Item 8. Financial Statements and Supplementary Data
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements:
Report of Independent Registered Public Accounting Firm
40
Balance Sheets
41
Statements of Income
42
Statements of Changes in Stockholders Equity
43
Statements of Cash Flows
44
Notes to Financial Statements
45
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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, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period
ended September 30, 2020, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph
Change in Accounting Principle
As discussed in Note 15 to the financial statements, the Company changed its method of accounting for leases in
2019 due to the adoption of ASU No. 2016-02, Leases (Topic 842), as amended, effective October 1, 2019, using the modified retrospective approach.
Basis for Opinion
These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on the Companys financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (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. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial
reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion.
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 Companys auditor since 2004.
Costa Mesa, CA
December 1, 2020
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Hennessy Advisors, Inc.
Balance Sheets
(In thousands, except share and per share amounts)
September 30,
September 30,
2020
2019
Assets
Current assets
Cash and cash equivalents
$
9,955
$
24,687
Investments in marketable securities, at fair value
9
9
Investment fee income receivable
2,403
3,291
Prepaid expenses
637
633
Other accounts receivable
378
392
Total current assets
13,382
29,012
Property and equipment, net of accumulated depreciation of $1,618 and $1,379,
respectively
294
361
Operating lease
right-of-use asset
276
Management contracts
80,643
80,643
Other assets
191
192
Total assets
$
94,786
$
110,208
Liabilities and Stockholders Equity
Current liabilities
Accrued liabilities and accounts payable
$
3,813
$
5,538
Accrued purchase consideration payable
710
Operating lease liability
330
Income taxes payable
949
672
Deferred rent
116
Current portion of long-term debt, net of debt issuance costs
4,327
Total current liabilities
5,092
11,363
Long-term debt, net of debt issuance costs and current portion
13,048
Deferred income tax liability, net
11,516
10,269
Total liabilities
16,608
34,680
Commitments and contingencies (Note 10)
Stockholders equity
Common stock, no par value, 22,500,000 shares authorized; 7,356,822 shares issued and outstanding
as of September 30, 2020, and 7,527,040 as of September 30, 2019
18,705
17,673
Retained earnings
59,473
57,855
Total stockholders equity
78,178
75,528
Total liabilities and stockholders equity
$
94,786
$
110,208
See Accompanying Notes to Financial Statements
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Hennessy Advisors, Inc.
Statements of Income
(In thousands, except share and per share amounts)
Fiscal Years Ended September 30,
2020
2019
Revenue
Investment advisory fees
$
30,831
$
39,357
Shareholder service fees
2,558
3,358
Total revenue
33,389
42,715
Operating expenses
Compensation and benefits
8,820
10,933
General and administrative
4,961
5,796
Mutual fund distribution
477
512
Sub-advisory fees
7,573
9,228
Depreciation
239
225
Total operating expenses
22,070
26,694
Net operating income
11,319
16,021
Interest expense
447
1,084
Other income
(89
)
(338
)
Income before income tax expense
10,961
15,275
Income tax expense
3,120
4,244
Net income
$
7,841
$
11,031
Earnings per share
Basic
$
1.07
$
1.42
Diluted
$
1.06
$
1.42
Weighted average shares outstanding
Basic
7,352,495
7,757,785
Diluted
7,378,729
7,771,561
Cash dividends declared per share
$
0.55
$
0.47
See Accompanying Notes to Financial Statements
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Hennessy Advisors, Inc.
Statements of Changes in Stockholders Equity
Fiscal Years Ended September 30, 2020 and 2019
(In thousands, except share data)
Common Stock
Retained
Total
Stockholders
Shares
Amount
Earnings
Equity
Balance at September 30, 2018
7,897,145
$
16,783
$
54,197
$
70,980
Net income
11,031
11,031
Dividends paid
(3,598
)
(3,598
)
Employee and director restricted stock vested
155,844
Repurchase of vested employee restricted stock for tax withholding
(37,621
)
(393
)
(5
)
(398
)
Shares issued for auto-investments pursuant to the 2018 Dividend Reinvestment and Stock Purchase
Plan
1,881
20
20
Shares issued for dividend reinvestment pursuant to the 2018 Dividend Reinvestment and Stock
Purchase Plan
5,738
59
59
Shares repurchased pursuant to a stock buyback program
(495,947
)
(980
)
(3,770
)
(4,750
)
Stock-based compensation
2,212
2,212
Employee restricted stock forfeiture
(28
)
(28
)
Balance at September 30, 2019
7,527,040
$
17,673
$
57,855
$
75,528
Net income
7,841
7,841
Dividends paid
(4,040
)
(4,040
)
Employee and director restricted stock vested
125,750
Repurchase of vested employee restricted stock for tax withholding
(34,887
)
(311
)
(3
)
(314
)
Shares issued for auto-investments pursuant to the 2018 Dividend Reinvestment and Stock Purchase
Plan
2,065
22
22
Shares issued for dividend reinvestment pursuant to the 2018 Dividend Reinvestment and Stock
Purchase Plan
7,750
73
73
Shares repurchased pursuant to a stock buyback program
(270,896
)
(534
)
(2,180
)
(2,714
)
Stock-based compensation
1,782
1,782
Balance at September 30, 2020
7,356,822
$
18,705
$
59,473
$
78,178
See Accompanying Notes to Financial Statements
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Hennessy Advisors, Inc.
Statements of Cash Flows
(In thousands)
Fiscal Years Ended September 30,
2020
2019
Cash flows from operating activities
Net income
$
7,841
$
11,031
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation
239
225
Change in
right-of-use asset and operating lease liability
(62
)
Deferred income taxes
1,247
1,304
Stock-based compensation
1,782
2,212
Interest expense associated with debt issuance cost
125
106
Employee restricted stock forfeiture
(28
)
Change in operating assets and liabilities
Investment fee income receivable
888
968
Prepaid expenses
(4
)
35
Other accounts receivable
14
21
Other assets
1
(1
)
Accrued liabilities and accounts payable
(1,725
)
(1,545
)
Income taxes payable
277
114
Deferred rent
(50
)
Net cash provided by operating activities
10,623
14,392
Cash flows from investing activities
Purchases of property and equipment
(172
)
(204
)
Payments related to management contracts
(710
)
(1,770
)
Net cash used in investing activities
(882
)
(1,974
)
Cash flows from financing activities
Principal payments on bank loan
(17,500
)
(4,375
)
Payment of debt issuance costs on bank loan amendment
(84
)
Shares repurchased pursuant to stock buyback program
(2,714
)
(4,750
)
Repurchase of vested employee restricted stock for tax withholding
(314
)
(398
)
Proceeds from shares issued pursuant to the 2018 Dividend Reinvestment and
Stock Repurchase Plan
22
20
Dividend payments
(3,967
)
(3,539
)
Net cash used in financing activities
(24,473
)
(13,126
)
Net decrease in cash and cash equivalents
(14,732
)
(708
)
Cash and cash equivalents at the beginning of the period
24,687
25,395
Cash and cash equivalents at the end of the period
$
9,955
$
24,687
Supplemental disclosures of cash flow information
Cash paid for income taxes
$
1,596
$
3,085
Cash paid for interest
$
381
$
999
Purchase consideration payable
$
$
710
See Accompanying Notes to Financial Statements
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Table of Contents
Notes to Financial Statements
(1)
Organization and Description of Business and Significant Accounting Policies
(a)
Organization and Description of Business
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 Companys operating activities consist primarily of providing investment advisory services to 16 open-end mutual funds branded as the Hennessy Funds. The Company serves as the investment advisor to all classes of the Hennessy Cornerstone Growth Fund, the Hennessy Focus Fund, the Hennessy Cornerstone Mid Cap 30
Fund, the Hennessy Cornerstone Large Growth Fund, the Hennessy Cornerstone Value Fund, the Hennessy Total Return Fund, the Hennessy Equity and Income Fund, the Hennessy Balanced Fund, the Hennessy BP Energy Fund, the Hennessy BP Midstream Fund, the
Hennessy Gas Utility Fund, the Hennessy Japan Fund, the Hennessy Japan Small Cap Fund, the Hennessy Large Cap Financial Fund, the Hennessy Small Cap Financial Fund, and the Hennessy Technology Fund. The Company also provides shareholder services to
shareholders of the Hennessy Funds.
The Companys 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 funds portfolio (including the purchase, retention, and disposition of portfolio securities in accordance with the funds investment objectives,
policies, and restrictions), seeking best execution for the funds portfolio, managing the use of soft dollars for the fund, and managing proxy voting for the fund;
performing a daily reconciliation of portfolio positions and cash for the fund;
monitoring the liquidity of the fund;
monitoring the funds compliance with its investment objectives and restrictions and federal securities
laws;
monitoring compliance with federal securities laws, maintaining a compliance program (including a code of
ethics), conducting ongoing reviews of the compliance programs of the funds service providers (including any sub-advisor), conducting on-site visits to the
funds service providers (including any sub-advisor) as feasible, monitoring incidents of abusive trading practices, reviewing fund expense accruals, payments, and fixed expense ratios, evaluating
insurance providers for fidelity bond, D&O/E&O insurance, and cybersecurity insurance coverage, managing regulatory examination compliance and responses, conducting employee compliance training, reviewing reports provided by service
providers, and maintaining books and records;
if applicable, overseeing the selection and continued employment of the funds sub-advisor, reviewing the funds investment performance, and monitoring the sub-advisors adherence to the funds investment objectives, policies, and
restrictions;
overseeing service providers that provide accounting, administration, distribution, transfer agency, custodial,
sales, marketing, public relations, audit, information technology, and legal services to the fund;
maintaining in-house marketing and distribution departments on behalf of
the fund;
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preparing or directing the preparation of all regulatory filings for the fund, including writing and annually
updating the funds prospectus and related documents;
preparing or reviewing a written summary of the funds performance during 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 funds 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 the Board of Trustees of Hennessy Funds Trust (the
Funds Board of Trustees); and
preparing or reviewing materials for the Funds Board of Trustees, presenting to or leading discussions with
the Funds Board of Trustees, preparing or reviewing all meeting minutes, and arranging for training and education of the Funds Board of Trustees.
The Company earns shareholder service fees from Investor Class shares of the Hennessy Funds by, among other things,
maintaining a toll-free number that the current investors in the Hennessy Funds may call to ask questions about the 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 Standards Codification 606 Revenue Recognition.
The Company
waived a portion of its fees with respect to (i) the Hennessy Cornerstone Large Growth Fund through the expiration of the expense limitation agreement on November 30, 2019, (ii) the Hennessy BP Energy Fund during the second half of
fiscal year 2020, and (iii) the Hennessy BP Midstream Fund and the Hennessy Technology Fund throughout fiscal year 2020, in each case to comply with contractual expense ratio limitations. The fee waivers are calculated daily by the Hennessy
Funds accountants at U.S. Bank Global Fund Services, reviewed by management, and then charged to expense monthly as offsets to the Companys revenues. Each waived fee is then deducted from investment advisory fee income and reduces the
aggregate amount of advisory fees the Company receives from such fund in the subsequent month. To date, the Company has only waived fees based on contractual obligations, but the Company has the ability to waive fees at its discretion. Any decision
to waive fees would apply only on a going-forward basis.
The Companys
contractual agreements for investment advisory and shareholder services prove that a contract exists with fixed and determinable fees, and the services are rendered daily. The collectability is deemed probable because the fees are received from the
Hennessy Funds in the month subsequent to the month in which the services are provided.
The Company is subject to risks
and uncertainties as a result of the COVID-19 pandemic, particularly risks and uncertainties related to the increased volatility in the stock market. The Company cannot reasonably estimate the continued extent
of the impact of the COVID-19 pandemic on the Companys business. As of the date of issuance of the Companys financial statements, the extent to which the
COVID-19 pandemic may materially impact the Companys financial condition, liquidity, or results of operations remains uncertain.
(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.
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(c)
Fair Value of Financial Instruments
The Financial Accounting Standards Board (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 the end of
fiscal years 2020 and 2019. Accordingly, the fair values presented in the Companys financial statements as of the end of fiscal years 2020 and 2019 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 marketable securities and money market accounts is based
on closing net asset values as reported by securities exchanges registered with the SEC.
(d)
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
Note 3 in this Item 8, Financial Statements and Supplementary Data.
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 2020 and 2019.
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.
(e)
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.
(f)
Management Contracts Purchased
Throughout its history, the Company has completed 10 purchases of the assets related to the management of 30 different mutual
funds, some of which were reorganized into already existing Hennessy Funds. In accordance with FASB guidance, the Company periodically reviews the carrying value of its management contract asset to determine if any impairment has occurred. The fair
value of the management contracts asset was estimated by applying the income approach and is based on management estimates and assumptions, including third-party valuations that utilize appropriate valuation techniques. It has been determined that
there was no impairment as of the end of fiscal years 2020 and 2019.
Under Accounting Standards
Codification 350 - Intangibles - Goodwill and Other, intangible assets that have indefinite useful lives are not amortized but are tested at least annually for impairment. The Company reviews the useful life of the management contracts
each reporting period to determine if they continue to have an indefinite useful life. The Company considers the management contracts asset to be an intangible asset with an indefinite useful life and no impairment as of the end of fiscal
year 2020.
The Company completed its most recent asset purchase on October 26, 2018, when it purchased the
assets related to the management of the BP Capital TwinLine Energy Fund and the BP Capital TwinLine MLP Fund (together, the BP Funds). At the completion of the transaction, this asset purchase added nearly $200 million to the
Companys 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 (BP
Capital). Upon completion of the transaction, the assets related to the management of the BP Funds were reorganized into two new series of Hennessy Funds Trust called the Hennessy BP Energy Fund and the Hennessy BP Midstream Fund,
respectively. In connection with the transaction, BP Capital became the sub-advisor to the Hennessy BP Energy Fund and the Hennessy BP Midstream Fund.
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In accordance with the Transaction Agreement, the purchase price comprised
two payments. The initial payment of $1.6 million was funded with available cash in connection with the closing and was based on 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, plus $100,000. The second payment of $0.7 million was funded with available cash promptly following the one-year
anniversary of the closing and was based on the aggregate current net asset value of the BP Funds measured as of the close of business on October 25, 2019, the trading day immediately preceding the
one-year anniversary of the closing date. The Company included the amount of the liability for the second payment in its fiscal year 2019 financial statements because it was measurable prior to the filing date
of the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2019.
(g)
Income Taxes
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 companys 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 the Companys income tax provision, net income, and cash flows. The accrual
for uncertain tax positions is attributable primarily to uncertainties concerning the tax treatment of the Companys domestic operations, including the allocation of income among different jurisdictions. For a further discussion on taxes, refer
to Note 11 in this Item 8, Financial Statements and Supplementary Data.
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The Company is subject to income tax in the U.S. federal jurisdiction and
multiple state jurisdictions. Following is a list of jurisdictions that the Company has identified as its major tax jurisdictions with the tax years that remain open and subject to examination by the appropriate governmental agencies marked:
Tax Jurisdiction
2020
2019
2018
2017
2016
Federal
United States
X
X
X
X
X
State
California
X
X
X
X
X
Colorado
X
X
Connecticut
X
X
X
X
District of Columbia
X
X
X
X
X
Florida
X
X
X
X
Georgia
X
X
X
X
Illinois
X
X
X
X
X
Indiana
X
Iowa
X
X
X
Louisiana
X
X
Maryland
X
X
X
X
X
Massachusetts
X
X
X
X
X
Michigan
X
X
X
X
X
Minnesota
X
X
X
X
X
New Hampshire
X
X
X
X
X
New Jersey
X
New York
X
X
X
X
X
North Carolina
X
X
X
X
X
Oregon
X
X
Pennsylvania
X
X
X
Texas
X
X
X
X
X
Wisconsin
X
X
X
X
Total State Jurisdictions
22
19
17
16
11
For state tax jurisdictions with unfiled tax returns, the statutes 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).
For fiscal years 2020 and 2019, the Company excluded 186,520 and 184,871 common stock
equivalents, respectively, from the diluted earnings per share calculations because they were not dilutive. In each case, the excluded common stock equivalents consisted of non-vested RSUs.
(i)
Equity
Amended and Restated 2013 Omnibus Incentive Plan
The Company has adopted, and the Companys 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 Companys 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.
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The compensation committee of the Companys 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.
Under the Omnibus Plan, participants may be granted RSUs, each of which represents an unfunded, unsecured right to receive a
share of the Companys common stock on the date specified in the recipients 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.
All compensation costs related to RSUs vested during fiscal years 2020 and 2019 have been recognized in the
financial statements.
The Company has available up to 3,678,411 shares of the Companys common stock in respect of
granted stock awards, in accordance with terms of the Omnibus Plan.
A summary of RSU activity is as follows:
Fiscal Years Ended September 30,
2020
2019
Shares
Weighted Average
Grant Date Fair
Value per Share
Shares
Weighted Average
Grant Date Fair
Value per Share
Non-vested balance at beginning of year
313,669
$
12.22
324,771
$
15.43
Granted
134,625
8.13
134,625
8.57
Vested (1)
(126,113
)
(14.13
)
(136,277
)
(16.02
)
Forfeited
(9,450
)
(15.68
)
Non-vested balance at end of year
322,181
$
9.76
313,669
$
12.22
(1)
Represents partially vested RSUs for which the Company already has recognized the associated compensation
expense but has not yet issued to employees the related shares of common stock.
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Additional information related to RSUs is as follows:
September 30, 2020
(In thousands,
except years)
Total expected compensation expense related to RSUs
$
16,056
Recognized compensation expense related to RSUs
(12,911
)
Unrecognized compensation expense related to RSUS
$
3,145
Weighted average remaining period to expense for RSUs
3.0
Dividend Reinvestment and Stock Purchase Plan
In January 2018, the Company adopted an updated Dividend Reinvestment and Stock Purchase Plan (the DRSPP) to
provide shareholders and new investors with a convenient and economical means of purchasing shares of the Companys common stock and reinvesting cash dividends paid on the Companys common stock. Under the DRSPP, the Company issued 9,815
and 7,619 shares of common stock in fiscal years 2020 and 2019, respectively. The maximum number of shares that may be issued under the DRSPP is 1,550,000 shares, of which 1,529,529 shares remain available for issuance.
Although the Company may issue up to 1,550,000 shares of its common stock under the DRSPP, the Company intends to limit the
issuances to less than 20% of the number of outstanding shares of the Companys common stock in accordance with the listing requirements of The NASDAQ Capital Market. As of September 30, 2020, the Company had 7,356,822 shares outstanding.
Therefore, the Company will not issue more than 1,471,364 shares of its common stock under the DRSPP without seeking shareholder approval.
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 repurchased 270,986 shares of its 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. The Company temporarily suspended repurchases under the stock buyback program as of March 24,
2020.
(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)
Fair Value Measurements
The Company applies Accounting Standards Codification 820 Fair Value Measurement for all financial assets and
liabilities, which establishes a framework for measuring fair value and expands disclosures about fair value measurements. The standard defines fair value as the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. It also establishes a fair value hierarchy consisting of the following three levels that prioritize the inputs to the valuation techniques used to measure fair value:
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
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Level 3 Significant unobservable inputs (including the entitys 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.
Based on the definitions, the following table represents the Companys assets categorized in the Level 1 to
Level 3 hierarchies:
September 30, 2020
Level 1
Level 2
Level 3
Total
(In thousands)
Money market fund deposits
$
6,053
$
$
$
6,053
Mutual fund investments
9
9
Total
$
6,062
$
$
$
6,062
Amounts included in
Cash and cash equivalents
$
6,053
$
$
$
6,053
Investments in marketable securities
9
9
Total
$
6,062
$
$
$
6,062
September 30, 2019
Level 1
Level 2
Level 3
Total
(In thousands)
Money market fund deposits
$
21,816
$
$
$
21,816
Mutual fund investments
9
9
Total
$
21,825
$
$
$
21,825
Amounts included in
Cash and cash equivalents
$
21,816
$
$
$
21,816
Investments in marketable securities
9
9
Total
$
21,825
$
$
$
21,825
There were no transfers between levels during fiscal years 2020 or 2019.
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(3)
Investments
The cost, gross unrealized gains, gross unrealized losses, and fair market value of the Companys trading investments were
as follows:
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Total
(In thousands)
2020
Mutual fund investments
$
4
$
23
$
(18
)
$
9
Total
4
23
(18
)
9
2019
Mutual fund investments
$
4
$
22
$
(17
)
$
9
Total
4
22
(17
)
9
The mutual fund investments are included as a separate line item in current assets on the
Companys balance sheets.
(4)
Property and Equipment, Net
The following table summarizes the Companys property and equipment balances:
September 30,
2020
2019
(In thousands)
Equipment
$
538
$
493
Leasehold improvements
154
154
Furniture and fixtures
391
391
IT infrastructure
71
71
Software
758
631
Property and equipment, gross
1,912
1,740
Accumulated depreciation
(1,618
)
(1,379
)
Property and equipment, net
$
294
$
361
During fiscal years 2020 and 2019, depreciation expense was $0.239 million and
$0.225 million, respectively.
(5)
Management Contracts
The costs related to the Companys purchase of the assets related to management contracts are capitalized as incurred and
comprise the management contracts asset. This asset was $80.6 million as of the end of fiscal year 2020, unchanged from the end of fiscal year 2019. The Company considers the management contracts asset to be an intangible asset per Accounting
Standards Codification 350 IntangiblesGoodwill and Other. The purchase costs that comprise the management contracts asset include legal fees, shareholder vote fees, and percent of asset costs to purchase the assets related to
the management contracts.
(6)
Investment Advisory Agreements
The Company has investment advisory agreements with Hennessy Funds Trust under which it provides investment advisory services
to all classes of the 16 Hennessy Funds.
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The investment advisory agreements must be renewed annually (except in
limited circumstances) by (a) the Funds Board of Trustees or the vote of a majority of the outstanding shares of the applicable Hennessy Fund and (b) the vote of a majority of the trustees of Hennessy Funds Trust who are not
interested persons of the Hennessy Funds. If an investment advisory agreement is not renewed, it terminates automatically. There are two additional circumstances in which an investment advisory agreement would terminate. First, an investment
advisory agreement automatically terminates if the Company assigns it to another advisor (assignment includes indirect assignment, which is the transfer of the Companys common stock in sufficient quantities deemed to constitute a
controlling block). Second, an investment advisory agreement may be terminated prior to its expiration upon 60 days written notice by either the applicable Hennessy Fund or the Company.
As provided in each investment advisory agreement, the Company receives investment advisory fees monthly based on a percentage
of the applicable funds average daily net asset value.
The Company has entered into
sub-advisory agreements for the Hennessy Focus Fund, the Hennessy Equity and Income Fund, the Hennessy BP Energy Fund, the Hennessy BP Midstream Fund, the Hennessy Japan Fund, and the Hennessy Japan Small Cap
Fund. Under each of these sub-advisory agreements, the sub-advisor is responsible for the investment of the assets of the applicable Hennessy Fund in accordance with the
terms of such agreement and the applicable Hennessy Funds Prospectus and Statement of Additional Information. The sub-advisors are subject to the direction, supervision, and control of the Company and
the Funds Board of Trustees. The sub-advisory agreements must be renewed annually (except in limited circumstances) in the same manner as, and are subject to the same termination provisions as, the
investment advisory agreements.
In exchange for the sub-advisory services, the
Company (not the Hennessy Funds) pays sub-advisory fees to the sub-advisors out of its own assets. Sub-advisory fees are
calculated as a percentage of the applicable sub-advised funds average daily net asset value.
(7)
Leases
The Company determines if an arrangement is an operating lease at inception. Operating leases are included in operating lease
right of use assets and current and long term operating lease liabilities on the Companys balance sheet. There are no long-term operating leases as of September 30, 2020. Right of use assets represent the Companys right to use an
underlying asset for the lease term and operating lease liabilities represent the Companys obligation to make lease payments arising from the lease. Operating lease right of use assets and liabilities are recognized at the lease commencement
date based on the present value of lease payments over the lease term. In determining the present value of lease payments, the Company uses its incremental borrowing rate based on the information available at the lease commencement date. The
Companys lease terms may include options to extend the lease when it is reasonably certain that it will exercise any such options. For its leases, the Company concluded that it is not reasonably certain that any renewal options would be
exercised, so the amounts are not recognized as part of operating lease right of use assets or operating lease liabilities. Leases with initial terms of 12 months or less and certain office equipment leases that are deemed insignificant are not
recorded on the balance sheet and are expensed as incurred and included within rent expense under general and administrative expense. Lease expense related to operating leases is recognized on a straight-line basis over the expected lease terms.
The Companys most significant leases are real estate leases of office facilities. The Company leases office space
under non-cancelable operating leases. Its principal executive office is located in Novato, California, and it has additional offices in Austin, Texas, Boston, Massachusetts, and Chapel Hill, North Carolina.
Only the office lease in Novato, California has been capitalized because the other operating leases have terms of 12 months or less, including leases that are
month-to-month in nature. The classification of the Companys operating lease
right-of-use assets and operating lease liabilities and other supplemental information related to the Companys operating leases are as follows:
September 30, 2020
(In thousands,
except years
and percentages)
Operating lease
right-of-use assets
$
276
Operating lease liability
$
330
Weighted average remaining lease term years
0.8
Weighted average discount rate
2.28
%
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For fiscal year 2020, the Companys lease payments related to its
operating lease right-of-use assets totaled $443,140 and rent expense, which is recorded under general and administrative expense in the statements of income, totaled
$381,440.
The undiscounted cash flows for future maturities of the Companys operating lease liabilities and the
reconciliation to the balance of operating lease liabilities reflected on the Companys balance sheet are as follows:
September 30, 2020
(In thousands)
Fiscal year 2021 undiscounted cash flows
340
Present value discount
(10
)
Total operating lease liabilities
$
330
(8)
Accrued Expenses
The details relating to the accrued expenses reflected on the Companys balance sheet are as follows:
September 30, 2020
September 30, 2019
(In thousands)
Accrued bonus liabilities
$
2,571
$
3,888
Accrued sub-advisor fees
552
730
Other accrued expenses
690
920
Total accrued expenses
$
3,813
$
5,538
(9)
Bank Loan
On March 26, 2020, the Company prepaid in full all principal, accrued interest, and costs and expenses outstanding under
its term loan agreement with U.S. Bank National Association. The aggregate prepayment amount of $15.4 million was funded by cash on hand, and the Company 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 the Companys 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, the Company was 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.
(10)
Commitments and Contingencies
The Company has no commitments and no significant contingencies with original terms in excess of one year other than operating
leases, which are discussed in Note 7.
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(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 at least 80 hours worked in that month. The Company also made discretionary profit-sharing contributions of $0.19 million and $0.19 million in fiscal years 2020
and 2019, respectively. To be eligible for the discretionary profit-sharing contribution, an employee must have completed a minimum of six consecutive months of service with at least 80 hours of service in each month.
(12)
Income Taxes
As of the end of fiscal years 2020 and 2019, the Companys gross liability for unrecognized tax benefits related to
uncertain tax positions was $0.6 million. If the tax benefits of such amounts were recognized, $0.5 million of such amounts would decrease the Companys effective income tax rate. The Companys net liability for accrued interest
and penalties was $0.27 million and $0.23 million as of September 30, 2020, and September 30, 2019, respectively. The Company has elected to recognize interest and penalties related to unrecognized tax benefits as a component of
income tax expense. During the years ended September 30, 2020, and September 30, 2019, the Company recognized approximately $0.04 million and $0.06 million in interest and penalties.
The Companys activity was as follows:
Fiscal Years Ended September 30,
2020
2019
(In thousands)
Beginning year balance
$
608
$
353
Decrease related to prior year tax positions
Increase related to current year tax positions
255
Settlements
Lapse of statutes of limitations
Ending year balance
$
608
$
608
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.
The
Companys income tax expense was as follows:
Fiscal Years Ended September 30,
2020
2019
(In thousands)
Current
Federal
$
1,321
$
2,216
State
552
724
1,873
2,940
Deferred
Federal
904
1,049
State
343
255
1,247
1,304
Total
$
3,120
$
4,244
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The principal reasons for the differences from the federal statutory income
tax rate and the Companys effective tax rate were as follows:
Fiscal Years Ended September 30,
2020
2019
Federal statutory income tax rate
21.0
%
21.0
%
State income taxes, net of federal benefit
4.3
3.9
Permanent and other differences
0.2
0.2
Difference due to executive compensation
1.1
Adjustment to beginning deferred taxes
1.4
0.4
Uncertain tax position allowance
0.4
1.9
Amendment of prior period tax return
(1.5
)
(1.3
)
Stock-based compensation
1.6
1.3
Other
0.4
Effective income tax rate
28.5
%
27.8
%
The tax effects of temporary differences that give rise to significant portions of deferred tax
assets and liabilities were as follows:
Fiscal Years Ended September 30,
2020
2019
(In thousands)
Deferred tax assets
Accrued compensation
$
47
$
81
Stock compensation
13
14
State taxes
245
200
Capital loss carryforward
7
7
Gross deferred tax assets
312
302
Disallowed capital loss
(7
)
(7
)
Net deferred tax assets
305
295
Deferred tax liabilities
Property and equipment
(28
)
(42
)
Management contracts
(11,793
)
(10,522
)
Total deferred tax liabilities
(11,821
)
(10,564
)
Net deferred tax liabilities
$
(11,516
)
$
(10,269
)
(13)
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:
September 30,
2020
2019
Weighted average common stock outstanding, basic
7,352,495
7,757,785
Dilutive impact of RSUs
26,234
13,776
Weighted average common stock outstanding, diluted
7,378,729
7,771,561
For fiscal years 2020 and 2019, the Company excluded 186,520 and 184,871 common stock
equivalents, respectively, from the diluted earnings per share calculations because they were not dilutive. In each case, the excluded common stock equivalents consisted of vested RSUs.
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(14)
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, 2020, exceeded the insurance limits of the Federal Deposit Insurance Corporation by approximately $3.8 million. In addition, total cash and cash equivalents include $6.0 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.
(15)
Recently Issued and Adopted Accounting Standards
In February 2016, the FASB issued Accounting Standards Update (ASU)
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
the Companys leases are operating leases. The Company 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, the Company did not update financial information or provide disclosures required under the new standard for dates and
periods prior to October 1, 2019. In addition, the Company 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 the Companys capitalized right of use asset, so this election did not impact its financial statements. Upon adoption of ASU 2016-02, the Company 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 (the Companys fiscal year 2021), with early adoption
permitted for any eliminated or modified disclosures. The Company is currently evaluating the impact of adopting this update, but does not expect it to have a material impact on the Companys financial condition, results of operations, cash
flows, or related disclosures.
There have been no other significant changes to the Companys critical accounting
policies and estimates during fiscal year 2020.
(16)
Subsequent Events
As of the file date of December 1, 2020, for this Annual Report on Form 10-K,
management evaluated the existence of events occurring subsequent to the end of fiscal year 2020, and determined the following to be a subsequent event:
On October 30, 2020, the Company announced a quarterly cash dividend of $0.1375 per share to be paid on
December 2, 2020, to shareholders of record as of November 12, 2020. The declaration and payment of dividends to holders of the Companys common stock, if any, are subject to the discretion of the Companys Board of Directors.
The Companys Board of Directors will take into account such matters as general economic and business conditions, the Companys strategic plans, the Companys financial results and condition, contractual, legal, and regulatory
restrictions on the payment of dividends by the Company, and such other factors as the Companys Board of Directors may consider relevant.
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ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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.