DAILY JOURNAL CORP - Quarter Report: 2021 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☑ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2021
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________ to _____________________
Commission File Number 0-14665
DAILY JOURNAL CORPORATION
(Exact name of registrant as specified in its charter)
| South Carolina | 95-4133299 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
| 915 East First Street | |
| Los Angeles, California | 90012-4050 |
| (Address of principal executive offices) | (Zip code) |
(213) 229-5300
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock | DJCO | The Nasdaq Stock Market |
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.
Yes: ☒ No: ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes: ☒ No: ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer: ☐ | Accelerated Filer: ☐ | ||
| Non-accelerated Filer: ☐ | Smaller Reporting Company: ☒ | ||
| Emerging Growth Company: ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: ☐ No: ☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: 1,380,746 shares outstanding at July 31, 2021
DAILY JOURNAL CORPORATION
INDEX
| Page Nos. | ||
| PART I |
Financial Information |
|
| Item 1. Financial Statements (Unaudited) |
||
| Consolidated Balance Sheets ‑ June 30, 2021 and September 30, 2020 |
3 |
|
| Consolidated Statements of Income and Comprehensive Income ‑ Three months ended June 30, 2021 and 2020 |
4 |
|
| Consolidated Statements of Income and Comprehensive Income (Loss) ‑ Nine months ended June 30, 2021 and 2020 |
5 |
|
| Consolidated Statements of Shareholders Equity ‑ Nine months ended June 30, 2021 and 2020 |
6 |
|
| Consolidated Statements of Cash Flows ‑Nine months ended June 30, 2021 and 2020 |
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 |
23 |
|
| Part II |
Other Information |
|
| Item 6. Exhibits |
24 |
PART I
Item 1. FINANCIAL STATEMENTS
DAILY JOURNAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| June 30 | September 30 | |||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 9,333,000 | $ | 26,922,000 | ||||
| Restricted cash | 2,043,000 | 2,041,000 | ||||||
| Marketable securities at fair value -- common stocks | 349,593,000 | 179,368,000 | ||||||
| Accounts receivable, less allowance for doubtful accounts of $ at June 30, 2021 and September 30, 2020 | 10,015,000 | 6,727,000 | ||||||
| Inventories | 55,000 | 36,000 | ||||||
| Prepaid expenses and other current assets | 629,000 | 613,000 | ||||||
| Income tax receivable | - | 601,000 | ||||||
| Total current assets | 371,668,000 | 216,308,000 | ||||||
| Property, plant and equipment, at cost | ||||||||
| Land, buildings and improvements | 16,559,000 | 16,572,000 | ||||||
| Furniture, office equipment and computer software | 1,788,000 | 1,782,000 | ||||||
| Machinery and equipment | 1,524,000 | 1,524,000 | ||||||
| 19,871,000 | 19,878,000 | |||||||
| Less accumulated depreciation | (9,730,000 | ) | (9,422,000 | ) | ||||
| 10,141,000 | 10,456,000 | |||||||
| Operating lease right-of-use assets | 171,000 | 140,000 | ||||||
| Deferred income taxes | 7,520,000 | 11,671,000 | ||||||
| $ | 389,500,000 | $ | 238,575,000 | |||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 4,022,000 | $ | 3,926,000 | ||||
| Accrued liabilities | 5,633,000 | 5,005,000 | ||||||
| Income tax payable | 375,000 | - | ||||||
| Note payable collateralized by real estate | 147,000 | 133,000 | ||||||
| Deferred subscriptions | 2,708,000 | 2,899,000 | ||||||
| Deferred consulting fees | 4,859,000 | 4,868,000 | ||||||
| Deferred maintenance agreements and others | 8,804,000 | 11,159,000 | ||||||
| Total current liabilities | 26,548,000 | 27,990,000 | ||||||
| Long term liabilities | ||||||||
| Investment margin account borrowings | 32,000,000 | 29,493,000 | ||||||
| Note payable collateralized by real estate | 1,468,000 | 1,576,000 | ||||||
| Deferred maintenance agreements | 211,000 | 450,000 | ||||||
| Accrued liabilities | 2,938,000 | 1,455,000 | ||||||
| Deferred income taxes | 70,275,000 | 35,870,000 | ||||||
| Total long term liabilities | 106,892,000 | 68,844,000 | ||||||
| Debts and commitments and contingencies (Notes 9 and 10) | - | - | ||||||
| Shareholders' equity | ||||||||
| Preferred stock, $ par value, shares authorized and shares issued | - | - | ||||||
| Common stock, $ par value, shares authorized; shares issued, including treasury shares, at June 30, 2021 and September 30, 2020 | 14,000 | 14,000 | ||||||
| Additional paid-in capital | 1,755,000 | 1,755,000 | ||||||
| Retained earnings | 254,291,000 | 139,972,000 | ||||||
| Total shareholders' equity | 256,060,000 | 141,741,000 | ||||||
| $ | 389,500,000 | $ | 238,575,000 | |||||
See accompanying Notes to Consolidated Financial Statements
DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
| Three months ended June 30 | ||||||||
| 2021 | 2020 | |||||||
| Revenues | ||||||||
| Advertising | $ | 2,195,000 | $ | 1,297,000 | ||||
| Circulation | 1,126,000 | 1,259,000 | ||||||
| Advertising service fees and other | 762,000 | 575,000 | ||||||
| Licensing and maintenance fees | 5,602,000 | 5,531,000 | ||||||
| Consulting fees | 2,100,000 | 3,147,000 | ||||||
| Other public service fees | 1,777,000 | 1,065,000 | ||||||
| 13,562,000 | 12,874,000 | |||||||
| Costs and expenses | ||||||||
| Salaries and employee benefits | 9,435,000 | 9,662,000 | ||||||
| Outside services | 794,000 | 586,000 | ||||||
| Postage and delivery expenses | 160,000 | 151,000 | ||||||
| Newsprint and printing expenses | 162,000 | 157,000 | ||||||
| Depreciation and amortization | 114,000 | 128,000 | ||||||
| Equipment maintenance and software | 298,000 | 276,000 | ||||||
| Credit card merchant discount fees | 462,000 | 244,000 | ||||||
| Rent expenses | 66,000 | 158,000 | ||||||
| Accounting and legal fees | 252,000 | 272,000 | ||||||
| Other general and administrative expenses | 495,000 | 647,000 | ||||||
| 12,238,000 | 12,281,000 | |||||||
| Income from operations | 1,324,000 | 593,000 | ||||||
| Other income (expense) | ||||||||
| Dividends and interest income | 776,000 | 1,596,000 | ||||||
| Other income | 69,000 | - | ||||||
| Net unrealized gains on marketable securities | 55,686,000 | 16,489,000 | ||||||
| Interest expense on note payable collateralized by real estate | (14,000 | ) | (20,000 | ) | ||||
| Interest expense on margin loans and others | (68,000 | ) | (64,000 | ) | ||||
| Income before income taxes | 57,773,000 | 18,594,000 | ||||||
| Income tax provisions | (15,200,000 | ) | (4,320,000 | ) | ||||
| Net income | $ | 42,573,000 | $ | 14,274,000 | ||||
| Weighted average number of common shares outstanding - basic and diluted | 1,380,746 | 1,380,746 | ||||||
| Basic and diluted net income per share | $ | 30.83 | $ | 10.34 | ||||
| Comprehensive income | $ | 42,573,000 | $ | 14,274,000 | ||||
See accompanying Notes to Consolidated Financial Statements.
DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
| Nine months ended June 30 | ||||||||
| 2021 | 2020 | |||||||
| Revenues | ||||||||
| Advertising | $ | 5,649,000 | $ | 5,415,000 | ||||
| Circulation | 3,458,000 | 3,857,000 | ||||||
| Advertising service fees and other | 1,964,000 | 1,923,000 | ||||||
| Licensing and maintenance fees | 16,990,000 | 16,246,000 | ||||||
| Consulting fees | 4,649,000 | 5,065,000 | ||||||
| Other public service fees | 5,242,000 | 4,401,000 | ||||||
| 37,952,000 | 36,907,000 | |||||||
| Costs and expenses | ||||||||
| Salaries and employee benefits | 27,228,000 | 28,227,000 | ||||||
| Outside services | 2,236,000 | 2,600,000 | ||||||
| Postage and delivery expenses | 490,000 | 552,000 | ||||||
| Newsprint and printing expenses | 469,000 | 528,000 | ||||||
| Depreciation and amortization | 344,000 | 384,000 | ||||||
| Equipment maintenance and software | 946,000 | 1,102,000 | ||||||
| Credit card merchant discount fees | 1,397,000 | 1,014,000 | ||||||
| Rent expenses | 228,000 | 500,000 | ||||||
| Accounting and legal fees | 746,000 | 730,000 | ||||||
| Other general and administrative expenses | 1,554,000 | 3,293,000 | ||||||
| 35,638,000 | 38,930,000 | |||||||
| Income (loss) from operations | 2,314,000 | (2,023,000 | ) | |||||
| Other income (expense) | ||||||||
| Dividends and interest income | 2,063,000 | 4,573,000 | ||||||
| Other income | 3,000 | |||||||
| Realized gains on sales of marketable securities | 18,478,000 | - | ||||||
| Net unrealized gains (losses) on marketable securities | 131,754,000 | (41,191,000 | ) | |||||
| Interest expense on note payable collateralized by real estate | (48,000 | ) | (63,000 | ) | ||||
| Interest expense on margin loans and others | (196,000 | ) | (401,000 | ) | ||||
| Income (loss) before income taxes | 154,434,000 | (39,102,000 | ) | |||||
| Income tax (provisions) benefits | (40,115,000 | ) | 11,260,000 | |||||
| Net income (loss) | $ | 114,319,000 | $ | (27,842,000 | ) | |||
| Weighted average number of common shares outstanding - basic and diluted | 1,380,746 | 1,380,746 | ||||||
| Basic and diluted net income (loss) per share | $ | 82.80 | $ | (20.16 | ) | |||
| Comprehensive income (loss) | $ | 114,319,000 | $ | (27,842,000 | ) | |||
See accompanying Notes to Consolidated Financial Statements.
DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
| Additional | Total | |||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Paid-in | Retained | Shareholders' | ||||||||||||||||||||||||
| Share | Amount | Share | Amount | Capital | Earnings | Equity | ||||||||||||||||||||||
| Balance at September 30, 2019 | 1,805,053 | $ | 18,000 | (424,307 | ) | $ | (4,000 | ) | $ | 1,755,000 | $ | 135,931,000 | $ | 137,700,000 | ||||||||||||||
| Net income | - | - | - | - | - | 14,210,000 | 14,210,000 | |||||||||||||||||||||
| Balance at December 31, 2019 | 1,805,053 | 18,000 | (424,307 | ) | (4,000 | ) | 1,755,000 | 150,141,000 | 151,910,000 | |||||||||||||||||||
| Net loss | - | - | - | - | - | (56,326,000 | ) | (56,326,000 | ) | |||||||||||||||||||
| Balance at March 31, 2020 | 1,805,053 | 18,000 | (424,307 | ) | (4,000 | ) | 1,755,000 | 93,815,000 | 95,584,000 | |||||||||||||||||||
| Net income | - | - | - | - | - | 14,274,000 | 14,274,000 | |||||||||||||||||||||
| Balance at June 30, 2020 | 1,805,053 | $ | 18,000 | (424,307 | ) | $ | (4,000 | ) | $ | 1,755,000 | $ | 108,089,000 | $ | 109,858,000 | ||||||||||||||
| Balance at September 30, 2020 | 1,805,053 | $ | 18,000 | (424,307 | ) | $ | (4,000 | ) | $ | 1,755,000 | $ | 139,972,000 | $ | 141,741,000 | ||||||||||||||
| Net income | - | - | - | - | - | 59,270,000 | 59,270,000 | |||||||||||||||||||||
| Balance at December 31, 2020 | 1,805,053 | 18,000 | (424,307 | ) | (4,000 | ) | 1,755,000 | 199,242,000 | 201,011,000 | |||||||||||||||||||
| Net income | - | - | - | - | - | 12,476,000 | 12,476,000 | |||||||||||||||||||||
| Balance at March 31, 2021 | 1,805,053 | 18,000 | (424,307 | ) | (4,000 | ) | 1,755,000 | 211,718,000 | 213,487,000 | |||||||||||||||||||
| Net income | - | - | - | - | - | 42,573,000 | 42,573,000 | |||||||||||||||||||||
| Balance at June 30, 2021 | 1,805,053 | $ | 18,000 | (424,307 | ) | $ | (4,000 | ) | $ | 1,755,000 | $ | 254,291,000 | $ | 256,060,000 | ||||||||||||||
See accompanying Notes to Consolidated Financial Statements
DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine months ended June 30 | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities | ||||||||
| Net income (loss) | $ | 114,319,000 | $ | (27,842,000 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided from (used in) operations | ||||||||
| Depreciation and amortization | 344,000 | 384,000 | ||||||
| Increase in bad debt allowance | - | 50,000 | ||||||
| Net unrealized (gains) losses on marketable securities | (131,754,000 | ) | 41,191,000 | |||||
| Realized gains on sales of marketable securities | (18,478,000 | ) | - | |||||
| Deferred income taxes | 38,556,000 | (10,691,000 | ) | |||||
| Changes in operating assets and liabilities | ||||||||
| (Increase) decrease in current assets | ||||||||
| Accounts receivable, net | (3,288,000 | ) | (2,366,000 | ) | ||||
| Inventories | (19,000 | ) | (11,000 | ) | ||||
| Prepaid expenses and other assets | (16,000 | ) | (192,000 | ) | ||||
| Income tax receivable | 601,000 | (659,000 | ) | |||||
| Increase (decrease) in liabilities | ||||||||
| Accounts payable | 96,000 | (1,062,000 | ) | |||||
| Accrued liabilities | 2,080,000 | 401,000 | ||||||
| Income tax payable | 375,000 | - | ||||||
| Deferred subscriptions | (191,000 | ) | (181,000 | ) | ||||
| Deferred consulting fees | 131,000 | 478,000 | ||||||
| Deferred maintenance agreements and others | (2,734,000 | ) | (1,001,000 | ) | ||||
| Net cash provided from (used in) operating activities | 22,000 | (1,501,000 | ) | |||||
| Cash flows from investing activities | ||||||||
| Proceeds from sales of marketable securities | 20,002,000 | - | ||||||
| Purchases of marketable securities | (39,995,000 | ) | - | |||||
| Purchases of property, plant and equipment | (29,000 | ) | (168,000 | ) | ||||
| Net cash used in investing activities | (20,022,000 | ) | (168,000 | ) | ||||
| Cash flows from financing activities | ||||||||
| Payment to margin loan principal | (14,493,000 | ) | - | |||||
| Borrowing from margin loan account | 17,000,000 | 1,000,000 | ||||||
| Payment of real estate loan principal | (94,000 | ) | (94,000 | ) | ||||
| Net cash provided from financing activities | 2,413,000 | 906,000 | ||||||
| Decrease in cash and restricted cash and cash equivalents | (17,587,000 | ) | (763,000 | ) | ||||
| Cash and restricted cash and cash equivalents | ||||||||
| Beginning of period | 28,963,000 | 10,630,000 | ||||||
| End of period | $ | 11,376,000 | $ | 9,867,000 | ||||
| Interest paid during period | $ | 245,000 | $ | 460,000 | ||||
| Net income taxes paid | $ | 580,000 | $ | 5,000 | ||||
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 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 June 30, 2021, its results of operations for the three- and nine-month periods ended June 30, 2021 and 2020, its consolidated statements of shareholders’ equity for the nine months ended June 30, 2021 and 2020 and cash flows for the nine months ended June 30, 2021 and 2020. The results of operations for the nine months ended June 30, 2021 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 June 30, 2021, the Company recorded a right-of-use asset and lease liability of approximately $171,000 for its operating office and equipment leases, including approximately $83,000 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).
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 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.
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 as revenues 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 June 30, 2021 and September 30, 2020, there were net accumulated pretax unrealized gains of $269,347,000 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 nine months ended June 30, 2021, the Company recorded and included in its net income the net unrealized gains on marketable securities of $131,754,000, as compared with the net unrealized losses on marketable securities of $41,191,000, in the prior year period. (For the three months ended June 30, 2021, the Company had net unrealized gains on marketable securities of $55,686,000, as compared with $16,489,000 in the prior year period.)
In January 2021, the Company sold part of its marketable securities for $20,002,000, realizing gains on the sales of those marketable securities of $18,478,000, and simultaneously purchased marketable securities of another company with a total cost of approximately $39,995,000. At June 30, 2021, there were unrealized losses of $2,504,000 related to the newly purchased marketable securities.
Investments in marketable securities as of June 30, 2021 and September 30, 2020 are summarized below.
Investment in Marketable Securities
| June 30, 2021 | September 30, 2020 | |||||||||||||||||||||||
| Aggregate fair value | Adjusted cost basis | Pretax unrealized gains | Aggregate fair value | Adjusted cost basis | Pretax unrealized gains | |||||||||||||||||||
| Marketable securities | ||||||||||||||||||||||||
| Common stocks | $ | 349,593,000 | $ | 80,246,000 | $ | 269,347,000 | $ | 179,368,000 | $ | 41,775,000 | $ | 137,593,000 | ||||||||||||
Note 8 - Income Taxes
For the nine months ended June 30, 2021, the Company recorded a provision for income taxes of $40,115,000 on pretax income of $154,434,000. This was the net result of applying the effective tax rate anticipated for fiscal 2021 to pretax income before the unrealized and realized gains on marketable securities for the nine months ended June 30, 2021. The effective rate of 21.32%, which was higher than the statutory rate of 21% primarily due to state taxes which were offset by the dividends received deduction, resulted in a tax provision of $896,000 on pretax income before the unrealized and realized gains on marketable securities. In addition, the Company recorded a tax provision of $34,405,000 on the unrealized gains on marketable securities, and a tax provision of $4,821,000 on the realized gains on marketable securities, both of which were offset by a tax benefit of $7,000 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 nine months ended June 30, 2021 was 26%, after including the taxes on the realized and unrealized gains on marketable securities.
For the nine months ended June 30, 2020, the Company recorded an income tax benefit of $11,260,000 on a pretax loss of $39,102,000. This was the net result of applying the effective tax rate anticipated for fiscal 2020 to the pretax loss, before the unrealized losses on marketable securities, for the nine months ended June 30, 2020. The effective tax rate was more than the statutory rate primarily due to the dividends received deduction, which increased the taxable loss, and state tax benefits. In addition, the Company recorded tax benefits of (i) $187,000 resulting from the Coronavirus Aid, Relief and Economic Security (“CARES”) Act and (ii) $11,166,000 for the unrealized losses on investments during the nine months ended June 30, 2020. The effective tax rate for the nine months ended June 30, 2020 was 29%, after including the tax benefits from the CARES Act and the unrealized losses on investments.
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 9 - Debt and Commitments
During fiscal 2013, the Company borrowed from its investment margin account the aggregate purchase price of $29,493,000 for two acquisitions, in each case pledging its marketable securities as collateral. During the nine months ended June 30, 2021, there was additional net borrowing of $2,507,000 for the purchase of additional marketable securities, bringing this margin loan account balance to $32,000,000 as of June 30, 2021. 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 June 30, 2021 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%. In October 2020, the Company executed an amendment to lower the interest rate of this loan to a fixed rate of 3.33% 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 with no penalties. This real estate loan had a balance of approximately $1,615,000 as of June 30, 2021.
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 2023.
Note 10 - Contingencies
From time to time, the Company is subject to contingencies, including litigation, arising in the normal course of its business. While it is not possible to predict the results of such contingencies, management does not believe the ultimate outcome of these matters will have a material effect on the Company’s financial position or results of operations or cash flows.
Note 11 - Operating Segments
The Company’s reportable segments are: (i) the Traditional Business and (ii) Journal Technologies. All inter-segment transactions were eliminated. Summarized financial information regarding the Company’s reportable segments is shown in the following table:
| Reportable Segments | ||||||||||||||||
| Traditional Business | Journal Technologies | Corporate income and expenses | Total | |||||||||||||
| Nine months ended June 30, 2021 | ||||||||||||||||
| Revenues | ||||||||||||||||
| Advertising | $ | 5,649,000 | $ | - | $ | - | $ | 5,649,000 | ||||||||
| Circulation | 3,458,000 | - | - | 3,458,000 | ||||||||||||
| Advertising service fees and other | 1,964,000 | - | - | 1,964,000 | ||||||||||||
| Licensing and maintenance fees | - | 16,990,000 | - | 16,990,000 | ||||||||||||
| Consulting fees | - | 4,649,000 | - | 4,649,000 | ||||||||||||
| Other public service fees | - | 5,242,000 | - | 5,242,000 | ||||||||||||
| Operating expenses | 11,001,000 | 24,637,000 | - | 35,638,000 | ||||||||||||
| Income from operations | 70,000 | 2,244,000 | - | 2,314,000 | ||||||||||||
| Dividends and interest income | - | - | 2,063,000 | 2,063,000 | ||||||||||||
| Other income | - | - | 69,000 | 69,000 | ||||||||||||
| Realized gains on sales of marketable securities | - | - | 18,478,000 | 18,478,000 | ||||||||||||
| Net unrealized gains on marketable securities | - | - | 131,754,000 | 131,754,000 | ||||||||||||
| Interest expenses on note payable collateralized by real estate | - | - | (48,000 | ) | (48,000 | ) | ||||||||||
| Interest expenses on margin loans and others | - | - | (196,000 | ) | (196,000 | ) | ||||||||||
| Pretax income | 70,000 | 2,244,000 | 152,120,000 | 154,434,000 | ||||||||||||
| Income tax expense | (15,000 | ) | (785,000 | ) | (39,315,000 | ) | (40,115,000 | ) | ||||||||
| Net income | 55,000 | 1,459,000 | 112,805,000 | 114,319,000 | ||||||||||||
| Total assets | 17,894,000 | 21,498,000 | 350,108,000 | 389,500,000 | ||||||||||||
| Capital expenditures | 22,000 | 7,000 | - | 29,000 | ||||||||||||
| Reportable Segments | ||||||||||||||||
| Traditional Business | Journal Technologies | Corporate income and expenses | Total | |||||||||||||
| Nine months ended June 30, 2020 | ||||||||||||||||
| Revenues | ||||||||||||||||
| Advertising | $ | 5,415,000 | $ | - | $ | - | $ | 5,415,000 | ||||||||
| Circulation | 3,857,000 | - | - | 3,857,000 | ||||||||||||
| Advertising service fees and other | 1,923,000 | - | - | 1,923,000 | ||||||||||||
| Licensing and maintenance fees | - | 16,246,000 | - | 16,246,000 | ||||||||||||
| Consulting fees | - | 5,065,000 | - | 5,065,000 | ||||||||||||
| Other public service fees | - | 4,401,000 | - | 4,401,000 | ||||||||||||
| Operating expenses | 11,319,000 | 27,611,000 | - | 38,930,000 | ||||||||||||
| Loss from operations | (124,000 | ) | (1,899,000 | ) | - | (2,023,000 | ) | |||||||||
| Dividends and interest income | - | - | 4,573,000 | 4,573,000 | ||||||||||||
| Other income | - | - | 3,000 | 3,000 | ||||||||||||
| Net unrealized losses on investments | - | - | (41,191,000 | ) | (41,191,000 | ) | ||||||||||
| Interest expenses on note payable collateralized by real estate | - | - | (63,000 | ) | (63,000 | ) | ||||||||||
| Interest expenses on margin loans and others | - | - | (401,000 | ) | (401,000 | ) | ||||||||||
| Pretax loss | (124,000 | ) | (1,899,000 | ) | (37,079,000 | ) | (39,102,000 | ) | ||||||||
| Income tax benefit | 15,000 | 380,000 | 10,865,000 | 11,260,000 | ||||||||||||
| Net loss | (109,000 | ) | (1,519,000 | ) | (26,214,000 | ) | (27,842,000 | ) | ||||||||
| Total assets | 17,752,000 | 24,667,000 | 155,545,000 | 197,964,000 | ||||||||||||
| Capital expenditures | 99,000 | 69,000 | - | 168,000 | ||||||||||||
| Reportable Segments | ||||||||||||||||
| Traditional Business | Journal Technologies | Corporate income and expenses | Total | |||||||||||||
| Three months ended June 30, 2021 | ||||||||||||||||
| Revenues | ||||||||||||||||
| Advertising | $ | 2,195,000 | $ | - | $ | - | $ | 2,195,000 | ||||||||
| Circulation | 1,126,000 | - | - | 1,126,000 | ||||||||||||
| Advertising service fees and other | 762,000 | - | - | 762,000 | ||||||||||||
| Licensing and maintenance fees | - | 5,602,000 | - | 5,602,000 | ||||||||||||
| Consulting fees | - | 2,100,000 | - | 2,100,000 | ||||||||||||
| Other public service fees | - | 1,777,000 | - | 1,777,000 | ||||||||||||
| Operating expenses | 3,665,000 | 8,573,000 | - | 12,238,000 | ||||||||||||
| Income from operations | 418,000 | 906,000 | - | 1,324,000 | ||||||||||||
| Dividends and interest income | - | - | 776,000 | 776,000 | ||||||||||||
| Other income | - | - | 69,000 | 69,000 | ||||||||||||
| Net unrealized losses on marketable securities | - | - | 55,686,000 | 55,686,000 | ||||||||||||
| Interest expenses on note payable collateralized by real estate | - | - | (14,000 | ) | (14,000 | ) | ||||||||||
| Interest expenses on margin loans and others | - | - | (68,000 | ) | (68,000 | ) | ||||||||||
| Pretax income | 418,000 | 906,000 | 56,449,000 | 57,773,000 | ||||||||||||
| Income tax expense | (175,000 | ) | (460,000 | ) | (14,565,000 | ) | (15,200,000 | ) | ||||||||
| Net income | 243,000 | 446,000 | 41,884,000 | 42,573,000 | ||||||||||||
| Total assets | 17,894,000 | 21,498,000 | 350,108,000 | 389,500,000 | ||||||||||||
| Capital expenditures | - | - | - | - | ||||||||||||
| Reportable Segments | ||||||||||||||||
| Traditional Business | Journal Technologies | Corporate income and expenses | Total | |||||||||||||
| Three months ended June 30, 2020 | ||||||||||||||||
| Revenues | ||||||||||||||||
| Advertising | $ | 1,297,000 | $ | - | $ | - | $ | 1,297,000 | ||||||||
| Circulation | 1,259,000 | - | - | 1,259,000 | ||||||||||||
| Advertising service fees and other | 575,000 | - | - | 575,000 | ||||||||||||
| Licensing and maintenance fees | - | 5,531,000 | - | 5,531,000 | ||||||||||||
| Consulting fees | - | 3,147,000 | - | 3,147,000 | ||||||||||||
| Other public service fees | - | 1,065,000 | - | 1,065,000 | ||||||||||||
| Operating expenses | 3,699,000 | 8,582,000 | - | 12,281,000 | ||||||||||||
| Income (loss) from operations | (568,000 | ) | 1,161,000 | - | 593,000 | |||||||||||
| Dividends and interest income | - | - | 1,596,000 | 1,596,000 | ||||||||||||
| Net unrealized losses on investments | - | - | 16,489,000 | 16,489,000 | ||||||||||||
| Interest expenses on note payable collateralized by real estate | - | - | (20,000 | ) | (20,000 | ) | ||||||||||
| Interest expenses on margin loans and others | - | - | (64,000 | ) | (64,000 | ) | ||||||||||
| Pretax (loss) income | (568,000 | ) | 1,161,000 | 18,001,000 | 18,594,000 | |||||||||||
| Income tax benefit (expense) | 125,000 | (545,000 | ) | (3,900,000 | ) | (4,320,000 | ) | |||||||||
| Net (loss) income | (443,000 | ) | 616,000 | 14,101,000 | 14,274,000 | |||||||||||
| Total assets | 17,752,000 | 24,667,000 | 155,545,000 | 197,964,000 | ||||||||||||
| Capital expenditures | - | - | - | - | ||||||||||||
During the nine months ended June 30, 2021, the Traditional Business had total operating revenues of $11,071,000 with $7,613,000 recognized after services were provided and $3,458,000 recognized ratably over the publication subscription terms, as compared with total operating revenues of $11,195,000 with $7,338,000 recognized after services were provided and $3,857,000 recognized ratably over the publication subscription terms in the prior fiscal year period. Total operating revenues for the Company’s software business were $26,881,000 with $11,029,000 recognized upon completion of services and $15,852,000 recognized ratably over the subscription periods, as compared with total operating revenues of $25,712,000 with $9,889,000 recognized upon completion of services and $15,823,000 recognized ratably over the subscription periods in the prior fiscal year period.
During the three months ended June 30, 2021, the Traditional Business had total operating revenues of $4,083,000 with $2,957,000 recognized after services were provided and $1,126,000 recognized ratably over the publication subscription terms, as compared with total operating revenues of $3,131,000 with $1,872,000 recognized after services were provided and $1,259,000 recognized ratably over the publication subscription terms in the prior fiscal year period. Total operating revenues for the Company’s software business were $9,479,000 with $4,312,000 recognized upon completion of services and $5,167,000 recognized ratably over the subscription periods, as compared with total operating revenues of $9,743,000 with $4,258,000 recognized upon completion of services and $5,485,000 recognized ratably over the subscription periods in the prior fiscal year period.
Approximately 71% of the Company’s revenues during the nine-month period ended June 30, 2021 were derived from Journal Technologies, as compared with 70% 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 nine-months ended June 30, 2021. 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 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 in-person operations and spending.
Management believes that the COVID-19 pandemic has had, and, with the recent rise of Delta variant cases, will continue to have, a significant impact on the Company’s business operations. Among other things, dividends from the Company’s securities portfolio have declined and are expected to remain lower than in the past. It is also possible that governments may again take extreme actions in response to the pandemic and the Delta variant, such as the renewed closure, or scaling back of operations, of courts and other governmental agencies that are the customers of the Company. Furthermore, even as 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 has been delayed. On the other side of the coin, the Company has seen a reduction in operating costs due to less business travel.
Comparable nine-month periods ended June 30, 2021 and 2020
The Company’s reportable segments, and its corporate income and expenses, for the nine months ended June 30, 2021 and 2020, are set forth below:
| Overall Financial Results (000) |
||||||||||||||||||||||||||||||||
| For the nine months ended June 30 |
||||||||||||||||||||||||||||||||
| Reportable Segments |
||||||||||||||||||||||||||||||||
| Traditional Business |
Journal Technologies |
Corporate income and expenses |
Total |
|||||||||||||||||||||||||||||
| 2021 |
2020 |
2021 |
2020 |
2021 |
2020 |
2021 |
2020 |
|||||||||||||||||||||||||
| Revenues |
||||||||||||||||||||||||||||||||
| Advertising |
$ | 5,649 | $ | 5,415 | $ | - | $ | - | $ | - | $ | - | $ | 5,649 | $ | 5,415 | ||||||||||||||||
| Circulation |
3,458 | 3,857 | - | - | - | - | 3,458 | 3,857 | ||||||||||||||||||||||||
| Advertising service fees and other |
1,964 | 1,923 | - | - | - | - | 1,964 | 1,923 | ||||||||||||||||||||||||
| Licensing and maintenance fees |
- | - | 16,990 | 16,246 | - | - | 16,990 | 16,246 | ||||||||||||||||||||||||
| Consulting fees |
- | - | 4,649 | 5,065 | - | - | 4,649 | 5,065 | ||||||||||||||||||||||||
| Other public service fees |
- | - | 5,242 | 4,401 | - | - | 5,242 | 4,401 | ||||||||||||||||||||||||
| Total revenues |
11,071 | 11,195 | 26,881 | 25,712 | - | - | 37,952 | 36,907 | ||||||||||||||||||||||||
| Operating expenses |
||||||||||||||||||||||||||||||||
| Salaries and employee benefits |
8,097 | 7,778 | 19,131 | 20,449 | - | - | 27,228 | 28,227 | ||||||||||||||||||||||||
| Others |
2,904 | 3,541 | 5,506 | 7,162 | - | - | 8,410 | 10,703 | ||||||||||||||||||||||||
| Total operating expenses |
11,001 | 11,319 | 24,637 | 27,611 | - | - | 35,638 | 38,930 | ||||||||||||||||||||||||
| Income (loss) from operations |
70 | (124 | ) | 2,244 | (1,899 | ) | - | - | 2,314 | (2,023 | ) | |||||||||||||||||||||
| Dividends and interest income |
- | - | - | - | 2,063 | 4,573 | 2,063 | 4,573 | ||||||||||||||||||||||||
| Other income |
- | - | - | - | 69 | 3 | 69 | 3 | ||||||||||||||||||||||||
| Realized gains on sales of marketable securities |
- | - | - | - | 18,478 | - | 18,478 | - | ||||||||||||||||||||||||
| Net unrealized gains (losses) on marketable securities |
- | - | - | - | 131,754 | (41,191 | ) | 131,754 | (41,191 | ) | ||||||||||||||||||||||
| Interest expenses on note payable collateralized by real estate |
- | - | - | - | (48 | ) | (63 | ) | (48 | ) | (63 | ) | ||||||||||||||||||||
| Interest expenses on margin loans |
- | - | - | - | (196 | ) | (401 | ) | (196 | ) | (401 | ) | ||||||||||||||||||||
| Pretax income (loss) |
$ | 70 | $ | (124 | ) | $ | 2,244 | $ | (1,899 | ) | $ | 152,120 | $ | (37,079 | ) | $ | 154,434 | $ | (39,102 | ) | ||||||||||||
Consolidated revenues were $37,952,000 and $36,907,000 for the nine months ended June 30, 2021 and 2020, respectively. This increase of $1,045,000 (3%) was primarily from increases in (i) Journal Technologies’ license and maintenance fees of $744,000 and public service fees of $841,000 and (ii) the Traditional Business’ legal notice advertising net revenues of $471,000 and government notice advertising net revenues of $173,000, partially offset by reductions in (i) Journal Technologies’ consulting fees of $416,000 and (ii) the Traditional Business’ display advertising net revenues of $44,000, classified advertising net revenues of $31,000, trustee sale notice advertising net revenues of $335,000, and circulation revenues of $399,000. The Company’s revenues derived from Journal Technologies’ operations constituted about 71% and 70% of the Company’s total revenues for the nine months ended June 30, 2021 and 2020, respectively.
Consolidated operating expenses decreased by $3,292,000 (8%) to $35,638,000 from $38,930,000. Total salaries and employee benefits decreased by $999,000 (4%) to $27,228,000 from $28,227,000 primarily resulting from a pandemic-related layoff in April 2020. Outside services decreased by $364,000 (14%) to $2,236,000 from $2,600,000 mainly because of decreased independent contractor costs for Journal Technologies, because many of them became employees in January 2020. Rent expenses decreased by $272,000 (54%) to $228,000 from $500,000 because of the closures of the Colorado office in August 2020 and the Corona, California office in March 2021. Equipment maintenance and software decreased by $156,000 (14%) to $946,000 from $1,102,000 primarily resulted from reduced maintenance and software costs due to the above-mentioned office closures. Other general and administrative expenses decreased by $1,739,000 (53%) to $1,554,000 from $3,293,000 mainly resulting from reduced business travel expenses due to the pandemic.
The Company’s non-operating income, net of expenses, increased by $189,199,000 (510%) to a gain of $152,120,000 from a loss of $37,079,000 in the prior fiscal year period primarily because of (i) the realized gains on sales of marketable securities of $18,478,000 and (ii) the recording of net unrealized gains on marketable securities of $131,754,000 during the nine months ended June 30, 2021 as compared with no realized gains and unrealized losses of $41,191,000 during the prior fiscal year period.
During the nine months ended June 30, 2021, consolidated pretax income was $154,434,000, as compared to a pretax loss of $39,102,000 in the prior fiscal year period. There was consolidated net income of $114,319,000 ($82.80 per share) for the nine months ended June 30, 2021, as compared with a net loss of $27,842,000 (-$20.16 per share) in the prior fiscal year period.
During the nine months ended June 30, 2021, the Company’s cash and restricted cash and cash equivalents decreased by $17,587,000 to $11,376,000 from $28,963,000, primarily because of the purchase of additional marketable securities. At June 30, 2021, the aggregate fair market value of the Company’s marketable securities was $349,593,000. These securities had approximately $269,347,000 of net unrealized gains before taxes of $70,275,000. They generated approximately $2,063,000 in dividends income during the nine months ended June 30, 2021, as compared with $4,573,000 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 nine months ended June 30, 2021, the Company recorded a provision for income taxes of $40,115,000 on pretax income of $154,434,000. This was the net result of applying the effective tax rate anticipated for fiscal 2021 to pretax income before the unrealized and realized gains on marketable securities for the nine months ended June 30, 2021. The effective rate of 21.32%, which was higher than the statutory rate of 21% primarily due to state taxes which were offset by the dividends received deduction, resulted in a tax provision of $896,000 on pretax income before the unrealized and realized gains on marketable securities. In addition, the Company recorded a tax provision of $34,405,000 on the unrealized gains on marketable securities, and a tax provision of $4,821,000 on the realized gains on marketable securities, both of which were offset by a tax benefit of $7,000 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 nine months ended June 30, 2021 was 26%, after including the taxes on the realized and unrealized gains on marketable securities.
For the nine months ended June 30, 2020, the Company recorded an income tax benefit of $11,260,000 on a pretax loss of $39,102,000. This was the net result of applying the effective tax rate anticipated for fiscal 2020 to the pretax loss, before the unrealized losses on marketable securities, for the nine months ended June 30, 2020. The effective tax rate was more than the statutory rate primarily due to the dividends received deduction, which increased the taxable loss, and state tax benefits. In addition, the Company recorded tax benefits of (i) $187,000 resulting from the Coronavirus Aid, Relief and Economic Security (“CARES”) Act and (ii) $11,166,000 for the unrealized losses on investments during the nine months ended June 30, 2020. The effective tax rate for the nine months ended June 30, 2020 was 29%, after including the tax benefits from the CARES Act and the unrealized losses on investments.
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 (for the nine-months ended June 30, 2021)
The Traditional Business’ pretax income increased by $194,000 (156%) to $70,000 from a pretax loss of $124,000 in the prior fiscal year period.
Advertising revenues increased by $234,000 (4%) to $5,649,000 from $5,415,000, primarily because of increased legal notice advertising net revenues of $471,000 mainly from fictitious business name publishing (as counties have tried to catch up with their backlogs), and government notice advertising net revenues of $173,000. The increases were partially offset by decreased display advertising net revenues of $44,000, classified advertising net revenues of $31,000, and trustee sale notice advertising net revenues of $335,000 primarily because of limited foreclosures due to the temporary halt or suspension of mortgage foreclosures in accordance with the federal COVID-19 related “Eviction and Foreclosure Orders” which started in February 2020 and expired in July 2021 although the eviction portion has been extended through the end of September 2021.
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 56% during the nine months ended June 30, 2021 as compared to the prior fiscal year period, primarily because of limited foreclosures, as discussed above. 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 nine months ended June 30, 2021. Public notice advertising revenues and related advertising and other service fees constituted about 16% of the Company’s total revenues for both the nine-month periods ended June 30, 2021 and 2020. Accordingly, the Company’s revenues would be adversely affected if California and Arizona eliminated the legal requirement to publish public notices in adjudicated newspapers of general circulation. 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 an adverse effect on the Company’s revenues.
The Daily Journals accounted for about 91% of the Traditional Business’ total circulation revenues, which declined by $399,000 (10%) to $3,458,000 from $3,857,000. 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 $318,000 (3%) to $11,001,000 from $11,319,000, primarily resulting from reduced outside contractor services.
Journal Technologies (for the nine-months ended June 30, 2021)
During the nine months ended June 30, 2021, Journal Technologies’ business segment pretax income increased by $4,143,000 (218%) to $2,244,000 from a pretax loss of $1,899,000 in the prior fiscal year period.
Revenues increased by $1,169,000 (5%) to $26,881,000 from $25,712,000 in the prior fiscal year period. Licensing and maintenance fees increased by $744,000 (5%) to $16,990,000 from $16,246,000 primarily because there were a few legacy-type projects that expanded and accounted for approximately $1,134,000 in one-time license fee revenues. (To focus on supporting the Company’s main eSeries products, the Company ended effective July 1, 2021 the maintenance of its legacy software products purchased as part of the acquisitions in fiscal 2013. As such, the Company expects a reduction in the legacy software licensing and maintenance revenues in the future.) Consulting fees decreased by $416,000 (8%) to $4,649,000 from $5,065,000 due to fewer go-lives. Other public service fees increased by $841,000 (19%) to $5,242,000 from $4,401,000 primarily due to increased traffic citation fee revenues and efiling 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 period.
Operating expenses decreased by $2,974,000 (11%) to $24,637,000 from $27,611,000 primarily because of decreased personnel costs due to the pandemic-related 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.
Comparable three-month periods ended June 30, 2021 and 2020
The Company’s reportable segments, and its corporate income and expenses, for the three months ended June 30, 2021 and 2020, are set forth below:
| Overall Financial Results (000) |
||||||||||||||||||||||||||||||||
| For the three months ended June 30 |
||||||||||||||||||||||||||||||||
| Reportable Segments |
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| Traditional Business |
Journal Technologies |
Corporate income and expenses |
Total |
|||||||||||||||||||||||||||||
| 2021 |
2020 |
2021 |
2020 |
2021 |
2020 |
2021 |
2020 |
|||||||||||||||||||||||||
| Revenues |
||||||||||||||||||||||||||||||||
| Advertising |
$ | 2,195 | $ | 1,297 | $ | - | $ | - | $ | - | $ | - | $ | 2,195 | $ | 1,297 | ||||||||||||||||
| Circulation |
1,126 | 1,259 | - | - | - | - | 1,126 | 1,259 | ||||||||||||||||||||||||
| Advertising service fees and other |
762 | 575 | - | - | - | - | 762 | 575 | ||||||||||||||||||||||||
| Licensing and maintenance fees |
- | - | 5,602 | 5,531 | - | - | 5,602 | 5,531 | ||||||||||||||||||||||||
| Consulting fees |
- | - | 2,100 | 3,147 | - | - | 2,100 | 3,147 | ||||||||||||||||||||||||
| Other public service fees |
- | - | 1,777 | 1,065 | - | - | 1,777 | 1,065 | ||||||||||||||||||||||||
| Total revenues |
4,083 | 3,131 | 9,479 | 9,743 | - | - | 13,562 | 12,874 | ||||||||||||||||||||||||
| Operating expenses |
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| Salaries and employee benefits |
2,736 | 2,614 | 6,699 | 7,048 | - | - | 9,435 | 9,662 | ||||||||||||||||||||||||
| Others |
929 | 1,085 | 1,874 | 1,534 | - | - | 2,803 | 2,619 | ||||||||||||||||||||||||
| Total operating expenses |
3,665 | 3,699 | 8,573 | 8,582 | - | - | 12,238 | 12,281 | ||||||||||||||||||||||||
| Income (loss) from operations |
418 | (568 | ) | 906 | 1,161 | - | - | 1,324 | 593 | |||||||||||||||||||||||
| Dividends and interest income |
- | - | - | - | 776 | 1,596 | 776 | 1,596 | ||||||||||||||||||||||||
| Other income |
- | - | - | - | 69 | - | 69 | - | ||||||||||||||||||||||||
| Net unrealized gains on marketable securities |
- | - | - | - | 55,686 | 16,489 | 55,686 | 16,489 | ||||||||||||||||||||||||
| Interest expenses on note payable collateralized by real estate |
- | - | - | - | (14 | ) | (20 | ) | (14 | ) | (20 | ) | ||||||||||||||||||||
| Interest expenses on margin loans |
- | - | - | - | (68 | ) | (64 | ) | (68 | ) | (64 | ) | ||||||||||||||||||||
| Pretax (loss) income |
$ | 418 | $ | (568 | ) | $ | 906 | $ | 1,161 | $ | 56,449 | $ | 18,001 | $ | 57,773 | $ | 18,594 | |||||||||||||||
Consolidated revenues were $13,562,000 and $12,874,000 for the three months ended June 30, 2021 and 2020, respectively. This increase of $688,000 (5%) was primarily from increases in (i) Journal Technologies’ license and maintenance fees of $71,000 and public service fees of $712,000 and (ii) the Traditional Business’ legal notice advertising net revenues of $605,000, government notice advertising net revenues of $155,000, display advertising net revenues of $177,000 and classified advertising net revenues of $61,000, partially offset by reductions in (i) Journal Technologies’ consulting fees of $1,047,000 and (ii) the Traditional Business’ trustee sale notice advertising net revenues of $100,000, and circulation revenues of $133,000. The Company’s revenues derived from Journal Technologies’ operations constituted about 70% and 76% of the Company’s total revenues for the three months ended June 30, 2021 and 2020, respectively.
Consolidated operating expenses decreased by $43,000 to $12,238,000 from $12,281,000. Total salaries and employee benefits decreased by $227,000 (2%) to $9,435,000 from $9,662,000 primarily resulting from a pandemic-related layoff in April 2020. Outside services increased by $208,000 (35%) to $794,000 from $586,000 mainly because there were reduced contractor costs for Journal Technologies during the prior year’s pandemic closures. Rent expenses decreased by $92,000 (58%) to $66,000 from $158,000 because of the closures of Colorado office in August 2020 and Corona, California office in March 2021. Other general and administrative expenses decreased by $152,000 (23%) to $495,000 from $647,000 mainly resulting from reduced business travel expenses due to the pandemic.
The Company’s non-operating income, net of expenses, increased by $38,448,000 (214%) to $56,449,000 from $18,001,000 primarily because of the recording of net unrealized gains on marketable securities of $55,686,000 during the three months ended June 30, 2021 as compared with $16,489,000 during the prior fiscal year period.
During the three months ended June 30, 2021, there was consolidated pretax income of $57,773,000, as compared with $18,594,000 in the prior fiscal year period. There was consolidated net income of $42,573,000 ($30.83 per share) for the three months ended June 30, 2021, as compared with $14,274,000 ($10.34 per share) in the prior fiscal year period.
The Traditional Business (for the three months ended June 30, 2021)
The Traditional Business’ pretax income increased by $986,000 (174%) to pretax income of $418,000 from a pretax loss of $568,000 in the prior fiscal year period.
Advertising revenues increased by $898,000 (69%) to $2,195,000 from $1,297,000, primarily because of increased legal notice advertising net revenues of $605,000 primarily for fictitious business name publishing (as the courts have tried to catch up with their backlogs), government notice advertising net revenues of $155,000, display advertising net revenues of $177,000 and classified advertising net revenues of $61,000, partially offset by a reduction in trustee sale notice advertising net revenues of $100,000 primarily because of limited foreclosures, as discussed above.
The Traditional Business segment operating expenses decreased by $34,000 to $3,665,000 from $3,699,000
Journal Technologies (for the three months ended June 30, 2021)
During the three months ended June 30, 2021, Journal Technologies’ business segment pretax income decreased by $255,000 (22%) to $906,000 from $1,161,000 in the prior fiscal year period.
Revenues decreased by $264,000 (3%) to $9,479,000 from $9,743,000 in the prior fiscal year period. Licensing and maintenance fees increased by $71,000 (1%) to $5,602,000 from $5,531,000 primarily because there were a few legacy-type projects that expanded and accounted for approximately $444,000 in one-time license fee revenues, partially offset by decreased legacy software maintenance revenues as the Company ended the maintenance of its legacy software products effective July 1, 2021. Consulting fees decreased by $1,047,000 (33%) to $2,100,000 from $3,147,000 due to fewer go-lives. Other public service fees increased by $712,000 (67%) to $1,777,000 from $1,065,000 primarily due to increased traffic citation fee revenues and efiling fee revenues.
Operating expenses decreased by $9,000 to $8,573,000 from $8,582,000.
Liquidity and Capital Resources
During the nine months ended June 30, 2021, the Company’s cash, restricted cash, cash equivalents and marketable security positions increased by $152,638,000, after additional net borrowing of $2,413,000 and net pretax unrealized gains on marketable securities of $131,754,000. Cash, cash equivalents and the proceeds from the sales of marketable securities were primarily used to purchase additional marketable securities of $39,995,000 and pay the real estate loan principal of $94,000.
The investments in marketable securities, which had an adjusted cost basis of approximately $80,246,000 and a market value of about $349,593,000 at June 30, 2021, generated approximately $2,063,000 in dividends income during the nine months ended June 30, 2021. These securities had approximately $269,347,000 of net unrealized gains before estimated taxes of $70,275,000 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 on the Company’s financial statements depending on the fluctuations of the market prices of the invested securities.
Cash flows from operating activities increased by $1,523,000 during the nine months ended June 30, 2021 as compared to the prior fiscal year period, primarily due to (i) decreases in income tax receivable of $1,260,000 and deferred tax assets of $49,247,000 and (ii) increases in income tax payable of $375,000; accounts payable and accrued liabilities of $1,427,000 (because of the timing difference in remitting efiling fees to the courts) and the additional accrual to the long-term supplemental compensation accrual of $1,410,000. This was partially offset by (i) a decrease in net income of $49,262,000, excluding the additional realized gains on sales of marketable securities of $18,478,000 and increases in unrealized gains on marketable securities of $172,945,000, (ii) a net decrease in deferred revenues of $2,090,000 and (iii) an increase in accounts receivable of $922,000 primarily resulting from more billings. Cash provided from operating activities of $22,000 included net decreases of $2,794,000 in total current and long-term deferred revenues of $16,582,000.
As of June 30, 2021, the Company had working capital of $345,120,000, including the liabilities for deferred subscriptions, deferred consulting fees and deferred maintenance agreements and others of $16,371,000.
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.
As of June 30, 2021, the investments were concentrated in just nine 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 June 30, 2021. 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 June 30, 2021.
PART II
Item 6. Exhibits
| 31 |
||
| 32 |
||
| 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.
| DAILY JOURNAL CORPORATION (Registrant)
/s/ Gerald L. Salzman
Chief Executive Officer President Chief Financial Officer Treasurer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) |
DATE: August 12, 2021