DAILY JOURNAL CORP - Quarter Report: 2020 December (Form 10-Q)

PART I

Item 1. FINANCIAL STATEMENTS

DAILY JOURNAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

See accompanying Notes to Consolidated Financial Statements

DAILY JOURNAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

See accompanying Notes to Consolidated Financial Statements.

DAILY JOURNAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

See accompanying Notes to Consolidated Financial Statements

DAILY JOURNAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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 $210,000 for its operating office leases, including approximately $86,000 beyond one year.  Operating office and equipment leases are included in operating lease ROU assets, current accrued liabilities and long-term accrued liabilities in the Company’s accompanying Consolidated Balance Sheets. 

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 $218,805,000 and $137,593,000, respectively, recorded in the accompanying Consolidated Balance Sheets. Most of the accumulated pretax unrealized gains were in the common stocks of three U.S. financial institutions and one foreign manufacturer.

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 $81,212,000 as compared with $19,531,000 in the prior year period. At December 31, 2020, there were no unrealized losses related to the marketable securities.

Investments in marketable securities as of December 31, 2020 and September 30, 2020 are summarized below.

   Investment in Marketable Securities

Note 8 - Income 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. 

Note 9 - Debt and Commitments

During fiscal 2013, the Company borrowed from its investment margin account the aggregate purchase price of $29,500,000 for two acquisitions, in each case pledging its marketable securities as collateral. During this quarter, the Company decided to pay down this investment margin account by $14,493,000 reducing the balance to $15,000,000 as of December 31, 2020. The interest rate for these investment margin account borrowings fluctuates based on the Federal Funds Rate plus 50 basis points with interest only payable monthly. The interest rate as of December 31, 2020 was 0.75%. These investment margin account borrowings do not mature.

In November 2015, the Company purchased a 30,700 square foot office building constructed in 1998 on about 3.6 acres in Logan, Utah, that had been previously leased by Journal Technologies. The Company paid $1,240,000 and financed the balance with a real estate bank loan of $2,260,000, which bore a fixed interest rate of 4.66% with a monthly installment of $17,600. In October 2020, the Company executed an amendment to lower the interest rate of this loan to a fixed rate of 3.33% for the remaining of its 10 years with equal monthly installments of about $16,600 through 2030. This loan is secured by the Logan facility and can be paid off at any time. This real estate loan had a balance of approximately $1,686,000 as of December 31, 2020.

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:

During the three months ended December 31, 2020 and 2019, the Traditional Business had total operating revenues of $3,529,000 and $4,132,000 of which $2,326,000 and $2,820,000, respectively, were recognized after services were provided while $1,203,000 and $1,312,000, respectively, were recognized ratably over the subscription terms. Total operating revenues for the Company’s software business were $6,891,000 and $7,545,000, of which $1,869,000 and $2,454,000, respectively, were recognized upon completion of services while $5,022,000 and $5,091,000, respectively, were recognized ratably over the subscription periods.

Approximately 66% of the Company’s revenues during the three-month period ended December 31, 2020 were derived from Journal Technologies, as compared with 65% in the prior year period. In addition, the Company’s revenues have been primarily from the United States with approximately 4% from foreign countries during the three-months ended December 31, 2020. Journal Technologies’ revenues are primarily from governmental agencies.

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:

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

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.