Daily Journal(DJCO) - 2022 Q1 - Quarterly Report

PART I: Financial Information Item 1. Financial Statements (Unaudited) Unaudited statements show increased assets and revenues but a sharp drop in net income due to unrealized losses on securities Consolidated Balance Sheets Total assets grew to $436.0 million, driven by increased marketable securities and financed partly by higher margin borrowings Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | Dec 31, 2021 | Sep 30, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $12,793 | $12,596 | | Marketable securities | $395,284 | $347,573 | | Total Assets | $436,007 | $390,577 | | Liabilities & Equity | | | | Investment margin account borrowings | $69,014 | $32,000 | | Total Liabilities | $174,488 | $135,936 | | Total Shareholders' Equity | $261,519 | $254,641 | | Total Liabilities & Equity | $436,007 | $390,577 | Consolidated Statements of Income and Comprehensive Income Net income fell to $6.9 million from $59.3 million year-over-year, primarily due to a significant swing from unrealized gains to losses on marketable securities Consolidated Income Statement Summary (in thousands, except per share data) | Metric | Q1 2022 (ended Dec 31, 2021) | Q1 2021 (ended Dec 31, 2020) | | :--- | :--- | :--- | | Total Revenues | $11,528 | $10,420 | | Income (loss) from operations | $56 | $(315) | | Net unrealized (losses) gains on marketable securities | $(36,088) | $81,212 | | Realized gains on sales of marketable securities | $46,694 | $0 | | Net Income | $6,878 | $59,270 | | Basic and diluted net income per share | $4.98 | $42.93 | Consolidated Statements of Shareholders' Equity Shareholders' equity increased to $261.5 million, with the growth entirely attributed to the $6.9 million in net income for the period Change in Shareholders' Equity (in thousands) | Description | Amount | | :--- | :--- | | Balance at September 30, 2021 | $254,641 | | Net income | $6,878 | | Balance at December 31, 2021 | $261,519 | Consolidated Statements of Cash Flows The company generated positive operating cash flow, used cash for security investments, and drew on its margin loan for financing Cash Flow Summary (in thousands) | Cash Flow Activity | Three months ended Dec 31, 2021 | Three months ended Dec 31, 2020 | | :--- | :--- | :--- | | Net cash from operating activities | $325 | $(2,783) | | Net cash used in investing activities | $(37,105) | $0 | | Net cash from financing activities | $36,978 | $(14,516) | | Increase (decrease) in cash | $198 | $(17,299) | Notes to Consolidated Financial Statements The notes detail two operating segments, a significant sale and purchase of marketable securities, and a 40% effective tax rate - The company operates two main businesses: a Traditional Business (newspapers and public notice advertising) and Journal Technologies (case management software for justice agencies)[21][22] - In December 2021, the company sold marketable securities for ~$50M, realizing a gain of $46.7M, and purchased new securities for ~$87.1M, financed in part by an additional $37M margin loan[39] Segment Performance (in thousands) | Segment | Revenues (Q1 2022) | Income (Loss) from Operations (Q1 2022) | Revenues (Q1 2021) | Income (Loss) from Operations (Q1 2021) | | :--- | :--- | :--- | :--- | :--- | | Traditional Business | $3,574 | $506 | $3,529 | $548 | | Journal Technologies | $7,954 | $(450) | $6,891 | $(863) | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses segment performance, noting revenue growth driven by Journal Technologies but a sharp drop in net income due to investment portfolio losses - The COVID-19 pandemic is expected to continue impacting business operations, potentially causing delays in government procurement for Journal Technologies and affecting dividend income from the securities portfolio[58][59][60] - The company's strategy is to become a significant software company while also operating its Traditional Business, and it is not a smaller version of Berkshire Hathaway Inc[89] Results of Operations Consolidated revenues rose 11%, but a swing from unrealized gains to losses on securities caused a significant drop in net income to $6.9 million Consolidated Financial Comparison (in thousands) | Metric | Q1 2022 | Q1 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Consolidated Revenues | $11,528 | $10,420 | 11% | | Consolidated Operating Expenses | $11,472 | $10,735 | 7% | | Pretax Income | $11,438 | $81,450 | -86% | | Net Income | $6,878 | $59,270 | -88% | - The primary reason for the decrease in non-operating income and net income was the recording of $36.1 million in net unrealized losses on marketable securities, compared to $81.2 million in unrealized gains in the prior year[67] The Traditional Business The Traditional Business segment's pretax income decreased by 8% despite a slight revenue increase driven by foreclosure notice advertising - Pretax income for the Traditional Business decreased by 8% to $506,000 from $548,000 in the prior year period[74] - The number of foreclosure notices published increased by 32% year-over-year, contributing to a 6% rise in advertising revenues[75] - Circulation revenues, primarily from The Daily Journals, declined by 8% to $1,110,000[77] Journal Technologies The Journal Technologies segment narrowed its pretax loss by 48% on 15% revenue growth, driven by a surge in consulting fees - The segment's pretax loss decreased by 48% to $450,000 from $863,000 in the prior year[79] Journal Technologies Revenue Breakdown (in thousands) | Revenue Source | Q1 2022 | Q1 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Licensing and maintenance fees | $4,480 | $5,033 | -11% | | Consulting fees | $1,761 | $244 | 622% | | Other public service fees | $1,713 | $1,614 | 6% | | Total Revenues | $7,954 | $6,891 | 15% | - The company ended maintenance for legacy software products on July 1, 2021, to focus on its main eSeries products, contributing to the decline in maintenance revenue[80] Liquidity and Capital Resources The company maintains a strong liquidity position with $373.9 million in working capital and actively managed its investment portfolio during the quarter - The company's cash, restricted cash, and marketable security positions increased by a net $47.9 million during the quarter[83] - As of December 31, 2021, the company had working capital of $373,851,000[87] - The company may need to consider selling some of its marketable securities to generate cash if needed to fund ongoing operations, and it could be subject to margin calls if its investment portfolio value decreases significantly[88] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were not effective as of December 31, 2021, due to previously identified material weaknesses - Due to material weaknesses in internal control over financial reporting discussed in the last Form 10-K, management concluded that disclosure controls and procedures were not effective as of December 31, 2021[93] PART II: Other Information Item 6. Exhibits This section lists the required CEO/CFO certifications and Inline XBRL financial data files filed as exhibits with the Form 10-Q - The report includes CEO/CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[96] - Inline XBRL data files are included as exhibits, covering the instance document, schema, calculations, definitions, labels, and presentation[97]