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Item 7. Management’s Discussion and Analysis

2022-12-07 compared with 2021-11-24 · 115 added, 159 removed, 116 unchanged (70% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING

This report contains “forward-looking statements” within the meaning of the securities laws, for which we claim the protection of the safe harbor for forward-looking

statements contained in the Private Securities Litigation Reform Act of 1995.

FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements” within the meaning of the securities laws, for which we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

In some cases, forward-looking statements can be identified by terminology such as “expect,” “anticipate,” “intend,” “may,” “plan,” “will,” “should,” “could,” “would,” “assume,” “believe,” “estimate,” “predict,” “potential,” “project,” “continue,” “seek,” and similar expressions, as well as statements in the future tense.

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Forward-looking statements are subject to risks, uncertainties, and assumptions, including those described in the section titled “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

Unforeseen developments could cause actual performance or results to differ substantially from those expressed in or suggested by the forward-looking

Management does not assume responsibility for the accuracy or completeness of these forward-looking

Unforeseen developments could cause actual performance or results to differ substantially from those expressed in or suggested by the forward-looking statements.

Management does not assume responsibility for the accuracy or completeness of these forward-looking statements.

There is no regulation requiring an update of any of the forward-looking statements after the date of this report to conform these statements to actual results or to changes in our expectations.

Our business activities are affected by many factors, including, without limitation, redemptions by mutual fund shareholders, taxes, general economic and business conditions, including those related to the COVID-19

pandemic, movement of interest rates, competitive conditions, industry regulation, and fluctuations in the stock market, many of which are beyond the control of our management.

Our business activities are affected by many factors, including, without limitation, redemptions by investors in the Hennessy Funds, taxes, general economic and business conditions, interest rate movements, inflation, the personal savings rate, competitive conditions, industry regulation, and fluctuations in the stock market, many of which are beyond the control of our management.

Further, the business and regulatory environments in which we operate remain complex, uncertain, and subject to change.

We expect that regulatory requirements and developments will cause us to incur additional administrative and compliance costs.

Notwithstanding the variability in our economic and regulatory environments, we remain focused on the investment performance of the Hennessy Funds and on providing high-quality

customer service to investors.

Our business strategy centers on (i) the identification, completion, and integration of future acquisitions and (ii) organic growth, through both the retention of the mutual fund assets we currently manage and the generation of inflows into the mutual funds we manage.

The success of our business strategy may be influenced by the factors discussed in Item 1A, “Risk Factors.” All statements regarding our business strategy, as well as statements regarding market trends and risks and assumptions about changes in the marketplace, are forward-looking

by their nature.

OUR CONTINUING RESPONSE TO THE COVID-19

We continue to monitor the effects of the COVID-19

pandemic on our business, particularly focusing on meeting the needs of our employees, our partners, and the Hennessy Funds and their shareholders.

Since March 2020, we have remained engaged with key partners and service providers, strengthened our digital marketing and public relations programs, maintained an effective governance and internal controls program, and kept our employees up to date with trainings on relevant government and regulatory guidance impacting in-office

work in order to ensure our continued success.

We returned to work in the Novato, California office in August 2021, and continue to adhere to our Site-Specific Protection Plan, which we regularly update to reflect current local, state, and federal requirements.

We remain committed to providing the same high level of services to the 16 Hennessy Funds and their shareholders, and we believe we have positioned the Company for long-term growth.

Our primary business activity is providing investment advisory services to a family of open-end

mutual funds branded as the Hennessy Funds.

Notwithstanding the variability in our economic and regulatory environments, we remain focused on the investment performance of the Hennessy Funds and on providing high-quality customer service to investors.

Our business strategy centers on (i) the identification, completion, and integration of future acquisitions and (ii) organic growth, through both the retention of the fund assets we currently manage and the generation of inflows into the funds we manage.

Our primary business activity is providing investment advisory services to a family of open-end mutual funds branded as the Hennessy Funds.

We manage 12 of the 16 Hennessy Funds internally.

For the remaining six funds, we have delegated the day-to-day

portfolio management responsibilities to sub-advisors,

subject to our oversight.

We oversee the selection and continued employment of each sub-advisor,

review each fund’s investment performance, and monitor each sub-advisor’s

adherence to each applicable fund’s investment objectives, policies, and restrictions.

In addition, we conduct ongoing reviews of the compliance programs of sub-advisors

and make on-site

visits to sub-advisors,

Our secondary business activity is providing shareholder services to shareholders of the Hennessy Funds.

For the remaining four funds, we have delegated the day-to-day portfolio management responsibilities to sub-advisors, subject to our oversight.

We oversee the selection and continued employment of each sub-advisor, review each fund’s investment performance, and monitor each sub-advisor’s adherence to each applicable fund’s investment objectives, policies, and restrictions.

In addition, we conduct ongoing reviews of the compliance programs of sub-advisors and make onsite visits to sub-advisors, as feasible.

Our secondary business activity is providing shareholder services to investors in the Hennessy Funds.

Prior to January 31, 2022, the day-to-day management of two Hennessy Funds, the Hennessy Energy Transition Fund and the Hennessy Midstream Fund, was performed by a sub-advisor, BP Capital Fund Services, LLC.

Effective as of that date, we mutually agreed with BP Capital Fund Services, LLC to terminate the sub-advisory agreement for those funds.

We derive our operating revenues from investment advisory fees and shareholder service fees paid to us by the Hennessy Funds.

These fees are calculated as a percentage of the average daily net assets in each Hennessy Fund.

These fees are calculated as a percentage of the average daily net assets of each Hennessy Fund.

The percentage amount of the investment advisory fees varies by fund.

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The dollar amount of the fees we receive fluctuates with changes in the average net asset value of each Hennessy Fund, which is affected by each fund’s investment performance, purchases and redemptions of shares, general market conditions, and the success of our marketing, sales, and public relations efforts.

equities had positive performance for the one-year

period ended September 30, 2021, with the S&P 500 ®

Index returning 30.00% and the Dow Jones Industrial Average returning 24.15% for the period (on a total return basis).

Equity prices advanced sharply during the period despite increased concerns over supply chain disruptions and elevated levels of inflation.

The offset to this dynamic was the idea that economic growth has resumed as economies continue to reopen despite the lingering effects of the COVID-19

After a 3.4% contraction in Real GDP in 2020, economic growth is expected to increase 5.9% in 2021, according to estimates compiled by Bloomberg.

Over the past year, we have seen widespread availability of vaccines, and with that the ability of an ever-increasing

number of people to travel, eat in restaurants, and return to work.

The unemployment rate improved from 7.9% at the end of September 2020 to 4.8% at the end of September 2021.

equities had negative performance for the one-year period ended September 30, 2022, with the S&P 500 ® Index returning -15.47% and the Dow Jones Industrial Average returning -13.40% for the period (on a total return basis).

Equity prices dropped sharply during the period as investors have turned their attention to rising interest rates amid continuing inflationary concerns.

Recent interest rate hikes by the Federal Reserve and the expectation of further rate hikes have contributed to weakness in equities.

Despite weakness in economic growth, the Federal Reserve has indicated that it will likely raise rates at upcoming meetings in an attempt to tame inflation.

According to Bloomberg, the Consumer Price Index is expected to increase 8.0% in 2022, while real GDP is expected to advance 1.6%.

While lower economic growth expectations would typically lead to talk of an easing interest rate environment, a strong labor market and volatile energy prices have contributed to stubbornly high and above average inflation levels.

The Federal Reserve has indicated a resolve to do what it takes to bring inflation down, regardless of economic growth conditions.

Long-term U.S.

bonds declined meaningfully during the one-year

period ended September 30, 2021, as the prospect of the Federal Reserve tapering its bond-buying

activity and potentially raising interest rates as soon as 2022 prompted investors to sell bonds.

economy reopens and some semblance of normalcy returns to the economy, investors’ attention has turned to the idea that inflation may continue to remain elevated, which may prompt the Federal Reserve to raise interest rates.

While the Federal Reserve has indicated that they would like to see employment numbers return to pre-pandemic

levels before raising rates, it seems that some investors are focused on the idea that any further inflationary pressures may force the Federal Reserve to act sooner.

For the one-year

period ended September 30, 2021, 10-year

bonds declined meaningfully during the one-year period ended September 30, 2022, as the Federal Reserve tapered its bond-buying activity and continued to raise the Federal Funds rate.

With a yield curve that is currently inverted, investor attention has focused on economic growth projections that continue to be revised downward.

While the unemployment rate in the United States stood at an incredibly low 3.5% as of September 2022, economic growth expectations continue to trend lower.

According to Bloomberg, consensus estimates for real GDP growth for 2022 are 1.6% and for 2023 are 0.7%.

The sharp decline in equities, coupled with recent weakness in the residential real estate market, likely portends some softening in consumer spending in the months to come.

For the one-year period ended September 30, 2022, 10-year U.S.

Government Bond yields rose from 1.49% to 3.83%.

The Japanese equity market rose 20.61% (in U.S.

dollar terms) for the one-year

period ended September 30, 2021, as measured by the Tokyo Stock Price Index.

Enthusiasm around Japanese equities has centered on the country’s recent surge in COVID-19

vaccinations as well as by the election of a new Prime Minister, Fumio Kishida, to replace Yoshihide Suga, who recently resigned.

Against this backdrop, all of the 16 Hennessy Funds posted positive returns for the one-year

period ended September 30, 2021.

The longer-term

performance numbers remain strong, with 14 of the Hennessy Funds posting positive returns for the five-year

period ended September 30, 2021, and all 14 Hennessy Funds with at least 10 years of operating history posting positive returns for the 10-year

period ended September 30, 2021.

As always, we are committed to providing superior service to investors and employing a consistent and disciplined approach to investing based on a buy-and-hold

philosophy that rejects the idea of market timing.

The Japanese equity market declined 28.41% (in U.S.

dollar terms) for the one-year period ended September 30, 2022, as measured by the Tokyo Stock Price Index.

Like many other markets, Japan has experienced elevated levels of inflation coupled with restrained trade with key trading partners.

China’s zero-COVID strategy has hampered growth in the country and adversely affected Japanese economic growth.

Japanese Yen weakness versus the U.S.

Dollar contributed to weak absolute dollar returns as the Tokyo Stock Price Index was only down 7.29% in local currency terms.

Against this negative equity performance backdrop, only three of the 16 Hennessy Funds posted positive returns for the one-year period ended September 30, 2022.

The longer-term performance numbers remain strong, with 13 of the Hennessy Funds posting positive returns for the five-year period ended September 30, 2022, and all 14 Hennessy Funds with at least 10 years of operating history posting positive returns for the 10-year period ended September 30, 2022.

As always, we are committed to providing superior service to investors and employing a consistent and disciplined approach to investing based on a buy-and-hold philosophy that rejects the idea of market timing.

Our goal is to provide products that investors can have confidence in, knowing their money is invested as promised and with their best interests in mind.

Accordingly, we continually seek new and improved ways to support investors in the Hennessy Funds, including by providing thought leadership and other resources to help them navigate through this unprecedented market disruption due to the pandemic.

We operate a robust and leading-edge

marketing automation and customer relationship management (CRM) system, with a database of over 100,000 financial advisors in addition to retail investors.

We utilize this technology both to retain assets and to drive new purchases into the Hennessy Funds.

Accordingly, we continually seek new and improved ways to support investors in the Hennessy Funds, including by providing market insights, sector highlights, and other resources to help them manage their fund investments with confidence.

We operate a robust and leading-edge marketing automation and customer relationship management (CRM) system, with a database of over 100,000 financial advisors in addition to retail investors.

We utilize this technology both to help retain assets and drive new purchases into the Hennessy Funds.

We employ a comprehensive marketing and sales program consisting of content, digital, social media, and traditional marketing initiatives and proactive meetings.

In addition, our consistent annual public relations campaign has resulted in the Hennessy brand name appearing on TV, radio, print, or online media on average once every two to three days.

We provide service to approximately 160,000 mutual fund accounts nationwide, including accounts held by shareholders who employ financial advisors to assist them with investing as well as accounts held by retail shareholders who invest directly with us.

We serve over 14,000 financial advisors who utilize the Hennessy Funds on behalf of their clients, including over 800 who purchased one of our Funds for the first time during fiscal year 2021.

Approximately 17% of such advisors own two or more Hennessy Funds, and nearly 550 advisors hold a position of over $500,000, demonstrating strong brand loyalty.

Total assets under management as of the end of fiscal year 2021 was $4.1 billion, an increase of $0.5 billion, or 14.1%, compared to the end of fiscal year 2020.

The increase in total assets during fiscal year 2021 was attributable to market appreciation.

The following table illustrates the changes in our assets under management over the past three years:

We provide service to over 145,000 fund accounts nationwide, including accounts held by investors who employ financial advisors to assist them with investing as well as accounts held by retail investors who invest directly with us.

We serve approximately 12,600 financial advisors who utilize the Hennessy Funds on behalf of their clients, including nearly 800 who purchased one of our Funds for the first time during fiscal year 2022.

Approximately 17% of such advisors own two or more Hennessy Funds, and nearly 400 advisors hold a position of over $500,000.

While numbers have declined in recent years, we continue to focus significant efforts on financial advisors who own two or more Hennessy Funds or hold a position of over $500,000 in an effort to build and maintain brand loyalty among our top tier of advisors.

Total assets under management as of the end of fiscal year 2022 was $2.9 billion, a decrease of $1.2 billion, or 28.8%, compared to the end of fiscal year 2021.

The decrease was attributable to net outflows of the Hennessy Funds and market depreciation.

The following table illustrates the changes in our assets under management over the past three fiscal years:

Fiscal Years Ended September 30,

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Organic inflows

Market appreciation (depreciation)

Market (depreciation) appreciation

Ending assets under management

As stated above, the fees we receive for providing investment advisory and shareholder service are based on average assets under management.

The following table shows average assets under management by share class over the past three years:

As stated above, the fees we receive for providing investment advisory and shareholder services are based on average assets under management.

The following table shows average assets under management by share class over the past three fiscal years:

Fiscal Years Ended September 30,

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Average assets under management - Institutional Class

The principal asset on our balance sheet, management contracts, represents the capitalized costs incurred in connection with the purchase of the assets related to the management of mutual funds.

As of the end of fiscal year 2021, this asset had a net balance of $80.6 million, unchanged since the end of fiscal year 2020.

The principal liability on our balance sheet as of the end of our fiscal year 2021 was the net deferred tax liability of $12.4 million generated due to the continued write-off

of our management contracts asset for tax purposes, which creates a book-to-tax

Following the end of our fiscal year 2021, 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.

The principal asset on our balance sheet, management contracts, represents the capitalized costs incurred in connection with the purchase of the assets related to the management of investment funds.

As of the end of fiscal year 2022, this asset had a net balance of $80.9 million, an increase of $0.3 since the end of fiscal year 2021.

The increase is related to costs associated with the definitive agreement signed with Stance Capital in August 2022.

(See Note 16 in Item 8, “Financial Statements and Supplementary Data.”)

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.

The 2026 Notes are the principal liability on our balance sheet at $38.9 million, net of issuance costs.

RESULTS OF OPERATIONS

The following table sets forth items in our statements of income as dollar amounts and as percentages of total revenue:

The following table sets forth items in the statements of income as dollar amounts and as percentages of total revenue:

Fiscal Years Ended September 30,

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Mutual fund distribution

Sub-advisory fees

Total operating expenses

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Income tax expense

Revenues – Investment Advisory Fees and Shareholder Service Fees

Revenue – Investment Advisory Fees and Shareholder Service Fees

Total revenue comprises investment advisory fees and shareholder service fees.

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The decrease in shareholder service fees was due to a decrease in the average daily net assets held in Investor Class shares of the Hennessy Funds.

Assets held in Investor Class shares of the Hennessy Funds are subject to a shareholder service fee, whereas assets held in Institutional Class shares of the Hennessy Funds are not subject to a service fee.

We collect investment advisory fees from each Hennessy Fund at differing annual rates.

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We collect an investment advisory fee from the Hennessy Focus Fund at an annual rate of 0.90% of average daily net assets.

However, we pay a sub-advisory

fee at an annual rate of 0.29% to the fund’s sub-advisor,

which reduces the net operating profit contribution of the fund to our financial operations.

However, we pay a sub-advisory fee at an annual rate of 0.29% to the fund’s sub-advisor, which reduces the net operating profit contribution of the fund to our financial operations.

The Hennessy Fund with the second largest average daily net assets for fiscal year 2022 was the Hennessy Japan Fund, with $583 million.

We collect an investment advisory fee from the Hennessy Japan Fund at an annual rate of 0.80% of average daily net assets.

However, we pay a sub-advisory

fee at an annual rate between 0.35% and 0.42% (depending on asset level) to the fund’s sub-advisor,

which reduces the net operating profit contribution of the fund to our financial operations.

Total assets under management as of the end of fiscal year 2021 was $4.1 billion, an increase of $0.5 billion, or 14.1%, compared to the end of fiscal year 2020.

The increase was attributable to market appreciation.

However, we pay a sub-advisory fee at an annual rate in the range of 0.35% to 0.42% (depending on asset level) to the fund’s sub-advisor, which reduces the net operating profit contribution of the fund to our financial operations.

Total assets under management as of the end of fiscal year 2022 was $2.9 billion, a decrease of $1.2 billion, or 28.8%, compared to the end of fiscal year 2021.

The decrease was attributable to net outflows of the Hennessy Funds and market depreciation.

The Hennessy Funds with the three largest amounts of net inflows were as follows:

Fiscal Year Ended September 30, 2022

Hennessy Japan Fund

Hennessy Small Cap Financial Fund

Hennessy Cornerstone Value Fund

Hennessy Japan Small Cap Fund

Hennessy Cornerstone Growth Fund

The Hennessy Funds with the three largest amounts of net outflows were as follows:

Fiscal Year Ended September 30, 2022

Hennessy Focus Fund

Hennessy Japan Fund

(222) million

Hennessy Gas Utility Fund

Hennessy Focus Fund

(181) million

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Operating Expenses

Comparing fiscal year 2020 to fiscal year 2021, total operating expenses remained relatively flat, decreasing by 0.9%, from $22.1 million to $21.9 million.

The slight decrease in the dollar amount of operating expenses was due to decreases in many expense categories, partially offset by increases in compensation and benefits expense and mutual fund distribution expense.

As a percentage of total revenue, total operating expenses increased 0.7 percentage points to 66.8%.

Although the dollar value decreased slightly, operating expenses increased slightly as a percentage of total revenue because some of our operating expenses are fixed costs that did not decrease with decreasing revenue during fiscal year 2021.

Comparing fiscal year 2021 to fiscal year 2022, total operating expenses decreased by 9.4%, from $21.9 million to $19.8 million.

The decrease in operating expenses was primarily due to decreases in sub-advisory fee and compensation and benefits expenses, partially offset by increases in general and administrative expense and mutual fund distribution expense.

As a percentage of total revenue, total operating expenses remained flat at 66.8%.

Compensation and Benefits Expense :

Comparing fiscal year 2020 to fiscal year 2021, compensation and benefits expense increased by 2.9%, from $8.8 million to $9.1 million.

Comparing fiscal year 2021 to fiscal year 2022, compensation and benefits expense decreased by 8.3%, from $9.1 million to $8.3 million.

As a percentage of total revenue, compensation and benefits expense increased 0.3 percentage points to 28.0%.

The increase in compensation and benefits expense was due to an increase in incentive-based

compensation during fiscal year 2021 resulting from our higher total assets under management, as well as an increase in salary compensation paid to our executive officers compared to our fiscal year 2020, which included five months during which our executive officers agreed to temporary 25% salary reductions.

The decrease in dollar value of compensation and benefits expense was due primarily to a decrease in head count and incentive-based compensation during fiscal year 2022.

General and Administrative Expense :

Comparing fiscal year 2020 to fiscal year 2021, general and administrative expense decreased by 4.2%, from $5.0 million to $4.8 million.

As a percentage of total revenue, general and administrative expense decreased 0.4 percentage points to 14.5%.

The decrease in general and administrative expense was due to lower director stock award expense, as well as a reduction in rent expense in our Novato office and a decrease in legal and accounting costs in the current period.

Comparing fiscal year 2021 to fiscal year 2022, general and administrative expense increased by 5.9%, from $4.8 million to $5.0 million.

As a percentage of total revenue, general and administrative expense increased 2.5 percentage points to 17.0%.

The increase in general and administrative expense was due to an increase in overall business travel, including conference and other industry event attendance, as we trend towards pre-pandemic travel levels.

Mutual Fund Distribution Expense :

Mutual fund distribution expense consists of fees paid to various financial institutions that offer the Hennessy Funds as potential investments to their clients.

When the Hennessy Funds are purchased through one of these financial institutions, the institution typically charges an asset-based

fee, which is recorded as mutual fund distribution expense on our statement of operations to the extent paid by us.

Mutual fund distribution expense consists of fees paid to various third-party financial intermediaries that offer the Hennessy Funds as potential investments to their clients.

When the Hennessy Funds are purchased through one of these financial intermediaries, the intermediary typically charges an asset-based fee, which is recorded as mutual fund distribution expense on our statement of operations to the extent paid by us.

When the Hennessy Funds are purchased directly, we do not incur any such expense.

These fees generally increase or decrease in line with the net assets of the Hennessy Funds held through these financial institutions, which are affected by inflows, outflows, and fund performance.

In addition, some financial institutions charge a minimum fee if the average daily net assets of a Hennessy Fund held by such an institution are less than a threshold amount.

These fees generally increase or decrease in line with the net assets of the Hennessy Funds held through these financial intermediaries, which are affected by inflows, outflows, and fund performance.

In addition, some financial intermediaries charge a minimum fee if the average daily net assets of a Hennessy Fund held by such an intermediary are less than a threshold amount.

In such cases, we pay the minimum fee.

Comparing fiscal year 2020 to fiscal year 2021, mutual fund distribution expense increased slightly by 1.7%, from $0.48 million to $0.49 million.

Comparing fiscal year 2021 to fiscal year 2022, mutual fund distribution expense increased by 10.5%, from $0.49 million to $0.54 million.

As a percentage of total revenue, mutual fund distribution expense increased 0.3 percentage points to 1.8%.

The increase in mutual fund distribution expense was due to slightly higher average daily net assets of the Hennessy Funds held at financial institutions in the current period.

In the second quarter of the prior fiscal year, significant market depreciation, primarily resulting from the COVID-19

pandemic, caused a decrease in average daily net assets.

Comparing fiscal year 2020 to fiscal year 2021, sub-advisory

fees expense decreased by 3.2%, from $7.6 million to $7.3 million.

As a percentage of total revenue, sub-advisory

fees expense decreased 0.3 percentage point to 22.4%.

The decrease in sub-advisory

fees was due to a decrease in average daily net assets of the sub-advised

Hennessy Funds.

Mutual fund distribution expenses are affected by many factors, including the following:

average daily net assets held by financial intermediaries;

the split of average daily net assets held by financial intermediaries in Institutional Class shares of the Hennessy Funds versus Investor Class shares of the Hennessy Funds;

fee minimums at various financial intermediaries.

Sub-Advisory Fees Expense :

Comparing fiscal year 2021 to fiscal year 2022, sub-advisory fees expense decreased by 21.9%, from $7.3 million to $5.7 million.

As a percentage of total revenue, sub-advisory fees expense decreased 3.1 percentage point to 19.3%.

The decrease in sub-advisory fees was due to a decrease in average daily net assets of the sub-advised Hennessy Funds, with an additional decrease as a result of us no longer paying sub-advisory fees with respect to the Hennessy Energy Transition Fund and the Hennessy Midstream Fund after January 31, 2022.

Depreciation Expense :

Comparing fiscal year 2020 to fiscal year 2021, depreciation expense decreased by 2.9% from $0.24 million to $0.23 million due to the write-off

of fully depreciated assets.

Comparing fiscal year 2021 to fiscal year 2022, depreciation expense decreased by 10.8% from $0.23 million to $0.21 million due to fewer fixed asset purchases.

As a percentage of total revenue, depreciation expense remained flat at 0.7%.

Interest Expense

Comparing fiscal year 2020 to fiscal year 2021, interest expense decreased by 100% from $0.4 million to $0.

The decrease in interest expense was due to the payoff in full of the remaining outstanding balance under our term loan agreement with U.S.

Bank National Association on March 26, 2020.

Comparing fiscal year 2021 to fiscal year 2022, interest expense increased from $0 to $2.1 million.

The increase in interest expense was due to our issuance of the 2026 Notes on October 20, 2021, for which we make interest payments quarterly, with the first interest payment made on December 31, 2021.

Income Tax Expense

Comparing fiscal year 2021 to fiscal year 2022, income tax expense decreased by 41.1%, from $3.0 million to $1.8 million.

The decrease in income tax expense was due primarily to lower net operating income in the current period.

Comparing fiscal year 2020 to fiscal year 2021, net income increased by 0.8%, from $7.8 million to $7.9 million.

The increase in net income was primarily due to decreased interest expense in the current period.

The decrease in income tax expense was due primarily to lower net operating income in the current period and secondarily to a lower effective income tax rate as discussed in Item 8, “Financial Statements and Supplementary Data.”

Comparing fiscal year 2021 to fiscal year 2022, net income decreased by 21.7%, from $7.9 million to $6.2 million.

The decrease in net income was primarily due to the interest expense related to the 2026 Notes in the current period.

LIQUIDITY AND CAPITAL RESOURCES

We continually review our capital requirements to ensure that we have funding available to support our business model.

Management anticipates that cash and other liquid assets on hand as of the end of fiscal year 2021 will be sufficient to meet our capital requirements for one year from the issuance date of this report, as well as our longer-term

capital requirements for periods beyond one year from the issuance date of this report.

Management anticipates that cash and other liquid assets on hand as of the end of fiscal year 2022 will be sufficient to meet our capital requirements for one year from the issuance date of this report, as well as our longer-term capital requirements for periods beyond one year from the issuance date of this report.

To the extent that liquid resources and cash provided by operations are not adequate to meet long-term capital requirements, management plans to raise additional capital by either, or both, seeking bank financing or accessing the capital markets.

There can be no assurance that we will be able to raise additional capital.

Following the end of our fiscal year 2021, on October 20, 2021, the Company completed a public offering of its 2026 Notes in the aggregate principal amount of $40,250,000.

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

Our total assets under management as of the end of fiscal year 2021 was $4.1 billion, an increase of $0.5 billion, or 14.1%, from the end of fiscal year 2020.

On October 20, 2021, we completed a public offering of our 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 4.875% per annum, payable on the last day of each calendar quarter and at maturity, beginning December 31, 2021.

Our total assets under management as of the end of fiscal year 2022 was $2.9 billion, a decrease of $1.2 billion, or 28.8%, compared to the end of fiscal year 2021.

The primary sources of our revenues, liquidity, and cash flow are our investment advisory fees and shareholder service fees, which are based on, and generated by, our average assets under management.

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Net cash used in investing activities

Net cash used in financing activities

Net increase (decrease) in cash and cash equivalents

The decrease in cash provided by operating activities of $0.2 million was due mainly to decreased operating income.

The decrease in cash used in investing activities of $0.6 million was due to a payment for the purchase of assets related to the management of the BP Funds made in the prior period.

The decrease in cash used for financing activities of $20.2 million was due primarily to the prepayment of the remaining outstanding balance payable under our term loan agreement with U.S.

Bank National Association in the prior period.

Net cash provided by (used) in financing activities

Net increase in cash and cash equivalents

The decrease in cash provided by operating activities of $1.7 million was mainly due to the interest expense related to the 2026 Notes in the current period.

The cash used in investing activities of $0.2 million remained the same in both periods.

The increase in cash provided by financing activities of $38.5 million was due to the issuance of the 2026 Notes on October 20, 2021.

Dividend Payments .

We have consistently paid dividends each year since 2005.

Our quarterly dividend rate remained constant during fiscal years 2020 and 2021, and our dividend payments totaled $4.0 million in each such fiscal year.

Our Bank Loan

On March 26, 2020, we prepaid in full all principal, accrued interest, and costs and expenses outstanding under our term loan agreement with U.S.

Bank National Association.

The aggregate prepayment amount of $15.4 million was funded by cash on hand, and we did not incur any prepayment penalties.

On October 20, 2021, we 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.

Our quarterly dividend rate remained constant during fiscal years 2022 and 2021, and our dividend payments totaled $4.1 and $4.0 million in each such fiscal year, respectively.

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.

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Pursuant to ASC 350, an entity first assesses qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform a quantitative impairment test.

The more-likely-than-not

threshold is defined as having a likelihood of more than 50 percent.

If an entity determines that it is more likely than not that an indefinite-lived

intangible asset is impaired, then it must conduct an impairment analysis.

We were able to forego the annual impairment analysis for fiscal year 2021 as the more-likely-than-not

threshold was not met as of the end of fiscal year 2021.

The costs related to our purchase of the assets related to the management of mutual funds are capitalized as incurred.

The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent.

If an entity determines that it is more likely than not that an indefinite-lived intangible asset is impaired, then it must conduct an impairment analysis.

We were able to forego the annual impairment analysis for fiscal year 2022 as the more-likely-than-not threshold was not met as of the end of fiscal year 2022.

The costs related to our purchase of the assets related to the management of investment funds are capitalized as incurred.

The costs are defined as an intangible asset per the FASB standard “Intangibles – Goodwill and Other.” The acquisition costs include legal fees, fees for soliciting shareholder approval, and a percent of asset costs to purchase the management contracts.

1 unchanged sentence

RECENTLY ISSUED AND ADOPTED ACCOUNTING STANDARDS

We reviewed accounting pronouncements issued between December 1, 2020, the filing date of our 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 have determined that no accounting pronouncement issued would have a material impact on our financial position, results of operations, or disclosures.

We reviewed accounting pronouncements issued between November 24, 2021, the filing date of our most recent previously filed Annual Report on Form 10-K, and December 7, 2022, the filing date of this Annual Report on Form 10-K, and have determined that no accounting pronouncement issued would have a material impact on our financial position, results of operations, or disclosures.

There have been no other significant changes to our critical accounting policies and estimates during fiscal year 2022.

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 7. Management’s Discussion and Analysis