DAILY JOURNAL CORP - Quarter Report: 2023 June (Form 10-Q)

DAILY JOURNAL CORPORATION

INDEX

PART I

Item 1. FINANCIAL STATEMENTS

DAILY JOURNAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

See accompanying Notes to Consolidated Financial Statements.

DAILY JOURNAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

See accompanying Notes to Consolidated Financial Statements.

DAILY JOURNAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

See accompanying Notes to Consolidated Financial Statements.

DAILY JOURNAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

See accompanying Notes to Consolidated Financial Statements.

DAILY JOURNAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying Notes to Consolidated Financial Statements.

DAILY JOURNAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - The Corporation and Operations

Daily Journal Corporation (“Daily Journal”) publishes newspapers and websites covering California and Arizona and produces several specialized information services. It also serves as a newspaper representative specializing in public notice advertising. This is sometimes referred to as the Company’s “Traditional Business”.

Journal Technologies, Inc. (“Journal Technologies”), a wholly-owned subsidiary of Daily Journal, supplies case management software systems and related products to courts, prosecutor and public defender offices, probation departments and other justice agencies, including administrative law organizations, city and county governments and bar associations. These organizations use the Journal Technologies family of products to help manage cases and information electronically, to interface with other critical justice partners and to extend electronic services to the public, including e-filing and a website to pay traffic citations and fees online. These products are licensed in approximately 30 states and internationally. In August 2022, the Company established a new wholly-owned subsidiary, Journal Technologies (Canada) Inc., in Victoria BC, Canada.

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, 2023, its results of operations for the three- and nine-month periods ended June 30, 2023 and 2022, its consolidated statements of shareholders’ equity for the nine months ended June 30, 2023 and 2022 and cash flows for the nine months ended June 30, 2023 and 2022. The results of operations for the nine months ended June 30, 2023 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, 2022.

Certain reclassifications of previously reported amounts have been made to conform to the current year’s presentation.

Note 3 – New Accounting Pronouncement

Current Expected Credit Losses

In June 2016, the Financial Accounting Standards Board issued a new Accounting Standards Codification (“ASU”) requiring financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The ASU eliminates the threshold for initial recognition in current U.S. GAAP and reflects an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets. The ASU is effective for the Company beginning in the first quarter of fiscal 2024. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

Note 4 – Right-of-Use (ROU) Asset

At June 30, 2023, the Company had a ROU asset and lease liability of approximately $34,000 for its operating office and equipment leases, including approximately $7,000 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 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, which is still in the process of being set up. These donated shares were considered treasury stock, and the Company accounted for them using the par method which resulted in an immaterial effect on the amount of 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, 2023. The net income per common share is based on the weighted average number of shares outstanding during each year. The shares used in the calculation were 1,377,026 for both the three- and nine-month periods ended June 30, 2023. For the three- and nine-month periods ended June 30, 2022, the weighted average number of shares outstanding were 1,380,133 and 1,380,542, respectively. The Company does not have any common stock equivalents, and therefore basic and diluted net income per share is the same.

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, 2023 and September 30, 2022, there were net accumulated pretax unrealized gains of $150,626,000 and $120,692,000, 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.

In the nine months ended June 30, 2023, the Company recorded and included in its net income the net unrealized gains on marketable securities of $29,934,000, as compared with the net unrealized losses on marketable securities of $57,075,000, in the prior year period.

In December 2022, the Company sold part of its marketable securities for approximately $2,826,000, realizing net gains of $422,000, and borrowed an additional $6,011,000 from the margin loan account to purchase additional marketable securities with a total cost of approximately $10,001,000. The Company repaid $11,000 subsequently. In addition, the Company received stock dividends in March 2023 worth approximately $2,978,000 from one of the companies in which it holds marketable securities.

In December 2021 and March 2022, the Company sold part of its marketable securities for approximately $80,570,000, realizing net gains on the sales of those marketable securities of $14,249,000, and borrowed an additional $43,014,000 from the margin loan account to primarily purchase additional marketable securities with a total cost of approximately $117,678,000. There was a subsequent repayment of $14,000.

Investments in marketable securities as of June 30, 2023 and September 30, 2022 are summarized below.

Investment in Financial Instruments

Note 9 - Income Taxes

For the nine months ended June 30, 2023, the Company recorded an income tax provision of $9,640,000 on the pretax income of $37,577,000. The income tax provision consisted of a tax provision of $110,000 on the realized gains on marketable securities, $7,950,000 on the unrealized gains on marketable securities, and a tax provision of $1,890,000 on income from operations and dividend income, partially offset by a tax benefit of $250,000 for the dividends received deduction and other permanent book and tax differences, and a tax benefit of $60,000 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, 2023 was 25.7%, after including the taxes on the realized and unrealized gains on marketable securities.

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.

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 2019 with regard to federal income taxes and fiscal 2018 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 also have been subsequent borrowings of $51.5 million to purchase additional marketable securities bringing the margin loan balance up to $81 million as of June 30, 2023. 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, 2023 was 5.75%. 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 $1.24 million and financed the balance with a real estate bank loan of $2.26 million which has a fixed interest rate of 3.33%. This loan is secured by the Logan facility and can be paid off at any time without prepayment penalty. This real estate loan had a balance of approximately $1.32 million as of June 30, 2023. Each monthly installment payment is about $16,600. In October 2022, the Company again amended this real estate loan contract as the bank transferred its index to the Secured Overnight Financing Rate, which replaces the London Interbank Offered Rate. The term of the loan, including the interest rate and the balance, was not affected by the amendment.

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.

Effective January 1, 2023, the Company began sponsoring a 401(k) retirement plan and a 409(A) non-qualified deferred compensation plan for its employees. As of June 30, 2023, there were deferred compensation liabilities of approximately $138,000 of which $122,000 were held under a trust account for the 409(A) plan.

Note 11 - Contingencies

From time to time, the Company is subject to contingencies, including litigation, arising in the normal course of its business. While it is not possible to predict the results of such contingencies, management does not believe the ultimate outcome of these matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Note 12 - Operating Segments

The Company’s Traditional Business is one reportable segment and the other is Journal Technologies which includes Journal Technologies, Inc. and Journal Technologies (Canada) Inc. All inter-segment transactions were eliminated. Additional detail about each of the reportable segments and its income and expenses is set forth below:

During the nine months ended June 30, 2023, the Traditional Business had total operating revenues of $12,007,000 with $8,701,000 recognized after services were provided and $3,306,000 recognized ratably over the subscription terms, as compared with total operating revenues of $11,863,000 with $8,584,000 recognized after services were provided and $3,279,000 recognized ratably over the subscription terms in the prior fiscal year period. Total operating revenues for the Company’s software business were $34,152,000 with $16,835,000 recognized upon completion of services and $17,317,000 recognized ratably over the subscription periods, as compared with total operating revenues of $23,639,000 with $9,989,000 recognized upon completion of services and $13,650,000 recognized ratably over the subscription periods in the prior fiscal year period.

During the three months ended June 30, 2023, the Traditional Business had total operating revenues of $4,130,000 with $3,030,000 recognized after services were provided and $1,100,000 recognized ratably over the subscription terms, as compared with total operating revenues of $4,138,000 with $3,041,000 recognized after services were provided and $1,097,000 recognized ratably over the subscription terms in the prior fiscal year period. Total operating revenues for the Company’s software business were $13,574,000 with $6,148,000 recognized upon completion of services and $7,426,000 recognized ratably over the subscription periods, as compared with total operating revenues of $8,679,000 with $4,046,000 recognized upon completion of services and $4,633,000 recognized ratably over the subscription periods in the prior fiscal year period.

Approximately 74% of the Company’s revenues during the nine-month period ended June 30, 2023 were derived from Journal Technologies, as compared with 67% 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, 2023. Journal Technologies’ revenues are primarily from governmental agencies.

Note 13 - Subsequent Events

The Company has completed an evaluation of all subsequent events through the issuance date of these financial statements and concluded that no subsequent events occurred that required recognition to the financial statements or disclosures in the Notes to Consolidated Financial Statements.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

The Company continues to operate as two different businesses: (1) The Traditional Business, being the business of newspaper publishing and related services that the Company had before 1999 when it purchased a software development company, and (2) Journal Technologies, Inc., which supplies case management software systems and related products to courts, prosecutor and public defender offices, probation departments and other justice agencies, including administrative law organizations, city and county governments and bar associations. These organizations use the Journal Technologies family of products to help manage cases and information electronically, to interface with other critical justice partners and to extend electronic services to the public, including e-filing and a website to pay traffic citations and fees online. These products are licensed in approximately 30 states and internationally.

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.

Although the World Health Organization has declared an end to the COVID-19 emergency, enduring changes in society resulting from efforts to contain the COVID-19 pandemic are likely to have continuing effects on the Company’s business. For example, in recent years, the newspaper industry, including our Traditional Business, has declined, and we expect this general trend to continue with 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 many 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, recognition of those revenues has been delayed. This can also create a risk of contract cancellations of in-progress projects, which has not been a common issue to date and Journal Technologies is working to minimize.

Reportable Segments

The Company’s Traditional Business is one reportable segment and the other is Journal Technologies which includes Journal Technologies, Inc. and Journal Technologies (Canada) Inc. All inter-segment transactions were eliminated. Additional detail about each reportable segment and its income and expenses is set forth below:

Comparable nine-month periods ended June 30, 2023 and 2022

Consolidated Financial Comparison

Consolidated revenues were $46,159,000 and $35,502,000 for the nine months ended June 30, 2023 and 2022, respectively. This increase of $10,657,000 (30%) was primarily from increases in (i) Journal Technologies’ consulting fees of $6,451,000, license and maintenance fees of $3,413,000 and other public service fees of $649,000 and (ii) the Traditional Business’ advertising revenues of $114,000 and circulation revenues of $27,000.

Consolidated operating expenses increased by $5,761,000 (15%) to $42,937,000 from $37,176,000. Total salaries and employee benefits increased by $3,708,000 (14%) to $30,453,000 from $26,745,000 primarily because of salary adjustments due to recent inflation in the compensation market for talent, and the hiring of additional staff members to strengthen operational efficiencies, product development, and bolster the teams working on the company’s installation projects. Outside services increased by $1,973,000 (68%) to $4,885,000 from $2,912,000 mainly because of additional contractor services and increased third-party hosting fees which were billed to clients. Newsprint and printing expenses increased by $81,000 (15%) to $610,000 from $529,000 primarily resulting from newsprint price increases and additional purchases of printing supplies. Equipment maintenance and software increased by $243,000 (28%) to $1,124,000 from $881,000 mainly resulting from increased maintenance costs and additional miscellaneous office software license purchases. Other general and administrative expenses increased by $411,000 (16%) to $2,903,000 from $2,492,000 mainly because there were increased business travel expenses as compared to the prior fiscal year period.

The Company’s non-operating income, net of expenses, increased by $73,213,000 (188%) to $34,355,000 from a loss of $38,858,000 in the prior fiscal year period primarily because of (i) the recording of net unrealized gains on marketable securities of $29,934,000 during the nine months ended June 30, 2023 as compared with net unrealized losses of $57,075,000 in the prior fiscal year period, and (ii) increases in dividends and interest income of $2,868,000 (67%) to $7,119,000 from $4,251,000. These increases were partially offset by (i) the recording of realized net gains on sales of marketable securities of $422,000 during the nine months ended June 30, 2023 as compared with $14,249,000 in the prior fiscal year period and (ii) increases in interest expenses of $2,565,000 (462%) to $3,120,000 from $555,000 primarily due to the federal interest rate increases.

During the nine months ended June 30, 2023, the Company’s consolidated pretax income was $37,577,000, as compared to a pretax loss of $40,532,000 in the prior fiscal year period. There was consolidated net income of $27,937,000 ($20.29 per share) for the nine months ended June 30, 2023, as compared with net loss of $30,797,000 (-$22.31 per share) in the prior fiscal year period.

At June 30, 2023, the aggregate fair market value of the Company’s marketable securities was $316,038,000. These securities had approximately $150,626,000 of net unrealized gains before taxes of $40,000,000. 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, 2023, the Company recorded an income tax provision of $9,640,000 on the pretax income of $37,577,000. The income tax provision consisted of a tax provision of $110,000 on the realized gains on marketable securities, $7,950,000 on the unrealized gains on marketable securities, and a tax provision of $1,890,000 on income from operations and dividend income, partially offset by a tax benefit of $250,000 for the dividends received deduction and other permanent book and tax differences, and a tax benefit of $60,000 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, 2023 was 25.7%, after including the taxes on the realized and unrealized gains on marketable securities.

 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.

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 2019 with regard to federal income taxes and fiscal 2018 for state income taxes.

The Traditional Business

The Traditional Business’ pretax income increased by $870,000 (60%) to $2,312,000 from $1,442,000 in the prior fiscal year period, primarily because there was more reduction to the long-term supplemental compensation accrual of $795,000 as compared with a $25,000 reduction in the prior fiscal year period.

During the nine months ended June 30, 2023, the Traditional Business had total operating revenues of $12,007,000, as compared with $11,863,000 in the prior fiscal year period. Advertising revenues increased by $114,000 (2%) to $6,498,000 from $6,384,000, primarily resulting from increased trustee sale notice advertising revenues of $176,000 (mainly because of the lifting of COVID-related foreclosure moratoriums on lenders), government notice advertising revenues of $55,000 and legal notice advertising revenues of $49,000, partially offset by decreased commercial advertising revenues of $166,000.

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 31% during the nine months ended June 30, 2023 as compared to the prior fiscal year period. The Company’s smaller newspapers, those other than the Los Angeles and San Francisco Daily Journals (“The Daily Journals”), accounted for about 88% of the total public notice advertising revenues during the nine months ended June 30, 2023. Public notice advertising revenues and related advertising and other service fees, including trustee sales legal advertising revenues, constituted about 15% of the Company's total operating revenues for the nine months ended June 30, 2023 and 19% in the prior fiscal year period.

The Daily Journals accounted for about 93% of the Traditional Business’ total circulation revenues, which increased by $27,000 (1%) to $3,306,000 from $3,279,000. 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 $44,000 to $10,490,000 from $10,446,000, primarily resulting from increased newsprint and printing costs.

Journal Technologies

During the nine months ended June 30, 2023, Journal Technologies’ business segment pretax income increased by $4,026,000 (129%) to $910,000 from a pretax loss of $3,116,000 in the prior fiscal year period primarily resulting from increased revenues of $10,513,000, partially offset by increased operating expenses of $6,487,000.

Revenues increased by $10,513,000 (44%) to $34,152,000 from $23,639,000 in the prior fiscal year period. Licensing and maintenance fees increased by $3,413,000 (25%) to $17,134,000 from $13,721,000. Consulting fees increased by $6,451,000 (137%) to $11,148,000 from $4,697,000 mainly resulting from more project go-lives (i.e. signoffs by the clients). Other public service fees increased by $649,000 (12%) to $5,870,000 from $5,221,000 primarily because of increased e-filing fee revenues.

Deferred consulting fees primarily represent advances from customers of Journal Technologies for installation services and are recognized upon final project go-lives. Deferred revenues on license and maintenance contracts represent prepayments of annual license and maintenance fees and are recognized ratably over the maintenance period.

Operating expenses increased by $6,487,000 (24%) to $33,242,000 from $26,755,000 primarily because of (i) increased personnel costs because of salary adjustments due to recent inflation in the compensation market for talent, (ii) additional contractor services and the hiring of additional staff members to strengthen operational efficiencies, product development, and bolster the teams working on the company’s installation projects, (iii) increased third-party hosting fees which were billed to clients and (iv) 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, particularly as investment in next-generation technology unfolds.

Reportable Segments (for the three-month periods ended June 30, 2023 and 2022)

Consolidated Financial Comparison

Consolidated revenues were $17,704,000 and $12,817,000 for the three months ended June 30, 2023 and 2022, respectively. This increase of $4,887,000 (38%) was primarily from increases in (i) Journal Technologies’ license and maintenance fees of $2,427,000, consulting fees of $2,126,000 and other public service fees of $342,000 and (ii) the Traditional Business’ advertising revenues of $50,000, partially offset by the Traditional Business’ decreased advertising service fees and other of $61,000.

Consolidated operating expenses increased by $471,000 (3%) to $15,391,000 from $14,920,000. Total salaries and employee benefits increased by $1,396,000 (15%) to $10,817,000 from $9,421,000 primarily because of salary adjustments due to recent inflation in the compensation market for talent, and the hiring of additional staff members to strengthen operational efficiencies, product development, and bolster the teams working on the company’s installation projects. Outside services increased by $831,000 (77%) to $1,905,000 from $1,074,000 mainly because of additional contractor services and increased third-party hosting fees which were billed to clients. Newsprint and printing expenses increased by $44,000 (25%) to $218,000 from $174,000 primarily resulting from newsprint price increases and additional purchases of printing supplies. Equipment maintenance and software increased by $204,000 (78%) to $467,000 from $263,000 mainly resulting from increased maintenance costs and additional miscellaneous office software license purchases. Accounting and legal fees increased by $55,000 (27%) to $261,000 from $206,000 primarily resulting from increased accounting fees. Other general and administrative expenses decreased by $58,000 (7%) to $743,000 from $801,000 mainly because there were decreased miscellaneous office supply and equipment expenses as compared to the prior fiscal year period.

The Company’s non-operating expenses, net of income, decreased by $9,493,000 (83%) to $1,931,000 from $11,424,000 in the prior fiscal year period primarily because of (i) the recording of net unrealized losses on marketable securities of $2,735,000 during the three months ended June 30, 2023 as compared with $12,666,000 in the prior fiscal year period and (ii) increases in dividends and interest income of $724,000 (57%) to $1,987,000 from $1,263,000 in the prior fiscal year period. These decreases were partially offset by increases in interest expenses of $890,000 (304%) to $1,183,000 from $293,000 primarily due to the federal rate increases. In addition, there were gains of $272,000 on sale of land during the prior fiscal year period.

During the three months ended June 30, 2023, the Company’s consolidated pretax income was $382,000, as compared to a pretax loss of $13,527,000 in the prior fiscal year period. There was consolidated net income of $677,000 ($0.49 per share) for the three months ended June 30, 2023, as compared with a net loss of $9,862,000 (-$7.15 per share) in the prior fiscal year period.

The Traditional Business

The Traditional Business’ pretax income increased by $1,819,000 (158%) to $669,000 from a pretax loss of $1,150,000 in the prior fiscal year period, primarily because there was a reduction of $95,000 to the long-term supplemental compensation accrual as compared with an addition of $1,985,000 in the prior fiscal year period. (Excluding the adjustments to the long-term supplemental compensation accruals, the Traditional Business’ pretax income was $574,000 as compared with $835,000 in the prior fiscal year period.)

During the three months ended June 30, 2023, the Traditional Business had total operating revenues of $4,130,000, as compared with $4,138,000 in the prior fiscal year period. Advertising revenues increased by $50,000 (2%) to $2,304,000 from $2,254,000, primarily resulting from increased trustee sale notice advertising revenues of $75,000 (mainly because of the lifting of COVID-related foreclosure moratoriums on lenders), government notice advertising revenues of $16,000 and legal notice advertising revenues of $40,000, partially offset by decreased commercial advertising revenues of $81,000.

The Traditional Business segment operating expenses, excluding the adjustments to the long-term supplemental compensation accrual, increased by $253,000 (8%) to $3,556,000 from $3,303,000, primarily resulting from increased newsprint and printing costs and personnel costs.

Journal Technologies

During the three months ended June 30, 2023, Journal Technologies’ business segment pretax income increased by $2,597,000 (272%) to $1,644,000 from a pretax loss of $953,000 in the prior fiscal year period.

Revenues increased by $4,895,000 (56%) to $13,574,000 from $8,679,000 in the prior fiscal year period. Licensing and maintenance fees increased by $2,427,000 (52%) to $7,060,000 from $4,633,000. Consulting fees increased by $2,126,000 (94%) to $4,393,000 from $2,267,000 mainly resulting from more project go-lives. Other public service fees increased by $342,000 (19%) to $2,121,000 from $1,779,000 primarily because of increased e-filing fee revenues.

Operating expenses increased by $2,298,000 (24%) to $11,930,000 from $9,632,000 primarily because of (i) increased personnel costs because of salary adjustments due to recent inflation in the compensation market for talent, (ii) additional contractor services and the hiring of additional staff members to strengthen operational efficiencies, product development, and bolster the teams working on the company’s installation projects, (iii) increased third-party hosting fees which were billed to clients and (iv) increased business travel expenses.

Liquidity and Capital Resources

For the nine-months ended June 30, 2023, the Company’s cash and cash equivalents, restricted cash, and marketable security positions increased by $47,558,000, after the sales of marketable securities of approximately $2,826,000 and additional borrowing of $6,000,000 from the margin loan account, partially offset by the recording of net pretax unrealized gains on marketable securities of $29,934,000. Cash, cash equivalents, the proceeds from the sales of marketable securities and additional borrowing were primarily used to purchase additional marketable securities of $10,001,000.

The investments in marketable securities, which had an adjusted cost basis of approximately $165,412,000 and a market value of about $316,038,000 at June 30, 2023, generated approximately $7,119,000 in dividends and interest income during the nine months ended June 30, 2023. These securities had approximately $150,626,000 of net unrealized gains before estimated taxes of $40,000,000 which will become due only when we sell securities in which there is unrealized appreciation.

Cash flows from operating activities increased by $18,289,000 during the nine months ended June 30, 2023, as compared to the prior fiscal year period, primarily due to (i) decreases in the Company’s income tax receivable of $4,832,000, its deferred tax benefit of $21,074,000 and its accounts receivable of $896,000 mainly resulting from more collections and (ii) increases in deferred revenues of $3,294,000 and income tax payable of $6,244,000. This was partially offset by (i) decreases in net income of $17,154,000, excluding the increases in unrealized gains on marketable securities of $87,009,000; decreases in realized net gains on sales of marketable securities of $13,827,000; additional stock dividends of $2,978,000, and prior year’s gains of $272,00 on sale of land, and (ii) decreases in net accounts payable and accrued liabilities of $705,000 (because of the timing difference in remitting e-filing fees to the courts).

As of June 30, 2023, the Company had working capital of $317,925,000, including the liabilities for deferred subscriptions, deferred consulting fees and deferred maintenance agreements and others of $26,944,000.

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. 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, 2022. 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 continuing effects of COVID-19 and the efforts to contain it on the Company’s customers, advertisers and subscribers; a further decline in subscriber revenues; possible security breaches of the Company’s software or websites; changes in accounting guidance; material weaknesses in the Company’s internal control over financial reporting; and declines in the market prices of the securities owned by the Company. In addition, such statements could be affected by general industry and market conditions, general economic conditions (particularly in California) and other factors.  Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in this Form 10-Q, including in conjunction with the forward-looking statements themselves. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in documents filed by the Company with the Securities and Exchange Commission, including in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022.

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, 2022, management concluded that the Company’s disclosure controls and procedures were not effective as of June 30, 2023.  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, 2023.

PART II

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 14, 2023