10-Q 1 djco20231231_10q.htm FORM 10-Q djco20231231_10q.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

  (Mark One)

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2023

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______________ to _____________________

 

Commission File Number 0-14665

 

DAILY JOURNAL CORPORATION

(Exact name of registrant as specified in its charter)

South Carolina   95-4133299

(State or other jurisdiction of 

incorporation or organization)

 

(I.R.S. Employer 

Identification No.)

     
915 East First Street    
Los Angeles, California   90012-4050
(Address of principal executive offices)   (Zip code)

         (213) 229-5300

(Registrant's telephone number, including area code)

 

None

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol(s)

Name of each exchange on which registered

Common Stock DJCO

The Nasdaq Stock Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.          

Yes: ☒           No: ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes: ☒            No: ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer: ☐ Accelerated Filer: ☐
Non-accelerated Filer: ☐ Smaller Reporting Company:
  Emerging Growth Company: 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes:             No: ☒

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date:  1,377,026 shares outstanding at January 31, 2024

 

 

1

 

 

DAILY JOURNAL CORPORATION

 

 

INDEX

 

 

 

  Page Nos.
   
PART I   Financial Information  
     
  Item 1.  Financial Statements (Unaudited)  
     
 

Consolidated Balance Sheets ‑

December 31, 2023 and September 30, 2023

3
     
 

Consolidated Statements of Income and Comprehensive Income ‑

Three months ended December 31 2023 and 2022   

4
     
 

Consolidated Statements of Shareholders’ Equity ‑

Three months ended December 31, 2023 and 2022      

5
     
 

Consolidated Statements of Cash Flows ‑

Three months ended December 31, 2023 and 2022        

6
     
  Notes to Consolidated Financial Statements     7
     
 

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

 

2

 

 

PART I

Item 1. FINANCIAL STATEMENTS

DAILY JOURNAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   

December 31

   

September 30

 
   

2023

   

2023

 

ASSETS

               

Current assets

               

Cash and cash equivalents

  $ 14,432,000     $ 20,844,000  

Restricted cash

    2,121,000       2,100,000  

Non-qualified deferred compensation plan - trust account asset value

    379,000       194,000  

Marketable securities at fair value -- common stocks

    317,818,000       303,128,000  

Accounts receivable, less allowance for doubtful accounts of $250,000 at December 31, 2023 and September 30, 2023

    12,742,000       18,687,000  

Inventories

    58,000       72,000  

Income tax receivable

    21,000        

Prepaid expenses and other current assets

    411,000       380,000  

Total current assets

    347,982,000       345,405,000  
                 

Property, plant and equipment, at cost

               

Land, buildings and improvements

    16,400,000       16,400,000  

Furniture, office equipment and computer software

    1,708,000       1,703,000  

Machinery and equipment

    1,521,000       1,521,000  
      19,629,000       19,624,000  

Less accumulated depreciation

    (10,330,000 )     (10,264,000 )
      9,299,000       9,360,000  

Operating lease right-of-use assets

    82,000       95,000  
    $ 357,363,000     $ 354,860,000  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               

Current liabilities

               

Accounts payable

  $ 6,019,000     $ 6,643,000  

Accrued liabilities

    5,032,000       8,789,000  

Income tax payable

          1,069,000  

Note payable collateralized by real estate

    160,000       158,000  

Deferred subscriptions

    2,623,000       2,678,000  

Deferred consulting fees

    5,744,000       5,828,000  

Deferred maintenance agreements and others

    15,131,000       17,033,000  

Total current liabilities

    34,709,000       42,198,000  
                 

Long term liabilities

               

Investment margin account borrowings

    70,000,000       75,000,000  

Note payable collateralized by real estate

    1,079,000       1,120,000  

Deferred maintenance agreements

    714,000       1,000,000  

Accrued liabilities

    3,841,000       4,274,000  

Accrued non-qualified deferred compensation

    387,000       200,000  

Deferred income taxes

    33,549,000       30,599,000  

Total long-term liabilities

    109,570,000       112,193,000  
                 

Commitments and contingencies (Notes 10 and 11)

           
                 

Shareholders' equity

               

Preferred stock, $.01 par value, 5,000,000 shares authorized and no shares issued

           

Common stock, $.01 par value, 5,000,000 shares authorized; 1,805,053 shares issued, including 428,027 treasury shares, at December 31, 2023 and September 30, 2023

    14,000       14,000  

Additional paid-in capital

    1,755,000       1,755,000  

Retained earnings

    211,315,000       198,700,000  

Total shareholders' equity

    213,084,000       200,469,000  
    $ 357,363,000     $ 354,860,000  

 

See accompanying Notes to Consolidated Financial Statements.

 

3

 

 

 

DAILY JOURNAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

 

   

Three months

ended December 31

 
   

2023

   

2022

 
                 

Revenues

               

Advertising

  $ 2,087,000     $ 1,990,000  

Circulation

    1,095,000       1,098,000  

Advertising service fees and other

    705,000       699,000  

Licensing and maintenance fees

    6,557,000       4,395,000  

Consulting fees

    3,302,000       2,322,000  

Other public service fees

    2,247,000       1,797,000  
      15,993,000       12,301,000  
                 

Costs and expenses

               

Salaries and employee benefits

    11,347,000       9,631,000  

Decrease to the long-term supplemental compensation accrual

    (420,000 )     (520,000 )

Agency commissions

    243,000       211,000  

Outside services

    1,667,000       1,230,000  

Postage and delivery expenses

    176,000       167,000  

Newsprint and printing expenses

    205,000       199,000  

Depreciation and amortization

    66,000       75,000  

Equipment maintenance and software

    376,000       303,000  

Credit card merchant discount fees

    552,000       425,000  

Rent expenses

    70,000       69,000  

Accounting and legal fees

    256,000       273,000  

Other general and administrative expenses

    832,000       954,000  
      15,370,000       13,017,000  

Income from operations

    623,000       (716,000 )

Other income (expense)

               

Dividends and interest income

    1,569,000       1,069,000  

Realized gains on sales of marketable securities

          422,000  

Net unrealized gains on marketable securities

    14,690,000       24,025,000  

Interest expense on margin loans and others

    (1,131,000 )     (861,000 )

Interest expense on note payable collateralized by real estate

    (11,000 )     (12,000 )

Income before income taxes

    15,740,000       23,927,000  

Income tax provisions

    (3,125,000 )     (6,100,000 )

Net income

  $ 12,615,000     $ 17,827,000  
                 

Weighted average number of common shares outstanding - basic and diluted

    1,377,026       1,377,026  

Basic and diluted net income per share

  $ 9.16     $ 12.95  
                 

Comprehensive income

  $ 12,615,000     $ 17,827,000  

 

See accompanying Notes to Consolidated Financial Statements.

 

4

 

 

 

DAILY JOURNAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

 

                                   

Additional

           

Total

 
   

Common Stock

   

Treasury Stock

   

Paid-in

   

Retained

   

Shareholders'

 
   

Share

   

Amount

   

Share

   

Amount

   

Capital

   

Earnings

   

Equity

 
                                                         

Balance at September 30, 2022

    1,805,053     $ 18,000       (428,027 )   $ (4,000 )   $ 1,755,000     $ 177,248,000     $ 179,017,000  

Net income

                                  17,827,000       17,827,000  

Balance at December 31, 2022

    1,805,053     $ 18,000       (428,027 )   $ (4,000 )   $ 1,755,000     $ 195,075,000     $ 196,844,000  
                                                         

Balance at September 30, 2023

    1,805,053     $ 18,000       (428,027 )   $ (4,000 )   $ 1,755,000     $ 198,700,000     $ 200,469,000  

Net income

                                  12,615,000       12,615,000  

Balance at December 31, 2023

    1,805,053     $ 18,000       (428,027 )   $ (4,000 )   $ 1,755,000     $ 211,315,000     $ 213,084,000  

 

See accompanying Notes to Consolidated Financial Statements.

 

5

 

 

 

DAILY JOURNAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

Three months

ended December 31

 
   

2023

   

2022

 

Cash flows from operating activities

               

Net income

  $ 12,615,000     $ 17,827,000  

Adjustments to reconcile net income to net cash (used in) provided from operations

               

Depreciation and amortization

    66,000       75,000  

Net unrealized gains on marketable securities

    (14,690,000 )     (24,025,000 )

Realized gains on sales of marketable securities

          (422,000 )

Deferred income taxes

    2,950,000       6,097,000  

Changes in operating assets and liabilities

               

(Increase) decrease in current assets

               

Accounts receivable, net

    5,945,000       5,553,000  

Inventories

    14,000       (25,000 )

Prepaid expenses and other assets

    (18,000 )     68,000  

Income tax receivable

    (21,000 )     2,000  

Increase (decrease) in liabilities

               

Accounts payable

    (624,000 )     207,000  

Accrued liabilities, including non-qualified deferred compensation

    (4,003,000 )     (3,408,000 )

Income tax payable

    (1,069,000 )      

Deferred subscriptions

    (55,000 )     (143,000 )

Deferred consulting fees

    (84,000 )     1,105,000  

Deferred maintenance agreements and others

    (2,188,000 )     (513,000 )

Net cash (used in) provided from operating activities

    (1,162,000 )     2,398,000  
                 

Cash flows from investing activities

               

Proceeds from sales of marketable securities

          2,826,000  

Purchases of marketable securities

          (10,001,000 )

Purchases of property, plant and equipment

    (5,000 )     (36,000 )

Net cash used in investing activities

    (5,000 )     (7,211,000 )
                 

Cash flows from financing activities

               

Proceeds from margin loan borrowing

          6,011,000  

Payment to margin loan borrowing

    (5,000,000 )      

Payment of real estate loan principal

    (39,000 )     (23,000 )

Net cash (used in) provided from financing activities

    (5,039,000 )     5,988,000  
                 

(Decrease) increase in cash and restricted cash and cash equivalents

    (6,206,000 )     1,175,000  
                 

Cash and restricted cash and cash equivalents

               

Beginning of period

    23,138,000       15,468,000  

End of period

  $ 16,932,000     $ 16,643,000  

Interest paid during period

  $ 1,232,000     $ 917,000  

Net income taxes paid

  $ 1,265,000     $  

 

See accompanying Notes to Consolidated Financial Statements.

 

6

 

 

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 the Company, supplies case management software systems and related products to courts, prosecutor and public defender offices, probation departments and other justice agencies, including administrative law organizations, city and county governments and bar associations. These organizations use the Journal Technologies family of products to help manage cases and information electronically, to interface with other critical justice partners and to extend electronic services to the public, including e-filing and a website to pay traffic citations and fees online. These products are licensed or subscribed to in approximately 30 states, and internationally.

 

Essentially all of the Company’s U.S. operations are based in California, Arizona and Utah. The Company also has a presence in Australia where Journal Technologies is working on three software installation projects and in British Columbia, Canada, where the Company established a new wholly-owned subsidiary, Journal Technologies (Canada) Inc., in August 2022.

 

 

Note 2 - Basis of Presentation

 

In the opinion of the Company, the accompanying interim unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of its financial position as of December 31, 2023, its results of operations for the three-month periods ended December 31, 2023 and 2022, its consolidated statements of shareholders’ equity for the three-month periods ended December 31, 2023 and 2022 and cash flows for the three-month periods ended December 31, 2023 and 2022. The results of operations for the three months ended December 31, 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, 2023.

 

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

 

7

 

 

 

Note 3 - Accounting Standards Adopted in Fiscal 2024

 

On October 1, 2023, the Company adopted Current Expected Credit Losses, a credit loss accounting standard (model) issued by the Financial Accounting Stands Board, 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 standard 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 adoption of this guidance has no material effect on the Company’s consolidated financial statements.

 

 

Note 4 – Right-of-Use (ROU) Asset

 

At December 31, 2023, the Company had a ROU asset and lease liability of approximately $82,000 for its operating office and equipment leases, including approximately $31,000 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.

 

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 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 e-file cases and pay traffic citations and other fees.

 

The adoption of ASC 606 also requires the capitalization of certain costs of obtaining contracts, specifically sales commissions which are to be amortized over the expected term of the contracts. For its software contracts, the Company incurs an immaterial amount of sales commission costs which have no significant impact on the Company’s financial condition and results of operations. In addition, the Company’s implementation and fulfillment costs do not meet all criteria required for capitalization.

 

8

 

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.

 

 

Note 6 - Treasury stock and net income per common share

 

In June 2022, the Company received from the late 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 subject to shareholders’ approval at the Company’s 2024 Annual Meeting. These donated shares were considered treasury stock, and the Company accounted for them using the par method which resulted in an immaterial effected amount on Treasury Stock and Additional Paid-in Capital. In addition, the number of outstanding shares of the Company was reduced by these 3,720 shares to reflect the actual number of outstanding shares of 1,377,026 at December 31, 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-month periods ended December 31, 2023 and 2022.

 

 

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 December 31, 2023 and September 30, 2023, there were net accumulated pretax unrealized gains of $152,406,000 and $137,716,000, 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 three months ended December 31, 2023, the Company recorded and included in its net income the net unrealized gains on marketable securities of $14,690,000, as compared with the net unrealized gains on marketable securities of $24,025,000, 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 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.

 

9

 

 

Investments in marketable securities as of December 31, 2023 and September 30, 2023 are summarized below.

 

Investment in Financial Instruments

 

   

December 31, 2023

   

September 30, 2023

 
   

Aggregate

fair value

   

Amortized/

Adjusted

cost basis

   

Pretax

unrealized

gains

   

Aggregate

fair value

   

Amortized/

Adjusted

cost basis

   

Pretax

unrealized

gains

 

Marketable securities

                                               

Common stocks

  $ 317,818,000     $ 165,412,000     $ 152,406,000     $ 303,128,000     $ 165,412,000     $ 137,716,000  

 

 

Note 9 - Income 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.

 

 

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 net borrowings of $40.5 million to purchase additional marketable securities bringing the margin loan balance to $70 million as of December 31, 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 December 31, 2023 was 6%. These investment margin account borrowings do not mature.

 

10

 

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 for Journal Technologies. The Company paid $1.24 million and financed the balance with a real estate bank loan of $2.26 million which had a fixed interest rate of 4.66%. This loan is secured by the Logan facility and can be paid off at any time without prepayment penalty. In October 2020, the Company executed an amendment to lower the interest rate of this loan to a fixed rate of 3.33% for the remaining 10 years. This real estate loan had a balance of approximately $1.24 million as of December 31, 2023. Each monthly installment payment is approximately $16,700. 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. (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 $387,000, of which $379,000 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.

 

11

 

 

 

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:

 

Overall Financial Results (000)

 

For the three months ended December 31, 2023 and 2022

 
                                                                 
   

Reportable Segments

                                 
   

Traditional

Business

   

Journal

Technologies

   

Corporate

   

Total

 
   

2023

   

2022

   

2023

   

2022

   

2023

   

2022

   

2023

   

2022

 

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  

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  

Operating expenses

                                                               

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 )

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  

 

During the three months ended December 31, 2023, the Traditional Business had total operating revenues of $3,887,000 with $2,792,000 recognized after services were provided and $1,095,000 recognized ratably over the publication subscription terms, as compared with total operating revenues of $3,787,000 with $2,689,000 recognized after services were provided and $1,098,000 recognized ratably over the publication subscription terms in the prior year period. Total operating revenues for the Company’s software business were $12,106,000 with $5,570,000 recognized upon completion of services and $6,536,000 recognized ratably over the subscription periods, as compared with total operating revenues of $8,514,000 with $4,121,000 recognized upon completion of services and $4,393,000 recognized ratably over the subscription periods in the prior year period.

 

12

 

Approximately 76% of the Company’s revenues during the three-month period ended December 31, 2023 were derived from Journal Technologies, as compared with 69% in the prior year period. In addition, the Company’s revenues during the quarter were primarily from the United States with approximately 21% from foreign countries during the three-months ended December 31, 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.

 

13

 

 

 

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.

 

14

 

 

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:

 

Overall Financial Results (000)

 

For the three months ended December 31, 2023 and 2022

 
                                                                 
   

Reportable Segments

                                 
   

Traditional

Business

   

Journal

Technologies

   

Corporate

   

Total

 
   

2023

   

2022

   

2023

   

2022

   

2023

   

2022

   

2023

   

2022

 

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  

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  

Operating expenses

                                                               

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 )

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.

 

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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.

 

16

 

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.

 

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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.

 

18

 

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.

 

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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.

 

20

 

 

PART II

 

Item 6.   Exhibits

 

 

31

Certifications by Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

32

Certifications by Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

101.INS

Inline XBRL Instance

 

 

101.SCH

Inline XBRL Taxonomy Extension Schema

 

 

101.CAL

Inline XBRL Taxonomy Extension Calculation

 

 

101.DEF

Inline XBRL Taxonomy Extension Definition

 

 

101.LAB

Inline XBRL Taxonomy Extension Labels

 

 

101.PRE

Inline XBRL Taxonomy Extension Presentation

 

 

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101

 

SIGNATURE

 

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

 

 

DAILY JOURNAL CORPORATION

(Registrant) 

 

 

 

 

 

 

 

 

 

 

/s/ Steven Myhill-Jones

 

     
  Chief Executive Officer  
  Chairman of the Board  
  (Principal Executive Officer)  

 

 

 

/s/ Tu To 

 

     
  Chief Financial Officer  
  (Principal Financial Officer and  
  Principal Accounting Officer)  

 

 

                           

         

 

DATE: February 14, 2024

 

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