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Item 1A. Risk Factors

2022-12-07 compared with 2021-11-24 · 84 added, 108 removed, 172 unchanged (53% of the section changed)

We face many risks and uncertainties, many of which are inherent in the financial services industry and the investment advisory business.

Investors should carefully consider the risks described below, together with all of the other information included in this Annual Report on Form 10-K,

in evaluating us and our common stock.

Investors should carefully consider the risks described below, together with all of the other information included in this Annual Report on Form 10-K, in evaluating us and our common stock.

Our business, results of operations, financial condition, and stock price could be materially adversely affected by any of the risks we face, including those described below.

RISKS RELATING TO OUR ASSETS UNDER MANAGEMENT

Volatility in and disruption of the capital markets and changes in the economy may significantly affect our revenues.

The securities markets are inherently volatile and may be affected by factors beyond our control, including global economic conditions, industry trends, interest and inflation rate fluctuations, and other factors that are difficult to predict.

Volatility in and disruption of the capital markets and changes in the economy has and may continue to significantly affect our assets under management and revenues.

Because our assets under management is largely concentrated in equity products, our results are particularly susceptible to downturns in the equity markets.

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Accordingly, our revenues increase or decrease as our average assets under management increases or decreases, which is affected by market appreciation or depreciation and purchases and redemptions of shares of the Hennessy Funds.

Changing market conditions could also cause an impairment to the value of our management contracts asset.

Investors in the Hennessy Funds can redeem their investments at any time and for any reason, including poor investment performance and volatile equity markets.

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Investors in the Hennessy Funds may redeem their investments at any time and for any reason without prior notice.

Success in the investment advisory and mutual fund business is largely dependent on investment performance, as well as client servicing and distribution.

If the Hennessy Funds perform poorly compared to the mutual funds of other investment advisory firms, we may experience a decrease in purchases of shares and an increase in redemptions of shares of the Hennessy Funds.

Further, sharp declines in the stock market, such as those experienced during our fiscal year 2020 as a result of the COVID-19

pandemic, may also cause increases in redemptions of shares of the Hennessy Funds.

Success in the investment advisory and fund business is largely dependent on investment performance, as well as investor servicing and distribution.

If the Hennessy Funds perform poorly compared to the investment products offered by other investment advisory firms, we may experience a decrease in purchases of shares and an increase in redemptions of shares of the Hennessy Funds.

Further, sharp declines in the stock market, such as those experienced during fiscal year 2022, have and may continue to cause increases in redemptions of shares of the Hennessy Funds.

Such redemptions reduce our assets under management and adversely affect our revenues.

pandemic has adversely impacted, and future pandemics may adversely impact, our business and financial performance.

pandemic adversely impacted global commercial activity and contributed to significant volatility in global equity and debt markets and disrupted, and in some cases continues to disrupt, supply chains, operations, and economic activity.

pandemic adversely impacted the value and performance of the Hennessy Funds’ assets under management, which resulted in declines in the Company’s revenues.

Our business and operations are subject to adverse effects from market reactions to the outbreak of contagious diseases.

The outbreak and spread of contagious diseases such as COVID-19 has adversely impacted global commercial activity, contributed to significant volatility in global equity and debt markets, and disrupted supply chains, operations, and economic activity.

The COVID-19 pandemic adversely impacted the value and performance of the Hennessy Funds, which resulted in declines in our revenues.

It also limited our ability to source and pursue potential acquisitions.

Future pandemic outbreaks could have similar adverse impacts on our business and financial performance.

Future outbreaks of contagious diseases could have similar adverse impacts on our business and financial performance.

Adverse opinions of the Hennessy Funds by third parties, including rating agencies or industry analysts, could decrease new investments in, or accelerate redemptions from, the Hennessy Funds, which would adversely affect our revenues.

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We derive a substantial portion of our revenues from a limited number of the Hennessy Funds.

For the past several years, approximately three quarters of our assets under management has been concentrated in four of our funds.

For the past several years, approximately 75% of our assets under management has been concentrated in four of our funds.

During fiscal year 2022, our average assets under management was concentrated in the following four funds:

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As a result, our operating results are particularly dependent upon the performance of a very small number funds and our ability to maintain and grow assets under management in these funds.

If any of these funds were to experience a significant increase in redemptions for any reason, our assets under management would be reduced, adversely affecting our revenues.

We utilize unaffiliated sub-advisors

to manage the portfolio composition of certain of the Hennessy Funds, and any matters that have an adverse impact on their businesses or any change in our relationships with our sub-advisors

could lead to a reduction in assets under management, which would adversely affect our revenues.

We utilize unaffiliated sub-advisors

to manage the portfolio composition of some of the Hennessy Funds.

Although we perform due diligence on our sub-advisors,

we do not manage their day-to-day

business activities.

Our financial condition and profitability may be adversely affected by situations that are specific to such sub-advisors,

such as disruption of their operations, their exposure to disciplinary action, or reputational harm to them.

We periodically negotiate the terms and conditions of these sub-advisory

relationships, and there can be no assurance that such terms will remain acceptable to us or our sub-advisors.

These relationships may also be terminated by us or the applicable sub-advisor

upon short notice without penalty.

An interruption or termination of our sub-advisory

relationships could affect our ability to market our sub-advised

funds and result in a reduction in assets under management, which would adversely affect our revenues.

These funds have experienced significant redemptions in recent years and may continue to do so for the future.

This has reduced, and may continue to reduce, our assets under management and revenues.

We utilize unaffiliated sub-advisors to manage the portfolio composition of certain of the Hennessy Funds, and any matters that have an adverse impact on their businesses or any change in our relationships with our sub-advisors could lead to a reduction in assets under management, which would adversely affect our revenues.

We utilize unaffiliated sub-advisors to manage the portfolio composition of some of the Hennessy Funds.

Although we perform due diligence on our sub-advisors, we do not manage their day-to-day business activities.

Our financial condition and profitability may be adversely affected by situations that are specific to such sub-advisors, such as disruption of their operations, their exposure to disciplinary action, or reputational harm to them.

We periodically negotiate the terms and conditions of these sub-advisory relationships, and there can be no assurance that such terms will remain acceptable to us or our sub-advisors.

These relationships may also be terminated by us or the applicable sub-advisor upon short notice without penalty.

An interruption or termination of our sub-advisory relationships could affect our ability to market our sub-advised funds and result in a reduction in assets under management, which would adversely affect our revenues.

We depend on key personnel to manage our business, and the loss of any key person’s services, combined with our inability to identify and retain a suitable replacement for such person, could materially adversely affect us.

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Borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested and therefore increase the risks associated with investing in our securities.

As of the end of fiscal year 2021, we had no outstanding indebtedness.

On October 20, 2021, we completed a public offering of 4.875% unsecured notes due 2026 in the aggregate principal amount of $40,250,000.

On October 20, 2021, we completed a public offering of the 2026 Notes in the aggregate principal amount of $40.25 million, which included the full exercise of the underwriters’ overallotment option.

The 2026 Notes mature on December 31, 2026, and may be redeemed in whole or in part at any time or from time to time at our option on or after December 31, 2023.

The 2026 Notes bear interest at a rate of 4.875% per year payable quarterly on March 31, June 30, September 30, and December 31.

The 2026 Notes bear interest at 4.875% per annum, payable on the last day of each calendar quarter and at maturity, beginning December 31, 2021.

The 2026 Notes are direct unsecured obligations, rank equally in right of payment with any of our future unsecured unsubordinated indebtedness, senior to any of our future indebtedness that expressly provides that it is subordinate to the 2026 Notes, effectively subordinate to all of our existing and future secured indebtedness, and structurally subordinated to all existing and future indebtedness and other obligations of any future subsidiaries of ours.

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Our ability to make payments of principal and interest on our indebtedness depends upon our future performance, which is subject to general economic conditions and financial, business, and other factors affecting our consolidated operations, many of which are beyond our control.

We depend on third-party investment professionals and the distribution channels they utilize to market the Hennessy Funds.

Our primary source of distribution of the Hennessy Funds is through intermediaries that include national, regional, and independent broker-dealers, financial planners, and registered investment advisors.

Changes in the distribution channels on which we depend could reduce our net revenues and hinder our growth.

Our primary source of distribution of the Hennessy Funds is through a variety of third-party financial intermediaries.

Our success is highly dependent on access to these various distribution channels.

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Increasing competition for these distribution channels could cause our distribution costs to rise, which could have a material adverse effect on our net income.

These distribution intermediaries generally can terminate their relationships with us on short notice.

Mergers and other corporate transactions among distributors also may affect our distribution relationships.

Moreover, regulations have led to significant shifts in distributors’ business models and more limited product offerings, which has resulted in reduced distribution of certain of the Hennessy Funds, and additional regulations could lead to further adverse changes.

Our lack of access to these distribution channels material adversely affects our business because investment professionals may opt not to distribute the Hennessy Funds if we are no longer participants on the platforms of firms that permit their investment professionals to utilize no-load

funds for their investors.

Either of these events could cause the net assets of the Hennessy Funds to decline, which would decrease our revenues and have a material adverse effect on our results of operations.

In addition, these intermediaries generally offer their customers a broad array of investment products that are in addition to, and compete with, the Hennessy Funds.

The intermediaries or their customers may favor competing investment products over the Hennessy Funds.

To the extent that current or future intermediaries or their customers prefer to do business with our competitors, our market share, revenues, and net income could decline.

Management contracts purchased by us are currently classified as an indefinite-life

asset subject to impairment analysis.

These financial intermediaries generally can terminate their relationships with us on short notice.

Mergers and other corporate transactions among distributors also may affect our relationships with financial intermediaries.

Certain of the financial intermediaries upon whom we rely to distribute the Hennessy Funds also sell their own competing proprietary investment products, which could limit the distribution of our products.

Investors increasingly rely on external consultants and other third parties for advice on the choice of investment manager.

These consultants and third parties tend to exert a significant degree of influence over their clients’ choices, and they may favor one of our competitors as better meeting their particular clients’ needs.

There is no assurance that the Hennessy Funds will be among their recommended choices in the future.

Additionally, particularly in the United States, certain third-party financial intermediaries have substantially reduced the number of investment funds they make available to their clients.

If a material portion of the financial intermediaries with whom we do business were to substantially narrow their product offerings, it could have a significant adverse effect on our assets under management, revenues, and net income.

More broadly, in both retail and institutional channels, financial intermediaries (distribution firms and consultants) are seeking to reduce the number of investment management firms with which they do business.

This poses risks of additional lost business if a particular financial intermediary chooses to stop or significantly reduce its business relationship with us.

Any failure to maintain strong business relationships with these financial intermediaries and the consultant community due to any of the above-described factors would impair our ability to distribute the Hennessy Funds, which in turn would have a negative effect on our assets under management, revenues, and net income.

Management contracts purchased by us are currently classified as an indefinite-life asset subject to impairment analysis.

The impairment analysis is based on subjective criteria, and an impairment loss could be recorded.

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If the management contracts asset is ever reclassified as an asset with a definite life, we would begin amortizing the management contracts over their remaining useful life.

If the management contracts asset continues to be classified as an indefinite-life

asset, we will continue to periodically review the carrying value to determine if any impairment has occurred.

If the management contracts asset continues to be classified as an indefinite-life asset, we will continue to periodically review the carrying value to determine if any impairment has occurred.

The impairment analysis is based on anticipated future cash flows, which are calculated based on assets under management.

Although the management contracts asset is not currently impaired, there is always a possibility of impairment in the future, which could require us to write off all or a portion of the asset.

depending on the amount, could have operational risks and could have a significant impact on the value of our equity and our earnings per share.

A write-off, depending on the amount, could have operational risks and could have a significant impact on the value of our equity and our earnings per share.

We may be required to forego all or a portion of our fees under our investment advisory agreements with the Hennessy Funds.

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While the Funds’ Board of Trustees has found our investment advisory fees to be reasonable in the past, we cannot guarantee that it will continue to do so.

Additionally, we regularly analyze the expense ratios of the Hennessy Funds and have the right to waive fees to compete with other mutual funds with lower expense ratios (although in the past we have only waived fees based on contractual obligations).

Additionally, we regularly analyze the expense ratios of the Hennessy Funds and have the right to waive fees to compete with other funds with lower expense ratios (although in the past we have only waived fees based on contractual obligations).

Any waiver of or reduction in fees would cause our revenues to decline and could adversely affect our business, results of operations, and financial condition.

Any fee waiver would apply only on a going-forward

Any fee waiver would apply only on a going-forward basis.

The Hennessy Japan Fund and the Hennessy Japan Small Cap Fund invest in the Japanese stock market in yen, which involves foreign exchange and economic uncertainties.

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The values of these funds fluctuate with changes in the value of the Japanese yen versus the U.S.

Investments in Japanese securities also expose these funds to the economic uncertainties affecting Japan, which may differ from those affecting the United States.

For example, the adverse effects of the COVID-19

pandemic, future variants of COVID-19,

or future pandemics may disproportionately impact Japan.

Investments in Japanese securities also expose these funds to the economic uncertainties affecting Japan, which may

differ from those affecting the United States.

For example, the adverse effects of a pandemic may disproportionately impact Japan.

Further, Japanese financial accounting standards and practices may differ, and there may be less information on Japanese companies available publicly.

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We utilize quantitative investment strategies for some of the Hennessy Funds that require us to invest in specific portfolios of securities and hold these positions for a specified period of time regardless of performance.

Our formula-driven

funds adhere to quantitative investment strategies, and the portfolios of stocks held by such funds are rescreened and rebalanced at designated times in accordance with such investment strategies.

Adhering to our investment strategies regardless of any adverse developments that may arise could result in substantial losses to the formula-driven

Hennessy Funds if, for example, the stocks selected for a fund are experiencing financial difficulty or are out of favor with investors in a given period This could, in theory, result in relatively low performance of the formula-driven

Hennessy Funds and adversely affect the net assets of such Hennessy Funds.

Our formula-driven funds adhere to quantitative investment strategies, and the portfolios of stocks held by such funds are rescreened and rebalanced at designated times in accordance with such investment strategies.

Adhering to our investment strategies regardless of any adverse developments that may arise could result in substantial losses to the formula-driven Hennessy Funds if, for example, the stocks selected for a fund are experiencing financial difficulty or are out of favor with investors in a given period This could, in theory, result in relatively low performance of the formula-driven Hennessy Funds and adversely affect the net assets of such Hennessy Funds.

A decrease in the net assets of the Hennessy Funds would adversely affect our revenues.

We pursue strategic asset purchases as part of our regular business strategy, and such acquisitions involve inherent risks that could adversely affect our operating results and financial condition and potentially dilute the holdings of current shareholders.

As part of our regular business strategy, we pursue strategic purchases of the assets related to the management of additional mutual funds.

As part of our regular business strategy, we pursue strategic purchases of the assets related to the management of additional funds.

This strategy is accompanied by risks including, among others, the possibility of the following:

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our inability to value potential asset purchases accurately and negotiate acceptable purchase terms;

our inability to obtain quorum and secure enough affirmative votes to gain approval of the proposed fund reorganization from the target fund’s shareholders;

the loss of mutual fund assets paid for in an asset purchase through redemptions by shareholders of the mutual funds involved in the asset purchase;

our inability to obtain quorum and secure enough affirmative votes to gain approval of the proposed fund reorganization from the target fund’s investors;

the loss of fund assets paid for in an asset purchase through redemptions by investors of the funds involved in the asset purchase;

higher than anticipated asset purchase expenses;

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While we seek to mitigate these risks through, among other things, due diligence and indemnification provisions, these or other risk-mitigating measures that we put in place may not be sufficient to address these risks.

If one or more of these risks occur, we may be unable to successfully complete a purchase of management-related

assets (thereby requiring us to write off any related expenses), we may experience an impairment of our management contract asset, we may receive negative publicity or suffer other negative impacts on our reputation, and we may not achieve the expected return on investment.

If one or more of these risks occur, we may be unable to successfully complete a purchase of management-related assets (thereby requiring us to write off any related expenses), we may experience an impairment of our management contracts asset, we may receive negative publicity or suffer other negative impacts on our reputation, and we may not achieve the expected return on investment.

Any of these results could have an adverse effect on our business, results of operations, and financial condition.

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In addition, they each must be renewed annually by the Funds’ Board of Trustees (or, in the case of our investment advisory agreements, by the vote of a majority of the outstanding shares of the applicable Hennessy Fund), including a majority of the disinterested trustees.

The termination or non-renewal

of these agreements, or the renegotiation of the terms of these agreements in a manner detrimental to us, could result in a substantial reduction in revenues, which could have a material adverse effect on our business, results of operations, and financial condition.

The termination or non-renewal of these agreements, or the renegotiation of the terms of these agreements in a manner detrimental to us, could result in a substantial reduction in revenues, which could have a material adverse effect on our business, results of operations, and financial condition.

RISKS RELATING TO OUR INDUSTRY

Investor behavior is influenced by short-term investment performance of mutual funds.

Investor behavior is influenced by short-term investment performance.

Investor behavior may be based on many factors, including short-term investment performance.

Poor short-term performance of the Hennessy Funds, irrespective of longer—term success, could potentially lead to a decrease in purchases of shares of the Hennessy Funds and an increase in redemptions, thereby reducing our assets under management and adversely affecting our revenues.

Assets invested through third-party intermediaries carry the risk of redemption, which could reduce our revenues.

Third-party intermediaries are attractive to investors because of the ease of accessibility to a variety of funds, but this may cause the investments to be more sensitive to fluctuations in performance, especially in the short-term.

If we were unable to retain the assets of the Hennessy Funds held through third-party intermediaries, our assets under management would be reduced.

Assets invested through third-party financial intermediaries can be quickly redeemed, which could reduce our revenues.

Third-party financial intermediaries are attractive to investors because of the ease of accessibility to a variety of funds, but this may cause the investments to be more sensitive to fluctuations in performance, especially in the short term.

If we were unable to retain the assets of the Hennessy Funds held through financial intermediaries, our assets under management would be reduced.

As a result, our revenues could decline and our business, results of operations, and financial condition could be materially adversely affected.

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For more information regarding competitive factors, see the “Competition” subheading in Item 1, “Business.”

We may be unable to develop or acquire new products and the development of new products may expose us to reputational harm, additional costs, or operational risk.

Our continued financial performance may depend on our ability to react to changes in the asset management industry, respond to evolving investor demands and develop, market, and manage new investment products.

Conversely, the development and introduction of new products, including the creation or acquisition of products with a focus on ESG (environmental, social, and governance) matters, requires continued innovative effort on our part and may require significant time and resources, as well as ongoing support and investment.

risks and uncertainties are associated with the introduction of new products, including the implementation of new and appropriate operational controls and procedures, shifting investor and market preferences, the introduction of competing products, constraints on our ability to manage growth, and compliance with regulatory and disclosure requirements.

A growing number of new products also depend on data provided by third parties as analytical inputs and are subject to additional risks, including with respect to data quality, cost, availability, and provider relationships.

There can be no assurance that we will be able to develop or acquire new products that address the needs of investors on the timescale they require.

Any failure to successfully develop or acquire new products, or effectively manage associated operational risks, could harm our reputation and expose us to additional costs, which may reduce our assets under management and adversely affect our revenues.

Market consolidation and industry trends could negatively impact our business.

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The increasing size and market influence of certain distributors of our products and of certain direct competitors may have a negative impact on our ability to compete at the same levels of profitability in the future.

Additionally, the market environment in recent years has led some investors to increasingly favor lower–fee, passive products.

Additionally, the market environment has increasingly led some investors to favor lower–fee, passive products.

As a result, investment advisors that emphasize passive products have gained, and may continue to gain, market share from active managers like us.

While we cannot predict how much market share these competitors will gain, we believe there will always be demand for good active management.

Industry trends and market pressure to lower our investment advisory fees could reduce our profit margin.

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In recent years, however, there has been a trend toward lower fees in the investment advisory industry.

To maintain our fee structures in a competitive environment, we must be able to provide our mutual fund investors with investment returns and service that will adequately compensate them for investing in our mutual funds with our current fee structures.

To maintain our fee structures in a competitive environment, we must be able to provide investors in the Hennessy Funds with investment returns and service that will adequately compensate them for investing in our funds with our current fee structures.

We may not succeed in maintaining our current fee structures, and fee reductions on existing or future business could have a material adverse effect on our results of operations.

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Certain insurance coverage may not be available or may be prohibitively expensive in future periods.

As our insurance policies come up for renewal, we may need to assume higher deductibles or co-insurance

liabilities, or pay higher premiums, which would increase our expenses and have a material adverse effect on our results of operations.

We are highly dependent on various software applications and other technologies, as well as on third parties who utilize various software applications and other technologies, for our business to function properly and to safeguard confidential information;

any significant limitation, failure, or security breach could adversely affect our operations.

As our insurance policies come up for renewal, we may need to assume higher deductibles or co-insurance liabilities, or pay higher premiums, which would increase our expenses and have a material adverse effect on our results of operations.

We depend on information technology, and any failures of or damage to, attack on or unauthorized access to our information technology systems or facilities, or those of third parties with which we do business, including as a result of cyber-attacks, could result in significant limits on our ability to conduct our operations and activities, costs, and reputational damage.

We use software and related technologies throughout our business and also utilize third-party vendors who use software and related technologies to provide services to us and the Hennessy Funds.

Although we take protective measures (including striving to understand the protective measures taken by our third-party vendors) and endeavor to modify such protective measures as circumstances warrant, we may experience system delays and interruptions as a result of natural disasters, power failures, acts of war, third-party failures, or other unexpected events.

We cannot predict with certainty all of the adverse effects that could result from the failure to efficiently address and resolve these delays and interruptions.

We could also be subject to losses if we fail to properly safeguard sensitive and confidential and proprietary information that we and our third-party

vendors store and transmit as part of our normal business operations.

Although we take protective measures, the security of our and our vendors’ computer systems, software, and networks may be vulnerable to hacking, breaches, unauthorized access, misuse, computer viruses, or other malicious code, as well as to other events that could have a security impact, such as an employee or vendor inadvertently or intentionally causing us to release confidential or proprietary information.

We are dependent on the effectiveness of our information and cybersecurity policies, procedures, and capabilities we maintain to protect our computer and telecommunications systems and the data that resides on or is transmitted through them, including

data provided by third parties that is significant to our business.

An information security incident, such as a cyber-attack involving a phishing scam, business email compromise, malware, or ransomware attack, or an internally caused incident or disruption, such as misuse or a failure to control access to sensitive systems, could materially interrupt our business operations or cause disclosure or modification of sensitive or confidential investor or competitive information.

Moreover, our growing reliance on mobile and cloud technology and any failure by mobile technology and cloud service providers to adequately safeguard their systems and prevent cyber-attacks could disrupt our operations and result in misappropriation, corruption, or loss of personal, confidential, or proprietary information or third-party data.

Additionally, although we take precautions to password protect and encrypt our laptops and other mobile electronic hardware, if such hardware is stolen, misplaced, or left unattended, it may become vulnerable to hacking or other unauthorized use, creating a possible security risk and resulting in potentially costly actions.

There have been a number of highly publicized cases in recent years involving financial services and consumer-based companies reporting the unauthorized disclosure of client or customer information, as well as cyber-attacks involving the dissemination, theft, and destruction of corporate information or other assets, as a result of employees’ or contractors’ failure to follow procedures or as a result of actions by third parties, including actions by terrorist organizations and hostile foreign governments.

We, the Hennessy Funds, and our third-party vendors may be vulnerable to such unauthorized disclosures and cyber-attacks.

Our increased use of mobile and cloud technologies could heighten these and other operational risks, and any failure by mobile technology and cloud service providers to adequately safeguard their systems and prevent cyber-attacks

could disrupt our operations and result in misappropriation, corruption, or loss of confidential or proprietary information.

Furthermore, there is a risk that encryption and other protective measures may be circumvented, particularly to the extent that new computing technologies increase the speed and computing power available.

The financial services industry has been the subject of cyber-attacks involving the dissemination, theft, and destruction of corporate information or other assets as a result of failure to follow procedures by employees or as a result of actions by third parties, including actions by terrorist organizations and nation-state actors.

Although we have implemented policies and controls to prevent and address potential data breaches, inadvertent disclosures, increasingly sophisticated cyber-attacks, and cyber-related fraud, there can be no assurance that any of these measures will prove effective.

Because the techniques used to obtain unauthorized access, disable, or degrade service or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques, to implement adequate preventative measures, or to address them until they are discovered.

In addition, a successful cyber-attack may persist for an extended period of time before being detected, and it may take a considerable amount of time for an investigation to be completed and the severity and potential impact to be known.

While such an investigation is ongoing, we may not necessarily know the extent of the harm or how best to remediate it, certain errors or actions could be repeated or compounded before they are discovered and remediated, and communication to the public, regulators, shareholders, and investors in the Hennessy Funds may be inaccurate, any or all of which could further increase the costs and consequences of an information security incident.

If any of these events were to occur, we could suffer a financial loss, a disruption of our business, liability to the Hennessy Funds and their investors, regulatory intervention, or reputational damage, any of which could have a material adverse effect on our business, results of operations, and financial condition.

We also may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures.

In addition, our cybersecurity insurance may not cover all losses and damages from such events and our ability to maintain or obtain sufficient insurance coverage in the future may be limited.

Finally, cybersecurity and data privacy have become high priorities for regulators, and many jurisdictions are enacting laws and regulations in these areas.

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We are exposed to legal risk and litigation, which could increase our expenses and reduce our profitability.

In recent years, the volume of claims and amount of damages claimed in litigation and regulatory proceedings against the financial services industry have been increasing.

While we strive to conduct our business in accordance with the highest ethical standards, we nevertheless remain exposed to litigation risk.

We could be sued by many different parties, including, by way of example, investors in the Hennessy Funds, our own shareholders, our employees, or regulators.

We are subject to a number of sources of potential legal liability, including, by way of example, investors in the Hennessy Funds, our own shareholders, our employees, or regulators.

Lawsuits or investigations that we may become involved in could be very expensive and highly damaging to our reputation, even if the underlying claims are without merit.

In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Exchange Act to compensate and protect whistleblowers who voluntarily provide original information to the SEC and establishes a fund to be used to pay whistleblowers who will be entitled to receive a payment equal to between 10% and 30% of certain monetary sanctions imposed in a successful government action resulting from the information provided by the whistleblower.

According to an annual report to Congress on the Dodd-Frank Whistleblower Program, whistleblower claims have increased significantly since the enactment of these provisions.

Addressing such claims could generate significant expenses and take up significant management time, even if such claims are frivolous or without merit.

Our business is extensively regulated, which increases our costs of doing business, and our failure to comply with regulatory requirements may harm our financial condition.

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The laws to which we are subject are designed primarily to protect investors in the Hennessy Funds as opposed to our shareholders.

In addition to an increased number of applicable laws, the mutual fund industry has undergone increased scrutiny by the SEC and state regulators in recent years, resulting in numerous enforcement actions and sweep examinations.

In addition to an

increased number of applicable laws, the investment fund industry has undergone increased scrutiny by the SEC and state regulators in recent years, resulting in numerous enforcement actions and sweep examinations.

Increased regulation has increased our costs in managing the Hennessy Funds, and we could continue to experience higher costs if new laws require us to spend more time, hire additional personnel, or buy new technology to comply effectively.

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In addition to securities regulations, our business also may be materially adversely affected by other types of laws and policies.

For example, the amount of net assets in the Hennessy Funds in a given time period could be affected by existing and proposed tax legislation or the interest rate policies of the Federal Reserve Board.

In recent years, we have been affected by changes in law such as the U.S.

Department of Labor fiduciary rule, which significantly expanded the class of advisers and the scope of investment advice that are subject to fiduciary standards, and the SEC’s Regulation Best Interest (“Regulation BI”), which requires broker-dealers

to act in the retail customer’s best interest and not place the broker-dealer’s interests ahead of the retail customer’s interests.

Both the fiduciary rule and Regulation BI caused financial advisers and broker-dealers

to make significant operational changes, including, in some cases, removing one or more of the Hennessy Funds from their platforms.

This resulted in fewer purchases of shares and increased redemptions of shares of the Hennessy Funds, and the effects of such regulations may persist even if they are ultimately replaced, retracted, or overturned.

For example, while the U.S.

Court of Appeals for the Fifth Circuit issued a mandate vacating the fiduciary rule in its entirety in June 2018, many companies had already implemented a number of business and compliance initiatives in order to change their distribution methods and operations in response to the rule, and most of these companies did not halt these initiatives following the court’s ruling.

Although we strive to conduct our business in accordance with applicable law, if we were found to have violated an applicable law, we could be subject to fines, suspensions of personnel, or other sanctions, including revocation of our registration as an investment advisor.

If a sanction were imposed against us or our personnel, even if only for a small monetary amount, the adverse publicity related to such a sanction could harm our reputation, result in redemptions by investors in the Hennessy Funds, and impede our ability to attract new investors, all of which could have a material adverse effect on our business, results of operations, and financial condition.

Any determination of a failure to comply with applicable laws, rules, or regulations could expose us or our employees to civil liability, criminal liability, or disciplinary or enforcement action, with penalties that could include the disgorgement of fees, fines, sanctions, suspensions, or censure of individual employees, or revocation or limitation of business activities or registration, and may result in monetary losses that are not covered by insurance in adequate amounts or at all, any of which could have an adverse impact on our financial condition and results of operations.

Further, if we or our employees were to fail to comply with applicable laws, rules, or regulations, or be named as a subject of an investigation or other regulatory action, the public announcement and potential publicity surrounding any such investigation or action could have an adverse effect on our reputation and our stock price and result in increased costs, even if we or our employees were found not to have violated such laws, rules, or regulations.

Changes to U.S.

15 unchanged sentences

Although we have been successful in generating sufficient cash in the past, we may not be successful in the future.

We may need to raise additional capital to fund new business initiatives, and financing may not be available to us in sufficient amounts, on acceptable terms, or at all.

We may need to raise additional capital to fund new business initiatives or repay the 2026 Notes, and financing may not be available to us in sufficient amounts, on acceptable terms, or at all.

Our ability to access bank financing or capital markets efficiently depends on a number of factors, including the state of credit and equity markets, interest rates, and credit spreads.

3 unchanged sentences

In recent years, there have been a number of highly publicized cases involving fraud, conflicts of interest, or other misconduct by individuals in the financial services industry.

We have extensive controls and risk management policies to monitor and manage risks, but we cannot be certain that such controls and policies will successfully identify and manage internal and external risks.

We have implemented controls and risk management policies to monitor and manage risks, but we cannot be certain that such controls and policies will successfully identify and manage internal and external risks.

Further, although we strive to conduct our business in accordance with the highest ethical standards and emphasize the importance of doing so to our employees, there is a risk that our employees could engage in misconduct that adversely affects our business.

14 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors