HENNESSY
ADVISORS, INC.
FORM 10-K
ANNUAL REPORT
Year Ended September 30, 2018
Hennessy Advisors, Inc.
7250 Redwood Boulevard, Suite 200
Novato, California 94945
800-966-4354
www.hennessyadvisors.com
(This page intentionally left blank.) UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 2018
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From to
Commission File Number 001-36423
HENNESSY ADVISORS, INC.
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction
of incorporation or organization)
7250 Redwood Blvd., Suite 200
Novato, California
(Address of principal
executive office)
68-0176227
(IRS Employer Identification No.)
94945
(Zip Code)
(415) 899-1555
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, no par value
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to
submit such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ☐
Non-accelerated filer ☐
Accelerated filer
☒
Smaller reporting company ☒
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of Common Stock held by non-affiliates (as affiliates are defined in Rule 12b-2 of the Exchange Act) of
the Registrant, based on the closing price of $19.30 on March 31, 2018, was $89,528,840.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
As of November 26, 2018, there were 7,916,115 shares of Common Stock (no par value) issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant’s definitive proxy statement for its 2019 annual meeting of stockholders will be, when filed, incorporated by
reference in Part III, Items 10, 11, 12, 13, and 14.
HENNESSY ADVISORS, INC.
TABLE OF CONTENTS
PART I
Item 1
Business
Item 1A Risk Factors
Item 1B Unresolved Staff Comments
Item 2
Properties
Item 3
Legal Proceedings
Item 4 Mine Safety Disclosures
Part II
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 8
Financial Statements and Supplementary Data
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A Controls and Procedures
Item 9B Other Information
Part III
Item 10 Directors, Executive Officers, and Corporate Governance
Item 11 Executive Compensation
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13 Certain Relationships and Related Transactions and Director Independence
Item 14
Principal Accounting Fees and Services
Part IV
Item 15 Exhibits and Financial Statement Schedules
Item 16
Form 10-K Summary
Signatures
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34
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70
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71
71
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73
76
77
2
ITEM 1.
BUSINESS
GENERAL
PART I
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 employing a consistent and repeatable investment process for the Hennessy Funds, combining time-tested stock
selection strategies with highly disciplined, team-managed approaches to investing, and to providing superior service to investors. Our
goal is to provide products that investors can have confidence in, knowing their money is invested as promised, with their best interest
in mind. Our firm was founded on these principles over 29 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 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), conducting investment research, monitoring compliance with each fund’s investment restrictions and
applicable laws and regulations, overseeing the selection and continued employment of sub-advisors and monitoring such sub-
advisors’ investment performance and adherence to investment policies and compliance procedures, overseeing other service
providers, maintaining public relations and marketing programs for each fund, preparing and distributing regulatory reports, and
overseeing distribution through third-party financial intermediaries. Shareholder services include maintaining an “800” number that
the current investors of the Hennessy Funds may call to ask questions about the funds or their accounts 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 revenues 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-advisor 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 2018 was $6.7 billion. As of the end of fiscal year 2018, our total assets
under management was $6.2 billion, an increase of over 1,550% from $375 million as of the end of fiscal year 2002, which was our
first fiscal year as a public company.
Our business strategy centers on (i) organic growth through our marketing and sales efforts and (ii) growth through strategic
purchases of management-related assets.
HISTORICAL 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 National Association of Securities Dealers (now known as the Financial Industry
Regulatory Authority).
1996
In March, we launched our first mutual fund, the Hennessy Balanced Fund.
3
1998
2000
2002
2003
2004
2005
2007
2009
In October, we launched our second mutual fund, the Hennessy Total Return Fund.
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”) named the O’Shaughnessy Cornerstone Growth Fund and
O’Shaughnessy Cornerstone Value Fund, which are now called the Hennessy Cornerstone Growth Fund and the Hennessy
Cornerstone Value Fund, respectively. The amount of the purchased assets as of the closing date totaled approximately
$197 million.
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.
In September, we purchased the assets related to the management of a fund previously managed by SYM Financial
Corporation, named the SYM Select Growth Fund, 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 was approximately $35 million.
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.
In July, we purchased the assets related to the management of a fund previously managed by Landis Associates LLC, named
The Henlopen Fund, 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.
In November, we launched the Hennessy Micro Cap Growth Fund, LLC, a non-registered private pooled investment fund.
In March, we purchased the assets related to the management of two funds previously managed by RBC Global Asset
Management (U.S.) Inc., named the Tamarack Large Growth Fund and the Tamarack Value Fund, and reorganized the
assets of such funds into the Hennessy Cornerstone Large Growth Fund and the Hennessy Large Value Fund, respectively.
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., named the SPARX Japan
Fund and the SPARX Japan Smaller Companies Fund, which are now called the Hennessy Japan Fund and the Hennessy
Japan Small Cap Fund, respectively. In conjunction with the completion of the transaction, SPARX Asset Management Co.,
Ltd. became the sub-advisor to the Hennessy Japan Fund and the Hennessy Japan Small Cap Fund. 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.
4
2012
2014
2015
2016
2017
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 our existing Hennessy Funds and changed the
fund names of the other seven FBR Funds to become part of our product offerings. In conjunction with the completion of
the transaction, Broad Run Investment Management, LLC became the sub-advisor to the Hennessy Focus Fund, Financial
Counselors, Inc. 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.
In April, our common stock began trading on The NASDAQ Capital Market.
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.
In September, we purchased the assets related to the management of two funds previously managed by Westport Advisers,
LLC, named the Westport Fund and the Westport Select Cap Fund, 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.
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”), named the Rainier Large Cap Equity Fund and the Rainier Mid Cap Equity Fund. We
reorganized the assets of the Rainier Large Cap Equity Fund into the Hennessy Cornerstone Large Growth Fund, and we
reorganized the assets of the Rainier Mid Cap Equity Fund into 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, named the
Rainier Small/Mid Cap Equity Fund (together with the Rainier Mid Cap Equity Fund and the Rainier Large Cap Equity
Fund, the “Rainier Funds”), 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 July, we signed a definitive agreement with BP Capital Fund Advisors, LLC to purchase the assets related to the
management of the BP Capital TwinLine Energy Fund and the BP Capital TwinLine MLP Fund (collectively, the “BP
Funds”). In October, following the end of our fiscal year 2018, we completed the transaction, which marked our 10th asset
purchase (see further discussion in Footnote 15 to the Financial Statements under Item 8, “Financial Statements and
Supplementary Data,” below).
5
PRODUCT INFORMATION
Investment Strategies of the Hennessy Funds
As of the end of fiscal year 2018, we managed 14 mutual funds, each of which is categorized as Domestic Equity, Multi-Asset,
or Sector and Specialty products, as shown below:
The Hennessy Funds Family
Domestic Equity
Multi-Asset
Sector and Specialty
Hennessy Cornerstone Growth Fund
Hennessy Focus Fund
Hennessy Cornerstone Mid Cap 30 Fund
Hennessy Cornerstone Large Growth Fund
Hennessy Cornerstone Value Fund
Hennessy Total Return Fund
Hennessy Equity and Income Fund
Hennessy Balanced Fund
Hennessy Gas Utility Fund
Hennessy Japan 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, but they all employ highly disciplined, team-managed 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 and 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 a universe of stocks with market capitalizations of more than $175 million, this fund
invests in the 50 common stocks with the highest one-year price appreciation that also have price-to-sales ratios of less
than 1.5, higher annual earnings than in the previous year, and positive stock price appreciation, or positive relative
strength, over the prior three-month and six-month periods.
• Hennessy Focus Fund (Investor Class symbol HFCSX and Institutional Class symbol HFCIX). The Hennessy Focus
Fund seeks capital appreciation by employing a fundamental, bottom-up investment approach that concentrates the fund’s
holdings in companies most attractive to its portfolio managers. This fund seeks high-quality businesses with large growth
opportunity, excellent management, modest valuation and low fundamental business risk. It maintains a concentrated
portfolio of 20 to 30 stocks that are conviction-weighted with 60% to 80% of the fund’s assets invested in the fund’s top
10 holdings.
• Hennessy Cornerstone Mid Cap 30 Fund (Investor Class symbol HFMDX and Institutional Class symbol HIMDX).
The Hennessy Cornerstone Mid Cap 30 Fund seeks long-term growth of capital by investing in mid-cap, growth-oriented
companies using a quantitative formula. From a universe of stocks 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 of less than 1.5, higher annual earnings than in the previous year, and positive stock price appreciation, or
positive relative strength, over the prior three-month and six-month periods.
6
• Hennessy Cornerstone Large Growth Fund (Investor Class symbol HFLGX and 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. This fund screens for the 50 stocks with the highest one-
year return on total capital that also have market capitalizations exceeding the average of the relevant database, a price-to-
cash flow ratio less than the median of the relevant database, and positive total capital.
• Hennessy Cornerstone Value Fund (Investor Class symbol HFCVX and 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 companies using a quantitative formula. This fund screens for the 50 stocks with the highest
dividend yield that also have market capitalizations exceeding the average of the relevant database, shares outstanding
exceeding the average of the relevant database, 12-month sales that are 50% greater than the average of the relevant
database, and cash flows that exceed the average of the relevant database.
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 mutual 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 (commonly referred to as the “Dogs of the Dow”)
and the remaining 50% of its assets in U.S. Treasury securities with a maturity of less than one year. The 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 and Institutional Class symbol HEIIX). The
Hennessy Equity and Income Fund seeks long-term capital growth and current income with a focus on downside
protection. Under normal circumstances, the fund invests approximately 60% of its assets in common stock, preferred
stock, and convertible securities and approximately 40% of its assets in high-quality corporate, agency and government
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 the Dogs of the Dow stocks and
approximately 50% of its assets in U.S. Treasury securities with a maturity of less than one year.
Sector and Specialty Funds
Six of the Hennessy Funds were categorized as Sector and Specialty products as of the end of fiscal year 2018. Of those six
funds, one is designed as an index fund and the other five are actively managed, but they all focus 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 Gas Utility Fund (Investor Class symbol GASFX and Institutional Class symbol HGASX). The Hennessy Gas
Utility Fund seeks income and capital appreciation by investing in the companies that are members of the American Gas
Association (“AGA”). The fund invests in companies in approximately the same proportion as each such company’s
weighting in the AGA Stock Index. The AGA Stock Index consists of all publicly traded member companies of the AGA,
and the percentage weighting of each company in the AGA Stock Index is equal to such company’s market capitalization
multiplied by the percentage of such company’s assets devoted to natural gas distribution and transmission.
7
• Hennessy Japan Fund (Investor Class symbol HJPNX and Institutional Class symbol HJPIX). The Hennessy Japan Fund
seeks long-term capital appreciation by investing in securities of Japanese publicly traded companies regardless of market
capitalization. Through 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 is limited to its portfolio managers’ best ideas and maintains a concentrated number of
holdings.
• Hennessy Japan Small Cap Fund (Investor Class symbol HJPSX and Institutional Class symbol HJSIX). The Hennessy
Japan Small Cap Fund seeks long-term capital appreciation by investing in securities of smaller Japanese companies,
defined as those with market capitalizations in the bottom 20% of all publicly traded Japanese companies. Through in-
depth analysis and on-site research, the portfolio managers focus on stocks with a potential “value gap” by screening for
small-capitalization companies that the portfolio managers believe have strong businesses and management and are
trading at attractive prices. The portfolio is limited to its portfolio managers’ best ideas and is unconfined to benchmarks.
• Hennessy Large Cap Financial Fund (Investor Class symbol HLFNX and Institutional Class symbol HILFX). The
Hennessy Large Cap Financial Fund seeks capital appreciation by investing in companies with market capitalizations of
$3 billion or more principally engaged in the business of providing financial services. This fund invests in financial
services companies that have low price-to-earnings ratios and low price-to-book ratios relative to other financial services
companies and that the portfolio managers believe have high-quality management teams, uncomplicated business models,
and sustainable earnings growth opportunities.
• Hennessy Small Cap Financial Fund (Investor Class symbol HSFNX and Institutional Class symbol HISFX). The
Hennessy Small Cap Financial Fund seeks capital appreciation by investing in companies with market capitalizations of
less than $3 billion principally engaged in the business of providing financial services. This fund invests in financial
services companies that have low price-to-earnings ratios and low price-to-book ratios relative to other financial services
companies and that the portfolio managers believe have high-quality management teams, uncomplicated business models,
and sustainable earnings growth opportunities.
• Hennessy Technology Fund (Investor Class symbol HTECX and Institutional Class symbol HTCIX). The Hennessy
Technology Fund seeks long-term capital appreciation by investing in companies principally engaged in the research,
design, development, manufacturing, or distributing of products or services in the technology industry. From a universe of
stocks with market capitalizations exceeding $175 million, the portfolio management team identifies approximately 60
common stocks that the team believes 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.
8
Following the end of fiscal year 2018, we purchased the assets related to the management of the BP Funds, adding the Hennessy
BP Energy Fund and the Hennessy BP Midstream Fund to the Hennessy Funds family in the Sector and Specialty category.
Historical Investment Performance of the Hennessy Funds
The following table presents the average annualized returns for each of the Hennessy Funds and their relevant benchmark
indices for the one-year, three-year, five-year, ten-year, and since inception periods ended September 30, 2018.
Returns are presented net of all expenses borne by mutual fund shareholders, but are not net of fees waived or expenses borne
by the Company. The past investment performance of the Hennessy Funds is no guarantee of future performance, and all of the
Hennessy Funds have experienced negative performance over various time periods in the past and may do so again in the future.
Hennessy Funds Performance as of September 30, 2018:
Hennessy Cornerstone Growth Fund*
One Year
Three Years
Five Years
Ten Years
Since Inception
(11/01/96)
Institutional Class Share—HICGX**
Investor Class Share—HFCGX
Russell 2000 Index (1)
S&P 500 Index (2)
6.55%
6.18%
15.24%
17.91%
9.47%
9.14%
17.12%
17.31%
10.74%
10.42%
11.07%
13.95%
8.53%
8.20%
11.11%
11.97%
9.43%
9.27%
9.05%
8.72%
Hennessy Focus Fund*
Institutional Class Share—HFCIX**
Investor Class Share—HFCSX
Russell 3000 Index (2)
Russell Midcap Growth Index (3)
One Year
Three Years
Five Years
Ten Years
9.34%
8.94%
17.58%
21.10%
11.26%
10.85%
17.07%
16.65%
10.63%
10.24%
13.46%
13.00%
13.50%
13.11%
12.01%
13.46%
Hennessy Cornerstone Mid Cap 30 Fund
One Year
Three Years
Five Years
Ten Years
Since Inception
(1/03/97)
13.22%
13.04%
8.62%
9.28%
Since Inception
(9/17/03)
Institutional Class Share—HIMDX**
Investor Class Share—HFMDX
Russell Midcap Index (4)
S&P 500 Index (2)
2.20%
1.80%
13.98%
17.91%
4.95%
4.57%
14.52%
17.31%
9.32%
8.99%
11.65%
13.95%
10.88%
10.49%
12.31%
11.97%
10.63%
10.36%
10.84%
9.42%
Hennessy Cornerstone Large Growth Fund
One Year
Three Years
Five Years
Institutional Class Share—HILGX
Investor Class Share—HFLGX
Russell 1000 Index (5)
S&P 500 Index (2)
13.97%
13.63%
17.77%
17.91%
13.70%
13.40%
17.07%
17.31%
11.39%
11.15%
13.67%
13.95%
Ten Years
—
—
12.09%
11.97%
Since Inception
(3/20/09)
16.57%
16.29%
17.59%
17.44%
Hennessy Cornerstone Value Fund*
One Year
Three Years
Five Years
Ten Years
Since Inception
(11/01/96)
Institutional Class Share—HICVX**
Investor Class Share—HFCVX
Russell 1000 Value Index (6)
S&P 500 Index (2)
10.89%
10.64%
9.45%
17.91%
15.47%
15.17%
13.55%
17.31%
10.31%
10.09%
10.72%
13.95%
11.18%
10.89%
9.79%
11.97%
7.37%
7.25%
8.68%
8.72%
9
Hennessy Total Return Fund
One Year
Three Years
Five Years
Ten Years
Since Inception
(7/29/98)
Investor Class Share—HDOGX
75/25 Blended DJIA/Treasury Index (7)
Dow Jones Industrial Average (2)
7.75%
15.80%
20.76%
11.81%
15.38%
20.49%
8.05%
11.01%
14.57%
7.85%
9.33%
12.22%
5.15%
6.70%
8.04%
Hennessy Equity and Income Fund*
One Year
Three Years
Five Years
Ten Years
Since Inception
(6/03/97)
Institutional Class Share—HEIIX
Investor Class Share—HEIFX***
Blended Balanced Index (8)
S&P 500 Index (2)
9.16%
8.75%
10.10%
17.91%
9.15%
8.74%
10.59%
17.31%
7.69%
7.31%
8.94%
13.95%
8.18%
7.85%
8.67%
11.97%
7.18%
6.97%
6.87%
7.98%
Hennessy Balanced Fund
One Year
Three Years
Five Years
Ten Years
Since Inception
(3/08/96)
Investor Class Share—HBFBX
50/50 Blended DJIA/Treasury Index (9)
Dow Jones Industrial Average (2)
5.13%
10.67%
20.76%
8.30%
10.35%
20.49%
5.19%
7.49%
14.57%
5.49%
6.58%
12.22%
4.52%
6.48%
9.71%
Hennessy Gas Utility Fund*
One Year
Three Years
Five Years
Ten Years
Since Inception
(5/10/89)
Institutional Class Share—HGASX**
Investor Class Share—GASFX
AGA Stock Index (10)
S&P 500 Index (2)
0.11%
-0.28%
1.08%
17.91%
7.73%
7.52%
8.96%
17.31%
7.26%
7.14%
8.35%
13.95%
10.13%
10.07%
11.02%
11.97%
9.53%
9.50%
10.66%
10.32%
Hennessy Japan Fund*
One Year
Three Years
Five Years
Ten Years
Since Inception
(10/31/03)
Institutional Class Share—HJPIX
Investor Class Share—HJPNX
Russell/Nomura Total Market Index (11)
Tokyo Stock Price Index (TOPIX) (12)
21.51%
20.98%
9.86%
9.85%
21.20%
20.74%
13.36%
13.14%
14.79%
14.42%
7.90%
7.82%
12.79%
12.50%
6.76%
6.76%
10.28%
10.05%
5.60%
5.48%
Hennessy Japan Small Cap Fund*
One Year
Three Years
Five Years
Ten Years
Since Inception
(8/31/07)
Institutional Class Share—HJSIX**
Investor Class Share—HJPSX
Russell/Nomura Small Cap Index (13)
Tokyo Stock Price Index (TOPIX) (12)
15.55%
15.01%
7.99%
9.85%
20.99%
20.65%
16.28%
13.14%
16.31%
16.07%
10.54%
7.82%
14.60%
14.48%
10.53%
6.76%
11.47%
11.36%
6.95%
3.44%
Hennessy Large Cap Financial Fund*
One Year
Three Years
Five Years
Ten Years
Since Inception
(1/03/97)
Institutional Class Share—HILFX**
Investor Class Share—HLFNX
Russell 1000 Financial Services Index (14)
Russell 1000 Index (5)
13.88%
13.57%
12.42%
17.77%
15.31%
14.85%
16.20%
17.07%
10.81%
10.52%
13.54%
13.67%
10.33%
10.18%
8.51%
12.09%
8.46%
8.39%
7.26%
8.64%
Hennessy Small Cap Financial Fund*
One Year
Three Years
Five Years
Ten Years
Since Inception
(1/03/97)
Institutional Class Share—HISFX**
Investor Class Share—HSFNX
Russell 2000 Financial Services Index (15)
Russell 2000 Index (1)
0.93%
0.49%
6.79%
15.24%
11.71%
11.26%
14.88%
17.12%
9.93%
9.51%
11.92%
11.07%
10.36%
10.02%
8.96%
11.11%
10.87%
10.71%
9.13%
8.79%
10
Hennessy Technology Fund*
One Year
Three Years
Five Years
Ten Years
Since Inception
(2/01/02)
Institutional Class Share—HTCIX**
Investor Class Share—HTECX
NASDAQ Composite Index (16)
S&P 500 Index (2)
22.68%
22.40%
25.17%
17.91%
17.05%
16.67%
21.70%
17.31%
11.38%
11.04%
17.72%
13.95%
10.24%
9.98%
15.77%
11.97%
7.25%
7.10%
10.16%
8.06%
*
**
Performance information from the inception date of the fund through the date Hennessy began managing the fund is included
because the previous investment manager(s) 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.
*** Performance shown for periods prior to the inception of Investor Class shares represents the performance of Institutional
Class shares of the fund and includes expenses that are not applicable to, and are lower than, those of Investor Class shares.
(1) The Russell 2000 Index is an unmanaged index commonly used to measure the performance of small-capitalization U.S. stocks.
(2) The S&P 500 Index, Russell 3000 Index, and Dow Jones Industrial Average are unmanaged, broad-based indices commonly
used to measure the performance of U.S. stocks.
(3) The Russell Midcap Growth Index is an unmanaged index commonly used to measure the performance of mid-capitalization,
growth-oriented U.S. stocks.
(4) The Russell Midcap Index is an unmanaged index commonly used to measure the performance of mid-capitalization U.S.
stocks.
(5) The Russell 1000 Index is an unmanaged index commonly used to measure the performance of large-capitalization U.S. stocks.
(6) The Russell 1000 Value Index is an unmanaged index commonly used to measure the performance of large-capitalization,
value-oriented U.S. stocks.
(7) 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 3-Month U.S. Treasury Bill Index, which is an
unmanaged index comprising U.S. Treasury securities maturing in three months.
(8) The Blended Balanced Index consists of 60% common stocks, represented by the S&P 500 Index, and 40% bonds, represented
by the Bloomberg Barclays Capital Intermediate U.S. Government/Credit Index, which is an unmanaged index commonly used
to measure the performance of U.S. bonds.
(9) 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 is an
unmanaged index comprised of U.S. Treasury securities maturing in approximately one year.
(10) The AGA Stock Index is a market capitalization-weighted index, adjusted monthly, consisting of member companies of the
AGA.
(11) The Russell/Nomura Total Market Index is a market capitalization-weighted index of Japanese equities and is presented in U.S.
dollar terms.
(12) The Tokyo Stock Price Index (TOPIX) is a market capitalization-weighted index of all companies listed on the First Section of
the Tokyo Stock Exchange and is presented in U.S. dollar terms.
(13) The Russell/Nomura Small Cap Index represents the universe of small-capitalization companies in the Japanese equity markets
and is presented in U.S. dollar terms.
(14) The Russell 1000 Financial Services Index is an unmanaged index commonly used to measure the performance of U.S. large-
capitalization financial sector stocks.
(15) The Russell 2000 Financial Services Index is an unmanaged index commonly used to measure the performance of U.S. small-
capitalization financial sector stocks.
(16) The NASDAQ Composite Index is a broad-based, capitalization-weighted index of all the common stocks listed on the
NASDAQ National Market.
11
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.
Development of New Investment Strategies and Expanding Our Product Offerings
We develop new investment strategies and expand our product offerings by identifying client needs and reviewing asset
allocation tables to determine where we can augment our family of mutual 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 mutual fund;
• We purchase the assets related to the management of an existing mutual fund that we then manage ourselves;
• We purchase the assets related to the management of an existing mutual 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 mutual 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 shareholders of 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-advisor 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 shareholders), acquisition
inflows, outflows (redemptions of shares of the Hennessy Funds by shareholders), and market appreciation or depreciation.
12
The following table summarizes our assets under management for the past three fiscal years:
Total Assets Under Management
For the Fiscal Year Ended September 30,
Beginning assets under management
Acquisition inflows
Organic inflows
Redemptions
Market appreciation
Ending assets under management
2018
2016
2017
(In thousands)
$ 6,612,812 $ 6,698,519 $ 5,987,985
374,361
— 434,530
1,193,270 1,150,462 2,168,840
(2,376,180) (2,093,315) (2,417,384)
393,354 857,146 524,548
$ 6,197,617 $ 6,612,812 $ 6,698,519
As stated above, the fees we receive for providing investment advisory and shareholder services increase or decrease as our
average assets under management rises or falls.
The following table summarizes our sources of revenues, net of sub-advisor fees, for the past three fiscal years:
Revenues for the Fiscal Year Ended September 30,
2018
2017
(In thousands)
2016
Investment advisory fees
Shareholder service fees
Subtotal
Sub-advisor fees
$
50,235 $
4,355
54,590
(10,461)
48,296 $
4,659
52,955
(9,225)
Revenues, net of sub-advisor fees
$
44,129 $
43,730 $
46,391
5,019
51,410
(8,743)
42,667
Investment Advisory Agreements and Fees
We provide investment advisory services to the entire family of Hennessy Funds pursuant to management contracts with
Hennessy Funds Trust. Under these management contracts, we are responsible for the provision of investment advisory services to the
Hennessy Funds, subject to the oversight of the Board of Trustees of Hennessy Funds Trust (the “Funds’ Board of Trustees”) and
according to each fund’s particular fundamental investment objectives and policies. The services that we provide to each Hennessy
Fund pursuant to these management contracts 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;
13
•
performing a daily reconciliation of portfolio positions and cash for the fund;
• monitoring the fund’s compliance with its investment objectives and restrictions and federal securities laws;
•
•
•
performing activities such as maintaining a compliance program, conducting ongoing reviews of the compliance programs
of the fund’s service providers (including its sub-advisor, as applicable), conducting on-site visits to the fund’s service
providers (including its sub-advisor, as applicable), monitoring incidents of abusive trading practices, reviewing fund
expense accruals, payments, and fixed expense ratios, evaluating insurance providers for fidelity bond, D&O/E&O, and
cybersecurity insurance coverage, conducting employee compliance training, reviewing reports provided by service
providers, maintaining books and records, and preparing an annual compliance report for the Funds’ Board of Trustees;
if applicable, overseeing the selection and continued employment of the fund’s sub-advisor, monitoring such sub-
advisor’s adherence to the fund’s investment objectives, policies, and restrictions, and reviewing the fund’s investment
performance;
overseeing service providers that provide accounting, administration, distribution, transfer agency, custodial, sales,
marketing, public relations, audit, information technology, and legal services to the fund;
• maintaining in-house marketing and distribution departments on behalf of the fund;
•
•
preparing or directing the preparation of all regulatory filings for the fund, including writing and annually updating the
fund’s prospectus and related documents;
preparing or reviewing a written summary of the fund’s performance for the most recent 12-month period for each annual
report of the fund;
• monitoring and overseeing the accessibility of the fund on third-party platforms;
•
•
•
paying the incentive compensation of the fund’s compliance officers and employing other staff such as legal, marketing,
national accounts, distribution, sales, administrative, and trading oversight personnel, as well as management executives;
providing a quarterly compliance certification to Hennessy Funds Trust; and
preparing or reviewing materials for the Funds’ Board of Trustees, presenting or leading discussions to or with the Funds’
Board of Trustees, preparing or reviewing meeting minutes, and arranging for training and education of the Funds’ Board
of Trustees.
The management contracts 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 is comprised of our Chief Executive Officer and Chairman of our Board of Directors, Neil J. Hennessy, and three trustees
who are not interested persons of the Hennessy Funds (the “disinterested trustees”). Under the Investment Company Act of 1940, a
majority of the disinterested trustees must approve the entry into and continuation of our management contracts. The disinterested
trustees also have sole responsibility for selecting and nominating other disinterested trustees.
14
In exchange for the services described above, we receive an investment advisory fee from each of the Hennessy Funds, which is
calculated as a percentage of each fund’s average daily net asset value. As of September 30, 2018, the percentages upon which the
annual investment advisory fees payable to us by the Hennessy Funds are based are as follows:
Hennessy Fund
All Class Shares
Hennessy Cornerstone Growth Fund
Hennessy Focus Fund
Hennessy Cornerstone Mid Cap 30 Fund
Hennessy Cornerstone Large Growth Fund
Hennessy Cornerstone Value Fund
Hennessy Total Return Fund
Hennessy Equity and Income Fund
Hennessy Balanced Fund
Hennessy Gas Utility Fund
Hennessy Japan Fund
Hennessy Japan Small Cap Fund
Hennessy Large Cap Financial Fund
Hennessy Small Cap Financial Fund
Hennessy Technology Fund*
Investment Advisory Fee
(as a % of fund assets)
0.74%
0.90%
0.74%
0.74%
0.74%
0.60%
0.80%
0.60%
0.40%
0.80%
0.80%
0.90%
0.90%
0.74%
* The investment advisory fee for the Hennessy Technology Fund was reduced from 0.90% to 0.74% effective as of February 28,
2017.
Following the end of fiscal year 2018, we purchased the assets related to the management of the BP Funds. We receive an
investment advisory fee from the Hennessy BP Energy Fund and the Hennessy BP Midstream Fund at annual rates of 1.25% and
1.10%, respectively, of the average daily net asset value of such funds.
Effective February 28, 2017, the Company waives fees with respect to the Hennessy Technology Fund to comply with a
contractual expense ratio limitation. The fee waiver is calculated daily by the Hennessy Funds’ accountants at U.S. Bank Global Fund
Services and is charged to expense monthly by the Company as an offset to revenues. The waived fee is deducted from investment
advisory fee income and reduces the aggregate amount of advisory fees received by the Company in the subsequent month. To date,
the Company has only waived fees based on contractual obligations, but the Company has the ability to waive fees at its discretion.
Any decision to waive fees voluntarily would not apply to previous periods, but would only apply on a going forward basis.
Our management contracts must be renewed annually (except in limited circumstances) by (i) the Funds’ Board of Trustees or
the vote of a majority of the outstanding shares of the applicable Hennessy Fund and (ii) the vote of a majority of the disinterested
trustees. If the management contracts are not renewed annually as described above, they terminate automatically. They also would
terminate automatically if the Company were to assign them to another advisor (assignment includes “indirect assignment,” which is
the transfer of the Company’s common stock in sufficient quantities deemed to constitute a controlling block) or if either the Company
or the applicable Hennessy Fund provides 60 days’ notice of termination to the other party.
15
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 services
that each sub-advisor provides to the applicable Hennessy Fund pursuant to the terms of the sub-advisory agreement include:
•
•
•
•
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;
preparing a written summary of the fund’s performance for the most recent 12-month period for each annual report of the
fund; and
providing a quarterly certification to Hennessy Funds Trust 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.
These sub-advisory services must be delivered in accordance with the terms of the sub-advisory agreement and the sub-advised
fund’s Prospectus and Statement of Additional Information, all as subject to the direction, supervision, and control of the Funds’
Board of Trustees and us. In exchange for sub-advisory services, we pay sub-advisor fees to the sub-advisors out of our own assets.
Sub-advisor 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-advisor fees payable by us to
such fund’s sub-advisor as of the end of fiscal year 2018:
Hennessy Fund
Hennessy Focus Fund
Hennessy Equity and Income Fund
Sub-Advisor
(for all class shares)
Broad Run Investment Management, LLC
Financial Counselors, Inc. (fixed income
allocation)
The London Company of Virginia, LLC (equity
allocation)
Sub-Advisor Fee
(as a % of fund assets)
0.29%
0.27%
0.33%
Hennessy Japan Fund
SPARX Asset Management Co. Ltd.
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%
$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 management contracts and are subject to the
same termination provisions.
16
Following the end of fiscal year 2018, we purchased the assets related to the management of the BP Funds and engaged BP
Capital Fund Advisors, LLC as the sub-advisor to the Hennessy BP Energy Fund and the Hennessy BP Midstream Fund at an annual
rate of 0.40% of the average daily net asset value of such funds.
Shareholder Servicing Agreements and Fees
We provide shareholder services to the entire family of the Hennessy Funds pursuant to a shareholder servicing agreement with
Hennessy Funds Trust covering Investor Class shares of such funds. The shareholder services that we provide for the Hennessy Funds
include, among other things, the following:
• maintaining an “800” number that the current investors of the Hennessy Funds may call to ask questions about the
Hennessy Funds or their accounts with the Hennessy Funds;
•
•
•
•
assisting the investors in the Hennessy Funds with processing exchange and redemption requests;
assisting the investors in the Hennessy Funds with changing dividend options, account designations, and addresses;
responding generally to questions from investors in the Hennessy Funds; and
providing other similar services that the Hennessy Funds may request.
In exchange for the services described above, we receive a shareholder service fee from each of the Hennessy Funds of 0.10%
of the average daily net assets of such fund’s Investor Class shares.
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 mutual 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 funds, including, but not limited to (i) advertising, (ii) compensation paid to financial
institutions, broker-dealers, and others for sales and marketing, (iii) shareholder accounting servicing, (iv) printing and mailing
prospectuses to possible new shareholders, and (v) printing and mailing sales literature. A mutual 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 shareholders, advertising, and preparing and distributing sales literature.
The 12b-1 fee for each of the Hennessy Funds is 0.15% of such fund’s average daily net assets.
CUSTODIAL AND BROKERAGE ARRANGEMENTS
A third-party custodian acts as custodian for all 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.
17
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.
BUSINESS STRATEGY
From the time we launched our first mutual fund in 1996 through the end of fiscal year 2018, we have grown our assets under
management to approximately $6.2 billion. During that time, we have consistently pursued a growth strategy centered on organic
growth through our marketing and sales efforts and growth through strategic purchases of management-related assets. The
implementation of this business strategy is described below.
• Delivering 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 repeatable investment
process that combines time-tested stock selection strategies with highly disciplined, team-managed approaches to investing. We offer
both quantitative funds and actively managed funds. We believe our quantitative funds will 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 believe that our actively managed funds will attract investors who appreciate a fundamental, hands-on investment
management approach and talented portfolio managers. We also believe our more conservative, income-generating funds will attract
investors seeking alternatives to mutual funds invested entirely in equities.
18
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. Along with our primary spokesperson, Neil J. Hennessy, who is
our Chief Executive Officer and Chairman of our Board of Directors and President, Chief Investment Officer, and a Portfolio Manager
of the Hennessy Funds, we also utilize David Ellison and Ryan Kelley, both Portfolio Managers of the Hennessy Funds, as well as our
sub-advisors, to further expand our public relations program and provide comprehensive media coverage of our products.
We maintain and regularly update a robust website. We also utilize more focused marketing efforts, such as sending
informational and promotional communications, fund performance updates, news articles pertaining to the Hennessy Funds, and
Portfolio Manager commentaries to investors and prospective investors. We also participate in exhibitions at select investment advisor
trade shows throughout the year. Additionally, we attend strategic industry-related conferences and participate as moderators or guest
speakers on industry-related panels whenever the opportunity arises.
• Expanding our distribution network to additional mutual fund platforms
One of the ways investors may purchase shares of the Hennessy Funds is through mutual fund supermarkets, such as Schwab,
Fidelity, TD Ameritrade, and Pershing. Mutual fund supermarkets 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. This ability to purchase various
mutual funds in a single location is very attractive to investors. The majority of our $6.2 billion of assets under management as of
September 30, 2018, is held at mutual fund supermarkets.
Investments in the Hennessy Funds are also available through national wire houses and broker-dealers, as well as independent
and regional broker-dealers. We see continued opportunities to form new relationships with these financial institutions, thereby
enhancing the accessibility of our no-load mutual funds to investors.
•
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 investors.
A recommendation by an investment professional to an investor 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 investors 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 investors as a way to increase the amount of assets that we manage, which will in turn increase our revenues.
19
•
Pursuing strategic purchases of management agreements for additional mutual funds
A primary component of our growth strategy is to selectively pursue strategic purchases of assets related to the management of
additional mutual funds. We believe the regulatory burden imposed upon the mutual fund industry, along with increased competition,
has compressed the margins of smaller to mid-sized mutual fund managers, making those managers more receptive to an asset
purchase. We believe that we are well prepared to benefit from these attractive asset purchase trends and from the increasing supply of
potential targets. In addition, we believe there are a number of attractive asset purchase opportunities from mutual fund managers who
are reaching retirement age or who are leaving the mutual fund management arena. We have generally been able to offer lower overall
expense ratios to the shareholders of purchased funds. In some instances, we have also been able to improve performance.
Through our asset purchase strategy, we have successfully completed nine asset purchases of management-related assets over an
18-year period, and we have efficiently integrated $4.1 billion of net assets of 28 different mutual funds into the Hennessy Funds
family. Our most recent asset purchase was completed on January 12, 2018, when we purchased the assets related to the management
of the Rainier Small/Mid Cap Equity Fund, the final of the three Rainier Funds we purchased pursuant to the Transaction Agreement,
dated May 10, 2017, with Rainier and Rainier’s majority owner, Manning & Napier Group, LLC. We had previously purchased the
assets of the Rainier Large Cap Equity Fund and the Rainier Mid Cap Equity Fund on December 1, 2017. The three Rainier Funds
collectively represented approximately $375 million in assets under management as of the applicable closing dates. In addition, on
July 10, 2018, we signed a definitive agreement with BP Capital Fund Advisors, LLC to purchase the assets related to the
management of the BP Funds. In October, following the end of our fiscal year 2018, we completed the transaction, which marked our
10th asset purchase (see further discussion in Footnote 15 to the Financial Statements under Item 8, “Financial Statements and
Supplementary Data,” below).
• 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 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:
•
•
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the investment performance for the Hennessy Funds;
the expense ratios of the Hennessy Funds;
the array of our product offerings;
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industry rankings for 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,” below.
REGULATORY ENVIRONMENT
We are subject to extensive and increasing federal and state laws and regulations intended to protect shareholders of mutual
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, limitations
on agency cross and principal transactions between an advisor and advisory investors, recordkeeping and reporting, disclosure, and
anti-fraud matters.
We manage accounts for the Hennessy Funds on a discretionary basis, with 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.
Our mutual funds are registered with the SEC under the Investment Company Act of 1940, which imposes additional
obligations on both the funds and the advisor, including detailed operational requirements. While we exercise broad discretion over
the day-to-day management of the business and affairs of the Hennessy Funds and the investment portfolios of the Hennessy Funds,
our own operations are subject to oversight and management by the Funds’ Board of Trustees. Under the Investment Company Act of
1940, a majority of the trustees must not be “interested persons” with respect to us (sometimes referred to as the “independent trustee”
requirement). The responsibilities of the Funds’ Board of Trustees include, among other things, annually approving the continuation of
our investment management 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 the investment advisor to a
mutual fund a fiduciary duty with respect to the receipt of the advisor’s 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 an
investment advisor’s registration. 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 September 30, 2018, we employed 23 employees, 20 of whom were full-time employees.
The executive officers of the company 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 serves as
President, Chief Investment Officer, 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.
Volatility in and disruption of the capital markets and changes in the economy may significantly affect our 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, 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.
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Investors in the Hennessy Funds can redeem their investments at any time and for any reason, including poor investment
performance. 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 mutual fund business is largely dependent on investment performance, as well as client servicing and
distribution. If the Hennessy Funds perform poorly compared to the mutual funds of other investment advisory firms, we may
experience a decrease in purchases of shares and an increase in redemptions of shares of the Hennessy Funds, thereby reducing our
assets under management and adversely affecting our revenues.
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.
Investor behavior is influenced by short-term investment performance of mutual funds.
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.
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 such 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.
We derive a substantial portion of our revenues from a limited number of the Hennessy Funds.
During fiscal year 2018, our average assets under management was concentrated in the following three Hennessy Funds: (i) the
Hennessy Focus Fund (40% of average assets under management); (ii) the Hennessy Gas Utility Fund (17% of average assets under
management); and (iii) the Hennessy Cornerstone Mid Cap 30 Fund (15% of average assets under management). Consequently, our
revenues followed a similar pattern of concentration: (a) the Hennessy Focus Fund (47% of total revenue); (b) the Hennessy
Cornerstone Mid Cap 30 Fund (15% of total revenue); and (c) the Hennessy Gas Utility Fund (10% of total revenue). As a result, our
operating results are particularly dependent upon the performance of these funds and our ability to maintain and grow assets under
management in these funds. If any of these funds were to experience a significant increase in redemptions for any reason, our assets
under management would be reduced, adversely affecting our revenues.
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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,” above.
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 in recent years has led some investors to increasingly 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. While we cannot predict how much market share these competitors will gain, we believe there will always be
demand for good active management.
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 investor
consent. In addition, they must be renewed annually by (i) the Funds’ Board of Trustees or the vote of a majority of the outstanding
shares of the applicable Hennessy Fund and (ii) 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.
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.
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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.
Assets invested through third-party intermediaries have a higher risk of redemption and are subject to changes in fee structures,
which could reduce our revenues.
Investments in the Hennessy Funds made through third-party intermediaries, as opposed to direct investments in the Hennessy
Funds, can be more easily moved to investments in funds outside of the Hennessy Fund family. Third-party intermediaries are
attractive to investors because of the ease of accessibility to a variety of funds, but this causes 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
third-party 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 depend on third-party investment professionals and the distribution channels they utilize to market the Hennessy Funds.
Our primary source of distribution of the Hennessy Funds is through intermediaries that include national, regional, and
independent broker-dealers, financial planners, and registered investment advisors. 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 distribution intermediaries generally can terminate their relationships with us on short notice. Mergers
and other corporate transactions among distributors also may affect our distribution relationships. Moreover, in the past, fiduciary
regulations have led to significant shifts in distributors’ business models and more limited product offerings, and additional
regulations could lead to further changes, potentially resulting in reduced distribution of certain of the Hennessy Funds. Our lack of
access to these distribution channels could have a material adverse effect on our business because investment professionals may not
distribute the Hennessy Funds if we are no longer participants on the platforms of firms that permit their investment professionals to
utilize no-load funds for their investors. Either of these events could cause the net assets of the Hennessy Funds to decline, which
would decrease our revenues and have a material adverse effect on our results of operations.
In addition, these intermediaries generally offer their customers a broad array of investment products that are in addition to, and
compete with, the Hennessy Funds. The intermediaries or their customers may favor competing investment products over the
Hennessy Funds. To the extent that current or future intermediaries or their customers prefer to do business with our competitors, our
market share, revenues, and net income could decline.
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. In order for us to maintain our fee structures in a competitive environment, we must be
able to provide our mutual fund investors with investment returns and service that will adequately compensate them for investing in
our mutual funds with our current fee structures. We cannot be assured that we will 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.
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We may be required to forego all or a portion of our fees under our management contracts covering the Hennessy Funds.
On an annual basis, the Funds’ Board of Trustees must assess the reasonableness of our investment advisory fees. We regularly
analyze the expense ratios of the Hennessy Funds and have the right to waive fees at our discretion to compete with other mutual
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 voluntary fee waiver would only apply on a going-forward basis and would not apply to previous periods.
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
may result in the sale of securities that have been performing well in the near term and the purchase of securities that have been
performing less well in the near term. Additionally, we will maintain a position in a relatively poorly performing security throughout
the course of the portfolio holding period. Either of these actions 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.
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. 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.
The terms of our loan agreement may restrict our current and future operations, particularly our ability to respond to certain
changes or to take future actions. In addition, certain events could cause us to default on our loan agreement.
The gross amount outstanding under our loan agreement with U.S. Bank National Association (“U.S. Bank”) and California
Bank & Trust, as of the end of fiscal year 2018, was $21.9 million (initially $35.0 million, consisting of a $20.0 million promissory
note to U.S. Bank and a $15.0 million promissory note to California Bank & Trust). The loan agreement contains a number of
covenants that collectively impose operating and financial restrictions on us, including restrictions that may limit our ability to engage
in acts that may be in our long-term best interests. The loan agreement also sets forth a number of events that, if they occur, would
constitute events of default, such as a failure by us to comply with the covenants in the loan agreement or the termination or non-
renewal of one or more of our management contracts if such termination or non-renewal would reasonably be expected to have a
material adverse effect on us. The occurrence of an event of default would give the lenders the right to declare our borrowings,
together with accrued and unpaid interest, to be immediately due and payable. In addition, the lenders would have the right to proceed
against the collateral we granted to them, which consists of substantially all of our assets. If the debt under our loan agreement were
accelerated, we might not have sufficient cash on hand or be able to sell sufficient collateral to repay this debt, which would have an
immediate material adverse effect on our business, results of operations, and financial condition.
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An increase in our borrowing costs may adversely affect our earnings and liquidity.
Under our loan agreement with U.S. Bank and California Bank & Trust, our effective interest rate as of the end of fiscal year
2018 is 4.854%. Because the interest payable is a floating rate (see further discussion in Footnote 7 to the Financial Statements under
Item 8, “Financial Statements and Supplementary Data,” below), the interest expense we incur will vary with changes in the
applicable reference rate. As a result, an increase in short-term interest rates will increase our interest costs and could adversely affect
our liquidity. Failure to maintain adequate liquidity could lead to unanticipated costs and force us to revise our strategic and business
initiatives, materially adversely affecting our business, results of operations, and financial condition.
We depend on key personnel to manage our business, and the loss of any of their 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.
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 investment management contracts that we have purchased, a $78.2 million asset on the balance sheet as of the end of fiscal
year 2018, are considered an intangible asset with an indefinite useful life. Management reviews the classification of the asset as an
asset with an “indefinite life” each reporting period. If our purchased investment management contracts are ever classified as an asset
with a definite life, we would begin amortizing such agreements over their remaining useful life. If the contracts continue to be
classified as an indefinite life asset, we will continue to review the carrying value to determine if any impairment has occurred. The
impairment analysis has been based on anticipated future cash flows, which are calculated based on assets under management.
Although the contracts are 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 contracts. 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 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 assets related to the management of additional mutual
funds. This strategy is accompanied by risks including, among others, the possibility of the following:
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the potential unavailability of attractive acquisition opportunities;
a high level of competition from other companies that may have greater financial resources than we do;
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our inability to value potential asset purchases accurately and negotiate acceptable purchase terms;
our inability to secure enough affirmative votes to gain approval of the proposed fund reorganization from the target
fund’s shareholders;
the loss of mutual fund assets paid for in an asset purchase through redemptions by shareholders of the mutual 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 management contract valuations, 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.
The potential future growth of our business may place significant demands on our resources and employees, and may increase our
expenses, risks, and regulatory oversight.
The potential future growth of our business may place significant demands on our infrastructure, investment team, and other
employees, which may increase our expenses. The potential inability of our systems to accommodate an increasing volume of
transactions could constrain our ability to expand our businesses. We may face significant challenges in maintaining and developing
adequate financial and operational controls, implementing new or updated information and financial systems, managing and
appropriately sizing our work force, and updating other components of our business on a timely basis and in a cost-effective manner.
There can be no assurance that we will be able to manage the potential future growth of our business effectively, and any failure to do
so could adversely affect our ability to generate revenues and control our expenses.
Higher insurance premiums and increased insurance coverage risks could increase our costs and reduce our profitability.
While we carry insurance in amounts and under terms that we believe are appropriate, we cannot guarantee that our insurance
will cover all liabilities and losses to which we may be exposed or, if covered, that such liabilities and losses will not exceed the limits
of available insurance coverage or that our insurers will remain solvent and meet their obligations. In addition, we cannot guarantee
that our insurance policies will continue to be available at current terms and fees.
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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 are highly dependent on various software applications and other technologies, as well as on third parties who utilize various
software applications and other technologies, for our business to function properly and to safeguard confidential information; any
significant limitation, failure, or security breach could adversely affect our operations.
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. Although we take protective measures (including striving to
understand the protective measures taken by our third-party vendors) and endeavor to modify such protective measures as
circumstances warrant, we may experience system delays and interruptions as a result of natural disasters, power failures, acts of war,
third-party failures, or other unexpected events. We cannot predict with certainty all of the adverse effects that could result from the
failure to efficiently address and resolve these delays and interruptions.
We could also be subject to losses if we fail to properly safeguard sensitive and confidential and proprietary information that we
and our third-party vendors store and transmit as part of our normal business operations. Although we take protective measures, the
security of our and our vendors’ computer systems, software, and networks may be vulnerable to hacking, breaches, unauthorized
access, misuse, computer viruses, or other malicious code, as well as to other events that could have a security impact, such as an
employee or vendor inadvertently or intentionally causing us to release confidential or proprietary information. 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.
There have been a number of highly publicized cases in recent years involving financial services and consumer-based
companies reporting the unauthorized disclosure of client or customer information, as well as cyber-attacks involving the
dissemination, theft, and destruction of corporate information or other assets, as a result of employees’ or contractors’ failure to follow
procedures or as a result of actions by third parties, including actions by terrorist organizations and hostile foreign governments. We,
the Hennessy Funds, and our third-party vendors may be vulnerable to such unauthorized disclosures and cyber-attacks. Our increased
use of mobile and cloud technologies could heighten these and other operational risks, 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 confidential or proprietary information.
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.
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Finally, cybersecurity and data privacy have become high priorities for regulators, and many jurisdictions are enacting laws and
regulations in these areas. 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.
In recent years, the volume of claims and amount of damages claimed in litigation and regulatory proceedings against the
financial services industry have been increasing. While we strive to conduct our business in accordance with the highest ethical
standards, we nevertheless remain exposed to litigation risk. We could be sued by many different parties, 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.
In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act included “whistleblower” provisions that entitle
persons who report alleged wrongdoing to the SEC to cash rewards. According to a recent annual report to Congress on the Dodd-
Frank Whistleblower Program, whistleblower claims have increased significantly since the enactment of these provisions. Addressing
such claims could generate significant expenses and take up significant management time, even if such claims are frivolous or non-
meritorious.
Any damage to our reputation could harm our business and lead to a reduction in revenues and profitability.
Our success depends, in part, on maintaining a strong reputation in the investment community. Our reputation is vulnerable to
many threats that can be difficult or impossible to control and costly or impossible to remediate, even if they are without merit or are
satisfactorily addressed. Our reputation may be impacted by many factors, including, but not limited to, litigation, regulatory inquiries
or investigations, conflicts of interest, employee misconduct, and rumors. Any damage to our reputation could result in redemptions
by investors in the Hennessy Funds, impede our ability to attract new investors, or negatively impact our relationships with third-party
intermediaries, any of which could have a material adverse effect on our business, results of operations, and financial condition.
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 regulations we are subject to are designed primarily to protect investors in the Hennessy Funds
as opposed to our shareholders. In addition to an increased number of applicable laws and regulations, the mutual fund industry has
undergone increased scrutiny by the SEC and state regulators for the past several years, resulting in numerous enforcement actions,
“sweep” examinations, and new rules and rule proposals. These actions have increased our costs in managing the Hennessy Funds,
and we could continue to experience higher costs if new rules, regulations, or legislation require us to spend more time, hire additional
personnel, or buy new technology to comply with these rules, regulations, and laws. Any changes in rules, regulations, and laws 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 regulations and policies. For example, the
amount of net assets in the Hennessy Funds in a given time period could be affected by, among other things, existing and proposed tax
legislation or the interest rate policies of the Federal Reserve Board. Additionally, in the past we have been affected by legislation
such as the U.S. Department of Labor “fiduciary rule,” which significantly expanded the class of advisers and the scope of investment
advice that are subject to fiduciary standards, causing financial advisers and broker-dealers to make significant operational changes,
including, in some cases, to remove one or more of the Hennessy Funds from their platforms. While the U.S. Court of Appeals for the
Fifth Circuit issued a mandate vacating the fiduciary rule in its entirety on June 21, 2018, a similar federal or state regulation could
result in a decrease in purchases of shares or an increase in redemptions of shares of the Hennessy Funds, which would adversely
affect our assets under management, and thus our revenues.
30
Although we strive to conduct our business in accordance with applicable rules, regulations, and laws, if we were found to have
violated an applicable rule, regulation, or law, we could be subject to fines, suspensions of personnel, or other sanctions, including
revocation of our registration as an investment advisor. If a sanction were imposed against us or our personnel, even if only for a small
monetary amount, the adverse publicity related to such a sanction could harm our reputation, result in redemptions by investors in the
Hennessy Funds, and impede our ability to attract new investors, all of which could have a material adverse effect on our business,
results of operations, and financial condition.
Changes to U.S. tax laws, including the Tax Cuts and Jobs Act of 2017, our failure to adequately comply with U.S. tax laws, or the
outcome of any audits or regulatory disputes with respect to our compliance with U.S. tax laws could adversely affect us.
The enactment of the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) resulted in fundamental changes to U.S. tax law,
including (i) a reduction to the federal corporate income tax rate from 35% to 21%, (ii) a partial limitation on the deductibility of
business interest expense, and (iii) certain modifications to Section 162(m) of the Internal Revenue Code. These changes could have a
material effect on our business operations and the Hennessy Funds’ investment activities. In addition, other changes to U.S. tax law
could be enacted in the future that could have a material adverse effect on our business, results of operations, and financial condition.
We are also 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 management contracts 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 management contracts 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.
Employee misconduct 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.
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.
31
Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act
could have a material adverse effect on our business and our stock price.
As a public company, we are required to maintain effective internal control over financial reporting in accordance with
Section 404 of the Sarbanes-Oxley Act of 2002. Internal control over financial reporting is complex and may be revised over time to
adapt to changes in our business, or changes in applicable accounting rules and therefore we cannot assure you that our internal
control over financial reporting will be effective at all times in the future. If our internal control over financial reporting were deemed
ineffective, we could be subjected to adverse regulatory consequences, including, among others, administrative cease and desist
orders, injunctive orders, civil monetary penalties, or a negative reaction in the financial markets due to a loss of investor confidence
in us and the reliability of our financial statements. Any of these potential consequences could have a material adverse effect on our
business or result in a decline in our stock price.
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. The declaration, amount, and payment of dividends, if any, to our
shareholders by us are subject to the discretion of our Board of Directors. Our Board of Directors will take into account such matters
as general economic and business conditions, our strategic plans, our financial results and condition, contractual, legal, and regulatory
restrictions on the payment of dividends by us, and such other factors as our Board of Directors may consider relevant.
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.
We may need to raise additional capital to fund new business initiatives or refinance existing debt, 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 the future cash needs of the Company is dependent upon our ability to generate cash. Although the Company
has been successful in generating sufficient cash in the past, it may not be successful in the future. We may need to raise additional
capital to fund new business initiatives or refinance existing debt, and financing may not be available to us in sufficient amounts, on
acceptable terms, or at all. Our ability to access 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.
32
Equity markets and our common stock have historically been volatile.
The market price of our common stock historically has experienced, and may continue to experience, volatility, and the broader
equity markets have experienced, and may again experience, significant price and volume fluctuations. In addition, our
announcements of quarterly operating results, changes in general conditions in the economy or the financial markets, and other
developments affecting us or our competitors could cause the market price of our common stock to fluctuate substantially.
Our common stock has relatively limited trading volume, and ownership of a large percentage is concentrated with a small number
of shareholders, which could increase the volatility in our stock trading and significantly affect our share price.
We have a limited number of shareholders, and a large percentage of our common stock is held by an even smaller 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. Public companies with a limited number of shareholders, such as we have, often experience
limited trading volume in their securities.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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 space in Austin, Boston, and Chapel Hill.
We consider these arrangements to be suitable and adequate for the management and operations of our business. We do not own any
real property.
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
Our common stock trades on The NASDAQ Capital Market 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 2018, we had 120 holders of record of our Common Stock. In addition to the 120 holders of record,
there are 43 brokerage firm accounts that represent 1,557 additional individual shareholders for a total of 1,677 shareholders as of the
end of fiscal year 2018.
The equity compensation plan information required by Item 201(d) of Regulation S-K is set forth in the “Equity Compensation
Plan Information” subheading in Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters,” below.
33
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
We purchased shares underlying vested restricted stock units (“RSUs”) from employees to provide withholding and tax
payments on behalf of our employees. The stock repurchases are presented in the following table for the three months ended
September 30, 2018:
Period
July 1-31, 2018
August 1-31, 2018
September 1-30, 2018 (1)
Total (2)
Total Number of
Shares Purchased
(a)
Average Price
Paid Per
Share
(b)
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs (3)
(c)
— $
— $
35,190 $
35,190 $
—
—
14.43
14.43
Maximum Number of
Shares that May
Yet Be Purchased
Under the Plans or
Programs (3)
(d)
1,363,211
1,363,211
1,363,211
1,363,211
—
—
—
—
(1) The shares repurchased in September 2018 were repurchased, according to the instructions of employees, to pay for tax expense
and withholding on the compensation recognized for RSUs that vested in September 2018, and were not purchased pursuant to
the stock buyback program described below.
(2) The total shares repurchased were purchased at a weighted average price of $14.43 per share.
(3) The share repurchases related to the RSUs were not completed pursuant to a plan or program and are therefore not subject to a
maximum per a plan or program. The Company has adopted a stock buyback program, which it announced August 5, 2010.
Pursuant to the program, the Company is authorized to purchase a maximum of 1,500,000 shares. The program has no
expiration date.
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, or means by, which such performance or
results will be achieved.
Forward-looking statements are subject to risks, uncertainties and assumptions, including those described in the section entitled
“Risk Factors” and elsewhere in 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.
34
Our business activities are affected by many factors, including, without limitation, redemptions by mutual fund shareholders,
general economic and financial conditions, movement of interest rates, competitive conditions, industry regulation, and fluctuations in
the stock market, many of which are beyond the control of our management. Further, the business and regulatory environments in
which we operate remain complex, uncertain, and subject to change. We expect that regulatory requirements and developments will
cause us to incur additional administrative and compliance costs. In addition, while domestic economic conditions are relatively
stable, further increases in short-term interest rates, governmental policy changes, and developments in international financial markets
could influence economic and financial conditions significantly. Notwithstanding the variability in our economic and regulatory
environments, we remain focused on the investment performance of the Hennessy Funds and on providing high-quality customer
service to investors.
Our business strategy centers on (i) the identification, completion, and integration of future acquisitions and (ii) organic growth,
through both the retention of the mutual fund assets we currently manage and the generation of inflows into the mutual funds we
manage. The success of our business strategy may be influenced by the factors discussed in Item 1A, “Risk Factors,” above. All
statements regarding our business strategy, as well as statements regarding market trends and risks and assumptions about changes in
the marketplace, are forward-looking by their nature.
OVERVIEW
Our primary operating activity is providing investment advisory services to a family of open-end mutual funds branded as the
Hennessy Funds. We have delegated the day-to-day portfolio management responsibilities to sub-advisors, subject to our oversight,
for some of the Hennessy Funds whose assets related to management we acquired through asset purchases. We oversee the selection
and continued employment of each sub-advisor, review each sub-advisor’s investment performance, and monitor each sub-advisor’s
adherence to each applicable fund’s investment objectives, policies, and restrictions. In addition, we conduct ongoing reviews of the
compliance programs of sub-advisors and make on-site visits to sub-advisors. Our secondary operating activity is providing
shareholder services to Investor Class shares of each of the Hennessy Funds.
We derive our operating revenues from investment advisory fees and shareholder service fees paid to us by the Hennessy Funds.
These fees are calculated as a percentage of the average daily net assets in each of the Hennessy Funds. The percentage amount of the
investment advisory fees varies from fund to fund, but the percentage amount of the shareholder service fees is consistent across all
funds. The dollar amount of the fees we receive fluctuates with changes in the average net asset value of each of the Hennessy Funds,
which is affected by each fund’s investment performance, purchases and redemptions of shares, general market conditions, and the
success of our marketing, sales, and public relations efforts.
U.S. equity markets rose during our fiscal year 2018, principally in response to the positive impact on earnings from the
significantly lower corporate tax rates established by the 2017 Tax Act. Investors were also encouraged by reports of economic
strength domestically, including an acceleration of real GDP growth to over 4% and robust job growth. During the spring and summer
months, equity prices came under some pressure in reaction to the imposition of tariffs on imported products by the U.S.
administration. However, fears of the impact a trade war might have on corporate profits were brushed aside towards the end of the
period as investors focused on strong earnings growth. The Federal Reserve, continuing to feel confident about the strength of the
economy and mindful of a tight labor market and a slight acceleration in inflation during our fiscal year 2018, raised short-term
interest rates four times in December, March, June and September, each time by a quarter point.
Long-term U.S. bond yields rose during our fiscal year 2018. The 10-year U.S. Treasury yield rose to over 3% by the close of
the period in response to indications of an acceleration in domestic economic growth, and confirmation by the Federal Reserve that a
more regular pace of interest rate increases would be maintained. Evidence of slightly higher rates of wage growth and inflation also
dampened demand for fixed income securities.
35
The Japanese equity market rose modestly in local currency terms during our fiscal year 2018. Equities rallied in the first half of
the period, boosted by evidence of continued strong economic growth, an acceleration in inflation, and healthy corporate profits
growth. However, equity prices softened in the second half of the period. The imposition of trade tariffs by the U.S. administration,
which set off fears of an international trade war, contributed to periodic weakness in equity prices, while a fall in the value of the yen
and reports of steady economic progress boosted equity prices. The reelection of Shinzo Abe as leader of the Liberal Democratic Party
in September, resulting in another three years as prime minister, was also welcome news to investors.
We seek to provide positive annualized returns to investors in the Hennessy Funds on average over a market cycle and to
generate inflows into the Hennessy Funds through our marketing and sales efforts. We regularly target over 100,000 financial advisors
through our marketing and sales program, and we currently serve 19,000 advisors who utilize the Hennessy Funds for their clients.
More than one in five of those advisors owns two or more of the Hennessy Funds. We continually seek to expand our team of sales
professionals to serve our advisor community and to assist us with providing services to our over 320,000 mutual fund accounts across
the country. In addition, we have an active public relations effort with the Hennessy brand name appearing on TV, radio, print, or
online media on average once every two and a half to three days.
Thirteen of the Hennessy Funds achieved positive annualized returns for the one-year period ended September 30, 2018, and all
14 Hennessy Funds achieved positive annualized returns for the three-year, five-year, ten-year, and since inception periods ended
September 30, 2018. Total assets under management as of the end of fiscal year 2018 was $6.2 billion, a decrease of $415 million, or
6.3%, compared to the end of fiscal year 2017. The decrease in total assets during fiscal year 2018 was attributable to $1.2 billion in
net outflows, offset by $393 million in market appreciation and the purchase of assets related to the management of the Rainier Funds
of $374 million. The decrease in total assets during fiscal year 2017 was attributable to $943 million in net outflows, offset by
$857 million in market appreciation. The following table illustrates the changes year by year in our assets under management since the
beginning of fiscal year 2016:
Total Assets Under Management
For the Fiscal Year Ended September 30,
2017
2018
2016
Beginning assets under management
Acquisition inflows
Organic inflows
Redemptions
Market appreciation
Ending assets under management
(In thousands)
$ 6,612,812 $ 6,698,519 $ 5,987,985
374,361
— 434,530
1,193,270 1,150,462 2,168,840
(2,376,180) (2,093,315) (2,417,384)
393,354 857,146 524,548
$ 6,197,617 $ 6,612,812 $ 6,698,519
The principal asset on our balance sheet, management contracts, represents the capitalized costs incurred in connection with the
purchase of assets related to the management of mutual funds. As of the end of fiscal year 2018, this asset had a net balance of
$78.2 million, compared to $74.6 million as of the end of fiscal year 2017. The increase was mainly due to one-time costs associated
with the purchase of assets related to the management of the Rainier Funds.
36
The principal liability on our balance sheet is the bank debt incurred in connection with the purchase of assets related to the
management of mutual funds and the repurchase of 1,500,000 shares of the Company’s common stock pursuant to the completion of
its self-tender offer in September 2015. As of the end of fiscal year 2018, this liability had a gross balance of $21.9 million
($21.7 million net of reclassified deferred loan fees of $0.15 million, further discussed in Footnote 7 to the Financial Statements under
Item 8, “Financial Statements and Supplementary Data,” below), compared to $26.3 million as of the end of fiscal year 2017. The
decrease was the result of making monthly loan payments on our bank debt.
2017 CORPORATE TAX REFORM
On December 22, 2017, during our first fiscal quarter, the 2017 Tax Act was enacted into law. Among other changes to various
corporate income tax provisions within the existing Internal Revenue Code, the 2017 Tax Act reduced the federal corporate income
tax rate from 35% to 21%, effective January 1, 2018. Because our fiscal year ends on September 30, we applied a blended statutory
tax rate of 24.5% for fiscal year 2018, which was based on the applicable tax rates and the corresponding number of days in our fiscal
year 2018 before and after the effective date of the tax rate change. Although the 2017 Tax Act did not become effective until
January 1, 2018, the start of our second fiscal quarter, we were required to recognize the effect of the reduced federal corporate
income tax rate on our deferred tax liability in the period of enactment. As a result, we recorded a one-time, non-cash benefit to
income taxes of approximately $4.0 million during our first fiscal quarter, or $0.54 in diluted earnings per share.
RESULTS OF OPERATIONS
The following table sets forth items in our statements of income and comprehensive income as dollar amounts and as
percentages of total revenue for fiscal years 2018 and 2017:
Revenue:
Investment advisory fees
Shareholder service fees
Total revenue
Operating expenses:
Compensation and benefits
General and administrative
Mutual fund distribution
Sub-advisor fees
Depreciation
Total operating expenses
Operating income
Interest expense
Other income
Income before income tax expense
Income tax expense
Net income
Fiscal Year Ended September 30,
2018
2017
Percent of
Total
Revenue
Percent of
Total
Revenue
Amounts
Amounts
(In thousands, except percentages)
$ 50,235
4,355
54,590
13,035
5,864
524
10,461
231
30,115
24,475
1,227
(145)
23,393
2,778
$ 20,615
92.0% $ 48,297
4,658
8.0
91.2%
8.8
100.0
52,955
100.0
23.9
10.7
1.0
19.2
0.4
55.2
44.8
2.2
(0.3)
42.9
5.1
12,862
5,882
274
9,225
219
28,462
24,493
1,256
(12)
23,249
8,307
24.3
11.1
0.5
17.4
0.4
53.7
46.3
2.4
(0.0)
43.9
15.7
37.8% $ 14,942
28.2%
37
Revenues – Investment Advisory Fees and Shareholder Service Fees
Total revenue is comprised of investment advisory fees and shareholder service fees. Comparing fiscal year 2017 to fiscal year
2018, total revenue increased by 3.1%, from $53.0 million to $54.6 million, investment advisory fees increased by 4.0%, from
$48.3 million to $50.2 million, and shareholder service fees decreased by 6.5%, from $4.7 million to $4.4 million.
The increase in investment advisory fees was mainly due to increased average daily net assets of the Hennessy Funds. Although
we had less total assets under management at the end of fiscal year 2018 than we had at the beginning of fiscal year 2018 (as discussed
below), average daily net assets of the Hennessy Funds for fiscal year 2018 increased to $6.7 billion, which represents an increase of
$87 million, or 1.3%, compared to fiscal year 2017.
The decrease in shareholder service fees was due to an increase in the average daily net assets held in Institutional Class shares
and a decrease in the average daily net assets held in Investor Class shares. Assets held in Institutional Class shares of the Hennessy
Funds are not subject to a shareholder service fee, whereas assets held in Investor Class shares of the Hennessy Funds are subject to a
shareholder service fee.
The Company collects investment advisory fees from each of the Hennessy Funds at differing annual rates. These annual rates
range between 0.40% and 0.90% of average daily net assets. The Hennessy Fund with the largest average daily net assets for fiscal
year 2018 was the Hennessy Focus Fund, with $2.64 billion. The Company collects an investment advisory fee from the Hennessy
Focus Fund at an annual rate of 0.90% of average daily net assets. However, the Company pays a sub-advisor 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 the Company’s financial
operations. The Hennessy Fund with the second largest average daily assets for fiscal year 2018 was the Hennessy Gas Utility Fund,
with $1.14 billion. The Company collects an investment advisory fee from the Hennessy Gas Utility Fund at an annual rate of 0.40%
of average daily net assets.
Total assets under management as of the end of fiscal year 2018 was $6.2 billion, a decrease of $415 million, or 6.3%, compared
to the end of fiscal year 2017. This decrease is attributable to aggregate net outflows from the Hennessy Funds of $1.2 billion, partly
offset by aggregate market appreciation of $393 million and $374 million from the purchase of assets related to the management of the
Rainier Funds.
The Hennessy Funds with the three largest amounts of net inflows and net outflows for fiscal year 2018 were as follows:
Largest Net Inflows
Fund Name
Hennessy Japan Fund
Hennessy Japan Small Cap Fund
Hennessy Large Cap Financial Fund
Largest Net Outflows
Net Inflows
Fund Name
$224 million Hennessy Focus Fund
$124 million Hennessy Mid Cap 30 Fund
Hennessy Gas Utility Fund
$19 million
Net Outflows
$(532) million
$(427) million
$(412) million
Redemptions as a percentage of assets under management increased from an average of 2.7% per month during fiscal year 2017
to an average of 3.0% per month during fiscal year 2018.
Operating Expenses
Comparing fiscal year 2017 to fiscal year 2018, total operating expenses increased by 5.8%, from $28.5 million to
$30.1 million. As a percentage of total revenue, total operating expenses increased 1.5 percentage points to 55.2%. The increase was
due primarily to an increase in sub-advisor fees expense.
38
Compensation and Benefits Expense: Comparing fiscal year 2017 to fiscal year 2018, compensation and benefits expense
increased by 1.3%, from $12.9 million to $13.0 million. Although the dollar value of compensation and benefits expense increased, as
a percentage of total revenue, compensation and benefits expense decreased 0.4 percentage points to 23.9%. The dollar value increase
was primarily due to equity compensation awards granted in fiscal year 2018.
General and Administrative Expense: Comparing fiscal year 2017 to fiscal year 2018, general and administrative expense
decreased by 0.3%, from $5.88 million to $5.86 million. As a percentage of total revenue, general and administrative expense
decreased 0.4 percentage points to 10.7%. The decrease resulted primarily from a decrease in outside vendor support, including legal
and audit work, during fiscal year 2018.
Mutual Fund Distribution Expense: Mutual fund distribution expense consists of fees paid to various financial institutions that
offer the Hennessy Funds as potential investments to their clients. When the Hennessy Funds are purchased through one of these
financial institutions, the institution typically charges an asset-based fee, which is recorded in “mutual fund distribution expense” in
our statement of operations to the extent paid by us. When the Hennessy Funds are purchased directly, we do not incur any such
expense. These fees generally increase or decrease in line with the net assets of the Hennessy Funds held through these financial
institutions, which are affected by inflows, outflows, and fund performance.
Comparing fiscal year 2017 to fiscal year 2018, mutual fund distribution expense increased by 91.2%, from $0.3 million to
$0.5 million. As a percentage of total revenue, mutual fund distribution expense increased 0.5 percentage points to 1.0%. The increase
was due to both entering into contract amendments that altered the services provided (and associated fees) and changes in the
composition of average daily net assets held by financial institutions. These changes have led to an allocation of a larger portion of
mutual fund distribution expense to the Company.
Sub-Advisor Fees Expense: Comparing fiscal year 2017 to fiscal year 2018, sub-advisor fees expense increased by 13.4%, from
$9.2 million to $10.5 million. As a percentage of total revenue, sub-advisor fees expense increased 1.8 percentage points to 19.2%.
The increase is a result of an increase in average assets under management in the sub-advised Hennessy Funds, as well as the
amendment to the sub-advisory agreement with SPARX Asset Management Co., Ltd that became effective February 28, 2018. The
amendment immediately increased the sub-advisory fee expense attributable to the Hennessy Japan Small Cap Fund and, more
recently, increased the sub-advisory fee expense attributable to the Hennessy Japan Fund, which surpassed $500 million of daily net
assets in September 2018.
Depreciation Expense: Comparing fiscal year 2017 to fiscal year 2018, depreciation expense increased by 5.5%, from
$0.22 million to $0.23 million. Although the dollar value of depreciation expense increased, as a percentage of total revenue,
depreciation expense remained the same at 0.4%. The dollar value increase was the result of higher fixed asset purchases.
Interest Expense
Comparing fiscal year 2017 to fiscal year 2018, interest expense decreased by 2.3%, from $1.26 million to $1.23 million. The
decrease was due primarily to a decrease to the Company’s principal loan balance, but was partly offset by rising interest rates.
Income Tax Expense
Comparing fiscal year 2017 to fiscal year 2018, income tax expense decreased by 66.6%, from $8.3 million to $2.8 million. The
decrease reflected the significant impact of the 2017 Tax Act, which reduced our federal corporate income tax rate. Of the $5.5 million
decrease, approximately $4.0 million, or $0.54 in diluted earnings per share, resulted from the one-time, non-cash benefit to income
tax expense that we recorded in our first fiscal quarter for the accounting re-measurement of our deferred tax liability based on the
reduced tax rate, with the remaining $1.5 million reduction resulting from the blended federal statutory rate of 24.5% that we applied
for fiscal year 2018.
39
Net Income
From fiscal year 2017 to fiscal year 2018, net income increased by 38.0%, from $14.9 million to $20.6 million, primarily as a
result of the reduction in income tax expense discussed above.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have, and have not had, any off-balance sheet arrangements.
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 September 30, 2018, will be sufficient to meet our short-term
capital requirements for at least one year from the issuance date of this report. To the extent that liquid resources and cash provided by
operations are not adequate to meet long-term capital requirements, management plans to raise additional capital by either, or both of,
seeking to increase our borrowing capacity or accessing the capital markets. There can be no assurance that we will be able to raise
additional capital.
Our total assets under management as of the end of fiscal year 2018 was $6.2 billion, a decrease of $415 million, or 6.3%, from
the end of fiscal year 2017. The primary source 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. As of the end of fiscal year
2018, property and equipment and management contracts purchased totaled $78.5 million, and we had cash and cash equivalents of
$25.4 million.
The following table summarizes key financial data relating to our liquidity and use of cash for fiscal years 2018 and 2017:
Cash flow data:
Operating cash flows
Investing cash flows
Financing cash flows
Net increase in cash and cash equivalents
For the Fiscal Year
Ended September 30,
2018
2017
(In thousands)
$ 21,531 $ 19,846
(445)
(7,236)
(3,895)
(7,941)
$ 9,695 $ 12,165
The increase in cash provided by operating activities of $1.7 million for fiscal year 2018 was due mainly to increased net
income and favorable changes to working capital compared to fiscal year 2017.
The increase in cash used for investing activities of $3.5 million was due to one-time costs associated with purchasing the assets
related to the management of the Rainier Funds in fiscal year 2018.
The increase in cash used for financing activities of $0.7 million was due to an increased dividend in fiscal year 2018.
40
Dividend Payments. We have consistently paid dividends each year since 2005. In January 2018, our Board of Directors
increased the quarterly dividend from $0.075 per share to $0.10 per share. Dividend payments for fiscal year 2018 totaled
$2.9 million. In January 2017, our Board of Directors increased the quarterly dividend from $0.067 per share to $0.075 per share.
Dividend payments for fiscal year 2017 totaled $2.2 million.
Our Bank Loan. We have an outstanding bank loan with U.S. Bank, as administrative agent and as a lender, and California
Bank & Trust, as syndication agent and as a lender. On September 17, 2015, in anticipation of the repurchase of up to 1,500,000
shares of our common stock at $16.67 per share pursuant to our self-tender offer, we entered into a term loan agreement with an
original principal amount of $35.0 million (consisting of a $20.0 million promissory note to U.S. Bank and a $15.0 million promissory
note to California Bank & Trust). On September 19, 2016, we entered into an amendment to our term loan agreement to allow us to
consummate the purchase of assets related to the management of the Westport Fund and the Westport Select Cap Fund. In addition,
the amendment revised one of the financial covenants in the term loan agreement. On November 16, 2017, the Company and its
lenders entered into an amendment to the term loan agreement to revise the excess cash flow prepayment requirements. On
November 30, 2017, the Company and its lenders entered into an amendment to the term loan agreement to allow the Company to
purchase the assets related to the management of the Rainier Funds. On September 20, 2018, the Company and its lenders entered into
an amendment to the term loan agreement to (i) extend the maturity date of the loan by one year, (ii) allow the Company to purchase
the assets related to the management of the BP Funds, (iii) add representations and covenants relating to customer due diligence
requirements for financial institutions, and (iv) add representations regarding matters related to the Employee Retirement Income
Security Act of 1974, as amended.
Our term loan agreement, as amended on September 20, 2018, requires 60 monthly payments of $364,583 plus interest
calculated based on one of the following, at the Company’s option:
(1) the sum of (a) a margin that ranges from 2.75% to 3.25%, depending on the Company’s ratio of consolidated debt to
consolidated earnings before interest, taxes, depreciation and amortization (excluding, among other things, certain non-cash gains and
losses) (“EBITDA”), plus (b) the LIBOR rate; or
(2) the sum of (a) a margin that ranges from 0.25% to 0.75%, depending on the Company’s ratio of consolidated debt to
consolidated EBITDA plus (b) the highest rate out of the following three rates: (i) the prime rate set by U.S. Bank from time to time,
(ii) the Federal Funds Rate plus 0.50%, or (iii) the one-month LIBOR rate plus 1.00%.
The Company currently uses a one-month LIBOR rate contract, which must be renewed monthly. As of September 30, 2018, the
effective rate is 4.854%, which is comprised of the LIBOR rate of 2.104% as of September 1, 2018, plus a margin of 2.75% based on
the Company’s ratio of consolidated debt to consolidated EBITDA as of June 30, 2018. The Company intends to continue renewing
the LIBOR rate contract on a monthly basis provided that the LIBOR-based interest rate remains favorable to the prime rate-based
interest rate.
All borrowings under the term loan agreement are secured by substantially all of the Company’s assets. The final installment of
the then-outstanding principal of $13.5 million plus accrued interest is due September 17, 2020.
Our term loan agreement includes certain reporting requirements and loan covenants requiring the maintenance of certain
financial ratios. We are in compliance with our loan covenants as of September 30, 2018. As of September 30, 2018, we had
$21.9 million currently outstanding under our bank loan ($21.7 million net of debt issuance costs).
41
CRITICAL ACCOUNTING POLICIES
Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in
the United States, which require the use of estimates, judgments, and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented.
These accounting policies, methods, and estimates are an integral part of the financial statements prepared by management and are
based upon management’s current judgments. Those judgments are normally based on knowledge and experience with regard to past
and current events and assumptions about future events. Certain accounting policies, methods, and estimates are particularly sensitive
because of their significance to the financial statements and because of the possibility that future events affecting them may differ
markedly from management’s current judgment. 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 the Financial Accounting Standards Board (the “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.
The management contracts we have purchased are considered intangible assets with an indefinite life and we account for them
in accordance with Accounting Standards Update (“ASU”) No. 2012-02, “Intangibles – Goodwill and Other (Topic 350): Testing
Indefinite-Lived Intangible Assets for Impairment,” as amended. Pursuant to ASU No. 2012-02, 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 in accordance with Subtopic 350-30, “Intangibles — Goodwill and
Other — General Intangibles Other than Goodwill.” 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 2018 as the more-likely-than-
not threshold is met as of September 30, 2018.
The costs related to our purchase of assets related to the management of mutual 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 contract asset, totaling $78.2 million as of September 30, 2018.
RECENTLY ISSUED AND ADOPTED ACCOUNTING STANDARDS
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from Contracts with Customers (ASU 2014-09). In addition, the FASB issued related revenue recognition guidance in five
ASUs: principal versus agent considerations (ASU 2016-08), identifying performance obligations and licensing (ASU 2016-10), a
revision of certain SEC staff observer comments (ASU 2016-11), implementation guidance (ASU 2016-12), and technical corrections
and improvements (ASU 2016-20). ASU 2014-09 is a comprehensive new revenue recognition standard that supersedes nearly all
revenue recognition guidance under GAAP, provides enhancements to the quality and consistency of how revenue is reported, and
improves comparability in financial statements presented under GAAP and International Financial Reporting Standards. This new
standard is effective for fiscal years and interim periods within those years beginning after December 15, 2017 (our fiscal year 2019).
The adoption of this standard is not expected to have a material impact on our financial condition, results of operations, or cash flows.
42
In November 2015, the FASB issued Accounting Standards Update No. 2015-17 “Balance Sheet Classifications of Deferred
Taxes.” The standard simplifies the presentation of deferred income taxes under U.S. GAAP by requiring that all deferred tax assets
and liabilities be classified as non-current. The Company adopted this standard in the current period and adjusted the prior period for
consistency.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” as amended in July 2018 by ASU No. 2018-10,
“Codification Improvements to Topic 842, Leases,” and ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements,” that
replaces existing lease guidance. The new standard is intended to provide enhanced transparency and comparability by requiring
lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. The new guidance will continue to
classify leases as either finance or operating, with classification affecting the pattern of expense recognition on the statement of
income. These ASUs are effective for fiscal years beginning after December 15, 2018 (our fiscal year 2020). The Company is
currently evaluating the impact of the provisions of these ASUs and anticipates the recognition of additional assets and corresponding
liabilities relating to these leases on its balance sheet, but does not expect the adjustment to be material assuming no changes in lease
activity.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment.” This update eliminates a step from impairment testing to simplify the process, particularly for entities with a
zero or negative carrying amount for an intangible asset, and is effective for annual reporting periods beginning after December 15,
2019 (our fiscal year 2021). The adoption of this update is not expected to have a material impact on our financial condition, results of
operations, or cash flows.
In June 2018, the FASB issued ASU No. 2018-07, “Compensation—Stock Compensation (Topic 718): Improvements to
Nonemployee Share-Based Payment Accounting,” which allows companies to account for nonemployee awards in the same manner
as employee awards. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those
annual periods (our fiscal year 2019). The adoption of this update is not expected to have a material impact on our financial condition,
results of operations, or cash flows.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes
to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates such disclosures as the amount of and reasons for
transfers between Level 1 and Level 2 of the fair value hierarchy and adds new disclosure requirements for Level 3 measurements. It
is effective for fiscal years beginning after December 15, 2019 (our fiscal year 2021), with early adoption permitted for any eliminated
or modified disclosures. The Company is evaluating the effect of adopting this new accounting guidance, but does not expect adoption
will have a material impact on the Company’s financial statements or disclosures.
43
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements:
Management’s Annual Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
Balance Sheets
Statements of Income
Statements of Changes in Stockholders’ Equity
Statements of Cash Flows
Notes to Financial Statements
45
46
48
49
50
51
52
53
44
Management’s Annual Report on Internal Control over Financial Reporting
Management of Hennessy Advisors, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended.
The Company’s 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.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of
September 30, 2018, 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, the Company’s management concluded that, as of
September 30, 2018, the Company’s internal control over financial reporting was effective based on those criteria.
Our independent registered public accounting firm, Marcum LLP, audited the effectiveness of our internal control over financial
reporting. Marcum LLP’s attestation report appears in Item 8, “Financial Statements and Supplementary Data,” below.
45
Report of Independent Registered Public Accounting Firm
on Internal Control Over Financial Reporting
To the Stockholders and Board of Directors of
Hennessy Advisors, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Hennessy Advisors, Inc.‘s (the “Company”) internal control over financial reporting as of September 30, 2018, based
on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of September 30, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the balance sheets as of September 30, 2018 and 2017 and the related statements of income, changes in stockholders’
equity, and cash flows for the years then ended of the Company and our report dated November 28, 2018 expressed an unqualified
opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Annual Report on
Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
46
Because of the 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 the risk that controls may become inadequate because of changes in
conditions, or that degree of compliance with the policies or procedures may deteriorate.
/s/ Marcum LLP
Marcum LLP
Irvine, CA
November 28, 2018
47
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
of Hennessy Advisors, Inc.:
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Hennessy Advisors, Inc. (the “Company”) as of September 30, 2018 and 2017,
and the related statements of income, changes in stockholders’ equity and cash flows for each of the two years in the period ended
September 30, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of September 30, 2018 and 2017, and the
results of its operations and its cash flows for each of the two years in the period ended September 30, 2018, in conformity with
accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company’s internal control over financial reporting as of September 30, 2018, based on the criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in 2013 and our report dated November 28, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ Marcum LLP
Marcum LLP
We have served as the Company’s auditor since 2004.
Irvine, CA
November 28, 2018
48
Hennessy Advisors, Inc.
Balance Sheets
(In thousands, except share and per share amounts)
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 $1,154 and $922, respectively
Management contracts
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accrued liabilities and accounts payable
Income taxes payable
Deferred rent
Current portion of long-term debt, net of debt issuance costs
Total current liabilities
Long-term debt, net of debt issuance costs and current portion
Deferred income tax liability, net
Total liabilities
Commitments and Contingencies (Note 10)
Stockholders’ equity:
Common stock, no par value, 22,500,000 shares authorized:
7,897,145 shares issued and outstanding at September 30, 2018, and 7,776,563 at
September 30, 2017
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
September 30,
2018
September 30,
2017
$
25,395 $
9
4,259
668
413
15,700
8
4,325
1,614
584
30,744
22,231
382
78,163
191
254
74,628
145
$
109,480 $
97,258
$
7,083 $
558
166
4,228
7,353
676
202
4,228
12,035
12,459
17,500
8,965
21,728
11,541
38,500
45,728
16,783
54,197
14,943
36,587
70,980
51,530
$
109,480 $
97,258
See accompanying notes to financial statements
49
Hennessy Advisors, Inc.
Statements of Income
(In thousands, except share and per share amounts)
Revenue
Investment advisory fees
Shareholder service fees
Total revenue
Operating expenses
Compensation and benefits
General and administrative
Mutual fund distribution
Sub-advisor 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
(prior periods restated for stock split, see Note 9):
Basic
Diluted
Cash dividends declared per share:
Fiscal Year Ended September 30,
2018
2017
$
50,235 $
4,355
48,297
4,658
54,590
52,955
13,035
5,864
524
10,461
231
30,115
24,475
1,227
(145)
23,393
2,778
12,862
5,882
274
9,225
219
28,462
24,493
1,256
(12)
23,249
8,307
$
$
$
20,615 $
14,942
2.64 $
2.61 $
1.94
1.92
7,808,421 7,691,937
7,890,758 7,790,527
$
0.39 $
0.29
See accompanying notes to financial statements
50
Hennessy Advisors, Inc.
Statements of Changes in Stockholders’ Equity
Fiscal Years Ended September 30, 2018 and 2017
(In thousands, except share data)
Common Stock
Retained
Earnings
Total
Stockholders’
Equity
Balance at September 30, 2016
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 2015 Dividend Reinvestment and
Stock Purchase Plan
Shares issued for dividend reinvestment pursuant to the 2015 Dividend Reinvestment
and Stock Purchase Plan
Stock-based compensation
Adjustment for fractional shares paid in cash in connection with stock split
Balance at September 30, 2017
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 2015 and 2018 Dividend
Reinvestment and Stock Purchase Plans
Shares issued for dividend reinvestment pursuant to the 2015 and 2018 Dividend
Reinvestment and Stock Purchase Plans
Stock-based compensation
Employee restricted stock forfeiture
Balance at September 30, 2018
Number
Amount
7,661,969 $ 13,279 $ 24,052 $
— — 14,942
— —
(2,243)
152,322 — —
(39,820)
(489)
(164)
37,331
14,942
(2,243)
—
(653)
183
3 —
3
1,965
33 —
— 2,118 —
(56)
(1) —
7,776,563 $ 14,943 $ 36,587 $
— — 20,615
— —
(2,928)
161,501 — —
(44,507)
(583)
(77)
33
2,118
(1)
51,530
20,615
(2,928)
—
(660)
873
16 —
16
2,715
45 —
— 2,413 —
—
(51) —
45
2,413
(51)
7,897,145 $ 16,783 $ 54,197 $
70,980
See accompanying notes to financial statements
51
Hennessy Advisors, Inc.
Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
Deferred income taxes
Stock-based compensation
Unrealized gains on marketable securities
Interest expense associated with debt issuance cost
RSU forfeiture
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
Deferred rent
Fiscal Year Ended September 30,
2018
2017
$
20,615 $
14,942
231
(2,576)
2,413
(1)
147
(51)
66
946
171
(6)
(270)
(118)
(36)
219
1,717
2,118
—
147
—
(95)
(439)
(4)
4
775
292
170
Net cash provided by operating activities
21,531
19,846
Cash flows from investing activities:
Purchases of property and equipment
Payments related to management contracts
Cash flows from financing activities:
Net cash used in investing activities
Principal payments on bank loan
Deferred offering costs
Restricted stock units repurchased for employee tax withholding
Proceeds from shares issued pursuant to the 2015 and 2018 Dividend Reinvestment and Stock
Repurchase Plans
Dividend payments
Cash paid for fractional shares in connection with stock split
Net cash 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
Interest
(360)
(3,535)
(3,895)
(4,375)
(39)
(660)
16
(2,883)
—
(7,941)
9,695
15,700
(176)
(269)
(445)
(4,375)
—
(653)
3
(2,210)
(1)
(7,236)
12,165
3,535
$
25,395 $
15,700
$
$
4,443 $
1,096 $
6,680
1,109
See accompanying notes to financial statements
52
(1) Summary of the Organization, Description of Business and Significant Accounting Policies
(a) Organization and Description of Business
Notes to Financial Statements
Hennessy Advisors, Inc. (the “Company”) was founded on February 1, 1989, as a California corporation under the name
Edward J. Hennessy, Incorporated. In 1990, the Company became a registered investment advisor, and on April 15, 2001, the
Company changed its name to Hennessy Advisors, Inc.
The Company’s operating activities consist primarily of providing investment advisory services to 14 open-end mutual
funds branded as the Hennessy Funds. The Company serves as the investment advisor to all classes of the Hennessy Cornerstone
Growth Fund, the Hennessy Focus Fund, the Hennessy Cornerstone Mid Cap 30 Fund, the Hennessy Cornerstone Large Growth
Fund, the Hennessy Cornerstone Value Fund, the Hennessy Total Return Fund, the Hennessy Equity and Income Fund, the
Hennessy Balanced Fund, the Hennessy Gas Utility Fund, the Hennessy Japan Fund, the Hennessy Japan Small Cap Fund, the
Hennessy Large Cap Financial Fund, the Hennessy Small Cap Financial Fund, and the Hennessy Technology Fund. The
Company also provides shareholder services to the entire family of the Hennessy Funds.
The Company’s operating revenues consist of contractual investment advisory and shareholder service fees paid to it by
the Hennessy Funds. The Company earns investment advisory fees from each Hennessy Fund by, among other things:
•
acting as portfolio manager for the fund or overseeing the sub-advisor acting as portfolio manager for the fund,
which includes managing the composition of the fund’s portfolio (including the purchase, retention, and
disposition of portfolio securities in accordance with the fund’s investment objectives, policies, and restrictions),
seeking best execution for the fund’s portfolio, managing the use of soft dollars for the fund, and managing proxy
voting for the fund;
•
performing a daily reconciliation of portfolio positions and cash for the fund;
• monitoring the fund’s compliance with its investment objectives and restrictions and federal securities laws;
•
•
•
performing activities such as maintaining a compliance program, conducting ongoing reviews of the compliance
programs of the fund’s service providers (including its sub-advisor, as applicable), conducting on-site visits to the
fund’s service providers (including its sub-advisor, as applicable), monitoring incidents of abusive trading
practices, reviewing fund expense accruals, payments, and fixed expense ratios, evaluating insurance providers for
fidelity bond, D&O/E&O, and cybersecurity insurance coverage, conducting employee compliance training,
reviewing reports provided by service providers, maintaining books and records, and preparing an annual
compliance report for the Board of Trustees of Hennessy Funds Trust (the “Funds’ Board of Trustees”);
if applicable, overseeing the selection and continued employment of the fund’s sub-advisor, monitoring such sub-
advisor’s adherence to the fund’s investment objectives, policies, and restrictions, and reviewing the fund’s
investment performance;
overseeing service providers that provide accounting, administration, distribution, transfer agency, custodial, sales,
marketing, public relations, audit, information technology, and legal services to the fund;
53
• maintaining in-house marketing and distribution departments on behalf of the fund;
•
•
preparing or directing the preparation of all regulatory filings for the fund, including writing and annually updating
the fund’s prospectus and related documents;
preparing or reviewing a written summary of the fund’s performance for the most recent 12-month period for each
annual report of the fund;
• monitoring and overseeing the accessibility of the fund on third-party platforms;
•
•
•
paying the incentive compensation of the fund’s compliance officers and employing other staff such as legal,
marketing, national accounts, distribution, sales, administrative, and trading oversight personnel, as well as
management executives;
providing a quarterly compliance certification to Hennessy Funds Trust; and
preparing or reviewing materials for the Funds’ Board of Trustees, presenting or leading discussions to or with the
Funds’ Board of Trustees, preparing or reviewing meeting minutes, and arranging for training and education of the
Funds’ Board of Trustees.
The Company earns shareholder service fees from Investor Class shares of the Hennessy Funds by, among other things,
maintaining an “800” number that the current investors of the Hennessy Funds may call to ask questions about the Hennessy
Funds or their accounts, or to get help with processing exchange and redemption requests or changing account options. These
fee revenues are earned and calculated daily by the Hennessy Funds’ accountants at U.S. Bank Global Fund Services and are
subsequently reviewed by management. The fees are computed and billed monthly, at which time they are recognized in
accordance with Accounting Standard Codification 605 — Revenue Recognition.
Effective February 28, 2017, the Company waives fees with respect to the Hennessy Technology Fund to comply with a
contractual expense ratio limitation. The fee waiver is calculated daily by the Hennessy Funds’ accountants at U.S. Bank Global
Fund Services, is subsequently reviewed by management, and is then charged to expense monthly by the Company as an offset
to revenue. The waived fee is deducted from investment advisory fee income and reduces the aggregate amount of advisory fees
received by the Company in the subsequent month. To date, the Company has only waived fees based on contractual
obligations, but the Company has the ability to waive fees at its discretion. Any decision to waive fees voluntarily would not
apply to previous periods, but would only apply on a going forward basis.
The Company’s contractual agreements for investment advisory and shareholder services provide persuasive evidence that
an arrangement exists with fixed and determinable fees, and the services are rendered daily. The collectability is deemed
probable as the fees are received from the Hennessy Funds in the month subsequent to the month in which the services are
provided.
(b) Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid investments with original maturities of three months
or less that are readily convertible into cash.
54
(c)
Investments
Investments in highly liquid financial instruments with remaining maturities of less than one year are classified as short-
term investments. Financial instruments with remaining maturities of greater than one year are classified as long-term
investments. A table of investments is included in Footnote 4.
The Company holds investments in publicly traded mutual funds, which are accounted for as trading securities.
Accordingly, unrealized gains of less than $1,000 per year were recognized in operations for fiscal years 2018 and 2017.
Dividend income is recorded on the ex-dividend date. Purchases and sales of marketable securities are recorded on a trade
date basis, and realized gains and losses recognized on sale are determined on a specific identification/average cost basis.
(d) Management Contracts Purchased
Throughout its history, the Company has completed nine purchases of assets related to the management of 28 different
mutual funds, some of which were reorganized into already existing Hennessy Funds. In accordance with the Financial
Accounting Standards Board (the “FASB”) guidance, the Company periodically reviews the carrying value of its purchased
management contracts to determine if any impairment has occurred. The fair value of management contracts is based on
management estimates and assumptions, including third-party valuations that utilize appropriate valuation techniques. The fair
value of the management contracts was estimated by applying the income approach. It is the opinion of the Company’s
management that there was no impairment as of September 30, 2018 or 2017.
Under the FASB guidance on “Intangibles – Goodwill and Other,” intangible assets that have indefinite useful lives are
not amortized but are tested at least annually for impairment. The Company reviews the life of the management contracts each
reporting period to determine if they continue to have an indefinite useful life. The Company considers the mutual fund
management contracts to be intangible assets with an indefinite useful life and no impairment as of September 30, 2018.
Most recently, the Company purchased the assets related to the management of the Rainier Large Cap Equity Fund, the
Rainier Mid Cap Equity Fund, and the Rainier Small/Mid Cap Equity Fund (collectively, the “Rainier Funds”). In the aggregate,
the Company paid $3.1 million for approximately $375 million of assets related to management of the Rainier Funds. The
transaction, which was completed in two stages, was consummated in accordance with the terms and conditions of the
Transaction Agreement, dated as of May 10, 2017, as amended, between the Company, Manning & Napier Group, LLC, and
Rainier Investment Management, LLC (“Rainier”). The total capitalized costs related to the purchases was $3.5 million.
The details of the first stage of the transaction, which closed on December 1, 2017, are as follows:
•
•
The Company purchased the assets related to the management of (i) the Rainier Large Cap Equity Fund, which
were reorganized into the Hennessy Cornerstone Large Growth Fund, and (ii) the Rainier Mid Cap Equity Fund,
which were reorganized into the Hennessy Cornerstone Mid Cap 30 Fund.
The purchase price of $1.0 million was funded with available cash and was based on the total net assets under
management of the Rainier Large Cap Equity Fund and the Rainier Mid Cap Equity Fund as measured at the close
of business on November 30, 2017.
•
The amount of the purchased assets under management as of the closing date was approximately $122 million.
55
The details of the second stage of the transaction, which closed on January 12, 2018, are as follows:
•
•
•
The Company purchased the assets related to the management of the Rainier Small/Mid Cap Equity Fund and
reorganized them into the Hennessy Cornerstone Mid Cap 30 Fund.
The purchase price of $2.1 million was funded with available cash and was based on the total net assets under
management of the Rainier Small/Mid Cap Equity Fund as measured at the close of business on January 11, 2018.
The amount of the purchased assets under management as of the closing date was approximately $253 million.
(e) Fair Value of Financial Instruments
The FASB guidance on “Disclosures about Fair Value of Financial Instruments” requires disclosures regarding the fair
value of all financial instruments for financial statement purposes. The estimates presented in these financial statements are
based on information available to management as of September 30, 2018 and 2017. Accordingly, the fair values presented in the
Company’s financial statements as of September 30, 2018 and 2017, may not be indicative of amounts that could be realized on
disposition of the financial instruments. The fair value of receivables, accounts payable and notes payable has been estimated at
carrying value due to the short maturity of these instruments. The fair value of purchased management contracts is estimated at
the cost of the purchase. The fair value of marketable securities and money market accounts is based on closing net asset values
as reported by securities exchanges registered with the SEC.
(f)
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, generally one to ten years.
(g)
Income Taxes
On December 22, 2017, during the Company’s first fiscal quarter, the Tax Cuts and Jobs Act of 2017 (the “2017 Tax
Act”) was enacted into law. Among other changes to various corporate income tax provisions within the existing Internal
Revenue Code, the 2017 Tax Act reduced the federal corporate income tax rate from 35% to 21%, effective January 1, 2018.
Because the Company’s fiscal year ends on September 30, it applied a blended statutory tax rate of 24.5% for fiscal year 2018,
which was based on the applicable tax rates and the corresponding number of days in its fiscal year 2018 before and after the
effective date of the tax rate change. Under accounting principles generally accepted in the United States, the Company is
required to recognize the effects of changes in tax laws and tax rates on deferred tax liabilities in the period in which the new
legislation is enacted.
On the same day the 2017 Tax Act was enacted, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 118 (“SAB 118”), which permits companies a period of one year from the enactment date of the 2017 Tax Act to
account for the resulting tax effects. Any required adjustment would be included in “net earnings from continuing operations” as
an adjustment to income tax expense in the reporting period during which such adjustment is identified. In the Company’s first
fiscal quarter, based on available information, it estimated the impact of the reduced corporate tax rate and re-measured its
deferred tax liability. As a result, the Company recorded a one-time, non-cash benefit to income tax expense of approximately
$4.0 million during its first fiscal quarter, or $0.54 in diluted earnings per share.
56
The Company’s effective income tax rates for fiscal years 2018 and 2017 were 11.9% and 35.7%, respectively. The
effective income tax rate was lower for fiscal year 2018 due to the 2017 Tax Act.
The Company, under the FASB guidance on “Accounting for Uncertainty in Income Tax,” uses a recognition threshold
and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected
to be taken in a company’s income tax return and also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. The Company utilizes a two-step approach for evaluating uncertain tax
positions. The first step, recognition, requires the Company to determine if the weight of available evidence indicates that a tax
position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes, if any.
The second step, measurement, is based on the largest amount of benefit that is more likely than not to be realized on ultimate
settlement.
The Company believes the positions taken on the tax returns are fully supported, but tax authorities may challenge these
positions and they may not be fully sustained on examination by the relevant tax authorities. Accordingly, the income tax
provision includes amounts intended to satisfy assessments that may result from these challenges. Determining the income tax
provision for these potential assessments and recording the related effects requires management judgement and estimates. The
amounts ultimately paid on resolution of an audit could be materially different from the amounts previously included in the
income tax provision and, therefore, could have a material impact on our income tax provision, net income, and cash flows. The
accrual for uncertain tax positions is attributable primarily to uncertainties concerning the tax treatment of our domestic
operations, including the allocation of income among different jurisdictions. For a further discussion on taxes, refer to Note 8 to
the Financial Statements and Supplementary Data.
The Company is subject to income tax in the U.S. federal jurisdiction and multiple state jurisdictions. Following is a list of
jurisdictions that the Company has identified as its major tax jurisdictions with the tax years that remain open and subject to
examination by the appropriate governmental agencies marked:
2014
2017
2015
2016
X X X
X X X X
X
X X
X
X
X X X
X X
X X X
X X
X X
X X X
X X
X X X
X X
X
Tax Jurisdiction
United States
California
Connecticut
District of Columbia
Florida
Georgia
Illinois
Maryland
Massachusetts
Michigan
Minnesota
New Hampshire
New York
North Carolina
Texas
Wisconsin
57
The Company did have a California Franchise Tax Board (“FTB”) audit in process as of September 30, 2018, relating to
the details of the Company’s sales factors and federal audit adjustments. The Company has worked with the FTB to resolve all
audit issues. In October, following the end of our fiscal year 2018, a final audit determination was issued (see further discussion
in Footnote 15 to the Financial Statements under Item 8, “Financial Statements and Supplementary Data,” below).
For state tax jurisdictions with unfiled tax returns, the statute of limitations will remain open indefinitely.
(h) Earnings Per Share
Basic earnings per share is determined by dividing net earnings by the weighted average number of shares of common
stock outstanding, while diluted earnings per share is determined by dividing net earnings by the weighted average number of
shares of common stock outstanding adjusted for the dilutive effect of common stock equivalents, which consist of restricted
stock units (“RSUs”).
All common stock equivalents were dilutive and therefore included in the diluted earnings per share calculation for fiscal
years 2018 and 2017.
On January 26, 2017, the Company’s Board of Directors declared a 3-for-2 stock split, which was effected on March 6,
2017, for shareholders of record as of February 10, 2017. All disclosures in this report relating to shares of common stock,
RSUs, and per-share data have been adjusted to reflect this stock split.
(i)
Equity
Amended and Restated 2013 Omnibus Incentive Plan
The Company has adopted, and the Company’s shareholders have approved, the Amended and Restated 2013 Omnibus
Incentive Plan (the “Omnibus Plan”), providing for the issuance of options, stock appreciation rights, restricted stock, RSUs,
performance awards, and other equity awards for the purpose of attracting and retaining executive officers, key employees, and
outside directors and advisors and increasing shareholder value. The maximum number of shares that may be issued under the
Omnibus Plan is 50% of the number of outstanding shares of common stock of the Company, subject to adjustment by the
compensation committee of the Company’s Board of Directors upon the occurrence of certain events. The 50% limitation does
not invalidate any awards made prior to a decrease in the number of outstanding shares, even if such awards have result or may
result in shares constituting more than 50% of the outstanding shares being available for issuance under the Omnibus Plan.
Shares available under the Omnibus Plan that are not awarded in one particular year may be awarded in subsequent years.
The compensation committee of the Company’s Board of Directors has the authority to determine the awards granted
under the Omnibus Plan, including among other things, the individuals who receive the awards, the times when they receive
them, vesting schedules, performance goals, whether an option is an incentive or nonqualified option and the number of shares
to be subject to each award. However, no participant may receive options or stock appreciation rights under the Omnibus Plan
for an aggregate of more than 75,000 shares in any calendar year. The exercise price and term of each option or stock
appreciation right is fixed by the compensation committee except that the exercise price for each stock option that is intended to
qualify as an incentive stock option must be at least equal to the fair market value of the stock on the date of grant and the term
of the option cannot exceed 10 years. In the case of an incentive stock option granted to a 10% or more shareholder, the exercise
price must be at least 110% of the fair market value on the date of grant and cannot exceed five years. Incentive stock options
may be granted only within 10 years from the date of adoption of the Omnibus Plan. The aggregate fair market value
(determined at the time the option is granted) of shares with respect to which incentive stock options may be granted to any one
individual, which stock options are exercisable for the first time during any calendar year, may not exceed $100,000. An
optionee may, with the consent of the compensation committee, elect to pay for the shares to be received upon exercise of his or
her options in cash, shares of common stock or any combination thereof.
58
Under the Omnibus Plan, participants may be granted RSUs, representing an unfunded, unsecured right to receive a share
of the Company’s common stock on the date specified in the recipient’s award. The Company issues new shares of its common
stock when it is required to deliver shares to an RSU recipient. The RSUs granted under the Omnibus Plan vest over four years,
at a rate of 25% per year. The Company recognizes stock-based compensation expense on a straight-line basis over the four-year
vesting term of each award. There were 127,825 and 130,900 RSUs granted during fiscal years 2018 and 2017, respectively.
All compensation costs related to RSUs vested during fiscal years 2018 and 2017 have been recognized in the financial
statements.
The Company has available up to 3,948,573 shares of the Company’s common stock in respect of granted stock awards, in
accordance with terms of the Omnibus Plan.
RSU activity for fiscal years 2018 and 2017 was as follows:
Non-vested Balance at September 30, 2016
Granted
Vested (1)
Forfeited
Non-vested Balance at September 30, 2017
Granted
Vested (1)
Forfeited
Non-vested Balance at September 30, 2018
RSU Activity
Fiscal Years Ended September 30, 2018 and 2017
Number of Restricted
Share Units
Weighted Avg. Fair
Value Per Share at
Each Date
379,464 $
130,900 $
(152,073) $
— $
358,291 $
127,825 $
(149,978) $
(11,367) $
324,771 $
16.19
14.38
13.93
—
16.48
13.03
15.75
16.62
15.43
(1) The number of vested RSUs includes partially vested shares. Shares of common stock have not been issued for the partially
vested shares, but the related compensation expense has been recognized. There were 116,994 and 112,502 net shares of
common stock issued for vested and issued RSUs in fiscal years 2018 and 2017, respectively.
59
RSU Compensation
Fiscal Year Ended September 30, 2018
Total expected compensation expense related to RSUs
Compensation expense recognized at reporting date
(In thousands)
13,955
$
(8,945)
Unrecognized compensation expense related to RSUs at reporting date
$
5,010
As of September 30, 2018, there was $5.0 million of total RSU compensation expense related to non-vested awards not
yet recognized that is expected to be recognized over a weighted-average vesting period of 2.9 years.
Dividend Reinvestment and Stock Purchase Plan
In January 2018, the Company adopted an updated Dividend Reinvestment and Stock Purchase Plan (the “DRSPP”),
replacing the previous Dividend Reinvestment and Stock Purchase Plan established in March 2015, to provide shareholders and
new investors with a convenient and economical means of purchasing shares of the Company’s common stock and reinvesting
cash dividends paid on the Company’s common stock. Under the DRSPP and its predecessor, the Company issued 3,588 and
2,148 shares of common stock in fiscal years 2018 and 2017, respectively. The maximum number of shares that may be issued
under the DRSPP is 1,550,000 shares, of which 1,546,963 shares remain available for issuance.
Stock Buyback Program
In August 2010, the Company adopted a stock buyback program. The program provides that the Company may
repurchase up to 1,500,000 shares of its common stock and has no expiration date. Share repurchases may be made in the open
market, in privately negotiated transactions, or otherwise. The Company did not repurchase any shares pursuant to the stock
buyback program during fiscal years 2018 and 2017.
(j) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
(2)
Investment Advisory Agreements
The Company has management contracts with Hennessy Funds Trust, under which it provides investment advisory
services to all classes of the family of Hennessy Funds.
The management contracts must be renewed annually (except in limited circumstances) by (i) the Funds’ Board of
Trustees or by the vote of a majority of the outstanding shares of the applicable Hennessy Fund and (ii) by the vote of a majority
of the disinterested trustees. If the management contracts are not renewed annually as described above, they terminate
automatically. There are two additional circumstances in which the management contracts may terminate. First, the management
contracts would automatically terminate if the Company assigned them to another advisor (assignment includes “indirect
assignment,” which is the transfer of the Company’s common stock in sufficient quantities deemed to constitute a controlling
block). Second, each management contract may be terminated prior to its expiration upon 60 days’ notice by either the
Company or the applicable Hennessy Fund.
60
As provided in the management contracts with each of the Hennessy Funds, the Company receives investment advisory
fees monthly based on a percentage of such fund’s average daily net assets.
The Company has entered into sub-advisory agreements for the Hennessy Focus Fund, the Hennessy Equity and Income
Fund, the Hennessy Japan Fund, and the Hennessy Japan Small Cap Fund. Under each of these sub-advisory agreements, the
sub-advisor is responsible for the investment and re-investment of the assets of the applicable Hennessy Fund in accordance
with the terms of such agreement and the applicable Hennessy Fund’s Prospectus and Statement of Additional Information. The
sub-advisors are subject to the direction, supervision, and control of the Company and the Funds’ Board of Trustees. The sub-
advisory agreements must be renewed annually in the same manner as, and are subject to the same termination provisions as, the
management contracts.
In exchange for the sub-advisory services, the Company (not the Hennessy Funds) pays sub-advisor fees to the sub-
advisors based on the amount of each applicable Hennessy Fund’s average daily net assets.
(3) Fair Value Measurements
The Company applies the FASB standard “Fair Value Measurements” for all financial assets and liabilities, which
establishes a framework for measuring fair value and expands disclosures about fair value measurements. The standard defines
fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.” It also establishes a fair value hierarchy consisting of the following three “levels”
that prioritize the inputs to the valuation techniques used to measure fair value:
•
•
•
Level 1 – Unadjusted, quoted prices in active markets for identical assets or liabilities that an entity has the ability
to access at the measurement date;
Level 2 – Other significant observable inputs (including, but not limited to, quoted prices in active markets for
similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities,
and model-derived valuations in which all significant inputs and significant value drivers are observable in active
markets); and
Level 3 – Significant unobservable inputs (including the entity’s own assumptions about what market participants
would use to price the asset or liability based on the best available information) when observable inputs are not
available.
61
Based on the definitions, the following table represents the Company’s assets categorized in the Level 1 to 3 hierarchies as
of the end of fiscal years 2018 and 2017:
Money market fund deposits
Mutual fund investments
Total
Amounts included in:
Cash and cash equivalents
Investments in marketable securities
Total
Money market fund deposits
Mutual fund investments
Total
Amounts included in:
Cash and cash equivalents
Investments in marketable securities
Total
Fair Value Measurements at September 30, 2018
(In thousands)
Level 1
Level 2
Level 3
$
22,978 $
— $ — $
9 — —
Total
22,978
9
$
22,987 $
— $
— $
22,987
$
22,978 $
— $
— $
9 — —
22,978
9
$
22,987 $
— $
— $
22,987
Fair Value Measurements at September 30, 2017
(In thousands)
Level 1
Level 2
Level 3
$
13,832 $
— $
— $
8 — —
Total
13,832
8
$
13,840 $
— $
— $
13,840
$
13,832 $
— $
— $
8 — —
13,832
8
$
13,840 $
— $
— $
13,840
There were no transfers between levels during either of such fiscal years.
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(4)
Investments
The cost, gross unrealized gains, gross unrealized losses, and fair market value of the Company’s trading investments at
the end of fiscal years 2018 and 2017 were as follows:
2018
Mutual fund investments
Total
2017
Mutual fund investments
Total
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Cost
Total
(In thousands)
$ 4 $
4
20 $
(15) $
9
20
(15) 9
$ 4 $
4
18 $
(14) $
8
18
(14) 8
The mutual fund investments are included as a separate line item in current assets on the Company’s balance sheets.
(5) Property and Equipment
Property and equipment were comprised of the following for fiscal years 2018 and 2017:
Equipment
Leasehold improvements
Furniture and fixtures
IT infrastructure
Software
Less: accumulated depreciation
September 30,
2018
2017
(In thousands)
$ 393
154
385
66
538
1,536
(1,154)
$ 214
123
371
61
407
1,176
(922)
$ 382
$ 254
During fiscal years 2018 and 2017, depreciation expense was $0.23 million and $0.22 million, respectively.
(6) Management Contracts
The costs related to the Company’s purchase of assets related to management contracts are capitalized as incurred. The
management contract asset was $78.2 million as of the end of fiscal year 2018, compared to $74.6 million at the end of fiscal
year 2017. The costs are defined as an “intangible asset” per the FASB standard “Intangibles – Goodwill and Other.” The
management contract purchase costs include legal fees, shareholder vote fees and percent of asset costs to purchase the assets
related to management contracts.
63
(7) Bank Loan
The Company has an outstanding bank loan with U.S. Bank National Association (“U.S. Bank”), as administrative agent
and as a lender, and California Bank & Trust, as syndication agent and as a lender. On September 17, 2015, in connection with
the repurchase of up to 1,500,000 shares of the Company’s common stock pursuant to its self-tender offer, the Company and its
lenders entered into a term loan agreement with an original principal amount of $35.0 million (consisting of a $20.0 million
promissory note to U.S. Bank and a $15.0 million promissory note to California Bank & Trust). On September 19, 2016, the
Company and its lenders entered into an amendment to the term loan agreement to allow the Company to purchase the assets
related to the management of the Westport Fund and the Westport Select Cap Fund (each of which merged into the Hennessy
Cornerstone Mid Cap 30 Fund). On November 16, 2017, the Company and its lenders entered into an amendment to the term
loan agreement to revise the excess cash flow prepayment requirements. On November 30, 2017, the Company and its lenders
entered into an amendment to the term loan agreement to allow the Company to purchase the assets related to the management
of the Rainier Funds. On September 20, 2018, the Company and its lenders entered into an amendment to the term loan
agreement to (i) extend the maturity date of the loan by one year, (ii) allow the Company to purchase the assets related to the
management of the BP Capital TwinLine Energy Fund and the BP Capital TwinLine MLP Fund (collectively, the “BP Funds”),
(iii) add representations and covenants relating to customer due diligence requirements for financial institutions, and (iv) add
representations regarding matters related to the Employee Retirement Income Security Act of 1974, as amended.
The term loan agreement, as amended September 20, 2018, requires 60 monthly payments in the amount of $364,583 plus
interest calculated based on one of the following, at the Company’s option:
(1) the sum of (a) a margin that ranges from 2.75% to 3.25%, depending on the Company’s ratio of consolidated debt to
consolidated earnings before interest, taxes, depreciation and amortization (excluding, among other things, certain non-cash
gains and losses) (“EBITDA”), plus (b) the LIBOR rate; or
(2) the sum of (a) a margin that ranges from 0.25% to 0.75%, depending on the Company’s ratio of consolidated debt to
consolidated EBITDA, plus (b) the highest rate out of the following three rates (i) the prime rate set by U.S. Bank from time to
time, (ii) the Federal Funds Rate plus 0.50%, or (iii) the one-month LIBOR rate plus 1.00%.
From the effective date of the term loan agreement through February 29, 2016, the interest rate in effect was U.S. Bank’s
prime rate plus a margin based on the Company’s ratio of consolidated debt to consolidated EBITDA. Effective March 1, 2016,
the Company converted $32.8 million of its principal loan balance to a one-month LIBOR contract, which has been renewed
each subsequent month. As of September 30, 2018, the effective rate is 4.854%, which is comprised of the LIBOR rate of
2.104% as of September 1, 2018, plus a margin of 2.75% based on the Company’s ratio of consolidated debt to consolidated
EBITDA as of June 30, 2018. The Company intends to renew the one-month LIBOR contract on a monthly basis as long as the
LIBOR-based interest rate remains favorable compared to the prime rate-based interest rate.
All borrowings under the term loan agreement are secured by substantially all of the Company’s assets. The final
installment of the then-outstanding principal and interest is due September 17, 2020. The note maturity schedule is as follows:
Fiscal Year Ended September 30,
2019
2020
Total
(In thousands)
$
4,375
17,500
$
21,875
64
The term loan agreement includes certain reporting requirements and loan covenants requiring the maintenance of
specified financial ratios. The Company was in compliance for fiscal years 2018 and 2017.
The Company did an evaluation of the debt modification and determined that the portion of the loan refinanced with the
same creditor (the $20.0 million with U.S. Bank) is not considered “substantially different” from the original loan with U.S.
Bank per the conditions set forth in Accounting Standards Codification 470-50 — Debt; Modifications and Extinguishments.
Furthermore, due to the variable nature of the interest rate, this feature of the loan was examined for potential bifurcation as an
embedded derivative, and it was determined that the feature does not require bifurcation from the host contract.
In connection with securing the financings discussed above, the Company incurred loan costs in the amount of
$0.41 million. These costs were reclassified to offset debt liability per Accounting Standards Update (“ASU”) No. 2015-03,
“Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs,” as of March 31,
2017, and the balance is being amortized on a straight-line basis, which approximates the effective interest basis, over
60 months. Amortization expense during for fiscal years 2018 and 2017 was $0.15 million for each period. The unamortized
balance of the loan fees was $0.15 million as of September 30, 2018.
In accordance with ASU No. 2015-03, the amortization expense of the debt issuance cost of $0.15 million per year is
included in interest expense, and the prior period has been reclassified for consistency.
(8)
Income Taxes
As of both September 30, 2018 and 2017, the Company’s gross liability for unrecognized tax benefits related to uncertain
tax positions remained the same at $0.35 million, of which $0.2 million would decrease the Company’s effective income tax rate
if the tax benefits were recognized.
The Company’s net liability for accrued interest and penalties was $0.14 million as of September 30, 2018. The Company
has elected to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense.
The total amount of unrecognized tax benefits can change due to final regulations, audit settlements, tax examinations
activities, lapse of applicable statutes of limitations and the recognition and measurement criteria under the guidance related to
accounting for uncertainly in income taxes. The Company is unable to estimate what this change could be within the next 12
months, but does not believe it would be material to its financial statements.
65
Income tax expense was comprised of the following for fiscal years 2018, and 2017:
Current
Federal
State
Deferred
Federal
State
Total
2018
2017
(In thousands)
$ 4,420
935
5,355
$ 6,088
493
6,581
(3,150)
573
1,606
120
(2,577)
1,726
$ 2,778
$ 8,307
The principal reasons for the differences from the federal statutory rate are as follows:
Federal tax at statutory rate
State taxes, net of federal benefit
Permanent and other differences
Adjustment to beginning deferred taxes
Uncertain tax position allowance
Amendment of prior period tax return
Stock-based compensation
Other
Effective tax rate
2018
24.5% 35.0%
2017
3.6
0.1
-16.7
—
—
0.1
0.3
2.5
0.2
-0.1
-0.5
-0.7
-0.7
—
11.9% 35.7%
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities as of
September 30, 2018 and 2017, are presented below:
Current deferred tax assets:
Accrued compensation
Stock Compensation
State taxes
Capital loss carryforward
Total deferred tax assets
Less: disallowed capital loss
Net deferred tax assets
Noncurrent deferred tax liabilities:
Property and equipment
Management contracts
Total deferred tax liabilities
Net deferred tax liabilities
2018
2017
(In thousands)
$
$
77
75
212
7
371
(7)
364
130
140
399
10
679
(10)
669
(39)
(9,290)
(24)
(12,186)
(9,329)
(12,210)
$ (8,965)
$ (11,541)
66
(9) Earnings Per Share
The weighted average common shares outstanding used in the calculation of basic earnings per share and weighted
average common shares outstanding, adjusted for common stock equivalents, used in the computation of diluted earnings per
share were as follows for fiscal years 2018 and 2017:
Weighted average common stock outstanding
Common stock equivalents—stock options and RSU’s
September 30,
2018
2017
7,808,421 7,691,937
98,590
82,337
7,890,758 7,790,527
All common stock equivalents were dilutive and therefore included in the diluted earnings per share calculation for fiscal
years 2018 and 2017.
On January 26, 2017, the Company’s Board of Directors declared a 3-for-2 stock split, which was effected on March 6,
2017, for shareholders of record as of February 10, 2017. All disclosures in this report relating to shares of common stock,
RSUs, and per-share data have been adjusted to reflect this stock split.
(10) Commitments and Contingencies
The Company leases office space under non-cancelable operating leases. Its principal executive office is located in
Novato, California, and it has additional offices in Austin, Boston, and Chapel Hill. Certain leases provide for renewal options.
The annual minimum future rental commitments under the Company’s operating leases as of September 30, 2018, are as
follows:
Fiscal Year
2019
2020
2021
Total
(In thousands)
477
$
394
286
$
1,157
(11) Retirement Plan
The Company has a 401(k) retirement plan covering eligible employees. Employees are eligible to participate if they are
over 21 years of age and have completed a minimum of one month of service with 80 hours worked in that month. The
Company also made discretionary profit-sharing contributions of $0.19 million and $0.18 million in fiscal years 2018 and 2017,
respectively. To be eligible for the discretionary profit-sharing contribution, an employee must be over 21 years of age and have
completed a minimum of six consecutive months of service with 80 hours of service in each month.
(12) Concentration of Credit Risk
The Company maintains its cash accounts with three commercial banks that, at times, may exceed federally insured limits.
The amount on deposit at September 30, 2018, exceeded the insurance limits of the Federal Deposit Insurance Corporation by
approximately $2.2 million. In addition, total cash and cash equivalents include $22.9 million held in the First American U.S.
Government Money Market Fund that is not federally insured. The Company believes it is not exposed to any significant credit
risk on cash and cash equivalents.
67
(13) Recently Issued and Adopted Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-
09, Revenue from Contracts with Customers (ASU 2014-09). In addition, the FASB issued related revenue recognition guidance
in five ASUs: principal versus agent considerations (ASU 2016-08), identifying performance obligations and licensing (ASU
2016-10), a revision of certain SEC staff observer comments (ASU 2016-11), implementation guidance (ASU 2016-12), and
technical corrections and improvements (ASU 2016-20). ASU 2014-09 is a comprehensive new revenue recognition standard
that supersedes nearly all revenue recognition guidance under GAAP, provides enhancements to the quality and consistency of
how revenue is reported, and improves comparability in financial statements presented under GAAP and International Financial
Reporting Standards. This new standard is effective for fiscal years and interim periods within those years beginning after
December 15, 2017 (our fiscal year 2019). The adoption of this standard is not expected to have a material impact on our
financial condition, results of operations, or cash flows.
In November 2015, the FASB issued Accounting Standards Update No. 2015-17 “Balance Sheet Classifications of
Deferred Taxes.” The standard simplifies the presentation of deferred income taxes under U.S. GAAP by requiring that all
deferred tax assets and liabilities be classified as non-current. The Company adopted this standard in the current period and
adjusted the prior period for consistency.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” as amended in July 2018 by ASU No. 2018-
10, “Codification Improvements to Topic 842, Leases,” and ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements,”
that replaces existing lease guidance. The new standard is intended to provide enhanced transparency and comparability by
requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. The new guidance will
continue to classify leases as either finance or operating, with classification affecting the pattern of expense recognition on the
statement of income. These ASUs are effective for fiscal years beginning after December 15, 2018 (our fiscal year 2020). The
Company is currently evaluating the impact of the provisions of these ASUs and anticipates the recognition of additional assets
and corresponding liabilities relating to these leases on its balance sheet, but does not expect the adjustment to be material
assuming no changes in lease activity.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the
Test for Goodwill Impairment.” This update eliminates a step from impairment testing to simplify the process, particularly for
entities with a zero or negative carrying amount for an intangible asset, and is effective for annual reporting periods beginning
after December 15, 2019 (our fiscal year 2021). The adoption of this update is not expected to have a material impact on our
financial condition, results of operations, or cash flows.
In June 2018, the FASB issued ASU No. 2018-07, “Compensation—Stock Compensation (Topic 718): Improvements to
Nonemployee Share-Based Payment Accounting,” which allows companies to account for nonemployee awards in the same
manner as employee awards. This update is effective for fiscal years beginning after December 15, 2018, and interim periods
within those annual periods (our fiscal year 2019). The adoption of this update is not expected to have a material impact on our
financial condition, results of operations, or cash flows.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework –
Changes to the Disclosure Requirements for Fair Value Measurement.” This update eliminates such disclosures as the amount of
and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and adds new disclosure requirements for
Level 3 measurements. It is effective for fiscal years beginning after December 15, 2019 (our fiscal year 2021), with early
adoption permitted for any eliminated or modified disclosures. The Company is evaluating the effect of adopting this new
accounting guidance, but does not expect adoption will have a material impact on the Company’s financial statements or
disclosures.
68
There have been no other significant changes in the Company’s critical accounting policies and estimates during fiscal
year 2018.
(14) Pending Asset Purchase of the BP Funds
On July 10, 2018, the Company announced that it signed a definitive agreement with BP Capital Fund Advisors, LLC to
purchase the assets related to the management of the BP Funds. The Company filed a Current Report on Form 8-K regarding
this transaction on July 11, 2018.
(15) Subsequent Events
As of the file date of November 28, 2018, for this Annual Report on Form 10-K, management evaluated the existence of
events occurring subsequent to the fiscal year end of September 30, 2018, and determined the following to be subsequent
events:
One October 25, 2018, the California FTB issued a final audit determination letter related to the FTB audit. The letter
indicated no change to the Company’s reported sales factor and increased the net operating loss (“NOL”) carryover deduction
on the Company’s California tax return for fiscal year 2014 due to an NOL carryover deduction decrease in the previous year,
which resulted in a benefit to the Company of $3,004.
On October 26, 2018, the Company completed its 10th asset purchase when it purchased the assets related to the
management of the BP Funds, adding nearly $200 million in assets under management. The purchase was consummated in
accordance with the terms and conditions of the Transaction Agreement, dated as of July 10, 2018, between the Company and
BP Capital Fund Advisors, LLC, which included customary representations, warranties, and covenants of the Company and BP
Capital Fund Advisors, LLC. Upon completion of the transaction, the assets related to the management of the BP Capital
TwinLine Energy Fund were reorganized into a new series of Hennessy Funds Trust called the Hennessy BP Energy Fund, and
the assets related to the management of the BP Capital TwinLine MLP Fund were reorganized into a new series called the
Hennessy BP Midstream Fund. In connection with the transaction, BP Capital Fund Advisors, LLC became the sub-advisor to
the Hennessy BP Energy Fund and the Hennessy BP Midstream Fund.
In accordance with the Transaction Agreement, the initial portion of the purchase price of $1.6 million was funded at
closing with available cash and was equal to (A) $100,000 plus (B) 0.75% of the aggregate current net asset value of the BP
Funds measured as of the close of business on October 25, 2018, the trading day immediately preceding the closing date of the
transaction. The remaining portion of the purchase price is payable on October 28, 2019, the business day immediately
following the one-year anniversary of the closing date, and will be equal to 0.75% of the aggregate current net asset value of the
Hennessy BP Energy Fund and the Hennessy BP Midstream Fund (the successor funds to the BP Funds) measured the close of
business on October 25, 2019, the trading day immediately preceding the one-year anniversary of the closing date.
On October 30, 2018, the Company announced a quarterly cash dividend of $0.11 per share to be paid on December 5,
2018, to shareholders of record as of November 13, 2018. The declaration and payment of dividends to holders of the
Company’s common stock, if any, are subject to the discretion of the Company’s Board of Directors. The Company’s Board of
Directors will take into account such matters as general economic and business conditions, the Company’s strategic plans, the
Company’s financial results and condition, contractual, legal, and regulatory restrictions on the payment of dividends by the
Company, and such other factors as the Company’s Board of Directors may consider relevant.
69
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
Management’s report on internal control over financial reporting set forth in Item 8, “Financial Statements and Supplementary
Data,” above, is incorporated herein by reference.
ATTESTATION REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The attestation report of our independent registered public accounting firm regarding internal control over financial reporting set
forth in Item 8, “Financial Statements and Supplementary Data,” above, is incorporated herein by reference.
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, 2018,
were effective to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Exchange
Act is (1) recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and
(2) 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) under the Exchange Act
that occurred during the fiscal quarter ended September 30, 2018, and that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
70
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 2019 Annual Meeting (“Proxy Statement”)
under the captions “Election of Directors,” “Corporate Governance” and “Executive Officers,” respectively. Such information is
incorporated by reference as if fully set forth herein.
CODE OF ETHICS
The Company has adopted a Code of Ethics that applies to its 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 the Company amends or waives any of the provisions of the Code of Ethics, the Company
intends to disclose these actions on its 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 Hennessy Advisors, Inc. 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
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
herein.
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 herein.
71
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information as of September 30, 2018, with respect to our equity compensation plans pursuant to
which shares of our common stock may be issued. We do not have any equity compensation plans that have not been approved by our
shareholders:
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security
holders
Total
Number of Securities
to Be Issued upon Exercise
of Outstanding Options,
Warrants, and Rights (2)
(a)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants, and Rights (2)
(b)
Number of Securities
Remaining for Issuance
Under Compensation Plans
(excluding securities
reflected in column (a)) (1)
(c)
338,375 $
—
338,375 $
—
—
—
1,823,342
—
1,823,342
(1) The maximum number of shares of common stock that may be issued under the Omnibus Plan is 50% of our outstanding
common stock, or 3,948,573 shares, as of September 30, 2018.
(2) The number of securities to be issued includes 338,375 shares relating to RSUs to be issued according to the vesting schedule of
25% per year. The exercise price for RSUs is zero, which is included in the weighted average exercise price of outstanding
securities.
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 herein.
ITEM 14. PRINCIPAL ACCOUNTING 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 herein.
72
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The financial statements and financial statement schedules for Hennessy Advisors, Inc. are included under Item 8, “Financial
Statements and Supplementary Data,” above.
Exhibit Index
Set forth below is a listing of all exhibits to this Annual Report on Form 10-K, including those incorporated by reference.
Exhibits
2.1
2.2
2.3
3.1
3.2
10.1
10.2
10.3
10.4
10.5
Transaction Agreement, dated as of July 10, 2018, between the registrant and BP Capital Fund Advisors, LLC (20)*
Transaction Agreement, dated as of May 10, 2017, among the registrant, Rainier Investment Management, LLC, and
Manning & Napier Group, LLC (15)*
Transaction Agreement, dated May 2, 2016, between the registrant and Westport Advisers, LLC (10)*
Amended and Restated Articles of Incorporation (14)
Fifth Amended and Restated Bylaws (18)
License Agreement, dated April 10, 2000, between Edward J. Hennessy, Inc. and Netfolio, Inc. (2)
Investment Advisory Agreement, dated March 23, 2009, between the registrant and Hennessy Funds Trust (on behalf of
the Hennessy Cornerstone Large Growth Fund) (3)
Investment Advisory Agreement, dated October 25, 2012, between the registrant and Hennessy Funds Trust (on behalf of
the Hennessy Focus Fund, the Hennessy Equity and Income Fund, the Hennessy Core Bond Fund, the Hennessy Gas Utility
Fund, the Hennessy Large Cap Financial Fund, the Hennessy Small Cap Financial Fund, and the Hennessy Technology
Fund) (4)
Investment Advisory Agreement, dated February 28, 2014, between the registrant and Hennessy Funds Trust (on behalf of
the Hennessy Cornerstone Growth Fund, the Hennessy Cornerstone Mid Cap 30 Fund, the Hennessy Cornerstone Value
Fund, the Hennessy Total Return Fund, the Hennessy Balanced Fund, the Hennessy Japan Fund, and the Hennessy Japan
Small Cap Fund) (7)
Amendment to Investment Advisory Agreement, dated March 1, 2016, between the registrant and Hennessy Funds Trust
(on behalf of the Hennessy Cornerstone Growth Fund, the Hennessy Cornerstone Mid Cap 30 Fund, the Hennessy
Cornerstone Value Fund, the Hennessy Total Return Fund, the Hennessy Balanced Fund, the Hennessy Japan Fund, and the
Hennessy Japan Small Cap Fund) (13)
10.6
Investment Advisory Agreement, dated October 26, 2018, between the registrant and Hennessy Funds Trust (on behalf of
the Hennessy BP Energy Fund and the Hennessy BP Midstream Fund)
73
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
Sub-Advisory Agreement, dated October 25, 2012, between the registrant and Broad Run Investment Management, LLC
(for the Hennessy Focus Fund) (4)
Sub-Advisory Agreement, dated October 25, 2012, between the registrant and The London Company of Virginia, LLC (for
the Hennessy Equity and Income Fund (equity sleeve)) (4)
Sub-Advisory Agreement, dated October 25, 2012, between the registrant and Financial Counselors, Inc. (for the Hennessy
Equity and Income Fund (fixed income sleeve)) (4)
Sub-Advisory Agreement, dated February 28, 2014, between the registrant and SPARX Asset Management Co., Ltd. (for
the Hennessy Japan Fund and the Hennessy Japan Small Cap Fund) (7)
First Amendment to Sub-Advisory Agreement, dated February 28, 2018, between registrant and SPARX Asset
Management Co., Ltd. (for the Hennessy Japan Fund and the Hennessy Japan Small Cap Fund) (19)
Sub-Advisory Agreement, dated October 26, 2018, between the registrant and BP Capital Fund Advisors, LLC (for the
Hennessy BP Energy Fund and the Hennessy BP Midstream Fund)
Amended and Restated Servicing Agreement, dated February 28, 2014, between the registrant and Hennessy Funds Trust
(on behalf of the Hennessy Cornerstone Growth Fund, the Hennessy Cornerstone Mid Cap 30 Fund, the Hennessy
Cornerstone Large Growth Fund, the Hennessy Cornerstone Value Fund, the Hennessy Large Value Fund, the Hennessy
Total Return Fund, the Hennessy Balanced Fund, the Hennessy Japan Fund, and the Hennessy Japan Small Cap Fund) (7)
First Amendment to Amended and Restated Servicing Agreement, dated March 1, 2015, between the registrant and
Hennessy Funds Trust (on behalf of all Funds) (9)
Second Amendment to Amended and Restated Servicing Agreement, dated October 26, 2018, between the registrant and
Hennessy Funds Trust (on behalf of all Funds)
10.16
Hennessy Advisors, Inc. Amended and Restated 2013 Omnibus Incentive Plan (6)
10.17
Form of Restricted Stock Unit Award Agreement for Employees (1)(5)
10.18
Form of Restricted Stock Unit Award Agreement for Directors (1)(5)
10.19
Form of Stock Option Award Agreement for Employees (1)(5)
10.20
Form of Stock Option Award Agreement for Directors (1)(5)
10.21
10.22
10.23
Second Amended and Restated Bonus Agreement, dated as of January 26, 2018, between the registrant and Teresa M.
Nilsen (1)(18)
Amended and Restated Bonus Agreement, dated as of October 10, 2016, between the registrant and Daniel B. Steadman
(1)(12)
Third Amended and Restated Employment Agreement, dated as of October 10, 2016, between the registrant and Neil J.
Hennessy (1)(12)
74
10.24
Amendment to Third Amended and Restated Employment Agreement, dated as of January 26, 2018, between the registrant
and Neil J. Hennessy (1)(18)
10.25
Employment Agreement, dated as of January 26, 2018, between the registrant and Teresa M. Nilsen (1)(18)
Term Loan Agreement among the registrant, U.S. Bank National Association and California Bank & Trust, dated
September 17, 2015 (8)*
First Amendment to Term Loan Agreement among the registrant, U.S. Bank National Association and California Bank &
Trust, dated September 19, 2016 (11)*
Second Amendment to Term Loan Agreement among the registrant, U.S. Bank National Association and California Bank
& Trust, dated November 16, 2017 (16)
Third Amendment to Term Loan Agreement among the registrant, U.S. Bank National Association and California Bank &
Trust, dated November 30, 2017 (17)*
Fourth Amendment to Term Loan Agreement among the registrant, U.S. Bank National Association, and California Bank
& Trust, dated September 20, 2018 (21)*
Consent of Marcum LLP, Independent Registered Public Accounting Firm
Rule 13a-14a Certification of the Principal Executive Officer
Rule 13a-14a Certification of the Principal Financial Officer
Written Statement of the Principal Executive Officer, Pursuant to 18 U.S.C. § 1350
Written Statement of the Principal Financial Officer, Pursuant to 18 U.S.C. § 1350
Financial statements from the Annual Report on Form 10-K of the registrant for the year ended September 30, 2018, filed
on November 28, 2018, 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.
10.26
10.27
10.28
10.30
10.31
23.1
31.1
31.2
32.1
32.2
101
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)
(3)
Incorporated by reference from the Company’s Form SB-2 registration statement (SEC File No. 333-66970) filed
August 6, 2001.
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.
75
(4)
(5)
(6)
(7)
(8)
(9)
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.
Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 000-49872) filed
September 18, 2013.
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.
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.
Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 001-36423) filed
September 23, 2015.
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.
(10) Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 001-36423) filed May 3,
2016.
(11) Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 001-36423) filed
September 23, 2016.
(12) Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 001-36423) filed October 13,
2016.
(13) 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.
(14) Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 001-36423) filed March 7,
2017.
(15) Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 001-36423) filed May 11,
2017.
(16) Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 001-36423) filed
November 20, 2017.
(17) Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 001-36423) filed December 4,
2017.
(18) Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 001-36423) filed January 25,
2018.
(19) 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.
(20) Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 001-36423) filed July 11,
2018.
(21) Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 001-36423) filed
September 21, 2018.
ITEM 16. FORM 10-K SUMMARY
None.
76
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)
By: /s/ Teresa M. Nilsen
Teresa M. Nilsen
President, Chief Operating Officer, Secretary, and Director
(As a duly authorized officer on behalf of the registrant and as Principal Executive
Officer)
Dated: November 28, 2018
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
Kathryn R. Fahy
Chief Financial Officer and Senior Vice President
(Principal Financial and Accounting Officer)
Dated: November 28, 2018
By: /s/ Neil J. Hennessy
Dated: November 28, 2018
Neil J. Hennessy
Chief Executive Officer and Chairman of the Board of Directors
By: /s/ Daniel B. Steadman
Daniel B. Steadman
Executive Vice President and Director
Dated: November 28, 2018
By: /s/ Henry Hansel
Dated: November 28, 2018
Henry Hansel
Director
By: /s/ Brian A. Hennessy
Dated: November 28, 2018
Brian A. Hennessy
Director
By: /s/ Daniel G. Libarle
Dated: November 28, 2018
Daniel G. Libarle
Director
By: /s/ Rodger Offenbach
Dated: November 28, 2018
Rodger Offenbach
Director
By: /s/ Susan Pomilia
Dated: November 28, 2018
Susan Pomilia
Director
By: /s/ Thomas L. Seavey
Dated: November 28, 2018
Thomas L. Seavey
Director
77
INVESTMENT ADVISORY AGREEMENT
Exhibit 10.6
THIS INVESTMENT ADVISORY AGREEMENT (this “Agreement”) is made as of October 26, 2018, by and between
Hennessy Funds Trust, a Delaware statutory trust (the “Trust”), on behalf of each of its investment series set forth on Schedule A
hereto as it may be amended from time to time (hereinafter referred to each as a “Fund” and together as the “Funds”), and Hennessy
Advisors, Inc., a California corporation (the “Adviser”).
RECITALS
WHEREAS, the Trust is registered with the Securities and Exchange Commission under the Investment Company Act of 1940,
as amended (the “Investment Company Act”), as an open-end management investment company; and
WHEREAS, the Trust desires to retain the Adviser, an investment adviser registered under the Investment Advisers Act of
1940, as amended, as the investment adviser to the Funds.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and covenants hereinafter contained, the Trust on behalf of the Funds
and the Adviser do mutually promise and agree as follows:
1. Employment. The Trust hereby employs the Adviser to manage the investment and reinvestment of the assets of each Fund
for the period and on the terms set forth in this Agreement. The Adviser hereby accepts such employment for the compensation herein
provided and agrees during such period to render the services and to assume the obligations herein set forth.
2. Authority of the Adviser. The Adviser shall supervise and manage the investment portfolio of each Fund, and, subject to such
policies as the trustees of the Trust may determine, direct the purchase and sale of investment securities in the day to day management
of each Fund. The Adviser shall for all purposes herein be deemed an independent contractor and shall, unless otherwise expressly
provided or authorized, have no authority to act for or represent the Trust or any Fund in any way or otherwise be deemed an agent of
the Trust or any Fund. However, one or more shareholders, officers, directors, or employees of the Adviser may serve as a trustee or
officer of the Trust, but without compensation or reimbursement of expenses for such services from the Trust unless otherwise
determined by the Trust’s Board of Trustees, including a majority of the Trustees who are not interested persons (as defined in the
Investment Company Act) of the Trust. Nothing herein contained shall be deemed to require the Trust to take any action contrary to its
Trust Instrument, as it may be amended from time to time, or any applicable statute or regulation, or to relieve or deprive the trustees
of the Trust of their responsibility for, and control of, the affairs of the Trust.
3. Use of Sub-Advisers. All services to be furnished by the Adviser under this Agreement may be furnished through the medium
of any managers, officers or employees of the Adviser or through such other parties (including, without limitation, a sub-adviser) as
the Adviser may determine from time to time. Each sub-advisory agreement may provide that the applicable sub-adviser, subject to
the control and supervision of the Trust’s Board of Trustees and the Adviser, shall have full investment discretion for the applicable
Fund, shall make all determinations with respect to the investment of such Fund’s assets assigned to it and the purchase and sale of
portfolio securities with those assets, and shall take such steps as may be necessary to implement its investment decisions. Any
delegation of duties pursuant to this Section 3 shall comply with any applicable provisions of Section 15 of the Investment Company
Act, except to the extent permitted by any exemptive order of the Securities and Exchange Commission or similar relief. The Adviser
shall not be responsible or liable for the investment merits of any decision by a sub-adviser to purchase, hold, or sell a security for the
applicable Fund’s portfolio; provided, however, that this provision shall not limit the Adviser’s obligation as a fiduciary to supervise
each Fund’s investment program and the activities of sub-advisers.
4. Expenses. The Adviser, at its own expense and without reimbursement from the Trust or any Fund, shall furnish office space,
and all necessary office facilities, equipment, and executive personnel for managing the investments of each Fund. The Adviser shall
not be required to pay any expenses of a Fund unless specifically stated herein. The expenses of each Fund’s operations borne by the
Fund include, by way of illustration and not limitation, the following: trustees’ fees paid to those trustees who are not interested
trustees under the Investment Company Act; the costs of preparing and printing its registration statements required under the
Securities Act of 1933, as amended, and the Investment Company Act (and amendments thereto); the expense of registering its shares
with the Securities and Exchange Commission and in the various states; the printing and distribution cost of prospectuses mailed to
existing shareholders; the cost of trustee and officer liability insurance, reports to shareholders, reports to government authorities, and
proxy statements; interest charges; taxes; legal expenses; salaries of personnel specifically employed or engaged by the Trust and
approved by the Trust’s Board of Trustees (including, but not limited to, the Trust’s Chief Compliance Officer); association
membership dues; auditing, accounting, and tax services; insurance premiums; brokerage and other costs incurred in connection with
the purchase and sale of securities; fees and expenses of the custodian of the Fund’s assets; shareholder servicing fees; expenses of
calculating the net asset value and repurchasing and redeeming shares; charges and expenses of dividend disbursing agents, registrars
and stock transfer agents, fund administrators, and fund accountants; and the cost of keeping all necessary shareholder records and
accounts.
5. Compensation of the Adviser. For the services and facilities to be rendered, the Trust through each Fund shall pay to the
Adviser an advisory fee, paid monthly, based on the average daily net assets of each such Fund, as determined by valuations made as
of the close of each business day during the month. The advisory fee payable by each Fund is set forth on Schedule A hereto. For any
month in which this Agreement is not in effect for the entire month, such fee shall be reduced proportionately on the basis of the
number of calendar days during which it is in effect and the fee computed upon the average daily net assets of the business days
during which it is so in effect.
6. Ownership of Shares of the Funds. The Adviser shall not take, and shall not permit any of its shareholders, officers, directors,
or employees to take, a long or short position in the shares of a Fund, except for the purchase of shares of the Fund for investment
purposes at the same price as that available to the public at the time of purchase.
7. Exclusivity. The services of the Adviser to the Trust hereunder are not to be deemed exclusive, and the Adviser shall be free
to furnish similar services to others as long as the services hereunder are not impaired thereby. Although the Adviser has permitted
and is permitting the Trust and one or more Funds to use the name “Hennessy,” it is understood and agreed that the Adviser reserves
the right to use, and to permit other persons, firms, or corporations, including other investment companies, to use, such name, and that
the Trust and the Funds will not use such name if the Adviser ceases to be each Fund’s sole investment adviser (not including any sub-
advisers engaged pursuant to Section 3). During the period that this Agreement is in effect, the Adviser shall be each Fund’s sole
investment adviser (not including any sub-advisers engaged pursuant to Section 3).
8. Liability. In the absence of willful misfeasance, bad faith, gross negligence, or reckless disregard of obligations or duties
hereunder on the part of the Adviser, the Adviser shall not be subject to liability to the Funds or to any shareholder of the Funds for
any act or omission in the course of, or connected with, rendering services hereunder, including any losses that may be sustained in the
purchase, holding or sale of any security.
9. Indemnification. The Adviser agrees to indemnify each Fund with respect to any loss, liability, judgment, cost, or penalty that
such Fund may directly or indirectly suffer or incur as a result of a material breach by the Adviser of its standard of care set forth in
Section 8. The Trust, on behalf of each Fund, agrees to indemnify the Adviser with respect to any loss, liability, judgment, cost, or
penalty that the Adviser may directly or indirectly suffer or incur in any way arising out of the performance of its duties under this
Agreement, except to the extent that such loss, liability, judgment, cost, or penalty was a result of a material breach by the Adviser of
its standard of care set forth in Section 8.
10. Brokerage Commissions. The Adviser, subject to the control and direction of the trustees of the Trust, shall have authority
and discretion to select brokers and dealers to execute portfolio transactions for each Fund and to select the markets on or in which the
transactions will be executed. The Adviser may cause each Fund to pay a broker dealer that provides brokerage or research services,
as such services are defined in Section 28(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), to the Adviser
a commission for effecting a securities transaction in excess of the amount another broker dealer would have charged for effecting
such transaction, if the Adviser determines in good faith that such amount of commission is reasonable in relation to the value of
brokerage and research services provided by the executing broker dealer viewed in terms of either that particular transaction or the
Adviser’s overall responsibilities with respect to the accounts as to which the Adviser exercises investment discretion (as defined in
Section 3(a)(35) of the Exchange Act). The Adviser shall provide such reports as the trustees of the Trust may reasonably request with
respect to each Fund’s brokerage commissions, the manner in which that brokerage was allocated, and brokerage and research services
received.
11. Code of Ethics. The Adviser has adopted a written code of ethics complying with the requirements of Rule 17j-1 under the
Investment Company Act and has provided the Trust with a copy of the code of ethics and evidence of its adoption. Upon written
request of the Trust, the Adviser shall permit the Trust to examine any reports required to be made by the Adviser pursuant to Rule
17j-1 under the Investment Company Act, to the extent such reports are not required, pursuant to Rule 17j-1, to be made to the Trust.
12. Amendments. This Agreement may be amended by the mutual consent of the parties; provided, however, that in no event
may it be amended without the approval of the trustees of the Trust in the manner required by the Investment Company Act, and, if
required by the Investment Company Act, by the vote of the majority of the outstanding voting securities of the affected Fund, as
defined in the Investment Company Act.
13. Termination. This Agreement may be terminated at any time with respect to a Fund, without the payment of any penalty, by
the trustees of the Trust or by a vote of the majority of the outstanding voting securities of that Fund, as defined in the Investment
Company Act, upon giving 60 days’ written notice to the Adviser. This Agreement may be terminated by the Adviser at any time upon
the giving of 60 days’ written notice to the Trust. This Agreement shall terminate automatically in the event of its assignment (as
defined in Section 2(a)(4) of the Investment Company Act). Subject to prior termination as hereinbefore provided, this Agreement
shall continue in effect for two years from the date hereof and indefinitely thereafter, but only so long as the continuance after such
two-year period is specifically approved annually by (a) the trustees of the Trust or by the vote of the majority of the outstanding
voting securities of each Fund, as defined in the Investment Company Act, and (b) the trustees of the Trust in the manner required by
the Investment Company Act, provided that any such approval may be made effective not more than 60 days thereafter.
14. Obligations of the Trust. The name “Hennessy Funds Trust” and references to the trustees of Hennessy Funds Trust refer
respectively to the Trust created and the trustees, as trustees but not individually or personally, acting from time to time under a Trust
Instrument dated as of September 16, 1992, as amended, which is hereby referred to and a copy of which is on file with the Secretary
of the State of Delaware. The obligations of Hennessy Funds Trust entered into in the name or on behalf thereof by any of the trustees,
representatives, or agents of the Trust are made not individually, but in such capacities, and are not binding upon any of the trustees,
shareholders, or representatives of the Trust personally, but bind only the Trust property, and all persons dealing with any class of
shares of the Trust must look solely to the Trust property belonging to such class for the enforcement of any claims against the Trust.
15. Counterparts. This Agreement may be executed in counterparts each of which shall be deemed to be an original and all of
which, taken together, shall be deemed to constitute the same instrument.
* * *
(Signatures on next page.)
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers as of
the date first mentioned above.
HENNESSY ADVISORS, INC.
By: /s/ Teresa M. Nilsen
Teresa M. Nilsen
President
HENNESSY FUNDS TRUST
By: /s/ Neil J. Hennessy
Neil J. Hennessy
President
Signature Page to Investment Advisory Agreement
SCHEDULE A
(as of October 26, 2018)
Name of Fund
Hennessy BP Energy Fund
Hennessy BP Midstream Fund
Advisory Fee per Annum
(as a % of average daily net assets)
1.25%
1.10%
Schedule A
SUB-ADVISORY AGREEMENT
Exhibit 10.12
THIS SUB-ADVISORY AGREEMENT (this “Agreement”) is made and entered into as of October 26, 2018, by and between
Hennessy Advisors, Inc., a California corporation (“Manager”), and BP Capital Fund Advisors, LLC, a Delaware limited liability
company (“Sub-Adviser”).
RECITALS
WHEREAS, Manager is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the
“Advisers Act”);
WHEREAS, Manager has entered into an Investment Advisory Agreement, dated as of October 26, 2018 (the “Advisory
Agreement”), with Hennessy Funds Trust (the “Trust”), an investment company registered under the Investment Company Act of
1940, as amended (the “Investment Company Act”);
WHEREAS, Sub-Adviser is registered as an investment adviser under the Advisers Act;
WHEREAS, Manager desires to retain Sub-Adviser to render investment advisory and other services to the funds specified in
Schedule A hereto, as amended from time to time, each a series of the Trust (each a “Fund” and together, the “Funds”), in the manner
and on the terms hereinafter set forth;
WHEREAS, Manager has the authority, subject to the approval of the Trustees of the Trust (the “Trustees”), and, if required
under the Investment Company Act, the shareholders of each Fund, to select one or more sub-advisers for each Fund; and
WHEREAS, Sub-Adviser is willing to furnish such services to Manager and each Fund.
NOW, THEREFORE, Manager and Sub-Adviser agree as follows:
AGREEMENT
1.
APPOINTMENT OF SUB-ADVISER
Manager hereby appoints Sub-Adviser to act as a sub-adviser for each Fund for the period and on the terms and conditions of
this Agreement.
2.
ACCEPTANCE OF APPOINTMENT
A. Sub-Adviser accepts that appointment and agrees to render the services herein set forth, for the compensation herein
provided.
B. The assets of each Fund will be maintained in the custody of a custodian (who shall be identified by Manager in writing).
Sub-Adviser will not have custody of any securities, cash, or other assets of any Fund and will not be liable for any loss resulting from
any act or omission of the custodian other than acts or omissions arising in reasonable reliance on instructions of Sub-Adviser. The
custodian will be responsible for the custody, receipt, and delivery of securities and other assets of each Fund, and Sub-Adviser shall
have no authority responsibility or obligation with respect to the custody receipt or delivery of securities or other assets of any Fund.
The Fund shall be responsible for all custodial arrangements, including the payment of all fees and charges to the custodian.
3.
SERVICES TO BE RENDERED BY SUB-ADVISER TO THE TRUST
A. As sub-adviser to each Fund, Sub-Adviser will coordinate the investment and reinvestment of the assets of the Fund and
determine the composition of the assets of the Fund, in accordance with the terms of this Agreement, the Fund’s Prospectus and the
Fund’s Statement of Additional Information (the “SAI”) (as each may be updated or amended, from time to time) and subject to the
direction, supervision, and control of Manager and the Trustees. Prior to the commencement of Sub-Adviser’s services hereunder,
Manager shall provide Sub-Adviser with current copies of each Fund’s Prospectus and SAI. Manager undertakes to provide Sub-
Adviser with copies or other written notice of any amendments, modifications, or supplements to each Fund’s Prospectus and SAI and
Sub-Adviser will not need to comply until a copy has been provided to Sub-Adviser.
B. Sub-Adviser may place orders for the execution of transactions with or through such brokers, dealers or banks as Sub-
Adviser may select and, subject to Section 28(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and other
applicable law, may pay commissions on transactions in excess of the amount of commissions another broker or dealer would have
charged. Sub-Adviser will seek best execution under the circumstances of the particular transaction taking into consideration the full
range and quality of a broker’s services in placing brokerage including, among other things, the value of research provided as well as
execution capability, commission rate, financial responsibility, and responsiveness to Sub-Adviser (the determinative factor is not the
lowest possible commission cost, but whether the transaction represents the best qualitative execution for a Fund). In no event shall
Sub-Adviser be under any duty to obtain the lowest commission or best net price for a Fund on any particular transaction. Sub-Adviser
is not under any duty to execute transactions for a Fund before or after transactions for other like accounts managed by Sub-Adviser.
Sub-Adviser may aggregate sales and purchase orders of securities or derivatives held in a Fund with similar orders being made
simultaneously for other portfolios managed by Sub-Adviser if, in Sub-Adviser’s reasonable judgment, such aggregation shall result in
an overall economic benefit to the Fund. Manager understands and agrees that when such aggregation does occur the actual prices
obtained will be averaged and the applicable Fund will be deemed to have purchased or sold its proportionate share of the securities
involved at such average price. Notwithstanding the foregoing, Sub-Adviser will not effect any transaction with a broker or dealer that
is an “affiliated person” (as defined under the Investment Company Act) of Sub-Adviser or Manager without the prior approval of
Manager. Manager shall provide Sub-Adviser with a list of brokers or dealers that are affiliated persons of Manager.
C. Manager understands and agrees and has advised the Trustees that Sub-Adviser performs investment management services
for various clients and may take action with respect to any of its other clients that may differ from action taken or from the timing or
nature of action taken by Sub-Adviser for a Fund. Sub-Adviser’s authority hereunder shall not be impaired because of the fact that it
may effect transactions with respect to securities for its own account, or for other accounts that it manages, that are identical or similar
to securities to which it may effect transactions for a Fund at the same or similar times.
D. Sub-Adviser will provide Manager with copies of Sub-Adviser’s current policies and procedures that relate to Sub-Adviser’s
duties described in this Agreement adopted in accordance with Rule 206(4)-7 under the Advisers Act. To the extent a Fund is required
by the Investment Company Act to adopt any such policy or procedure, Manager will submit such policy or procedure to the Trustees
for adoption by each of the Funds, with such modifications or additions thereto as the Trustees may recommend. Sub-Adviser’s Chief
Compliance Officer shall provide to Manager’s Chief Compliance Officer or his or her delegate the following:
(i) a report of any material changes to Sub-Adviser’s policies and procedures described in Section 3(D) above on a
quarterly basis;
(ii) a report of any “material compliance matters,” as defined by Rule 38a-1 under the Investment Company Act, that have
occurred in connection with Sub-Adviser’s policies and procedures on a quarterly basis;
(iii) a summary of Sub-Adviser’s Chief Compliance Officer’s report identifying the material compliance matters relevant
to the Funds with respect to the annual review of Sub-Adviser’s policies and procedures pursuant to Rule 206(4)-7 under the
Advisers Act; and
(iv) an annual certification regarding Sub-Adviser’s compliance with Rule 206(4)-7 under the Advisers Act and
Section 38a-1 of the Investment Company Act, as well as the foregoing subparagraphs (i) through (iii).
E. Sub-Adviser will maintain and preserve all accounts, books, and records with respect to each Fund as are required of an
investment adviser of a registered investment company pursuant to the Investment Company Act and the Advisers Act and the rules
thereunder and shall file with the Securities and Exchange Commission (“SEC”) all forms pursuant to Sections 13(d), 13(f), and 13(g)
of the Exchange Act, with respect to its duties as are set forth herein.
F. Sub-Adviser shall reasonably cooperate with Manager and/or the Trust in responding to any regulatory or compliance
examinations or inspections (including any information requests) relating to the Trust, a Fund or Manager brought by any
governmental or regulatory authorities.
G. Sub-Adviser will, unless and until otherwise directed by Manager, exercise all rights of security holders with respect to
securities held by each Fund; provided that Sub-Adviser will not be responsible for any other corporate actions relating to the
securities in which assets of the Fund’s investment portfolio are invested, including administrative filings, such as proofs or claims in
class actions.
H. Sub-Adviser, in connection with its rights and duties with respect to the Funds and the Trust shall use the care, skill,
prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such
matters would use in the conduct of an enterprise of a like character and with like aims.
4.
COMPENSATION OF SUB-ADVISER
As compensation for providing services in accordance with this Agreement, Manager will pay Sub-Adviser those fees as set
forth in Schedule A, calculated based on the relevant Fund’s average daily net assets and payable monthly. Manager and Sub-Adviser
agree that all fees shall become due and owing to Sub-Adviser promptly after the termination date of Sub-Adviser with respect to any
Fund and that the amount of such fees shall be calculated by treating the termination date as the next fee computation date. The annual
base fee will be prorated for such fees owed through the termination date.
5.
REPRESENTATIONS OF MANAGER
Manager represents, warrants, and agrees that:
A. Manager has been duly authorized by the Trustees to delegate to Sub-Adviser the provision of investment services to each
Fund as contemplated hereby.
B. The Trust has adopted a written code of ethics complying with the requirements of Rule 17j-1 under the Investment
Company Act and will provide Sub-Adviser with a copy of such code of ethics.
C. Manager (i) is registered as an investment adviser under the Advisers Act and will continue to be so registered for so long as
this Agreement remains in effect, (ii) is not prohibited by the Investment Company Act, the Advisers Act, or other law, regulation, or
order from performing the services contemplated by this Agreement, (iii) has met and will seek to continue to meet for so long as this
Agreement is in effect, any other applicable federal or state requirements, or the applicable requirements of any regulatory or industry
self-regulatory agency necessary to be met in order to perform the services contemplated by this Agreement, (iv) has the full power
and authority to enter into and perform the services contemplated by this Agreement, and (v) will promptly notify Sub-Adviser of the
occurrence of any event that would disqualify Manager from serving as investment manager of an investment company pursuant to
Section 9(a) of the Investment Company Act or otherwise.
6.
REPRESENTATIONS OF SUB-ADVISER
Sub-Adviser represents, warrants, and agrees as follows:
A. Sub-Adviser (i) is registered as an investment adviser under the Advisers Act and will continue to be so registered for so long
as this Agreement remains in effect, (ii) is not prohibited by the Investment Company Act, the Advisers Act or other law, regulation,
or order from performing the services contemplated by this Agreement, (iii) has met, and will seek to continue to meet for so long as
this Agreement remains in effect, any other applicable federal or state requirements, or the applicable requirements of any regulatory
or industry self-regulatory agency necessary to be met in order to perform the services contemplated by this Agreement, (iv) has the
full power and authority to enter into and perform the services contemplated by this Agreement, and (v) will promptly notify Manager
of the occurrence of any event that would disqualify Sub-Adviser from serving as an investment adviser of an investment company
pursuant to Section 9(a) of the Investment Company Act or otherwise.
B. Sub-Adviser has adopted a written code of ethics complying with the requirements of Rule 17j-1 under the Investment
Company Act and Rule 204A-1 under the Advisers Act and will provide Manager with a copy of such code of ethics.
C. Sub-Adviser agrees to maintain an appropriate level of errors and omissions or professional liability insurance coverage.
D. Sub-Adviser will promptly notify Manager of (i) any change in its governing documents, which if implemented would mean
that it would be unable to perform its obligations hereunder, or (ii) its knowledge that any of the warranties or representations given in
this Agreement is incorrect or would be incorrect if given at the time concerned.
E. Sub-Adviser will, to the extent required under applicable regulatory requirements, disclose to Manager (i) any financial
condition that is likely to impair its ability to meet its contractual commitments hereunder, (ii) any legal or disciplinary event that is
material to an evaluation of the Sub-Adviser’s integrity or its ability to meet its contractual commitments hereunder, and (iii) any
changes to Sub-Adviser’s ownership structure.
7.
NON-EXCLUSIVITY
The services of Sub-Adviser to Manager, the Funds, and the Trust are not to be deemed to be exclusive, and Sub-Adviser shall
be free to render investment advisory or other services to others and to engage in other activities. It is understood and agreed that the
directors, officers, and employees of Sub-Adviser are not prohibited from engaging in any other business activity or from rendering
services to any other person, or from serving as partners, officers, directors, trustees, or employees of any other firm or corporation.
8.
SUPPLEMENTAL ARRANGEMENTS
Sub-Adviser may from time to time employ or associate itself with any person it believes to be particularly suited to assist it in
providing the services to be performed by Sub-Adviser hereunder; provided that no such person shall perform any services with
respect to the Funds that would constitute an assignment or require a written advisory agreement pursuant to the Investment Company
Act. Any compensation payable to such persons shall be the sole responsibility of Sub-Adviser, and neither Manager nor the Trust
shall have any obligations with respect thereto or otherwise arising under this Agreement.
9.
DURATION OF AGREEMENT
This Agreement shall become effective upon the date first above written, provided that this Agreement shall not take effect with
respect to a Fund unless it has first been approved (i) by a vote of a majority of those trustees of the Trust who are not “interested
persons” (as defined in the Investment Company Act) of any party to this Agreement (“Independent Trustees”), cast in person at a
meeting called for the purpose of voting on such approval, and (ii) by vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Fund or as permitted by Rule 2a-6 of the Investment Company Act. This Agreement
shall continue in effect for a period more than two years from the date of its execution only so long as such continuance is specifically
approved at least annually by the Trustees; provided that in such event such continuance shall also be approved by the vote of a
majority of the Independent Trustees cast in person at a meeting called for the purpose of voting on such approval.
10. TERMINATION OF AGREEMENT
This Agreement may be terminated with respect to any Fund at any time, without the payment of any penalty, by a vote of the
majority of the Trustees, by the vote of a majority of the outstanding voting securities of such Fund, or by Manager on 60 days’ prior
written notice to Sub-Adviser (and to Manager, as appropriate). In addition, this Agreement may be terminated with respect to any
Fund by Sub-Adviser upon 60 days’ prior written notice to Manager. This Agreement will automatically terminate, without the
payment of any penalty, in the event the Advisory Agreement is assigned (as defined in the Investment Company Act) or terminates
for any other reason. This Agreement will also terminate upon written notice to the other party that the other party is in material
breach of this Agreement, unless the breaching party cures such breach to the reasonable satisfaction of the party alleging the breach
within 30 days after written notice. Any “assignment” (as that term is defined in the Investment Company Act) of this Agreement will
result in automatic termination of this Agreement. Sub-Adviser will promptly notify the Trust and Manager of any such assignment
and of any changes in key personnel who are either the portfolio manager(s) of the Funds named in the Prospectus and/or SAI or
senior management of Sub-Adviser, in each case prior to or promptly after such change. Sub-Adviser agrees to bear all reasonable
legal, printing, mailing, proxy, and related expenses of the Trust and Manager, if any, arising out of an assignment of this Agreement
by Sub-Adviser.
11. AMENDMENTS TO THE AGREEMENT
This Agreement may be amended by the parties with respect to any Fund only by written agreement. It is understood that certain
material amendments may require approval of a Fund’s shareholders. Additional Funds may be added to Schedule A by written
agreement of Manager and Sub-Adviser.
12. ASSIGNMENT
Sub-Adviser shall not assign this Agreement. Any assignment (as that term is defined in the Investment Company Act) of this
Agreement shall result in the automatic termination of this Agreement, as provided in Section 10 hereof. Notwithstanding the
foregoing, no assignment shall be deemed to result from any changes in the directors, officers, or employees of such Sub-Adviser
except as may be provided to the contrary in the Investment Company Act or the rules or regulations thereunder.
13. NOTICES
All notices required to be given pursuant to this Agreement shall be delivered or mailed to the address listed below of each
applicable party (i) in person, (ii) by registered or certified mail, or (iii) delivery service, providing the sender with notice of receipt, or
to such other address as specified in a notice duly given to the other parties. Notice shall be deemed given on the date delivered or
mailed in accordance with this paragraph.
If to Sub-Adviser:
Patrick Hurley, Principal
BP Capital Fund Advisors, LLC
8117 Preston Rd., Suite 260
Dallas, Texas 75225
(214) 731-4113 (telephone)
phurley@bcpfunds.com
If to Manager:
Hennessy Advisors, Inc.
Attention: Teresa M. Nilsen, President
7250 Redwood Blvd, Suite 200
Novato, CA 94945
(415) 899-1555 (telephone)
terry@hennessyfunds.com
With a copy to, which shall not constitute notice:
Hennessy Advisors, Inc.
Attention: Legal
7250 Redwood Blvd, Suite 200
Novato, CA 94945
415-899-1555 (telephone)
legal@hennessyfunds.com
14. SEVERABILITY AND SURVIVAL
Should any portion of this Agreement for any reason be held to be void in law or in equity, this Agreement shall be construed,
insofar as is possible, as if such portion had never been contained herein. Section 15, Section 16, and Section 17 shall survive the
termination of this Agreement.
15. GOVERNING LAW AND LANGUAGE
The provisions of this Agreement shall be construed and interpreted in accordance with the laws of the State of Delaware, or any
of the applicable provisions of the Investment Company Act. To the extent that the laws of the State of Delaware or any of the
provisions in this Agreement conflict with applicable provisions of the Investment Company Act, the latter shall control.
16.
INTERPRETATION
Any question of interpretation of any term or provision of this Agreement having a counterpart in or otherwise derived from a
term or provision of the Investment Company Act shall be resolved by reference to such term or provision of the Investment Company
Act and to interpretations thereof, if any, by the United States courts or, in the absence of any controlling decision of any such court,
by rules, regulations, or orders of the SEC validly issued pursuant to the Investment Company Act. Specifically, the terms “vote of a
majority of the outstanding voting securities,” “interested persons,” “assignment,” and “affiliated persons” as used herein shall have
the meanings assigned to them by Section 2(a) of the Investment Company Act. In addition, where the effect of a requirement of the
Investment Company Act reflected in any provision of this Agreement is relaxed by a rule, regulation, or order of the SEC, whether of
special or of general application, such provision shall be deemed to incorporate the effect of such rule, regulation, or order.
17. CONFIDENTIALITY
Each party shall treat as confidential all Confidential Information (as that term is defined below) of the other and use such
information only in furtherance of the purposes of this Agreement. Each party shall limit access to the Confidential Information to its
affiliates, employees, consultants, auditors, and regulators who reasonably require access to such Confidential Information and shall
otherwise maintain policies and procedures designed to prevent disclosure of the Confidential Information. For purposes of this
Agreement, Confidential Information shall include all non-public business and financial information, methods, plans, techniques,
processes, documents, and trade secrets of a party. Confidential Information shall not include anything that (i) is or lawfully becomes
in the public domain, other than as a result of a breach of an obligation hereunder, (ii) is furnished to the applicable party by a third
party having a lawful right to do so, or (iii) was known to the applicable party at the time of the disclosure.
In accordance with Regulation S-P, if non-public personal information regarding any party’s customers or consumers is
disclosed to the other party in connection with this Agreement, the other party receiving such information will not disclose or use that
information other than as necessary to carry out the purposes of this Agreement.
18. USE OF NAME
During the term of this Agreement, Manager shall have permission to use Sub-Adviser’s name in the offering and marketing of
any Fund, and agree to furnish Sub-Adviser, for its prior approval (such approval not to be unreasonably withheld), all prospectuses,
brochures, advertisements, promotional materials, web based information, proxy statements, shareholder reports, and other similar
informational materials that are to be made available to shareholders of a Fund or to the public and that refer to Sub-Adviser in any
way. Sub-Adviser agrees that Manager may request that Sub-Adviser approve use of a certain type of marketing material, and that
Manager need not provide for approval each additional piece of marketing material that is substantially the same type.
19. LIMITATION OF LIABILITY
Sub-Adviser is hereby expressly put on notice of the limitation of shareholder liability as set forth in the Trust’s Declaration of
Trust and agrees that obligations, if any, assumed by the Trust pursuant to this Agreement shall be limited in all cases to the Trust and
its assets, and if the liability relates to one or more series, the obligations hereunder shall be limited to the respective assets of the
Fund. Sub-Adviser further agrees that it shall not seek satisfaction of any such obligation from the shareholders or any individual
shareholder of the Fund(s), nor from the Trustees or any individual Trustee. The assets of a Fund shall be available only to satisfy the
liabilities and obligations of that Fund, and not the liabilities or obligations of any other Fund. The obligations of each of the Funds
under this agreement are several and not joint, and are included together in this Agreement solely for the sake of convenience.
Sub-Adviser shall not be liable for, and Manager will not take any action against Sub-Adviser or hold Sub-Adviser liable for,
any error of judgment or mistake of law or for any loss suffered by the Funds (including, without limitation, by reason of the purchase,
sale or retention of any security) in connection with the performance of Sub-Adviser’s duties under this Agreement, except for a loss
resulting from willful misfeasance, bad faith, or gross negligence on the part of Sub-Adviser in the performance of its duties under this
Agreement, or by reason of its reckless disregard of its obligations and duties under this Agreement.
20. AUTHORITY TO EXECUTE TRANSACTION DOCUMENTS
Subject to any other written instructions of Manager or the Trust, Sub-Adviser is hereby appointed agent and attorney-in-fact for
the limited purposes of executing, on behalf of each Fund specified on Schedule A hereto, the following: account documentation,
transaction term sheets and confirmations, certifications regarding the Fund’s status as an accredited investor, qualified institutional
buyer, or qualified purchaser, and certifications regarding other factual matters as may be requested by brokers, dealers, or
counterparties in connection with its management of the Fund’s assets. However, nothing in this section shall be construed as
imposing a duty on Sub-Adviser to act in its capacity as attorney-in-fact for a Fund. Any person dealing with Sub-Adviser in its
capacity as attorney-in-fact hereunder for a Fund is hereby expressly put on notice that Sub-Adviser is acting solely in the capacity as
an agent of the Fund and that any such person must look solely to the Fund for enforcement of any claim against Fund, as Sub-Adviser
assumes no personal liability to such person whatsoever for obligations of the Fund entered into by Sub-Adviser in its capacity as
attorney-in-fact for the Fund.
21. CYBERSECURITY AND BUSINESS CONTINUITY
Sub-Adviser shall establish, implement, and maintain documented procedures to ensure the appropriate identification,
monitoring, detection, and mitigation of information technology related risks of Sub-Adviser as they affect the Funds on an ongoing
basis. Specifically, Sub-Adviser shall take the following actions: (1) implement documented cybersecurity procedures to identify
threats and to prevent and detect security events and incidents and put in place safeguards to protect all information and data relating
to the Funds against unauthorized access or use by a third party or misuse, damage, or destruction by any person; (2) ensure that
appropriate information technology and cyber risk assessments are conducted at regular intervals; (3) ensure that the effectiveness of
its information technology systems, controls, and cybersecurity arrangements are reviewed and tested on a periodic basis, and, where
weaknesses are identified as part of this review process, remediate such weaknesses in a timely manner; (4) provide all relevant
information relating to its information technology risk management and cybersecurity procedures as may be reasonably requested by
the Trustees from time to time and, upon request, make a presentation to the Trustees on such procedures; (5) ensure that training on
cybersecurity awareness is delivered to its employees on a periodic basis; (6) put in place a documented cybersecurity incident
response and recovery plan that sets down the actions Sub-Adviser will take during and after a cybersecurity incident; (7) document
and implement a business continuity plan that enables Sub-Adviser to maintain business operations and services impacting the Funds
in the event of a disruption; (8) document and implement an adequate and appropriate disaster recovery plan that enables it to recover
from and resume provision of services to the Funds on a timely basis in the event of a disaster or emergency situation; and
(9) promptly notify the Trustees when Sub-Adviser becomes aware of any (a) failure or significant malfunction of any hardware or
software used by Sub-Adviser that would impact the provision of services to the Funds, (b) loss of data relating to the Funds by Sub-
Adviser, or (c) action taken through the use of computer networks that results in an actual or potential adverse effect on Sub-Adviser’s
information system or data residing on that system.
22. ENTIRE AGREEMENT
This Agreement contains the entire understanding and agreement of the parties with respect to each Fund.
23. HEADINGS
The headings in the sections of this Agreement are inserted for convenience of reference only and shall not constitute a part
hereof.
24. COUNTERPARTS
This Agreement may be executed in counterparts each of which shall be deemed to be an original and all of which, taken
together, shall be deemed to constitute the same instrument.
* * *
(Signatures on next page.)
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers as
of the date first mentioned above.
HENNESSY ADVISORS, INC.
By: /s/ Teresa M. Nilsen
Teresa M. Nilsen
President
BP CAPITAL FUND ADVISORS, LLC
By: /s/ Patrick Hurley
Patrick Hurley
Principal
Signature Page to Sub-Advisory Agreement
SCHEDULE A
(as of October 26, 2018)
Name of Fund
Hennessy BP Energy Fund
Hennessy BP Midstream Fund
Sub-Advisory Fee per Annum
(as a % of average daily net assets)
0.40%
0.40%
Schedule A
SECOND AMENDMENT TO
AMENDED AND RESTATED SERVICING AGREEMENT
Exhibit 10.15
THIS SECOND AMENDMENT TO AMENDED AND RESTATED SERVICING AGREEMENT (this
“Amendment”) is made effective as of October 26, 2018 by and between Hennessy Funds Trust, a Delaware statutory trust (the
“Trust”), on behalf of each of its investment series set forth on Schedule A hereto as it may be amended from time to time (hereinafter
referred to each as a “Fund” and together as the “Funds”), and Hennessy Advisors, Inc., a California corporation (“HNNA”).
RECITALS
WHEREAS, the Trust is engaged in business as a diversified open-end management investment company and HNNA
serves as investment adviser to the Funds pursuant to one or more investment advisory agreements with the Trust (the “Advisory
Agreements”);
WHEREAS, the Trust and HNNA previously entered into an Amended and Restated Servicing Agreement, dated as of
February 28, 2014, pursuant to which the Trust retained HNNA to perform services to certain of the Funds that are in addition to the
services that HNNA performs for such Funds pursuant to the Advisory Agreements (the “A&R Agreement”);
WHEREAS, the Trust and HNNA previously amended the A&R Agreement pursuant to the First Amendment to
Amended and Restated Servicing Agreement, dated as of March 1, 2015, to replace Schedule A with an updated schedule; and
WHEREAS, the parties now desire to further amend the A&R Agreement to replace Schedule A with a further updated
schedule.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and covenants hereinafter contained, the Trust on behalf of the
Funds and HNNA do mutually promise and agree as follows:
1. Schedule A to the A&R Agreement is hereby replaced in its entirety with Schedule A to this Amendment.
2. Except as herein modified or amended, the terms and conditions of the A&R Agreement shall remain unchanged and in
full force and effect.
(Signature page follows.)
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed on the day first above written.
HENNESSY ADVISORS, INC.
By: /s/ Teresa M. Nilsen
Teresa M. Nilsen
President
HENNESSY FUNDS TRUST
By: /s/ Neil J. Hennessy
Neil J. Hennessy
President
Signature Page to Second Amendment to Amended and Restated Servicing Agreement
SCHEDULE A
(as of October 26, 2018)
Name of Fund — Investor Class Shares Only
Hennessy Cornerstone Growth Fund
Hennessy Focus Fund
Hennessy Cornerstone Mid Cap 30 Fund
Hennessy Cornerstone Large Growth Fund
Hennessy Cornerstone Value Fund
Hennessy Total Return Fund
Hennessy Equity and Income Fund
Hennessy Balanced Fund
Hennessy BP Energy Fund
Hennessy BP Midstream Fund
Hennessy Gas Utility Fund
Hennessy Japan Fund
Hennessy Japan Small Cap Fund
Hennessy Large Cap Financial Fund
Hennessy Small Cap Financial Fund
Hennessy Technology Fund
Schedule A
Servicing Fee per Annum
(as a % of average daily net assets)
0.10%
0.10%
0.10%
0.10%
0.10%
0.10%
0.10%
0.10%
0.10%
0.10%
0.10%
0.10%
0.10%
0.10%
0.10%
0.10%
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. 333-222001)
and Form S-8 (No. 333-188439) of our report dated November 28, 2018, with respect to our audits of the financial statements of
Hennessy Advisors, Inc. as of September 30, 2018 and 2017, and for the years ended September 30, 2018 and 2017, and our report
dated November 28, 2018, with respect to our audit of the effectiveness of internal control over financial reporting of Hennessy
Advisors, Inc. as of September 30, 2018, which reports are included in this Annual Report on Form 10-K of Hennessy Advisors, Inc.
for the year ended September 30, 2018.
/s/ Marcum LLP
Marcum LLP
San Francisco, California
November 28, 2018
Exhibit 31.1
I, Teresa M. Nilsen, certify that:
Rule 13a – 14a Certification of the Principal Executive Officer
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Hennessy Advisors, Inc.;
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;
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;
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.
Date: November 28, 2018
/s/ Teresa M. Nilsen
Teresa M. Nilsen, President
Hennessy Advisors, Inc.
Exhibit 31.2
I, Kathryn R. Fahy, certify that:
Rule 13a – 14a Certification of the Principal Financial Officer
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Hennessy Advisors, Inc.;
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;
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;
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.
Date: November 28, 2018
/s/ Kathryn R. Fahy
Kathryn R. Fahy, Chief Financial Officer
Hennessy Advisors, Inc.
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, 2018 (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: November 28, 2018
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, 2018 (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: November 28, 2018
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