HENNESSY ADVISORS INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements: Report of Independent Registered Public Accounting Firm 40 Balance Sheets 42 Statements of Income 43 Statements of Changes in Stockholders’ Equity 44 Statements of Cash Flows 45 Notes to Financial Statements 46 39 Table of Contents 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, 2021 and 2020, the related statements of income, changes in stockholders’ equity and cash flows for each of the two years in the period ended September 30, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended September 30, 2021, in conformity with accounting principles generally accepted in the United States of America. 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 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 control 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 Company’s 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. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinion on the critical audit matter or on the account or disclosures to which it relates. Valuation of Management Contract Assets – Impairment Consideration As described in Note 1(f) to the financial statements, the Company has historically capitalized the cost of purchasing management contracts as intangible assets. These intangible assets are considered to have indefinite useful lives and are therefore not amortized, but rather tested at least annually for impairment. As part of this annual test, management (i) evaluates whether events and circumstances indicate that it is more likely than not that impairment exists, and/or (ii) estimates the fair value of such intangible assets and compares it to the cost of the assets to determine whether impairment has occurred. Management’s estimate of the fair value of management contract assets involves subjective assumptions that include stock market returns and weighted average cost of capital. 40 Table of Contents We have determined that the valuation of management contract assets constitutes a critical audit matter for the following reasons: (i) it is a matter that should be communicated to the audit committee, since it involves a significant management estimate; (ii) it involves a material account balance; and (iii) it involves especially subjective auditor judgment. We have addressed this critical audit matter by performing appropriate audit procedures. These procedures included (i) performing an independent evaluation of whether events or circumstances indicate that it is more likely than not that impairment exists; (ii) evaluating the reasonableness of management’s fair value estimate assumptions; and (iii) testing the mathematical accuracy of management’s valuation model. Professionals with specialized skills and knowledge were used to assist in evaluating of the measurement of the Company’s estimated fair value of the management contract assets. /s/ Marcum LLP Marcum LLP We have served as the Company’s auditor since 2004. Costa Mesa, CA November 24, 2021 41 Table of Contents Hennessy Advisors, Inc. Balance Sheets (In thousands, except share and per share amounts) September 30, 2021 2020 Assets Current assets Cash and cash equivalents $ 15,836 $ 9,955 Investments in marketable securities, at fair value 10 9 Investment fee income receivable 2,795 2,403 Prepaid expenses 788 637 Other accounts receivable 277 378 Total current assets 19,706 13,382 Property and equipment, net of accumulated depreciation of $ 1,850 and $ 1,618 , respectively 311 294 Operating lease right-of-use asset 1,010 276 Management contracts 80,643 80,643 Other assets 235 191 Total assets $ 101,905 $ 94,786 Liabilities and Stockholders’ Equity Current liabilities Accrued liabilities and accounts payable $ 4,151 $ 3,813 Operating lease liability 359 330 Income taxes payable 1,050 949 Total current liabilities 5,560 5,092 Long-term operating lease liability 646 — Net deferred income tax liability 12,437 11,516 Total liabilities 18,643 16,608 Commitments and contingencies (Note 10) Stockholders’ equity Common stock, no par value, 22,500,000 shares authorized; 7,469,584 shares issued and outstanding as of September 30, 2021, and 7,356,822 as of September 30, 2020 19,964 18,705 Retained earnings 63,298 59,473 Total stockholders’ equity 83,262 78,178 Total liabilities and stockholders’ equity $ 101,905 $ 94,786 See Accompanying Notes to Financial Statements 4 2 Table of Contents Hennessy Advisors, Inc. Statements of Income (In thousands, except share and per share amounts) Fiscal Years Ended September 30, 2021 2020 Revenue Investment advisory fees $ 30,367 $ 30,831 Shareholder service fees 2,393 2,558 Total revenue 32,760 33,389 Operating expenses Compensation and benefits 9,078 8,820 General and administrative 4,754 4,961 Mutual fund distribution 485 477 Sub-advisory fees 7,332 7,573 Depreciation 232 239 Total operating expenses 21,881 22,070 Net operating income 10,879 11,319 Interest expense — 447 Other income ( 2 ) ( 89 ) Income before income tax expense 10,881 10,961 Income tax expense 2,979 3,120 Net income $ 7,902 $ 7,841 Earnings per share Basic $ 1.07 $ 1.07 Diluted $ 1.07 $ 1.06 Weighted average shares outstanding Basic 7,367,948 7,352,495 Diluted 7,409,112 7,378,729 Cash dividends declared per share $ 0.55 $ 0.55 See Accompanying Notes to Financial Statements 4 3 Table of Contents Hennessy Advisors, Inc. Statements of Changes in Stockholders’ Equity (In thousands, except share data) Common Stock Retained Total Stockholders’ Shares Amount Earnings Equity 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 Net income — — 7,902 7,902 Dividends paid — — ( 4,049 ) ( 4,049 ) Employee and director restricted stock vested 132,588 — — — Repurchase of vested employee restricted stock for tax withholding ( 32,492 ) ( 294 ) ( 28 ) ( 322 ) Shares issued for auto-investments pursuant to the 2018 Dividend Reinvestment and Stock Purchase Plan 958 9 — 9 Shares issued for dividend reinvestment pursuant to the 2018 Dividend Reinvestment and Stock Purchase Plan 2,165 19 — 19 Shares issued for auto-investments pursuant to the 2021 Dividend Reinvestment and Stock Purchase Plan 3,219 29 — 29 Shares issued for dividend reinvestment pursuant to the 2021 Dividend Reinvestment and Stock Purchase Plan 6,324 58 — 58 Stock-based compensation — 1,438 — 1,438 Balance at September 30, 2021 7,469,584 $ 19,964 $ 63,298 $ 83,262 See Accompanying Notes to Financial Statements 4 4 Table of Contents Hennessy Advisors, Inc. Statements of Cash Flows (In thousands) Fiscal Years Ended September 30, 2021 2020 Cash flows from operating activities Net income $ 7,902 $ 7,841 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 232 239 Change in right-of-use asset and operating lease liability ( 59 ) ( 62 ) Deferred income taxes 921 1,247 Deferred offering costs ( 11 ) — Stock-based compensation 1,438 1,782 Unrealized gains on marketable securities ( 1 ) — Interest expense associated with debt issuance cost — 125 Change in operating assets and liabilities: Investment fee income receivable ( 392 ) 888 Prepaid expenses ( 151 ) ( 4 ) Other accounts receivable 101 14 Other assets ( 33 ) 1 Accrued liabilities and accounts payable 338 ( 1,725 ) Income taxes payable 101 277 Net cash provided by operating activities 10,386 10,623 Cash flows from investing activities Purchases of property and equipment ( 249 ) ( 172 ) Payments related to management contracts — ( 710 ) Net cash used in investing activities ( 249 ) ( 882 ) Cash flows from financing activities Principal payments on bank loan — ( 17,500 ) Shares repurchased pursuant to stock buyback program — ( 2,714 ) Repurchase of vested employee restricted stock for tax withholding ( 322 ) ( 314 ) Proceeds from shares issued pursuant to the 2018 Dividend Reinvestment and Stock Repurchase Plan 9 22 Proceeds from shares issued pursuant to the 2021 Dividend Reinvestment and Stock Repurchase Plan 29 — Dividend payments ( 3,972 ) ( 3,967 ) Net cash used in financing activities ( 4,256 ) ( 24,473 ) Net increase (decrease) in cash and cash equivalents 5,881 ( 14,732 ) Cash and cash equivalents at the beginning of the period 9,955 24,687 Cash and cash equivalents at the end of the period $ 15,836 $ 9,955 Supplemental disclosures of cash flow information Cash paid for income taxes $ 1,957 $ 1,596 Cash paid for interest $ — $ 381 See Accompanying Notes to Financial Statements 4 5 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 Company’s operating activities consist primarily of providing investment advisory s e rvices 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 Transition 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 t o shareholders 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 liquidity of the fund; • monitoring the fund’s compliance with its investment objectives and restrictions and federal securities laws; • maintaining a compliance program (including a code of ethics), conducting ongoing reviews of the compliance programs of the fund’s service providers (including any sub-advisor), including their codes of ethics, as appropriate, conducting onsite visits to the fund’s service providers (including any sub-advisor) as feasible, monitoring incidents of abusive trading practices, reviewing fund expense accruals, payments, and fixed expense ratios, evaluating insurance providers for fidelity bond, directors and officers and errors and omissions insurance, and cybersecurity insurance coverage, managing regulatory examination compliance and responses, conducting employee compliance training, reviewing reports provided by service providers, and maintaining books and records; • if applicable, overseeing the selection and continued employment of the fund’s sub-advisor, reviewing the fund’s investment performance, and monitoring the sub-advisor’s adherence to the fund’s investment objectives, policies, and restrictions; • overseeing service providers that provide accounting, administration, distribution, transfer agency, custodial, sales, marketing, public relations, audit, information technology, and legal services to the fund; • maintaining in-house marketing and distribution departments on behalf of the fund; 46 Table of Contents • preparing or directing the preparation of all regulatory filings for the fund, including writing and annually updating the fund’s prospectus and related documents; • for each annual report of the fund, preparing or reviewing a written summary of the fund’s performance during the most recent 12-month period; • monitoring and overseeing the accessibility of the fund on third-party 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 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 their accounts or the funds 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 from Contracts with Customers. The Company waived a portion of its fees with respect to the Hennessy Cornerstone Large Growth Fund and the Hennessy BP Energy Transition Fund through the expiration of each fund’s expense limitation agreement on November 30, 2019, and October 25, 2020, respectively. The Company continues to waive a portion of its fees with respect to the Hennessy BP Midstream Fund and the Hennessy Technology Fund to comply with contractual expense ratio limitations. The fee waivers are calculated daily by the Hennessy Funds’ accountants at U.S. Bank Global Fund Services, reviewed by management, and then charged to expense monthly as offsets to the Company’s revenues. Each waived fee is then deducted from investment advisory fee income and reduces the aggregate amount of advisory fees the Company receives from such fund in the subsequent month. To date, the Company has only waived fees based on contractual obligations, but the Company has the ability to waive fees at its discretion. Any decision to waive fees would apply only on a going-forward basis. The Company’s contractual agreements for investment advisory and shareholder services prove that a contract exists with fixed and determinable fees, and the services are rendered daily. The collectability is deemed probable because the fees are received from the Hennessy Funds in the month subsequent to the month in which the services are provided. (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. (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 manage m ent as of the end of fiscal years 2021 and 2020. Accordingly, the fair values presented in the Company’s financial statements as of the end of fiscal years 2021 and 2020 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 v a lue of marketable securities and money market accounts is based on closing net asset values as reported by securities exchanges registered with the SEC. 4 7 Table of Contents (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 2021 and 2020. 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 ba s is. (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 between one and ten years. (f) Management Contracts Purchase d 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 t o 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 was determined that there was no impairment as of the end of fiscal years 2021 and 202 0 . 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 2021. 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 (the “BP Funds”), which were reorganized into the Hennessy BP Energy Transition Fund and the Hennessy BP Midstream Fund, respectively, two new series of Hennessy Funds Trust . (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 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. 4 8 Table of Contents The Company believes the positions taken on its 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 Company’s 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 Company’s 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.” The Company is subject to income tax in the U.S. federal jurisdiction and multiple state jurisdictions. The Company’s U.S. federal income taxes for 2017 through 2021 remain open and subject to examination. The Company has identified 22 major state tax jurisdictions in which it is subject to income tax, which include California, Colorado, Connecticut, Illinois, Indiana, Iowa, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New York, North Carolina, Oregon, Pennsylvania, Texas, and Wisconsin. For tax years that remain open, the below chart shows the number of such state tax jurisdictions that remain subject to examination by the appropriate governmental agencies: Year Number of State Tax Jurisdictions 2021 22 2020 22 2019 19 2018 17 2017 16 For state tax jurisdictions with unfiled tax returns, the statutes of limitations remains 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 e f fect of common stock equivalents, which consist of restricted stock units (“RSUs”). (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”), which provides 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. 4 9 Table of Contents 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. Under the Omnibus Plan, participants may be granted RSUs, each of which represents an unfunded, unsecured right to receive a share of the Company’s common stock on the date specified in the recipient’s award. The Company issues new shares of its common stock when it is required to deliver shares t o 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 2021 and 2020 have been recognized in the financial statements. The Company has available up to 3,734,792 shares of the Company’s 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, 2021 2020 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 322,181 $ 9.76 313,669 $ 12.22 Granted 134,625 8.64 134,625 8.13 Vested (1) ( 132,996 ) ( 10.81 ) ( 126,113 ) ( 14.13 ) Forfeited — — — — Non-vested balance at end of year 323,810 $ 8.87 322,181 $ 9.76 (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. Additional information related to RSUs is as follows: September 30, 2021 (In thousands, except years) Total expected compensation expense related to RSUs $ 16,905 Recognized compensation expense related to RSUs ( 14,034 ) Unrecognized compensation expense related to RSUS $ 2,871 Weighted average remaining period to expense for RSUs 3.0 Dividend Reinvestment and Stock Purchase Plan In January 2021, the Company adopted an updated Div i dend Reinvestment and Stock Purchase Plan (the “DRSPP”), replacing the previous Dividend Rei n vestment and Stock Purchase Plan that had been in place since 2018. The DRSPP provides shareholders and new investors with a convenient and economical means of purchasing shares of the Company’s common stock and reinvesting cash dividends paid on the Company’s common stock. Under the DRSPP and its predecessor plan, the Company issued 12,666 and 9,815 shares of common stock in fiscal years 2021 and 2020, respectively. The maximum number of shares that may be issued under the DRSPP is 1,470,000 , of which 1,460,457 shares remained available for issuance as of September 30, 2021. 50 Table of Contents 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. 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, so the Company did not repurchase any shares of its common stock pursuant to the stock buyback program during fiscal year 2021. (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 • 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. 5 1 Table of Contents Based on the definitions, th e following table represents the Company’s assets categorized in the Level 1 to Level 3 hierarchies: September 30, 2021 Level 1 Level 2 Level 3 Total (In thousands) Money market fund deposits $ 11,554 $ — $ — $ 11,554 Mutual fund investments 10 — — 10 Total $ 11,564 $ — $ — $ 11,564 Amounts included in Cash and cash equivalents $ 11,554 $ — $ — $ 11,554 Investments in marketable securities 10 — — 10 Total $ 11,564 $ — $ — $ 11,564 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 There were no transfers between levels during fiscal years 2021 or 2020. (3) Investments The cost, gross unrealized gains, gross unrealized losses, and fair market value of the Company’s trading investments were as follows: Cost Gross Unrealized Gains Gross Unrealized Losses Total (In thousands) 2021 Mutual fund investments $ 4 $ 24 $ ( 18 ) $ 10 Total 4 24 ( 18 ) 10 2020 Mutual fund investments $ 4 $ 23 $ ( 18 ) $ 9 Total 4 23 ( 18 ) 9 The mutual fund investments are included as a separate line item in current assets on the Company’s balance sheets. 5 2 Table of Contents (4) Property and Equipment, Net The following table summarizes the Company’s property and equipment balances: September 30, 2021 2020 (In thousands) Equipment $ 599 $ 538 Leasehold improvements 154 154 Furniture and fixtures 391 391 IT infrastructure 84 71 Software 933 758 Property and equipment, gross 2,161 1,912 Accumulated depreciation ( 1,850 ) ( 1,618 ) Property and equipment, net $ 311 $ 294 During each of fiscal year 2021 and fiscal year 2020, depreciation expense was $ 0.2 million. (5) Management Contracts The costs related to the Company’s 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 2021, unchanged from the end of fiscal year 2020. The Company considers the management contracts asset to be an intangible asset per Accounting Standards Codification 350 — Intangibles—Goodwill 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. The inv e stment 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 Company’s common stock in sufficient quantities deemed to constitute a controlling block). Second, an investment advisory agreement may be terminated prior to its expiration upon 60 days’ written notice by either the applicable Hennessy Fund or the Company. As provided in each investment advisory agreement, the Company receives investment advisory fees monthly based on a percentage of the applicable fund’s average daily net asset value. The Company has entered into sub-advisory agreements for the Hennessy Focus Fund, the Hennessy Equity and Income Fund, the Hennessy BP Energy Transition 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 Fund’s Prospectus and Statement of Additional Information. The sub-advisors are subject to the direction, supervision, and control of the Company and the Funds’ Board of Trustees. The sub-advisory agreements must be renewed annually (except in limited circumstances) in the same manner as, and are subject to the same termination provisions as, the investment advisory agreements. In exchange for the sub-advisory services, the Company (not the Hennessy Funds) pays sub-advisory fees to the sub-advisors out of its own assets. Sub-advisory fees are calculated as a percentage of the applicable sub-advised fund’s average daily net asset value. 5 3 Table of Contents (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 Company’s balance sheet. During the quarter ended March 31, 2021, the Company renewed the lease for its office in Novato, California for an additional three years . The renewed lease expires on July 31, 2024 . The lease renewal created a long-term operating lease as of March 31, 2021, and the Company recorded a right-of-use asset of $ 1.1 million on the balance sheet. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, the Company uses its incremental borrowing rate based on th e information available at the lease commencement date. The Company’s lease terms ma y 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 Company’s most significant leases are real estate leases of office facilities. The Company leases office space under non-cancelable operating leases. Its principal executive office is located in Novato, California, and it has additional offices in Austin, Texas, Boston, Massachusetts, and Chapel Hill, North Carolina. Only the office lease in Novato, California has been capitalized because the other operating leases have terms of 12 months or less, including leases that are month-to-month in nature. The classification of the Company’s operating lease right-of-use assets and operating lease liabilities and other supplemental information related to the Company’s operating leases are as follows: September 30, 2021 (In thousands, except years and percentages) Operating lease right-of-use assets $ 1,010 Current operating lease liability $ 359 Long-term operating lease liability $ 646 Weighted average remaining lease term 2.8 Weighted average discount rate 0.90 % For fiscal years 2021 and 2020, the Company’s lease payments related to its operating lease right-of-use assets totaled $ 0.43 million and $ 0.44 million, respectively, and total rent expense for all offices, which is recorded under general and administrative expense in the statements of income, totaled $ 0.51 million and $ 0.57 million, respectively. 5 4 Table of Contents The undiscounted cash flows for future maturities of the Company’s operating lease liabilities and the reconciliation to the balance of operating lease liabilities reflected o n the Company’s balance sheet are as follows: September 30, 2021 (In thousands) Fiscal year 2022 undiscounted cash flows 363 Fiscal year 2023 374 Fiscal year 2024 286 Total undiscounted cash flows 1,023 Present value discount ( 18 ) Total operating lease liabilities $ 1,005 (8) Accrued Liabilities and Accounts Payable The details relating to the accrued liabilities and accounts payable reflected on the Company’s balance sheet are as follows: September 30 2021 2020 (In thousands) Accrued bonus liabilities $ 2,738 $ 2,571 Accrued sub-advisor fees 628 552 Other accrued expenses 785 690 Total accrued expenses $ 4,151 $ 3,813 (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. (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. (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 $ 0.2 million in each of the fiscal years 2021 and 2020. To be eligible for the discretionary profit-sharing contribution, an employee must be eligible to participate in the 401(k) retirement plan and must complete at least 501 hours of service during the calendar year or be employed as of the last day of the calendar year. (12) Income Taxes As of the end of each of fiscal years 2021 and 2020, the Company’s gross liability for unrecognized tax benefits related to uncertain tax positions was $ 0.6 million. If the tax benefits of such amounts were recognized, $ 0.50 million of such amounts would decrease the Company’s effective income tax rate. The Company’s net liability for accrued interest and penalties was $ 0.30 million and $ 0.27 million as of September 30, 2021, and September 30, 2020, 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, 2021, and September 30, 2020, the Company recognized approximately $ 0.03 million and $ 0.04 million in interest and penalties, respectively. 5 5 Table of Contents The Company’s activity was as follows: Fiscal Years Ended September 30, 2021 2020 (In thousands) Beginning year balance $ 608 $ 608 Decrease related to prior year tax positions — — Increase related to current year tax positions — — Settlements — — Lapse of statutes of limitations — — Ending year balance $ 608 $ 608 The total amount of unrecognized ta x 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 Company’s income tax expense was as follows: Fiscal Years Ended September 30, 2021 2020 (In thousands) Current Federal $ 1,545 $ 1,321 State 513 552 Total Current 2,058 1,873 Deferred Federal 752 904 State 169 343 Total Deferred 921 1,247 Total $ 2,979 $ 3,120 The principal reasons for the differences from the federal statutory income tax rate and the Company’s effective tax rate were as follows: Fiscal Years Ended September 30, 2021 2020 Federal statutory income tax rate 21.0 % 21.0 % State income taxes, net of federal benefit 4.1 4.3 Permanent and other differences 0.3 0.2 Difference due to executive compensation 1.3 1.1 Tax return to provision adjustments 0.1 ( 0.1 ) Uncertain tax position allowance 0.3 0.4 Stock-based compensation 0.3 1.6 Effective income tax rate 27.4 % 28.5 % 5 6 Table of Contents 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, 2021 2020 (In thousands) Deferred tax assets Accrued compensation $ 60 $ 47 Stock compensation 2 13 State taxes 266 245 Capital loss carryforward 7 7 ROU asset/lease liability ( 1 ) — Gross deferred tax assets 334 312 Disallowed capital loss ( 7 ) ( 7 ) Net deferred tax assets 327 305 Deferred tax liabilities Property and equipment ( 33 ) ( 28 ) Management contracts ( 12,731 ) ( 11,793 ) Total deferred tax liabilities ( 12,764 ) ( 11,821 ) Net deferred tax liabilities $ ( 12,437 ) $ ( 11,516 ) (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, 2021 2020 Weighted average common stock outstanding, basic 7,367,948 7,352,495 Dilutive impact of RSUs 41,164 26,234 Weighted average common stock outstanding, diluted 7,409,112 7,378,729 For fiscal years 2021 and 2020, the Company excluded 65,098 and 186,520 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. (14) Concentration of Credit Risk The Company m a intains its cash accounts with three com m ercial banks that, at times, may exceed federally insured limits. The amount on deposit at September 30, 2021, exceeded the insurance limits of the Federal Deposit Insurance Corporation by approximately $ 4.0 million. In addition, total cash and cash equivalents include $ 11.5 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 The Company has reviewed accounting pronouncements issued between December 1, 2020, the filing date of its most recent previously filed Annual Report on Form 10-K, and November 24, 2021, the filing date of this Annual Report on Form 10-K, and has determined that no accounting pronouncement issued would have a material impact on the Company’s financial position, results of operations, or disclosures. There have been no other significant changes to the Company’s critical accounting policies and estimates during fiscal year 2021. 5 7 Table of Contents (16) Subsequent Events As of November 24, 2021, the filing date of this Annual Report on Form 10-K, management evaluated the existence of events occurring subsequent to the end of fiscal year 2021, and determined the following to be subsequent events: On October 20, 2021, the Company completed a public offering of 4.875 % notes due 2026 in the aggregate principal amount of $ 40,250,000 , which included the full exercise of the underwriters’ overallotment option. The 2026 Notes bear interest at 4.875% per annum, payable on the last day of eac h calendar quarter and at maturity, beginning December 31, 2021 . The 2026 Notes mature on December 31, 2026 . On October 29, 2021 , the Company announced a quarterly cash dividend of $ 0.1375 per share paid on November 23, 2021 , to shareholders of record as of November 11, 2021 . 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. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.