HENNESSY ADVISORS INC - Annual Report: 2021 (Form 10-K)

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

California		68-0176227
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

Title of each class		Trading symbol		Name of each exchange on which registered
Common stock, no par value		HNNA		The Nasdaq Stock Market LLC
4.875% Notes due 2026		HNNAZ		The Nasdaq Stock Market LLC

Large accelerated filer		☐		Accelerated filer		☐
Non-accelerated filer		☒		Smaller reporting company		☒
				Emerging growth company		☐

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Hennessy Advisors, Inc. (the “Company,” “we,” “us,” or “our”) is a publicly traded investment management firm whose primary business activity is managing, servicing, and marketing a family of mutual funds branded as the Hennessy Funds. We are committed to providing superior service to investors and employing a consistent and disciplined approach to investing based on a 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. Our firm was founded on these principles over 30 years ago, and the same principles guide us today.

We earn revenues primarily by providing investment advisory services to the Hennessy Funds and secondarily by providing shareholder services to shareholders of the Hennessy Funds. Investment advisory services include managing the composition of each fund’s portfolio (including the purchase, retention, and disposition of portfolio securities in accordance with each fund’s investment objectives, policies, and restrictions), monitoring each fund’s compliance with its investment restrictions and federal securities laws, monitoring the liquidity of each fund, reviewing each fund’s investment performance, overseeing the selection and continued employment of and monitoring such adherence to the fund’s investment objectives, policies, and restrictions, monitoring and overseeing other service providers, maintaining marketing and distribution departments, preparing and distributing regulatory reports, and monitoring and overseeing distribution through third-party financial intermediaries. Shareholder services include maintaining a 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. The fees we receive for investment advisory and shareholder services are calculated as a percentage of the average daily net asset values of the Hennessy Funds. Accordingly, our total revenue increases or decreases as our average assets under management rises or falls. The percentage amount of the investment advisory fees varies from fund to fund, but the percentage amount of the shareholder service fees is consistent across all funds.

We have delegated the portfolio management responsibilities to subject to our oversight, for some of the Hennessy Funds. In exchange for these services, we pay each a fee out of our own assets, which is calculated as a percentage of the average daily net asset values of the funds. Accordingly, the fees we pay increase or decrease as our average assets under management in our funds increases or decreases, respectively.

Our business strategy centers on (i) organic growth through our marketing, sales, and distribution efforts and (ii) growth through strategic purchases of assets.

We manage 16 mutual funds, each of which is categorized as a Domestic Equity, or Sector and Specialty product. Shares of the funds generally are available for purchase only by U.S. residents and, in certain circumstances, U.S. citizens living abroad.

Three of the Hennessy Funds are categorized as Multi-Asset products. Of those three funds, two utilize a quantitative investment strategy and one is actively managed. These funds follow a more conservative investment strategy focused on generating income and providing an alternative to mutual funds containing only equity stocks. Following is a brief description of the investment objectives and principal investment strategies of the Hennessy Funds in the product category:

The following table presents the average annualized returns for each Hennessy Fund and its relevant benchmark indices for the three-year, five-year, and (or since inception for Hennessy Funds that commenced operations less than ten years ago) periods ended September 30, 2021.

We earn revenues primarily by providing investment advisory services to the Hennessy Funds and secondarily by providing shareholder services to shareholders of the Hennessy Funds. The fees we receive for these services are calculated as a percentage of the average daily net asset values of the Hennessy Funds. In addition, the fees that we pay are also calculated as a percentage of the average daily net asset values of the Hennessy Funds. The amount of our assets under management fluctuates as a result of organic inflows (purchases of shares of the Hennessy Funds by new or existing shareholders), acquisition inflows, outflows (redemptions of shares of the Hennessy Funds by shareholders), and market appreciation or depreciation.

The following table summarizes our sources of revenues, net of fees:

We waived a portion of our 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. We continue 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 our revenues. Each waived fee is then deducted from investment advisory fee income and reduces the aggregate amount of advisory fees we receive from such fund in the subsequent month. Total fee waivers during fiscal years 2021 and 2020 were $0.1 million and $0.3 million, respectively. To date, we have only waived fees based on contractual obligations, but we have the ability to waive fees at our discretion. Any decision to waive fees would apply only on a basis.

We have delegatedd the portfolio management responsibilities to subject to our oversight, for some of the Hennessy Funds. In each case, the entity or the individuals working at the entity is the same entity or are the same individuals who advised the fund prior to our purchase of the assets related to the management of such fund. The provision of services must be in accordance with the applicable Hennessy Fund’s agreement, Prospectus, and Statement of Additional Information. The services that each provides to the applicable Hennessy Fund pursuant to the terms of the agreement include, among other things, the following:

In exchange for services, we pay fees to the out of our own assets. fees are calculated as a percentage of the applicable fund’s average daily net asset value. The following table lists each of our funds, the for such fund, and the percentage used to calculate the annual fees payable by us to such fund’s as of the end of fiscal year 2021:

The agreements must be renewed annually in the same manner as the investment advisory agreements and are subject to the same termination provisions.

Pursuant to a shareholder servicing agreement with Hennessy Funds Trust, we provide shareholder services to shareholders of the Hennessy Funds including, among other things, maintaining a 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. In exchange for these services, we receive a shareholder service fee from each Hennessy Fund of 0.10% of the average daily net assets of such fund’s Investor Class shares.

All of the Hennessy Funds have adopted a plan. These plans are named after Rule of the Investment Company Act of 1940, which permits a mutual fund to adopt a plan that allows the fund to collect fees to use to make payments to third parties in connection with the distribution of fund shares. Amounts paid under a plan may be spent on any activities or expenses primarily intended to result in sale of shares of the fund, including, but not limited to (i) advertising, (ii) compensation paid to financial institutions, broker-dealers, and others for sales and marketing, (iii) shareholder accounting servicing, (iv) printing and mailing prospectuses to possible new shareholders, and (v) printing and mailing sales literature. A mutual fund may also employ a distributor to distribute and market fund shares and then use fees to pay the distributor for expenses relating to telephone use, overhead, employing employees who engage in or support the distribution of the fund shares, printing prospectuses and other reports for possible new shareholders, advertising, and preparing and distributing sales literature.

The fee for each Hennessy Fund is 0.15% of the average daily net assets of such fund’s Investor Class shares.

All trades for the Hennessy Funds are executed by independent brokerage firms following our direction or the direction of our When selecting brokers, we and our are required to seek best execution. Although there is no single statutory definition, Securities and Exchange Commission (“SEC”) releases and other legal guidelines make clear that this duty requires us to seek “the most advantageous terms reasonably available under the circumstances for a customer’s account.” The lowest possible commission, while important, is not the sole determinative factor. We and our also consider factors such as order size and market depth, availability of competing markets and liquidity, trading characteristics of the security, financial responsibility of the and the broker’s ability to address current market conditions.

Our ability to use the names and formulaic investment strategies of the Hennessy Cornerstone Growth Fund and the Hennessy Cornerstone Value Fund are governed by the terms and conditions of a license agreement, dated as of April 10, 2000, with Netfolio. Under the license agreement, Netfolio granted us a perpetual, exclusive license to use certain trademarks, such as “Strategy Indexing,” “Cornerstone Growth,” and “Cornerstone Value,” as well as the formula investment strategies used by the Hennessy Cornerstone Growth Fund and the Hennessy Cornerstone Value Fund. All of our advertising, marketing, promotional, and other materials incorporating or referring to the trademarks are subject to the prior written approval of Netfolio, except that we do not need Netfolio’s prior written approval to use the trademarks in a manner that is not substantially unchanged from any prior use by Netfolio in its own business or from any prior use by us previously approved by Netfolio. We have the right to assign the license to another person or entity if the assignee agrees in writing to be bound by the terms of the license agreement. There are no ongoing licensing fees associated with this license agreement, and Netfolio does not have any contractual rights to terminate the license agreement.

From the time we launched our first mutual fund in 1996, we have consistently pursued a growth strategy centered on organic growth through our marketing, sales, and distribution efforts and growth through strategic purchases of assets. The implementation of this business strategy is described below.

We believe we can attract investors to the Hennessy Funds by effectively marketing our consistent and disciplined approach to investing based on a philosophy that rejects the idea of market timing. We offer quantitative funds, actively managed funds, and income-generating funds. We believe our quantitative funds attract investors who want to understand exactly how their investments are managed and who favor statistical analysis and empirical evidence as the basis for investment decisions. We also believe that our actively managed funds attract investors who appreciate a fundamental, investment management approach and talented portfolio managers. Finally, we believe our more conservative, funds attract investors seeking alternatives to mutual funds invested entirely in equities.

We run a comprehensive and public relations program designed to disseminate our message to a wide variety of potential investors through frequent television appearances, radio spots, feature articles, and print media mentions. We have partnered with an industry-leading public relations firm, SunStar Strategic, to proactively promote the Hennessy Funds to national financial media. This public relations program has consistently resulted in the Hennessy Funds being mentioned an average of once every two to three days in national print and broadcast media such as CNBC, Fox News, Bloomberg radio and TV, The Wall Street Journal, Kiplinger, and Barron’s, among others. To facilitate our presence in the media, we utilize LiveStudio, an studio providing a direct link to media broadcasts, at our office in Novato, California. We have several spokespeople who help us expand our public relations program and provide comprehensive media coverage of our products, including (i) Neil J. Hennessy, who is our Chief Executive Officer and Chairman of our Board of Directors as well as President, Chief Market Strategist, and a Portfolio Manager of the Hennessy Funds, (ii) Ryan Kelley, Chief Investment Officer and a Portfolio Manager of the Hennessy Funds, and (iii) Portfolio Managers David Ellison and Josh Wein, as well as the Portfolio Managers at our

We maintain and regularly update a robust website and social media presence. Our core marketing efforts include targeted outreach to both current and prospective investors in the Hennessy Funds, including financial advisors and retail investors. Our content marketing includes overall market and thought leadership, promotional investment ideas, fund updates, and commentary from our portfolio managers, as well as feature news articles and broadcast appearances. We attend select investment advisor trade shows and strategic conferences, and we seek opportunities to moderate or speak on industry-related panels. Through much of our fiscal year 2021 and the second half of our fiscal year 2020, we participated in these activities via videoconference or teleconference, as necessary.

Investors may purchase shares of the Hennessy Funds through financial intermediaries, including mutual fund supermarkets, national wirehouses and independent and regional broker-dealers, and registered investment advisors, or directly from the Hennessy Funds.

Mutual fund supermarkets, such as Schwab, Fidelity, TD Ameritrade, and Pershing, generally offer funds of many different investment companies to investors in exchange for a services fee paid by the applicable fund or that fund’s investment advisor. The ability to purchase various mutual funds in a single location is very attractive to investors, and the majority of our $3.6 billion of assets under management as of the end of fiscal year 2021 was held at mutual fund supermarkets. Additionally, we continually seek opportunities to form new relationships with financial intermediaries to make our mutual funds even more accessible to investors. We oversee distribution of the Hennessy Funds through all financial intermediaries.

Investment professionals generally have access to a wide variety of investment products they may recommend to their investors. A recommendation by an investment professional to an investor to buy one of the Hennessy Funds may greatly influence that investor. Thus, we believe that expanding our current base of investment professionals who utilize funds for their investors will help us increase our assets under management, which will in turn increase our revenues.

We continually strive to develop relationships with national full-service firms that permit their investment professionals to offer funds to their investors as a way to increase the amount of assets that we manage, which will in turn increase our revenues.

A primary component of our growth strategy is to selectively pursue strategic purchases of the assets related to the management of additional mutual funds. We believe the regulatory burden imposed upon the mutual fund industry, along with increased competition, has compressed the margins of smaller to mutual fund managers, making those managers more receptive to an asset purchase. The trend toward lower fees has made it more challenging to identify accretive asset purchases, but we believe that we are well positioned to move quickly once we identify any attractive purchase targets from the increasingly large supply of potential targets.

Through our asset purchase strategy, we have completed 10 purchases of the assets related to the management of mutual funds over a period, integrating $4.3 billion in net assets of 30 different mutual funds into the Hennessy Funds family. We completed our most recent asset purchase on October 26, 2018, when we purchased the assets related to the management of the BP Capital TwinLine Energy Fund and the BP Capital TwinLine MLP Fund (together, the “BP Funds”), which were reorganized into the Hennessy BP Energy Transition Fund and the Hennessy BP Midstream Fund, respectively, two new series of Hennessy Funds Trust.

We manage accounts for the Hennessy Funds on a discretionary basis, meaning that we have the authority to buy and sell securities for each portfolio, select to execute trades, and negotiate brokerage commission rates. In connection with certain of these transactions, we receive soft dollar credits from broker-dealers that have the effect of reducing certain of our expenses. All of our soft dollar arrangements are intended to be within the safe harbor provided by Section 28(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). If our ability to use soft dollars were reduced or eliminated as a result of the implementation of statutory amendments or new regulations, our operating expenses would increase.

Our mutual funds are registered with the SEC under the Investment Company Act of 1940, which imposes additional obligations on both the Hennessy Funds and us, as the advisor to the Hennessy Funds, including detailed operational requirements. While we exercise broad discretion over the management of the business, affairs, and investment portfolios of the Hennessy Funds, our operations are subject to oversight and management by the Funds’ Board of Trustees. The responsibilities of the Funds’ Board of Trustees include, among other things, annually approving the continuation of our investment advisory agreements and shareholder servicing agreement with the Hennessy Funds and our agreements with the to the Hennessy Funds, approving other service providers, determining the method of valuing assets, and monitoring transactions involving affiliates. The Investment Company Act of 1940 also imposes on us a fiduciary duty with respect to receiving investment advisory fees. That fiduciary duty may be enforced by the SEC, by administrative action, or through litigation initiated by investors in the Hennessy Funds pursuant to a private right of action.

We make available free of charge through a link on our website, www.hennessyadvisors.com, our Annual Report on Form Quarterly Reports on Current Reports on Form and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. We are not including the information contained on our website as part of, or incorporating it by reference into, this Annual Report on Form

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 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.

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 pandemic, may also cause increases in redemptions of shares of the Hennessy Funds. Such redemptions reduce our assets under management and adversely affect our revenues.

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

We utilize unaffiliated to manage the portfolio composition of some of the Hennessy Funds. Although we perform due diligence on our we do not manage their business activities. Our financial condition and profitability may be adversely affected by situations that are specific to such 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 relationships, and there can be no assurance that such terms will remain acceptable to us or our These relationships may also be terminated by us or the applicable upon short notice without penalty. An interruption or termination of our relationships could affect our ability to market our funds and result in a reduction in assets under management, which would adversely affect our revenues.

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. Our success is highly dependent on access to these various distribution channels. We cannot guarantee we will be able to retain access to these channels at similar pricing or at all. 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 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.

The management contracts we have purchased, an $80.6 million asset on the balance sheet as of the end of fiscal year 2021, are considered an intangible asset with an indefinite useful life. Management reviews the indefinite life classification of our management contracts asset each reporting period. 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 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. A 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.

On an annual basis, the Funds’ Board of Trustees must assess the reasonableness of our investment advisory fees. 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). 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 basis.

The Hennessy Japan Fund and the Hennessy Japan Small Cap Fund are invested in securities listed on the Japanese stock market, which exposes these funds to risks that are not typically associated with an investment in a U.S. issuer. The values of these funds fluctuate with changes in the value of the Japanese yen versus the U.S. dollar. 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 pandemic, future variants of or future pandemics may disproportionately impact Japan. Further, Japanese financial accounting standards and practices may differ, and there may be less information on Japanese companies available publicly. If these circumstances result in a reduction in the total assets of the Hennessy Japan Fund and the Hennessy Japan Small Cap Fund, our assets under management would be reduced, which would adversely affect our revenues.

Our 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 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 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.

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

We generate all of our operating revenues from the investment advisory and shareholder servicing agreements with the Hennessy Funds. These agreements may be terminated without penalty on 60 days’ notice and may not be assigned without the consent of investors in the Hennessy Funds. 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 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.

We are subject to regulatory and governmental inquiries and civil litigation. An adverse outcome of any such proceeding could involve substantial financial penalties. Various claims may also arise against us in the ordinary course of business, such as employment-related claims. There has been increased incidence of litigation and regulatory investigations in the financial services industry in recent years, including customer claims and class action suits alleging substantial monetary damages. 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 liabilities, or pay higher premiums, which would increase our expenses and have a material adverse effect on our results of operations.

We could also be subject to losses if we fail to properly safeguard sensitive and confidential and proprietary information that we and our 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. 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 could disrupt our operations and result in misappropriation, corruption, or loss of confidential or proprietary information.

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 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 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.

Our investment advisory agreements with the Hennessy Funds contain contractual provisions that require us to comply with the investment policies and strategies of the Hennessy Funds when we provide our investment advisory services. We are also required to comply with numerous investment, asset valuation, distribution, and tax requirements under applicable law and regulations. Any allegation of a failure to adhere to these requirements could result in investor claims, reputational damage, withdrawal of assets, and potential regulatory sanctions, any of which could negatively impact our revenues and earnings. We have implemented procedures and utilize the services of experienced administrators, accountants, and lawyers to assist in satisfying these requirements, but there can be no assurance that these precautions will protect us from potential liabilities.

The equity compensation plan information required by Item 201(d) of is set forth in the “Equity Compensation Plan Information” subheading under Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

This report contains “forward-looking statements” within the meaning of the securities laws, for which we claim the protection of the safe harbor for statements contained in the Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by terminology such as “expect,” “anticipate,” “intend,” “may,” “plan,” “will,” “should,” “could,” “would,” “assume,” “believe,” “estimate,” “predict,” “potential,” “project,” “continue,” “seek,” and similar expressions, as well as statements in the future tense. We have based these forward-looking statements on our current expectations and projections about future events, based on information currently available to us. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at which, or means by which, such performance or results will be achieved.

Forward-looking statements are subject to risks, uncertainties, and assumptions, including those described in the section titled “Risk Factors” and elsewhere in this Annual Report on Unforeseen developments could cause actual performance or results to differ substantially from those expressed in or suggested by the statements. Management does not assume responsibility for the accuracy or completeness of these 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 pandemic, movement of interest rates, competitive conditions, industry regulation, and fluctuations in the stock market, many of which are beyond the control of our management. Further, the business and regulatory environments in which we operate remain complex, uncertain, and subject to change. We expect that regulatory requirements and developments will cause us to incur additional administrative and compliance costs. Notwithstanding the variability in our economic and regulatory environments, we remain focused on the investment performance of the Hennessy Funds and on providing 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 by their nature.

We continue to monitor the effects of the 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 work in order to ensure our continued success.

Our primary business activity is providing investment advisory services to a family of mutual funds branded as the Hennessy Funds. We manage 10 of the 16 Hennessy Funds internally. For the remaining six funds, we have delegated the portfolio management responsibilities to subject to our oversight. We oversee the selection and continued employment of each review each fund’s investment performance, and monitor each adherence to each applicable fund’s investment objectives, policies, and restrictions. In addition, we conduct ongoing reviews of the compliance programs of and make visits to as feasible. Our secondary business activity is providing shareholder services to shareholders of the Hennessy Funds.

U.S. equities had positive performance for the 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 pandemic. 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 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.

Long-term U.S. bonds declined meaningfully during the period ended September 30, 2021, as the prospect of the Federal Reserve tapering its activity and potentially raising interest rates as soon as 2022 prompted investors to sell bonds. As the U.S. 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 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 period ended September 30, 2021, U.S. Government Bond yields rose from 0.68% to 1.49%.

The Japanese equity market rose 20.61% (in U.S. dollar terms) for the 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 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 period ended September 30, 2021. The performance numbers remain strong, with 14 of the Hennessy Funds posting positive returns for the period ended September 30, 2021, and all 14 Hennessy Funds with at least 10 years of operating history posting positive returns for the 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 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 marketing automation and customer relationship management (CRM) system, with a database of over 100,000 financial advisors in addition to retail investors. We utilize this technology both to retain assets and to drive new purchases into the Hennessy Funds. We employ a comprehensive marketing and sales program consisting of content, digital, social media, and traditional marketing initiatives and proactive meetings. In addition, our consistent annual public relations campaign has resulted in the Hennessy brand name appearing on TV, radio, print, or online media on average once every two to three days.

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 of our management contracts asset for tax purposes, which creates a difference. 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 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 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.

We collect investment advisory fees from each Hennessy Fund at differing annual rates. These annual rates range between 0.40% and 1.25% of average daily net assets. Average daily net assets of the Hennessy Funds for fiscal year 2021 was $4.0 billion, which represents a decrease of $0.1 billion, or 2.7%, compared to fiscal year 2020. The Hennessy Fund with the largest average daily net assets for fiscal year 2021 was the Hennessy Focus Fund, with $1.1 billion. We collect an investment advisory fee from the Hennessy Focus Fund at an annual rate of 0.90% of average daily net assets. However, we pay a fee at an annual rate of 0.29% to the fund’s 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 2021 was the Hennessy Japan Fund, with $844 million. We collect an investment advisory fee from the Hennessy Japan Fund at an annual rate of 0.90% of average daily net assets. However, we pay a fee at an annual rate between 0.35% and 0.42% (depending on asset level) to the fund’s which reduces the net operating profit contribution of the fund to our financial operations.

: Comparing fiscal year 2020 to fiscal year 2021, compensation and benefits expense increased by 2.9%, from $8.8 million to $9.1 million. As a percentage of total revenue, compensation and benefits expense increased 1.3 percentage points to 27.7%. The increase in compensation and benefits expense was due to an increase in 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.

: 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.

: 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 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. 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. As a percentage of total revenue, mutual fund distribution expense increased 0.1 percentage points to 1.5%. 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 pandemic, caused a decrease in average daily net assets.

: Comparing fiscal year 2020 to fiscal year 2021, fees expense decreased by 3.2%, from $7.6 million to $7.3 million. As a percentage of total revenue, fees expense decreased 0.3 percentage point to 22.4%. The decrease in fees was due to a decrease in average daily net assets of the Hennessy Funds.

: 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 of fully depreciated assets. As a percentage of total revenue, depreciation expense remained flat at 0.7%.

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 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.

. 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.

. 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. 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 mature on December 31, 2026.

The management contracts we have purchased are considered intangible assets with an indefinite life and we account for them in accordance with Accounting Standards Codification 350: Intangibles – Goodwill and Other (“ASC 350”). 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 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 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 threshold was not met as of the end of fiscal year 2021.

We reviewed accounting pronouncements issued between December 1, 2020, the filing date of our most recent previously filed Annual Report on Form and November 24, 2021, the filing date of this Annual Report on Form and have determined that no accounting pronouncement issued would have a material impact on our financial position, results of operations, or disclosures.