DJCO 10-Q
Daily Journal Corp (DJCO)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended |
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from _______________ to _____________________ |
Commission File Number
(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:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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The |
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.
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).
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: |
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| 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 ‑ March 31, 2024 and September 30, 2023 | 3 |
| Consolidated Statements of Income and Comprehensive Income ‑ Three months ended March 31, 2024 and 2023 | 4 |
| Consolidated Statements of Income and Comprehensive Income ‑ Six months ended March 31, 2024 and 2023 | 5 |
| Consolidated Statements of Shareholders’ Equity ‑ Six months ended March 31, 2024 and 2023 | 6 |
| Consolidated Statements of Cash Flows ‑ Six months ended March 31, 2024 and 2023 | 7 |
| Notes to Consolidated Financial Statements | 8 |
| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 15 |
| Item 4. Controls and Procedures | 22 |
| Part II Other Information | |
| Item 6. Exhibits | 23 |
PART I
Item 1. FINANCIAL STATEMENTS
DAILY JOURNAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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March 31 |
September 30 |
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|
2024 |
2023 |
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|
ASSETS |
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Current assets |
||||||||
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Cash and cash equivalents |
$ | $ | ||||||
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Restricted cash |
||||||||
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Non-qualified deferred compensation plan - trust account asset value |
||||||||
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Marketable securities at fair value -- common stocks |
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Accounts receivable, less allowance for doubtful accounts of $ |
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Inventories |
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Prepaid expenses and other current assets |
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Total current assets |
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Property, plant and equipment, at cost |
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Land, buildings and improvements |
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Furniture, office equipment and computer software |
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Machinery and equipment |
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Less accumulated depreciation |
( |
) | ( |
) | ||||
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Operating lease right-of-use assets |
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| $ | $ | |||||||
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
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Current liabilities |
||||||||
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Accounts payable |
$ | $ | ||||||
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Accrued liabilities |
||||||||
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Income tax payable |
||||||||
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Note payable collateralized by real estate |
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Deferred subscriptions |
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Deferred consulting fees |
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Deferred maintenance agreements and others |
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Total current liabilities |
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Long term liabilities |
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Investment margin account borrowings |
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Note payable collateralized by real estate |
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Deferred maintenance agreements |
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Accrued liabilities |
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Accrued non-qualified deferred compensation |
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Deferred income taxes |
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Total long-term liabilities |
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Commitments and contingencies (Notes 10 and 11) |
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Shareholders' equity |
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Preferred stock, $ par value, |
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Common stock, $ par value, |
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Additional paid-in capital |
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Retained earnings |
||||||||
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Total shareholders' equity |
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| $ | $ | |||||||
See accompanying Notes to Consolidated Financial Statements.
DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
|
Three months ended March 31 |
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2024 |
2023 |
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Revenues |
||||||||
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Advertising |
$ | $ | ||||||
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Circulation |
||||||||
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Advertising service fees and other |
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Licensing and maintenance fees |
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Consulting fees |
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Other public service fees |
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Costs and expenses |
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Salaries and employee benefits |
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Decrease to the long-term supplemental compensation accrual |
( |
) | ( |
) | ||||
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Agency commissions |
||||||||
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Outside services |
||||||||
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Postage and delivery expenses |
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Newsprint and printing expenses |
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Depreciation and amortization |
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Equipment maintenance and software |
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Credit card merchant discount fees |
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Rent expenses |
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Accounting and legal fees |
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Other general and administrative expenses |
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Income from operations |
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Other income (expense) |
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Dividends and interest income |
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Realized gains on sales of marketable securities |
||||||||
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Net unrealized gains on marketable securities |
||||||||
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Interest expense on margin loans and others |
( |
) | ( |
) | ||||
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Interest expense on note payable collateralized by real estate |
( |
) | ( |
) | ||||
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Income before income taxes |
||||||||
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Income tax provisions |
( |
) | ( |
) | ||||
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Net income |
$ | $ | ||||||
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Weighted average number of common shares outstanding - basic and diluted |
||||||||
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Basic and diluted net income per share |
$ | $ | ||||||
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Comprehensive income |
$ | $ | ||||||
See accompanying Notes to Consolidated Financial Statements.
DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
|
Six months ended March 31 |
||||||||
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2024 |
2023 |
|||||||
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Revenues |
||||||||
|
Advertising |
$ | $ | ||||||
|
Circulation |
||||||||
|
Advertising service fees and other |
||||||||
|
Licensing and maintenance fees |
||||||||
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Consulting fees |
||||||||
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Other public service fees |
||||||||
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Costs and expenses |
||||||||
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Salaries and employee benefits |
||||||||
|
Decrease to the long-term supplemental compensation accrual |
( |
) | ( |
) | ||||
|
Agency commissions |
||||||||
|
Outside services |
||||||||
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Postage and delivery expenses |
||||||||
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Newsprint and printing expenses |
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Depreciation and amortization |
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Equipment maintenance and software |
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Credit card merchant discount fees |
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Rent expenses |
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Accounting and legal fees |
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Other general and administrative expenses |
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Income from operations |
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Other income (expense) |
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Dividends and interest income |
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Realized gains on sales of marketable securities |
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Net unrealized gains on marketable securities |
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Interest expense on margin loans and others |
( |
) | ( |
) | ||||
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Interest expense on note payable collateralized by real estate |
( |
) | ( |
) | ||||
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Income before income taxes |
||||||||
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Income tax provisions |
( |
) | ( |
) | ||||
|
Net income |
$ | $ | ||||||
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Weighted average number of common shares outstanding - basic and diluted |
||||||||
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Basic and diluted net income (loss) per share |
$ | $ | ||||||
|
Comprehensive income |
$ | $ | ||||||
See accompanying Notes to Consolidated Financial Statements.
DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
|
Additional |
Total |
|||||||||||||||||||||||||||
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Common Stock |
Treasury Stock |
Paid-in |
Retained |
Shareholders' |
||||||||||||||||||||||||
|
Share |
Amount |
Share |
Amount |
Capital |
Earnings |
Equity |
||||||||||||||||||||||
|
Balance at September 30, 2022 |
$ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||||||||||||||
|
Net income |
- | - | - | - | - | |||||||||||||||||||||||
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Balance at December 31, 2022 |
( |
) | ( |
) | ||||||||||||||||||||||||
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Net income |
- | - | ||||||||||||||||||||||||||
|
Balance at March 31, 2023 |
$ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||||||||||||||
|
Balance at September 30, 2023 |
$ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||||||||||||||
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Net income |
- | - | ||||||||||||||||||||||||||
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Balance at December 31, 2023 |
( |
) | ( |
) | ||||||||||||||||||||||||
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Net income |
- | - | ||||||||||||||||||||||||||
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Balance at March 31, 2024 |
$ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Six months ended March 31 |
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2024 |
2023 |
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Cash flows from operating activities |
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Net income |
$ | $ | ||||||
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Adjustments to reconcile net income to net cash (used in) provided from operations |
||||||||
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Depreciation and amortization |
||||||||
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Net unrealized gains on marketable securities |
( |
) | ( |
) | ||||
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Realized gains on sales of marketable securities |
( |
) | ( |
) | ||||
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Stock dividends |
( |
) | ||||||
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Deferred income taxes |
||||||||
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Changes in operating assets and liabilities (Increase) decrease in current assets |
||||||||
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Accounts receivable, net |
||||||||
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Inventories |
( |
) | ||||||
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Prepaid expenses and other assets |
( |
) | ||||||
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Income tax receivable |
||||||||
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Increase (decrease) in liabilities |
||||||||
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Accounts payable |
( |
) | ( |
) | ||||
|
Accrued liabilities, including non-qualified deferred compensation |
( |
) | ( |
) | ||||
|
Income tax payable |
||||||||
|
Deferred subscriptions |
( |
) | ( |
) | ||||
|
Deferred consulting fees |
( |
) | ||||||
|
Deferred maintenance agreements and others |
( |
) | ( |
) | ||||
|
Net cash (used in) provided from operating activities |
( |
) | ||||||
|
Cash flows from investing activities |
||||||||
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Proceeds from sales of marketable securities |
||||||||
|
Purchases of marketable securities |
- | ( |
) | |||||
|
Purchases of property, plant and equipment |
( |
) | ( |
) | ||||
|
Net cash provided from (used in) investing activities |
( |
) | ||||||
|
Cash flows from financing activities |
||||||||
|
Proceeds from margin loan borrowing |
- | |||||||
|
Payment to margin loan borrowing |
( |
) | ( |
) | ||||
|
Payment of real estate loan principal |
( |
) | ( |
) | ||||
|
Net cash (used in) provided from financing activities |
( |
) | ||||||
|
(Decrease) increase 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 (“Daily Journal”) publishes newspapers and websites covering California and Arizona 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 e-filing and a website to pay traffic citations and fees online. These products are licensed or subscribed to in approximately 30 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 and in British Columbia, Canada, where the Company established a new wholly-owned subsidiary, Journal Technologies (Canada) Inc., in August 2022.
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 March 31, 2024, its results of operations for the three- and six-month periods ended March 31, 2024 and 2023, its consolidated statements of shareholders’ equity for the three- and six-month periods ended March 31, 2024 and 2023 and cash flows for the six-month periods ended March 31, 2024 and 2023. The results of operations for the six months ended March 31, 2034 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, 2023.
Certain reclassifications of previously reported amounts have been made to conform to the current year’s presentation.
Note 3 - Accounting Standards Adopted in Fiscal 2024
On October 1, 2023, the Company adopted Current Expected Credit Losses, a credit loss accounting standard (model) issued by the Financial Accounting Stands Board, requiring financial assets measured at amortized cost to be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The standard eliminates the threshold for initial recognition in current U.S. GAAP and reflects an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets. The adoption of this guidance has no material effect on the Company’s consolidated financial statements.
Note 4 – Right-of-Use (ROU) Asset
At March 31, 2024, the Company had a ROU 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).
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.
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 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 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 e-file cases or 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 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. 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 - Treasury stock and net income per common share
In June 2022, the Company received from the late Charles T. Munger
Note 7 - 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 8 - 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 March 31, 2024 and September 30, 2023, there were net accumulated pretax unrealized gains of $
During the six months ended March 31, 2024, the Company recorded and included in its net income the net unrealized gains on marketable securities of $
In March 2024, the Company sold part of its marketable securities for approximately $
In December 2022, the Company sold part of its marketable securities for approximately $
Our long-serving director and former chairman, Charles T. Munger, had managed the Company’s marketable securities portfolio since the original purchases were made with the Company’s excess cash in 2009 as an alternative to near-zero interest rate investments. Mr. Munger died in November 2023, and the Company remains committed to using the portfolio as a source of strength in support of its operating businesses, just as it has for the past 15 years. The Board has been evaluating ways to ensure the prudent and effective management of these assets in the context of the current market and the needs of the businesses, and the recent sales of a portion of the portfolio and the concurrent paydown of the Company’s margin loan, each as described above, are reflective of that evaluation.
Investments in marketable securities as of March 31, 2024 and September 30, 2023 are summarized below.
Investment in Financial Instruments
|
March 31, 2024 |
September 30, 2023 |
|||||||||||||||||||||||
|
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 9 - Income Taxes
For the six months ended March 31, 2024, the Company recorded an income tax provision of $
For the six months ended March 31, 2023, the Company recorded an income tax provision 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 with regard to federal income taxes and fiscal for state income taxes.
Note 10 - 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 October 2025.
Effective January 1, 2023, the Company began sponsoring a 401(k) retirement plan and a 409(A) non-qualified deferred compensation plan for its employees. As of March 31, 2024, there were deferred compensation liabilities of approximately $
Note 11 - 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 adverse effect on the Company’s financial position, results of operations or cash flows.
Note 12 - Operating Segments
The Company’s Traditional Business is one reportable segment and the other is Journal Technologies which includes Journal Technologies, Inc. and Journal Technologies (Canada) Inc. All inter-segment transactions were eliminated. Additional detail about each of the reportable segments and its income and expenses is set forth below:
Overall Financial Results (000)
For the six months ended March 31
|
Reportable Segments |
||||||||||||||||||||||||||||||||
|
Traditional Business |
Journal Technologies |
Corporate |
Total |
|||||||||||||||||||||||||||||
|
2024 |
2023 |
2024 |
2023 |
2024 |
2023 |
2024 |
2023 |
|||||||||||||||||||||||||
|
Revenues |
||||||||||||||||||||||||||||||||
|
Advertising |
$ | $ | $ | - | $ | - | $ | - | $ | - | $ | $ | ||||||||||||||||||||
|
Circulation |
- | - | - | - | ||||||||||||||||||||||||||||
|
Advertising service fees and other |
- | - | - | - | ||||||||||||||||||||||||||||
|
Licensing and maintenance fees |
- | - | - | - | ||||||||||||||||||||||||||||
|
Consulting fees |
- | - | - | - | ||||||||||||||||||||||||||||
|
Other public service fees |
- | - | - | - | ||||||||||||||||||||||||||||
|
Total operating revenues |
- | - | ||||||||||||||||||||||||||||||
|
Operating expenses |
||||||||||||||||||||||||||||||||
|
Salaries and employee benefits |
- | - | ||||||||||||||||||||||||||||||
|
Decrease to the long-term supplemental compensation accrual |
( |
) | ( |
) | ( |
) | ( |
) | - | - | ( |
) | ( |
) | ||||||||||||||||||
|
Others |
- | - | ||||||||||||||||||||||||||||||
|
Total operating expenses |
- | - | ||||||||||||||||||||||||||||||
|
Income (loss) from operations |
( |
) | - | - | ||||||||||||||||||||||||||||
|
Dividends and interest income |
- | - | - | - | ||||||||||||||||||||||||||||
|
Interest expenses on note payable collateralized by real estate |
- | - | - | - | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||
|
Interest expense on margin loans and others |
- | - | - | - | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||
|
Gains on sales of marketable securities, net |
- | - | - | - | ||||||||||||||||||||||||||||
|
Net unrealized gains on marketable securities |
- | - | - | - | ||||||||||||||||||||||||||||
|
Pretax income (loss) |
( |
) | ||||||||||||||||||||||||||||||
|
Income tax (expense) benefit |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||
|
Net income (loss) |
$ | $ | $ | $ | ( |
) | $ | $ | $ | $ | ||||||||||||||||||||||
|
Total assets |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Capital expenditures |
$ | $ | $ | - | $ | $ | - | $ | - | $ | $ | |||||||||||||||||||||
|
Overall Financial Results (000) |
|||||||||||
|
For the three months ended March 31 |
|
Reportable Segments |
||||||||||||||||||||||||||||||||
|
Traditional Business |
Journal Technologies |
Corporate |
Total |
|||||||||||||||||||||||||||||
|
2024 |
2023 |
2024 |
2023 |
2024 |
2023 |
2024 |
2023 |
|||||||||||||||||||||||||
|
Revenues |
||||||||||||||||||||||||||||||||
|
Advertising |
$ | $ | $ | - | $ | - | $ | - | $ | - | $ | $ | ||||||||||||||||||||
|
Circulation |
- | - | - | - | ||||||||||||||||||||||||||||
|
Advertising service fees and other |
- | - | - | - | ||||||||||||||||||||||||||||
|
Licensing and maintenance fees |
- | - | - | - | ||||||||||||||||||||||||||||
|
Consulting fees |
- | - | - | - | ||||||||||||||||||||||||||||
|
Other public service fees |
- | - | - | - | ||||||||||||||||||||||||||||
|
Total operating revenues |
- | - | ||||||||||||||||||||||||||||||
|
Operating expenses |
||||||||||||||||||||||||||||||||
|
Salaries and employee benefits |
- | - | ||||||||||||||||||||||||||||||
|
Decrease to the long-term supplemental compensation accrual |
( |
) | ( |
) | ( |
) | - | - | - | ( |
) | ( |
) | |||||||||||||||||||
|
Others |
- | - | ||||||||||||||||||||||||||||||
|
Total operating expenses |
- | - | ||||||||||||||||||||||||||||||
|
Income from operations |
- | - | ||||||||||||||||||||||||||||||
|
Dividends and interest income |
- | - | - | - | ||||||||||||||||||||||||||||
|
Interest expenses on note payable collateralized by real estate |
- | - | - | - | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||
|
Interest expense on margin loans and other |
- | - | - | - | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||
|
Gains on sales of marketable securities |
- | - | - | - | - | - | ||||||||||||||||||||||||||
|
Net unrealized gains on marketable securities |
- | - | - | - | ||||||||||||||||||||||||||||
|
Pretax income |
||||||||||||||||||||||||||||||||
|
Income tax (expense) benefit |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||
|
Net income |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Total assets |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Capital expenditures |
$ | $ | $ | - | $ | - | $ | - | $ | - | $ | $ | ||||||||||||||||||||
During the six months ended March 31, 2024, the Traditional Business had total operating revenues of $
During the three months ended March 31, 2024, the Traditional Business had total operating revenues of $
Approximately
Note 13 - 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., 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 e-filing and a website to pay traffic citations and fees online. These products are licensed in approximately 30 states and internationally.
Reportable Segments
The Company’s Traditional Business is one reportable segment and the other is Journal Technologies which includes Journal Technologies, Inc. and Journal Technologies (Canada) Inc. All inter-segment transactions were eliminated. Additional detail about each reportable segment and its income and expenses is set forth below:
Overall Financial Results (000)
For the six months ended March 31
|
Reportable Segments |
||||||||||||||||||||||||||||||||
|
Traditional Business |
Journal Technologies |
Corporate |
Total |
|||||||||||||||||||||||||||||
|
2024 |
2023 |
2024 |
2023 |
2024 |
2023 |
2024 |
2023 |
|||||||||||||||||||||||||
|
Revenues |
||||||||||||||||||||||||||||||||
|
Advertising |
$ | 4,403 | $ | 4,194 | $ | - | $ | - | $ | - | $ | - | $ | 4,403 | $ | 4,194 | ||||||||||||||||
|
Circulation |
2,194 | 2,206 | - | - | - | - | 2,194 | 2,206 | ||||||||||||||||||||||||
|
Advertising service fees and other |
1,402 | 1,477 | - | - | - | - | 1,402 | 1,477 | ||||||||||||||||||||||||
|
Licensing and maintenance fees |
- | - | 13,411 | 10,074 | - | - | 13,411 | 10,074 | ||||||||||||||||||||||||
|
Consulting fees |
- | - | 6,501 | 6,755 | - | - | 6,501 | 6,755 | ||||||||||||||||||||||||
|
Other public service fees |
- | - | 4,653 | 3,749 | - | - | 4,653 | 3,749 | ||||||||||||||||||||||||
|
Total operating revenues |
7,999 | 7,877 | 24,565 | 20,578 | - | - | 32,564 | 28,455 | ||||||||||||||||||||||||
|
Operating expenses |
||||||||||||||||||||||||||||||||
|
Salaries and employee benefits |
5,173 | 4,499 | 18,185 | 15,279 | - | - | 23,358 | 19,778 | ||||||||||||||||||||||||
|
Decrease to the long-term supplemental compensation accrual |
(800 | ) | (700 | ) | (30 | ) | (20 | ) | - | - | (830 | ) | (720 | ) | ||||||||||||||||||
|
Others |
2,765 | 2,435 | 6,015 | 6,053 | - | - | 8,780 | 8,488 | ||||||||||||||||||||||||
|
Total operating expenses |
7,138 | 6,234 | 24,170 | 21,312 | - | - | 31,308 | 27,546 | ||||||||||||||||||||||||
|
Income (loss) from operations |
861 | 1,643 | 395 | (734 | ) | - | - | 1,256 | 909 | |||||||||||||||||||||||
|
Dividends and interest income |
- | - | - | - | 2,858 | 5,132 | 2,858 | 5,132 | ||||||||||||||||||||||||
|
Interest expenses on note payable collateralized by real estate |
- | - | - | - | (21 | ) | (24 | ) | (21 | ) | (24 | ) | ||||||||||||||||||||
|
Interest expense on margin loans and others |
- | - | - | - | (2,187 | ) | (1,913 | ) | (2,187 | ) | (1,913 | ) | ||||||||||||||||||||
|
Gains on sales of marketable securities, net |
- | - | - | - | 14,261 | 422 | 14,261 | 422 | ||||||||||||||||||||||||
|
Net unrealized gains on marketable securities |
- | - | - | - | 20,193 | 32,669 | 20,193 | 32,669 | ||||||||||||||||||||||||
|
Pretax income (loss) |
861 | 1,643 | 395 | (734 | ) | 35,104 | 36,286 | 36,360 | 37,195 | |||||||||||||||||||||||
|
Income tax (expense) benefit |
(200 | ) | (435 | ) | (90 | ) | 135 | (8,040 | ) | (9,635 | ) | (8,330 | ) | (9,935 | ) | |||||||||||||||||
|
Net income (loss) |
$ | 661 | $ | 1,208 | $ | 305 | $ | (599 | ) | $ | 27,064 | $ | 26,651 | $ | 28,030 | $ | 27,260 | |||||||||||||||
|
Total assets |
$ | 14,807 | $ | 14,053 | $ | 23,937 | $ | 25,444 | $ | 297,003 | $ | 319,523 | $ | 335,747 | $ | 359,020 | ||||||||||||||||
|
Capital expenditures |
$ | 23 | $ | 70 | $ | - | $ | 4 | $ | - | $ | - | $ | 23 | $ | 74 | ||||||||||||||||
Comparable six-month periods ended March 31, 2024 and 2023
Consolidated Financial Comparison
Consolidated revenues were $32,564,000 and $28,455,000 for the six months ended March 31, 2024 and 2023, respectively. This increase of $4,109,000 (14%) was primarily from increases in (i) Journal Technologies’ license and maintenance fees of $3,337,000, and other public service fees of $904,000, partially offset by decreased consulting fees of $254,000, and (ii) the Traditional Business’ advertising revenues of $209,000.
Approximately 75% of the Company’s revenues during the six months ended March 31, 2024 were derived from Journal Technologies, as compared with 72% in the prior fiscal year period. In addition, the Company’s revenues during the quarter were primarily from the United States, with approximately $4,543,000 (14%) from foreign countries. Almost all of Journal Technologies’ revenues are from governmental agencies.
Consolidated operating expenses increased by $3,762,000 (14%) to $31,308,000 from $27,546,000. Total salaries and employee benefits increased by $3,580,000 (18%) to $23,358,000 from $19,778,000 primarily due to annual salary adjustments and the hiring of additional staff members to strengthen operational efficiencies, conduct product development and address technical debt, and bolster teams working on the company’s installation projects. Outside services increased by $271,000 (9%) to $3,250,000 from $2,979,000 mainly because of additional contractor services and increased third-party hosting fees which were billed to clients. Equipment maintenance and software increased by $55,000 (8%) to $712,000 from $657,000 mainly resulting from increased maintenance costs. Accounting and legal fees decreased by $84,000 (17%) to $411,000 from $495,000 primarily resulting from decreased legal fees. Other general and administrative expenses decreased by $262,000 (13%) to $1,757,000 from $2,019,000 mainly because there were decreased business travel expenses and reduced miscellaneous office supply expenses as compared to the prior fiscal year period.
The Company’s non-operating income, net of expenses, decreased by $1,182,000 (3%) to $35,104,000 from $36,286,000 in the prior fiscal year period primarily because of (i) the recording of net unrealized gains on marketable securities of $20,193,000 as compared with $32,669,000 in the prior fiscal year period, and (ii) decreases in dividends and interest income of $2,274,000 (44%) to $2,858,000 from $5,132,000. These decreases were partially offset by the recording of realized net gains on sales of marketable securities of $14,261,000 as compared with $422,000 in the prior fiscal year period.
During the six months ended March 31, 2024, the Company’s consolidated pretax income was $36,360,000, as compared to $37,195,000 in the prior fiscal year period. There was consolidated net income of $28,030,000 ($20.36 per share) for the six months ended March 31, 2024, as compared with $27,260,000 ($19.80 per share) in the prior fiscal year period.
At March 31, 2024, the aggregate fair market value of the Company’s marketable securities was $297,003,000. These securities had approximately $157,909,000 of net unrealized gains before taxes of $40,490,000. The portfolio generated approximately $2,858,000 in dividends and interest income during the six months ended March 31, 2024, as compared with $5,132,000 in the prior fiscal year period. Most of the unrealized gains were in the common stocks of three U.S. financial institutions and one foreign manufacturer.
Taxes
For the six months ended March 31, 2024, the Company recorded an income tax provision of $8,330,000 on the pretax income of $36,360,000. The income tax provision consisted of tax provisions of $3,660,000 on the realized gains on marketable securities, $5,180,000 on the unrealized gains on marketable securities, $40,000 on income from foreign operations, and $480,000 on income from US operations and dividend income, partially offset by a tax benefit of $210,000 for the dividends received deduction and other permanent book and tax differences, and a tax benefit of $820,000 for the effect of a change in state apportionment on the beginning of the year’s deferred tax liability. Consequently, the overall effective tax rate for the six months ended March 31, 2024 was 22.9%, after including the taxes on the realized and unrealized gains on marketable securities.
For the six months ended March 31, 2023, the Company recorded an income tax provision of $9,935,000 on the pretax income of $37,195,000. The income tax provision consisted of a tax provision of $110,000 on the realized gains on marketable securities and $8,770,000 on the unrealized gains on marketable securities, a tax provision of $1,005,000 on income from operations, including dividend income, and a tax provision of $210,000 for the effect of a change in state apportionment on the beginning of the year’s deferred tax liability, partially offset by a tax benefit of $160,000 for the dividends received deduction and other permanent book and tax differences. Consequently, the overall effective tax rate for the six months ended March 31, 2023 was 26.7%, after including the taxes on the realized and 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 2021 with regard to federal income taxes and fiscal 2020 for state income taxes.
The Traditional Business
The Traditional Business’ pretax income decreased by $782,000 (48%) to $861,000 from $1,643,000 in the prior fiscal year period, primarily due to increased personnel costs of $674,000 (15%) to $5,173,000 from $4,499,000, partially offset by an increased reduction of $100,000 (14%) to the long-term supplemental compensation accrual to arrive at a reduction of $800,000 as compared with a reduction of $700,000 in the prior fiscal year period.
During the six months ended March 31, 2024, the Traditional Business had total operating revenues of $7,999,000, as compared with $7,877,000 in the prior fiscal year period. Advertising revenues increased by $209,000 (5%) to $4,403,000 from $4,194,000, primarily resulting from increased commercial advertising revenues of $252,000, legal notice advertising revenues of $32,000, and trustee sale notice advertising revenues of $29,000, partially offset by decreased government notice advertising revenues of $104,000.
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 slightly by 1% during the six months ended March 31, 2024 as compared to the prior fiscal year period. The Company’s smaller newspapers, those other than the Los Angeles and San Francisco Daily Journals (“The Daily Journals”), accounted for about 86% of the total public notice advertising revenues during the six months ended March 31, 2024. Public notice advertising revenues and related advertising and other service fees, including trustee sales legal advertising revenues, constituted about 14% of the Company's total operating revenues for the six months ended March 31, 2024 and 16% for the six months ended March 31, 2023.
The Daily Journals accounted for about 93% of the Traditional Business’ total circulation revenues, which decreased by $12,000 (1%) to $2,194,000 from $2,206,000. The court rule and judicial profile services generated about 4% 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, excluding the adjustments to the long-term supplemental compensation accrual, increased by $1,004,000 (14%) to $7,938,000 from $6,934,000, primarily resulting from the annual salary adjustments.
Journal Technologies
During the six months ended March 31, 2024, Journal Technologies’ business segment pretax income increased by $1,129,000 (154%) to pretax income of $395,000 from a pretax loss of $734,000 in the prior fiscal year period primarily resulting from increased revenues of $3,987,000, partially offset by increased operating expenses of $2,858,000.
Revenues increased by $3,987,000 (19%) to $24,565,000 from $20,578,000 in the prior fiscal year period. Licensing and maintenance fees increased by $3,337,000 (33%) to $13,411,000 from $10,074,000. Consulting fees decreased by $254,000 (4%) to $6,501,000 from $6,755,000 mainly due to fewer project go-lives (i.e. signoffs by the clients). Other public service fees increased by $904,000 (24%) to $4,653,000 from $3,749,000 primarily because of increased e-filing fee revenues.
Deferred consulting fees primarily represent 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 periods.
Operating expenses increased by $2,858,000 (13%) to $24,170,000 from $21,312,000 primarily because of (i) increased personnel costs because of salary adjustments (ii) additional contractor services and the hiring of additional staff members to strengthen operational efficiencies, conduct product development and address technical debt, and bolster teams working on the Company’s installation projects, and (iii) increased third-party hosting fees which were billed to clients.
Journal Technologies continues to update and upgrade its software products, which includes improving aspects like user experience, documentation, and ease of ongoing customer upgrades. These costs are expensed as incurred and will impact earnings at least through the foreseeable future.
Impact of the COVID-19 Pandemic
Although the World Health Organization has declared an end to the COVID-19 emergency, enduring changes in society resulting from efforts to contain the COVID-19 pandemic may have continuing effects on the Company’s business. For example, for Journal Technologies, although we were able to complete many existing projects remotely, we were delayed in finishing 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, recognition of those revenues has been delayed and in some cases costs have increased. This can also create a risk of contract cancellations for in-progress projects, which has not been a common issue to date, and Journal Technologies is working to minimize additional cancellations.
Reportable Segments (for the three-month periods ended March 31, 2024 and 2023)
|
Overall Financial Results (000) |
|||||||||||
|
For the three months ended March 31 |
|
Reportable Segments |
||||||||||||||||||||||||||||||||
|
Traditional Business |
Journal Technologies |
Corporate |
Total |
|||||||||||||||||||||||||||||
|
2024 |
2023 |
2024 |
2023 |
2024 |
2023 |
2024 |
2023 |
|||||||||||||||||||||||||
|
Revenues |
||||||||||||||||||||||||||||||||
|
Advertising |
$ | 2,316 | $ | 2,204 | $ | - | $ | - | $ | - | $ | - | $ | 2,316 | $ | 2,204 | ||||||||||||||||
|
Circulation |
1,099 | 1,108 | - | - | - | - | 1,099 | 1,108 | ||||||||||||||||||||||||
|
Advertising service fees and other |
697 | 778 | - | - | - | - | 697 | 778 | ||||||||||||||||||||||||
|
Licensing and maintenance fees |
- | - | 6,854 | 5,679 | - | - | 6,854 | 5,679 | ||||||||||||||||||||||||
|
Consulting fees |
- | - | 3,199 | 4,433 | - | - | 3,199 | 4,433 | ||||||||||||||||||||||||
|
Other public service fees |
- | - | 2,406 | 1,952 | - | - | 2,406 | 1,952 | ||||||||||||||||||||||||
|
Total operating revenues |
4,112 | 4,090 | 12,459 | 12,064 | - | - | 16,571 | 16,154 | ||||||||||||||||||||||||
|
Operating expenses |
||||||||||||||||||||||||||||||||
|
Salaries and employee benefits |
2,624 | 2,281 | 9,387 | 7,866 | - | - | 12,011 | 10,147 | ||||||||||||||||||||||||
|
Decrease to the long-term supplemental compensation accrual |
(380 | ) | (200 | ) | (30 | ) | - | - | - | (410 | ) | (200 | ) | |||||||||||||||||||
|
Others |
1,294 | 1,301 | 3,043 | 3,281 | - | - | 4,337 | 4,582 | ||||||||||||||||||||||||
|
Total operating expenses |
3,538 | 3,382 | 12,400 | 11,147 | - | - | 15,938 | 14,529 | ||||||||||||||||||||||||
|
Income from operations |
574 | 708 | 59 | 917 | - | - | 633 | 1,625 | ||||||||||||||||||||||||
|
Dividends and interest income |
- | - | - | - | 1,289 | 4,063 | 1,289 | 4,063 | ||||||||||||||||||||||||
|
Interest expenses on note payable collateralized by real estate |
- | - | - | - | (10 | ) | (12 | ) | (10 | ) | (12 | ) | ||||||||||||||||||||
|
Interest expense on margin loans and other |
- | - | - | - | (1,056 | ) | (1,052 | ) | (1,056 | ) | (1,052 | ) | ||||||||||||||||||||
|
Gains on sales of marketable securities |
- | - | - | - | 14,261 | - | 14,261 | - | ||||||||||||||||||||||||
|
Net unrealized gains on marketable securities |
- | - | - | - | 5,503 | 8,644 | 5,503 | 8,644 | ||||||||||||||||||||||||
|
Pretax income |
574 | 708 | 59 | 917 | 19,987 | 11,643 | 20,620 | 13,268 | ||||||||||||||||||||||||
|
Income tax (expense) benefit |
(145 | ) | (200 | ) | 160 | (215 | ) | (5,220 | ) | (3,420 | ) | (5,205 | ) | (3,835 | ) | |||||||||||||||||
|
Net income |
$ | 429 | $ | 508 | $ | 219 | $ | 702 | $ | 14,767 | $ | 8,223 | $ | 15,415 | $ | 9,433 | ||||||||||||||||
|
Total assets |
$ | 14,807 | $ | 14,053 | $ | 23,937 | $ | 25,444 | $ | 297,003 | $ | 319,523 | $ | 335,747 | $ | 359,020 | ||||||||||||||||
|
Capital expenditures |
$ | 18 | $ | 38 | $ | - | $ | - | $ | - | $ | - | $ | 18 | $ | 38 | ||||||||||||||||
Consolidated Financial Comparison
Consolidated revenues were $16,571,000 and $16,154,000 for the three months ended March 31, 2024 and 2023, respectively. This increase of $417,000 (3%) was primarily from increases in (i) Journal Technologies’ license and maintenance fees of $1,175,000, and other public service fees of $454,000, partially offset by decreased consulting fees of $1,234,000, and (ii) the Traditional Business’ advertising revenues of $112,000, partially offset by decreased advertising service fees and other of $81,000.
Approximately 75% of the Company’s revenues were derived from Journal Technologies during both the three-month periods ended March 31, 2024 and 2023. In addition, the Company’s revenues during the quarter were primarily from the United States, with approximately $2,051,000 (12%) from foreign countries. Almost all of Journal Technologies’ revenues are from governmental agencies.
Consolidated operating expenses increased by $1,409,000 (10%) to $15,938,000 from $14,529,000. Total salaries and employee benefits increased by $1,864,000 (18%) to $12,011,000 from $10,147,000 primarily due to annual salary adjustments and the hiring of additional staff members to strengthen operational efficiencies, conduct product development and address technical debt, and bolster teams working on the company’s installation projects. Outside services decreased by $166,000 (9%) to $1,583,000 from $1,749,000 mainly because of reduced contractor services. Accounting and legal fees decreased by $67,000 (30%) to $155,000 from $222,000 primarily resulting from decreased legal fees. Other general and administrative expenses decreased by $140,000 (13%) to $925,000 from $1,065,000 mainly because there were decreased business travel expenses and reduced miscellaneous office supply expenses as compared to the prior fiscal year period.
The Company’s non-operating income, net of expenses, increased by $8,344,000 (72%) to $19,987,000 from $11,643,000 in the prior fiscal year period primarily because there were realized gains on sales of marketable securities of $14,261,000 during this quarter. These gains were partially offset by (i) the recording of net unrealized gains on marketable securities of $5,503,000 as compared with $8,644,000 in the prior fiscal year period, and (ii) decreases in dividends and interest income of $2,774,000 (68%) to $1,289,000 from $4,063,000.
During the three months ended March 31, 2024, the Company’s consolidated pretax income was $20,620,000, as compared to $13,268,000 in the prior fiscal year period. There was consolidated net income of $15,415,000 ($11.19 per share) for the three months ended March 31, 2024, as compared with $9,433,000 ($6.85 per share) in the prior fiscal year period.
The Traditional Business
The Traditional Business’ pretax income decreased by $134,000 (19%) to $574,000 from $708,000 in the prior fiscal year period, primarily due to increased personnel costs of $343,000 (15%) to $2,624,000 from $2,281,000, partially offset by an increased reduction of $180,000 (90%) to the long-term supplemental compensation accrual to arrive at a reduction of $380,000 as compared with a reduction of $200,000 in the prior fiscal year period.
During the three months ended March 31, 2024, the Traditional Business had total operating revenues of $4,112,000, as compared with $4,090,000 in the prior fiscal year period. Advertising revenues increased by $112,000 (5%) to $2,316,000 from $2,204,000, primarily resulting from increased commercial advertising revenues of $137,000, legal notice advertising revenues of $30,000, and trustee sale notice advertising revenues of $19,000, partially offset by decreased government notice advertising revenues of $74,000.
The Traditional Business segment operating expenses, excluding the adjustments to the long-term supplemental compensation accrual, increased by $336,000 (9%) to $3,918,000 from $3,582,000, primarily resulting from the annual salary adjustments.
Journal Technologies
During the three months ended March 31, 2024, Journal Technologies’ business segment pretax income decreased by $858,000 (94%) to $59,000 from $917,000 in the prior fiscal year period primarily resulting from increased operating expenses of $1,253,000, partially offset by increased revenues of $395,000.
Revenues increased by $395,000 (3%) to $12,459,000 from $12,064,000 in the prior fiscal year period. Licensing and maintenance fees increased by $1,175,000 (21%) to $6,854,000 from $5,679,000. Consulting fees decreased by $1,234,000 (28%) to $3,199,000 from $4,433,000 mainly due to fewer project go-lives (i.e. signoffs by the clients). Other public service fees increased by $454,000 (23%) to $2,406,000 from $1,952,000 primarily because of increased e-filing fee revenues.
Operating expenses, excluding the adjustment to long-term supplemental compensation accrual, increased by $1,283,000 (12%) to $12,430,000 from $11,147,000 primarily because of (i) increased personnel costs because of salary adjustments (ii) the hiring of additional staff members to strengthen operational efficiencies, conduct product development and address technical debt, and bolster teams working on the Company’s installation projects, and (iii) increased third-party hosting fees which were billed to clients.
Liquidity and Capital Resources
During the six months ended March 31, 2024, the Company’s cash and cash equivalents, restricted cash, and marketable security positions decreased by $16,368,000 after the recording of net pretax unrealized gains on marketable securities of $20,193,000. In March 2024, the Company sold part of its marketable securities for approximately $40,579,000. Cash and cash equivalents as well as proceeds from sales of marketable securities were primarily used to pay down the margin loan balance by $45,579,000.
The investments in marketable securities, which had an adjusted cost basis of approximately $139,094,000 and a market value of about $297,003,000 at March 31, 2024, generated approximately $2,858,000 in dividends and interest income during the six months ended March 31, 2024. These securities had approximately $157,909,000 of net unrealized gains before estimated taxes of $40,490,000 which will become due only when we sell securities in which there is unrealized appreciation. The balance on the Company’s margin loan secured by the securities portfolio was $29,421,000 and $75,000,000 at March 31, 2024, and September 30, 2023, respectively.
Cash flows from operating activities decreased by $6,543,000 during the six months ended March 31, 2024, as compared to the prior fiscal year period, primarily due to (i) increases in the Company’s income tax receivable of $269,000 and accounts receivable of $353,000, and (ii) decreases in deferred tax liability of $4,567,000, accounts payable and accrued liabilities of $211,000, and deferred revenues of $4,914,000. This was partially offset by increases in (i) income tax payable of $1,481,000, and (ii) the Company’s net income of $2,385,000, excluding the decreases in unrealized gains on marketable securities of $12,476,000, stock dividends of $2,978,000, and increased realized net gains on sales of marketable securities of $13,839,000.
As of March 31, 2024, the Company had working capital of $290,031,000, including the liabilities for deferred subscriptions, deferred consulting fees and deferred maintenance agreements and others of $21,562,000.
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. The amount available for borrowing is based on the market value of the Company’s investment portfolio and fluctuates depending on the value of the underlying securities. In addition, the Company could be subject to margin calls should the balance of the investment decrease significantly.
The Company is not a smaller version of Berkshire Hathaway Inc. The Company’s goal is simply to continue to develop a successful and profitable software business, while continuing to enjoy the benefit of its Traditional Business for as long as possible.
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 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, 2023. 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, and disruptive new technologies like artificial intelligence; Journal Technologies’ reliance on professional services engagements with justice agencies; material changes in the costs of postage and paper; additional 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 continuous effects of COVID-19 and the efforts to contain it on the Company’s customers, advertisers and subscribers; a further decline in subscriber revenues; possible security breaches of the Company’s software or websites; 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, 2023.
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, 2023, management concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2024. 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 March 31, 2024, although the Company plans to rectify these material weaknesses in its internal control over financial reporting.
II
Item 6. Exhibits
| 31 | Certifications by Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32 | Certifications 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/ Steven Myhill-Jones | |||
| Chief Executive Officer | |||
| Chairman of the Board | |||
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(Principal Executive Officer) |
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| /s/ Tu To | |||
| Chief Financial Officer | |||
| (Principal Financial Officer and | |||
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Principal Accounting Officer) |
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DATE: May 14, 2024