&P 500® trademarks.
The Dow Jones Industrial Average is the property of the Dow Jones & Company, Inc. Dow Jones & Company, Inc. is not affiliated with the Hennessy Funds or its investment advisor. Dow Jones & Company, Inc. has not participated in any way in the creation of the Hennessy Funds or in the selection of stocks included in the Hennessy Funds and has not approved any information included in this communication.
The Alerian US Midstream Energy Index is a servicemark of GKD Index Partners. LLC d/b/a Alerian (“Alerian”), and its use is granted under a license from Alerian. Alerian makes no express or implied warranties, representations, or promises regarding the originality, merchantability, suitability, or fitness for a particular purpose or use with respect to the Alerian indices. No party may rely on, and Alerian does not accept any liability for any errors, omissions, interruptions, or defects in, the Alerian indices or underlying data.
Development of New Investment Strategies and Expanding Our Product Offerings
We develop new investment strategies and expand our product offerings by identifying investor needs and reviewing asset allocation tables to determine where we can augment our family of funds. Once we identify an attractive market segment, we select one of the following methods to initiate the new strategy:
| • | We screen the appropriate universe of stocks with a set of parameters that we believe identifies stocks that will produce higher long-term returns with lower associated risk than their relative indices, and we then introduce the new investment strategy into the marketplace by opening and directly marketing a new fund; |
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| • | We purchase the assets related to the management of an existing fund that we then manage ourselves; |
| • | We purchase the assets related to the management of an existing fund and then engage the existing portfolio managers or strategic firm to act as a sub-advisor to manage the fund; or |
| • | We purchase the assets related to the management of an existing fund and then employ the existing portfolio management team to manage the fund. |
ASSETS UNDER MANAGEMENT, SOURCES OF REVENUES, AND 12B-1 PLANS
We earn revenues primarily by providing investment advisory services to the Hennessy Funds and secondarily by providing shareholder services to investors in the Hennessy Funds. The fees we receive for these services are calculated as a percentage of the average daily net asset values of the Hennessy Funds. In addition, the sub-advisory fees that we pay are also calculated as a percentage of the average daily net asset values of the sub-advised Hennessy Funds. The amount of our assets under management fluctuates as a result of organic inflows (purchases of shares of the Hennessy Funds by new or existing investors), acquisition inflows, outflows (redemptions of shares of the Hennessy Funds by investors), and market appreciation or depreciation.
The following table summarizes our assets under management for the past three fiscal years:
| Fiscal Years Ended September 30, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| (In thousands) | ||||||||||||
| Beginning assets under management |
$ | 4,065,922 | $ | 3,564,597 | $ | 4,873,839 | ||||||
| Acquisition inflows |
— | — | — | |||||||||
| Organic inflows |
656,491 | 818,358 | 571,195 | |||||||||
| Redemptions |
(1,147,888 | ) | (1,345,371 | ) | (1,771,127 | ) | ||||||
| Market (depreciation) appreciation |
(678,808 | ) | 1,028,338 | (109,310 | ) | |||||||
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| Ending assets under management |
$ | 2,895,717 | $ | 4,065,922 | $ | 3,564,597 | ||||||
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As stated above, the amount of fees we receive for providing investment advisory and shareholder services increases or decreases as our average assets under management rises or falls.
The following table summarizes our sources of revenues, net of sub-advisory fees, for the past three fiscal years:
| Fiscal Years Ended September 30, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| (In thousands) | ||||||||||||
| Investment advisory fees |
$ | 27,468 | $ | 30,367 | $ | 30,831 | ||||||
| Shareholder service fees |
2,199 | 2,393 | 2,558 | |||||||||
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| Subtotal |
29,667 | 32,760 | 33,389 | |||||||||
| Sub-advisory fees |
(5,727 | ) | (7,332 | ) | (7,573 | ) | ||||||
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| Revenue, net of sub-advisory fees |
$ | 23,940 | $ | 25,428 | $ | 25,816 | ||||||
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Investment Advisory Agreements and Fees
We provide investment advisory services to the Hennessy Funds pursuant to investment advisory agreements with Hennessy Funds Trust. Our provision of investment advisory services to the Hennessy Funds is subject to the oversight of the Board of Trustees of Hennessy Funds Trust (the “Funds’ Board of Trustees”) and must be in accordance with the applicable Hennessy Fund’s investment advisory agreement, Prospectus, and
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Statement of Additional Information. The services that we provide to each Hennessy Fund pursuant to these investment advisory agreements include, among other things, the following:
| • | acting as portfolio manager for the fund or overseeing the sub-advisor acting as portfolio manager for the fund, which includes managing the composition of the fund’s portfolio (including the purchase, retention, and disposition of portfolio securities in accordance with the fund’s investment objectives, policies, and restrictions), seeking best execution for the fund’s portfolio, managing the use of soft dollars for the fund, and managing proxy voting for the fund; |
| • | performing a daily reconciliation of portfolio positions and cash for the fund; |
| • | monitoring the liquidity of the fund; |
| • | monitoring the fund’s compliance with its investment objectives and restrictions and federal securities laws; |
| • | maintaining a compliance program (including a code of ethics), conducting ongoing reviews of the compliance programs of the fund’s service providers (including any sub-advisor), including their codes of ethics, as appropriate, conducting on-site visits to the fund’s service providers (including any sub-advisor) as feasible, monitoring incidents of abusive trading practices, reviewing fund expense accruals, payments, and fixed expense ratios, evaluating insurance providers for fidelity bond, directors and officers and errors and omissions insurance, and cybersecurity insurance coverage, managing regulatory examination compliance and responses, conducting employee compliance training, reviewing reports provided by service providers, and maintaining books and records; |
| • | if applicable, overseeing the selection and continued employment of the fund’s sub-advisor, reviewing the fund’s investment performance, and monitoring the sub-advisor’s adherence to the fund’s investment objectives, policies, and restrictions; |
| • | overseeing service providers that provide accounting, administration, distribution, transfer agency, custodial, sales, marketing, public relations, audit, information technology, and legal services to the fund; |
| • | maintaining in-house marketing and distribution departments on behalf of the fund; |
| • | preparing or directing the preparation of all regulatory filings for the fund, including writing and annually updating the fund’s prospectus and related documents; |
| • | for each annual report of the fund, preparing or reviewing a written summary of the fund’s performance during the most recent 12-month period; |
| • | monitoring and overseeing the accessibility of the fund on third-party financial intermediary platforms; |
| • | paying the incentive compensation of the fund’s compliance officer and employing other staff such as legal, marketing, national accounts, distribution, sales, administrative, and trading oversight personnel, as well as management executives; |
| • | providing a quarterly compliance certification to the Funds’ Board of Trustees; and |
| • | preparing or reviewing materials for the Funds’ Board of Trustees, presenting to or leading discussions with the Funds’ Board of Trustees, preparing or reviewing all meeting minutes, and arranging for training and education of the Funds’ Board of Trustees. |
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The investment advisory agreements also provide that we are responsible for performing any ordinary clerical and bookkeeping services needed by the Hennessy Funds that are not provided by the funds’ custodian, administrator, or transfer agent. The Funds’ Board of Trustees comprises four trustees who are not interested persons of the Hennessy Funds (the “disinterested trustees”) and Neil J. Hennessy, who is our Chief Executive Officer and Chairman of our Board of Directors. Under the Investment Company Act of 1940, a majority of the trustees must be disinterested trustees, and the disinterested trustees must approve entering into and continuing our investment advisory agreements. The disinterested trustees also have sole responsibility for selecting and nominating other disinterested trustees.
In exchange for the services described above, we receive an investment advisory fee from each Hennessy Fund that is calculated as a percentage of such fund’s average daily net asset value. As of the end of fiscal year 2022, the percentages of each fund’s assets used to calculate the annual investment advisory fees payable to us are as follows:
| Hennessy Fund |
Investment Advisory Fee (as a % of fund assets) |
|||
| Hennessy Cornerstone Growth Fund |
0.74 | % | ||
| Hennessy Focus Fund |
0.90 | % | ||
| Hennessy Cornerstone Mid Cap 30 Fund |
0.74 | % | ||
| Hennessy Cornerstone Large Growth Fund |
0.74 | % | ||
| Hennessy Cornerstone Value Fund |
0.74 | % | ||
| Hennessy Total Return Fund |
0.60 | % | ||
| Hennessy Equity and Income Fund |
0.80 | % | ||
| Hennessy Balanced Fund |
0.60 | % | ||
| Hennessy Energy Transition Fund |
1.25 | % | ||
| Hennessy Midstream Fund |
1.10 | % | ||
| Hennessy Gas Utility Fund |
0.40 | % | ||
| Hennessy Japan Fund |
0.80 | % | ||
| Hennessy Japan Small Cap Fund |
0.80 | % | ||
| Hennessy Large Cap Financial Fund |
0.90 | % | ||
| Hennessy Small Cap Financial Fund |
0.90 | % | ||
| Hennessy Technology Fund |
0.74 | % | ||
We waived a portion of our fees with respect to the Hennessy Energy Transition Fund through the expiration of the fund’s expense limitation agreement on October 25, 2020. We continue to waive a portion of our fees with respect to the Hennessy 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 our revenues. Each waived fee is then deducted from investment advisory fee income and reduces the aggregate amount of advisory fees we receive from such fund in the subsequent month. Total fee waivers during each of fiscal year 2022 and 2021 were $0.1 million. To date, we have only waived fees based on contractual obligations, but we have the ability to waive fees at our discretion. Any decision to waive fees would apply only on a going-forward basis.
Our 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 disinterested trustees. 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 we assign it to another advisor (assignment includes “indirect assignment,” which is the transfer of our 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 us.
Sub-Advisory Agreements and Fees
We have delegated the day-to-day portfolio management responsibilities to sub-advisors, subject to our oversight, for some of the Hennessy Funds. In each case, the sub-advisor entity or the individuals working at the sub-advisor entity is the same entity or are the same individuals who advised the fund prior to our purchase of the assets related to the management of such fund. The provision of sub-advisory services must be in accordance with
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the applicable Hennessy Fund’s sub-advisory agreement, Prospectus, and Statement of Additional Information. The services that each sub-advisor provides to the applicable Hennessy Fund pursuant to the terms of the sub-advisory agreement include, among other things, the following:
| • | acting as portfolio manager for the fund, which includes managing the composition of the fund’s portfolio (including the purchase, retention, and disposition of portfolio securities in accordance with the fund’s investment objectives, policies, and restrictions), seeking best execution for the fund’s portfolio, managing the use of soft dollars for the fund, and managing proxy voting for the fund; |
| • | ensuring that its compliance programs include policies and procedures relevant to the fund and the sub-advisor’s duties as a portfolio manager to the fund; |
| • | for each annual report of the fund, preparing a written summary of the fund’s performance during the most recent 12-month period; and |
| • | providing a quarterly certification to Funds’ Board of Trustees regarding trading and allocation practices, supervisory matters, the sub-advisor’s compliance program (including its code of ethics), compliance with the fund’s policies, and general firm updates. |
In exchange for sub-advisory services, we pay sub-advisory fees to the sub-advisors out of our own assets. Sub-advisory fees are calculated as a percentage of the applicable fund’s average daily net asset value. The following table lists each of our sub-advised funds, the sub-advisor for such fund, and the percentage used to calculate the annual sub-advisory fees payable by us to such fund’s sub-advisor as of the end of fiscal year 2022:
| Hennessy Fund |
Sub-Advisor |
Sub-Advisory Fee |
||||||
| Hennessy Focus Fund |
Broad Run Investment Management, LLC |
0.29% |
| |||||
| Hennessy Equity and Income Fund |
FCI Advisors |
0.27% |
| |||||
| The London Company of Virginia, LLC |
0.33% |
| ||||||
| Hennessy Japan Fund |
SPARX Asset Management Co., Ltd. |
$0-$500 million: | 0.35 | % | ||||
| Above $500 million-$1 billion: | 0.40 | % | ||||||
| Above $1 billion: | 0.42 | % | ||||||
| Hennessy Japan Small Cap Fund |
SPARX Asset Management Co., Ltd. |
$0-$500 million: | 0.35 | % | ||||
| Above $500 million-$1 billion: | 0.40 | % | ||||||
| Above $1 billion: | 0.42 | % | ||||||
The sub-advisory agreements must be renewed annually in the same manner as the investment advisory agreements and are subject to the same termination provisions.
Shareholder Servicing Agreements and Fees
Pursuant to a shareholder servicing agreement with Hennessy Funds Trust, we provide shareholder services to investors in the Hennessy Funds including, 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. In exchange for these services, we receive a shareholder service fee from each Hennessy Fund of 0.10% of the average daily net assets of such fund’s Investor Class shares.
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The shareholder servicing agreement must be renewed annually by the Funds’ Board of Trustees, including the vote of a majority of the disinterested trustees. If the shareholder servicing agreement is not renewed, it terminates automatically. In addition, the shareholder servicing agreement may be terminated prior to its expiration upon 60 days’ written notice by Hennessy Funds Trust or us.
12b-1 Plans
All of the Hennessy Funds have adopted a 12b-1 plan. These plans are named after Rule 12b-1 of the Investment Company Act of 1940, which permits a fund to adopt a plan that allows the fund to collect fees to use to make payments to third parties in connection with the distribution of fund shares. Amounts paid under a plan may be spent on any activities or expenses primarily intended to result in sale of shares of the fund, including, but not limited to (i) advertising, (ii) compensation paid to financial intermediaries, broker-dealers, and others for sales and marketing, (iii) shareholder accounting servicing, (iv) printing and mailing prospectuses to possible new investors, and (v) printing and mailing sales literature. A fund may also employ a distributor to distribute and market fund shares and then use 12b-1 fees to pay the distributor for expenses relating to telephone use, overhead, employing employees who engage in or support the distribution of the fund shares, printing prospectuses and other reports for possible new investors, advertising, and preparing and distributing sales literature.
The 12b-1 fee for each Hennessy Fund is 0.15% of the average daily net assets of such fund’s Investor Class shares.
CUSTODIAL, DISTRIBUTION, AND BROKERAGE ARRANGEMENTS
We use independent third parties for custody and distribution of our assets under management.
All trades for the Hennessy Funds are executed by independent brokerage firms following our direction or the direction of our sub-advisors. When selecting brokers, we and our sub-advisors are required to seek best execution. Although there is no single statutory definition, Securities and Exchange Commission (“SEC”) releases and other legal guidelines make clear that this duty requires us to seek “the most advantageous terms reasonably available under the circumstances for a customer’s account.” The lowest possible commission, while important, is not the sole determinative factor. We and our sub-advisors also consider factors such as order size and market depth, availability of competing markets and liquidity, trading characteristics of the security, financial responsibility of the broker-dealer, and the broker’s ability to address current market conditions.
Currently, we participate in soft dollar arrangements with one of our brokers. This means we receive research reports and real-time electronic research to assist us in trading and managing the Hennessy Funds. Under these soft dollar arrangements, the Hennessy Funds pay brokerage commissions for securities trades at the regular market rate, and some or all of the value of those commissions is received by us in the form of research or other services that benefit the Hennessy Funds. We believe our soft dollar arrangements comply with SEC guidance regarding soft dollars.
LICENSE AGREEMENT
Our ability to use the names and formulaic investment strategies of the Hennessy Cornerstone Growth Fund and the Hennessy Cornerstone Value Fund are governed by the terms and conditions of a license agreement, dated as of April 10, 2000, with Netfolio. Under the license agreement, Netfolio granted us a perpetual, paid-up, royalty-free, exclusive license to use certain trademarks, such as “Strategy Indexing,” “Cornerstone Growth,” and “Cornerstone Value,” as well as the formula investment strategies used by the Hennessy Cornerstone Growth Fund and the Hennessy Cornerstone Value Fund. All of our advertising, marketing, promotional, and other materials incorporating or referring to the trademarks are subject to the prior written approval of Netfolio, except that we do not need Netfolio’s prior written approval to use the trademarks in a manner that is not substantially unchanged from any prior use by Netfolio in its own business or from any prior use by us previously approved by Netfolio. We have the right to assign the license to another person or entity if the assignee agrees in writing to be bound by the terms of the license agreement. There are no ongoing licensing fees associated with this license agreement, and Netfolio does not have any contractual rights to terminate the license agreement.
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BUSINESS STRATEGY
From the time we launched our first mutual fund in 1996, we have consistently pursued a growth strategy centered on organic growth through our marketing, sales, and distribution efforts and growth through strategic purchases of management-related assets. The implementation of this business strategy is described below.
| • | Seeking to deliver strong investment performance of the Hennessy Funds |
One of the most effective ways we can grow the assets of the Hennessy Funds is by delivering strong investment performance, which we believe should:
| • | result in an increase in the value of existing assets of the Hennessy Funds; |
| • | encourage more investors to buy shares of the Hennessy Funds and decrease the number of investors who redeem their shares and leave the Hennessy Funds; and |
| • | motivate current investors to invest additional money in the Hennessy Funds. |
| • | Utilizing our branding and marketing campaign to attract assets |
We believe we can attract investors to the Hennessy Funds by effectively marketing our consistent and disciplined approach to investing based on a buy-and-hold philosophy that rejects the idea of market timing. We offer quantitative funds, actively managed funds, and income-generating funds. We believe our quantitative funds attract investors who want to understand exactly how their investments are managed and who favor statistical analysis and empirical evidence as the basis for investment decisions. We also believe that our actively managed funds attract investors who appreciate a fundamental, hands-on investment management approach and talented portfolio managers. Finally, we believe our more conservative, income-generating funds attract investors seeking alternatives to funds invested entirely in equities.
We run a comprehensive and far-reaching public relations program designed to disseminate our message to a wide variety of potential investors through frequent television appearances, radio spots, feature articles, and print media mentions. We have partnered with an industry-leading public relations firm, SunStar Strategic, to proactively promote the Hennessy Funds to national financial media. This public relations program has consistently resulted in the Hennessy Funds being mentioned an average of once every two to three days in national print and broadcast media such as CNBC, Fox News, Bloomberg radio and TV, The Wall Street Journal, Kiplinger, and Barron’s, among others. To facilitate our presence in the media, we utilize LiveStudio, an in-house studio providing a direct link to media broadcasts, at our office in Novato, California. We have several spokespeople who help us expand our public relations program and provide comprehensive media coverage of our products, including (i) Neil J. Hennessy, who is our Chief Executive Officer and Chairman of our Board of Directors as well as President, Chief Market Strategist, and a Portfolio Manager of the Hennessy Funds, (ii) Ryan Kelley, Chief Investment Officer and a Portfolio Manager of the Hennessy Funds, and (iii) Portfolio Managers Ben Cook, David Ellison, and Josh Wein, as well as the Portfolio Managers at our sub-advisors.
We maintain and regularly update a robust website and social media presence. Our core marketing efforts include targeted outreach to both current and prospective investors in the Hennessy Funds, including financial advisors and retail investors. Our content marketing includes overall market and sector-specific thought leadership, promotional investment ideas, fund updates, and commentary from our portfolio managers, as well as feature news articles and broadcast appearances. We attend select investment advisor trade shows and strategic industry-related conferences, and we seek opportunities to moderate or speak on industry-related panels. Through much of our fiscal year 2021 and the second half of our fiscal year 2020, we participated in these activities via videoconference or teleconference, as necessary.
| • | Expanding our distribution network to additional distribution platforms |
Investors may purchase shares of the Hennessy Funds through third-party financial intermediaries, including fund supermarkets, national wirehouses and broker-dealers, independent and regional broker-dealers, and registered investment advisors, or directly from the Hennessy Funds.
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Fund supermarkets, such as Schwab, Fidelity, TD Ameritrade, and Pershing, generally offer funds of many different investment companies to investors in exchange for a services fee paid by the applicable fund or that fund’s investment advisor. The ability to purchase various funds in a single location is very attractive to investors, and the majority of our assets under management as of the end of fiscal year 2022 was held at fund supermarkets. Additionally, we continually seek opportunities to form new relationships with financial intermediaries to make our no-load funds even more accessible to investors. We oversee distribution of the Hennessy Funds through all financial intermediaries.
Investors may also purchase shares of the Hennessy Funds directly through the Hennessy Funds website or by calling us or U.S. Bank Global Fund Services, the Hennessy Funds’ administrator.
| • | Increasing our current base of financial advisors and investment professionals |
Investment professionals generally have access to a wide variety of investment products they may recommend to their clients. A recommendation by an investment professional to a client to buy one of the Hennessy Funds may greatly influence that investor. Thus, we believe that expanding our current base of investment professionals who utilize no-load funds for their clients will help us increase our assets under management, which will in turn increase our revenues.
| • | Securing participation on the platforms of national full-service firms |
We continually strive to develop relationships with national full-service firms that permit their investment professionals to offer no-load funds to their clients as a way to increase the amount of assets that we manage, which will in turn increase our revenues.
| • | Pursuing strategic purchases of management agreements for additional funds |
A primary component of our growth strategy is to selectively pursue strategic purchases of the assets related to the management of additional funds. We believe the regulatory burden imposed upon the fund industry, along with increased competition, has compressed the margins of smaller to mid-sized fund managers, making those managers more receptive to an asset purchase. The long-term trend toward lower fees has made it more challenging to identify accretive asset purchases, but we believe that we are well positioned to move quickly once we identify any attractive purchase targets from the large supply of potential targets.
Through our asset purchase strategy, we have completed 10 purchases of the assets related to the management of mutual funds over a 20-year period, integrating $4.3 billion in net assets of 30 different mutual funds into the Hennessy Funds family.
| • | Delivering strong, high-quality financial results. |
We seek to maintain a strong financial position and to manage our investment advisory business to meet the highest regulatory, ethical, and business standards and to maintain continuity of service to all of the investors in the Hennessy Funds.
COMPETITION
The investment advisory industry is highly competitive, with new competitors continually entering the industry. We compete directly with numerous global and U.S. investment managers, commercial banks, savings and loans associations, brokerage and investment banking firms, broker-dealers, insurance companies, and other financial institutions that often provide investment products with similar features and objectives to those we offer. These institutions range from small boutique firms to large financial services complexes. We are considered a small investment advisory company. Many competing companies are part of larger financial services companies that conduct business in more markets and have greater marketing, financial, technical, research, and distribution resources and other capabilities than we do. Most of the larger firms offer a broader range of financial services to the same retail and institutional investors we seek to serve. These factors may place us at a competitive disadvantage, and we can give no assurance that our strategies and efforts to maintain and enhance our current investor
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relationships, as well as to create new ones, will be successful. To grow our business, we must be able to compete effectively for assets under management. Key competitive factors include:
| • | the investment performance of the Hennessy Funds; |
| • | the expense ratios of the Hennessy Funds; |
| • | the breadth of our product offerings; |
| • | industry rankings of the Hennessy Funds; |
| • | the quality of our services; |
| • | our ability to further develop and market our brand; |
| • | our commitment to placing the interests of investors first; and |
| • | our general business reputation. |
Increased competition could reduce the demand for our products and services, which could have a material adverse effect on our business, results of operations, and financial condition.
Competition is an important risk that our business faces and should be considered along with other risk factors that we discuss in Item 1A, “Risk Factors.”
REGULATORY ENVIRONMENT
We are subject to an increasing number of extensive and complex federal and state laws and regulations intended to protect investors in funds and investors of registered investment advisors. We believe we are in compliance in all material respects with all applicable laws and regulations.
We are registered as an investment advisor with the SEC and, therefore, must comply with the requirements of the Investment Advisers Act of 1940 and related SEC regulations. Such requirements relate to, among other things, fiduciary duties to investors, transactions with investors, compliance program effectiveness, solicitation arrangements, conflicts of interest, advertising, recordkeeping and reporting, disclosure, and anti-fraud matters.
We manage accounts for the Hennessy Funds on a discretionary basis, meaning that we have the authority to buy and sell securities for each portfolio, select broker-dealers to execute trades, and negotiate brokerage commission rates. In connection with certain of these transactions, we receive soft dollar credits from broker-dealers that have the effect of reducing certain of our expenses. All of our soft dollar arrangements are intended to be within the safe harbor provided by Section 28(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). If our ability to use soft dollars were reduced or eliminated as a result of the implementation of statutory amendments or new regulations, our operating expenses would increase.
The Hennessy Funds are registered with the SEC under the Investment Company Act of 1940, which imposes additional obligations on both the Hennessy Funds and us, as the advisor to the Hennessy Funds, including detailed operational requirements. While we exercise broad discretion over the day-to-day management of the business, affairs, and investment portfolios of the Hennessy Funds, our operations are subject to oversight and management by the Funds’ Board of Trustees. The responsibilities of the Funds’ Board of Trustees include, among other things, annually approving the continuation of our investment advisory agreements and shareholder servicing agreement with the Hennessy Funds and our sub-advisory agreements with the sub-advisors to the Hennessy Funds, approving other service providers, determining the method of valuing assets, and monitoring transactions involving affiliates. The Investment Company Act of 1940 also imposes on us a fiduciary duty with respect to receiving investment advisory fees. That fiduciary duty may be enforced by the SEC, by administrative action, or through litigation initiated by investors in the Hennessy Funds pursuant to a private right of action.
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The SEC is authorized to institute proceedings and impose sanctions for violations of the Investment Advisers Act of 1940 and the Investment Company Act of 1940, ranging from fines and censures to the suspension of individual employees to termination of our registration as an investment advisor. A violation of applicable law or regulations could also subject us, our directors, and our employees to civil actions brought by private parties. We believe we are in compliance in all material respects with all applicable SEC requirements.
EMPLOYEES
As of the end of fiscal year 2022, we had 19 employees, 17 of whom were full-time employees. Our 19 employees had an average tenure of 12 years as of the end of fiscal year 2022. We focus on providing our employees competitive compensation, a friendly and flexible office environment, and fostering close-knit working relationships among our team members. Over 50% of our employees are women, and with an executive team that is 50% women and 25% minority, we believe we have created an environment in which all team members can be successful and supported.
Our executive officers are (i) Neil J. Hennessy, Chief Executive Officer and Chairman of our Board of Directors, (ii) Teresa M. Nilsen, President, Chief Operating Officer, Secretary, and a member of our Board of Directors, (iii) Kathryn R. Fahy, Chief Financial Officer and Senior Vice President, and (iv) Daniel B. Steadman, Executive Vice President and a member of our Board of Directors. In addition to our executive officers’ responsibilities at Hennessy Advisors, Inc., (a) Mr. Hennessy is President, Chief Market Strategist, and a Portfolio Manager of the Hennessy Funds and is a member of the Funds’ Board of Trustees, (b) Ms. Nilsen is an Executive Vice President and Treasurer of the Hennessy Funds, (c) Ms. Fahy is Vice President, Assistant Treasurer, and Assistant Secretary of the Hennessy Funds, and (d) Mr. Steadman is an Executive Vice President and Secretary of the Hennessy Funds.
AVAILABLE INFORMATION
We make available free of charge through a link on our website, www.hennessyadvisors.com, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. We are not including the information contained on our website as part of, or incorporating it by reference into, this Annual Report on Form 10-K.
| ITEM 1A. | RISK FACTORS |
We face many risks and uncertainties, many of which are inherent in the financial services industry and the investment advisory business. Investors should carefully consider the risks described below, together with all of the other information included in this Annual Report on Form 10-K, in evaluating us and our common stock. Our business, results of operations, financial condition, and stock price could be materially adversely affected by any of the risks we face, including those described below.
RISKS RELATING TO OUR ASSETS UNDER MANAGEMENT
Volatility in and disruption of the capital markets and changes in the economy has and may continue to significantly affect our assets under management and revenues.
The securities markets are inherently volatile and may be affected by factors beyond our control, including global economic conditions, industry trends, interest and inflation rate fluctuations, political factors, the imposition of economic sanctions, public health crises, natural disasters, and other factors that are difficult to predict. Because our assets under management is largely concentrated in equity products, our results are particularly susceptible to downturns in the equity markets. We derive all of 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 asset value of the Hennessy Funds. Accordingly, our revenues increase or decrease as our average assets under management increases or decreases, which is affected by market appreciation or depreciation and purchases and redemptions of shares of the Hennessy Funds. Changing market conditions could also cause an impairment to the value of our management contracts asset.
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Investors in the Hennessy Funds can redeem their investments at any time and for any reason, including poor investment performance and volatile equity markets. A decline in our assets under management adversely affects our revenues.
Investors in the Hennessy Funds may redeem their investments at any time and for any reason without prior notice. Success in the investment advisory and fund business is largely dependent on investment performance, as well as investor servicing and distribution. If the Hennessy Funds perform poorly compared to the investment products offered by other investment advisory firms, we may experience a decrease in purchases of shares and an increase in redemptions of shares of the Hennessy Funds. Further, sharp declines in the stock market, such as those experienced during fiscal year 2022, have and may continue to cause increases in redemptions of shares of the Hennessy Funds. Such redemptions reduce our assets under management and adversely affect our revenues.
Our business and operations are subject to adverse effects from market reactions to the outbreak of contagious diseases.
The outbreak and spread of contagious diseases such as COVID-19 has adversely impacted global commercial activity, contributed to significant volatility in global equity and debt markets, and disrupted supply chains, operations, and economic activity. The COVID-19 pandemic adversely impacted the value and performance of the Hennessy Funds, which resulted in declines in our revenues. It also limited our ability to source and pursue potential acquisitions. Future outbreaks of contagious diseases could have similar adverse impacts on our business and financial performance.
Adverse opinions of the Hennessy Funds by third parties, including rating agencies or industry analysts, could decrease new investments in, or accelerate redemptions from, the Hennessy Funds, which would adversely affect our revenues.
The Hennessy Funds are rated, ranked, and assessed by independent third parties, including rating agencies, industry analysts, distribution partners, and industry periodicals. These ratings, rankings, and assessments often influence the investment decisions of investors, but they can be affected by a number of factors that are not under our direct control and may change frequently. For example, a ranking agency like Morningstar may change its ranking designs and methodology, which could result in a decrease in the ratings of the Hennessy Funds without any action on our part. If the Hennessy Funds received an adverse rating, ranking, or assessment from a third party, it could result in an increase in the withdrawal of assets from the Hennessy Funds by existing investors and the inability to attract additional investments into the Hennessy Funds from existing and new investors, thereby reducing our assets under management and adversely affecting our revenues.
The failure or negative performance of products offered by competitors may have a negative impact on the Hennessy Funds within such similar product type, irrespective of our fund performance.
Many competitors offer similar products to the Hennessy Funds, and the failure or negative performance of competitors’ products could lead to a loss of confidence in the corresponding products in the Hennessy Funds lineup, irrespective of the performance of the Hennessy Funds. Any loss of confidence in a product type could lead to redemptions in the Hennessy Fund within such product type, which could have a material adverse effect on our business, results of operations, and financial condition.
RISKS RELATING TO OUR BUSINESS MODEL AND OPERATIONS
We derive a substantial portion of our revenues from a limited number of the Hennessy Funds.
For the past several years, approximately 75% of our assets under management has been concentrated in four of our funds. During fiscal year 2022, our average assets under management was concentrated in the following four funds: (i) the Hennessy Focus Fund (27% of average assets under management); (ii) the Hennessy Japan Fund (16% of average assets under management); (iii) the Hennessy Gas Utility Fund (16% of average assets under management); and (iv) the Hennessy Cornerstone Mid Cap 30 Fund (10% of average assets under management). Consequently, our revenues followed a similar pattern of concentration: (a) the Hennessy Focus Fund (32% of total revenue); (b) the Hennessy Japan Fund (16% of total revenue); (c) the Hennessy Mid Cap 30 Fund (10% of total revenue); and (d) the Hennessy Gas Utility Fund (9% of total revenue). As a result, our operating results are particularly dependent upon the performance of a very small number funds and our ability to maintain and grow assets under management in these funds. These funds have experienced significant redemptions in recent years and may continue to do so for the future. This has reduced, and may continue to reduce, our assets under management and revenues.
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We utilize unaffiliated sub-advisors to manage the portfolio composition of certain of the Hennessy Funds, and any matters that have an adverse impact on their businesses or any change in our relationships with our sub-advisors could lead to a reduction in assets under management, which would adversely affect our revenues.
We utilize unaffiliated sub-advisors to manage the portfolio composition of some of the Hennessy Funds. Although we perform due diligence on our sub-advisors, we do not manage their day-to-day business activities. Our financial condition and profitability may be adversely affected by situations that are specific to such sub-advisors, such as disruption of their operations, their exposure to disciplinary action, or reputational harm to them.
We periodically negotiate the terms and conditions of these sub-advisory relationships, and there can be no assurance that such terms will remain acceptable to us or our sub-advisors. These relationships may also be terminated by us or the applicable sub-advisor upon short notice without penalty. An interruption or termination of our sub-advisory relationships could affect our ability to market our sub-advised funds and result in a reduction in assets under management, which would adversely affect our revenues.
We depend on key personnel to manage our business, and the loss of any key person’s services, combined with our inability to identify and retain a suitable replacement for such person, could materially adversely affect us. Additionally, the cost to retain our key personnel could put pressure on our operating margins.
Our success is largely dependent on the skills, experience, and performance of our key personnel. The business acumen, investment advisory expertise, and business relationships of our key personnel are critical elements in operating and expanding our business. Financial services professionals are in high demand, and we face significant competition for qualified employees. The loss of services of any of our key personnel for any reason, combined with our inability to identify and retain a suitable replacement for such person, could have a material adverse effect on our business, results of operations, and financial condition. Moreover, in order to retain key personnel, we may be required to increase compensation to such individuals, resulting in additional expense.
We have debt and may incur additional debt, which may increase the risk of investing in us and may harm our financial condition and results of operations.
Borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested and therefore increase the risks associated with investing in our securities.
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.
We may incur additional debt in the future. Our indebtedness could (i) decrease our ability to obtain additional financing for working capital, capital expenditures, general corporate or other purposes, (ii) limit our flexibility to make acquisitions, (iii) increase our cash requirements to support the payment of interest, (iv) limit our flexibility in planning for, or reacting to, changes in our business and our industry, and (v) increase our vulnerability to adverse changes in general economic and industry conditions. Our ability to make payments of principal and interest on our indebtedness depends upon our future performance, which is subject to general economic conditions and financial, business, and other factors affecting our consolidated operations, many of which are beyond our control.
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Changes in the distribution channels on which we depend could reduce our net revenues and hinder our growth.
Our primary source of distribution of the Hennessy Funds is through a variety of third-party financial intermediaries. Our success is highly dependent on access to these various distribution channels. We cannot guarantee we will be able to retain access to these channels at similar pricing or at all. Increasing competition for these distribution channels could cause our distribution costs to rise, which could have a material adverse effect on our net income. These financial intermediaries generally can terminate their relationships with us on short notice. Mergers and other corporate transactions among distributors also may affect our relationships with financial intermediaries. Certain of the financial intermediaries upon whom we rely to distribute the Hennessy Funds also sell their own competing proprietary investment products, which could limit the distribution of our products. Investors increasingly rely on external consultants and other third parties for advice on the choice of investment manager. These consultants and third parties tend to exert a significant degree of influence over their clients’ choices, and they may favor one of our competitors as better meeting their particular clients’ needs. There is no assurance that the Hennessy Funds will be among their recommended choices in the future.
Additionally, particularly in the United States, certain third-party financial intermediaries have substantially reduced the number of investment funds they make available to their clients. If a material portion of the financial intermediaries with whom we do business were to substantially narrow their product offerings, it could have a significant adverse effect on our assets under management, revenues, and net income. More broadly, in both retail and institutional channels, financial intermediaries (distribution firms and consultants) are seeking to reduce the number of investment management firms with which they do business. This poses risks of additional lost business if a particular financial intermediary chooses to stop or significantly reduce its business relationship with us. Any failure to maintain strong business relationships with these financial intermediaries and the consultant community due to any of the above-described factors would impair our ability to distribute the Hennessy Funds, which in turn would have a negative effect on our assets under management, revenues, and net income.
Management contracts purchased by us are currently classified as an indefinite-life asset subject to impairment analysis. The impairment analysis is based on subjective criteria, and an impairment loss could be recorded.
The management contracts we have purchased, an $80.9 million asset on the balance sheet as of the end of fiscal year 2022, are considered an intangible asset with an indefinite useful life. Management reviews the indefinite life classification of our management contracts asset each reporting period. If the management contracts asset is ever reclassified as an asset with a definite life, we would begin amortizing the management contracts over their remaining useful life. If the management contracts asset continues to be classified as an indefinite-life asset, we will continue to periodically review the carrying value to determine if any impairment has occurred. The impairment analysis is based on anticipated future cash flows, which are calculated based on assets under management. Although the management contracts asset is not currently impaired, there is always a possibility of impairment in the future, which could require us to write off all or a portion of the asset. A write-off, depending on the amount, could have operational risks and could have a significant impact on the value of our equity and our earnings per share.
We may be required to forego all or a portion of our fees under our investment advisory agreements with the Hennessy Funds.
On an annual basis, the Funds’ Board of Trustees must assess the reasonableness of our investment advisory fees. While the Funds’ Board of Trustees has found our investment advisory fees to be reasonable in the past, we cannot guarantee that it will continue to do so. Additionally, we regularly analyze the expense ratios of the Hennessy Funds and have the right to waive fees to compete with other funds with lower expense ratios (although in the past we have only waived fees based on contractual obligations). Any waiver of or reduction in fees would cause our revenues to decline and could adversely affect our business, results of operations, and financial condition. Any fee waiver would apply only on a going-forward basis.
The Hennessy Japan Fund and the Hennessy Japan Small Cap Fund invest in the Japanese stock market in yen, which involves foreign exchange and economic uncertainties.
The Hennessy Japan Fund and the Hennessy Japan Small Cap Fund are invested in securities listed on the Japanese stock market, which exposes these funds to risks that are not typically associated with an investment in a U.S. issuer. The values of these funds fluctuate with changes in the value of the Japanese yen versus the U.S. dollar. Investments in Japanese securities also expose these funds to the economic uncertainties affecting Japan, which may
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differ from those affecting the United States. For example, the adverse effects of a pandemic may disproportionately impact Japan. Further, Japanese financial accounting standards and practices may differ, and there may be less information on Japanese companies available publicly. If these circumstances result in a reduction in the total assets of the Hennessy Japan Fund and the Hennessy Japan Small Cap Fund, our assets under management would be reduced, which would adversely affect our revenues.
We utilize quantitative investment strategies for some of the Hennessy Funds that require us to invest in specific portfolios of securities and hold these positions for a specified period of time regardless of performance.
Our formula-driven funds adhere to quantitative investment strategies, and the portfolios of stocks held by such funds are rescreened and rebalanced at designated times in accordance with such investment strategies. Adhering to our investment strategies regardless of any adverse developments that may arise could result in substantial losses to the formula-driven Hennessy Funds if, for example, the stocks selected for a fund are experiencing financial difficulty or are out of favor with investors in a given period This could, in theory, result in relatively low performance of the formula-driven Hennessy Funds and adversely affect the net assets of such Hennessy Funds. A decrease in the net assets of the Hennessy Funds would adversely affect our revenues.
We pursue strategic asset purchases as part of our regular business strategy, and such acquisitions involve inherent risks that could adversely affect our operating results and financial condition and potentially dilute the holdings of current shareholders.
As part of our regular business strategy, we pursue strategic purchases of the assets related to the management of additional funds. This strategy is accompanied by risks including, among others, the possibility of the following:
| • | the potential unavailability of attractive acquisition opportunities; |
| • | a high level of competition from other companies that may have greater financial resources than we do; |
| • | our inability to value potential asset purchases accurately and negotiate acceptable purchase terms; |
| • | our inability to obtain quorum and secure enough affirmative votes to gain approval of the proposed fund reorganization from the target fund’s investors; |
| • | the loss of fund assets paid for in an asset purchase through redemptions by investors of the funds involved in the asset purchase; |
| • | higher than anticipated asset purchase expenses; |
| • | our inability to successfully integrate and maintain adequate infrastructure to support business growth; |
| • | increasing our leverage; |
| • | the potential diversion of our management’s time and attention; |
| • | dilution to our shareholders if we fund an asset purchase in whole or in part with our common stock; and |
| • | adverse effects on our earnings if purchased intangible assets become impaired. |
While we seek to mitigate these risks through, among other things, due diligence and indemnification provisions, these or other risk-mitigating measures that we put in place may not be sufficient to address these risks. If one or more of these risks occur, we may be unable to successfully complete a purchase of management-related assets (thereby requiring us to write off any related expenses), we may experience an impairment of our management contracts asset, we may receive negative publicity or suffer other negative impacts on our reputation, and we may not achieve the expected return on investment. Any of these results could have an adverse effect on our business, results of operations, and financial condition.
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Our investment advisory and shareholder servicing agreements can be terminated on short notice, are not freely assignable, and must be renewed annually; the loss of such agreements would reduce our revenues.
We generate all of our operating revenues from the investment advisory and shareholder servicing agreements with the Hennessy Funds. These agreements may be terminated without penalty on 60 days’ notice and may not be assigned without the consent of investors in the Hennessy Funds. In addition, they each must be renewed annually by the Funds’ Board of Trustees (or, in the case of our investment advisory agreements, by the vote of a majority of the outstanding shares of the applicable Hennessy Fund), including a majority of the disinterested trustees. The termination or non-renewal of these agreements, or the renegotiation of the terms of these agreements in a manner detrimental to us, could result in a substantial reduction in revenues, which could have a material adverse effect on our business, results of operations, and financial condition.
RISKS RELATING TO OUR INDUSTRY
Investor behavior is influenced by short-term investment performance.
Investor behavior may be based on many factors, including short-term investment performance. Poor short-term performance of the Hennessy Funds, irrespective of longer—term success, could potentially lead to a decrease in purchases of shares of the Hennessy Funds and an increase in redemptions, thereby reducing our assets under management and adversely affecting our revenues.
Assets invested through third-party financial intermediaries can be quickly redeemed, which could reduce our revenues.
Third-party financial intermediaries are attractive to investors because of the ease of accessibility to a variety of funds, but this may cause the investments to be more sensitive to fluctuations in performance, especially in the short term. If we were unable to retain the assets of the Hennessy Funds held through financial intermediaries, our assets under management would be reduced. As a result, our revenues could decline and our business, results of operations, and financial condition could be materially adversely affected.
We face intense competition in attracting investors and retaining net assets in the Hennessy Funds.
The investment advisory industry is intensely competitive and new participants are continually entering the industry. We compete directly with numerous global and U.S. investment advisors, commercial banks, savings and loan associations, brokerage and investment banking firms, broker-dealers, insurance companies, and other financial institutions that often provide investment products with similar features and objectives to those we offer. These institutions range from small boutique firms to large financial services complexes. We are considered a small investment advisory company. Many competing companies are part of larger financial services companies that conduct business in more markets and have greater marketing, financial, technical, research, and distribution resources and other capabilities than we do. Most of the larger firms offer a broader range of financial services to the same retail and institutional investors that we seek to serve. If we are unable to attract investors and retain net assets in the Hennessy Funds due to increased competition, our revenues could decline and we could experience a material adverse effect on our business, results of operations, and financial condition.
For more information regarding competitive factors, see the “Competition” subheading in Item 1, “Business.”
We may be unable to develop or acquire new products and the development of new products may expose us to reputational harm, additional costs, or operational risk.
Our continued financial performance may depend on our ability to react to changes in the asset management industry, respond to evolving investor demands and develop, market, and manage new investment products. Conversely, the development and introduction of new products, including the creation or acquisition of products with a focus on ESG (environmental, social, and governance) matters, requires continued innovative effort on our part and may require significant time and resources, as well as ongoing support and investment. Substantial
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risks and uncertainties are associated with the introduction of new products, including the implementation of new and appropriate operational controls and procedures, shifting investor and market preferences, the introduction of competing products, constraints on our ability to manage growth, and compliance with regulatory and disclosure requirements. A growing number of new products also depend on data provided by third parties as analytical inputs and are subject to additional risks, including with respect to data quality, cost, availability, and provider relationships. There can be no assurance that we will be able to develop or acquire new products that address the needs of investors on the timescale they require. Any failure to successfully develop or acquire new products, or effectively manage associated operational risks, could harm our reputation and expose us to additional costs, which may reduce our assets under management and adversely affect our revenues.
Market consolidation and industry trends could negatively impact our business.
In recent years, there have been several instances of industry consolidation in both the distribution and investment management areas. Further consolidation may occur in these areas in the future. The increasing size and market influence of certain distributors of our products and of certain direct competitors may have a negative impact on our ability to compete at the same levels of profitability in the future. Additionally, the market environment has increasingly led some investors to favor lower–fee, passive products. As a result, investment advisors that emphasize passive products have gained, and may continue to gain, market share from active managers like us.
Industry trends and market pressure to lower our investment advisory fees could reduce our profit margin.
Our profits are highly dependent on the fees we are able to charge to the Hennessy Funds for investment advisory services. To the extent we are forced to compete on the basis of the investment advisory fees we charge to the Hennessy Funds, we may not be able to maintain our current fee structures. We have historically competed primarily on the performance of the Hennessy Funds and not on the level of our investment advisory fees relative to those of our competitors. In recent years, however, there has been a trend toward lower fees in the investment advisory industry. To maintain our fee structures in a competitive environment, we must be able to provide investors in the Hennessy Funds with investment returns and service that will adequately compensate them for investing in our funds with our current fee structures. We may not succeed in maintaining our current fee structures, and fee reductions on existing or future business could have a material adverse effect on our results of operations.
Higher insurance premiums and increased insurance coverage risks could increase our costs and reduce our profitability.
We carry insurance in amounts and under terms that we believe are appropriate, but we cannot guarantee that our insurance policies will cover all liabilities and losses to which we may be exposed or, if covered, that such liabilities and losses will not exceed insurance coverage limits or that our insurers will remain solvent and meet their obligations. In addition, insurance premiums and required retentions have increased in recent years and may continue to do so.
We are subject to regulatory and governmental inquiries and civil litigation. An adverse outcome of any such proceeding could involve substantial financial penalties. Various claims may also arise against us in the ordinary course of business, such as employment-related claims. There has been increased incidence of litigation and regulatory investigations in the financial services industry in recent years, including customer claims and class action suits alleging substantial monetary damages. Certain insurance coverage may not be available or may be prohibitively expensive in future periods. As our insurance policies come up for renewal, we may need to assume higher deductibles or co-insurance liabilities, or pay higher premiums, which would increase our expenses and have a material adverse effect on our results of operations.
We depend on information technology, and any failures of or damage to, attack on or unauthorized access to our information technology systems or facilities, or those of third parties with which we do business, including as a result of cyber-attacks, could result in significant limits on our ability to conduct our operations and activities, costs, and reputational damage.
We use software and related technologies throughout our business and also utilize third-party vendors who use software and related technologies to provide services to us and the Hennessy Funds. We are dependent on the effectiveness of our information and cybersecurity policies, procedures, and capabilities we maintain to protect our computer and telecommunications systems and the data that resides on or is transmitted through them, including
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data provided by third parties that is significant to our business. An information security incident, such as a cyber-attack involving a phishing scam, business email compromise, malware, or ransomware attack, or an internally caused incident or disruption, such as misuse or a failure to control access to sensitive systems, could materially interrupt our business operations or cause disclosure or modification of sensitive or confidential investor or competitive information. Moreover, our growing reliance on mobile and cloud technology and any failure by mobile technology and cloud service providers to adequately safeguard their systems and prevent cyber-attacks could disrupt our operations and result in misappropriation, corruption, or loss of personal, confidential, or proprietary information or third-party data. Additionally, although we take precautions to password protect and encrypt our laptops and other mobile electronic hardware, if such hardware is stolen, misplaced, or left unattended, it may become vulnerable to hacking or other unauthorized use, creating a possible security risk and resulting in potentially costly actions. Furthermore, there is a risk that encryption and other protective measures may be circumvented, particularly to the extent that new computing technologies increase the speed and computing power available.
The financial services industry has been the subject of cyber-attacks involving the dissemination, theft, and destruction of corporate information or other assets as a result of failure to follow procedures by employees or as a result of actions by third parties, including actions by terrorist organizations and nation-state actors. Although we have implemented policies and controls to prevent and address potential data breaches, inadvertent disclosures, increasingly sophisticated cyber-attacks, and cyber-related fraud, there can be no assurance that any of these measures will prove effective. Because the techniques used to obtain unauthorized access, disable, or degrade service or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques, to implement adequate preventative measures, or to address them until they are discovered. In addition, a successful cyber-attack may persist for an extended period of time before being detected, and it may take a considerable amount of time for an investigation to be completed and the severity and potential impact to be known. While such an investigation is ongoing, we may not necessarily know the extent of the harm or how best to remediate it, certain errors or actions could be repeated or compounded before they are discovered and remediated, and communication to the public, regulators, shareholders, and investors in the Hennessy Funds may be inaccurate, any or all of which could further increase the costs and consequences of an information security incident.
If any of these events were to occur, we could suffer a financial loss, a disruption of our business, liability to the Hennessy Funds and their investors, regulatory intervention, or reputational damage, any of which could have a material adverse effect on our business, results of operations, and financial condition. We also may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures. In addition, our cybersecurity insurance may not cover all losses and damages from such events and our ability to maintain or obtain sufficient insurance coverage in the future may be limited.
Finally, cybersecurity and data privacy have become high priorities for regulators, and many jurisdictions are enacting laws and regulations in these areas. Two such laws are the California Consumer Privacy Act of 2018, which took effect in 2020, and the California Privacy Rights Act of 2020, which will take effect in 2023. Enactment of new privacy laws or regulations could, among other things, result in additional costs of compliance or litigation. In addition, while we strive to comply with the relevant laws and regulations, any failure to comply could result in regulatory investigations and penalties as well as negative publicity, which could materially adversely affect our business, results of operations, and financial condition.
We are exposed to legal risk and litigation, which could increase our expenses and reduce our profitability.
We are subject to a number of sources of potential legal liability, including, by way of example, investors in the Hennessy Funds, our own shareholders, our employees, or regulators. Lawsuits or investigations that we may become involved in could be very expensive and highly damaging to our reputation, even if the underlying claims are without merit.
Our business is extensively regulated, which increases our costs of doing business, and our failure to comply with regulatory requirements may harm our financial condition.
Our business is subject to extensive regulation in the United States, particularly by the SEC. We are subject to regulation under the Securities Act of 1933, as amended, the Exchange Act, the Investment Company Act of 1940, the Investment Advisers Act of 1940, and various other statutes. The laws to which we are subject are designed primarily to protect investors in the Hennessy Funds as opposed to our shareholders. In addition to an
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increased number of applicable laws, the investment fund industry has undergone increased scrutiny by the SEC and state regulators in recent years, resulting in numerous enforcement actions and sweep examinations. Increased regulation has increased our costs in managing the Hennessy Funds, and we could continue to experience higher costs if new laws require us to spend more time, hire additional personnel, or buy new technology to comply effectively. Any change in law could also have a material adverse effect on us by limiting the sources of our revenues and increasing our costs. In addition to securities regulations, our business also may be materially adversely affected by other types of laws and policies.
Any determination of a failure to comply with applicable laws, rules, or regulations could expose us or our employees to civil liability, criminal liability, or disciplinary or enforcement action, with penalties that could include the disgorgement of fees, fines, sanctions, suspensions, or censure of individual employees, or revocation or limitation of business activities or registration, and may result in monetary losses that are not covered by insurance in adequate amounts or at all, any of which could have an adverse impact on our financial condition and results of operations. Further, if we or our employees were to fail to comply with applicable laws, rules, or regulations, or be named as a subject of an investigation or other regulatory action, the public announcement and potential publicity surrounding any such investigation or action could have an adverse effect on our reputation and our stock price and result in increased costs, even if we or our employees were found not to have violated such laws, rules, or regulations.
Changes to U.S. or state tax laws, our failure to adequately comply with U.S. or state tax laws, or the outcome of any audits or regulatory disputes with respect to our compliance with U.S. or state tax laws could adversely affect us.
Changes to U.S. or state tax law could be enacted in the future that could have a material adverse effect on our business, results of operations, and financial condition. Further, we are subject to potential tax audits in various jurisdictions and in such event, tax authorities may disagree with certain positions we have taken and assess penalties or additional taxes. While we assess regularly the likely outcomes of these potential audits, there can be no assurance that we will accurately predict the outcome of a potential audit, and an audit could have a material adverse impact on our business, results of operations, and financial condition.
Our investment advisory agreements require us to adhere to the investment policies and strategies of the Hennessy Funds; any failure to comply with such requirements could result in claims, losses, or regulatory sanctions.
Our investment advisory agreements with the Hennessy Funds contain contractual provisions that require us to comply with the investment policies and strategies of the Hennessy Funds when we provide our investment advisory services. We are also required to comply with numerous investment, asset valuation, distribution, and tax requirements under applicable law and regulations. Any allegation of a failure to adhere to these requirements could result in investor claims, reputational damage, withdrawal of assets, and potential regulatory sanctions, any of which could negatively impact our revenues and earnings. We have implemented procedures and utilize the services of experienced administrators, accountants, and lawyers to assist in satisfying these requirements, but there can be no assurance that these precautions will protect us from potential liabilities.
We may need to raise additional capital to fund new business initiatives, and resources may not be available to us in sufficient amounts or on acceptable terms, which could have an adverse impact on our business.
Our ability to meet our future cash needs is dependent upon our ability to generate cash. Although we have been successful in generating sufficient cash in the past, we may not be successful in the future. We may need to raise additional capital to fund new business initiatives or repay the 2026 Notes, and financing may not be available to us in sufficient amounts, on acceptable terms, or at all. Our ability to access bank financing or capital markets efficiently depends on a number of factors, including the state of credit and equity markets, interest rates, and credit spreads. If we are unable to access sufficient capital on acceptable terms, our business could be adversely impacted.
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Failure to establish adequate controls and risk management policies, as well as circumvention of established controls and policies by employees, could harm us by impairing our ability to attract and retain investors in the Hennessy Funds and by subjecting us to significant legal liability, regulatory scrutiny, and reputational harm.
Our reputation is critical to attracting and retaining investors in the Hennessy Funds. In recent years, there have been a number of highly publicized cases involving fraud, conflicts of interest, or other misconduct by individuals in the financial services industry. We have implemented controls and risk management policies to monitor and manage risks, but we cannot be certain that such controls and policies will successfully identify and manage internal and external risks. Further, although we strive to conduct our business in accordance with the highest ethical standards and emphasize the importance of doing so to our employees, there is a risk that our employees could engage in misconduct that adversely affects our business. For example, if an employee were to engage in, or be accused of engaging in, illegal or suspicious activity (such as improper trading, disclosure of confidential information, or breach of fiduciary duties), we could be subject to regulatory sanctions and suffer serious harm to our reputation, financial position, and ability to maintain and grow the number of investors in the Hennessy Funds.
The historical performance of the Hennessy Funds should not be considered indicative of the future results of the Hennessy Funds or of any returns expected on our common stock.
The historical performance of the Hennessy Funds is relevant to returns on our common stock only insofar as the fees we have earned in the past and may earn in the future, which are based on average assets under management, may impact the performance of our common stock. Positive performance of the Hennessy Funds typically increases our revenues, which in turn could positively affect our business, and poor performance typically reduces our revenues, which in turn could adversely affect our business. However, the historical and potential future returns of the Hennessy Funds are not directly linked to returns on our common stock, such that positive performance of the Hennessy Funds will not necessarily result in positive returns on our common stock and poor performance of the Hennessy Funds will not necessary result in negative returns on our common stock. Moreover, the historical performance of the Hennessy Funds should not be considered indicative of the future results that should be expected from such funds.
RISKS RELATING TO OUR COMMON STOCK
Ownership of a large percentage of our common stock is concentrated with a small number of shareholders, which could increase the volatility in our stock trading and significantly affect our share price and causes us to experience limited trading volume in our securities.
We have a limited number of shareholders, and a large percentage of our common stock is held by an even fewer number of shareholders. If our larger shareholders were to decide to liquidate their ownership positions, it could cause significant fluctuations in the share price of our common stock. Having a limited number of shareholders also causes us to experience limited trading volume in our securities.
We intend to pay regular dividends to our shareholders, but our ability to do so is subject to the discretion of our Board of Directors.
We have consistently paid dividends each year since 2005, but the declaration, amount, and payment of dividends to our shareholders by us are subject to the discretion of our Board of Directors. Our Board of Directors takes into account general economic and business conditions, our strategic plans, our financial results and condition, any contractual, legal, and regulatory restrictions on our payment of dividends, and such other factors as our Board of Directors deems relevant to determining whether to declare dividends and the amount of such dividends.
| ITEM 2. | PROPERTIES. |
Our principal executive office is located at 7250 Redwood Boulevard, Suite 200, Novato, California 94945, where we occupy approximately 13,728 square feet and have the right to use all common areas. We also lease office space in Austin, Texas, Dallas, Texas, Boston, Massachusetts, and Chapel Hill, North Carolina. We consider these arrangements to be suitable and adequate for the management and operations of our business. We do not own any real property.
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| ITEM 3. | LEGAL PROCEEDINGS. |
None.
| ITEM 4. | MINE SAFETY DISCLOSURES. |
Not applicable.
PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES |
Until October 18, 2021, our common stock traded on The Nasdaq Capital Market under the stock symbol “HNNA.” On October 19, 2021, our common stock moved to and began trading on The Nasdaq Global Market, where it continues to trade under the stock symbol “HNNA.”
We have paid regular cash dividends to our shareholders and intend to continue to do so, although the declaration of a dividend is always subject to the discretion of our Board of Directors.
As of the end of fiscal year 2022, we had 127 holders of record of our common stock. In addition, there were 47 brokerage firm accounts that represent 2,055 additional individual shareholders for a total of 2,182 shareholders.
The equity compensation plan information required by Item 201(d) of Regulation S-K is set forth in the “Equity Compensation Plan Information” subheading under Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
During fiscal year 2022, we repurchased shares underlying vested restricted stock units (“RSUs”) from employees to satisfy tax withholding obligations arising in connection with the vesting of RSUs. The stock repurchases are presented in the following table for the three months ended September 30, 2022:
| Period |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1) |
||||||||||||
| July 1-31, 2022 |
— | $ | — | — | 596,368 | |||||||||||
| August 1-31, 2022 (2) |
8,731 | 9.93 | — | 1,096,368 | ||||||||||||
| September 1-30, 2022 (2) |
25,529 | 9.15 | — | 1,096,368 | ||||||||||||
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|
|
|
|||||||||
| Total |
34,260 | $ | 9.35 | — | 1,096,368 | |||||||||||
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| (1) | We are authorized to purchase a maximum of 2,000,000 shares under our stock buyback program. We announced the stock buyback program in August 2010, and the program has no expiration date. In August 2022, the Board of Directors increased the number of shares that may be repurchased under the stock buyback program by 500,000 shares, to a total of 2,000,000 shares. We did not repurchase any shares pursuant to the stock buyback program during the three months ended September 30, 2022. |
| (2) | The shares that we repurchased in August and September 2022 are not subject to a maximum per plan or program because we did not repurchase them pursuant to a plan or program. |
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| ITEM 7. | 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 the section titled “Risk Factors” and elsewhere in this Annual Report on Form 10-K. 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 (i) the identification, completion, and integration of future acquisitions and (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 Item 1A, “Risk Factors.” 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 open-end mutual funds branded as the Hennessy Funds. We manage 12 of the 16 Hennessy Funds internally. For the remaining four 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 Funds.
Prior to January 31, 2022, the day-to-day management of two Hennessy Funds, the Hennessy Energy Transition Fund and the Hennessy Midstream Fund, was performed by a sub-advisor, BP Capital Fund Services, LLC. Effective as of that date, we mutually agreed with BP Capital Fund Services, LLC to terminate the sub-advisory agreement for those 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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U.S. equities had negative performance for the one-year period ended September 30, 2022, with the S&P 500® Index returning -15.47% and the Dow Jones Industrial Average returning -13.40% for the period (on a total return basis). Equity prices dropped sharply during the period as investors have turned their attention to rising interest rates amid continuing inflationary concerns. Recent interest rate hikes by the Federal Reserve and the expectation of further rate hikes have contributed to weakness in equities. Despite weakness in economic growth, the Federal Reserve has indicated that it will likely raise rates at upcoming meetings in an attempt to tame inflation. According to Bloomberg, the Consumer Price Index is expected to increase 8.0% in 2022, while real GDP is expected to advance 1.6%. While lower economic growth expectations would typically lead to talk of an easing interest rate environment, a strong labor market and volatile energy prices have contributed to stubbornly high and above average inflation levels. The Federal Reserve has indicated a resolve to do what it takes to bring inflation down, regardless of economic growth conditions.
Long-term U.S. bonds declined meaningfully during the one-year period ended September 30, 2022, as the Federal Reserve tapered its bond-buying activity and continued to raise the Federal Funds rate. With a yield curve that is currently inverted, investor attention has focused on economic growth projections that continue to be revised downward. While the unemployment rate in the United States stood at an incredibly low 3.5% as of September 2022, economic growth expectations continue to trend lower. According to Bloomberg, consensus estimates for real GDP growth for 2022 are 1.6% and for 2023 are 0.7%. The sharp decline in equities, coupled with recent weakness in the residential real estate market, likely portends some softening in consumer spending in the months to come. For the one-year period ended September 30, 2022, 10-year U.S. Government Bond yields rose from 1.49% to 3.83%.
The Japanese equity market declined 28.41% (in U.S. dollar terms) for the one-year period ended September 30, 2022, as measured by the Tokyo Stock Price Index. Like many other markets, Japan has experienced elevated levels of inflation coupled with restrained trade with key trading partners. China’s zero-COVID strategy has hampered growth in the country and adversely affected Japanese economic growth. Japanese Yen weakness versus the U.S. Dollar contributed to weak absolute dollar returns as the Tokyo Stock Price Index was only down 7.29% in local currency terms.
Against this negative equity performance backdrop, only three of the 16 Hennessy Funds posted positive returns for the one-year period ended September 30, 2022. The longer-term performance numbers remain strong, with 13 of the Hennessy Funds posting positive returns for the five-year period ended September 30, 2022, and all 14 Hennessy Funds with at least 10 years of operating history posting positive returns for the 10-year period ended September 30, 2022.
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 145,000 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 12,600 financial advisors who utilize the Hennessy Funds on behalf of their clients, including nearly 800 who purchased one of our Funds for the first time during fiscal year 2022. Approximately 17% of such advisors own two or more Hennessy Funds, and nearly 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.
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Total assets under management as of the end of fiscal year 2022 was $2.9 billion, a decrease of $1.2 billion, or 28.8%, compared to the end of fiscal year 2021. The decrease was attributable to net outflows of the Hennessy Funds and market depreciation.
The following table illustrates the changes in our assets under management over the past three fiscal years:
| Fiscal Years Ended September 30, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| (In thousands) | ||||||||||||
| Beginning assets under management |
$ | 4,065,922 | $ | 3,564,597 | $ | 4,873,839 | ||||||
| Acquisition inflows |
— | — | — | |||||||||
| Organic inflows |
656,491 | 818,358 | 571,195 | |||||||||
| Redemptions |
(1,147,888 | ) | (1,345,371 | ) | (1,771,127 | ) | ||||||
| Market (depreciation) appreciation |
(678,808 | ) | 1,028,338 | (109,310 | ) | |||||||
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| Ending assets under management |
$ | 2,895,717 | $ | 4,065,922 | $ | 3,564,597 | ||||||
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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 by share class over the past three fiscal years:
| Fiscal Years Ended September 30, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| (In thousands) | ||||||||||||
| Average assets under management - Investor Class |
$ | 2,199,250 | $ | 2,394,194 | $ | 2,556,875 | ||||||
| Average assets under management - Institutional Class |
1,445,112 | 1,595,106 | 1,541,529 | |||||||||
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| Total |
$ | 3,644,362 | $ | 3,989,300 | $ | 4,098,404 | ||||||
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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 investment funds. As of the end of fiscal year 2022, this asset had a net balance of $80.9 million, an increase of $0.3 since the end of fiscal year 2021. The increase is related to costs associated with the definitive agreement signed with Stance Capital in August 2022. (See Note 16 in Item 8, “Financial Statements and Supplementary Data.”)
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 $38.9 million, net of issuance costs.
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RESULTS OF OPERATIONS
The following table sets forth items in the statements of income as dollar amounts and as percentages of total revenue:
| Fiscal Years Ended September 30, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| Amounts | Percent of Total Revenue |
Amounts | Percent of Total Revenue |
|||||||||||||
| (In thousands, except percentages) | ||||||||||||||||
| Revenue |
||||||||||||||||
| Investment advisory fees |
$ | 27,468 | 92.6 | % | $ | 30,367 | 92.7 | % | ||||||||
| Shareholder service fees |
2,199 | 7.4 | 2,393 | 7.3 | ||||||||||||
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|
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| Total revenue |
29,667 | 100.0 | 32,760 | 100.0 | ||||||||||||
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| Operating expenses |
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| Compensation and benefits |
8,322 | 28.0 | 9,078 | 27.7 | ||||||||||||
| General and administrative |
5,036 | 17.0 | 4,754 | 14.5 | ||||||||||||
| Mutual fund distribution |
536 | 1.8 | 485 | 1.5 | ||||||||||||
| Sub-advisory fees |
5,727 | 19.3 | 7,332 | 22.4 | ||||||||||||
| Depreciation |
207 | 0.7 | 232 | 0.7 | ||||||||||||
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| Total operating expenses |
19,828 | 66.8 | 21,881 | 66.8 | ||||||||||||
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| Operating income |
9,839 | 33.2 | 10,879 | 33.2 | ||||||||||||
| Interest expense |
2,122 | 7.2 | — | — | ||||||||||||
| Other income |
(229 | ) | (0.8 | ) | (2 | ) | (0.0 | ) | ||||||||
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| Income before income tax expense |
7,946 | 26.8 | 10,881 | 33.2 | ||||||||||||
| Income tax expense |
1,756 | 5.9 | 2,979 | 9.1 | ||||||||||||
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| Net income |
$ | 6,190 | 20.9 | % | $ | 7,902 | 24.1 | % | ||||||||
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Revenue – Investment Advisory Fees and Shareholder Service Fees
Total revenue comprises investment advisory fees and shareholder service fees. Comparing fiscal year 2022 to fiscal year 2021, total revenue decreased by 9.4%, from $32.8 million to $29.7 million, investment advisory fees decreased by 9.5%, from $30.4 million to $27.5 million, and shareholder service fees decreased by 8.1%, from $2.4 million to $2.2 million.
The decrease in investment advisory fees was due to decreased average daily net assets of the Hennessy Funds. 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 Hennessy Fund 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 fiscal year 2022 was $3.6 billion, which represents a decrease of $0.3 billion, or 8.6%, compared to fiscal year 2021. The Hennessy Fund with the largest average daily net assets for fiscal year 2022 was the Hennessy Focus Fund, with $1.0 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 net assets for fiscal year 2022 was the Hennessy Japan Fund, with $583 million. We collect an investment advisory fee from the Hennessy Japan Fund at an annual rate of 0.80% 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.
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Total assets under management as of the end of fiscal year 2022 was $2.9 billion, a decrease of $1.2 billion, or 28.8%, compared to the end of fiscal year 2021. The decrease was attributable to net outflows of the Hennessy Funds and market depreciation.
The Hennessy Funds with the three largest amounts of net inflows were as follows:
| Fiscal Year Ended September 30, 2022 |
||||
| Fund Name |
Amount | |||
| Hennessy Cornerstone Value Fund |
$ | 12 million | ||
| Hennessy Japan Small Cap Fund |
$ | 2 million | ||
| Hennessy Cornerstone Growth Fund |
$ | 2 million | ||
The Hennessy Funds with the three largest amounts of net outflows were as follows:
| Fiscal Year Ended September 30, 2022 |
||||
| Fund Name |
Amount | |||
| Hennessy Japan Fund |
$ | (222) million | ||
| Hennessy Focus Fund |
$ | (181) million | ||
| Hennessy Cornerstone Mid Cap 30 Fund |
$ | (31) million | ||
Redemptions as a percentage of assets under management decreased from an average of 2.8% per month during fiscal year 2021 to an average of 2.6% per month during fiscal year 2022.
Operating Expenses
Comparing fiscal year 2021 to fiscal year 2022, total operating expenses decreased by 9.4%, from $21.9 million to $19.8 million. The decrease in operating expenses was primarily due to decreases in sub-advisory fee and compensation and benefits expenses, partially offset by increases in general and administrative expense and mutual fund distribution expense. As a percentage of total revenue, total operating expenses remained flat at 66.8%.
Compensation and Benefits Expense: Comparing fiscal year 2021 to fiscal year 2022, compensation and benefits expense decreased by 8.3%, from $9.1 million to $8.3 million. As a percentage of total revenue, compensation and benefits expense increased 0.3 percentage points to 28.0%. The decrease in dollar value of compensation and benefits expense was due primarily to a decrease in head count and incentive-based compensation during fiscal year 2022.
General and Administrative Expense: Comparing fiscal year 2021 to fiscal year 2022, general and administrative expense increased by 5.9%, from $4.8 million to $5.0 million. As a percentage of total revenue, general and administrative expense increased 2.5 percentage points to 17.0%. The increase in general and administrative expense was due to an increase in overall business travel, including conference and other industry event attendance, as we trend towards pre-pandemic travel levels.
Mutual Fund Distribution Expense: Mutual fund distribution expense consists of fees paid to various third-party financial intermediaries that offer the Hennessy Funds as potential investments to their clients. When the Hennessy Funds are purchased through one of these financial intermediaries, the intermediary typically charges an asset-based fee, which is recorded as mutual fund distribution expense on 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 intermediaries, which are affected by inflows, outflows, and fund performance. In addition, some financial intermediaries charge a minimum fee if the average daily net assets of a Hennessy Fund held by such an intermediary are less than a threshold amount. In such cases, we pay the minimum fee.
Comparing fiscal year 2021 to fiscal year 2022, mutual fund distribution expense increased by 10.5%, from $0.49 million to $0.54 million. As a percentage of total revenue, mutual fund distribution expense increased 0.3 percentage points to 1.8%.
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Mutual fund distribution expenses are affected by many factors, including the following:
| • | average daily net assets held by financial intermediaries; |
| • | the split of average daily net assets held by financial intermediaries in Institutional Class shares of the Hennessy Funds versus Investor Class shares of the Hennessy Funds; and |
| • | fee minimums at various financial intermediaries. |
Sub-Advisory Fees Expense: Comparing fiscal year 2021 to fiscal year 2022, sub-advisory fees expense decreased by 21.9%, from $7.3 million to $5.7 million. As a percentage of total revenue, sub-advisory fees expense decreased 3.1 percentage point to 19.3%. The decrease in sub-advisory fees was due to a decrease in average daily net assets of the sub-advised Hennessy Funds, with an additional decrease as a result of us no longer paying sub-advisory fees with respect to the Hennessy Energy Transition Fund and the Hennessy Midstream Fund after January 31, 2022.
Depreciation Expense: Comparing fiscal year 2021 to fiscal year 2022, depreciation expense decreased by 10.8% from $0.23 million to $0.21 million due to fewer fixed asset purchases. As a percentage of total revenue, depreciation expense remained flat at 0.7%.
Interest Expense
Comparing fiscal year 2021 to fiscal year 2022, interest expense increased from $0 to $2.1 million. The increase in interest expense was due to our issuance of the 2026 Notes on October 20, 2021, for which we make interest payments quarterly, with the first interest payment made on December 31, 2021.
Income Tax Expense
Comparing fiscal year 2021 to fiscal year 2022, income tax expense decreased by 41.1%, from $3.0 million to $1.8 million. 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 in Item 8, “Financial Statements and Supplementary Data.”
Net Income
Comparing fiscal year 2021 to fiscal year 2022, net income decreased by 21.7%, from $7.9 million to $6.2 million. The decrease in net income was primarily due to the interest expense related to the 2026 Notes in the current period.
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 the end of fiscal year 2022 will be sufficient to meet our capital requirements for one year from the issuance date of this report, as well as our longer-term capital requirements for periods beyond 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 bank financing or accessing the capital markets. There can be no assurance that we will be able to raise additional capital.
On October 20, 2021, we completed a public offering of our 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.
35
Table of Contents
Our total assets under management as of the end of fiscal year 2022 was $2.9 billion, a decrease of $1.2 billion, or 28.8%, compared to the end of fiscal year 2021. The primary sources of our revenues, 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 fiscal year 2022 was $3.6 billion. As of the end of fiscal year 2022, we had cash and cash equivalents of $58.5 million.
The following table summarizes key financial data relating to our liquidity and use of cash:
| Fiscal Years Ended September 30, |
||||||||
| 2022 | 2021 | |||||||
| (In thousands) | ||||||||
| Net cash provided by operating activities |
$ | 8,665 | $ | 10,386 | ||||
| Net cash used in investing activities |
(231 | ) | (249 | ) | ||||
| Net cash provided by (used) in financing activities |
34,217 | (4,256 | ) | |||||
|
|
|
|
|
|||||
| Net increase in cash and cash equivalents |
$ | 42,651 | $ | 5,881 | ||||
|
|
|
|
|
|||||
The decrease in cash provided by operating activities of $1.7 million was mainly due to the interest expense related to the 2026 Notes in the current period.
The cash used in investing activities of $0.2 million remained the same in both periods.
The increase in cash provided by financing activities of $38.5 million was due to the issuance of the 2026 Notes on October 20, 2021.
Dividend Payments. We have consistently paid dividends each year since 2005. Our quarterly dividend rate remained constant during fiscal years 2022 and 2021, and our dividend payments totaled $4.1 and $4.0 million in each such fiscal year, respectively.
2026 Notes. On October 20, 2021, we completed a public offering of our 2026 Notes in the aggregate principal amount of $40.25 million, which included the full exercise of the underwriters’ overallotment option. 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.
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. Described below are the accounting policies that we believe are most critical to understanding our results of operations and financial position.
Our operating revenues consist of contractual investment advisory and shareholder service fees. We earn our investment advisory fees through portfolio management of the Hennessy Funds, and we earn our shareholder service fees by assisting investors in purchases, sales, distribution, and customer service. These fee revenues are earned and calculated daily by the Hennessy Funds’ accountants. In accordance with Financial Accounting Standards Board (“FASB”) guidance on revenue recognition, we recognize fee revenues monthly. Our contractual agreements provide persuasive evidence that an arrangement exists with fixed and determinable fees, and the services are rendered daily. The collectability is probable as the fees are received from the Hennessy Funds in the month subsequent to the month in which the services are provided.
36
Table of Contents
The management contracts we have purchased are considered intangible assets with an indefinite life and we account for them in accordance with Accounting Standards Codification 350: Intangibles – Goodwill and Other (“ASC 350”). Pursuant to ASC 350, an entity first assesses qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform a quantitative impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. If an entity determines that it is more likely than not that an indefinite-lived intangible asset is impaired, then it must conduct an impairment analysis. We were able to forego the annual impairment analysis for fiscal year 2022 as the more-likely-than-not threshold was not met as of the end of fiscal year 2022.
The costs related to our purchase of the assets related to the management of investment funds are capitalized as incurred. The costs are defined as an intangible asset per the FASB standard “Intangibles – Goodwill and Other.” The acquisition costs include legal fees, fees for soliciting shareholder approval, and a percent of asset costs to purchase the management contracts. The amounts are included in the management contracts asset, totaling $80.9 million as of the end of fiscal year 2022.
RECENTLY ISSUED AND ADOPTED ACCOUNTING STANDARDS
We reviewed accounting pronouncements issued between November 24, 2021, the filing date of our most recent previously filed Annual Report on Form 10-K, and December 7, 2022, the filing date of this Annual Report on Form 10-K, and have determined that no accounting pronouncement issued would have a material impact on our financial position, results of operations, or disclosures.
There have been no other significant changes to our critical accounting policies and estimates during fiscal year 2022.
37
Table of Contents
| 39 | ||||
| 41 | ||||
| 42 | ||||
| 43 | ||||
| 44 | ||||
| 45 | ||||
/s/ Marcum LLP |
| Marcum LLP |
| We have served as the Company’s auditor since 2004. |
| Costa Mesa, CA |
| December 7, 2022 |
September 30, |
||||||||
2022 |
2021 |
|||||||
| Assets |
||||||||
| Current assets |
||||||||
| Cash and cash equivalents |
$ | $ | ||||||
| Investments in marketable securities, at fair value |
||||||||
| Investment fee income receivable |
||||||||
| Prepaid expenses |
||||||||
| Other accounts receivable |
||||||||
| |
|
|
|
|||||
| Total current assets |
||||||||
| |
|
|
|
|||||
| Property and equipment, net of accumulated depreciation of $ |
||||||||
| Operating lease right-of-use |
||||||||
| Management contracts |
||||||||
| Other assets |
||||||||
| |
|
|
|
|||||
| Total assets |
$ | $ | ||||||
| |
|
|
|
|||||
| Liabilities and Stockholders’ Equity |
||||||||
| Current liabilities |
||||||||
| Accrued liabilities and accounts payable |
$ | $ | ||||||
| Accrued management contract payment |
|
|
|
|
|
|
— |
|
| Operating lease liability |
||||||||
| Income taxes payable |
||||||||
| |
|
|
|
|||||
| Total current liabilities |
||||||||
| |
|
|
|
|||||
| Notes payable, net of issuance costs |
— | |||||||
| Long-term operating lease liability |
||||||||
| Net deferred income tax liability |
||||||||
| |
|
|
|
|||||
| Total liabilities |
||||||||
| |
|
|
|
|||||
| Commitments and contingencies (Note 9) |
||||||||
| Stockholders’ equity |
||||||||
| Common stock, |
||||||||
| Retained earnings |
||||||||
| |
|
|
|
|||||
| Total stockholders’ equity |
||||||||
| |
|
|
|
|||||
| Total liabilities and stockholders’ equity |
$ | $ | ||||||
| |
|
|
|
|
|
|
|
|
Fiscal Years Ended September 30, |
||||||||
2022 |
2021 |
|||||||
| Revenue |
||||||||
| Investment advisory fees |
$ | $ | ||||||
| Shareholder service fees |
||||||||
| |
|
|
|
|||||
| Total revenue |
||||||||
| |
|
|
|
|||||
| Operating expenses |
||||||||
| Compensation and benefits |
||||||||
| General and administrative |
||||||||
| Mutual fund distribution |
||||||||
| Sub-advisory fees |
||||||||
| Depreciation |
||||||||
| |
|
|
|
|||||
| Total operating expenses |
||||||||
| |
|
|
|
|||||
| Net operating income |
||||||||
| Interest expense |
||||||||
| Other income |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Income before income tax expense |
||||||||
| Income tax expense |
||||||||
| |
|
|
|
|||||
| Net income |
$ | $ | ||||||
| |
|
|
|
|||||
| Earnings per share |
||||||||
| Basic |
$ | $ | ||||||
| |
|
|
|
|||||
| Diluted |
$ | $ | ||||||
| |
|
|
|
|||||
| Weighted average shares outstanding |
||||||||
| Basic |
||||||||
| |
|
|
|
|||||
| Diluted |
||||||||
| |
|
|
|
|||||
| Cash dividends declared per share |
$ | $ | ||||||
| |
|
|
|
|||||
Common Stock |
Retained |
Total Stockholders’ |
||||||||||||||
Shares |
Amount |
Earnings |
Equity |
|||||||||||||
| Balance at September 30, 2020 |
$ | $ | $ | |||||||||||||
| Net income |
— | — | ||||||||||||||
| Dividends paid |
— | — | ( |
) | ( |
) | ||||||||||
| Employee and director restricted stock vested |
— | — | — | |||||||||||||
| Repurchase of vested employee restricted stock for tax withholding |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Shares issued for auto-investments pursuant to the 2018 Dividend Reinvestment and Stock Purchase Plan |
— | |||||||||||||||
| Shares issued for dividend reinvestment pursuant to the 2018 Dividend Reinvestment and Stock Purchase Plan |
— | |||||||||||||||
| Shares issued for auto-investments pursuant to the 2021 Dividend Reinvestment and Stock Purchase Plan |
— | |||||||||||||||
| Shares issued for dividend reinvestment pursuant to the 2021 Dividend Reinvestment and Stock Purchase Plan |
— | |||||||||||||||
| Stock-based compensation |
— | — | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Balance at September 30, 2021 |
$ | $ | $ | |||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Net income |
— | — | ||||||||||||||
| Dividends paid |
— | — | ( |
) | ( |
) | ||||||||||
| Employee and director restricted stock vested |
— | — | — | |||||||||||||
| Repurchase of vested employee restricted stock for tax withholding |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Shares issued for auto-investments pursuant to the 2021 Dividend Reinvestment and Stock Purchase Plan |
— | |||||||||||||||
| Shares issued for dividend reinvestment pursuant to the 2021 Dividend Reinvestment and Stock Purchase Plan |
— | |||||||||||||||
| Stock-based compensation |
— | — | ||||||||||||||
| Employee restricted stock forfeiture |
— | ( |
) | — | ( |
) | ||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Balance at September 30, 2022 |
$ | $ | $ | |||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
Fiscal Years Ended September 30, |
||||||||
2022 |
2021 |
|||||||
| Cash flows from operating activities |
||||||||
| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities |
|
|||||||
| Depreciation |
||||||||
| Change in right-of-use |
— | ( |
) | |||||
| Amortization of note issuance costs |
— | |||||||
| Deferred income taxes |
||||||||
| Deferred offering costs |
— | ( |
) | |||||
| Employee restricted stock forfeiture |
( |
) | — | |||||
| Stock-based compensation |
||||||||
| Unrealized loss (gain) on marketable securities |
( |
) | ||||||
| Change in operating assets and liabilities: |
||||||||
| Investment fee income receivable |
( |
) | ||||||
| Prepaid expenses |
( |
) | ( |
) | ||||
| Other accounts receivable |
||||||||
| Other assets |
( |
) | ||||||
| Accrued liabilities and accounts payable |
( |
) | ||||||
| Income taxes payable |
( |
) | ||||||
| |
|
|
|
|||||
| Net cash provided by operating activities |
||||||||
| |
|
|
|
|||||
| Cash flows from investing activities |
||||||||
| Purchases of property and equipment |
( |
) | ( |
) | ||||
| Payments related to management contracts |
( |
) | — | |||||
| |
|
|
|
|||||
| Net cash used in investing activities |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Cash flows from financing activities |
||||||||
| Proceeds from issuance of notes, net of underwriting discount |
— | |||||||
| Payment of issuance costs on notes |
( |
) | — | |||||
| Repurchase of vested employee restricted stock for tax withholding |
( |
) | ( |
) | ||||
| Proceeds from shares issued pursuant to the 2018 Dividend Reinvestment and Stock Repurchase Plan |
— | |||||||
| Proceeds from shares issued pursuant to the 2021 Dividend Reinvestment and Stock Repurchase Plan |
||||||||
| Dividend payments |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Net cash provided by (used in) financing activities |
( |
) | ||||||
| |
|
|
|
|||||
| Net increase in cash and cash equivalents |
||||||||
| Cash and cash equivalents at the beginning of the period |
||||||||
| |
|
|
|
|||||
| Cash and cash equivalents at the end of the period |
$ | $ | ||||||
| |
|
|
|
|||||
| Supplemental disclosures of cash flow information |
||||||||
| Cash paid for income taxes |
$ | $ | ||||||
| Cash paid for interest |
$ | $ | — | |||||
| Dividend investment issued in shares |
$ | $ | ||||||
| Non-cash payment related to management contract (Note 17) |
|
$ |
|
|
|
$ |
— |
|
| (1) | Organization and Description of Business and Significant Accounting Policies |
| (a) | Organization and Description of Business |
| • | acting as portfolio manager for the fund or overseeing the sub-advisor acting as portfolio manager for the fund, which includes managing the composition of the fund’s portfolio (including the purchase, retention, and disposition of portfolio securities in accordance with the fund’s investment objectives, policies, and restrictions), seeking best execution for the fund’s portfolio, managing the use of soft dollars for the fund, and managing proxy voting for the fund; |
| • | performing a daily reconciliation of portfolio positions and cash for the fund; |
| • | monitoring the liquidity of the fund; |
| • | monitoring the fund’s compliance with its investment objectives and restrictions and federal securities laws; |
| • | maintaining a compliance program (including a code of ethics), conducting ongoing reviews of the compliance programs of the fund’s service providers (including any sub-advisor), including their codes of ethics, as appropriate, conducting on-site visits to the fund’s service providers (including any sub-advisor) as feasible, monitoring incidents of abusive trading practices, reviewing fund expense accruals, payments, and fixed expense ratios, evaluating insurance providers for fidelity bond, directors and officers and errors and omissions insurance, and cybersecurity insurance coverage, managing regulatory examination compliance and responses, conducting employee compliance training, reviewing reports provided by service providers, and maintaining books and records; |
| • | if applicable, overseeing the selection and continued employment of the fund’s sub-advisor, reviewing the fund’s investment performance, and monitoring the sub-advisor’s adherence to the fund’s investment objectives, policies, and restrictions; |
| • | overseeing service providers that provide accounting, administration, distribution, transfer agency, custodial, sales , marketing, public relations, audit, information technology, and legal services to the fund; |
| • | maintaining in-house marketing and distribution departments on behalf of the fund; |
| • | preparing or directing the preparation of all regulatory filings for the fund, including writing and annually updating the fund’s prospectus and related documents; |
| • | for each annual report of the fund, preparing or reviewing a written summary of the fund’s performance during the most recent 12-month period; |
| • | monitoring and overseeing the accessibility of the fund on third-party financial intermediary platforms; |
| • | paying the incentive compensation of the fund’s compliance officer and employing other staff such as legal, marketing, national accounts, distribution, sales, administrative, and trading oversight personnel, as well as management executives; |
| • | providing a quarterly compliance certification to the Board of Trustees of Hennessy Funds Trust (the “Funds’ Board of Trustees”); and |
| • | preparing or reviewing materials for the Funds’ Board of Trustees, presenting to or leading discussions with the Funds’ Board of Trustees, preparing or reviewing all meeting minutes, and arranging for training and education of the Funds’ Board of Trustees. |
| (b) | Cash and Cash Equivalents |
| (c) | Fair Value of Financial Instruments |
(d) |
Investments |
| (e) | Property and Equipment |
| (f) | Management Contracts Purchased |
| (g) | Income Taxes |
Year |
Number of State Tax Jurisdictions |
|||
2022 |
||||
2021 |
||||
2020 |
||||
2019 |
||||
2018 |
||||
| (h) | Earnings per Share |
| (i) | Equity |
Fiscal Years Ended September 30, September 30, 2019 and 2018 |
||||||||||||||||
2022 |
2021 |
|||||||||||||||
Shares |
Weighted Average Grant Date Fair Value per Share |
Shares |
Weighted Average Grant Date Fair Value per Share |
|||||||||||||
Non-vested balance at beginning of year |
$ | $ | ||||||||||||||
Granted |
||||||||||||||||
Vested (1) |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Forfeited |
( |
) | ( |
) | ||||||||||||
Non-vested balance at end of year |
$ | $ | ||||||||||||||
(1) |
Represents partially vested RSUs for which the Company already has recognized the associated compensation expense but has not yet issued to employees the related shares of common stock. |
September 30, 2022 |
||||
(In thousands, except years) |
||||
Total expected compensation expense related to RSUs |
$ | |||
Recognized compensation expense related to RSUs |
( |
) | ||
Unrecognized compensation expense related to RSUS |
$ | |||
Weighted average remaining period to expense for RSUs |
||||
| (j) | Use of Estimates |
(2) |
Fair Value Measurements |
| • | Level 1 – Unadjusted, quoted prices in active markets for identical assets or liabilities that an entity has the ability to access at the measurement date; |
| • | Level 2 – Other significant observable inputs (including, but not limited to, quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets); and |
| • | Level 3 – Significant unobservable inputs (including the entity’s own assumptions about what market participants would use to price the asset or liability based on the best available information) when observable inputs are not available. |
September 30, 2022 |
||||||||||||||||
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||
(In thousands) |
||||||||||||||||
| Money market fund deposits |
$ | $ | — | $ | — | $ | ||||||||||
| Mutual fund investments |
— | — | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ | $ | — | $ | — | $ | ||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Amounts included in |
||||||||||||||||
| Cash and cash equivalents |
$ | $ | — | $ | — | $ | ||||||||||
| Investments in marketable securities |
— | — | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ | $ | — | $ | — | $ | ||||||||||
| |
|
|
|
|
|
|
|
|||||||||
September 30, 2021 |
||||||||||||||||
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||
(In thousands) |
||||||||||||||||
| Money market fund deposits |
$ | $ | — | $ | — | $ | ||||||||||
| Mutual fund investments |
— | — | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ | $ | — | $ | — | $ | ||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Amounts included in |
||||||||||||||||
| Cash and cash equivalents |
$ | $ | — | $ | — | $ | ||||||||||
| Investments in marketable securities |
— | — | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ | $ | — | $ | — | $ | ||||||||||
| |
|
|
|
|
|
|
|
|||||||||
(3) |
Investments |
Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Total |
|||||||||||||
(In thousands) |
||||||||||||||||
| 2022 |
||||||||||||||||
| Mutual fund investments |
$ | $ | $ | ( |
) | $ | ||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
( |
) | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| 2021 |
||||||||||||||||
| Mutual fund investments |
$ | $ | $ | ( |
) | $ | ||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
( |
) | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
(4) |
Property and Equipment, Net |
September 30, |
||||||||
2022 |
2021 |
|||||||
(In thousands) |
||||||||
| Equipment |
$ | $ | ||||||
| Leasehold improvements |
||||||||
| Furniture and fixtures |
||||||||
| IT infrastructure |
||||||||
| Software |
||||||||
| |
|
|
|
|||||
| Property and equipment, gross |
||||||||
| Accumulated depreciation |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Property and equipment, net |
$ | $ | ||||||
| |
|
|
|
|||||
(5) |
Management Contracts |
(6) |
Investment Advisory Agreements |
(7) |
Leases |
September 30, 2022 |
||||
(In thousands, except years and percentages) |
||||
| Operating lease right-of-use |
$ | |||
| Current operating lease liability |
$ | |||
| Long-term operating lease liability |
$ | |||
| Weighted average remaining lease term |
||||
| Weighted average discount rate |
% | |||
September 30, 2022 |
||||
(In thousands) |
||||
| Fiscal year 2023 undiscounted cash flows |
||||
| Fiscal year 2024 |
||||
| |
|
|||
| Total undiscounted cash flows |
||||
| |
|
|||
| Present value discount |
( |
) | ||
| |
|
|||
| Total operating lease liabilities |
$ | |
||
| |
|
|||
(8) |
Accrued Liabilities and Accounts Payable |
September 30 |
||||||||
2022 |
2021 |
|||||||
(In thousands) |
||||||||
| Accrued bonus liabilities |
$ | $ | ||||||
| Accrued sub-advisor fees |
||||||||
| Other accrued expenses |
||||||||
| |
|
|
|
|||||
| Total accrued expenses |
$ | $ | ||||||
| |
|
|
|
|||||
| (9) | Debt Outstanding |
(10) |
Commitments and Contingencies |
(11) |
Retirement Plan |
(12) |
Income Taxes |
Fiscal Years Ended September 30, |
||||||||
2022 |
2021 |
|||||||
(In thousands) |
||||||||
| Beginning year balance |
$ | $ | |
|||||
| Decrease related to prior year tax positions |
( |
) | ||||||
| Increase related to current year tax positions |
||||||||
| Settlements |
||||||||
| Lapse of statutes of limitations |
||||||||
| |
|
|
|
|||||
| Ending year balance |
$ | $ | ||||||
| |
|
|
|
|||||
Fiscal Years Ended September 30, |
||||||||
2022 |
2021 |
|||||||
(In thousands) |
||||||||
| Current |
||||||||
| Federal |
$ | $ | ||||||
| State |
( |
) | ||||||
| |
|
|
|
|||||
| Total Current |
||||||||
| |
|
|
|
|||||
| Deferred |
||||||||
| Federal |
||||||||
| State |
||||||||
| |
|
|
|
|||||
| Total Deferred |
||||||||
| |
|
|
|
|||||
| Total |
$ | $ | ||||||
| |
|
|
|
|||||
Fiscal Years Ended September 30, |
||||||||
2022 |
2021 |
|||||||
| Federal statutory income tax rate |
||||||||
| State income taxes, net of federal benefit |
||||||||
| Permanent and other differences |
||||||||
| Difference due to executive compensation |
||||||||
| Tax return to provision adjustments |
( |
( |
||||||
| Uncertain tax position allowance |
( |
|||||||
| Stock-based compensation |
||||||||
| |
|
|
|
|||||
| Effective income tax rate |
||||||||
| |
|
|
|
|||||
Fiscal Years Ended September 30, |
||||||||
2022 |
2021 |
|||||||
(In thousands) |
||||||||
| Deferred tax assets |
||||||||
| Accrued compensation |
$ | $ | ||||||
| Stock compensation |
||||||||
| State taxes |
||||||||
| Capital loss carryforward |
||||||||
| ROU asset/lease liability |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Gross deferred tax assets |
||||||||
| Disallowed capital loss |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Net deferred tax assets |
||||||||
| Deferred tax liabilities |
||||||||
| Property and equipment |
( |
) | ( |
) | ||||
| Management contracts |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Total deferred tax liabilities |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Net deferred tax liabilities |
$ | ( |
) | $ | ( |
) | ||
| |
|
|
|
|||||
(13) |
Earnings per Share |
September 30, |
||||||||
2022 |
2021 |
|||||||
| Weighted average common stock outstanding, basic |
||||||||
| Dilutive impact of RSUs |
||||||||
| |
|
|
|
|||||
| Weighted average common stock outstanding, diluted |
||||||||
| |
|
|
|
|||||
(14) |
Concentration of Credit Risk |
(15) |
Recently Issued and Adopted Accounting Standards |
(16) |
Risk and Uncertainties – COVID-19 and Geopolitical Tensions |
(17) |
Pending Asset Purchase of the Stance Equity ESG Large Cap Core ETF |
(18) |
Subsequent Events |
Table of Contents
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES |
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of September 30, 2022, using the criteria set forth in 2013 Internal Control — Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management concluded that, as of September 30, 2022, the Company’s internal control over financial reporting was effective based on those criteria.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) of the Exchange Act, as of the end of the period covered by this report. Based on such evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures as of September 30, 2022, were effective to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and (ii) accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROLS
There have been no changes in internal control over financial reporting as defined in Rules 13a-15(f) of the Exchange Act that occurred during the fiscal quarter ended September 30, 2022, and that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| ITEM 9B. | OTHER INFORMATION |
None.
| ITEM 9C. | DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS |
Not applicable.
PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE |
The information required by this item can be found in our Proxy Statement for our 2023 Annual Meeting (“Proxy Statement”) under the captions “Election of Directors,” “Corporate Governance,” and “Executive Officers.” Such information is incorporated by reference as if fully set forth in this report.
CODE OF ETHICS
We have adopted a Code of Ethics that applies to our principal executive officer, principal financial officer, executive vice presidents, directors, and all employees. The code has been designed in accordance with the Sarbanes-Oxley Act of 2002 to promote honest and ethical conduct. The code also applies to Hennessy Funds Trust. The Code of Ethics is posted on our website at www.hennessyadvisors.com. In the event we amend or waive any of the provisions of the Code of Ethics, we intend to disclose these actions on our website. We are not including the information contained on our website as part of, or incorporating it by reference into, this report.
Any person may obtain a copy of the Code of Ethics, at no cost, by forwarding a written request to:
Hennessy Advisors, Inc.
7250 Redwood Blvd., Suite 200
Novato, CA 94945
Attention: Teresa Nilsen
59
Table of Contents
| ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this item can be found in the Proxy Statement under the captions “Compensation Discussion and Analysis” and “Compensation of Executive Officers and Directors.” Such information is incorporated by reference as if fully set forth in this report.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item can be found in the Proxy Statement under the caption “Voting Securities.” Such information is incorporated by reference as if fully set forth in this report.
EQUITY COMPENSATION PLAN INFORMATION
Our Omnibus Plan, which was approved by our shareholders, is the only equity compensation plan under which we may issue our common stock.
| September 30, 2022 | ||||||||||||
| Plan Category |
Number of Securities to Be Issued upon Exercise of Outstanding Options, Warrants, and Rights |
Weighted-Average Exercise Price of Outstanding Options, Warrants, and Rights |
Number of Securities Remaining for Issuance Under Compensation Plans (2) |
|||||||||
| Equity compensation plans approved by security holders (1) |
188,550 | — | 1,277,553 | |||||||||
| Equity compensation plans not approved by security holders |
— | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
188,550 | — | 1,277,553 | |||||||||
|
|
|
|
|
|
|
|||||||
| (1) | Securities to be issued pursuant to outstanding RSUs that vest over four years at a rate of 25% per year, for which the weighted average exercise price is zero. |
| (2) | Excludes securities to be issued upon the vesting of outstanding RSUs. The maximum number of shares of common stock that may be issued under the Omnibus Plan is 50% of our outstanding common stock, or 3,785,871 shares, as of the end of fiscal year 2022. |
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
The information required by this item can be found in the Proxy Statement under the caption “Corporate Governance.” Such information is incorporated by reference as if fully set forth in this report.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this item can be found in the Proxy Statement under the caption “Independent Registered Public Accounting Firm.” Such information is incorporated by reference as if fully set forth in this report.
60
Table of Contents
PART IV
| ITEM 15. | EXHIBIT AND FINANCIAL STATEMENT SCHEDULES |
The financial statements and financial statement schedules for Hennessy Advisors, Inc. are included in Item 8, “Financial Statements and Supplementary Data.”
Exhibit Index
Set forth below is a list of all exhibits to this Annual Report on Form 10-K, including those incorporated by reference.
Exhibits
61
Table of Contents
62
Table of Contents
| 101 | Financial statements from the Annual Report on Form 10-K of the registrant for the year ended September 30, 2022, filed on December 7, 2022, formatted in XBRL: (i) the Balance Sheets; (ii) the Statements of Income and Comprehensive Income; (iii) the Statements of Changes in Stockholders’ Equity; (iv) the Statements of Cash Flows; and (v) the Notes to Financial Statements. | |
| 104 | The Cover Page Interactive Data File (the cover page XBRL tags are embedded in the Inline XBRL document). | |
Notes:
| * | The related schedules to the agreement are not being filed herewith. The registrant agrees to furnish supplementally a copy of any such schedules to the Securities and Exchange Commission upon request. |
| (1) | Management contract or compensatory plan or arrangement. | |
| (2) | Incorporated by reference from the Company’s Form SB-2 registration statement (SEC File No. 333-66970) filed August 6, 2001. | |
| (3) | Incorporated by reference from the Company’s Form 10-K for the fiscal year ended September 30, 2009 (SEC File No. 000-49872), filed December 4, 2009. | |
| (4) | Incorporated by reference from the Company’s Form 10-Q for the quarter ended December 31, 2012 (SEC File No. 000-49872), filed January 17, 2013. | |
| (5) | Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 000-49872) filed September 18, 2013. | |
| (6) | Incorporated by reference to Annex A of the Company’s definitive proxy statement on Schedule 14A for the Company’s Special Meeting of Shareholders held on March 26, 2015 (SEC File No. 000-49872), filed February 21, 2014. | |
| (7) | Incorporated by reference from the Company’s Form 10-Q for the quarter ended June 30, 2014 (SEC File No. 001-36423), filed August 6, 2014. | |
| (8) | Incorporated by reference from the Company’s Form 10-K for the fiscal year ended September 30, 2015 (SEC File No. 001-36423), filed November 30, 2015. | |
| (9) | Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 001-36423) filed October 13, 2016. | |
| (10) | Incorporated by reference from the Company’s Form 10-K for the fiscal year ended September 30, 2016 (SEC File No. 001-36423), filed December 1, 2016. | |
| (11) | Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 001-36423) filed March 7, 2017. | |
| (12) | Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 001-36423) filed May 11, 2017. | |
| (13) | Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 001-36423) filed January 25, 2018. | |
| (14) | Incorporated by reference from the Company’s Form 10-Q for the quarter ended March 31, 2018 (SEC File No. 001-36423), filed May 2, 2018. | |
63
Table of Contents
| (15) | Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 001-36423) filed February 25, 2019. | |
| (16) | Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 001-36423), filed October 20, 2021. | |
| (17) | Incorporated by reference from the Company’s Form 10-K for the fiscal year ended September 30, 2021 (SEC File No. 001-36423), filed November 24, 2021. | |
| ITEM 16. | FORM 10-K SUMMARY |
None.
64
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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:
Hennessy Advisors, Inc.
(Registrant)
| Date: December 7, 2022 | ||||||
| By: | /s/ Teresa M. Nilsen |
|||||
| Teresa M. Nilsen | ||||||
| President, Chief Operating Officer, and Director | ||||||
| (As a duly authorized officer on behalf of the registrant and as | ||||||
| Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
| By: | /s/ Kathryn R. Fahy |
Date: December 7, 2022 | ||||
| Kathryn R. Fahy | ||||||
| Chief Financial Officer and Senior Vice President | ||||||
| (Principal Financial and Accounting Officer) | ||||||
| By: | /s/ Neil J. Hennessy |
Date: December 7, 2022 | ||||
| Neil J. Hennessy | ||||||
| Chief Executive Officer and Chairman of the Board of Directors | ||||||
| By: | /s/ Daniel B. Steadman |
Date: December 7, 2022 | ||||
| Daniel B. Steadman | ||||||
| Executive Vice President and Director | ||||||
| By: | /s/ Henry Hansel |
Date: December 7, 2022 | ||||
| Henry Hansel | ||||||
| Director | ||||||
| By: | /s/ Brian A. Hennessy |
Date: December 7, 2022 | ||||
| Brian A. Hennessy | ||||||
| Director | ||||||
| By: | /s/ Lydia Knight-O’Riordan |
Date: December 7, 2022 | ||||
| Lydia Knight-O’Riordan | ||||||
| Director | ||||||
| By: | /s/ Daniel G. Libarle |
Date: December 7, 2022 | ||||
| Daniel G. Libarle | ||||||
| Director | ||||||
| By: | /s/ Rodger Offenbach |
Date: December 7, 2022 | ||||
| Rodger Offenbach | ||||||
| Director | ||||||
| By: | /s/ Susan W. Pomilia |
Date: December 7, 2022 | ||||
| Susan W. Pomilia | ||||||
| Director | ||||||
| By: | /s/ Thomas L. Seavey |
Date: December 7, 2022 | ||||
| Thomas L. Seavey | ||||||
| Director | ||||||
65
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement of Hennessy Advisors, Inc. on Form S-3 (No. 333-251201) and Form S-8 (No. 333-188439) of our report dated December 7, 2022, with respect to our audits of the financial statements of Hennessy Advisors, Inc. as of September 30, 2022 and 2021, and for the years ended September 30, 2022 and 2021, which report is included in this Annual Report on Form 10-K of Hennessy Advisors, Inc. for the year ended September 30, 2022.
| /s/ Marcum LLP |
| Marcum LLP |
| Costa Mesa, California |
| December 7, 2022 |
Exhibit 31.1
Rule 13a – 14a Certification of the Principal Executive Officer
I, Teresa M. Nilsen, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Hennessy Advisors, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| /s/ Teresa M. Nilsen |
| Teresa M. Nilsen, President |
| Hennessy Advisors, Inc. |
| Date: December 7, 2022 |
Exhibit 31.2
Rule 13a – 14a Certification of the Principal Financial Officer
I, Kathryn R. Fahy, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Hennessy Advisors, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| /s/ Kathryn R. Fahy |
| Kathryn R. Fahy, Chief Financial Officer |
| Hennessy Advisors, Inc. |
| Date: December 7, 2022 |
Exhibit 32.1
Written Statement of the Principal Executive Officer
Pursuant to 18 U.S.C. § 1350
Solely for the purposes of complying with 18 U.S.C. § 1350, I, the undersigned President of Hennessy Advisors, Inc. (the “Company”), hereby certify, based on my knowledge, that the Annual Report on Form 10-K of the Company for the year ended September 30, 2022 (the “Report”), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Teresa M. Nilsen |
| Teresa M. Nilsen, President |
| Hennessy Advisors Inc. |
| Date: December 7, 2022 |
Exhibit 32.2
Written Statement of the Principal Financial Officer
Pursuant to 18 U.S.C. § 1350
Solely for the purposes of complying with 18 U.S.C. § 1350, I, the undersigned Chief Financial Officer of Hennessy Advisors, Inc. (the “Company”), hereby certify, based on my knowledge, that the Annual Report on Form 10-K of the Company for the year ended September 30, 2022 (the “Report”), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Kathryn R. Fahy |
| Kathryn R. Fahy, Chief Financial Officer |
| Hennessy Advisors, Inc. |
| Date: December 7, 2022 |