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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________ to _____________________
Commission File Number
(Exact name of registrant as specified in its charter)
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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| , | ||
| (Address of principal executive offices) | (Zip code) |
()
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) |
Name of each exchange on which registered |
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The 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.
: ☒ 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).
: ☒ 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: ☐ |
| : ☐ | 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: shares outstanding at January 31, 2024
DAILY JOURNAL CORPORATION
INDEX
| Page Nos. | ||
| PART I Financial Information | ||
| Item 1. Financial Statements (Unaudited) | ||
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Consolidated Balance Sheets ‑ December 31, 2023 and September 30, 2023 |
3 | |
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Consolidated Statements of Income and Comprehensive Income ‑ Three months ended December 31 2023 and 2022 |
4 | |
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Consolidated Statements of Shareholders’ Equity ‑ Three months ended December 31, 2023 and 2022 |
5 | |
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Consolidated Statements of Cash Flows ‑ Three months ended December 31, 2023 and 2022 |
6 | |
| Notes to Consolidated Financial Statements | 7 | |
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
14 | |
| Item 4. Controls and Procedures | 20 | |
| Part II Other Information | ||
| Item 6. Exhibits | 21 | |
PART I
Item 1. FINANCIAL STATEMENTS
DAILY JOURNAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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December 31 |
September 30 |
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2023 |
2023 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
$ | $ | ||||||
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Restricted cash |
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Non-qualified deferred compensation plan - trust account asset value |
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Marketable securities at fair value -- common stocks |
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Accounts receivable, less allowance for doubtful accounts of $ at December 31, 2023 and September 30, 2023 |
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Inventories |
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Income tax receivable |
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Prepaid expenses and other current assets |
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Total current assets |
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Property, plant and equipment, at cost |
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Land, buildings and improvements |
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Furniture, office equipment and computer software |
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Machinery and equipment |
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Less accumulated depreciation |
( | ) | ( | ) | ||||
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Operating lease right-of-use assets |
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| $ | $ | |||||||
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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Current liabilities |
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Accounts payable |
$ | $ | ||||||
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Accrued liabilities |
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Income tax payable |
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Note payable collateralized by real estate |
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Deferred subscriptions |
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Deferred consulting fees |
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Deferred maintenance agreements and others |
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Total current liabilities |
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Long term liabilities |
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Investment margin account borrowings |
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Note payable collateralized by real estate |
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Deferred maintenance agreements |
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Accrued liabilities |
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Accrued non-qualified deferred compensation |
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Deferred income taxes |
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Total long-term liabilities |
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Commitments and contingencies (Notes 10 and 11) |
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Shareholders' equity |
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Preferred stock, $.01 par value, shares authorized and no shares issued |
— | — | ||||||
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Common stock, $.01 par value, shares authorized; shares issued, including treasury shares, at December 31, 2023 and September 30, 2023 |
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Additional paid-in capital |
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Retained earnings |
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Total shareholders' equity |
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| $ | $ | |||||||
See accompanying Notes to Consolidated Financial Statements.
DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
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Three months ended December 31 |
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2023 |
2022 |
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Revenues |
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Advertising |
$ | $ | ||||||
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Circulation |
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Advertising service fees and other |
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Licensing and maintenance fees |
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Consulting fees |
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Other public service fees |
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Costs and expenses |
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Salaries and employee benefits |
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Decrease to the long-term supplemental compensation accrual |
( | ) | ( | ) | ||||
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Agency commissions |
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Outside services |
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Postage and delivery expenses |
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Newsprint and printing expenses |
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Depreciation and amortization |
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Equipment maintenance and software |
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Credit card merchant discount fees |
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Rent expenses |
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Accounting and legal fees |
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Other general and administrative expenses |
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Income from operations |
( | ) | ||||||
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Other income (expense) |
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Dividends and interest income |
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Realized gains on sales of marketable securities |
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Net unrealized gains on marketable securities |
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Interest expense on margin loans and others |
( | ) | ( | ) | ||||
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Interest expense on note payable collateralized by real estate |
( | ) | ( | ) | ||||
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Income before income taxes |
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Income tax provisions |
( | ) | ( | ) | ||||
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Net income |
$ | $ | ||||||
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Weighted average number of common shares outstanding - basic and diluted |
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Basic and diluted net income per share |
$ | $ | ||||||
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Comprehensive income |
$ | $ | ||||||
See accompanying Notes to Consolidated Financial Statements.
DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
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Additional |
Total |
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Common Stock |
Treasury Stock |
Paid-in |
Retained |
Shareholders' |
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Share |
Amount |
Share |
Amount |
Capital |
Earnings |
Equity |
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Balance at September 30, 2022 |
$ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||
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Net income |
— | — | — | — | — | |||||||||||||||||||||||
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Balance at December 31, 2022 |
$ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||
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Balance at September 30, 2023 |
$ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||
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Net income |
— | — | ||||||||||||||||||||||||||
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Balance at December 31, 2023 |
$ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three months ended December 31 |
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2023 |
2022 |
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Cash flows from operating activities |
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Net income |
$ | $ | ||||||
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Adjustments to reconcile net income to net cash (used in) provided from operations |
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Depreciation and amortization |
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Net unrealized gains on marketable securities |
( | ) | ( | ) | ||||
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Realized gains on sales of marketable securities |
( | ) | ||||||
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Deferred income taxes |
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Changes in operating assets and liabilities |
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(Increase) decrease in current assets |
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Accounts receivable, net |
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Inventories |
( | ) | ||||||
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Prepaid expenses and other assets |
( | ) | ||||||
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Income tax receivable |
( | ) | ||||||
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Increase (decrease) in liabilities |
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Accounts payable |
( | ) | ||||||
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Accrued liabilities, including non-qualified deferred compensation |
( | ) | ( | ) | ||||
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Income tax payable |
( | ) | ||||||
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Deferred subscriptions |
( | ) | ( | ) | ||||
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Deferred consulting fees |
( | ) | ||||||
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Deferred maintenance agreements and others |
( | ) | ( | ) | ||||
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Net cash (used in) provided from operating activities |
( | ) | ||||||
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Cash flows from investing activities |
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Proceeds from sales of marketable securities |
— | |||||||
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Purchases of marketable securities |
— | ( | ) | |||||
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Purchases of property, plant and equipment |
( | ) | ( | ) | ||||
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Net cash used in investing activities |
( | ) | ( | ) | ||||
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Cash flows from financing activities |
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Proceeds from margin loan borrowing |
— | |||||||
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Payment to margin loan borrowing |
( | ) | — | |||||
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Payment of real estate loan principal |
( | ) | ( | ) | ||||
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Net cash (used in) provided from financing activities |
( | ) | ||||||
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(Decrease) increase in cash and restricted cash and cash equivalents |
( | ) | ||||||
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Cash and restricted cash and cash equivalents |
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Beginning of period |
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End of period |
$ | $ | ||||||
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Interest paid during period |
$ | $ | ||||||
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Net income taxes paid |
$ | $ | ||||||
See accompanying Notes to Consolidated Financial Statements.
DAILY JOURNAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Since the Company recognizes revenues when it can invoice the customer pursuant to the contract for the value of completed performance, as a practical expedient and because reliable estimates cannot be made, it has elected not to include the transaction price allocated to unsatisfied performance obligations. Furthermore, there are no fulfillment costs to be capitalized for the software contracts because these costs do not generate or enhance resources that will be used in satisfying future performance obligations.
In the three months ended December 31, 2023, the Company recorded and included in its net income the net unrealized gains on marketable securities of $, as compared with the net unrealized gains on marketable securities of $, in the prior year period.
In December 2022, the Company sold part of its marketable securities for approximately $, realizing net gains of $, and borrowed an additional $ from the margin loan account to purchase additional marketable securities with a total cost of approximately $. (The Company repaid $ in the subsequent quarter.) There was no purchase or sale of marketable securities during the three months ended December 31, 2023.
Our long-serving director and former chairman, Charles T. Munger, had managed the Company’s marketable securities portfolio since the original purchases were made with the Company’s excess cash in 2009 as an alternative to near-zero interest rate investments. Following Mr. Munger’s death in November 2023, the Company remains committed to using the portfolio as a source of strength in support of its operating businesses, and the Board is in the process of considering ways to ensure the prudent and effective management of these assets in the context of the current market and the needs of the businesses.
Investments in marketable securities as of December 31, 2023 and September 30, 2023 are summarized below.
Investment in Financial Instruments
For the three months ended December 31, 2022, the Company recorded an income tax provision of $ on the pretax income of $. The income tax provision consisted of a tax provision of $ on the realized gains on marketable securities and $ on the unrealized gains on marketable securities, partially offset by a tax benefit of $ on loss from operations, $ for the dividends received deduction and other permanent book and tax differences, and $ 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 three months ended December 31, 2022 was %, 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 with regard to federal income taxes and fiscal for state income taxes.
In November 2015, the Company purchased a square foot office building constructed in 1998 on about acres in Logan, Utah that had been previously leased for Journal Technologies. The Company paid $ million and financed the balance with a real estate bank loan of $ million which had a fixed interest rate of %. 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 % for the remaining years. This real estate loan had a balance of approximately $ million as of December 31, 2023. Each monthly installment payment is approximately $. In April 2022, the Company sold approximately square feet of the land along the front of its Logan building to the City of Logan for approximately $ in connection with the City of Logan’s street widening project. (In October 2022, the Company again amended this real estate loan contract as the bank transferred its index to Secured Overnight Financing Rate from London Interbank Offered Rate which was ceased by the Federal Reserve and the Alternative Reference Rates Committee in the United States. The term of the loan, including the interest rate and the balance, remains unchanged.)
The Company also owns its facilities in Los Angeles and leases space for its other offices under operating leases which expire at various dates through October 2025.
Effective January 1, 2023, the Company began sponsoring a 401(k) retirement plan and a 409(A) non-qualified deferred compensation plan for its employees. As of December 31, 2023, there were deferred compensation liabilities of approximately $, of which $ were held under a trust account for the 409(A) plan.
Circulation
Advertising service fees and other
Licensing and maintenance fees
Consulting fees
Other public service fees
Total operating revenues
Operating expenses
Salaries and employee benefits
Decrease to the long-term supplemental compensation accrual
Others
Total operating expenses
Income (loss) from operations
Dividends and interest income
Interest expenses on note payable collateralized by real estate and other
Interest expense on margin loans
Gains on sales of marketable securities, net
Net unrealized gains (losses) on marketable securities
Pretax income (loss)
Income tax (expense) benefit
Net income (loss)
Total assets
Capital expenditures
During the three months ended December 31, 2023, the Traditional Business had total operating revenues of $ with $ recognized after services were provided and $ recognized ratably over the publication subscription terms, as compared with total operating revenues of $ with $ recognized after services were provided and $ recognized ratably over the publication subscription terms in the prior year period. Total operating revenues for the Company’s software business were $ with $ recognized upon completion of services and $ recognized ratably over the subscription periods, as compared with total operating revenues of $ with $ recognized upon completion of services and $ recognized ratably over the subscription periods in the prior year period.
Approximately % of the Company’s revenues during the three-month period ended December 31, 2023 were derived from Journal Technologies, as compared with % in the prior year period. In addition, the Company’s revenues during the quarter were primarily from the United States with approximately % from foreign countries during the three-months ended December 31, 2023. Journal Technologies’ revenues are primarily from governmental agencies.
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
Although the World Health Organization has declared an end to the COVID-19 emergency, enduring changes in society resulting from efforts to contain the COVID-19 pandemic may have continuing effects on the Company’s business. For example, for Journal Technologies, although we were able to complete many existing projects remotely, we were delayed in finishing certain implementations and trainings because of our inability to work with clients in-person. Given that we are typically paid for implementation services upon “go-live” of a system, recognition of those revenues has been delayed. This can also create a risk of contract cancellations for in-progress projects, which has not been a common issue to date (there were two in 2023), and Journal Technologies is working to minimize additional cancellations.
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:
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Overall Financial Results (000) |
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For the three months ended December 31, 2023 and 2022 |
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Reportable Segments |
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Traditional Business |
Journal Technologies |
Corporate |
Total |
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|
2023 |
2022 |
2023 |
2022 |
2023 |
2022 |
2023 |
2022 |
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|
Revenues |
||||||||||||||||||||||||||||||||
|
Advertising |
$ | 2,087 | $ | 1,990 | $ | — | $ | — | $ | — | $ | — | $ | 2,087 | $ | 1,990 | ||||||||||||||||
|
Circulation |
1,095 | 1,098 | — | — | — | — | 1,095 | 1,098 | ||||||||||||||||||||||||
|
Advertising service fees and other |
705 | 699 | — | — | — | — | 705 | 699 | ||||||||||||||||||||||||
|
Licensing and maintenance fees |
— | — | 6,557 | 4,395 | — | — | 6,557 | 4,395 | ||||||||||||||||||||||||
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Consulting fees |
— | — | 3,302 | 2,322 | — | — | 3,302 | 2,322 | ||||||||||||||||||||||||
|
Other public service fees |
— | — | 2,247 | 1,797 | — | — | 2,247 | 1,797 | ||||||||||||||||||||||||
|
Total operating revenues |
3,887 | 3,787 | 12,106 | 8,514 | — | — | 15,993 | 12,301 | ||||||||||||||||||||||||
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Operating expenses |
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Salaries and employee benefits |
2,549 | 2,218 | 8,798 | 7,413 | — | — | 11,347 | 9,631 | ||||||||||||||||||||||||
|
Decrease to the long-term supplemental compensation accrual |
(420 | ) | (500 | ) | — | (20 | ) | — | — | (420 | ) | (520 | ) | |||||||||||||||||||
|
Others |
1,471 | 1,134 | 2,972 | 2,772 | — | — | 4,443 | 3,906 | ||||||||||||||||||||||||
|
Total operating expenses |
3,600 | 2,852 | 11,770 | 10,165 | — | — | 15,370 | 13,017 | ||||||||||||||||||||||||
|
Income (loss) from operations |
287 | 935 | 336 | (1,651 | ) | — | — | 623 | (716 | ) | ||||||||||||||||||||||
|
Dividends and interest income |
— | — | — | — | 1,569 | 1,069 | 1,569 | 1,069 | ||||||||||||||||||||||||
|
Interest expenses on note payable collateralized by real estate and other |
— | — | — | — | (11 | ) | (12 | ) | (11 | ) | (12 | ) | ||||||||||||||||||||
|
Interest expense on margin loans |
— | — | — | — | (1,131 | ) | (861 | ) | (1,131 | ) | (861 | ) | ||||||||||||||||||||
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Gains on sales of marketable securities, net |
— | — | — | — | — | 422 | — | 422 | ||||||||||||||||||||||||
|
Net unrealized gains (losses) on marketable securities |
— | — | — | — | 14,690 | 24,025 | 14,690 | 24,025 | ||||||||||||||||||||||||
|
Pretax income (loss) |
287 | 935 | 336 | (1,651 | ) | 15,117 | 24,643 | 15,740 | 23,927 | |||||||||||||||||||||||
|
Income tax (expense) benefit |
(55 | ) | (235 | ) | (250 | ) | 350 | (2,820 | ) | (6,215 | ) | (3,125 | ) | (6,100 | ) | |||||||||||||||||
|
Net income (loss) |
$ | 232 | $ | 700 | $ | 86 | $ | (1,301 | ) | $ | 12,297 | $ | 18,428 | $ | 12,615 | $ | 17,827 | |||||||||||||||
|
Total assets |
$ | 15,483 | $ | 45,288 | $ | 24,062 | $ | 25,202 | $ | 317,818 | $ | 275,781 | $ | 357,363 | $ | 346,271 | ||||||||||||||||
|
Capital expenditures |
$ | 5 | $ | 32 | $ | — | $ | 4 | $ | — | $ | — | $ | 5 | $ | 36 | ||||||||||||||||
Comparable three-month periods ended December 31, 2023 and 2022
Consolidated Financial Comparison
Consolidated revenues were $15,993,000 and $12,301,000 for the three months ended December 31, 2023 and 2022, respectively. This increase of $3,692,000 (30%) was primarily from increases in (i) Journal Technologies’ license and maintenance fees of $2,162,000, consulting fees of $980,000, and other public service fees of $450,000, and (ii) the Traditional Business’ advertising revenues of $97,000.
Approximately 76% of the Company’s revenues during the three months ended December 31, 2023 were derived from Journal Technologies, as compared with 69% in the prior fiscal year period. In addition, the Company’s revenues during the quarter were primarily from the United States, with approximately $2,492,000 (21%) from foreign countries. Almost all of Journal Technologies’ revenues are from governmental agencies.
Consolidated operating expenses increased by $2,353,000 (18%) to $15,370,000 from $13,017,000. Total salaries and employee benefits increased by $1,716,000 (18%) to $11,347,000 from $9,631,000 primarily due to annual salary adjustments 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 $437,000 (36%) to $1,667,000 from $1,230,000 mainly because of additional contractor services and increased third-party hosting fees which were billed to clients. Equipment maintenance and software increased by $73,000 (24%) to $376,000 from $303,000 mainly resulting from increased maintenance costs and additional miscellaneous software license purchases. Other general and administrative expenses decreased by $122,000 (13%) to $832,000 from $954,000 mainly because there were decreased business travel expenses and reduced miscellaneous office supply expenses as compared to the prior fiscal year period.
The Company’s non-operating income, net of expenses, decreased by $9,526,000 (39%) to $15,117,000 from $24,643,000 in the prior fiscal year period primarily because of (i) the recording of net unrealized gains on marketable securities of $14,690,000 as compared with $24,025,000 in the prior fiscal year period, (ii) increases in interest expenses of $269,000 (31%) to $1,142,000 from $873,000 primarily due to the federal interest rate increases, and (iii) the recording of realized net gains on sales of marketable securities of $422,000 in the prior fiscal year period. These decreases were partially offset by increases in dividends and interest income of $500,000 (47%) to $1,569,000 from $1,069,000.
During the three months ended December 31, 2023, the Company’s consolidated pretax income was $15,740,000, as compared to $23,927,000 in the prior fiscal year period. There was consolidated net income of $12,615,000 ($9.16 per share) for the three months ended December 31, 2023, as compared with $17,827,000 ($12.95 per share) in the prior fiscal year period.
At December 31, 2023, the aggregate fair market value of the Company’s marketable securities was $317,818,000. These securities had approximately $152,406,000 of net unrealized gains before taxes of $39,080,000. They generated approximately $1,569,000 in dividends and interest income during the three months ended December 31, 2023, as compared with $1,069,000 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 three months ended December 31, 2023, the Company recorded an income tax provision of $3,125,000 on the pretax income of $15,740,000. The income tax provision consisted of tax provisions of $3,765,000 on the unrealized gains on marketable securities, $30,000 on income from foreign operations, and $270,000 on income from US operations and dividend income, partially offset by a tax benefit of $120,000 for the dividends received deduction and other permanent book and tax differences, and a tax benefit of $820,000 for the effect of a change in state apportionment on the beginning of the year’s deferred tax liability. Consequently, the overall effective tax rate for the three months ended December 31, 2023 was 19.9%, after including the taxes on the unrealized gains on marketable securities.
For the three months ended December 31, 2022, the Company recorded an income tax provision of $6,100,000 on the pretax income of $23,927,000. The income tax provision consisted of a tax provision of $110,000 on the realized gains on marketable securities and $6,360,000 on the unrealized gains on marketable securities, partially offset by a tax benefit of $140,000 on loss from operations, $80,000 for the dividends received deduction and other permanent book and tax differences, and $150,000 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 three months ended December 31, 2022 was 25.49%, after including the taxes on the realized and unrealized gains on marketable securities.
The Company files consolidated federal income tax returns in the United States and with various state jurisdictions and is no longer subject to examinations for fiscal years before fiscal 2021 with regard to federal income taxes and fiscal 2020 for state income taxes.
The Traditional Business
The Traditional Business’ pretax income decreased by $648,000 (69%) to $287,000 from $935,000 in the prior fiscal year period, primarily due to increased personnel costs of $331,000 (15%) to $2,549,000 from $2,218,000, and a smaller reduction of $80,000 (16%) to the long-term supplemental compensation accrual to a reduction of $420,000 as compared with a reduction of $500,000 in the prior fiscal year period.
During the three months ended December 31, 2023, the Traditional Business had total operating revenues of $3,887,000, as compared with $3,787,000 in the prior fiscal year period. Advertising revenues increased by $97,000 (5%) to $2,087,000 from $1,990,000, primarily resulting from increased commercial advertising revenues of $115,000 and trustee sale notice advertising revenues of $10,000, partially offset by decreased government notice advertising revenues of $30,000.
Trustee sale notices are very much dependent on the number of California and Arizona foreclosures for which public notice advertising is required by law. The number of foreclosure notices published by the Company decreased by 2% during the three months ended December 31, 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 87% of the total public notice advertising revenues during the three months ended December 31, 2023. Public notice advertising revenues and related advertising and other service fees, including trustee sales legal advertising revenues, constituted about 14% of the Company's total operating revenues for the three months ended December 31,2023 and 18% for the three months ended December 31, 2022.
The Daily Journals accounted for about 93% of the Traditional Business’ total circulation revenues, which decreased slightly by $3,000 to $1,095,000 from $1,098,000. 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 $668,000 (20%) to $4,020,000 from $3,352,000, primarily resulting from the annual salary adjustments.
Journal Technologies
During the three months ended December 31, 2023, Journal Technologies’ business segment pretax income increased by $1,987,000 (120%) to $336,000 from a pretax loss of $1,651,000 in the prior fiscal year period primarily resulting from increased revenues of $3,592,000, partially offset by increased operating expenses of $1,605,000.
Revenues increased by $3,592,000 (42%) to $12,106,000 from $8,514,000 in the prior fiscal year period. Licensing and maintenance fees increased by $2,162,000 (49%) to $6,557,000 from $4,395,000. Consulting fees increased by $980,000 (42%) to $3,302,000 from $2,322,000 mainly resulting from more project go-lives (i.e. signoffs by the clients). Other public service fees increased by $450,000 (25%) to $2,247,000 from $1,797,000 primarily because of increased e-filing fee revenues.
Deferred consulting fees primarily represent advances from customers of Journal Technologies for installation services and are recognized upon final project go-lives. Deferred revenues on license and maintenance contracts represent prepayments of annual license and maintenance fees and are recognized ratably over the maintenance periods.
Operating expenses increased by $1,605,000 (16%) to $11,770,000 from $10,165,000 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, and (iii) increased third-party hosting fees which were billed to clients.
Journal Technologies continues to update and upgrade its software products. These costs are expensed as incurred and will impact earnings at least through the foreseeable future.
Liquidity and Capital Resources
During the three months ended December 31, 2023, the Company’s cash and cash equivalents, restricted cash, and marketable security positions increased by $8,484,000 after the recording of net pretax unrealized gains on marketable securities of $14,690,000. Cash and cash equivalents were primarily used to pay down the margin loan balance by $5,000,000.
The investments in marketable securities, which had an adjusted cost basis of approximately $165,412,000 and a market value of about $317,818,000 at December 31, 2023, generated approximately $1,569,000 in dividends and interest income during the three months ended December 31, 2023. These securities had approximately $152,406,000 of net unrealized gains before estimated taxes of $39,080,000 which will become due only when we sell securities in which there is unrealized appreciation. The balance on the Company’s margin loan secured by the securities portfolio was $70,000,000 and $75,000,000 at December 31, 2023, and September 30, 2023, respectively.
Cash flows from operating activities decreased by $3,560,000 during the three months ended December 31, 2023, as compared to the prior fiscal year period, primarily due to (i) increases in the Company’s deferred tax benefit of $3,147,000 and income tax receivable of $23,000, and (ii) decreases in net accounts payable and accrued liabilities of $1,426,000 (because of the timing difference in remitting e-filing fees to the courts), deferred revenues of $2,776,000, and income tax payable of $1,069,000. This was partially offset by (i) decreases in the Company’s accounts receivable of $392,000 mainly resulting from more collections, and (ii) increases in its net income of $4,545,000, excluding the decreases in unrealized gains on marketable securities of $9,335,000 and the realized net gains on sales of marketable securities of $422,000 during the prior fiscal year period.
As of December 31, 2023, the Company had working capital of $313,273,000, including the liabilities for deferred subscriptions, deferred consulting fees and deferred maintenance agreements and others of $23,498,000.
The Company believes that it will be able to fund its operations for the foreseeable future through its cash flows from operations and its current working capital and expects that any such cash flows will be invested in its businesses. The Company may or may not have the ability to borrow additional amounts against its marketable securities and, among other possibilities, it may be required to consider selling some of those securities to generate cash if needed to fund ongoing operations. The amount available for borrowing is based on the market value of the Company’s investment portfolio and fluctuates depending on the value of the underlying securities. In addition, the Company could be subject to margin calls should the balance of the investment decrease significantly.
The Company is not a smaller version of Berkshire Hathaway Inc. The Company’s goal is simply to continue to develop a successful and profitable software business, while continuing to enjoy the benefit of its Traditional Business for as long as possible.
Critical Accounting Policies and Estimates
The Company’s financial statements and accompanying notes are prepared in accordance with U.S. generally accepted accounting principles. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Management believes that revenue recognition, accounting for software costs, fair value measurement and disclosures (including the long-term Incentive Plan liabilities) and income taxes are critical accounting policies and estimates.
The Company’s critical accounting policies are detailed in its Annual Report on Form 10-K for the year ended September 30, 2023. The above discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in this report.
Disclosure Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Certain statements contained in this document, including but not limited to those in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are “forward-looking” statements that involve risks and uncertainties that may cause actual future events or results to differ materially from those described in the forward-looking statements. Words such as “expects,” “intends,” “anticipates,” “should,” “believes,” “will,” “plans,” “estimates,” “may,” variations of such words and similar expressions are intended to identify such forward-looking statements. We disclaim any intention or obligation to revise any forward-looking statements whether as a result of new information, future developments, or otherwise. There are many factors that could cause actual results to differ materially from those contained in the forward-looking statements. These factors include, among others: risks associated with software development and implementation efforts, and disruptive new technologies like artificial intelligence; Journal Technologies’ reliance on professional services engagements with justice agencies; material changes in the costs of postage and paper; additional possible changes in the law, particularly changes limiting or eliminating the requirements for public notice advertising; possible loss of the adjudicated status of the Company’s newspapers and their legal authority to publish public notice advertising; the continuous effects of COVID-19 and the efforts to contain it on the Company’s customers, advertisers and subscribers; a further decline in subscriber revenues; possible security breaches of the Company’s software or websites; changes in accounting guidance; material weaknesses in the Company’s internal control over financial reporting; and declines in the market prices of the securities owned by the Company. In addition, such statements could be affected by general industry and market conditions, general economic conditions (particularly in California) and other factors. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in this Form 10-Q, including in conjunction with the forward-looking statements themselves. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in documents filed by the Company with the Securities and Exchange Commission, including in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2023.
Item 4. CONTROLS AND PROCEDURES
In light of the material weaknesses in the Company’s internal control over financial reporting discussed in the Company’s Form 10-K for the fiscal year ended September 30, 2023, management concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 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 December 31, 2023.
PART II
Item 6. Exhibits
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31 |
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32 |
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101.INS |
Inline XBRL Instance |
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101.SCH |
Inline XBRL Taxonomy Extension Schema |
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101.CAL |
Inline XBRL Taxonomy Extension Calculation |
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101.DEF |
Inline XBRL Taxonomy Extension Definition |
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101.LAB |
Inline XBRL Taxonomy Extension Labels |
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101.PRE |
Inline XBRL Taxonomy Extension Presentation |
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104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101 |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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DAILY JOURNAL CORPORATION (Registrant) |
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/s/ Steven Myhill-Jones |
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| Chief Executive Officer | |||
| Chairman of the Board | |||
| (Principal Executive Officer) | |||
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/s/ Tu To |
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| Chief Financial Officer | |||
| (Principal Financial Officer and | |||
| Principal Accounting Officer) | |||
DATE: February 14, 2024