DAILY JOURNAL CORP - Quarter Report: 2022 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, 2022
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 incorporation or organization) | (I.R.S. Employer 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: 1,377,026 shares outstanding at July 31, 2022
DAILY JOURNAL CORPORATION
INDEX
| Page Nos. | |
| PART I Financial Information | |
| Item 1. Financial Statements (Unaudited) |
|
| Consolidated Balance Sheets ‑ June 30, 2022 and September 30, 2021 |
3 |
| Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income ‑ Three months ended June 30, 2022 and 2021 |
4 |
| Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income ‑ Nine months ended June 30, 2022 and 2021 |
5 |
| Consolidated Statements of Shareholders’ Equity ‑ Nine months ended June 30, 2022 and 2021 |
6 |
| Consolidated Statements of Cash Flows ‑ Nine months ended June 30, 2022 and 2021 |
7 |
| Notes to Consolidated Financial Statements |
8 |
| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
16 |
| Item 4. Controls and Procedures |
25 |
| Part II Other Information | |
| Item 6. Exhibits |
26 |
PART I
Item 1. FINANCIAL STATEMENTS
DAILY JOURNAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| June 30 | September 30 | |||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 8,879,000 | $ | 12,596,000 | ||||
| Restricted cash | 2,044,000 | 2,043,000 | ||||||
| Marketable securities at fair value -- common stocks | 341,855,000 | 347,573,000 | ||||||
| Accounts receivable, less allowance for doubtful accounts of $ at June 30, 2022 and September 30, 2021 | 10,694,000 | 9,524,000 | ||||||
| Inventories | 70,000 | 43,000 | ||||||
| Income tax receivable | 3,950,000 | --- | ||||||
| Prepaid expenses and other current assets | 552,000 | 557,000 | ||||||
| Total current assets | 368,044,000 | 372,336,000 | ||||||
| Property, plant and equipment, at cost | ||||||||
| Land, buildings and improvements | 16,330,000 | 16,499,000 | ||||||
| Furniture, office equipment and computer software | 1,702,000 | 1,688,000 | ||||||
| Machinery and equipment | 1,524,000 | 1,524,000 | ||||||
| 19,556,000 | 19,711,000 | |||||||
| Less accumulated depreciation | (9,947,000 | ) | (9,706,000 | ) | ||||
| 9,609,000 | 10,005,000 | |||||||
| Operating lease right-of-use assets | 130,000 | 215,000 | ||||||
| Deferred income taxes | 6,791,000 | 8,021,000 | ||||||
| $ | 384,574,000 | $ | 390,577,000 | |||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 4,407,000 | $ | 4,239,000 | ||||
| Accrued liabilities | 5,391,000 | 6,052,000 | ||||||
| Income tax payable | --- | 6,244,000 | ||||||
| Note payable collateralized by real estate | 152,000 | 147,000 | ||||||
| Deferred subscriptions | 2,800,000 | 2,694,000 | ||||||
| Deferred consulting fees | 6,695,000 | 5,498,000 | ||||||
| Deferred maintenance agreements and others | 10,796,000 | 9,138,000 | ||||||
| Total current liabilities | 30,241,000 | 34,012,000 | ||||||
| Long term liabilities | ||||||||
| Investment margin account borrowings | 75,000,000 | 32,000,000 | ||||||
| Note payable collateralized by real estate | 1,316,000 | 1,431,000 | ||||||
| Deferred maintenance agreements and others | 383,000 | 995,000 | ||||||
| Accrued liabilities | 3,250,000 | 3,383,000 | ||||||
| Deferred income taxes | 50,540,000 | 64,115,000 | ||||||
| Total long term liabilities | 130,489,000 | 101,924,000 | ||||||
| Commitments and contingencies (Notes 10 and 11) | --- | --- | ||||||
| Shareholders' equity | ||||||||
| Preferred stock, $ par value, shares authorized and shares issued | ||||||||
| Common stock, $ par value, shares authorized; shares issued, including and treasury shares, at June 30, 2022 and September 30, 2021, respectively | 14,000 | 14,000 | ||||||
| Additional paid-in capital | 1,755,000 | 1,755,000 | ||||||
| Retained earnings | 222,075,000 | 252,872,000 | ||||||
| Total shareholders' equity | 223,844,000 | 254,641,000 | ||||||
| $ | 384,574,000 | $ | 390,577,000 | |||||
See accompanying Notes to Consolidated Financial Statements
DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME
(Unaudited)
| Three months ended June 30 |
||||||||
| 2022 |
2021 |
|||||||
| Revenues |
||||||||
| Advertising |
$ | 1,989,000 | $ | 2,195,000 | ||||
| Circulation |
1,097,000 | 1,126,000 | ||||||
| Advertising service fees and other |
787,000 | 762,000 | ||||||
| Licensing and maintenance fees |
4,633,000 | 5,602,000 | ||||||
| Consulting fees |
2,267,000 | 2,100,000 | ||||||
| Other public service fees |
1,779,000 | 1,777,000 | ||||||
| 12,552,000 | 13,562,000 | |||||||
| Costs and expenses |
||||||||
| Salaries and employee benefits |
9,421,000 | 8,780,000 | ||||||
| Increase to the long-term supplemental compensation accrual |
1,985,000 | 655,000 | ||||||
| Outside services |
1,074,000 | 794,000 | ||||||
| Postage and delivery expenses |
165,000 | 160,000 | ||||||
| Newsprint and printing expenses |
174,000 | 162,000 | ||||||
| Depreciation and amortization |
73,000 | 114,000 | ||||||
| Equipment maintenance and software |
263,000 | 298,000 | ||||||
| Credit card merchant discount fees |
429,000 | 462,000 | ||||||
| Rent expenses |
64,000 | 66,000 | ||||||
| Accounting and legal fees |
206,000 | 252,000 | ||||||
| Other general and administrative expenses |
801,000 | 495,000 | ||||||
| 14,655,000 | 12,238,000 | |||||||
| (Loss) income from operations |
(2,103,000 | ) | 1,324,000 | |||||
| Other income (expense) |
||||||||
| Dividends and interest income |
1,263,000 | 776,000 | ||||||
| Gains on sale of land |
272,000 | --- | ||||||
| Other income |
--- | 69,000 | ||||||
| Net unrealized (losses) gains on marketable securities |
(12,666,000 | ) | 55,686,000 | |||||
| Interest expense on margin loans and others |
(281,000 | ) | (68,000 | ) | ||||
| Interest expense on note payable collateralized by real estate |
(12,000 | ) | (14,000 | ) | ||||
| (Loss) income before income taxes |
(13,527,000 | ) | 57,773,000 | |||||
| Income tax benefits (provisions) |
3,665,000 | (15,200,000 | ) | |||||
| Net (loss) income |
$ | (9,862,000 | ) | $ | 42,573,000 | |||
| Weighted average number of common shares outstanding - basic and diluted |
1,380,133 | 1,380,746 | ||||||
| Basic and diluted net (loss) income per share |
$ | (7.15 | ) | $ | 30.83 | |||
| Comprehensive (loss) income |
$ | (9,862,000 | ) | $ | 42,573,000 | |||
See accompanying Notes to Consolidated Financial Statements.
DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME
(Unaudited)
| Nine months ended June 30 |
||||||||
| 2022 |
2021 |
|||||||
| Revenues |
||||||||
| Advertising |
$ | 5,679,000 | $ | 5,649,000 | ||||
| Circulation |
3,279,000 | 3,458,000 | ||||||
| Advertising service fees and other |
2,200,000 | 1,964,000 | ||||||
| Licensing and maintenance fees |
13,721,000 | 16,990,000 | ||||||
| Consulting fees |
4,697,000 | 4,649,000 | ||||||
| Other public service fees |
5,221,000 | 5,242,000 | ||||||
| 34,797,000 | 37,952,000 | |||||||
| Costs and expenses |
||||||||
| Salaries and employee benefits |
26,745,000 | 25,818,000 | ||||||
| (Decrease) increase to the long-term supplemental compensation accrual |
(65,000 | ) | 1,410,000 | |||||
| Outside services |
2,912,000 | 2,236,000 | ||||||
| Postage and delivery expenses |
492,000 | 490,000 | ||||||
| Newsprint and printing expenses |
529,000 | 469,000 | ||||||
| Depreciation and amortization |
301,000 | 344,000 | ||||||
| Equipment maintenance and software |
881,000 | 946,000 | ||||||
| Credit card merchant discount fees |
1,249,000 | 1,397,000 | ||||||
| Rent expenses |
187,000 | 228,000 | ||||||
| Accounting and legal fees |
748,000 | 746,000 | ||||||
| Other general and administrative expenses |
2,492,000 | 1,554,000 | ||||||
| 36,471,000 | 35,638,000 | |||||||
| (Loss) income from operations |
(1,674,000 | ) | 2,314,000 | |||||
| Other income (expense) |
||||||||
| Dividends and interest income |
4,251,000 | 2,063,000 | ||||||
| Gains on sale of land |
272,000 | --- | ||||||
| Other income |
--- | 69,000 | ||||||
| Realized gains on sales of marketable securities |
14,249,000 | 18,478,000 | ||||||
| Net unrealized (losses) gains on marketable securities |
(57,075,000 | ) | 131,754,000 | |||||
| Interest expense on margin loans and others |
(517,000 | ) | (196,000 | ) | ||||
| Interest expense on note payable collateralized by real estate |
(38,000 | ) | (48,000 | ) | ||||
| (Loss) income before income taxes |
(40,532,000 | ) | 154,434,000 | |||||
| Income tax benefits (provisions) |
9,735,000 | (40,115,000 | ) | |||||
| Net (loss) income |
$ | (30,797,000 | ) | $ | 114,319,000 | |||
| Weighted average number of common shares outstanding - basic and diluted |
1,380,542 | 1,380,746 | ||||||
| Basic and diluted net (loss) income per share |
$ | (22.31 | ) | $ | 82.80 | |||
| Comprehensive (loss) income |
$ | (30,797,000 | ) | $ | 114,319,000 | |||
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, 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 | ||||||||||||||
| Balance at September 30, 2021 | 1,805,053 | $ | 18,000 | (424,307 | ) | $ | (4,000 | ) | $ | 1,755,000 | $ | 252,872,000 | $ | 254,641,000 | ||||||||||||||
| Net income | --- | --- | --- | --- | --- | 6,878,000 | 6,878,000 | |||||||||||||||||||||
| Balance at December 31, 2021 | 1,805,053 | 18,000 | (424,307 | ) | (4,000 | ) | 1,755,000 | 259,750,000 | 261,519,000 | |||||||||||||||||||
| Net loss | --- | --- | --- | --- | --- | (27,813,000 | ) | (27,813,000 | ) | |||||||||||||||||||
| Balance at March 31, 2022 | 1,805,053 | $ | 18,000 | (424,307 | ) | (4,000 | ) | 1,755,000 | 231,937,000 | 233,706,000 | ||||||||||||||||||
| Receipt of donated treasury stock | --- | --- | (3,720 | ) | --- | --- | --- | --- | ||||||||||||||||||||
| Net loss | --- | --- | --- | --- | --- | (9,862,000 | ) | (9,862,000 | ) | |||||||||||||||||||
| Balance at June 30, 2022 | 1,805,053 | $ | 18,000 | (428,027 | ) | $ | (4,000 | ) | $ | 1,755,000 | $ | 222,075,000 | $ | 223,844,000 | ||||||||||||||
See accompanying Notes to Consolidated Financial Statements
DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine months Ended June 30 |
||||||||
| 2022 |
2021 |
|||||||
| Cash flows from operating activities |
||||||||
| Net (loss) income |
$ | (30,797,000 | ) | $ | 114,319,000 | |||
| Adjustments to reconcile net (loss) income to net cash (used in) provided from operations |
||||||||
| Depreciation and amortization |
301,000 | 344,000 | ||||||
| Net unrealized losses (gains) on marketable securities |
57,075,000 | (131,754,000 | ) | |||||
| Realized gains on sales of marketable securities |
(14,249,000 | ) | (18,478,000 | ) | ||||
| Gains on sale of land |
(272,000 | ) | --- | |||||
| Deferred income taxes |
(12,345,000 | ) | 38,556,000 | |||||
| Changes in operating assets and liabilities |
||||||||
| (Increase) decrease in current assets |
||||||||
| Accounts receivable, net |
(1,170,000 | ) | (3,288,000 | ) | ||||
| Inventories |
(27,000 | ) | (19,000 | ) | ||||
| Prepaid expenses and other assets |
90,000 | (16,000 | ) | |||||
| Income tax receivable |
(3,950,000 | ) | 601,000 | |||||
| Increase (decrease) in liabilities |
||||||||
| Accounts payable |
168,000 | 96,000 | ||||||
| Accrued liabilities |
(794,000 | ) | 2,080,000 | |||||
| Income tax payable |
(6,244,000 | ) | 375,000 | |||||
| Deferred subscriptions |
106,000 | (191,000 | ) | |||||
| Deferred consulting fees |
1,197,000 | 131,000 | ||||||
| Deferred maintenance agreements and others |
1,046,000 | (2,734,000 | ) | |||||
| Net cash (used in) provided from operating activities |
(9,865,000 | ) | 22,000 | |||||
| Cash flows from investing activities |
||||||||
| Proceeds from sales of marketable securities |
80,570,000 | 20,002,000 | ||||||
| Purchases of marketable securities |
(117,678,000 | ) | (39,995,000 | ) | ||||
| Sale of land |
381,000 | --- | ||||||
| Purchases of property, plant and equipment |
(14,000 | ) | (29,000 | ) | ||||
| Net cash used in investing activities |
(36,741,000 | ) | (20,022,000 | ) | ||||
| Cash flows from financing activities |
||||||||
| Payment to margin loan principal |
(14,000 | ) | (14,493,000 | ) | ||||
| Borrowing from margin loan account |
43,014,000 | 17,000,000 | ||||||
| Payment of real estate loan principal |
(110,000 | ) | (94,000 | ) | ||||
| Net cash provided from financing activities |
42,890,000 | 2,413,000 | ||||||
| Decrease in cash and restricted cash and cash equivalents |
(3,716,000 | ) | (17,587,000 | ) | ||||
| Cash and restricted cash and cash equivalents |
||||||||
| Beginning of period |
14,639,000 | 28,963,000 | ||||||
| End of period |
$ | 10,923,000 | $ | 11,376,000 | ||||
| Interest paid during period |
$ | 509,000 | $ | 245,000 | ||||
| Net income taxes paid |
$ | 12,801,000 | $ | 580,000 | ||||
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 approximately 30 states and internationally.
Essentially all of the Company’s U.S. operations are based in California, Arizona and Utah. The Company also has a presence in Australia where Journal Technologies is working on three software installation projects.
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, 2022, its results of operations for the three- and nine-month periods ended June 30, 2022 and 2021, its consolidated statements of shareholders’ equity for the nine months ended June 30, 2022 and 2021 and cash flows for the nine months ended June 30, 2022 and 2021. The results of operations for the nine months ended June 30, 2022 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, 2021.
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 June 30, 2022, the Company had a right-of-use asset and lease liability of approximately $130,000 for its operating office and equipment leases, including approximately $35,000 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 - Treasury stock and net (loss) income per common share
In June 2022, the Company received from Director Charles T. Munger 3,720 shares of Daily Journal common stock as his gracious personal gift (worth approximately $1 million on the date of the gift) for the purpose of establishing a new senior management equity incentive plan. These donated shares are now considered treasury stock, and the Company accounted for them using the par method which resulted in an immaterial effected amount on Treasury Stock and Additional Paid-in Capital. In addition, the number of outstanding shares of the Company was reduced by these 3,720 shares to reflect the actual number of outstanding shares of 1,377,026 as of June 30, 2022. The net (loss) income per common share is based on the weighted average number of shares outstanding during the comparable financial periods. The shares used in the calculation were 1,380,542 and 1,380,133 for the nine- and three-month periods ended June 30, 2022 respectively. For both the nine- and three-month periods ended June 30, 2021, the weighted average number of shares outstanding was 1,380,746.
Note 7 - Basic and Diluted Net Income Per Share
The Company does not have any common stock equivalents, and therefore basic and diluted net income per share are the same.
Note 8 - Investments in Marketable Securities
All investments are classified as “Current assets” because they are available for sale at any time. These “available-for-sale” marketable securities are stated at fair value. The Company uses quoted prices in active markets for identical assets (consistent with the Level 1 definition in the fair value hierarchy) to measure the fair value of its investments on a recurring basis pursuant to ASC 820, Fair Value Measurement. As of June 30, 2022 and September 30, 2021, there were net accumulated pretax unrealized gains of $187,018,000 and $244,093,000, 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.
For the nine months ended June 30, 2022, the Company recorded and included in its net income the net unrealized losses on marketable securities of $57,075,000, as compared with the net unrealized gains on marketable securities of $131,754,000, in the prior year period.
In December 2021 and March 2022, the Company sold part of its marketable securities for approximately $80,570,000, realizing net gains of $14,249,000, and borrowed an additional net $43,000,000 from the margin loan account to primarily purchase additional marketable securities with a total cost of approximately $117,678,000.
Investments in marketable securities as of June 30, 2022 and September 30, 2021 are summarized below.
Investment in Marketable Securities
| June 30, 2022 | September 30, 2021 | |||||||||||||||||||||||
| Aggregate fair value | Adjusted cost basis | Pretax unrealized gains | Aggregate fair value | Adjusted cost basis | Pretax unrealized gains | |||||||||||||||||||
| Marketable securities | ||||||||||||||||||||||||
| Common stocks | $ | 341,855,000 | $ | 154,837,000 | $ | 187,018,000 | $ | 347,573,000 | $ | 103,480,000 | $ | 244,093,000 | ||||||||||||
Note 9 - Income Taxes
For the nine months ended June 30, 2022, the Company recorded an income tax benefit of $9,735,000 on the pretax loss of $40,532,000. The income tax benefit consisted of a tax benefit of $15,425,000 on the unrealized losses on marketable securities and a benefit of $250,000 for the dividends received deduction and other permanent book and tax differences, offset by tax provisions of $3,850,000 on the realized gains on marketable securities, $500,000 on income from operations, and $1,590,000 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, 2022 was 24%, after including the taxes on the realized gains and unrealized losses on marketable securities.
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.
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 2018 with regard to federal income taxes and fiscal 2017 for state income taxes.
Note 10 - Debt and Commitments
During fiscal 2013, the Company borrowed from its investment margin account the aggregate purchase price of $29.5 million for two acquisitions, in each case pledging its marketable securities as collateral. There were also subsequent borrowings of net $45.5 million to purchase additional marketable securities bringing the margin loan balance up to $75 million as of June 30, 2022. 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, 2022 was 2.25%. 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 $1.24 million and financed the balance with a real estate bank loan of $2.26 million which had a fixed interest rate of 4.66%. This loan is secured by the Logan facility and can be paid off at any time without prepayment penalty. 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 10 years. This real estate loan had a balance of approximately $1.47 million as of June 30, 2022. Each monthly installment payment is about $16,600. In April 2022, the Company sold approximately 17,564 square feet of the land along the front of its Logan building to the City of Logan for approximately $381,000 in connection with the City of Logan’s street widening project.
The Company also owns its facilities in Los Angeles and leases space for its other offices under operating leases which expire at various dates through October 2023.
Note 11 - Contingencies
From time to time, the Company is subject to contingencies, including litigation, arising in the normal course of its business. While it is not possible to predict the results of such contingencies, management does not believe the ultimate outcome of these matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows.
Note 12 - Operating Segments
The Company’s 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:
Overall Financial Results (000)
For the nine months ended June 30
| Reportable Segments | ||||||||||||||||||||||||||||||||
| Traditional Business | Journal Technologies | Corporate income and expenses | Total | |||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
| Revenues | ||||||||||||||||||||||||||||||||
| Advertising | $ | 5,679 | $ | 5,649 | $ | --- | $ | --- | $ | --- | $ | --- | $ | 5,679 | $ | 5,649 | ||||||||||||||||
| Circulation | 3,279 | 3,458 | --- | --- | --- | --- | 3,279 | 3,458 | ||||||||||||||||||||||||
| Advertising service fees and other | 2,200 | 1,964 | --- | --- | --- | --- | 2,200 | 1,964 | ||||||||||||||||||||||||
| Licensing and maintenance fees | --- | --- | 13,721 | 16,990 | --- | --- | 13,721 | 16,990 | ||||||||||||||||||||||||
| Consulting fees | --- | --- | 4,697 | 4,649 | --- | --- | 4,697 | 4,649 | ||||||||||||||||||||||||
| Other public service fees | --- | --- | 5,221 | 5,242 | --- | --- | 5,221 | 5,242 | ||||||||||||||||||||||||
| Total revenues | 11,158 | 11,071 | 23,639 | 26,881 | --- | --- | 34,797 | 37,952 | ||||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||||||||
| Salaries and employee benefits | 6,864 | 6,687 | 19,881 | 19,131 | --- | --- | 26,745 | 25,818 | ||||||||||||||||||||||||
| (Decrease) increase to the long-term supplemental compensation accrual | (25 | ) | 1,410 | (40 | ) | --- | --- | --- | (65 | ) | 1,410 | |||||||||||||||||||||
| Others | 2,877 | 2,904 | 6,914 | 5,506 | --- | --- | 9,791 | 8,410 | ||||||||||||||||||||||||
| Total operating expenses | 9,716 | 11,001 | 26,755 | 24,637 | --- | --- | 36,471 | 35,638 | ||||||||||||||||||||||||
| Income (loss) from operations | 1,442 | 70 | (3,116 | ) | 2,244 | --- | --- | (1,674 | ) | 2,314 | ||||||||||||||||||||||
| Dividends and interest income | --- | --- | --- | --- | 4,251 | 2,063 | 4,251 | 2,063 | ||||||||||||||||||||||||
| Gains on sale of land | --- | --- | --- | --- | 272 | --- | 272 | --- | ||||||||||||||||||||||||
| Other income | --- | --- | --- | --- | --- | 69 | --- | 69 | ||||||||||||||||||||||||
| Interest expenses on note payable collateralized by real estate and other | --- | --- | --- | --- | (38 | ) | (48 | ) | (38 | ) | (48 | ) | ||||||||||||||||||||
| Interest expenses on margin loans | --- | --- | --- | --- | (517 | ) | (196 | ) | (517 | ) | (196 | ) | ||||||||||||||||||||
| Net realized gains on sales of marketable securities | --- | --- | --- | --- | 14,249 | 18,478 | 14,249 | 18,478 | ||||||||||||||||||||||||
| Net unrealized (losses) gains on marketable securities | --- | --- | --- | --- | (57,075 | ) | 131,754 | (57,075 | ) | 131,754 | ||||||||||||||||||||||
| Pretax income (loss) | 1,442 | 70 | (3,116 | ) | 2,244 | (38,858 | ) | 152,120 | (40,532 | ) | 154,434 | |||||||||||||||||||||
| Income tax (expense) benefit | (335 | ) | (15 | ) | 985 | (785 | ) | 9,085 | (39,315 | ) | 9,735 | (40,115 | ) | |||||||||||||||||||
| Net income (loss) | $ | 1,107 | $ | 55 | $ | (2,131 | ) | $ | 1,459 | $ | (29,773 | ) | $ | 112,805 | $ | (30,797 | ) | $ | 114,319 | |||||||||||||
| Total assets | $ | 22,091 | $ | 17,894 | $ | 20,814 | $ | 21,498 | $ | 341,669 | $ | 350,108 | $ | 384,574 | $ | 389,500 | ||||||||||||||||
| Capital expenditures | $ | 4 | $ | 22 | $ | 10 | $ | 7 | $ | --- | $ | --- | $ | 14 | $ | 29 | ||||||||||||||||
Overall Financial Results (000)
For the three months ended June 30
| Reportable Segments | ||||||||||||||||||||||||||||||||
| Traditional Business | Journal Technologies | Corporate income and expenses | Total | |||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
| Revenues | ||||||||||||||||||||||||||||||||
| Advertising | $ | 1,989 | $ | 2,195 | $ | --- | $ | --- | $ | --- | $ | --- | $ | 1,989 | $ | 2,195 | ||||||||||||||||
| Circulation | 1,097 | 1,126 | --- | --- | --- | --- | 1,097 | 1,126 | ||||||||||||||||||||||||
| Advertising service fees and other | 787 | 762 | --- | --- | --- | --- | 787 | 762 | ||||||||||||||||||||||||
| Licensing and maintenance fees | --- | --- | 4,633 | 5,602 | --- | --- | 4,633 | 5,602 | ||||||||||||||||||||||||
| Consulting fees | --- | --- | 2,267 | 2,100 | --- | --- | 2,267 | 2,100 | ||||||||||||||||||||||||
| Other public service fees | --- | --- | 1,779 | 1,777 | --- | --- | 1,779 | 1,777 | ||||||||||||||||||||||||
| Total revenues | 3,873 | 4,083 | 8,679 | 9,479 | --- | --- | 12,552 | 13,562 | ||||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||||||||
| Salaries and employee benefits | 2,134 | 2,081 | 7,287 | 6,699 | --- | --- | 9,421 | 8,780 | ||||||||||||||||||||||||
| Increase to the long-term Supplemental compensation accrual | 1,985 | 655 | --- | --- | --- | --- | 1,985 | 655 | ||||||||||||||||||||||||
| Others | 904 | 929 | 2,345 | 1,874 | --- | --- | 3,249 | 2,803 | ||||||||||||||||||||||||
| Total operating expenses | 5,023 | 3,665 | 9,632 | 8,573 | --- | --- | 14,655 | 12,238 | ||||||||||||||||||||||||
| Income (loss) from operations | (1,150 | ) | 418 | (953 | ) | 906 | --- | --- | (2,103 | ) | 1,324 | |||||||||||||||||||||
| Dividends and interest income | --- | --- | --- | --- | 1,263 | 776 | 1,263 | 776 | ||||||||||||||||||||||||
| Gains on land sale | --- | --- | --- | --- | 272 | --- | 272 | --- | ||||||||||||||||||||||||
| Other income | --- | --- | --- | --- | --- | 69 | --- | 69 | ||||||||||||||||||||||||
| Interest expenses on note payable collateralized by real estate and other | --- | --- | --- | --- | (12 | ) | (14 | ) | (12 | ) | (14 | ) | ||||||||||||||||||||
| Interest expenses on margin loans | --- | --- | --- | --- | (281 | ) | (68 | ) | (281 | ) | (68 | ) | ||||||||||||||||||||
| Net unrealized (losses) gains on marketable securities | --- | --- | --- | --- | (12,666 | ) | 55,686 | (12,666 | ) | 55,686 | ||||||||||||||||||||||
| Pretax (loss) income | (1,150 | ) | 418 | (953 | ) | 906 | (11,424 | ) | 56,449 | (13,527 | ) | 57,773 | ||||||||||||||||||||
| Income tax benefit (expense) | 225 | (175 | ) | 280 | (460 | ) | 3,160 | (14,565 | ) | 3,665 | (15,200 | ) | ||||||||||||||||||||
| Net (loss) income | $ | (925 | ) | $ | 243 | $ | (673 | ) | $ | 446 | $ | (8,264 | ) | $ | 41,884 | $ | (9,862 | ) | $ | 42,573 | ||||||||||||
| Total assets | $ | 22,091 | $ | 17,894 | $ | 20,814 | $ | 21,498 | $ | 341,669 | $ | 350,108 | $ | 384,574 | $ | 389,500 | ||||||||||||||||
| Capital expenditures | $ | 4 | $ | --- | $ | 7 | $ | --- | $ | --- | $ | --- | $ | 11 | $ | --- | ||||||||||||||||
During the nine months ended June 30, 2022, the Traditional Business had total operating revenues of $11,158,000 with $7,879,000 recognized after services were provided and $3,279,000 recognized ratably over the subscription terms, as compared with total operating revenues of $11,071,000 with $7,613,000 recognized after services were provided and $3,458,000 recognized ratably over the subscription terms in the prior fiscal year period. Total operating revenues for the Company’s software business were $23,639,000 with $9,989,000 recognized upon completion of services and $13,650,000 recognized ratably over the subscription periods, as compared with total operating revenues of $26,881,000 with $11,029,000 recognized upon completion of services and $15,852,000 recognized ratably over the subscription periods in the prior fiscal year period.
During the three months ended June 30, 2022, the Traditional Business had total operating revenues of $3,873,000 with $2,776,000 recognized after services were provided and $1,097,000 recognized ratably over the subscription terms, as compared with total operating revenues of $4,083,000 with $2,957,000 recognized after services were provided and $1,126,000 recognized ratably over the subscription terms in the prior fiscal year period. Total operating revenues for the Company’s software business were $8,679,000 with $4,046,000 recognized upon completion of services and $4,633,000 recognized ratably over the subscription periods, as compared with total operating revenues of $9,479,000 with $4,312,000 recognized upon completion of services and $5,167,000 recognized ratably over the subscription periods in the prior fiscal year period.
Approximately 68% of the Company’s revenues during the nine-month period ended June 30, 2022 were derived from Journal Technologies, as compared with 71% in the prior year period. In addition, the Company’s revenues have been primarily from the United States with approximately 5% from foreign countries during the nine-months ended June 30, 2022. 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 approximately 30 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 other 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 Delta and Omicron variant cases, and most recently the more contagious BA.4 and BA.5 sub-variant cases, will continue to have, a significant impact on the Company’s business operations. It is also possible that governments may again take actions in response to the pandemic and new variants and sub-variants, such as a 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, which 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 related changes in business operations and personal behaviors, 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 general trend to continue due to the impacts of COVID-19 and its aftermath, including fewer lawyers receiving our newspapers at their offices as they continue to work from home.
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 delayed in finishing certain implementations and trainings because of our inability to work with clients in-person. Given that we are typically paid for implementation services upon “go-live” of a system, receipt of those revenues has been delayed.
Reportable Segments (for the nine months ended June 30, 2022 and 2021)
The Company’s Traditional Business is one reportable segment, and the other is Journal Technologies. Additional details about each of the reportable segments and its corporate income and expenses is 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 |
|||||||||||||||||||||||||||||
| 2022 |
2021 |
2022 |
2021 |
2022 |
2021 |
2022 |
2021 |
|||||||||||||||||||||||||
| Revenues |
||||||||||||||||||||||||||||||||
| Advertising |
$ | 5,679 | $ | 5,649 | $ | --- | $ | --- | $ | --- | $ | --- | $ | 5,679 | $ | 5,649 | ||||||||||||||||
| Circulation |
3,279 | 3,458 | --- | --- | --- | --- | 3,279 | 3,458 | ||||||||||||||||||||||||
| Advertising service fees and other |
2,200 | 1,964 | --- | --- | --- | --- | 2,200 | 1,964 | ||||||||||||||||||||||||
| Licensing and maintenance fees |
--- | --- | 13,721 | 16,990 | --- | --- | 13,721 | 16,990 | ||||||||||||||||||||||||
| Consulting fees |
--- | --- | 4,697 | 4,649 | --- | --- | 4,697 | 4,649 | ||||||||||||||||||||||||
| Other public service fees |
--- | --- | 5,221 | 5,242 | --- | --- | 5,221 | 5,242 | ||||||||||||||||||||||||
| Total revenues |
11,158 | 11,071 | 23,639 | 26,881 | --- | --- | 34,797 | 37,952 | ||||||||||||||||||||||||
| Operating expenses |
||||||||||||||||||||||||||||||||
| Salaries and employee benefits |
6,864 | 6,687 | 19,881 | 19,131 | --- | --- | 26,745 | 25,818 | ||||||||||||||||||||||||
| (Decrease) increase to the long-term supplemental compensation accrual |
(25 | ) | 1,410 | (40 | ) | --- | --- | --- | (65 | ) | 1,410 | |||||||||||||||||||||
| Others |
2,877 | 2,904 | 6,914 | 5,506 | --- | --- | 9,791 | 8,410 | ||||||||||||||||||||||||
| Total operating expenses |
9,716 | 11,001 | 26,755 | 24,637 | --- | --- | 36,471 | 35,638 | ||||||||||||||||||||||||
| Income (loss) from operations |
1,442 | 70 | (3,116 | ) | 2,244 | --- | --- | (1,674 | ) | 2,314 | ||||||||||||||||||||||
| Dividends and interest income |
--- | --- | --- | --- | 4,251 | 2,063 | 4,251 | 2,063 | ||||||||||||||||||||||||
| Gains on sale of land |
--- | --- | --- | --- | 272 | --- | 272 | --- | ||||||||||||||||||||||||
| Other income |
--- | --- | --- | --- | --- | 69 | --- | 69 | ||||||||||||||||||||||||
| Interest expenses on note payable collateralized by real estate and other |
--- | --- | --- | --- | (38 | ) | (48 | ) | (38 | ) | (48 | ) | ||||||||||||||||||||
| Interest expenses on margin loans |
--- | --- | --- | --- | (517 | ) | (196 | ) | (517 | ) | (196 | ) | ||||||||||||||||||||
| Net realized gains on sales of marketable securities |
--- | --- | --- | --- | 14,249 | 18,478 | 14,249 | 18,478 | ||||||||||||||||||||||||
| Net unrealized (losses) gains on marketable securities |
--- | --- | --- | --- | (57,075 | ) | 131,754 | (57,075 | ) | 131,754 | ||||||||||||||||||||||
| Pretax income (loss) |
1,442 | 70 | (3,116 | ) | 2,244 | (38,858 | ) | 152,120 | (40,532 | ) | 154,434 | |||||||||||||||||||||
| Income tax (expense) benefit |
(335 | ) | (15 | ) | 985 | (785 | ) | 9,085 | (39,315 | ) | 9,735 | (40,115 | ) | |||||||||||||||||||
| Net income (loss) |
$ | 1,107 | $ | 55 | $ | (2,131 | ) | $ | 1,459 | $ | (29,773 | ) | $ | 112,805 | $ | (30,797 | ) | $ | 114,319 | |||||||||||||
| Total assets |
$ | 22,091 | $ | 17,894 | $ | 20,814 | $ | 21,498 | $ | 341,669 | $ | 350,108 | $ | 384,574 | $ | 389,500 | ||||||||||||||||
| Capital expenditures |
$ | 4 | $ | 22 | $ | 10 | $ | 7 | $ | --- | $ | --- | $ | 14 | $ | 29 | ||||||||||||||||
Comparable nine-month periods ended June 30, 2022 and 2021
Consolidated Financial Comparison
Consolidated revenues were $34,797,000 and $37,952,000 for the nine months ended June 30, 2022 and 2021, respectively. This decrease of $3,155,000 (8%) was primarily from decreases in (i) Journal Technologies’ license and maintenance fees of $3,269,000 and public service fees of $21,000, and (ii) the Traditional Business’ circulation revenues of $179,000, partially offset by increases in Journal Technologies’ consulting fees of $48,000 and the Traditional Business’ advertising net revenues of $30,000 and advertising service fees and other of $236,000.
Approximately 68% of the Company’s revenues during the nine months ended June 30, 2022 were derived from Journal Technologies, as compared with 71% in the prior fiscal year period. In addition, the Company’s revenues have been primarily from the United States, with approximately 5% from foreign countries. Almost all of Journal Technologies’ revenues are from governmental agencies.
Consolidated operating expenses increased by $833,000 (2%) to $36,471,000 from $35,638,000 for the nine months ended June 30, 2022. Total salaries and employee benefits increased by $927,000 (4%) to $26,745,000 from $25,818,000 primarily because of (i) salary adjustments and some Australian payroll tax accruals. Outside services increased by $676,000 (30%) to $2,912,000 from $2,236,000 mainly because of increased third-party hosting fees which were billed to clients. Newsprint and printing expenses increased by $60,000 (13%) to $529,000 from $469,000 primarily resulting from newsprint price increases and additional purchases of printing supplies. Other general and administrative expenses increased by $938,000 (60%) to $2,492,000 from $1,554,000 mainly because there were increased miscellaneous office equipment purchases and business travel expenses as compared to the prior fiscal year period.
The Company’s non-operating income, net of expenses, decreased by $190,978,000 to a loss of $38,858,000 from a gain of $152,120,000 in the prior fiscal year period primarily because of the recordings of (i) net unrealized losses on marketable securities of $57,075,000 during the nine months ended June 30, 2022 as compared with net unrealized gains of $131,754,000 in the prior year period, and (ii) realized net gains on sales of marketable securities of $14,249,000 during the nine months ended June 30, 2022 as compared with $18,478,000 in the prior year period. In addition, there were gains of $272,000 on a partial land sale associated with the City of Logan’s street widening project.
During the nine months ended June 30, 2022, the Company’s consolidated pretax loss was $40,532,000, as compared to pretax income of $154,434,000 in the prior fiscal year period. There was consolidated net loss of $30,797,000 (-$22.31 per share) for the nine months ended June 30, 2022, as compared with consolidated net income of $114,319,000 ($82.80 per share) in the prior fiscal year period.
At June 30, 2022, the aggregate fair market value of the Company’s marketable securities was $341,855,000. These securities had approximately $187,018,000 of net unrealized gains before taxes of $50,540,000. They generated approximately $4,251,000 in dividends income during the nine months ended June 30, 2022, as compared with $2,063,000 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, 2022, the Company recorded an income tax benefit of $9,735,000 on the pretax loss of $40,532,000. The income tax benefit consisted of a tax benefit of $15,425,000 on the unrealized losses on marketable securities and a benefit of $250,000 for the dividends received deduction and other permanent book and tax differences, offset by tax provisions of $3,850,000 on the realized gains on marketable securities, $500,000 on income from operations, and $1,590,000 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, 2022 was 24%, after including the taxes on the realized gains and unrealized losses on marketable securities.
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.
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 2018 with regard to federal income taxes and fiscal 2017 for state income taxes.
The Traditional Business (for the nine-month periods ended June 30, 2022 and 2021)
The Traditional Business’ pretax income increased by $1,372,000 to $1,442,000 from $70,000 in the prior fiscal year period, primarily resulting from a reduction to the long-term supplemental compensation accrual of $25,000 as compared with an increase of $1,410,000 in the prior fiscal year period.
During the nine months ended June 30, 2022, the Traditional Business had total operating revenues of $11,158,000, as compared with $11,071,000 in the prior fiscal year period. Advertising revenues increased by $30,000 (1%) to $5,679,000 from $5,649,000, primarily because of increased legal notice advertising net revenues of $122,000 and trustee sale notice advertising net revenues of $130,000 primarily resulting from the lifting of the foreclosure moratoriums relative to the “Eviction and Foreclosure Orders” and lenders’ processing files that were already in the pipeline when the pandemic struck. These increases were offset by decreased government notice advertising net revenues of $149,000 and commercial advertising net revenues of $73,000.
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 increased by 63% during the nine months ended June 30, 2022 as compared to the prior fiscal year period, primarily because of the lifting of foreclosure moratoriums, as discussed above. 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 during the nine months ended June 30, 2022. Public notice advertising revenues and related advertising and other service fees, including trustee sales legal advertising revenues, constituted about 19% of the Company's total operating revenues for the nine months ended June 30, 2022 and 16% in the prior fiscal year period.
The Daily Journals accounted for about 92% of the Traditional Business’ total circulation revenues, which declined by $179,000 (5%) to $3,279,000 from $3,458,000. The court rule and judicial profile services generated about 5% of the total circulation revenues, with the other newspapers and services accounting for the balance. Advertising service fees and other are Traditional Business segment revenues, which include primarily (i) agency commissions received from outside newspapers in which the advertising is placed, and (ii) fees generated when filing notices with government agencies.
The Traditional Business segment operating expenses, excluding the adjustments to the long-term supplemental compensation accrual, increased by $150,000 (2%) to $9,741,000 from $9,591,000, primarily resulting from the annual salary adjustments.
Journal Technologies (for the nine-month periods ended June 30, 2022 and 2021)
During the nine months ended June 30, 2022, Journal Technologies’ business segment pretax loss increased by $5,360,000 to $3,116,000 from pretax income of $2,244,000 in the prior fiscal year period.
Revenues decreased by $3,242,000 (12%) to $23,639,000 from $26,881,000 in the prior fiscal year period. Licensing and maintenance fees decreased by $3,269,000 (19%) to $13,721,000 from $16,990,000 primarily resulting from the reduction in legacy software products’ maintenance and support revenues as the Company ended effective July 1, 2021 the maintenance of these legacy software products, so as to focus on supporting the Company’s main eSeries products. Consulting fees increased by $48,000 (1%) to $4,697,000 from $4,649,000. Other public service fees decreased by $21,000 to $5,221,000 from $5,242,000 primarily due to decreased traffic citation 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 increased by $2,118,000 (9%) to $26,755,000 from $24,637,000 primarily because of (i) increased personnel costs resulting from the salary adjustments and some Australian payroll tax accruals, (ii) increased third-party hosting fees which were billed to clients and (iii) additional miscellaneous office equipment purchases and increased 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.
Reportable Segments (for the three-month periods ended June 30, 2022 and 2021)
Overall Financial Results (000)
For the three months ended June 30
| Reportable Segments |
||||||||||||||||||||||||||||||||
| Traditional Business |
Journal Technologies |
Corporate income and expenses |
Total |
|||||||||||||||||||||||||||||
| 2022 |
2021 |
2022 |
2021 |
2022 |
2021 |
2022 |
2021 |
|||||||||||||||||||||||||
| Revenues |
||||||||||||||||||||||||||||||||
| Advertising |
$ | 1,989 | $ | 2,195 | $ | --- | $ | --- | $ | --- | $ | --- | $ | 1,989 | $ | 2,195 | ||||||||||||||||
| Circulation |
1,097 | 1,126 | --- | --- | --- | --- | 1,097 | 1,126 | ||||||||||||||||||||||||
| Advertising service fees and other |
787 | 762 | --- | --- | --- | --- | 787 | 762 | ||||||||||||||||||||||||
| Licensing and maintenance fees |
--- | --- | 4,633 | 5,602 | --- | --- | 4,633 | 5,602 | ||||||||||||||||||||||||
| Consulting fees |
--- | --- | 2,267 | 2,100 | --- | --- | 2,267 | 2,100 | ||||||||||||||||||||||||
| Other public service fees |
--- | --- | 1,779 | 1,777 | --- | --- | 1,779 | 1,777 | ||||||||||||||||||||||||
| Total revenues |
3,873 | 4,083 | 8,679 | 9,479 | --- | --- | 12,552 | 13,562 | ||||||||||||||||||||||||
| Operating expenses |
||||||||||||||||||||||||||||||||
| Salaries and employee benefits |
2,134 | 2,081 | 7,287 | 6,699 | --- | --- | 9,421 | 8,780 | ||||||||||||||||||||||||
| Increase to the long-term Supplemental compensation accrual |
1,985 | 655 | --- | --- | --- | --- | 1,985 | 655 | ||||||||||||||||||||||||
| Others |
904 | 929 | 2,345 | 1,874 | --- | --- | 3,249 | 2,803 | ||||||||||||||||||||||||
| Total operating expenses |
5,023 | 3,665 | 9,632 | 8,573 | --- | --- | 14,655 | 12,238 | ||||||||||||||||||||||||
| Income (loss) from operations |
(1,150 | ) | 418 | (953 | ) | 906 | --- | --- | (2,103 | ) | 1,324 | |||||||||||||||||||||
| Dividends and interest income |
--- | --- | --- | --- | 1,263 | 776 | 1,263 | 776 | ||||||||||||||||||||||||
| Gains on land sale |
--- | --- | --- | --- | 272 | --- | 272 | --- | ||||||||||||||||||||||||
| Other income |
--- | --- | --- | --- | --- | 69 | --- | 69 | ||||||||||||||||||||||||
| Interest expenses on note payable collateralized by real estate and other |
--- | --- | --- | --- | (12 | ) | (14 | ) | (12 | ) | (14 | ) | ||||||||||||||||||||
| Interest expenses on margin loans |
--- | --- | --- | --- | (281 | ) | (68 | ) | (281 | ) | (68 | ) | ||||||||||||||||||||
| Net unrealized (losses) gains on marketable securities |
--- | --- | --- | --- | (12,666 | ) | 55,686 | (12,666 | ) | 55,686 | ||||||||||||||||||||||
| Pretax (loss) income |
(1,150 | ) | 418 | (953 | ) | 906 | (11,424 | ) | 56,449 | (13,527 | ) | 57,773 | ||||||||||||||||||||
| Income tax benefit (expense) |
225 | (175 | ) | 280 | (460 | ) | 3,160 | (14,565 | ) | 3,665 | (15,200 | ) | ||||||||||||||||||||
| Net (loss) income |
$ | (925 | ) | $ | 243 | $ | (673 | ) | $ | 446 | $ | (8,264 | ) | $ | 41,884 | $ | (9,862 | ) | $ | 42,573 | ||||||||||||
| Total assets |
$ | 22,091 | $ | 17,894 | $ | 20,814 | $ | 21,498 | $ | 341,669 | $ | 350,108 | $ | 384,574 | $ | 389,500 | ||||||||||||||||
| Capital expenditures |
$ | 4 | $ | --- | $ | 7 | $ | --- | $ | --- | $ | --- | $ | 11 | $ | --- | ||||||||||||||||
Comparable three-month periods ended June 30, 2022 and 2021
Consolidated Financial Comparison
Consolidated revenues were $12,552,000 and $13,562,000 for the three months ended June 30, 2022 and 2021, respectively. This decrease of $1,010,000 (7%) resulted primarily from decreases in Journal Technologies’ license and maintenance fees of $969,000, and the Traditional Business’ advertising net revenues of $206,000 and circulation revenues of $29,000, partially offset by increases in (i) Journal Technologies’ consulting fees of $167,000 and public service fees of $2,000, and (ii) the Traditional Business’ advertising service fees and other of $25,000.
Approximately 69% of the Company’s revenues during the three months ended June 30, 2022 were derived from Journal Technologies, as compared with 70% in the prior fiscal year period.
Consolidated operating expenses increased by $2,417,000 (20%) to $14,655,000 from $12,238,000 for the three months ended June 30, 2022. Total salaries and employee benefits increased by $641,000 to $9,421,000 from $8,780,000 primarily because of the salary adjustments and some Australian payroll tax accruals. Outside services increased by $280,000 (35%) to $1,074,000 from $794,000 mainly because of increased third-party hosting fees which were billed to clients. Newsprint and printing expenses increased by $12,000 (7%) to $174,000 from $162,000 primarily resulting from newsprint price increases and additional purchases of printing supplies. Other general and administrative expenses increased by $306,000 (62%) to $801,000 from $495,000 mainly because there were increased miscellaneous office equipment purchases and business travel expenses as compared to the prior fiscal year period.
The Company’s non-operating income, net of expenses, decreased by $67,873,000 to a loss of $11,424,000 from a gain of $56,449,000 in the prior fiscal year period primarily because of the recording of net unrealized losses on marketable securities of $12,666,000 during the three months ended June 30, 2022 as compared with net unrealized gains of $55,686,000 in the prior fiscal year period. In addition, there were gains of $272,000 on partial land sale associated with the City of Logan’s street widening project.
During the three months ended June 30, 2022, consolidated pretax loss was $13,527,000, as compared to pretax income of $57,773,000 in the prior fiscal year period. There was consolidated net loss of $9,862,000 (-$7.15 per share) for the three months ended June 30, 2022, as compared with consolidated net income of $42,573,000 ($30.83 per share) in the prior fiscal year period.
The Traditional Business (for the three-month periods ended June 30, 2022 and 2021)
The Traditional Business’ pretax loss increased by $1,568,000 to $1,150,000 from pretax income of $418,000 in the prior fiscal year period, primarily resulting from an increase to the long-term supplemental compensation accrual of $1,985,000 as compared with an increase of $655,000 in the prior fiscal year period.
During the three months ended June 30, 2022, the Traditional Business had total operating revenues of $3,873,000, as compared with $4,083,000 in the prior fiscal year period. Advertising revenues decreased by $206,000 (9%) to $1,989,000 from $2,195,000, primarily because of decreased commercial advertising net revenues of $125,000 and government notice advertising net revenues of $123,000. These increases were offset by increased legal notice advertising net revenues of $38,000 and trustee sale notice advertising net revenues of $4,000.
The Traditional Business segment operating expenses, excluding the adjustments to the long-term supplemental compensation accrual, increased by $28,000 (1%) to $3,038,000 from $3,010,000, primarily resulting from the annual salary adjustments.
Journal Technologies (for the three-month periods ended June 30, 2022 and 2021)
During the three months ended June 30, 2022, Journal Technologies’ business segment pretax loss increased by $1,859,000 to $953,000 from pretax income of $906,000 in the prior fiscal year period.
Revenues decreased by $800,000 (8%) to $8,679,000 from $9,479,000 in the prior fiscal year period. Licensing and maintenance fees decreased by $969,000 (17%) to $4,633,000 from $5,602,000 primarily resulting from the reduction in legacy software products’ maintenance and support revenues. Consulting fees increased by $167,000 (8%) to $2,267,000 from $2,100,000. Other public service fees increased slightly by $2,000 to $1,779,000 from $1,777,000.
Operating expenses increased by $1,059,000 (12%) to $9,632,000 from $8,573,000 primarily because of (i) increased personnel costs resulting from the salary adjustments and some Australian payroll tax accruals, (ii) increased third-party hosting fees which were billed to clients and (iii) additional miscellaneous office equipment purchases and increased business travel expenses.
Liquidity and Capital Resources
For the nine months ended June 30, 2022, the Company’s cash and cash equivalents, restricted cash, and marketable security positions decreased by $9,434,000, after the sales of marketable securities of approximately $80,570,000 and additional net borrowing of $43,000,000 from the margin loan account, partially offset by the recording of net pretax unrealized losses on marketable securities of $57,075,000. Cash, cash equivalents, the proceeds from the sales of marketable securities and additional net borrowing were primarily used to purchase additional marketable securities of $117,678,000.
The investments in marketable securities, which had an adjusted cost basis of approximately $154,837,000 and a market value of about $341,855,000 at June 30, 2022, generated approximately $4,251,000 in dividends income during the nine months ended June 30, 2022. These securities had approximately $187,018,000 of net unrealized gains before estimated taxes of $50,540,000 which will become due only when we sell securities in which there is unrealized appreciation.
Cash flows from operating activities decreased by $9,887,000 during the nine months ended June 30, 2022 as compared to the prior fiscal year period, primarily due to (i) increases in deferred tax assets of $50,901,000 and the Company’s income tax receivable of $4,551,000, (ii) decreases in the Company’s income tax payable of $6,619,000 and (iii) decreases in net accounts payable and accrued liabilities of $2,802,000 (because of the timing difference in remitting efiling fees to the courts). This was partially offset by (i) increases in net income of $47,942,000, excluding the increases in unrealized losses on marketable securities of $188,829,000 and decreases in realized net gains on sales of marketable securities of $4,229,000, (ii) decreases in the Company’s accounts receivable of $2,118,000 mainly resulting from more collections, and (iii) increases in deferred revenues of $5,143,000.
As of June 30, 2022, the Company had working capital of $337,803,000, including the liabilities for deferred subscriptions, deferred consulting fees and deferred maintenance agreements and others of $20,291,000.
The Company believes that it will be able to fund its operations for the foreseeable future through its cash flows from operations and its current working capital and expects that any such cash flows will be invested in its businesses. The Company may or may not have the ability to borrow additional amounts against its marketable securities and, among other possibilities, it may be required to consider selling some of those securities to generate cash if needed to fund ongoing operations. The amount available for borrowing is based on the market value of the Company’s investment portfolio and fluctuates depending on the value of the underlying securities. In addition, the Company could be subject to margin calls should the balance of the investment decrease significantly.
The Company is not a smaller version of Berkshire Hathaway Inc. 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 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, 2021. 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 variants 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 subscriber revenues; possible security breaches of the Company’s software or websites; changes in accounting guidance; material weaknesses in the Company’s internal control over financial reporting; and declines in the market prices of the securities owned by the Company. In addition, such statements could be affected by general industry and market conditions, general economic conditions (particularly in California) and other factors. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in this Form 10-Q, including in conjunction with the forward-looking statements themselves. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in documents filed by the Company with the Securities and Exchange Commission, including in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2021.
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, 2021, management concluded that the Company’s disclosure controls and procedures were not effective as of June 30, 2022. 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, 2022.
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/ Tu To | |
| Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
|
| /s/ Steven Myhill-Jones | |
| Interim Chief Executive Officer Chairman of the Board (Principal Executive Officer) |
DATE: August 12, 2022