Item 5. Market for Registrant’s Common Equity
ITEM 5.
MARKET FOR REGISTRANTS 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 2020, we had 126 holders of record of our common stock.
In addition to the 126 holders of record, there were 43 brokerage firm accounts that represent 1,554 additional individual shareholders for a total of 1,680 shareholders.
The equity compensation plan information required by Item 201(d) of Regulation S-K is set
forth in the Equity Compensation Plan Information subheading under Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
We repurchased 270,896 shares of our common stock pursuant to the stock buyback program during fiscal year 2020. A total of 596,368 shares
remains available for repurchase under the stock buyback program. We temporarily suspended repurchases under the stock buyback program as of March 24, 2020.
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We also repurchased shares underlying vested restricted stock units (RSUs) from
employees to satisfy tax withholding obligations arising in connection with the vesting of RSUs. The stock repurchases are presented in the following table for the three months ended September 30, 2020:
Period
Total Number of
Shares Purchased
Average Price Paid
per Share
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans or
Programs (1)
July 1-31, 2020
$
596,368
August 1-31, 2020
596,368
September 1-30, 2020 (2)
34,887
9.01
596,368
Total
34,887
$
9.01
596,368
(1)
We are authorized to purchase a maximum of 1,500,000 shares under our stock buyback program. We announced the
stock buyback program in August 2010, and the program has no expiration date. We did not repurchase any shares pursuant to the stock buyback program during the three months ended September 30, 2020.
(2)
The shares repurchased in September 2020 were not completed pursuant to a plan or program and are therefore not
subject to a maximum per plan or program.
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the securities laws, for which we claim the protection of the
safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by terminology such as
expect, anticipate, intend, may, plan, will, should, could, would, assume, believe, estimate,
predict, potential, project, continue, seek, and similar expressions, as well as statements in the future tense. We have based these forward-looking statements on our current expectations
and projections about future events, based on information currently available to us. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at
which, or means by which, such performance or results will be achieved.
Forward-looking statements are subject to risks, uncertainties,
and assumptions, including those described in the section 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.
Our business activities are affected by many factors, including, without limitation, redemptions by mutual fund
shareholders, taxes, general economic and business conditions, including those related to the COVID-19 pandemic, movement of interest rates, competitive conditions, industry regulation, and fluctuations in the
stock market, many of which are beyond the control of our management. Further, the business and regulatory environments in which we operate remain complex, uncertain, and subject to change. We expect that regulatory requirements and developments
will cause us to incur additional administrative and compliance costs. 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. 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.
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OUR CONTINUING RESPONSE TO THE COVID-19 PANDEMIC
In mid-March 2020, in response to the COVID-19 pandemic, we
invoked our business continuity plan to ensure a smooth transition to remote work for our employees. We have continued to effectively operate the Company and remain committed to providing the same high level of services to the 16 Hennessy Funds and
their shareholders. Further, we have undertaken various initiatives to ensure our continuing success in the work-from-home environment and to look forward to our
employees returning to the office, including the following:
Regularly engaging with key partners and service providers to garner assurance regarding their ability to
continue to provide high-quality services to us and to the Hennessy Funds;
Strengthening our digital marketing and public relations, including by expanding our online presence and speaking
on and moderating panels at virtual industry-related conferences;
Keeping open lines of communication with our employees as they work from home to help ensure seamless operations,
productive interactions, and early identification of issues;
Creating a thorough
return-to-work plan and training all employees on such plan to prepare for their eventual return to in-office work; and
Maintaining effective governance and internal controls in a remote work setting.
Given the dynamic nature of the COVID-19 pandemic and its effects, we will continue to revise our
approach to these initiatives and take any additional actions we deem appropriate to meet the needs of our employees, our partners, and the Hennessy Funds and their shareholders. While we cannot reasonably estimate the duration and severity of the COVID-19 pandemic or its ultimate impact on our business and revenues, we believe we have positioned ourselves as best as possible to emerge from the current crisis prepared for long-term growth.
OVERVIEW
Our primary business activity
is providing investment advisory services to a family of open-end mutual funds branded as the Hennessy Funds. We manage 10 of the 16 Hennessy Funds internally. For the remaining six funds, we have delegated
the day-to-day portfolio management responsibilities to sub-advisors, subject to our oversight. We oversee the selection and
continued employment of each sub-advisor, review each funds investment performance, and monitor each sub-advisors adherence to each applicable funds
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, as feasible. Our secondary business activity is providing shareholder services to shareholders of the Hennessy Funds.
We derive our operating revenues from investment advisory fees and shareholder service fees paid to us by the Hennessy Funds. These fees are
calculated as a percentage of the average daily net assets in each Hennessy Fund. The percentage amount of the investment advisory fees varies by fund. The percentage amount of the shareholder service fees is consistent across all funds, but
shareholder service fees are charged on Investor Class shares only. The dollar amount of the fees we receive fluctuates with changes in the average net asset value of each Hennessy Fund, which is affected by each funds investment
performance, purchases and redemptions of shares, general market conditions, and the success of our marketing, sales, and public relations efforts.
U.S. equities had positive performance for the 12 months ended September 30, 2020, with the S&P 500 ® Index returning 15.15% and the Dow Jones Industrial Average returning 5.70% for the period (on a total return basis). It should be noted that during the same period, where large market
capitalization stocks outperformed smaller ones, over half of the S&P 500s return for the period was comprised of only three stocks Apple, Microsoft, and Amazon. During the recent quarter ended September 30, 2020, equity prices
continued their advance with the S&P 500 ® Index up 8.93% and the Dow Jones Industrial Average up 8.22%. After an initial sharp selloff in equities earlier this year, investor panic
over COVID-19 appears to have subsided somewhat, perhaps due to increased optimism about the prospect of FDA approval of a COVID-19 vaccine in the next several months.
In addition, low interest rates, and the expectation that they will remain low for the foreseeable future, have provided a tailwind to equity prices. Despite a difficult labor market, recent trends appear to show promise as the unemployment rate has
declined significantly. After peaking at 14.7% in April, the unemployment rate declined to 7.9% in September.
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Long-term U.S. bonds rallied strongly during the 12 months ended September 30, 2020, as
the Federal Reserve acted quickly in the face of the COVID-19 pandemic to attempt to bring stability to financial markets. Further, the Federal Reserve has indicated that it is highly unlikely that it will
raise rates in the next few years. With the unemployment rate still elevated from its 2019 lows and inflation in check, investors appear to take solace in the idea that the Federal Reserve stands ready to support the market given the tools it has at
its disposal.
The Japanese equity market rose 7.38% (in U.S. dollar terms) over the 12 months ended September 30, 2020, as measured
by the Tokyo Stock Price Index. Investors appeared heartened by the recent trend in COVID-19 cases in the country and the prospect of a broader economic rebound in Asia. The replacement of Prime Minister
Shinzo Abe with his close ally Yoshihide Suga suggests that economic growth will continue to be the governments priority.
Against
this backdrop, 9 of the 16 Hennessy Funds posted positive returns for the one-year period ended September 30, 2020. The longer-term performance numbers remain
strong, with 13 of the Hennessy Funds posting positive returns for the five-year period ended September 30, 2020, and all 14 Hennessy Funds with at least 10 years of operating history posting
positive returns for the 10-year period ended September 30, 2020.
As always, we are
committed to providing superior service to investors and employing a consistent and disciplined approach to investing based on a buy-and-hold philosophy that rejects the
idea of market timing. Our goal is to provide products that investors can have confidence in, knowing their money is invested as promised and with their best interests in mind. Accordingly, we continually seek new and improved ways to support
investors in the Hennessy Funds, including by providing thought leadership and other resources to help them navigate through this unprecedented market disruption due to the pandemic. We operate a robust and
leading-edge marketing automation and customer relationship management (CRM) system, with a database of over 100,000 financial advisors in addition to retail investors. We utilize this technology both to
retain assets and to drive new purchases into the Hennessy Funds. We employ a comprehensive marketing and sales program consisting of content, digital, social media, and traditional marketing initiatives and proactive meetings. In addition, our
consistent annual public relations campaign has resulted in the Hennessy brand name appearing on TV, radio, print, or online media on average once every two to three days.
We provide service to nearly 180,000 mutual fund accounts nationwide, including accounts held by shareholders who employ financial
advisors to assist them with investing and retail shareholders who invest directly with us. We serve approximately 16,000 financial advisors who utilize the Hennessy Funds on behalf of their clients, including 800 advisors who purchased one of
our Funds for the first time during fiscal year 2020. Approximately 17% of such advisors owns two or more Hennessy Funds, and nearly 550 advisors hold a position of over $500,000, demonstrating strong brand loyalty.
Total assets under management as of the end of fiscal year 2020 was $3.6 billion, a decrease of $1.3 billion, or 26.9%,
compared to the end of fiscal year 2019. The decrease in total assets during fiscal year 2020 was primarily attributable to net outflows from the Hennessy Funds, but it was further impacted by market depreciation in the quarter ended
March 31, 2020, as a result of the COVID-19 pandemic.
The following table illustrates the
changes in our assets under management over the past three years:
Fiscal Years Ended September 30,
2020
2019
2018
(In thousands)
Beginning assets under management
$
4,873,839
$
6,197,617
$
6,612,812
Acquisition inflows
194,948
374,361
Organic inflows
571,195
825,541
1,193,270
Redemptions
(1,771,127
)
(2,374,734
)
(2,376,180
)
Market appreciation (depreciation)
(109,310
)
30,467
393,354
Ending assets under management
$
3,564,597
$
4,873,839
$
6,197,617
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As stated above, the fees we receive for providing investment advisory and shareholder
service are based on average assets under management. The following table shows average assets under management by share class over the past three years:
Fiscal Years Ended September 30,
2020
2019
2018
(In thousands)
Average assets under managementInvestor Class
$
2,556,875
$
3,357,813
$
4,354,765
Average assets under managementInstitutional Class
1,541,529
1,826,929
2,295,791
Total
$
4,098,404
$
5,184,742
$
6,650,556
The principal asset on our balance sheet, management contracts, represents the capitalized costs incurred in
connection with the purchase of the assets related to the management of mutual funds. As of the end of fiscal year 2020, this asset had a net balance of $80.6 million, unchanged since the end of fiscal year 2019.
The principal liability on our balance sheet has historically been bank debt. However, on March 26, 2020, we prepaid in full all
principal, accrued interest, and costs and expenses outstanding under our term loan agreement. The aggregate prepayment amount was $15.4 million. As a result of this prepayment, as of September 30, 2020, the principal liability on our
balance sheet is the deferred tax liability of $11.5 million generated due to the continued write off of our management contracts asset for tax purposes, which creates a
book-to-tax difference.
RESULTS OF OPERATIONS
The following table sets forth items in our statements of income as dollar amounts and as percentages of total revenue:
Fiscal Years Ended September 30,
2020
2019
Amounts
Percent of
Total Revenue
Amounts
Percent of
Total Revenue
(In thousands, except percentages)
Revenue
Investment advisory fees
$
30,831
92.3
%
$
39,357
92.1
%
Shareholder service fees
2,558
7.7
3,358
7.9
Total revenue
33,389
100.0
42,715
100.0
Operating expenses
Compensation and benefits
8,820
26.4
10,933
25.6
General and administrative
4,961
14.9
5,796
13.6
Mutual fund distribution
477
1.4
512
1.2
Sub-advisory fees
7,573
22.7
9,228
21.6
Depreciation
239
0.7
225
0.5
Total operating expenses
22,070
66.1
26,694
62.5
Operating income
11,319
33.9
16,021
37.5
Interest expense
447
1.3
1,084
2.5
Other income
(89
)
(0.2
)
(338
)
(0.8
)
Income before income tax expense
10,961
32.8
15,275
35.8
Income tax expense
3,120
9.3
4,244
10.0
Net income
$
7,841
23.5
%
$
11,031
25.8
%
Revenues Investment Advisory Fees and Shareholder Service Fees
Total revenue comprises investment advisory fees and shareholder service fees. Comparing fiscal year 2020 to fiscal year 2019, total revenue
decreased by 21.8%, from $42.7 million to $33.4 million, investment advisory fees decreased by 21.7%, from $39.4 million to $30.8 million, and shareholder service fees decreased by 23.8%, from $3.4 million to
$2.6 million.
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The decrease in investment advisory fees was mainly due to decreased average daily net
assets of the Hennessy Funds, which was primarily attributable to net outflows. In addition, market depreciation that largely resulted from the COVID-19 pandemic had a significant impact on our total assets
under management in the quarter ended March 31, 2020, which put additional downward pressure on our average assets under management for the remainder of our fiscal year 2020.
The decrease in shareholder service fees was due to a decrease in the average daily net assets held in Investor Class shares of the
Hennessy Funds for the same reasons described in the paragraph above. Assets held in Investor Class shares of the Hennessy Funds are subject to a shareholder service fee, whereas assets held in Institutional Class shares of the Hennessy
Funds are not subject to a service fee.
We collect investment advisory fees from each Hennessy Fund at differing annual rates. These
annual rates range between 0.40% and 1.25% of average daily net assets. Average daily net assets of the Hennessy Funds for fiscal year 2020 was $4.1 billion, which represents a decrease of $1.1 billion, or 21.0%, compared to fiscal year
2019. The Hennessy Fund with the largest average daily net assets for fiscal year 2020 was the Hennessy Focus Fund, with $1.4 billion. We collect an investment advisory fee from the Hennessy Focus Fund at an annual rate of 0.90% of average
daily net assets. However, we pay a sub-advisory fee at an annual rate of 0.29% to the funds sub-advisor, which reduces the net operating profit contribution of
the fund to our financial operations. The Hennessy Fund with the second largest average daily assets for fiscal year 2020 was the Hennessy Gas Utility Fund, with $0.7 billion. We collect an investment advisory fee from the Hennessy Gas Utility
Fund at an annual rate of 0.40% of average daily net assets.
Total assets under management as of the end of fiscal year 2020 was
$3.6 billion, a decrease of $1.3 billion, or 26.9%, compared to the end of fiscal year 2019. The decrease was attributable primarily to net outflows from the Hennessy Funds and secondarily to market depreciation that largely resulted
from the COVID-19 pandemic.
The Hennessy Funds, like many actively managed U.S. mutual funds,
experienced net outflows this year. The Hennessy Balanced Fund, with $0.5 million in net inflows, was the only Hennessy Fund with net inflows for fiscal year 2020.
The Hennessy Funds with the three largest amounts of net outflows were as follows:
Fiscal Year Ended September 30,
2020
Fund Name
Amount
Hennessy Focus Fund
$(562) million
Hennessy Gas Utility Fund
$(214) million
Hennessy Mid Cap 30 Fund
$(88) million
Redemptions as a percentage of assets under management decreased from an average of 3.7% per month during
fiscal year 2019 to an average of 3.6% per month during fiscal year 2020.
Operating Expenses
Comparing fiscal year 2019 to fiscal year 2020, total operating expenses decreased by 17.3%, from $26.7 million to $22.1 million, due
to decreases in all expense categories other than depreciation expense, which moderately increased. Although the dollar value decreased, operating expenses as a percentage of total revenue increased 3.6 percentage points to 66.1% because our fixed
costs did not decrease with decreasing revenue.
Compensation and Benefits Expense : Comparing fiscal year 2019 to fiscal year 2020,
compensation and benefits expense decreased by 19.3%, from $10.9 million to $8.8 million, due primarily to a decrease in incentive-based compensation and secondarily to temporary 25% salary
reductions taken voluntarily by our executive officers for the period from May 1, 2020, through September 30, 2020. Although the dollar value decreased, compensation and benefits expense as a percentage of total revenue increased 0.8
percentage points to 26.4% because our fixed salary and benefits costs did not decrease with decreasing revenue (other than the temporary voluntary salary reductions taken by our executive officers).
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General and Administrative Expense : Comparing fiscal year 2019 to fiscal year 2020,
general and administrative expense decreased by 14.4%, from $5.8 million to $5.0 million, due mainly to decreased travel and conference-related expense. Although the dollar value decreased, general and administrative expense as a
percentage of total revenue increased 1.3 percentage points to 14.9% because our fixed costs did not decrease with decreasing revenue.
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 2019 to fiscal year 2020, mutual fund distribution expense decreased by 6.8%, from $0.51 million to
$0.48 million, due to lower average daily net assets of the Hennessy Funds held at financial institutions, which was driven in large part by significant market depreciation in the quarter ended March 31, 2020, that primarily resulted from
the COVID-19 pandemic. Although the dollar value decreased, mutual fund distribution expense as a percentage of total revenue increased 0.2 percentage points to 1.4%.
Sub-Advisory Fees Expense : Comparing fiscal year 2019 to fiscal year 2020, sub-advisory fees expense decreased by 17.9%, from $9.2 million to $7.6 million, due to decreased average daily net assets held in the sub-advised Hennessy Funds.
Although the dollar value of sub-advisory fees expense decreased, as a percentage of total revenue, sub-advisory fees expense increased 1.1 percentage points to 22.7%
due to a greater decrease in average daily net assets held by the Hennessy Funds that we internally manage than in average daily net assets of the sub-advised Hennessy Funds.
Depreciation Expense : Comparing fiscal year 2019 to fiscal year 2020, depreciation expense increased by 6.2% from $0.23 million to
$0.24 million as a result of a higher fixed assets purchase base. As a percentage of total revenue, depreciation expense increased 0.2 percentage points to 0.7%.
Interest Expense
Comparing fiscal year
2019 to fiscal year 2020, interest expense decreased by 58.8%, from $1.1 million to $0.4 million, due primarily to a decrease in our principal loan balance, which we repaid in full on March 26, 2020.
Income Tax Expense
Comparing fiscal year
2019 to fiscal year 2020, income tax expense decreased by 26.5%, from $4.2 million to $3.1 million, due primarily to lower net operating income in the current period, offset slightly by a higher effective income tax rate that resulted from
paying income taxes to a greater number of states.
Net Income
Comparing fiscal year 2019 to fiscal year 2020, net income decreased by 28.9%, from $11.0 million to $7.8 million, primarily due to
lower net operating income in the current period, and secondarily due to the higher effective income tax rate 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 the end of fiscal year 2020 will be sufficient to meet our capital requirements for at least one year from the issuance date of this report. To the extent that liquid resources and cash provided
by operations are not adequate to meet long-term capital requirements, management plans to raise additional capital by either, or both, seeking bank financing or accessing the capital markets. There can be no assurance that we will be able to raise
additional capital.
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Our total assets under management as of the end of fiscal year 2020 was $3.6 billion, a
decrease of $1.3 billion, or 26.9%, from the end of fiscal year 2019. The primary sources of our revenues, liquidity, and cash flow are our investment advisory fees and shareholder service fees, which are based on, and generated by, our average
assets under management. Our average assets under management for fiscal year 2020 was $4.1 billion. As of the end of fiscal year 2020, we had cash and cash equivalents of $10.0 million.
The following table summarizes key financial data relating to our liquidity and use of cash:
Fiscal Years Ended September 30,
2020
2019
(In thousands)
Net cash provided by operating activities
$
10,623
$
14,392
Net cash used in investing activities
(882
)
(1,974
)
Net cash used in financing activities
(24,473
)
(13,126
)
Net decrease in cash and cash equivalents
$
(14,732
)
$
(708
)
Comparing fiscal year 2019 to fiscal year 2020, cash provided by operating activities decreased
$3.8 million due mainly to decreased operating income.
Comparing fiscal year 2019 to fiscal year 2020, cash used for investing
activities decreased $1.1 million because the first payment for the purchase of the assets related to the management of the BP Funds in fiscal year 2019 was larger than the second payment for such assets in fiscal year 2020.
Comparing fiscal year 2019 to fiscal year 2020, cash used for financing activities increased $11.3 million, which represents the
difference between the repayment in full of our term loan during fiscal year 2020 compared to the aggregate amount of the regular payments made on our term loan during fiscal year 2019.
Dividend Payments . We have consistently paid dividends each year since 2005. Our quarterly dividend rate remained constant during
fiscal year 2020, and dividend payments totaled $4.0 million. During fiscal year 2019, our Board of Directors increased the quarterly dividend rate twice, (i) from $0.10 per share to $0.11 per share in October 2018 and
(ii) from $0.11 per share to $0.1375 per share in August 2019. Dividend payments for fiscal year 2019 totaled $3.5 million.
Our Bank Loan . On March 26, 2020, we prepaid in full all principal, accrued interest, and costs and expenses outstanding under our
term loan agreement with U.S. Bank National Association. The aggregate prepayment amount of $15.4 million was funded by cash on hand, and we did not incur any prepayment penalties. Under the term loan agreement, interest was calculated based on
the one-month LIBOR rate plus a margin that ranged from 2.25% to 2.75% depending on our ratio of consolidated debt to consolidated EBITDA. Prior to repayment, certain debt issuance costs were capitalized and
netted against the underlying loan balance and were then amortized over the term of the loan. Upon repayment, the unamortized debt issuance costs were charged to interest expense.
Prior to its termination, we were obligated under the term loan agreement to make monthly payments of $364,583 plus interest, the final
installment of which would have been due on May 9, 2022.
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 managements current judgments. Those judgments are normally based on knowledge and experience with regard to
past and current events and assumptions about future events. Certain accounting policies, methods, and estimates are particularly sensitive because of their significance to the financial statements and because future events affecting them may differ
markedly from managements current judgment. Described below are the accounting policies that we believe are most critical to understanding our results of operations and financial position.
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Our operating revenues consist of contractual investment advisory and shareholder service
fees. We earn our investment advisory fees through portfolio management of the Hennessy Funds, and we earn our shareholder service fees by assisting investors in purchases, sales, distribution, and customer service. These fee revenues are earned and
calculated daily by the Hennessy Funds accountants. In accordance with Financial Accounting Standards Board (FASB) guidance on revenue recognition, we recognize fee revenues monthly. Our contractual agreements provide persuasive
evidence that an arrangement exists with fixed and determinable fees, and the services are rendered daily. The collectability is probable as the fees are received from the Hennessy Funds in the month subsequent to the month in which the services are
provided.
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 2020 as the
more-likely-than-not threshold was not met as of the end of fiscal year 2020.
The costs
related to our purchase of the 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 contracts asset, totaling $80.6 million as of the end of fiscal
year 2020.
RECENTLY ISSUED AND ADOPTED ACCOUNTING STANDARDS
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), as
amended, which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. The new standard establishes a
right-of-use model that requires a lessee to recognize a right-of-use asset and lease
liability on the balance sheet for all leases with a term longer than 12 months. Leases must be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. All of
our leases are operating leases. We adopted the new standard on October 1, 2019, using the modified retrospective method and the transition relief guidance provided by the FASB in ASU No. 2018-11,
Leases (Topic 842): Targeted Improvements. As a result, we did not update financial information or provide disclosures required under the new standard for dates and periods prior to October 1, 2019. In addition, we adopted the
FASBs lessee practical expedient option to combine lease and non-lease components for all asset classes and elected, as an accounting policy, not to recognize right-of-use assets and lease liabilities for leases with terms of 12 months or less. Non-lease components are fixed costs, such as electricity or common area
maintenance, that can be included in rent payments but are not a part of the underlying asset being capitalized. There were no such fixed costs associated with our capitalized right of use asset, so this election did not impact our financial
statements. Upon adoption of ASU 2016-02, we recorded $0.7 million in right-of-use assets (which is net of
$0.1 million in deferred rent outstanding just before adoption) and $0.8 million in lease liabilities.
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. We are currently evaluating the impact of adopting this update, but do not expect it to have a material impact on our
financial condition, results of operations, cash flows, or related disclosures.
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There have been no other significant changes to our critical accounting policies and
estimates during fiscal year 2020.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.