Daily Journal Corp 10-Q for FY2021 Q1
Daily Journal Corp (DJCO)
About this 10-Q
Daily Journal Corp filed this 10-Q on February 12, 2021, covering the quarter ended December 31, 2020 (FY2021 Q1).
Headline figures
Quarter ended December 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $10.42M
- down 10.8% from $11.68M a year earlier
- Net income
- $59.27M
- up 317.1% from net income of $14.21M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| (Mark One) |
| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended | |
| or | |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from _______________ to _____________________ |
| Commission File Number |
| DAILY JOURNAL CORPORATION |
| (Exact name of registrant as specified in its charter) |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
| (Address of principal executive offices) | (Zip code) |
(
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| | | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
| No: ☐ |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
| No: ☐ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer: ☐ | Accelerated Filer: ☐ | |
| Smaller Reporting Company: | ||
| Emerging Growth Company: |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes:
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date:
DAILY JOURNAL CORPORATION
INDEX
| Page Nos. |
| PART I | Financial Information | |
| Item 1. Financial Statements (Unaudited) | ||
| Consolidated Balance Sheets - December 31, 2020 and September 30, 2019 | 3 | |
| Consolidated Statements of Income and Comprehensive Income - Three months ended December 31, 2020 and 2019 | 4 | |
| Consolidated Statements of Shareholders' Equity - Three months ended December 31, 2020 and 2019 | 5 | |
| Consolidated Statements of Cash Flows - Three months ended December 31, 2020 and 2019 | 6 | |
| Notes to Consolidated Financial Statements | 7 | |
| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 13 | |
| Item 4. Controls and Procedures | 19 | |
| Part II | Other Information | |
| Item 6. Exhibits | 20 |
PART I
Item 1. FINANCIAL STATEMENTS
DAILY JOURNAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| December 31 | September 30 | |||||||
| 2020 | 2020 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Marketable securities at fair value -- common stocks | ||||||||
| Accounts receivable, less allowance for doubtful accounts of $ at December 31, 2020 and September 30, 2020 | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Income tax receivable | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, at cost | ||||||||
| Land, buildings and improvements | ||||||||
| Furniture, office equipment and computer software | ||||||||
| Machinery and equipment | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Operating lease right-of-use assets | ||||||||
| Deferred income taxes - Federal | ||||||||
| Deferred income taxes - State |
| |||||||
| $ | $ | |||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Note payable collateralized by real estate | ||||||||
| Deferred subscriptions | ||||||||
| Deferred installation contracts | ||||||||
| Deferred professional fees | ||||||||
| Deferred maintenance agreements and others | ||||||||
| Total current liabilities | ||||||||
| Long term liabilities | ||||||||
| Investment margin account borrowings | ||||||||
| Note payable collateralized by real estate | ||||||||
| Deferred maintenance agreements | ||||||||
| Accrued liabilities | ||||||||
| Deferred income taxes - State | ||||||||
| Deferred income taxes | ||||||||
| Total long term liabilities | ||||||||
| Debts and commitments and contingencies (Notes 9 and 10) | - | - | ||||||
| Shareholders' equity | ||||||||
| Preferred stock, $ par value, shares authorized and shares issued | ||||||||
| Common stock, $ par value, shares authorized; shares issued, including treasury shares, at December 31, 2020 and September 30, 2020 | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Total shareholders' equity | ||||||||
| $ | $ | |||||||
See accompanying Notes to Consolidated Financial Statements
DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
| Three months ended December 31 | ||||||||
| 2020 | 2019 | |||||||
| Revenues | ||||||||
| Advertising | $ | $ | ||||||
| Circulation | ||||||||
| Advertising service fees and other | ||||||||
| Licensing and maintenance fees | ||||||||
| Consulting fees | ||||||||
| Other public service fees | ||||||||
| Costs and expenses | ||||||||
| Salaries and employee benefits | ||||||||
| Outside services | ||||||||
| Postage and delivery expenses | ||||||||
| Newsprint and printing expenses | ||||||||
| Depreciation and amortization | ||||||||
| Equipment maintenance and software | ||||||||
| Credit card merchant discount fees | ||||||||
| Rent expenses | ||||||||
| Accounting and legal fees | ||||||||
| Other general and administrative expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income (expense) | ||||||||
| Dividends and interest income | ||||||||
| Other income | ||||||||
| Net unrealized gains on marketable securities | ||||||||
| Interest expense on note payable collateralized by real estate | ( | ) | ( | ) | ||||
| Interest expense on margin loans and others | ( | ) | ( | ) | ||||
| Income before income taxes | ||||||||
| Provision for income taxes | ( | ) | ( | ) | ||||
| Net income | $ | $ | ||||||
| Weighted average number of common shares outstanding - basic and diluted | ||||||||
| Basic and diluted net income per share | $ | $ | ||||||
| Comprehensive income | $ | $ | ||||||
See accompanying Notes to Consolidated Financial Statements.
DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
| Additional |
Total |
|||||||||||||||||||||||||||
| Common Stock |
Treasury Stock |
Paid-in |
Retained |
Shareholders' |
||||||||||||||||||||||||
| Share |
Amount |
Share |
Amount |
Capital |
Earnings |
Equity |
||||||||||||||||||||||
| Balance at September 30, 2019 |
$ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||||||||||||||
| Net income |
- | - | ||||||||||||||||||||||||||
| Balance at December 31, 2019 |
$ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||||||||||||||
| Balance at September 30, 2020 |
$ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||||||||||||||
| Net income |
- | - | ||||||||||||||||||||||||||
| Balance at December 31, 2020 |
$ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements
DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three months ended December 31 |
||||||||
| 2020 |
2019 |
|||||||
| Cash flows from operating activities |
||||||||
| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash used in operations |
||||||||
| Depreciation and amortization |
||||||||
| Net unrealized gains on marketable securities |
( |
) | ( |
) | ||||
| Deferred income taxes |
||||||||
| Changes in operating assets and liabilities |
||||||||
| (Increase) decrease in current assets |
||||||||
| Accounts receivable, net |
( |
) | ( |
) | ||||
| Inventories |
( |
) | ||||||
| Prepaid expenses and other assets |
( |
) | ||||||
| Income tax receivable |
||||||||
| Increase (decrease) in liabilities |
||||||||
| Accounts payable |
( |
) | ( |
) | ||||
| Accrued liabilities |
( |
) | ( |
) | ||||
| Deferred subscriptions |
( |
) | ( |
) | ||||
| Deferred installation contracts |
|
|||||||
| Deferred professional fees |
||||||||
| Deferred maintenance agreements and others |
( |
) | ( |
) | ||||
| Net cash used in operating activities |
( |
) | ( |
) | ||||
| Cash flows from investing activities |
||||||||
| Purchases of property, plant and equipment |
|
( |
) | |||||
| Net cash used in investing activities |
( |
) | ||||||
| Cash flows from financing activities |
||||||||
| Payment to margin loan principal |
( |
) | ||||||
| Payment of real estate loan principal |
( |
) | ( |
) | ||||
| Net cash used in financing activities |
( |
) | ( |
) | ||||
| Decrease in cash and restricted cash and cash equivalents |
( |
) | ( |
) | ||||
| Cash and restricted cash and cash equivalents |
||||||||
| Beginning of period |
||||||||
| End of period |
$ | $ | ||||||
| Interest paid during period |
$ | $ | ||||||
| Net income taxes paid |
$ | $ | ||||||
See accompanying Notes to Consolidated Financial Statements.
DAILY JOURNAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - The Corporation and Operations
Daily Journal Corporation (the “Company”) publishes newspapers and websites reporting California and Arizona news and produces several specialized information services. It also serves as a newspaper representative specializing in public notice advertising. This is sometimes referred to as the Company’s “Traditional Business”.
Journal Technologies, Inc. (“Journal Technologies”), a wholly-owned subsidiary of the Company, supplies case management software systems and related products to courts, prosecutor and public defender offices, probation departments and other justice agencies, including administrative law organizations, city and county governments and bar associations. These organizations use the Journal Technologies family of products to help manage cases and information electronically, to interface with other critical justice partners and to extend electronic services to the public, including efiling and a website to pay traffic citations and fees online. These products are licensed to more than 500 organizations in 42 states and internationally.
Essentially all of the Company’s U.S. operations are based in California, Arizona and Utah. The Company also has a presence in Australia where Journal Technologies is working on three software installation projects.
Note 2 - Basis of Presentation
In the opinion of the Company, the accompanying interim unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of its financial position as of December 31, 2020, its results of operations for the three-month periods ended December 31, 2020 and 2019, its consolidated statements of shareholders’ equity for the three months ended December 31, 2020 and 2019 and cash flows for the three months ended December 31, 2020 and 2019. The results of operations for the three months ended December 31, 2020 are not necessarily indicative of the results to be expected for the full year.
The consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2020.
Certain reclassifications of previously reported amounts have been made to conform to the current year’s presentation.
Note 3 – New Accounting Pronouncement
No new accounting pronouncement issued or effective has had, or is expected to have, a material impact on the Company’s consolidated financial statements.
Note 4 – Right-of-Use (ROU) Asset
At the beginning of fiscal 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) which requires that all leases be recognized by lessees on the balance sheet through a right-of-use (ROU) asset and corresponding lease liability, including today’s operating leases. There has been no significant impact on the Company’s financial condition, results of operations or disclosures. At December 31, 2020, the Company recorded a right-of-use asset and lease liability of approximately $
Note 5 – Revenue Recognition
The Company recognizes revenues in accordance with the provisions of ASU No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606), which it adopted effective October 1, 2017, using the modified retrospective method.
For the Traditional Business, proceeds from the sale of subscriptions for newspapers, court rule books and other publications and other services are recorded as deferred revenue and are included in earned revenue only when the services are provided, generally over the subscription term. Advertising revenues are recognized when advertisements are published and are net of agency commissions.
Journal Technologies contracts may include several products and services, which are generally distinct and include separate transaction pricing and performance obligations. Most are one-transaction contracts. These current subscription-type contract revenues include (i) implementation consulting fees (professional fees) to configure the system to go-live, (ii) subscription software license, maintenance (including updates and upgrades) and support fees, and (iii) third-party hosting fees when used. Revenues for consulting are generally recognized at point of delivery (go-live) upon completion of services. These contracts include assurance warranty provisions for limited periods and do not include financing terms. For some contracts, the Company acts as a principal with respect to certain services, such as data conversion, interfaces and hosting that are provided by third-parties, and recognizes such revenues on a gross basis. For legacy contracts with perpetual license arrangements, licenses and consulting services are recognized at point of delivery (go-live), and maintenance revenues are recognized ratably after the go-live. Other public service fees are earned and recognized as revenues when the Company processes credit card payments on behalf of the courts via its websites through which the public can efile cases and pay traffic citations and other fees.
The adoption of ASC 606 also requires the capitalization of certain costs of obtaining contracts, specifically sales commissions which are to be amortized over the expected term of the contracts. For its software contracts, the Company incurs an immaterial amount of sales commission costs which have no significant impact on the Company’s financial condition and results of operations. In addition, the Company’s implementation and fulfillment costs do not meet all criteria required for capitalization.
Since the Company generally recognizes revenues when it can invoice the customer pursuant to the contract for the value of completed performance, as a practical expedient and because reliable estimates cannot be made, it has elected not to include the transaction price allocated to unsatisfied performance obligations. Also, as a practical expedient, the Company has elected not to include its evaluation of variable consideration of certain usage based fees (i.e. public service fees) that are included in some contracts. Furthermore, there are no fulfillment costs to be capitalized for the software contracts because these costs do not generate or enhance resources that will be used in satisfying future performance obligations.
Note 6 - Basic and Diluted Net Income Per Share
The Company does not have any common stock equivalents, and therefore basic and diluted net income per share are the same.
Note 7 - Investments in Marketable Securities
All investments are classified as “Current assets” because they are available for sale at any time. These “available-for-sale” marketable securities are stated at fair value. The Company uses quoted prices in active markets for identical assets (consistent with the Level 1 definition in the fair value hierarchy) to measure the fair value of its investments on a recurring basis pursuant to ASC 820, Fair Value Measurement. As of December 31, 2020 and September 30, 2020, there were net accumulated pretax unrealized gains of $
The Company adopted ASU No. 2016-01, Subtopic 825-10 in fiscal 2019. For the three months ended December 31, 2020, the Company recorded and included in its net income the net unrealized gains on marketable securities of $
Investments in marketable securities as of December 31, 2020 and September 30, 2020 are summarized below.
Investment in Marketable Securities
| December 31, 2020 |
September 30, 2020 |
|||||||||||||||||||||||
|
Aggregate fair value |
Amortized/ Adjusted cost basis |
Pretax unrealized gains |
Aggregate fair value |
Amortized/ Adjusted cost basis |
Pretax unrealized gains |
|||||||||||||||||||
| Marketable securities |
||||||||||||||||||||||||
| Common stocks |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Note 8 - Income Taxes
For the three months ended December 31, 2020, the Company recorded a provision for income taxes of $
For the three months ended December 31, 2019, the Company recorded a provision for income taxes of $
The Company files consolidated federal income tax returns in the United States and with various state jurisdictions and is no longer subject to examinations for fiscal years before fiscal
Note 9 - Debt and Commitments
During fiscal 2013, the Company borrowed from its investment margin account the aggregate purchase price of $
In November 2015, the Company purchased a
The Company also owns its facilities in Los Angeles and leases space for its other offices under operating leases which expire at various dates through fiscal 2022.
Note 10 - Contingencies
From time to time, the Company is subject to contingencies, including litigation, arising in the normal course of its business. While it is not possible to predict the results of such contingencies, management does not believe the ultimate outcome of these matters will have a material effect on the Company’s financial position or results of operations or cash flows.
Note 11 - Operating Segments
The Company’s reportable segments are: (i) the Traditional Business and (ii) Journal Technologies. All inter-segment transactions were eliminated. Summarized financial information regarding the Company’s reportable segments is shown in the following table:
| Reportable Segments | ||||||||||||||||
| Traditional Business | Journal Technologies | Corporate income and expenses |
Total | |||||||||||||
| Three months ended December 31, 2020 | ||||||||||||||||
| Revenues | ||||||||||||||||
| Advertising | $ | $ | $ | $ | ||||||||||||
| Circulation | ||||||||||||||||
| Advertising service fees and other | ||||||||||||||||
| Licensing and maintenance fees | ||||||||||||||||
| Consulting fees | ||||||||||||||||
| Other public service fees | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ||||||||||||
| Dividends and interest income | ||||||||||||||||
| Net unrealized gains on marketable securities | ||||||||||||||||
| Interest expenses on note payable collateralized by real estate | ( | ) | ( | ) | ||||||||||||
| Interest expenses on margin loans and others | ( | ) | ( | ) | ||||||||||||
| Pretax income (loss) | ( | ) | ||||||||||||||
| Income tax (expense) benefit | ( | ) | ( | ) | ( | ) | ||||||||||
| Net income (loss) | ( | ) | ||||||||||||||
| Total assets | ||||||||||||||||
| Capital expenditures | ||||||||||||||||
| Reportable Segments | ||||||||||||||||
| Traditional Business | Journal Technologies | Corporate income and expenses |
Total | |||||||||||||
| Three months ended December 31, 2019 | ||||||||||||||||
| Revenues | ||||||||||||||||
| Advertising | $ | $ | $ | $ | ||||||||||||
| Circulation | ||||||||||||||||
| Advertising service fees and other | ||||||||||||||||
| Licensing and maintenance fees | ||||||||||||||||
| Consulting fees | ||||||||||||||||
| Other public service fees | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ||||||||||||
| Dividends and interest income | ||||||||||||||||
| Other income | ||||||||||||||||
| Net unrealized gains on marketable securities | ||||||||||||||||
| Interest expenses on note payable collateralized by real estate | ( | ) | ( | ) | ||||||||||||
| Interest expenses on margin loans | ( | ) | ( | ) | ||||||||||||
| Pretax income (loss) | ( | ) | ||||||||||||||
| Income tax (expense) benefit | ( | ) | ( | ) | ( | ) | ||||||||||
| Net income (loss) | ( | ) | ||||||||||||||
| Total assets | ||||||||||||||||
| Capital expenditures | ||||||||||||||||
During the three months ended December 31, 2020 and 2019, the Traditional Business had total operating revenues of $
Approximately
Note 12 - Subsequent Events
The Company has completed an evaluation of all subsequent events through the issuance date of these financial statements and concluded that no subsequent events occurred that required recognition to the financial statements or disclosures in the Notes to Consolidated Financial Statements.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company continues to operate as two different businesses: (1) The Traditional Business, being the business of newspaper publishing and related services that the Company had before 1999 when it purchased a software development company, and (2) Journal Technologies, Inc. (“Journal Technologies”), a wholly-owned subsidiary which supplies case management software systems and related products to courts, prosecutor and public defender offices, probation departments and other justice agencies, including administrative law organizations, city and county governments and bar associations. These organizations use the Journal Technologies family of products to help manage cases and information electronically, to interface with other critical justice partners and to extend electronic services to the public, including efiling and a website to pay traffic citations and fees online. These products are licensed to more than 500 organizations in 42 states and internationally.
Impact of the COVID-19 Pandemic
On March 13, 2020, the United States declared the outbreak of COVID-19 to be a national emergency, and several states and municipalities also declared public health emergencies. Unprecedented actions were taken by public health and governmental authorities to contain and combat the spread of COVID-19, including “stay-at-home” orders and similar mandates that restricted the daily activities of individuals and limited the operation of businesses that were deemed “non-essential.” In addition, most of Journal Technologies’ customers, which are primarily courts and governmental agencies in the United States, Canada and Australia, were either closed or significantly scaled back their activities. Similarly, many law firms and companies from which the Traditional Business derives advertising and subscription revenues also curtailed their operations and spending.
In light of this extraordinary situation, on April 30, 2020, the Company made a difficult decision to reorganize its part-time and full-time workforce at both The Traditional Business and Journal Technologies, which included some layoffs and temporary furloughs.
Management believes that the COVID-19 pandemic has had, and, with the continued surge of COVID-19 cases, will continue to have a significant impact on the Company’s business operations. This might include a substantial decrease in the value of the Company’s marketable securities portfolio, which is concentrated in the common stocks of three U.S. financial institutions and one foreign manufacturer, or at least a fair degree of volatility. Dividends from the Company’s portfolio have declined and are expected to remain lower than in the past as some banks reduce their dividends. It might also include the unprecedented continued closure, renewed closure or scaling back of operations of courts and other governmental agencies that are the customers of Journal Technologies, and fundamental changes in the way the advertisers and subscribers of the Traditional Business conduct operations. Even if courts, governmental agencies and other businesses return to more normal operations, there are likely to be changes in those operations and personal behaviors going forward, including limitations on travel and more working from home, that will adversely affect the Company, its financial results and cash flows.
Due to the uncertainties associated with the duration and severity of the COVID-19 pandemic, the efforts to contain it, and the changes in business operations and personal behaviors that are likely to follow from it, management cannot at this point estimate the magnitude of its impact on the Company’s business operations. In recent years, the newspaper industry, including our Traditional Business, has declined, and we expect this to continue at an accelerated pace due to the impacts of COVID-19 and its aftermath, as advertising and subscription revenues decrease.
For Journal Technologies, there have been several delays or cancellations in government procurement processes. Also, although we have been able to complete some existing projects remotely, we have been unable to finish certain implementations and trainings because of our inability to work with clients in-person. Given that we are typically paid for implementation services upon “go-live” of a system, receipt of those revenues is being delayed. In addition, there has been a reduction in efiling revenues and delayed client payments as many courts and other justice agencies were closed for most of the period. On the other side of the coin, the Company has seen a reduction in operating costs due to less business travel.
Comparable three-month periods ended December 31, 2020 and 2019
The Company’s reportable segments, and its corporate income and expenses, for the three months ended December 31, 2020 and 2019, are set forth below:
| Overall Financial Results (000) |
|||||||||||
| For the three months ended December 31 |
| Reportable Segments |
||||||||||||||||||||||||||||||||
| Traditional Business |
Journal Technologies |
Corporate income and expenses |
Total |
|||||||||||||||||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
2020 |
2019 |
2020 |
2019 |
|||||||||||||||||||||||||
| Revenues |
||||||||||||||||||||||||||||||||
| Advertising |
$ | 1,692 | $ | 2,126 | $ | - | $ | - | $ | - | $ | - | $ | 1,692 | $ | 2,126 | ||||||||||||||||
| Circulation |
1,203 | 1,312 | - | - | - | - | 1,203 | 1,312 | ||||||||||||||||||||||||
| Advertising service fees and other |
634 | 694 | - | - | - | - | 634 | 694 | ||||||||||||||||||||||||
| Licensing and maintenance fees |
- | - | 5,033 | 5,210 | - | - | 5,033 | 5,210 | ||||||||||||||||||||||||
| Consulting fees |
- | - | 244 | 689 | - | - | 244 | 689 | ||||||||||||||||||||||||
| Other public service fees |
- | - | 1,614 | 1,646 | - | - | 1,614 | 1,646 | ||||||||||||||||||||||||
| Total revenues |
3,529 | 4,132 | 6,891 | 7,545 | - | - | 10,420 | 11,677 | ||||||||||||||||||||||||
| Operating expenses |
||||||||||||||||||||||||||||||||
| Salaries and employee benefits |
1,920 | 2,537 | 5,972 | 6,350 | - | - | 7,892 | 8,887 | ||||||||||||||||||||||||
| Others |
1,061 | 1,321 | 1,782 | 2,987 | - | - | 2,843 | 4,308 | ||||||||||||||||||||||||
| Total operating expenses |
2,981 | 3,858 | 7,754 | 9,337 | - | - | 10,735 | 13,195 | ||||||||||||||||||||||||
| Income (loss) from operations |
548 | 274 | (863 | ) | (1,792 | ) | - | - | (315 | ) | (1,518 | ) | ||||||||||||||||||||
| Dividends and interest income |
- | - | - | - | 638 | 1,680 | 638 | 1,680 | ||||||||||||||||||||||||
| Other income |
- | - | - | - | - | 3 | - | 3 | ||||||||||||||||||||||||
| Net unrealized gains on marketable securities |
- | - | - | - | 81,212 | 19,531 | 81,212 | 19,531 | ||||||||||||||||||||||||
| Interest expenses on note payable collateralized by real estate |
(21 | ) | (22 | ) | - | - | - | - | (21 | ) | (22 | ) | ||||||||||||||||||||
| Interest expenses on margin loans |
- | - | - | - | (64 | ) | (184 | ) | (64 | ) | (184 | ) | ||||||||||||||||||||
| Pretax (loss) income |
$ | 527 | $ | 252 | $ | (863 | ) | $ | (1,792 | ) | $ | 81,786 | $ | 21,030 | $ | 81,450 | $ | 19,490 | ||||||||||||||
Consolidated revenues were $10,420,000 and $11,677,000 for the three months ended December 31, 2020 and 2019, respectively. This decrease of $1,257,000 (11%) was primarily from (i) decreased Journal Technologies’ license and maintenance fees of $177,000, consulting fees of $445,000 and public service fees of $32,000, and (ii) a reduction in the Traditional Business’ display advertising net revenues of $164,000, classified advertising net revenues of $65,000, trustee sale notice advertising net revenues of $102,000, legal notice advertising net revenues of $53,000, government notice advertising net revenues of $50,000 and circulation revenues of $109,000. The Company’s revenues derived from Journal Technologies’ operations constituted about 66% and 65% of the Company’s total revenues for the three months ended December 31, 2020 and 2019, respectively.
Consolidated operating expenses decreased by $2,460,000 (19%) to $10,735,000 from $13,195,000. Total salaries and employee benefits decreased by $995,000 (11%) to $7,892,000 from $8,887,000 primarily resulting from the pandemic layoff in April 2020. Outside services decreased by $491,000 (40%) to $723,000 from $1,214,000 mainly because of decreased contractor costs for Journal Technologies. Rent expenses decreased by $100,000 (58%) to $72,000 from $172,000 because of the closure of Colorado office in August 2020. Accounting and legal fees increased by $94,000 (37%) to $350,000 from $256,000 primarily because of increased legal fees. Other general and administrative expenses decreased by $889,000 (61%) to $557,000 from $1,446,000 mainly resulting from reduced business travel expenses due to the pandemic.
The Company’s non-operating income, net of expenses, increased by $60,757,000 (289%) to $81,765,000 from $21,008,000 primarily because of the recording of net unrealized gains on marketable securities of $81,212,000 during the three months ended December 31, 2020 as compared with $19,531,000 during the prior fiscal year period.
During the three months ended December 31, 2020, consolidated pretax income was $81,450,000, as compared $19,490,000 in the prior fiscal year period. There was consolidated net income of $59,270,000 ($42.93 per share) for the three months ended December 31, 2020, as compared with $14,210,000 ($10.29 per share) in the prior fiscal year period.
During the three months ended December 31, 2020, the Company’s cash and restricted cash and cash equivalents decreased by $17,299,000 to $11,664,000 from $28,963,000, primarily because of the payment of $14,493,000 to the margin loan account. At December 31, 2020, the aggregate fair market value of the Company’s marketable securities was $260,580,000. These securities had approximately $218,805,000 of net unrealized gains before taxes of $58,230,000. They generated approximately $638,000 in dividends income during the three months ended December 31, 2020, which lowers the Company’s effective income tax rate because of the dividends received deduction. Most of the unrealized gains were in the common stocks of three U.S. financial institutions and one foreign manufacturer.
Taxes
For the three months ended December 31, 2020, the Company recorded a provision for income taxes of $22,180,000 on pretax income of $81,450,000. The income tax provision consisted of a tax provision of $63,000 on income from operations, a tax benefit of $84,000 for the dividends received deduction and other permanent book and tax differences, a tax provision of $22,360,000 on the unrealized gains on marketable securities and a tax benefit of $159,000 related to restating state deferred taxes to the current state rate. The overall effective tax rate for the three months ended December 31, 2020 was 27%, after including the taxes on the unrealized gains on marketable securities.
For the three months ended December 31, 2019, the Company recorded a provision for income taxes of $5,280,000 on pretax income of $19,490,000. This was the net result of applying the 19% effective tax rate that had been anticipated for fiscal 2020 to the pretax loss, before the unrealized gains on marketable securities, for the three months ended December 31, 2019. The 19% effective tax rate was less than the statutory rate primarily due to the dividends received deduction and state tax benefits. In addition, the Company recorded taxes on its unrealized gains on marketable securities of $19,531,000 during the three months ended December 31, 2019. The overall effective tax rate for the three months ended December 31, 2019 was 27%, after including the taxes on the unrealized gains on marketable securities.
The Company files consolidated federal income tax returns in the United States and with various state jurisdictions and is no longer subject to examinations for fiscal years before fiscal 2017 with regard to federal income taxes and fiscal 2016 for state income taxes.
The Traditional Business
The Traditional Business’ pretax income increased by $275,000 (109%) to $527,000 from $252,000 in the prior fiscal year period.
Advertising revenues decreased by $434,000 (20%) to $1,692,000 from $2,126,000, primarily because of decreased display advertising net revenues of $164,000, classified advertising net revenues of $65,000, trustee sale notice advertising net revenues of $102,000, legal notice advertising net revenues of $53,000 and government notice advertising net revenues of $50,000.
Trustee sale notices are very much dependent on the number of California and Arizona foreclosures for which public notice advertising is required by law. The number of foreclosure notices published by the Company decreased by 61% during the three months ended December 31, 2020 as compared to the prior fiscal year period. Unless the economic impact of the efforts to contain COVID-19 result in significant additional foreclosures in California and Arizona, management expects there will be fewer foreclosure notice and other public notice advertisements and declining revenues for fiscal 2021. The Company’s smaller newspapers, those other than the Los Angeles and San Francisco Daily Journals (“The Daily Journals”), accounted for about 87% of the total public notice advertising revenues in the three months ended December 30, 2020. Public notice advertising revenues and related advertising and other service fees constituted about 19% of the Company’s total revenues for each of the three-month periods ended December 31, 2020 and 2019. Because of this concentration, the Company’s revenues would be significantly adversely affected if California and Arizona eliminated the legal requirement to publish public notices in adjudicated newspapers of general circulation, as was implemented in Arizona in 2017 for one notice type that had represented approximately $500,000 in annual revenues for the Company. Also, if the adjudication of one or more of the Company’s newspapers was challenged and revoked, those newspapers would no longer be eligible to publish public notice advertising, and it could have a material adverse effect on the Company’s revenues.
The Daily Journals accounted for about 90% of the Traditional Business’ total circulation revenues, which declined by $109,000 (8%) to $1,203,000 from $1,312,000. The court rule and judicial profile services generated about 7% of the total circulation revenues, with the other newspapers and services accounting for the balance. Advertising service fees and other are Traditional Business segment revenues, which include primarily (i) agency commissions received from outside newspapers in which the advertising is placed, and (ii) fees generated when filing notices with government agencies.
The Traditional Business segment operating expenses decreased by $877,000 (23%) to $2,981,000 from $3,858,000, primarily due to decreased personnel costs.
Journal Technologies
During the three months ended December 31, 2020, Journal Technologies’ business segment pretax loss decreased by $929,000 (9%) to $863,000 from $1,792,000 in the prior fiscal year period.
Revenues decreased by $654,000 (9%) to $6,891,000 from $7,545,000 in the prior fiscal year period. Licensing and maintenance fees decreased by $177,000 (3%) to $5,033,000 from $5,210,000 primarily due to the non-renewal of some legacy software products’ maintenance and support contracts. (To focus on supporting the Company’s main eSeries products, the Company has announced an end to the maintenance of its legacy software products purchased as part of the New Dawn and ISD acquisitions in fiscal 2013 effective July 1, 2021.) Consulting fees decreased by $445,000 (65%) to $244,000 from $689,000 due to fewer go-lives.
Deferred revenues on installation contracts primarily represent the fair value of advances from customers of Journal Technologies for installation services and are recognized upon final project go-lives. Deferred revenues on license and maintenance contracts represent prepayments of annual license and maintenance fees and are recognized ratably over the maintenance period. Other public service fees decreased by $32,000 (2%) to $1,614,000 from $1,646,000 primarily due to reduced efiling revenues.
Operating expenses decreased by $1,583,000 (17%) to $7,754,000 from $9,337,000 primarily because of decreased personnel costs due to the pandemic layoff and reduced business travel expenses.
Journal Technologies continues to update and upgrade its software products. These costs are expensed as incurred and will impact earnings at least through the foreseeable future.
Liquidity and Capital Resources
During the three months ended December 31, 2020, the Company’s cash and restricted cash and cash equivalents and marketable security positions increased by $63,913,000, including net pretax unrealized gains on marketable securities of $81,212,000. Cash and cash equivalents were used to pay down the margin loan principal of $14,493,000 as well as the real estate loan principal of $23,000. There was cash used in operating activities of $2,783,000 which included net decreases of $1,577,000 in deferred subscriptions, deferred professional fees and deferred maintenance agreements and others.
The investments in marketable securities, which had an adjusted cost basis of approximately $41,775,000 and a market value of about $260,580,000 at December 31, 2020, generated approximately $638,000 in dividends income during the three months ended December 31, 2020. These securities had approximately $218,805,000 of net unrealized gains before estimated taxes of $58,230,000 which will become due only when we sell securities in which there is unrealized appreciation. Beginning in fiscal 2019, changes in unrealized gains (losses) on marketable securities are now included in the Company’s net income (loss) and thus may have a significant impact depending on the fluctuations of the market prices of the invested securities.
Cash flows from operating activities increased by $343,000 during the three months ended December 31, 2020 as compared to the prior fiscal year period, primarily due to increases in net income of $45,060,000, decreases in deferred tax assets of $16,975,000 and decreases in accounts receivable of $368,000 primarily resulting from more payment collections, partially offset by (i) increases in unrealized gains on marketable securities of $61,681,000 and (ii) decreases in accounts payable and accrued liabilities of $339,000 because of the timing difference in remitting efiling fees to the courts and net deferred subscriptions, deferred professional fees, deferred installation contracts and deferred maintenance agreements and others of $279,000.
As of December 31, 2020, the Company had working capital of $254,992,000, including the liabilities for deferred subscriptions, deferred installation, deferred professional fees and deferred maintenance agreements and others of $17,461,000.
The Company believes that it will be able to fund its operations for the foreseeable future through its cash flows from operations and its current working capital and expects that any such cash flows will be invested in its businesses. The Company may or may not have the ability to borrow additional amounts against its marketable securities and, among other possibilities, it may be required to consider selling some of those securities to generate cash if needed to fund ongoing operations.
As of December 31, 2020, the investments were concentrated in just five companies. Accordingly, a significant decline in the market value of one or more of the Company’s investments may not be offset by the hypothetically better performance of other investments, and that could result in a large decrease in the Company’s shareholders’ equity and net income.
The Company is not a smaller version of Berkshire Hathaway Inc. Instead, it hopes to be a significant software company while it also operates its Traditional Business.
Critical Accounting Policies and Estimates
The Company’s financial statements and accompanying notes are prepared in accordance with U.S. generally accepted accounting principles. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Management believes that revenue recognition, accounting for software costs, fair value measurement and disclosures (including for the long-term Incentive Plan liabilities) and income taxes are critical accounting policies and estimates.
The Company’s critical accounting policies are detailed in its Annual Report on Form 10-K for the year ended September 30, 2020. The above discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in this report.
Disclosure Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Certain statements contained in this document, including but not limited to those in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are “forward-looking” statements that involve risks and uncertainties that may cause actual future events or results to differ materially from those described in the forward-looking statements. Words such as “expects,” “intends,” “anticipates,” “should,” “believes,” “will,” “plans,” “estimates,” “may,” variations of such words and similar expressions are intended to identify such forward-looking statements. We disclaim any intention or obligation to revise any forward-looking statements whether as a result of new information, future developments, or otherwise. There are many factors that could cause actual results to differ materially from those contained in the forward-looking statements. These factors include, among others: risks associated with software development and implementation efforts; Journal Technologies’ reliance on professional services engagements with justice agencies; material changes in the costs of postage and paper; possible changes in the law, particularly changes limiting or eliminating the requirements for public notice advertising; possible loss of the adjudicated status of the Company’s newspapers and their legal authority to publish public notice advertising; the impacts of COVID-19 and the efforts to contain it on the Company’s customers, advertisers and subscribers, particularly the closure or scaling back of operations of courts, justice agencies and other businesses; a further decline in public notice advertising revenues because of fewer foreclosures; a further decline in subscriber and commercial advertising revenues; possible security breaches of the Company’s software or websites; the Company’s reliance on its president and chief executive officer, who has reduced his work schedule due to a health issue; changes in accounting guidance; material weaknesses in the Company’s internal control over financial reporting; and declines in the market prices of the securities owned by the Company. In addition, such statements could be affected by general industry and market conditions, general economic conditions (particularly in California) and other factors. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in this Form 10-Q, including in conjunction with the forward-looking statements themselves. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in documents filed by the Company with the Securities and Exchange Commission, including in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2020.
Item 4. CONTROLS AND PROCEDURES
In light of the material weaknesses in the Company’s internal control over financial reporting discussed in the Company’s Form 10-K for the fiscal year ended September 30, 2020, management concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2020. There were no material changes in the Company’s internal control over financial reporting or in other factors reasonably likely to affect its internal control over financial reporting during the quarter ended December 31, 2020.
PART II
| Item 6. | Exhibits | |
| 31 | Certification by Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32 | Certification by Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS | Inline XBRL Instance | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition | |
| 101.LAB | Inline XBRL Taxonomy Extension Labels | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101 |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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DAILY JOURNAL CORPORATION |
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(Registrant) |
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/s/ Gerald L. Salzman |
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Chief Executive Officer |
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President |
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| Chief Financial Officer | ||
| Treasurer | ||
| (Principal Executive Officer, | ||
| Principal Financial Officer and | ||
| Principal Accounting Officer) | ||
| DATE: February 12, 2021 |
Exhibit 31
CERTIFICATIONS BY CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gerald L. Salzman, certify that:
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1. |
I have reviewed this quarterly report on Form 10-Q of Daily Journal Corporation; |
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2. |
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
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4. |
I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared; |
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designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c. |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
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a. |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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b. |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: February 12, 2021 | |||
| /s/ Gerald L. Salzman | |||
| Gerald L. Salzman | |||
| Chief Executive Officer, President, | |||
| Chief Financial Officer and Treasurer |
Exhibit 32
CERTIFICATION BY CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Daily Journal Corporation (the "Company") for the period ended December 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gerald L. Salzman, President, Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Gerald L. Salzman | |
| Gerald L. Salzman | |
| Chief Executive Officer, President, | |
| Chief Financial Officer and Treasurer | |
| February 12, 2021 |
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350, and is not being filed as part of the Report or as a separate disclosure document.