Hillman Value Fund
Notes to Financial Statements
(Unaudited)
As of March 31, 2020
1. Organization and Significant Accounting Policies
The Hillman Value Fund (the “Fund”) (formerly known as The Hillman Fund) is a series of the Hillman Capital Management Investment Trust (the “Trust”), which was organized on July 14, 2000 as a Delaware Business Statutory Trust and is registered under the Investment Company Act of 1940, (the “1940 Act”), as amended, as an open-ended management investment company.
The Fund commenced operations on December 29, 2000. The investment objective of the Fund is to seek to provide long-term total return from a combination of income and capital gains.
The following is a summary of significant accounting policies consistently followed by the Fund. The policies are in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Fund follows the accounting and reporting guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 946 “Financial Services – Investment Companies,” and Financial Accounting Standards Update (“ASU”) 2013-08.
Investment Valuation
The Fund’s investments in securities are carried at fair value. Securities listed on an exchange or quoted on a national market system are valued at the last sales price as of 4:00 p.m. Eastern Time. Securities traded in the over-the-counter market and listed securities for which no sale was reported on that date are valued at the mean of the most recent bid and ask prices. Securities and assets for which representative market quotations are not readily available (e.g., (i) a portfolio security is so thinly traded that there have been no transactions for that security over an extended period of time; (ii) the exchange on which the portfolio is principally traded closes early; or (iii) trading of the portfolio security is halted during the day and does not resume prior to the Fund’s NAV calculation) or which cannot be accurately valued using the Fund’s normal pricing procedures are valued at fair value as determined in good faith under policies approved by the Board of Trustees (the “Trustees”). A portfolio security’s “fair value” price may differ from the price next available for that portfolio security using the Fund’s normal pricing procedures. Instruments with maturities of 60 days or less are valued at amortized cost, which approximates market value.
Option Valuation
Options are valued at the mean of the last quoted bid and prices as of the valuation time. If an option is not traded on the valuation date, the option is priced at the mean of the last quoted bid and ask prices at the valuation time. Options will be valued on the basis of prices provided by pricing services when such prices are reasonably believed to reflect the market value of such options and may include the use of composite or NBBO pricing information provided by the pricing services. An option may be fair valued when (i) the option does not trade on the valuation date and a reliable last quoted bid and ask price at the valuation time are not readily available or (ii) the Fund’s investment advisor or Fund management does not believe the prices provided by the pricing services reflect the market value of such option.
Fair Value Measurement
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in the three broad levels listed below:
a. | Level 1: quoted prices in active markets for identical securities |
b. | Level 2: other significant observable inputs (including quoted prices for similar securities and identical securities in inactive markets, interest rates, credit risk, etc.) |
c. | Level 3: significant unobservable inputs (including the Fund’s own assumptions in determining fair value of investments) |
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
Hillman Value Fund
Notes to Financial Statements
(Unaudited)
As of March 31, 2020
The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety, is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The following table summarizes the inputs as of March 31, 2020 for the Fund’s investments:
| | | |
| Investments in Securities (a) | | Total | | Level 1 | | Level 2 | | Level 3 |
Assets Common Stocks* | $ | 63,603,028 | $ | 63,603,028 | $ | - | $ | - |
Real Estate Investment Trust | | 1,179,490 | | 1,179,490 | | - | | - |
Limited Partnerships | | 2,603,898 | | 2,603,898 | | - | | - |
Short-Term Investment | | 8,931,948 | | 8,931,948 | | - | | - |
| Total Assets | $ | 76,318,364 | $ | 76,318,364 | $ | - | $ | - |
| | | | | | | | | |
Liabilities Call Options Written | $ | 20,880 | $ | - | $ | 20,880 | $ | - |
Put Options Written | | 1,177,233 | | - | | 1,177,233 | | - |
| Total Liabilities | $ | 1,198,113 | $ | - | $ | 1,198,113 | $ | - |
| | | | | | | | | |
(a) The Fund did not hold any Level 3 securities during the period.
*For a detailed breakout by sector, please refer to the Schedule of Investments.
Investment Transactions and Investment Income
Investment transactions are accounted for as of the date purchased or sold (trade date). Dividend income is recorded on the ex-dividend date. Interest income is recorded on the accrual basis and includes accretion and amortization of discounts and premiums using the effective interest method. Gains and losses are determined on the identified cost basis, which is the same basis used for Federal income tax purposes.
Expenses
The Fund bears expenses incurred specifically on its behalf and Trust level expenses.
Distributions
The Fund may declare and distribute dividends from net investment income (if any) annually. Distributions from capital gains (if any) are generally declared and distributed annually. Dividends and distributions to shareholders are recorded on ex-date.
Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in the net assets from operations during the reporting period. Actual results could differ from those estimates.
Federal Income Taxes
No provision for income taxes is included in the accompanying financial statements, as the Fund intends to distribute to shareholders all taxable investment income and realized gains and otherwise comply with Subchapter M of the Internal Revenue Code applicable to regulated investment companies.
Option Writing
When the Fund writes an option, an amount equal to the premium received by the Fund is recorded as a liability and is subsequently adjusted to the current fair value of the option written. Premiums received from writing options that expire unexercised are treated by the Fund on the expiration date as realized gains (losses) from options written. The difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain or loss (depending on if the premium is less than the amount paid for the closing purchase transaction). If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security in determining whether the Fund has realized a gain or loss. If a put option is exercised, the premium reduces the cost basis of the securities purchased by the Fund. The Fund, as the writer of an option, bears the market risk of an unfavorable change in the price of the security underlying the written option. Written options are non-income producing securities.
Hillman Value Fund
Notes to Financial Statements
(Unaudited)
As of March 31, 2020
Derivative Financial Instruments
The Fund may invest in derivative financial instruments (derivatives) in order to manage risk or gain exposure to various other investments or markets. Derivatives may contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and the potential for market movements which may expose the Fund to gains or losses in excess of the amounts shown on the Statement of Assets and Liabilities.
Derivatives are marked to market daily based upon quotations from market makers or the Fund’s independent pricing services and the Fund’s net benefit or obligation under the contract, as measured by the fair market value of the contract, is included in Investments, at value on the Statement of Assets and Liabilities for options purchased and the Options Written, at value on the Statement of Assets and Liabilities for options written. Net realized gains and losses and net change in unrealized appreciation and depreciation on these contracts for the year are included in the Realized and Unrealized Gain on Investments on the Statement of Operations for options purchased and Realized and Unrealized Gain on Options Written on the Statement of Operations for options written.
The derivative instruments outstanding as of March 31, 2020 are disclosed below and the amounts of realized and changes in unrealized gains and losses on derivative instruments during the year as disclosed below serve as indicators of the volume of derivative activity for the Fund.
The following table sets forth the effect of the derivative instruments on the Statement of Assets and Liabilities as of March 31, 2020:
Derivative Type | Location | | Market Value | Notional Value |
| | | | | |
| Equity Contracts – written options | Liabilities-Options written, at value | | $1,198,113 | $6,376,650 |
The following table sets forth the effect of the derivative instruments on the Statement of Operations for the fiscal period ended March 31, 2020:
| Derivative Type | Location | Gains/Losses |
| | | |
| Equity Contracts – written options | Net realized gain from options written | $ 405,564 |
| | | |
| Equity Contracts – written options | Net change in unrealized depreciation on options written | $ (19,433,672) |
| | | |
Hillman Value Fund
Notes to Financial Statements
(Unaudited)
As of March 31, 2020
The following table represents the total premiums received or paid on options, which serve as an indicator of volume for options during the fiscal period ended March 31, 2020:
| Derivative Type | Type | Total Value |
| | | |
Equity Contracts – written options | Premiums Received | $ 828,817 |
The following table presents the Fund’s liabilities available for offset under a master netting arrangement of collateral pledged as of March 31, 2020:
Gross Amounts of Assets Presented in the Statement of Assets & Liabilities |
| | Gross Amounts of Recognized Liabilities | Financial Instruments Pledged* | Cash Collateral Pledged* | Net Amount of Assets |
Description of Liability: | | | | |
Options Written | $1,198,113 | $1,198,113 | $ - | $ - |
Total | $1,198,113 | $1,198,113 | $ - | $ - |
| | | | | |
*The actual financial instruments and cash collateral pledged may be in excess of the amounts shown in the table. The table only reflects collateral amounts up to the amount of the financial instrument disclosed on the Statement of Assets and Liabilities.
2. Transactions with Affiliates
Advisor
Effective January 31, 2020, the Fund pays a monthly fee to Hillman Capital Management, Inc. (the “Advisor”) calculated at the annual rate of 0.85% of the Fund’s average daily net assets. Prior to January 31, 2020, the Fund paid a management fee calculated at the annual rate of 1.00% of the Fund’s average daily net assets.
Effective January 31, 2020, the Advisor entered into an Expense Limitation Agreement with the Trust, pursuant to which the Advisor has agreed to waive or limit its fees and to assume other expenses so that the total annual operating expenses of the Fund (exclusive of (i) any front-end or contingent deferred loads; (ii) brokerage fees and commissions, (iii) acquired fund fees and expenses; (iv) fees and expenses associated with investments in other collective investment vehicles or derivative instruments (including for example option and swap fees and expenses); (v) borrowing costs (such as interest and dividend expense on securities sold short); (vi) taxes; and (vii) extraordinary expenses, such as litigation expenses (which may include indemnification of Fund officers and Trustees and contractual indemnification of Fund service providers (other than the Advisor)) is limited to 0.95% of the average daily net assets of the Fund. Prior to January 31, 2020, the percentage of the average daily net assets were limited as set forth in the table below.. The Expense Limitation Agreement runs through January 31, 2021 and may be terminated by the Board at any time. The Advisor cannot recoup from the Fund any amounts paid by the Advisor under the Expense Limitation Agreement.
| Average Daily Net Assets of the Fund | Expense Cap |
| Up to $53 million | 1.50% |
| $53 million to $60 million | 1.25% |
| $60 million to $75 million | 1.18% |
| $75 million to $100 million | 1.08% |
| Over $100 million | 0.98% |
Hillman Value Fund
Notes to Financial Statements
(Unaudited)
As of March 31, 2020
For the fiscal period ended March 31, 2020, $381,496 in advisory fees were incurred, of which $117,415 in advisory fees were waived by the Advisor.
Administrator
The Fund pays a monthly fee to The Nottingham Company (the “Administrator”) based upon the average daily net assets of the Fund and calculated at the annual rates as shown in the schedule below subject to a minimum of $2,000 per month. The Administrator also receives a fee to procure and pay the Fund’s custodian, as additional compensation for fund accounting and recordkeeping services, and additional compensation for certain costs involved with the daily valuation of securities and as reimbursement for out-of-pocket expenses. The Administrator also receives a miscellaneous compensation fee for peer group, comparative analysis, and compliance support totaling $350 per month. As of March 31, 2020, the Administrator received $2,196 in miscellaneous expenses.
A breakdown of the fees is provided in the following table:
| Administration Fees* | Custody Fees* | Fund Accounting Fees (minimum monthly) | Fund Accounting Fees (asset- based fee) | Blue Sky Administration Fees (annual) |
Average Net Assets | Annual Rate | Average Net Assets | Annual Rate |
| First $250 million | 0.100% | First $200 million | 0.020% | $2,250 | 0.01% | $150 per state |
| Next $250 million | 0.080% | Over $200 million | 0.009% | | | |
| Next $250 million | 0.060% | | | | | |
| Next $250 million | 0.050% | *Minimum monthly fees of $2,000 and $417 for Administration and Custody, respectively. |
| Next $1 billion | 0.040% |
| Over $2 billion | 0.035% |
The Fund incurred $41,809 in administration fees, $11,239 in custody fees (received by the Administrator to pay the custodian), and $17,557 in fund accounting fees for the fiscal period ended March 31, 2020.
Compliance Services
Cipperman Compliance Services, LLC provides services as the Trust’s Chief Compliance Officer. Cipperman Compliance Services, LLC is entitled to receive customary fees from the Fund for their services pursuant to the Compliance Services Agreement with the Fund.
Transfer Agent
Nottingham Shareholder Services, LLC (“Transfer Agent”) serves as transfer, dividend paying, and shareholder servicing agent for the Fund. For its services, the Transfer Agent is entitled to receive compensation from the Fund pursuant to the Transfer Agent’s fee arrangements with the Fund. The Fund incurred $14,376 in transfer agent fees during the fiscal period ended March 31, 2020.
Distributor
Capital Investment Group, Inc. (the “Distributor”) serves as the Fund’s principal underwriter and distributor. The Distributor receives $5,000 per year paid in monthly installments for services provided and expenses assumed. These are included on the Statement of Operations in the Shareholder Fulfillment Expenses.
3. Trustees and Officers
The Board of Trustees is responsible for the management and supervision of the Fund. The Trustees approve all significant agreements between the Trust, on behalf of the Fund, and those companies that furnish services to the Fund; review performance of the Advisor and the Fund; and oversee activities of the Fund. Officers of the Trust and Trustees who are interested persons of the Trust or the Advisor will receive no salary or fees from the Trust. Effective January 1, 2020, Trustees who are not “interested persons” of the Trust or the Advisor within the meaning of the 1940 Act (the “Independent Trustees”) an annual retainer of $5,000, plus a meeting fee of $500 for each quarterly meeting. In addition, each Independent Trustee receives a meeting fee of $500 for each special meeting attended in-person and $250 for each special meeting attended via telephone. Prior to January 1, 2020, each Independent Trustee received an annual retainer of $4,000, plus $250 per series of the Trust per meeting attended in person and $100 per series of the Trust per meeting attended by telephone. The Trust will reimburse each Trustee and officer of the Trust for his or her travel and other expenses relating to attendance of Board meetings. Additional fees may also be incurred during the year as special meetings are necessary in addition to the regularly scheduled meetings of the Board of Trustees.
Hillman Value Fund
Notes to Financial Statements
(Unaudited)
As of March 31, 2020
Certain officers of the Trust may also be officers of the Administrator.
4. Purchases and Sales of Investment Securities
For the fiscal period ended March 31, 2020, the aggregate cost of purchases and proceeds from sales of investment securities (excluding short-term securities) were as follows:
Purchases of Securities | | Proceeds from Sales of Securities |
| $38,085,885 | | $13,414,007 |
There were no long-term purchases or sales of U.S Government Obligations during the fiscal period ended March 31, 2020.
5. Federal Income Tax
Distributions are determined in accordance with Federal income tax regulations, which differ from GAAP, and, therefore, may differ significantly in amount or character from net investment income and realized gains for financial reporting purposes. Financial reporting records are adjusted for permanent book/tax differences to reflect tax character but are not adjusted for temporary differences. Permanent differences do not have an effect on the net asset values of the Fund. There were no such reclassifications during the fiscal period ended March 31, 2020.
Management reviewed the Fund’s tax positions taken or to be taken on Federal income tax returns for the open tax years September 30, 2017 through September 30, 2019, and the fiscal period ended March 31, 2020, and determined that the Fund does not have a liability for uncertain tax positions. The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations. During the period, the Fund did not incur any interest or penalties.
Distributions during the fiscal year or period ended were characterized for tax purposes as follows:
| | March 31, 2020 | September 30, 2019 |
Ordinary Income | $1,505,998 | $236,135 |
Long-Term Capital Gains | $1,520,000 | $ - |
At March 31, 2020, the tax-basis cost of investments and components of distributable earnings were as follows:
Cost of Investments | $
| 90,751,737 |
| | | |
Gross Unrealized Appreciation | | 3,892,172 |
Gross Unrealized Depreciation | | (19,523,658) |
Net Unrealized Depreciation | $ | (15,631,487 |
| | | |
| | | | | | |
Hillman Value Fund
Notes to Financial Statements
(Unaudited)
As of March 31, 2020
6. New Accounting Pronouncement
In August 2018, the Securities and Exchange Commission adopted amendments to certain disclosure requirements under Regulation S-X to conform to US GAAP, including: (i) an amendment to require presentation of the total, rather than the components, of distributable earnings on the Statement of Assets and Liabilities; and (ii) an amendment to require presentation of the total, rather than the components, of distributions to shareholders, except for tax return of capital distributions, if any, on the Statements of Changes in Net Assets. The amendments also removed the requirement for parenthetical disclosure of undistributed net investment income on the Statements of Changes in Net Assets. This amendment facilitates compliance of the disclosure of information without significantly altering the information provided to investors. These amendments have been adopted with these financial statements. The changes have been applied to the Fund’s financial statements as of the fiscal period ended March 31, 2020.
7. Commitments and Contingencies
Under the Trust’s organizational documents, its officers and Trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund enters into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
8. Subsequent Events
Effective May 1, 2020, Nottingham Compliance Services replaced Cipperman Compliance Services, LLC as the Trust’s compliance service provider including services as the Trust’s Chief Compliance Officer.
Management is currently evaluating the recent introduction of the COVID-19 virus and its impact on the financial services industry and has concluded that while it is reasonably possible that the virus could have a negative effect on the fair value of the Fund’s investments and results of operations, the specific impact is not readily determinable as of the date of these financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
In accordance with GAAP, management has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date of issuance of these financial statements. Management has concluded there are no additional matters, other than those noted above, requiring recognition or disclosure.
Hillman Value Fund
Additional Information
(Unaudited)
1. Proxy Voting Policies and Voting Record
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is included as Appendix B to the Fund’s Statement of Additional Information and is available, (1) without charge, upon request, by calling 800-773-3863 and (2) on the Securities and Exchange Commission’s (“SEC”) website at http://www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling the Fund at the number above and (2) on the SEC’s website at http://www.sec.gov.
2. Quarterly Portfolio Holdings
The Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-PORT. The Fund’s Form N-PORT is available on the SEC’s website at http://www.sec.gov. You may obtain copies without charge, upon request, by calling the Fund at 800-773-3863.
3. Tax Information
We are required to advise you within 60 days of the Fund’s fiscal year-end regarding the Federal tax status of certain distributions received by shareholders during each fiscal year. The following information is provided for the Fund’s fiscal period ended March 31, 2020.
During the fiscal period, income distributions totaling $1,505,998 were paid from the Fund, and $1,520,000 were paid in long-term capital gain distributions.
Dividend and distributions received by retirement plans such as IRAs, Keogh-type plans, and 403(b) plans need not be reported as taxable income. However, many retirement plans may need this information for their annual information meeting.
4. Schedule of Shareholder Expenses
As a shareholder of the Fund, you incur other Fund expenses, including Advisory fees. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from October 1, 2019 through March 31, 2020.
Actual Expenses – The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (e.g., an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes – The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Hillman Value Fund
Additional Information
(Unaudited)
| | Beginning Account Value October 1, 2019 | Ending Account Value March 31, 2020 | Expenses Paid During Period* |
Actual Hypothetical (5% annual return before expenses) | | | |
| $1,000.00 | $ 811.80 | $4.76 |
| $1,000.00 | $1,019.75 | $5.30 |
*Expenses are equal to the average account value over the period multiplied by the Fund’s annualized expense ratio of 1.05%, multiplied by 183/366 (to reflect the one-half year period).
