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 March 31, 2020

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 (I.R.S. Employer
incorporation or organization) 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: 1,380,746 shares outstanding at April 30, 2020

 

1

 

 

DAILY JOURNAL CORPORATION

 

 

INDEX

 

 

    Page Nos.
PART I Financial Information    
     
Item 1. Financial Statements    
     
Consolidated Balance Sheets - March 31, 2020 and September 30, 2019   3
     
Consolidated Statements of Comprehensive Income (Loss) - Three months ended March 31, 2020 and 2019   4
     
Consolidated Statements of Comprehensive Income (Loss) - Six months ended March 31, 2020 and 2019   5
     
Consolidated Statements of Shareholders’ Equity - Six months ended March 31, 2020 and 2019    6
     
Consolidated Statements of Cash Flows - Six months ended March 31, 2020 and 2019   7
     
Notes to Consolidated Financial Statements    8
     
Item 2.      Management's Discussion and Analysis of Financial Condition and Results of Operations   15
     
Item 3.      Quantitative and Qualitative Disclosures about Market Risk   22
     
Item 4.      Controls and Procedures   22
     
Part II Other Information    
     
Item 1A.    Risk Factors   23
     
Item 6.       Exhibits   23

 

 

2

 

 

PART I

Item 1. FINANCIAL STATEMENTS

DAILY JOURNAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   

March 31

   

September 30

 
   

2020

   

2019

 

ASSETS

               

Current assets

               

Cash and cash equivalents

  $ 5,822,000     $ 10,630,000  

Marketable securities at fair value -- common stocks of $136,901,000 at March 31, 2020 and $194,581,000 at September 30, 2019

    136,901,000       194,581,000  

Accounts receivable, less allowance for doubtful accounts of $200,000 at March 31, 2020 and September 30, 2019

    6,347,000       7,036,000  

Inventories

    40,000       40,000  

Prepaid expenses and other current assets

    593,000       508,000  

Income tax receivable

    470,000       153,000  

Total current assets

    150,173,000       212,948,000  
                 

Property, plant and equipment, at cost

               

Land, buildings and improvements

    16,599,000       16,499,000  

Furniture, office equipment and computer software

    2,188,000       2,119,000  

Machinery and equipment

    1,749,000       1,750,000  
      20,536,000       20,368,000  

Less accumulated depreciation

    (9,828,000 )     (9,572,000 )
      10,708,000       10,796,000  

Operating lease right-of-use assets

    382,000       ---  

Deferred income taxes - Federal

    11,661,000       12,596,000  

Deferred income taxes - State

    1,811,000       1,036,000  
    $ 174,735,000     $ 237,376,000  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               

Current liabilities

               

Accounts payable

  $ 3,061,000     $ 4,520,000  

Accrued liabilities

    5,216,000       5,173,000  

Note payable collateralized by real estate

    129,000       126,000  

Deferred subscriptions

    2,884,000       3,195,000  

Deferred installation contracts

    1,108,000       1,932,000  

Deferred maintenance agreements and others

    13,201,000       15,722,000  

Total current liabilities

    25,599,000       30,668,000  
                 

Long term liabilities

               

Investment margin account borrowings

    29,493,000       29,493,000  

Note payable collateralized by real estate

    1,644,000       1,709,000  

Deferred maintenance agreements

    256,000       335,000  

Accrued liabilities

    343,000       230,000  

Deferred income taxes

    21,816,000       37,241,000  

Total long term liabilities

    53,552,000       69,008,000  
                 

Commitments and contingencies (Notes 8 and 9)

    ---       ---  
                 

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 424,307 treasury shares, at March 31, 2020 and September 30, 2019

    14,000       14,000  

Additional paid-in capital

    1,755,000       1,755,000  

Retained earnings

    93,815,000       135,931,000  

Total shareholders' equity

    95,584,000       137,700,000  
    $ 174,735,000     $ 237,376,000  

 

See accompanying Notes to Consolidated Financial Statements

 

3

 

 

DAILY JOURNAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

 

   

Three months

ended March 31

 
   

2020

   

2019

 
                 

Revenues

               

Advertising

  $ 1,992,000     $ 2,108,000  

Circulation

    1,286,000       1,273,000  

Advertising service fees and other

    654,000       624,000  

Licensing and maintenance fees

    5,505,000       4,640,000  

Consulting fees

    1,229,000       399,000  

Other public service fees

    1,690,000       1,668,000  
      12,356,000       10,712,000  
                 

Costs and expenses

               

Salaries and employee benefits

    9,678,000       8,791,000  

Outside services

    1,154,000       1,244,000  

Postage and delivery expenses

    191,000       205,000  

Newsprint and printing expenses

    193,000       186,000  

Depreciation and amortization

    128,000       150,000  

Equipment maintenance and software

    504,000       410,000  

Credit card merchant discount fees

    388,000       375,000  

Rent expenses

    170,000       257,000  

Accounting and legal fees

    202,000       396,000  

Other general and administrative expenses

    846,000       1,369,000  
      13,454,000       13,383,000  

Loss from operations

    (1,098,000 )     (2,671,000 )

Other income (expense)

               

Dividends and interest income

    1,297,000       1,141,000  

Other income

    ---       9,000  

Net unrealized (losses) gains on investments

    (77,211,000 )     8,497,000  

Interest expense on note payable collateralized by real estate

    (21,000 )     (22,000 )

Interest expense on margin loans and others

    (153,000 )     (219,000 )

(Loss) income before income taxes

    (77,186,000 )     6,735,000  

Benefit from (provision for) income taxes

    20,860,000       (1,717,000 )

Net (loss) income

  $ (56,326,000 )   $ 5,018,000  
                 

Weighted average number of common shares outstanding - basic and diluted

    1,380,746       1,380,746  

Basic and diluted net (loss) income per share

  $ (40.79 )   $ 3.63  
                 

Comprehensive (loss) income

  $ (56,326,000 )   $ 5,018,000  

 

See accompanying Notes to Consolidated Financial Statements.

 

4

 

DAILY JOURNAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

 

   

Six months

ended March 31

 
   

2020

   

2019

 
                 

Revenues

               

Advertising

  $ 4,118,000     $ 4,300,000  

Circulation

    2,598,000       2,611,000  

Advertising service fees and other

    1,348,000       1,293,000  

Licensing and maintenance fees

    10,715,000       9,430,000  

Consulting fees

    1,918,000       940,000  

Other public service fees

    3,336,000       2,566,000  
      24,033,000       21,140,000  
                 

Costs and expenses

               

Salaries and employee benefits

    18,565,000       17,446,000  

Outside services

    2,014,000       2,402,000  

Postage and delivery expenses

    401,000       409,000  

Newsprint and printing expenses

    371,000       362,000  

Depreciation and amortization

    256,000       303,000  

Equipment maintenance and software

    826,000       753,000  

Credit card merchant discount fees

    770,000       645,000  

Rent expenses

    342,000       515,000  

Accounting and legal fees

    458,000       799,000  

Other general and administrative expenses

    2,646,000       2,698,000  
      26,649,000       26,332,000  

Loss from operations

    (2,616,000 )     (5,192,000 )

Other income (expense)

               

Dividends and interest income

    2,977,000       2,671,000  

Other income

    3,000       19,000  

Net unrealized losses on investments

    (57,680,000 )     (20,143,000 )

Interest expense on note payable collateralized by real estate

    (43,000 )     (45,000 )

Interest expense on margin loans and others

    (337,000 )     (425,000 )

Loss before income taxes

    (57,696,000 )     (23,115,000 )

Benefit from income taxes

    15,580,000       6,600,000  

Net loss

  $ (42,116,000 )   $ (16,515,000 )
                 

Weighted average number of common shares outstanding - basic and diluted

    1,380,746       1,380,746  

Basic and diluted loss per share

  $ (30.50 )   $ (11.96 )
                 

Comprehensive loss

  $ (42,116,000 )   $ (16,515,000 )

 

See accompanying Notes to Consolidated Financial Statements.

 

5

 

 

DAILY JOURNAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

 

                                                   

Accumulated

         
                                   

Additional

           

Other

   

Total

 
   

Common Stock

   

Treasury Stock

   

Paid-in

   

Retained

   

Comprehensive

   

Shareholders'

 
   

Share

   

Amount

   

Share

   

Amount

   

Capital

   

Earnings

   

Income

   

Equity

 
                                                                 

Balance at September 30, 2018

    1,805,053     $ 18,000       (424,307 )   $ (4,000 )   $ 1,755,000     $ 45,361,000     $ 115,786,000     $ 162,916,000  

Adoption of new accounting pronouncement

    ---       ---       ---       ---       ---       115,786,000       (115,786,000 )     ---  

Net loss

    ---       ---       ---       ---       ---       (21,533,000 )     ---       (21,533,000 )

Balance at December 31, 2018

    1,805,053       18,000       (424,307 )     (4,000 )     1,755,000       139,614,000       ---       141,383,000  

Net income

    ---       ---       ---       ---       ---       5,018,000       ---       5,018,000  

Balance at March 31, 2019

    1,805,053     $ 18,000       (424,307 )   $ (4,000 )   $ 1,755,000     $ 144,632,000     $ ---     $ 146,401,000  
                                                                 
                                                                 

Balance at September 30, 2019

    1,805,053     $ 18,000       (424,307 )   $ (4,000 )   $ 1,755,000     $ 135,931,000     $ ---     $ 137,700,000  

Net income

    ---       ---       ---       ---       ---       14,210,000       ---       14,210,000  

Balance at December 31, 2019

    1,805,053       18,000       (424,307 )     (4,000 )     1,755,000       150,141,000       ---       151,910,000  

Net loss

    ---       ---       ---       ---       ---       (56,326,000 )     ---       (56,326,000 )

Balance at March 31, 2020

    1,805,053     $ 18,000       (424,307 )   $ (4,000 )   $ 1,755,000     $ 93,815,000     $ ---     $ 95,584,000  

 

See accompanying Notes to Consolidated Financial Statements

 

6

 

 

DAILY JOURNAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

Six months

ended March 31

 
   

2020

   

2019

 

Cash flows from operating activities

               

Net loss

  $ (42,116,000 )   $ (16,515,000 )

Adjustments to reconcile net loss to net cash used in operations

               

Depreciation and amortization

    256,000       304,000  

Net unrealized losses on investments

    57,680,000       20,143,000  

Deferred income taxes

    (15,265,000 )     (6,486,000 )

Changes in operating assets and liabilities

               

(Increase) decrease in current assets

               

Accounts receivable, net

    689,000       (2,539,000 )

Inventories

    ---       3,000  

Prepaid expenses and other assets

    (85,000 )     123,000  

Income tax receivable

    (317,000 )     7,000  

Increase (decrease) in liabilities

               

Accounts payable

    (1,459,000 )     1,751,000  

Accrued liabilities

    (226,000 )     (64,000 )

Deferred subscriptions

    (311,000 )     (196,000 )

Deferred maintenance agreements and others

    (2,600,000 )     220,000  

Deferred installation contracts

    (824,000 )     (126,000 )

Net cash used in operating activities

    (4,578,000 )     (3,375,000 )
                 

Cash flows from investing activities

               

Purchases of property, plant and equipment

    (168,000 )     (84,000 )

Net cash used in investing activities

    (168,000 )     (84,000 )
                 

Cash flows from financing activities

               

Payment of real estate loan principal

    (62,000 )     (60,000 )

Net cash used in financing activities

    (62,000 )     (60,000 )
                 

Decrease in cash and cash equivalents

    (4,808,000 )     (3,519,000 )
                 

Cash and cash equivalents

               

Beginning of period

    10,630,000       9,301,000  

End of period

  $ 5,822,000     $ 5,782,000  
                 

Interest paid during period

  $ 390,000     $ 470,000  

Net income taxes paid (refunded)

  $ 1,000     $ (121,000 )

 

See accompanying Notes to Consolidated Financial Statements.

 

7

 

DAILY JOURNAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 1 - The Corporation and Operations

 

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

 

Journal Technologies, Inc. (“Journal Technologies”), a wholly-owned subsidiary of Daily Journal, supplies case management software systems and related products to courts, prosecutor and public defender offices, probation departments and other justice agencies, including administrative law organizations, city and county governments and bar associations. These organizations use the Journal Technologies family of products to help manage cases and information electronically, to interface with other critical justice partners and to extend electronic services to the public, including efiling and a website to pay traffic citations and fees online, and bar members. These products are licensed to more than 500 organizations in 42 states and internationally.

 

Essentially all of the Company’s U.S. operations are based in California, Arizona, Colorado and Utah. The Company also has a presence in Australia where Journal Technologies is working on two software installation projects.

 

 

Note 2 - Basis of Presentation

 

In the opinion of the Company, the accompanying interim unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of its financial position as of March 31, 2020, its results of operations for the three- and six-months periods ended March 31, 2020 and 2019, its consolidated statements of shareholders’ equity for the six months ended March 31, 2020 and 2019 and cash flows for the six months ended March 31, 2020 and 2019. The results of operations for the six months ended March 31, 2020 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, 2019.

 

 

Note 3 - Accounting Standards Adopted in Fiscal 2020

 

In February 2016, the Financial Accounting Standard Board issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) which requires that all leases be recognized by lessees on the balance sheet through a right-of-use (ROU) asset and corresponding lease liability, including today’s operating leases. During the first quarter of fiscal 2020, the Company adopted this standard using the modified retrospective method, which does not require an adjustment to comparative period financial statements. At March 31, 2020, the Company recorded a right-of-use (ROU) asset and lease liability of approximately $382,000 for its operating office leases. As allowed by the guidance, the Company has elected not to recognize ROU assets and lease liabilities for short-term (less than one year) leases of any class of underlying asset. ROU assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent its obligation to make rental payments from the leases. ROU assets and liabilities are required to be recognized based on the present value of lease payments over the lease term. At March 31, 2020, the Company had office lease obligations of approximately $43,000 beyond one year; it is deemed immaterial for the present value difference. Operating office leases are included in operating lease ROU assets, current accrued liabilities and long-term accrued liabilities in the Company’s accompanying Consolidated Balance Sheets. The Company’s adoption of this new standard had no significant impact on the Company’s financial condition, results of operations or disclosures.

 

8

 

 

Note 4 – Revenue Recognition

 

The Company recognizes revenues in accordance with the provisions of ASU No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606), which it adopted effective October 1, 2017, using the modified retrospective method.

 

For the Company’s Traditional Business, proceeds from the sale of subscriptions for newspapers, court rule books and other publications and other services are recorded as deferred revenue and are included in earned revenue only when the services are provided, generally over the subscription term. Advertising revenues are recognized when advertisements are published and are net of agency commissions.

 

Journal Technologies’ contracts may include several products and services, which are generally distinct and include separate transaction pricing and performance obligations. Most are one-transaction contracts. These current subscription-type contract revenues include (i) implementation consulting fees to configure the system to go-live, (ii) subscription software license, maintenance (including updates and upgrades) and support fees, and (iii) third-party hosting fees when used. Revenues for consulting are 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, and maintenance revenues are recognized ratably after the go-live. Other public service fees are earned and recognized as revenues when the Company processes credit card payments on behalf of the courts via its websites through which the public can efile cases and pay traffic citations and other fees.

 

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

 

Since the Company 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. Also, as a practical expedient, the Company has elected not to include its evaluation of variable consideration of certain usage-based public service fees that are included in some contracts. Furthermore, there are no fulfillment costs to be capitalized for the software contracts because these costs do not generate or enhance resources that will be used in satisfying future performance obligations.

 

 

Note 5 - Basic and Diluted Income Per Share

 

The Company does not have any common stock equivalents, and therefore basic and diluted income (loss) per share are the same.

 

9

 

 

Note 6 - 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 March 31, 2020, there were net accumulated unrealized gains of $83,012,000. At September 30, 2019, there were net accumulated unrealized gains of $140,692,000 recorded in the accompanying Consolidated Balance Sheets. Most of the accumulated unrealized gains were in the common stocks of three U.S. financial institutions and one foreign manufacturer.

 

With the adoption in the prior fiscal year of ASU No. 2016-01, Subtopic 825-10, the Company recorded and included in its net (loss) income the net unrealized losses on investments of $77,211,000 and $57,680,000 for the three- and six-months ended March 31, 2020 as compared with net unrealized gains on investments of $8,497,000 and net unrealized losses on investments of $20,143,000, respectively, in the prior year periods.

 

Investments in marketable securities as of March 31, 2020 and September 30, 2019 are summarized below.

 

 Investments in Marketable Securities

 

   

March 31, 2020

   

September 30, 2019

 
   

Aggregate

fair value

   

Adjusted

cost basis

   

Pretax net unrealized gains

   

Aggregate

fair value

   

Amortized/Adjusted

cost basis

   

Pretax unrealized gains

 

Marketable securities

                                               

Common stocks

  $ 136,901,000     $ 53,889,000     $ 83,012,000     $ 194,581,000     $ 53,889,000     $ 140,692,000  

 

 

Note 7 - Income Taxes

 

For the six months ended March 31, 2020, the Company recorded an income tax benefit of $15,580,000 on a pretax loss of $57,696,000.   This was the net result of applying the effective tax rate anticipated for fiscal 2020 to the pretax loss, before the unrealized losses on investments, for the six months ended March 31, 2020.  The effective tax rate was more than the statutory rate primarily due to the dividends received deduction, which increased the taxable loss, and state tax benefits.   In addition, the Company recorded tax benefits of (i) $187,000 resulting from the Coronavirus Aid, Relief and Economic Security (“CARES”) Act (see below) and (ii) $15,425,000 for the unrealized losses on investments during the six months ended March 31, 2020.  The effective tax rate for the six months ended March 31, 2020 was 27%, after including the tax benefits from the CARES Act and the unrealized losses on investments.

 

The CARES Act, which was signed into law on March 27, 2020, contains two federal tax provisions beneficial to the Company.  One provision provides that net operating losses arising in tax years beginning in 2018, that were previously only available to be carried forward, can now be carried back to the five previous years.  In addition, any alternative minimum tax credits carried forward from prior years can be claimed as a refund in years beginning in 2018.  Consequently, the Company recorded a tax benefit resulting from carrying back a portion of the net operating loss generated in fiscal 2019 to fiscal 2014.  The Company anticipates receiving a refund for all taxes and alternative minimum taxes paid in fiscal 2014.  The resulting tax benefit from carrying back the net operating loss is primarily attributable to the difference in the federal tax rates of 34% in fiscal 2014 and 21% in fiscal 2019.

 

10

 

For the six months ended March 31, 2019, the Company recorded an income tax benefit of $6,600,000 on a pretax loss of $23,115,000.   This was the net result of applying the effective tax rate anticipated for fiscal 2019 to the pretax loss for the six months ended March 31, 2019. The effective tax rate was greater than the statutory rate primarily due to state tax benefits. 

 

The Company’s effective tax rate was 27% for the six months ended March 31, 2020 as compared with 29% in the prior year period. 

 

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 2016 with regard to federal income taxes and fiscal 2015 for state income taxes. 

 

 

Note 8 - 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. 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 March 31, 2020 was 0.75%. These investment margin account borrowings do not mature.

 

In 2015, the Company purchased a 30,700 square foot office building constructed in 1998 on about 3.6 acres in Logan, Utah that had been previously leased by Journal Technologies. The Company paid $1.24 million and financed the balance with a real estate bank loan of $2.26 million which bears a fixed interest rate of 4.66% and is repayable in equal monthly installments of about $17,600 through 2030. This loan is secured by the Logan facility and can be paid off at any time without prepayment penalty. This real estate loan had a balance of approximately $1.77 million as of March 31, 2020.

 

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 fiscal 2021.

 

 

Note 9 - 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 effect on the Company’s financial position or results of operations or cash flows.

 

11

 

 

Note 10 - Operating Segments

 

The Company’s reportable segments are: (i) the Traditional Business and (ii) Journal Technologies. All inter-segment transactions were eliminated. Summarized financial information regarding the Company’s reportable segments is shown in the following table:

 

   

Reportable Segments

                 
   

Traditional

Business

   

Journal

Technologies

   

Corporate income

and expenses

   

 

Total

 

Six months ended March 31, 2020

                               

Revenues

                               

Advertising

  $ 4,118,000     $ ---     $ ---     $ 4,118,000  

Circulation

    2,598,000       ---       ---       2,598,000  

Advertising service fees and other

    1,348,000       ---       ---       1,348,000  

Licensing and maintenance fees

    ---       10,715,000       ---       10,715,000  

Consulting fees

    ---       1,918,000       ---       1,918,000  

Other public service fees

    ---       3,336,000       ---       3,336,000  

Operating expenses

    7,906,000       18,743,000       ---       26,649,000  

Income (loss) from operations

    158,000       (2,774,000 )     ---       (2,616,000 )

Dividends and interest income

    ---       ---       2,977,000       2,977,000  

Other income

    ---       ---       3,000       3,000  

Net unrealized losses on investments

    ---       ---       (57,680,000 )     (57,680,000 )

Interest expenses on note payable collateralized by real estate

    (43,000 )     ---       ---       (43,000 )

Interest expenses on margin loans and others

    ---       ---       (337,000 )     (337,000 )

Pretax income (loss)

    115,000       (2,774,000 )     (55,037,000 )     (57,696,000 )

Income tax (expense) benefit

    (30,000 )     925,000       14,685,000       15,580,000  

Net income (loss)

    85,000       (1,849,000 )     (40,352,000 )     (42,116,000 )

Total assets

    16,074,000       19,578,000       139,083,000       174,735,000  

Capital expenditures

    99,000       69,000       ---       168,000  

 

   

Reportable Segments

                 
   

Traditional

Business

   

Journal

Technologies

   

Corporate income

and expenses

   

 

Total

 

Six months ended March 31, 2019

                               

Revenues

                               

Advertising

  $ 4,300,000     $ ---     $ ---     $ 4,300,000  

Circulation

    2,611,000       ---       ---       2,611,000  

Advertising service fees and other

    1,293,000       ---       ---       1,293,000  

Licensing and maintenance fees

    ---       9,430,000       ---       9,430,000  

Consulting fees

    ---       940,000       ---       940,000  

Other public service fees

    ---       2,566,000       ---       2,566,000  

Operating expenses

    8,348,000       17,984,000       ---       26,332,000  

Loss from operations

    (144,000 )     (5,048,000 )     ---       (5,192,000 )

Dividends and interest income

    ---       ---       2,671,000       2,671,000  

Other income

    ---       ---       19,000       19,000  

Net unrealized losses on investments

    ---       ---       (20,143,000 )     (20,143,000 )

Interest expenses on note payable collateralized by real estate

    (45,000 )     ---       ---       (45,000 )

Interest expenses on margin loans

    ---       ---       (425,000 )     (425,000 )

Pretax loss

    (189,000 )     (5,048,000 )     (17,878,000 )     (23,115,000 )

Income tax benefit

    115,000       1,300,000       5,185,000       6,600,000  

Net loss

    (74,000 )     (3,748,000 )     (12,693,000 )     (16,515,000 )

Total assets

    17,399,000       31,710,000       194,354,000       243,463,000  

Capital expenditures

    50,000       34,000       ---       84,000  

 

12

 

   

Reportable Segments

                 
   

Traditional

Business

   

Journal

Technologies

   

Corporate income

and expenses

   

 

Total

 

Three months ended March 31, 2020

                               

Revenues

                               

Advertising

  $ 1,992,000     $ ---     $ ---     $ 1,992,000  

Circulation

    1,286,000       ---       ---       1,286,000  

Advertising service fees and other

    654,000       ---       ---       654,000  

Licensing and maintenance fees

    ---       5,505,000       ---       5,505,000  

Consulting fees

    ---       1,229,000       ---       1,229,000  

Other public service fees

    ---       1,690,000       ---       1,690,000  

Operating expenses

    3,908,000       9,546,000       ---       13,454,000  

Income (loss) from operations

    24,000       (1,122,000 )     ---       (1,098,000 )

Dividends and interest income

    ---       ---       1,297,000       1,297,000  

Net unrealized losses on investments

    ---       ---       (77,211,000 )     (77,211,000 )

Interest expenses on note payable collateralized by real estate

    (21,000 )     ---       ---       (21,000 )

Interest expenses on margin loans and others

    ---       ---       (153,000 )     (153,000 )

Pretax income (loss)

    3,000       (1,122,000 )     (76,067,000 )     (77,186,000 )

Income tax benefit

    ---       415,000       20,445,000       20,860,000  

Net income (loss)

    3,000       (707,000 )     (55,622,000 )     (56,326,000 )

Total assets

    16,074,000       19,578,000       139,083,000       174,735,000  

Capital expenditures

    64,000       7,000       ---       71,000  

 

   

Reportable Segments

                 
   

Traditional

Business

   

Journal

Technologies

   

Corporate income

and expenses

   

 

Total

 

Three months ended March 31, 2019

                               

Revenues

                               

Advertising

  $ 2,108,000     $ ---     $ ---     $ 2,108,000  

Circulation

    1,273,000       ---       ---       1,273,000  

Advertising service fees and other

    624,000       ---       ---       624,000  

Licensing and maintenance fees

    ---       4,640,000       ---       4,640,000  

Consulting fees

    ---       399,000       ---       399,000  

Other public service fees

    ---       1,668,000       ---       1,668,000  

Operating expenses

    4,140,000       9,243,000       ---       13,383,000  

Loss from operations

    (135,000 )     (2,536,000 )     ---       (2,671,000 )

Dividends and interest income

    ---       ---       1,141,000       1,141,000  

Other income

    ---       ---       9,000       9,000  

Net unrealized gains on investments

    ---       ---       8,497,000       8,497,000  

Interest expenses on note payable collateralized by real estate

    (22,000 )     ---       ---       (22,000 )

Interest expenses on margin loans

    ---       ---       (219,000 )     (219,000 )

Pretax income (loss)

    (157,000 )     (2,536,000 )     9,428,000       6,735,000  

Income tax benefit (expense)

    35,000       715,000       (2,467,000 )     (1,717,000 )

Net (loss) income

    (122,000 )     (1,821,000 )     6,961,000       5,018,000  

Total assets

    17,399,000       31,710,000       194,354,000       243,463,000  

Capital expenditures

    ---       ---       ---       ---  

 

During the six months ended March 31, 2020, the Traditional Business had total revenues of $8,064,000 of which $5,466,000 were recognized, at a point of time, after services were provided, and $2,598,000 were recognized ratably over the subscription terms. Total revenues for the Journal Technologies’ software business were $15,969,000 of which $5,631,000 were recognized upon completion of services with customer acceptance, while $10,338,000 were recognized ratably over the license and maintenance periods.

 

During the six months ended March 31, 2019, the Traditional Business had total revenues of $8,204,000 of which $5,593,000 were recognized, at a point of time, after services were provided, and $2,611,000 were recognized ratably over the subscription terms. Total revenues for the Company’s software business were $12,936,000 of which $4,035,000 were recognized upon completion of services with customer acceptance, while $8,901,000 were recognized ratably over the license and maintenance periods.

 

13

 

During the three months ended March 31, 2020, the Traditional Business had total revenues of $3,932,000 of which $2,646,000 were recognized, at a point of time, after services were provided, and $1,286,000 were recognized ratably over the subscription terms. Total revenues for the Journal Technologies’ software business were $8,424,000 of which $3,177,000 were recognized upon completion of services with customer acceptance, while $5,247,000 were recognized ratably over the license and maintenance periods.

 

During the three months ended March 31, 2019, the Traditional Business had total revenues of $4,005,000 of which $2,732,000 were recognized, at a point of time, after services were provided, and $1,273,000 were recognized ratably over the subscription terms. Total revenues for the Company’s software business were $6,707,000 of which $2,100,000 were recognized upon completion of services with customer acceptance, while $4,607,000 were recognized ratably over the subscription periods.

 

Approximately 68% and 66% of the Company’s revenues during the three- and six-month periods ended March 31, 2020 were derived from Journal Technologies, as compared with 63% and 61% in the prior year periods. In addition, the Company’s revenues have been primarily from the United States with approximately 1% from foreign countries. Journal Technologies’ revenues are primarily from governmental agencies.

 

The following table sets forth certain deferred obligations from October 1, 2019 through March 31, 2020:

 

   

Beginning

Balance

Oct. 1, 2019

   

 

 

Addition

   

 

 

Recognized

   

Ending

Balance

March 31, 2020

 
                                 

Deferred subscriptions

  $ 3,195,000     $ 2,287,000     $ (2,598,000 )   $ 2,884,000  

Deferred installation contracts

    1,932,000       1,471,000       (2,295,000 )     1,108,000  

Deferred maintenance agreements and others

    16,057,000       7,738,000       (10,338,000 )     13,457,000  

 

 

Note 11 - Subsequent Events

 

On March 13, 2020, the United States declared the outbreak of COVID-19 to be a national emergency, and several states and municipalities have declared public health emergencies. Unprecedented actions have been taken by public health and governmental authorities to contain and combat the spread of COVID-19, including “stay-at-home” orders and similar mandates that restrict the daily activities of individuals and limit the operation of businesses that are deemed “non-essential.” In addition, most of Journal Technologies’ customers, which are primarily courts and governmental agencies in the United States and Canada, are either closed or have significantly scaled back their activities. Similarly, many law firms and companies from which the Traditional Business derives advertising and subscription revenues have also curtailed their operations and spending.

 

In light of this extraordinary and ongoing situation, on April 30, 2020, the Company made the difficult decision to reorganize its part-time and full-time workforce at both the Traditional Business and Journal Technologies, which included some layoffs and temporary furloughs.

 

Except for the personnel reorganization mentioned above, 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.

 

14

 

 

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. (“Journal Technologies”), a wholly-owned subsidiary 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 efiling and a website to pay traffic citations and fees online, and bar members. These products are licensed to more than 500 organizations in 42 states and internationally.

 

Impact of the Coronavirus (COVID-19) Pandemic

 

Management believes that the COVID-19 pandemic has had, and will continue to have, a significant impact on the Company’s business operations. That impact started in March, and management believes it will continue to be reflected in subsequent quarterly financial results and cash flows for the foreseeable future. This includes the substantial decrease in the value of the Company’s marketable securities portfolio, which could decrease further and is likely, at a minimum, to continue to be volatile. It also includes the unprecedented closure or scaling back of operations of courts and other governmental agencies that are the customers of Journal Technologies, and fundamental changes in the way the advertisers and subscribers of the Traditional Business conduct operations. Even if courts, governmental agencies and other businesses return to a more normal operations, there are likely to be changes in those operations and personal behaviors going forward, including limitations on travel, that will adversely affect the Company, its financial results and cash flows.

 

For the three months ended March 31, 2020, the Company experienced a material negative impact on its financial results primarily because of the recording of the unrealized losses on investments of $77,211,000 for its marketable securities as the stock market plunged. In addition, the Company’s portfolio is concentrated in the common stocks of three U.S. financial institutions, which have experienced a greater decline than the market as a whole. In the future, dividends income from the Company’s portfolio may be reduced. (Beginning in fiscal 2019, changes in unrealized gains (losses) on investments are now included in the Company’s net income (loss) and thus may have a significant impact depending on the fluctuations of the market prices of the securities in the portfolio.)

 

In recent years, the newspaper industry, including our Traditional Business, has declined, and we expect this to continue at an accelerated pace due to the impacts of COVID-19 and its aftermath, as advertising and subscription revenues decrease.

 

For Journal Technologies, there have been delays or cancellations in government procurement processes. Also, although we have been able to complete some existing projects remotely, we have been unable to finish certain implementations and trainings because we cannot work with clients in-person. Given that we are typically paid for implementation services upon “go-live” of a system, receipt of those revenues is being delayed. In addition, there has been a reduction in efiling revenues and delayed client payments as courts and other justice agencies are temporarily closed.

 

15

 

Due to the uncertainties associated with the duration and severity of the COVID-19 pandemic, the efforts to contain it, and the changes in business operations and personal behaviors that are likely to follow from it, management cannot at this point estimate the magnitude of its impact on the Company’s business operations. However, it is often said that past results are not indicative of future performance, and that is especially true of the Company’s operating results for the first half of fiscal 2020, which are not likely to be replicated in the second half of the year due to COVID-19 and its aftermath.

 

For risk factors associated with the Company’s businesses, please see “Item 1A – Risk Factors” of the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2019, as well as the information contained in “Item 1A – Risk Factors” on page 23 of this Form 10-Q.

 

Comparable six-month periods ended March 31, 2020 and 2019

 

Consolidated revenues were $24,033,000 and $21,140,000 for the six months ended March 31, 2020 and 2019, respectively. This increase of $2,893,000 (14%) was primarily from (i) increased Journal Technologies’ license and maintenance fees of $1,285,000, consulting fees of $978,000 and public service fees of $770,000, and (ii) increased Traditional Business’ legal notice advertising and service fee net revenues of $215,000 and government notice advertising and service fee net revenues of $38,000, partially offset by a reduction in the Traditional Business’ display advertising net revenues of $252,000 (including conferences), classified advertising net revenues of $40,000, trustee sale notice advertising net revenues of $57,000 and circulation revenues of $13,000. The Company’s revenues derived from Journal Technologies’ operations constituted about 66% and 61% of the Company’s total revenues for the six months ended March 31, 2020 and 2019, respectively.

 

Consolidated operating expenses increased by $317,000 (1%) to $26,649,000 from $26,332,000. Total salaries and employee benefits increased by $1,119,000 (6%) to $18,565,000 from $17,446,000 primarily resulting from additional personnel costs for Journal Technologies. Outside services decreased by $388,000 (16%) to $2,014,000 from $2,402,000 mainly because of decreased contractor costs for Journal Technologies. Depreciation and amortization costs decreased by $47,000 to $256,000 from $303,000. Credit card merchant discount fees, which represent fees paid to credit card service providers to process payments for the public service fee revenues, increased by $125,000 (19%) to $770,000 from $645,000 mainly resulting from increased efilings. Rent expenses decreased by $173,000 (34%) to $342,000 from $515,000 because of the closure of both the San Francisco and Modesto offices in October 2019. Accounting and legal fees decreased by $341,000 (43%) to $458,000 from $799,000 primarily because of decreased legal fees to review and negotiate Journal Technologies’ contracts with customers, more of which was done in-house.

 

The Company’s non-operating income, net of expenses, decreased by $37,157,000 to a loss of $55,080,000 from a loss of $17,923,000 primarily because of the recording of net unrealized losses on investments of $57,680,000 during the six months ended March 31, 2020, as compared with $20,143,000 during the prior year period.

 

During the six months ended March 31, 2020, the consolidated pretax loss was $57,696,000, as compared with $23,115,000 in the prior year period. There was a consolidated net loss of $42,116,000 (-$30.50 per share) after tax benefits for the six months ended March 31, 2020, as compared with $16,515,000 (-$11.96 per share) in the prior year period.

 

16

 

At March 31, 2020, the aggregate fair market value of the Company’s marketable securities was $136,901,000. These securities had approximately $83,012,000 of net unrealized gains before taxes of $21,816,000, and generated approximately $2,977,000 in dividends income during the six months ended March 31, 2020, which lowers the Company’s effective income tax rate because of the dividends received deduction. Most of the unrealized gains were in the common stocks of three U.S. financial institutions and one foreign manufacturer.

 

Additional detail about each of the Company’s reportable segments, and its corporate income and expenses, is set forth below:

 

Overall Financial Results (000)

 

For the six months ended March 31

 
                                                                 
   

Reportable Segments

                                 
   

Traditional

Business

   

Journal

Technologies

   

Corporate

income and expenses

   

 

Total

 
   

2020

   

2019

   

2020

   

2019

   

2020

   

2019

   

2020

   

2019

 

Revenues

                                                               

Advertising

  $ 4,118     $ 4,300     $ ---     $ ---     $ ---     $ ---     $ 4,118     $ 4,300  

Circulation

    2,598       2,611       ---       ---       ---       ---       2,598       2,611  

Advertising service fees and other

    1,348       1,293       ---       ---       ---       ---       1,348       1,293  

Licensing and maintenance fees

    ---       ---       10,715       9,430       ---       ---       10,715       9,430  

Consulting fees

    ---       ---       1,918       940       ---       ---       1,918       940  

Other public service fees

    ---       ---       3,336       2,566       ---       ---       3,336       2,566  

Total revenues

    8,064       8,204       15,969       12,936       ---       ---       24,033       21,140  

Operating expenses

                                                               

Salaries and employee benefits

    5,164       5,203       13,401       12,243       ---       ---       18,565       17,446  

Others

    2,742       3,145       5,342       5,741       ---       ---       8,084       8,886  

Total operating expenses

    7,906       8,348       18,743       17,984       ---       ---       26,649       26,332  

Income (loss) from operations

    158       (144 )     (2,774 )     (5,048 )     ---       ---       (2,616 )     (5,192 )

Dividends and interest income

    ---       ---       ---       ---       2,977       2,671       2,977       2,671  

Other income

    ---       ---       ---       ---       3       19       3       19  

Net unrealized losses on investments

    ---       ---       ---       ---       (57,680 )     (20,143 )     (57,680 )     (20,143 )

Interest expenses on note payable collateralized by real estate

    (43 )     (45 )     ---       ---       ---       ---       (43 )     (45 )

Interest expenses on margin loans and others

    ---       ---       ---       ---       (337 )     (425 )     (337 )     (425 )

Pretax income (loss)

  $ 115     $ (189 )   $ (2,774 )   $ (5,048 )   $ (55,037 )   $ (17,878 )   $ (57,696 )   $ (23,115 )

 

The Traditional Business

 

The Traditional Business had pretax income of $115,000, representing a $304,000 increase from a pretax loss of $189,000 in the prior year period.

 

Advertising revenues decreased by $182,000 to $4,118,000 from $4,300,000, primarily because of decreased display advertising net revenues of $252,000 (including conferences), classified advertising net revenues of $40,000 and trustee sale notice advertising net revenues of $57,000, partially offset by increased legal notice advertising net revenues of $152,000.

 

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 14% during the six months ended March 31, 2020 as compared to the prior year period. Unless the economic impact of the efforts to contain COVID-19 result in significant additional foreclosures in California and Arizona, management expects there will be fewer foreclosure notice and other public notice advertisements and declining revenues for all of fiscal 2020. 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 in the six months ended March 31, 2020. Public notice advertising revenues and related advertising and other service fees constituted about 18% and 20% of the Company’s total revenues for the six months ended March 31, 2020 and 2019, respectively. Because of this concentration, the Company’s revenues would be significantly adversely affected if California and Arizona eliminated the legal requirement to publish public notices in adjudicated newspapers of general circulation, as was implemented in Arizona for one notice type that had represented approximately $500,000 in annual revenues for the Company. Also, if the adjudication of one or more of the Company’s newspapers was challenged and revoked, those newspapers would no longer be eligible to publish public notice advertising, and it could have a material adverse effect on the Company’s revenues.

 

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The Daily Journals accounted for about 91% of the Traditional Business’ total circulation revenues, which declined by $13,000 to $2,598,000 from $2,611,000. The court rule and judicial profile services generated about 7% 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 decreased by $442,000 (5%) to $7,906,000 from $8,348,000, primarily due to decreased personnel costs and outside contract printing and distributing costs.

 

Journal Technologies

 

Journal Technologies’ business segment pretax loss decreased by $2,274,000 (45%) to $2,774,000 from $5,048,000 for the six months ended March 31, 2020 and 2019, respectively.

 

Revenues increased by $3,033,000 (23%) to $15,969,000 from $12,936,000 in the prior year period. Licensing and maintenance fees increased by $1,285,000 (14%) to $10,715,000 from $9,430,000. Consulting fees increased by $978,000 (104%) to $1,918,000 from $940,000 due to more go-lives.

 

Deferred revenues on installation contracts primarily represent the fair value of advances from customers of Journal Technologies for installation services and are recognized upon final project go-lives. Deferred revenues on license and maintenance contracts represent prepayments of annual license and maintenance fees and are recognized ratably over the maintenance period. Other public service fees increased by $770,000 (30%) to $3,336,000 from $2,566,000 primarily due to additional efiling fee revenues.

 

Operating expenses increased by $759,000 (4%) to $18,743,000 from $17,984,000, primarily because of increased salaries and employee benefit costs.

 

Taxes

 

For the six months ended March 31, 2020, the Company recorded an income tax benefit of $15,580,000 on a pretax loss of $57,696,000.   This was the net result of applying the effective tax rate anticipated for fiscal 2020 to the pretax loss, before the unrealized losses on investments, for the six months ended March 31, 2020.  The effective tax rate was more than the statutory rate primarily due to the dividends received deduction, which increased the taxable loss, and state tax benefits.   In addition, the Company recorded tax benefits of (i) $187,000 resulting from the Coronavirus Aid, Relief and Economic Security (“CARES”) Act (see below) and (ii) $15,425,000 for the unrealized losses on investments during the six months ended March 31, 2020.  The effective tax rate for the six months ended March 31, 2020 was 27%, after including the tax benefits from the CARES Act and the unrealized losses on investments.

 

The CARES Act, which was signed into law on March 27, 2020, contains two federal tax provisions beneficial to the Company.  One provision provides that net operating losses arising in tax years beginning in 2018, that were previously only available to be carried forward, can now be carried back to the five previous years.  In addition, any alternative minimum tax credits carried forward from prior years can be claimed as a refund in years beginning in 2018.  Consequently, the Company recorded a tax benefit resulting from carrying back a portion of the net operating loss generated in fiscal 2019 to fiscal 2014.  The Company anticipates receiving a refund for all taxes and alternative minimum taxes paid in fiscal 2014.  The resulting tax benefit from carrying back the net operating loss is primarily attributable to the difference in the federal tax rates of 34% in fiscal 2014 and 21% in fiscal 2019.

 

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For the six months ended March 31, 2019, the Company recorded an income tax benefit of $6,600,000 on a pretax loss of $23,115,000.   This was the net result of applying the effective tax rate anticipated for fiscal 2019 to the pretax loss for the six months ended March 31, 2019. The effective tax rate was greater than the statutory rate primarily due to state tax benefits. 

 

The Company’s effective tax rate was 27% for the six months ended March 31, 2020 as compared with 29% in the prior year period. 

 

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 2016 with regard to federal income taxes and fiscal 2015 for state income taxes. 

 

Comparable three-month periods ended March 31, 2020 and 2019

 

Consolidated revenues were $12,356,000 and $10,712,000 for the three months ended March 31, 2020 and 2019, respectively. This increase of $1,644,000 (15%) was primarily from increased Journal Technologies’ license and maintenance fees of $865,000, consulting fees of $830,000 and public service fees of $22,000, partially offset by a reduction in the Traditional Business’ conference revenues of $80,000, classified advertising net revenues of $24,000 and trustee sale notice advertising net revenues of $20,000. The Company’s revenues derived from Journal Technologies’ operations constituted about 68% and 63% of the Company’s total revenues for the three months ended March 31, 2020 and 2019, respectively.

 

Consolidated operating expenses increased by $71,000 to $13,454,000 from $13,383,000. Total salaries and employee benefits increased by $887,000 (10%) to $9,678,000 from $8,791,000 primarily resulting from additional personnel costs for Journal Technologies. Outside services decreased by $90,000 (7%) to $1,154,000 from $1,244,000 mainly because of decreased contractor costs for Journal Technologies. Depreciation and amortization costs decreased by $22,000 to $128,000 from $150,000. Credit card merchant discount fees, which represent fees paid to credit card service providers to process payments for the public service fee revenues, increased by $13,000 (3%) to $388,000 from $375,000 mainly resulting from increased efilings. Rent expenses decreased by $87,000 (34%) to $170,000 from $257,000 because of the closure of both the San Francisco and Modesto offices in October 2019. Accounting and legal fees decreased by $194,000 (49%) to $202,000 from $396,000 primarily because of decreased legal fees to review and negotiate Journal Technologies’ contracts with customers, more of which was done in-house. Other general and administrative expenses decreased by $523,000 (38%) to $846,000 from $1,369,000 mainly resulting from reduced miscellaneous office equipment purchases.

 

The Company’s non-operating income, net of expenses, decreased by $85,494,000 to a loss of $76,088,000 from an income of $9,406,000 primarily because of the recording of net unrealized losses on investments of $77,211,000 during the three months ended March 31, 2020, as compared with net unrealized gains on investments of $8,497,000 during the prior year period.

 

During the three months ended March 31, 2020, consolidated pretax loss was $77,186,000, as compared with pretax income of $6,735,000 in the prior year period. There was consolidated net loss of $56,326,000 (-$40.79 per share) after tax benefits for the three months ended March 31, 2020, as compared with net income of $5,018,000 ($3.63 per share) in the prior year period.

 

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Liquidity and Capital Resources

 

During the six months ended March 31, 2020, the Company’s cash and cash equivalents and marketable security positions decreased by $62,488,000, including unrealized losses on investments of $57,680,000. Cash and cash equivalents were used for the purchase of capital assets of $168,000 and operating activities of $4,578,000 which included net decreases of $3,735,000 in deferred subscriptions, deferred installation contracts and deferred maintenance agreements and others.

 

The investments in marketable securities, which had an adjusted cost basis of approximately $53,889,000 and a market value of about $136,901,000 at March 31, 2020, generated approximately $2,977,000 in dividends income during the six months ended March 31, 2020. These securities had approximately $83,012,000 of net unrealized gains before estimated taxes of $21,816,000 which will become due only when we sell securities in which there is unrealized appreciation. Beginning in fiscal 2019, changes in unrealized gains (losses) on investments are now included in the Company’s net income (loss) and thus may have a significant impact depending on the fluctuations of the market prices of the invested securities.

 

Cash flows from operating activities decreased by $1,203,000 during the six months ended March 31, 2020 as compared to the prior year period, primarily due to (i) decreases in accounts payable and accrued liabilities of $3,372,000 because of the timing difference in remitting efiling fees to the courts and (ii) decreases in net deferred subscriptions, deferred maintenance agreements and others and deferred installation contracts of $3,633,000, partially offset by decreases in accounts receivable of $3,228,000 resulting from more collections.

 

As of March 31, 2020, the Company had working capital of $124,574,000, including the liabilities for deferred subscriptions, deferred installation and maintenance agreements and others of $17,193,000.

 

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. COVID-19 and the efforts to contain it, however, have significantly impacted the Company’s cash flows from operations and the value of its marketable securities portfolio. 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.

 

As of March 31, 2020, the investments were concentrated in just six companies. Accordingly, a significant decline in the market value of one or more of the Company’s investments may not be offset by the hypothetically better performance of other investments, and that could result in a large decrease in the Company’s shareholders’ equity and net income, as it did in the three-month and six-month periods ending March 31, 2020.

 

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 for the long-term Incentive Plan liabilities) and income taxes are critical accounting policies and estimates.

 

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The Company’s critical accounting policies are detailed in its Annual Report on Form 10-K for the year ended September 30, 2019. The above discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in this report.

 

Disclosure Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Certain statements contained in this document, including but not limited to those in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are “forward-looking” statements that involve risks and uncertainties that may cause actual future events or results to differ materially from those described in the forward-looking statements. Words such as “expects,” “intends,” “anticipates,” “should,” “believes,” “will,” “plans,” “estimates,” “may,” variations of such words and similar expressions are intended to identify such forward-looking statements. We disclaim any intention or obligation to revise any forward-looking statements whether as a result of new information, future developments, or otherwise. There are many factors that could cause actual results to differ materially from those contained in the forward-looking statements. These factors include, among others: risks associated with software development and implementation efforts; Journal Technologies’ reliance on professional services engagements with justice agencies; material changes in the costs of postage and paper; possible changes in the law, particularly changes limiting or eliminating the requirements for public notice advertising; possible loss of the adjudicated status of the Company’s newspapers and their legal authority to publish public notice advertising; the impacts of COVID-19 and the efforts to contain it on the Company’s customers, advertisers and subscribers, particularly the closure or scaling back of operations of courts, justice agencies and other businesses; a further decline in public notice advertising revenues because of fewer foreclosures; a further decline in subscriber and commercial advertising revenues; possible security breaches of the Company’s software or websites; the Company’s reliance on its president and chief executive officer, who has reduced his work schedule due to a health issue; 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, 2019.

 

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 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

For information regarding the Company’s market risk, refer to Item 7A – Quantitative and Qualitative Disclosures about Market Risk in the Company’s Form 10-K for the fiscal year ended September 30, 2019. There have been no material changes to the Company’s market risk exposures since September 30, 2019.

 

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, 2019, management concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2020.  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 March 31, 2020.

 

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PART II

 

Item 1A. Risk Factors

 

Except as set forth below, as of the date of this report, there have been no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended September 30, 2019.

 

The Company’s business is likely to be materially and adversely affected by an epidemic or pandemic such as COVID-19, or by a similar event or the fear of such an event, and the measures that governmental authorities implement to address it.

 

As COVID-19 began to spread in March and April 2020, governmental authorities and health officials implemented numerous unprecedented measures to contain the virus, including “stay at home” orders for non-essential workers, travel restrictions, quarantines and business shutdowns. Most of Journal Technologies’ customers, which are primarily courts and governmental agencies in the United States and Canada, are either closed or have significantly scaled back their activities. Similarly, many law firms and companies from which the Traditional Business derives advertising and subscription revenues have also curtailed their operations and spending.

 

The impact on economic activity of these actions or similar actions in the future are likely to significantly impact the Traditional Business’ advertising and subscription revenues. The trend of working from home and using on-line services is also likely to put additional pressure on the newspaper business by impacting circulation numbers that may not be replaced by on-line revenues. Actions restricting travel, requiring non-essential workers to “stay at home” or causing courts and justice agencies to close or cut back operations can impact the ability of Journal Technologies to complete certain projects that are typically done in-person (and for which payment is usually received upon completion), reduce efiling revenues, affect procurement processes and result in overall payment delays. In addition, the Company relies on its portfolio of marketable securities for dividend income and balance sheet support, and the value of the portfolio can be materially affected by declines in stock prices, particularly among the common stocks of the three U.S. financial institutions that make up a substantial portion of the portfolio.

 

Due to the uncertainties associated with the duration and severity of an event like COVID-19, the efforts to contain it, and the changes in business operations and personal behaviors that are likely to follow from it, it is difficult to estimate the magnitude of its impact on the Company’s business in future periods, but it could materially affect the Company’s operations, staffing levels, financial condition, liquidity and cash flows going forward.

 

Item 6. Exhibits

 

  31 Certification by Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
  32 Certification by Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
  101.INS** XBRL Instance
     
  101.SCH** XBRL Taxonomy Extension Schema
     
  101.CAL** XBRL Taxonomy Extension Calculation
     
  101.DEF** XBRL Taxonomy Extension Definition
     
  101.LAB** XBRL Taxonomy Extension Labels
     
  101.PRE** XBRL Taxonomy Extension Presentation
     
  ** XBRL information is furnished and not filed as a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

                     

23

 

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/ Gerald L. Salzman

 

Chief Executive Officer

President

Chief Financial Officer

Treasurer

(Principal Executive Officer,

Principal Financial Officer and

Principal Accounting Officer)  

                            

DATE: May 11, 2020

 

 

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