Daily Journal(DJCO) - 2022 Q3 - Quarterly Report

PART I. Financial Information This section presents the unaudited consolidated financial statements and management's discussion and analysis for the company Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements for Daily Journal Corporation, including balance sheets, statements of (loss) income and comprehensive (loss) income, statements of shareholders' equity, and statements of cash flows, along with accompanying notes. The financial results for the nine months ended June 30, 2022, show a significant net loss compared to net income in the prior year, primarily driven by unrealized losses on marketable securities Consolidated Balance Sheets This section details the company's financial position, including assets, liabilities, and shareholders' equity at specific dates Consolidated Balance Sheets | Metric | June 30, 2022 | September 30, 2021 | | :------------------------------------- | :-------------- | :----------------- | | Total Current Assets | $368,044,000 | $372,336,000 | | Total Assets | $384,574,000 | $390,577,000 | | Total Current Liabilities | $30,241,000 | $34,012,000 | | Total Long Term Liabilities | $130,489,000 | $101,924,000 | | Total Shareholders' Equity | $223,844,000 | $254,641,000 | - Marketable securities at fair value decreased from $347,573,000 at September 30, 2021, to $341,855,000 at June 30, 2022[7] - Investment margin account borrowings significantly increased from $32,000,000 at September 30, 2021, to $75,000,000 at June 30, 2022[7] Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income (Three Months) This section presents the company's financial performance, including revenues, expenses, and net (loss) income for the three-month period Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income (Three Months) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | | :------------------------------------- | :------------------------------- | :------------------------------- | | Total Revenues | $12,552,000 | $13,562,000 | | Total Costs and Expenses | $14,655,000 | $12,238,000 | | (Loss) Income from Operations | $(2,103,000) | $1,324,000 | | Net Unrealized (Losses) Gains on Marketable Securities | $(12,666,000) | $55,686,000 | | Net (Loss) Income | $(9,862,000) | $42,573,000 | | Basic and Diluted Net (Loss) Income Per Share | $(7.15) | $30.83 | - Total revenues decreased by 7.45% YoY for the three months ended June 30, 2022, primarily due to a decline in licensing and maintenance fees[11] - The company reported a significant net loss of $(9,862,000) for the three months ended June 30, 2022, compared to net income of $42,573,000 in the prior year, largely driven by net unrealized losses on marketable securities[11] Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income (Nine Months) This section presents the company's financial performance, including revenues, expenses, and net (loss) income for the nine-month period Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income (Nine Months) | Metric | Nine Months Ended June 30, 2022 | Nine Months Ended June 30, 2021 | | :------------------------------------- | :------------------------------ | :------------------------------ | | Total Revenues | $34,797,000 | $37,952,000 | | Total Costs and Expenses | $36,471,000 | $35,638,000 | | (Loss) Income from Operations | $(1,674,000) | $2,314,000 | | Net Unrealized (Losses) Gains on Marketable Securities | $(57,075,000) | $131,754,000 | | Net (Loss) Income | $(30,797,000) | $114,319,000 | | Basic and Diluted Net (Loss) Income Per Share | $(22.31) | $82.80 | - Total revenues decreased by 8.31% YoY for the nine months ended June 30, 2022, primarily due to a reduction in Journal Technologies' licensing and maintenance fees[15] - The company reported a net loss of $(30,797,000) for the nine months ended June 30, 2022, a significant decline from net income of $114,319,000 in the prior year, largely attributable to net unrealized losses on marketable securities[15] Consolidated Statements of Shareholders' Equity This section outlines changes in the company's equity, including retained earnings and total shareholders' equity Consolidated Statements of Shareholders' Equity | Metric | June 30, 2022 | September 30, 2021 | | :------------------------------------- | :-------------- | :----------------- | | Retained Earnings | $222,075,000 | $252,872,000 | | Total Shareholders' Equity | $223,844,000 | $254,641,000 | - Total shareholders' equity decreased from $254,641,000 at September 30, 2021, to $223,844,000 at June 30, 2022, primarily due to net losses incurred during the period[18] - The company received 3,720 shares of common stock as a gift from Director Charles T. Munger in June 2022, which are now considered treasury stock[18][40] Consolidated Statements of Cash Flows This section details the cash inflows and outflows from operating, investing, and financing activities Consolidated Statements of Cash Flows | Metric | Nine Months Ended June 30, 2022 | Nine Months Ended June 30, 2021 | | :------------------------------------- | :------------------------------ | :------------------------------ | | Net Cash (Used in) Provided from Operating Activities | $(9,865,000) | $22,000 | | Net Cash Used in Investing Activities | $(36,741,000) | $(20,022,000) | | Net Cash Provided from Financing Activities | $42,890,000 | $2,413,000 | | Decrease in Cash and Restricted Cash and Cash Equivalents | $(3,716,000) | $(17,587,000) | - Operating activities shifted from providing $22,000 in cash in 2021 to using $(9,865,000) in 2022, primarily due to net loss and changes in deferred income taxes[22][111] - Investing activities used significantly more cash in 2022 ($(36,741,000)) compared to 2021 ($(20,022,000)), driven by increased purchases of marketable securities[22] - Financing activities provided substantial cash ($42,890,000) in 2022, mainly from increased borrowings from the margin loan account[22] Notes to Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the consolidated financial statements Note 1 - The Corporation and Operations This note describes the company's business segments and operational activities - Daily Journal Corporation operates two main businesses: the 'Traditional Business' (newspaper publishing and related services) and Journal Technologies, Inc. (case management software systems for justice agencies)[25][26] - Journal Technologies' products are licensed in approximately 30 states and internationally, with a presence in Australia for software installation projects[26][27] Note 2 - Basis of Presentation This note explains the accounting principles and presentation methods used for the interim financial statements - The interim unaudited consolidated financial statements include all necessary adjustments for a fair presentation and are prepared in accordance with SEC rules, with certain information condensed or omitted[28][29] Note 3 – New Accounting Pronouncement This note discusses the impact of recent accounting pronouncements on the company's financial reporting - No new accounting pronouncements issued or effective have had, or are expected to have, a material impact on the Company's consolidated financial statements[31] Note 4 – Right-of-Use (ROU) Asset This note details the company's right-of-use assets and corresponding lease liabilities - As of June 30, 2022, the Company had a right-of-use asset and lease liability of approximately $130,000 for operating office and equipment leases[33] Note 5 – Revenue Recognition This note outlines the company's policies for recognizing revenue across its business segments - Revenue recognition follows ASU No. 2014-09 (ASC Topic 606). For the Traditional Business, advertising is recognized when published, and subscriptions are recognized over the term. For Journal Technologies, revenues from consulting, software licenses, maintenance, and public service fees are recognized at point of delivery or ratably over subscription periods[34][35][36] Note 6 - Treasury stock and net (loss) income per common share This note provides information on treasury stock transactions and per-share earnings calculations - In June 2022, Director Charles T. Munger donated 3,720 shares of Daily Journal common stock to establish a new senior management equity incentive plan, reducing outstanding shares to 1,377,026 as of June 30, 2022[40] Weighted Average Shares Outstanding | Period | Weighted Average Shares Outstanding | | :------------------------------------- | :-------------------------------- | | Nine months ended June 30, 2022 | 1,380,542 | | Three months ended June 30, 2022 | 1,380,133 | | Nine months ended June 30, 2021 | 1,380,746 | | Three months ended June 30, 2021 | 1,380,746 | Note 7 - Basic and Diluted Net Income Per Share This note clarifies the calculation of basic and diluted net income per common share - The Company does not have any common stock equivalents, so basic and diluted net income per share are the same[41] Note 8 - Investments in Marketable Securities This note details the company's marketable securities portfolio, including fair values and unrealized gains or losses - All marketable securities are classified as current assets and stated at fair value, with most accumulated pretax unrealized gains in common stocks of three U.S. financial institutions and one foreign manufacturer[42] Investments in Marketable Securities | Metric | June 30, 2022 | September 30, 2021 | | :------------------------------------- | :-------------- | :----------------- | | Aggregate Fair Value | $341,855,000 | $347,573,000 | | Aggregate Adjusted Cost Basis | $154,837,000 | $103,480,000 | | Pretax Unrealized Gains | $187,018,000 | $244,093,000 | - For the nine months ended June 30, 2022, the Company recorded net unrealized losses of $57,075,000 on marketable securities, a significant shift from net unrealized gains of $131,754,000 in the prior year[43] - The Company sold marketable securities for $80,570,000, realizing net gains of $14,249,000, and borrowed an additional net $43,000,000 from the margin loan account to purchase $117,678,000 in additional marketable securities[44] Note 9 - Income Taxes This note provides information on the company's income tax provisions, benefits, and effective tax rates - For the nine months ended June 30, 2022, the Company recorded an income tax benefit of $9,735,000 on a pretax loss of $40,532,000, resulting in an overall effective tax rate of 24%[47] - The tax benefit included $15,425,000 on unrealized losses on marketable securities, offset by provisions on realized gains, income from operations, and state apportionment changes[47] - For the nine months ended June 30, 2021, the Company recorded a tax provision of $40,115,000 on pretax income of $154,434,000, with an overall effective tax rate of 26%[48] Note 10 - Debt and Commitments This note outlines the company's debt obligations and significant financial commitments - Investment margin account borrowings increased to $75 million as of June 30, 2022, with an interest rate of 2.25% (Federal Funds Rate plus 50 basis points) and no maturity[50] - The Company has a real estate bank loan of approximately $1.47 million as of June 30, 2022, secured by its Logan, Utah facility, with a fixed interest rate of 3.33%[52] - In April 2022, the Company sold approximately 17,564 square feet of land in Logan, Utah, for $381,000 due to a street widening project[52] Note 11 - Contingencies This note discusses potential future liabilities and legal matters affecting the company - Management believes that the ultimate outcome of contingencies, including litigation arising in the normal course of business, will not have a material adverse effect on the Company's financial position, results of operations, or cash flows[54] Note 12 - Operating Segments This note presents financial data for the company's distinct operating segments - The Company has two reportable segments: the Traditional Business and Journal Technologies. Inter-segment transactions are eliminated[56] Nine Months Ended June 30, 2022 vs. 2021 (Segment Revenues) | Revenue Type | Traditional Business 2022 | Traditional Business 2021 | Journal Technologies 2022 | Journal Technologies 2021 | | :------------------------------------- | :------------------------ | :------------------------ | :------------------------ | :------------------------ | | Advertising | $5,679,000 | $5,649,000 | --- | --- | | Circulation | $3,279,000 | $3,458,000 | --- | --- | | Advertising service fees and other | $2,200,000 | $1,964,000 | --- | --- | | Licensing and maintenance fees | --- | --- | $13,721,000 | $16,990,000 | | Consulting fees | --- | --- | $4,697,000 | $4,649,000 | | Other public service fees | --- | --- | $5,221,000 | $5,242,000 | | Total Revenues | $11,158,000 | $11,071,000 | $23,639,000 | $26,881,000 | Three Months Ended June 30, 2022 vs. 2021 (Segment Revenues) | Revenue Type | Traditional Business 2022 | Traditional Business 2021 | Journal Technologies 2022 | Journal Technologies 2021 | | :------------------------------------- | :------------------------ | :------------------------ | :------------------------ | :------------------------ | | Advertising | $1,989,000 | $2,195,000 | --- | --- | | Circulation | $1,097,000 | $1,126,000 | --- | --- | | Advertising service fees and other | $787,000 | $762,000 | --- | --- | | Licensing and maintenance fees | --- | --- | $4,633,000 | $5,602,000 | | Consulting fees | --- | --- | $2,267,000 | $2,100,000 | | Other public service fees | --- | --- | $1,779,000 | $1,777,000 | | Total Revenues | $3,873,000 | $4,083,000 | $8,679,000 | $9,479,000 | - Journal Technologies accounted for approximately 68% of the Company's total revenues during the nine-month period ended June 30, 2022, down from 71% in the prior year[62] Note 12 - Subsequent Events This note discloses significant events occurring after the reporting period but before financial statement issuance - No subsequent events occurred through the issuance date of these financial statements that required recognition or disclosure[63] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial performance and condition, highlighting the impact of the COVID-19 pandemic, detailed segment results for both the Traditional Business and Journal Technologies, and an analysis of liquidity and capital resources. The Company experienced a significant consolidated net loss for both the three and nine months ended June 30, 2022, primarily due to unrealized losses on marketable securities and increased operating expenses Results of Operations This section provides an overview of the company's financial performance across its business segments - The Company operates two distinct businesses: the Traditional Business (newspaper publishing) and Journal Technologies, Inc. (case management software for justice agencies)[65] Impact of the COVID-19 Pandemic This section discusses the ongoing effects of the COVID-19 pandemic on the company's business operations - The COVID-19 pandemic, including new variants, continues to significantly impact the Company's business operations, leading to delays or cancellations in government procurement for Journal Technologies and a decline in the Traditional Business due to remote work[67][68][69] - Management cannot estimate the full magnitude of the pandemic's impact due to uncertainties, but expects the decline in the newspaper industry to continue[68] Reportable Segments (Nine Months) This section analyzes the financial performance of the company's operating segments for the nine-month period Consolidated Financial Comparison This section provides a comparative analysis of the company's consolidated financial results for the nine-month period Consolidated Financial Comparison (Nine Months) | Metric | Nine Months Ended June 30, 2022 | Nine Months Ended June 30, 2021 | Change ($) | Change (%) | | :------------------------------------- | :------------------------------ | :------------------------------ | :--------- | :--------- | | Consolidated Revenues | $34,797,000 | $37,952,000 | $(3,155,000) | (8%) | | Consolidated Operating Expenses | $36,471,000 | $35,638,000 | $833,000 | 2% | | Consolidated Pretax (Loss) Income | $(40,532,000) | $154,434,000 | $(194,966,000) | (126%) | | Consolidated Net (Loss) Income | $(30,797,000) | $114,319,000 | $(145,116,000) | (127%) | | Basic and Diluted Net (Loss) Income Per Share | $(22.31) | $82.80 | $(105.11) | (127%) | - The decrease in consolidated revenues was primarily due to decreases in Journal Technologies' license and maintenance fees ($3,269,000) and public service fees ($21,000), and the Traditional Business' circulation revenues ($179,000)[73] - Consolidated operating expenses increased due to higher salaries and employee benefits ($927,000), outside services ($676,000), newsprint and printing expenses ($60,000), and other general and administrative expenses ($938,000)[75] - Non-operating income decreased significantly by $190,978,000, primarily due to net unrealized losses on marketable securities of $57,075,000 in 2022 compared to net unrealized gains of $131,754,000 in 2021[76] Taxes This section details the company's income tax expenses and benefits for the nine-month period - For the nine months ended June 30, 2022, the Company recorded an income tax benefit of $9,735,000 on a pretax loss of $40,532,000, resulting in an effective tax rate of 24%[80] - The tax benefit included $15,425,000 on unrealized losses on marketable securities, offset by tax provisions on realized gains, income from operations, and state apportionment changes[80] - For the nine months ended June 30, 2021, the Company recorded a tax provision of $40,115,000 on pretax income of $154,434,000, with an effective tax rate of 26%[81] The Traditional Business This section analyzes the financial performance of the Traditional Business segment for the nine-month period - The Traditional Business' pretax income increased by $1,372,000 to $1,442,000, primarily due to a reduction in the long-term supplemental compensation accrual[83] - Total operating revenues for the Traditional Business increased slightly to $11,158,000, with advertising revenues up 1% due to increased legal notice and trustee sale advertising following the lifting of foreclosure moratoriums[84] - Circulation revenues declined by $179,000 (5%) to $3,279,000, mainly from The Daily Journals[87] Journal Technologies This section analyzes the financial performance of the Journal Technologies segment for the nine-month period - Journal Technologies' pretax loss increased by $5,360,000 to $3,116,000, compared to pretax income in the prior year[89] - Revenues decreased by $3,242,000 (12%) to $23,639,000, primarily due to a 19% decrease in licensing and maintenance fees as the Company ended support for legacy software products[90] - Operating expenses increased by $2,118,000 (9%) due to higher personnel costs, increased third-party hosting fees, and additional office equipment purchases and business travel[92] Reportable Segments (Three Months) This section analyzes the financial performance of the company's operating segments for the three-month period Consolidated Financial Comparison This section provides a comparative analysis of the company's consolidated financial results for the three-month period Consolidated Financial Comparison (Three Months) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Change ($) | Change (%) | | :------------------------------------- | :------------------------------- | :------------------------------- | :--------- | :--------- | | Consolidated Revenues | $12,552,000 | $13,562,000 | $(1,010,000) | (7%) | | Consolidated Operating Expenses | $14,655,000 | $12,238,000 | $2,417,000 | 20% | | Consolidated Pretax (Loss) Income | $(13,527,000) | $57,773,000 | $(71,300,000) | (123%) | | Consolidated Net (Loss) Income | $(9,862,000) | $42,573,000 | $(52,435,000) | (123%) | | Basic and Diluted Net (Loss) Income Per Share | $(7.15) | $30.83 | $(37.98) | (123%) | - The decrease in consolidated revenues was primarily due to decreases in Journal Technologies' license and maintenance fees ($969,000) and the Traditional Business' advertising net revenues ($206,000) and circulation revenues ($29,000)[96] - Consolidated operating expenses increased significantly by 20% due to higher salaries and employee benefits ($641,000), outside services ($280,000), and other general and administrative expenses ($306,000)[99] - Non-operating income decreased by $67,873,000, primarily due to net unrealized losses on marketable securities of $12,666,000 in 2022 compared to net unrealized gains of $55,686,000 in 2021[100] The Traditional Business This section analyzes the financial performance of the Traditional Business segment for the three-month period - The Traditional Business' pretax loss increased by $1,568,000 to $1,150,000, mainly due to an increase in the long-term supplemental compensation accrual[102] - Total operating revenues decreased to $3,873,000, with advertising revenues down 9% due to decreased commercial and government notice advertising[103] Journal Technologies This section analyzes the financial performance of the Journal Technologies segment for the three-month period - Journal Technologies' pretax loss increased by $1,859,000 to $953,000, compared to pretax income in the prior year[106] - Revenues decreased by $800,000 (8%) to $8,679,000, primarily due to a 17% decrease in licensing and maintenance fees from the reduction in legacy software product support[107] - Operating expenses increased by $1,059,000 (12%) due to higher personnel costs, increased third-party hosting fees, and additional office equipment purchases and business travel expenses[108] Liquidity and Capital Resources This section discusses the company's ability to meet its short-term and long-term financial obligations - The Company's cash, cash equivalents, restricted cash, and marketable security positions decreased by $9,434,000 for the nine months ended June 30, 2022, despite sales of marketable securities and additional margin loan borrowings[109] - Investments in marketable securities had a market value of $341,855,000 and generated $4,251,000 in dividends income during the nine months ended June 30, 2022[110] - As of June 30, 2022, working capital was $337,803,000. The Company believes it can fund operations through cash flows and current working capital, but may need to sell securities or borrow more, subject to market value fluctuations and margin calls[112][113] Critical Accounting Policies and Estimates This section highlights the significant accounting policies and judgments used in financial reporting - Key critical accounting policies and estimates include revenue recognition, accounting for software costs, fair value measurement and disclosures, and income taxes[116] Disclosure Regarding Forward-Looking Statements This section provides cautionary statements about future-oriented information and associated risks - The report contains forward-looking statements subject to risks and uncertainties, including those related to software development, reliance on justice agencies, costs of postage and paper, changes in law, COVID-19 impacts, security breaches, accounting guidance, internal control weaknesses, and market price declines of securities[119] Item 4. Controls and Procedures Management concluded that the Company's disclosure controls and procedures were not effective as of June 30, 2022, due to material weaknesses in internal control over financial reporting previously discussed in the Form 10-K for fiscal year ended September 30, 2021. No material changes occurred in internal control over financial reporting during the quarter - Disclosure controls and procedures were not effective as of June 30, 2022, due to material weaknesses in internal control over financial reporting[120] - There were no material changes in the Company's internal control over financial reporting during the quarter ended June 30, 2022[120] PART II. Other Information This section includes additional information not covered in the financial statements, such as exhibits Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications by the Chief Financial Officer and Chief Executive Officer, and various Inline XBRL taxonomy files - Exhibits include Certifications by Chief Financial Officer and Chief Executive Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[123] - The report also includes Inline XBRL Instance, Taxonomy Extension Schema, Calculation, Definition, Labels, and Presentation files, along with the Cover Page Interactive Data File[124]