# Daily Journal Corp: Form 10-Q for the period ended Dec 31, 2021

- Company: [Daily Journal Corp](/companies/djco.md) (CIK 783412)
- Form: 10-Q
- Filed: 2022-02-11
- Accepted by EDGAR: Feb 11, 2022, 13:05 ET
- Period: 2021-12-31
- Accession: 0001437749-22-003100
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/783412/000143774922003100/djco20211231_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/783412/000143774922003100/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2021-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2021-10-01 to 2021-12-31 | $11.5m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Operating income | 3 months, 2021-10-01 to 2021-12-31 | $56.0k | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2021-10-01 to 2021-12-31 | $4.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2021-10-01 to 2021-12-31 | $6.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2021-10-01 to 2021-12-31 | $4.98 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 3 months, 2021-10-01 to 2021-12-31 | $325.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2021-12-31 | $12.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2021-12-31 | $417.9m | us-gaap:AssetsCurrent |
| Total assets | at 2021-12-31 | $436.0m | us-gaap:Assets |
| Current liabilities | at 2021-12-31 | $44.0m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2021-12-31 | $261.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 22,808 characters.

### 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. These products are licensed in 30 states and internationally.

### Impact of the COVID-19 Pandemic

On March 13, 2020, the United States declared the outbreak of COVID-19 to be a national emergency, and several states and municipalities also declared public health emergencies. Unprecedented actions were 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 restricted the daily activities of individuals and limited the operation of businesses that were deemed “non-essential”. In addition, most of Journal Technologies’ customers, which are primarily courts and other governmental agencies in the United States, Canada and Australia, were either closed or significantly scaled back their activities. Similarly, many law firms and companies from which the Traditional Business derives advertising and subscription revenues also curtailed their in-person operations and spending.

Management believes that the COVID-19 pandemic has had, and, with the Delta and Omicron variant cases, will continue to have, a significant impact on the Company’s business operations. Among other things, dividends from the Company’s securities portfolio have declined and are expected to remain lower than in the past even though some banks have recently started to increase their dividends. It is also possible that governments may again take actions in response to the pandemic and new variants, such as the renewed closure, or scaling back of operations, of courts and other governmental agencies that are the customers of the Company. Furthermore, even as courts, governmental agencies and other businesses return to more normal operations, there are likely to be changes in those operations and personal behaviors going forward, including limitations on travel and more working from home, that will adversely affect the Company, its financial results and cash flows.

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. In recent years, the newspaper industry, including our Traditional Business, has declined, and we expect this general trend to continue due to the impacts of COVID-19 and its aftermath.

For Journal Technologies, there have been several 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 of our inability to work with clients in-person. Given that we are typically paid for implementation services upon “go-live” of a system, receipt of those revenues has been delayed.

### Reportable Segments

The Company’s Traditional Business is one reportable segment and the other is Journal Technologies. Additional details about each of the reportable segments and its corporate income and expenses is set forth below:

Overall Financial Results (000)

For the three months ended December 31, 2021 and 2020

| Revenues | Reportable Segments Traditional Business 2021 | 2020 | Journal Technologies 2021 | 2020 | Corporate 2021 | 2020 | Total 2021 | 2020 |
| --- | ---: | ---: | ---: | ---: | --- | --- | ---: | ---: |
| Advertising | $1,794 | $1,692 | $--- | $--- | $--- | $--- | $1,794 | $1,692 |
| Circulation | 1,110 | 1,203 | --- | --- | --- | --- | 1,110 | 1,203 |
| Advertising service fees and other | 670 | 634 | --- | --- | --- | --- | 670 | 634 |
| Licensing and maintenance fees | --- | --- | 4,480 | 5,033 | --- | --- | 4,480 | 5,033 |
| Consulting fees | --- | --- | 1,761 | 244 | --- | --- | 1,761 | 244 |
| Other public service fees | --- | --- | 1,713 | 1,614 | --- | --- | 1,713 | 1,614 |
| Total operating revenues | 3,574 | 3,529 | 7,954 | 6,891 | --- | --- | 11,528 | 10,420 |
| Operating expenses |  |  |  |  |  |  |  |  |
| Salaries and employee benefits | 2,225 | 1,920 | 6,122 | 5,972 | --- | --- | 8,347 | 7,892 |
| Others | 843 | 1,061 | 2,282 | 1,782 | --- | --- | 3,125 | 2,843 |
| Total operating expenses | 3,068 | 2,981 | 8,404 | 7,754 | --- | --- | 11,472 | 10,735 |
| Income (loss) from operations | 506 | 548 | (450) | (863) | --- | --- | 56 | (315) |
| Dividends and interest income | --- | --- | --- | --- | 875 | 638 | 875 | 638 |
| Interest expenses on note payable collateralized by real estate and other | --- | --- | --- | --- | (13) | (21) | (13) | (21) |
| Interest expense on margin loans | --- | --- | --- | --- | (86) | (64) | (86) | (64) |
| Gains on sales of marketable securities | --- | --- | --- | --- | 46,694 | --- | 46,694 | --- |
| Net unrealized (losses) gains on marketable securities | --- | --- | --- | --- | (36,088) | 81,212 | (36,088) | 81,212 |
| Pretax income (loss) | 506 | 548 | (450) | (863) | 11,382 | 81,765 | 11,438 | 81,450 |
| Income tax (expense) benefit | (205) | (110) | 250 | 405 | (4,605) | (22,475) | (4,560) | (22,180) |
| Net income (loss) | $301 | $438 | $(200) | $(458) | $6,777 | $59,290 | $6,878 | $59,270 |
| Total assets | $21,984 | $21,799 | $18,925 | $19,923 | $395,098 | $261,621 | $436,007 | $303,343 |
| Capital expenditures | --- | --- | --- | --- | --- | --- | --- | --- |

14

#### Comparable three-month periods ended December 31, 2021 and 2020

#### Consolidated Financial Comparison

Consolidated revenues were $11,528,000 and $10,420,000 for the three months ended December 31, 2021 and 2020, respectively. This increase of $1,108,000 (11%) was primarily from increases in (i) Journal Technologies’ consulting fees of $1,517,000 and public service fees of $99,000, and (ii) the Traditional Business’ advertising net revenues of $102,000, partially offset by decreases in (i) Journal Technologies’ license and maintenance fees of $553,000 and (ii) the Traditional Business’ circulation revenues of $93,000.

Approximately 69% of the Company’s revenues during the three months ended December 31, 2021 were derived from Journal Technologies, as compared with 66% in the prior fiscal year period. In addition, the Company’s revenues have been primarily from the United States, with approximately 6% from foreign countries. Almost all of Journal Technologies’ revenues are from governmental agencies.

Consolidated operating expenses increased by $737,000 (7%) to $11,472,000 from $10,735,000 for the three months ended December 31, 2021. Total salaries and employee benefits increased by $455,000 (6%) to $8,347,000 from $7,892,000 primarily because of annual salary adjustments. Outside services increased by $201,000 (28%) to $924,000 from $723,000 mainly because of increased third-party hosting fees which were billed to clients. Other general and administrative expenses increased by $182,000 (33%) to $739,000 from $557,000 mainly because there were increased business travel expenses as compared to the prior fiscal year period which had nominal business travels.

The Company’s non-operating income, net of expenses, decreased by $70,383,000 to a gain of $11,382,000 from $81,765,000 in the prior fiscal year period primarily because of the recording of net unrealized losses on marketable securities of $36,088,000 during the three months ended December 31, 2021 as compared with unrealized gains of $81,212,000 in the prior year period. This decrease was partially offset by the realized gains on sales of marketable securities of $46,694,000.

During the three months ended December 31, 2021, consolidated pretax income was $11,438,000, as compared to $81,450,000 in the prior fiscal year period. There was consolidated net income of $6,878,000 ($4.98 per share) for the three months ended December 31, 2021, as compared with $59,270,000 ($42.93 per share) in the prior fiscal year period.

At December 31, 2021, the aggregate fair market value of the Company’s marketable securities was $395,284,000. These securities had approximately $208,005,000 of net unrealized gains before taxes of $56,175,000. They generated approximately $875,000 in dividends income during the three months ended December 31, 2021, as compared with $638,000 in the prior fiscal year period. Most of the unrealized gains were in the common stocks of three U.S. financial institutions and one foreign manufacturer.

#### Taxes

For the three months ended December 31, 2021, the Company recorded a provision for income taxes of $4,560,000 on pretax income of $11,438,000. The income tax provision consisted of a tax provision of $230,000 on income from operations, a tax benefit of $91,000 for the dividends received deduction and other permanent book and tax differences, a tax benefit of $9,747,000 on the unrealized losses on marketable securities, a tax provision of $12,612,000 on the realized gains on marketable securities and a tax provision of $1,556,000 for the effect of a change in state apportionment on the beginning of the year’s deferred tax liability. Consequently, the overall effective tax rate for the three months ended December 31, 2021 was 40%, after including the taxes on the realized gains and unrealized losses on marketable securities.

For the three months ended December 31, 2020, the Company recorded a provision for income taxes of $22,180,000 on pretax income of $81,450,000. The income tax provision consisted of a tax provision of $63,000 on income from operations, a tax benefit of $84,000 for the dividends received deduction and other permanent book and tax differences, a tax provision of $22,360,000 on the unrealized gains on marketable securities and a tax benefit of $159,000 related to restating state deferred taxes to the current state rate. The overall effective tax rate for the three months ended December 31, 2020 was 27%, after including the taxes on the unrealized gains on marketable securities.

The Company files consolidated federal income tax returns in the United States and with various state jurisdictions and is no longer subject to examinations for fiscal years before fiscal 2018 with regard to federal income taxes and fiscal 2017 for state income taxes.

#### The Traditional Business

The Traditional Business’ pretax income decreased by $42,000 (8%) to $506,000 from $548,000 in the prior fiscal year period.

During the three months ended December 31, 2021, the Traditional Business had total operating revenues of $3,574,000, as compared with $3,529,000 in the prior fiscal year period. Advertising revenues increased by $102,000 (6%) to $1,794,000 from $1,692,000, primarily because of increased commercial advertising net revenues of $12,000, legal notice advertising net revenues of $35,000, government notice advertising net revenues of $8,000 and trustee sale notice advertising net revenues of $47,000 primarily resulting from the lifting of the foreclosure moratoriums relative to the “Eviction and Foreclosure Orders” and lenders’ processing files that were already in the pipeline when the pandemic struck. (The volume of new foreclosures is expected to remain relatively low through 2022 because of the good housing market.)

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 increased by 32% during the three months ended December 31, 2021 as compared to the prior fiscal year period, primarily because of the lifting of foreclosure moratoriums, as discussed above. The Company’s smaller newspapers, those other than the Los Angeles and San Francisco Daily Journals (“The Daily Journals”), accounted for about 86% of the total public notice advertising revenues during the three months ended December 31, 2021. Public notice advertising revenues and related advertising and other service fees, including trustee sales legal advertising revenues, constituted about 18% of the Company's total operating revenues for the three months ended December 31, 2021 and 19% in the prior fiscal year period.

The Daily Journals accounted for about 92% of the Traditional Business’ total circulation revenues, which declined by $93,000 (8%) to $1,110,000 from $1,203,000. The court rule and judicial profile services generated about 6% 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 increased by $87,000 (3%) to $3,068,000 from $2,981,000, primarily resulting from increased personnel costs.

#### Journal Technologies

During the three months ended December 31, 2021, Journal Technologies’ business segment pretax loss decreased by $413,000 (48%) to $450,000 from $863,000 in the prior fiscal year period.

Revenues increased by $1,063,000 (15%) to $7,954,000 from $6,891,000 in the prior fiscal year period. Licensing and maintenance fees decreased by $553,000 (11%) to $4,480,000 from $5,033,000 primarily resulting from the reduction in legacy software products’ maintenance and support revenues as the Company ended effective July 1, 2021 the maintenance of these legacy software products, so as to focus on supporting the Company’s main eSeries products. Consulting fees increased by $1,517,000 (622%) to $1,761,000 from $244,000 due to more go-lives. Other public service fees increased by $99,000 (6%) to $1,713,000 from $1,614,000 primarily due to increased traffic citation fee revenues and efiling fee revenues.

Deferred consulting fees primarily represent advances from customers of Journal Technologies for installation services and are recognized upon final project go-lives. Deferred revenues on license and maintenance contracts represent prepayments of annual license and maintenance fees and are recognized ratably over the maintenance period.

Operating expenses increased by $650,000 (8%) to $8,404,000 from $7,754,000 primarily because of increased personnel costs resulting from annual salary adjustments and increased third-party’s hosting fees which were billed to clients.

Journal Technologies continues to update and upgrade its software products. These costs are expensed as incurred and will impact earnings at least through the foreseeable future.

### Liquidity and Capital Resources

For the three months ended December 31, 2021, the Company’s cash and cash equivalents, restricted cash, and marketable security positions increased by $47,909,000, after the sales of marketable securities of approximately $50,020,000 and additional net borrowing of $37,014,000 from the margin loan account, partially offset by the recording of net pretax unrealized losses on marketable securities of $36,088,000. Cash, cash equivalents, the proceeds from the sales of marketable securities and additional net borrowing were primarily used to purchase additional marketable securities of $87,125,000.

The investments in marketable securities, which had an adjusted cost basis of approximately $187,279,000 and a market value of about $395,284,000 at December 31, 2021, generated approximately $875,000 in dividends income during the three months ended December 31, 2021. These securities had approximately $208,005,000 of net unrealized gains before estimated taxes of $56,175,000 which will become due only when we sell securities in which there is unrealized appreciation.

Cash flows from operating activities increased by $3,108,000 during the three months ended December 31, 2021 as compared to the prior fiscal year period, primarily due to (i) an increase in net income of $18,214,000, excluding the additional realized gains on sales of marketable securities of $46,694,000 and increases in unrealized losses on marketable securities of $117,300,000, (ii) decreases in the Company’s accounts receivable of $2,477,000 mainly resulting from more collections, (iii) increases in the Company’s income tax payable of $12,842,000 and (iv) a net increase in deferred revenues of $1,263,000. This was partially offset by (i) an increase in deferred tax assets of $30,139,000 and (ii) decreases in accounts payable and accrued liabilities of $1,385,000 (because of the timing difference in remitting efiling fees to the courts).

As of December 31, 2021, the Company had working capital of $373,851,000, including the liabilities for deferred subscriptions, deferred consulting fees and deferred maintenance agreements and others of $17,670,000.

The Company believes that it will be able to fund its operations for the foreseeable future through its cash flows from operations and its current working capital and expects that any such cash flows will be invested in its businesses. The Company may or may not have the ability to borrow additional amounts against its marketable securities and, among other possibilities, it may be required to consider selling some of those securities to generate cash if needed to fund ongoing operations. The amount available for borrowing is based on the market value of the Company’s investment portfolio and fluctuates depending on the value of the underlying securities. In addition, the Company could be subject to margin calls should the balance of the investment decrease significantly.

The Company is not a smaller version of Berkshire Hathaway Inc. Instead, it hopes to be a significant software company while it also operates its Traditional Business.

### Critical Accounting Policies and Estimates

The Company’s financial statements and accompanying notes are prepared in accordance with U.S. generally accepted accounting principles. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Management believes that revenue recognition, accounting for software costs, fair value measurement and disclosures (including the long-term Incentive Plan liabilities) and income taxes are critical accounting policies and estimates.

The Company’s critical accounting policies are detailed in its Annual Report on Form 10-K for the year ended September 30, 2021. 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 variants 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 subscriber revenues; possible security breaches of the Company’s software or websites; the Company’s reliance on its president and chief executive officer, who continues to work a reduced schedule; 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, 2021.

## Controls and procedures

As filed, 1,759 characters.

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, 2021, management concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2021. There were no material changes in the Company’s internal control over financial reporting or in other factors reasonably likely to affect its internal control over financial reporting during the quarter ended December 31, 2021.

### PART II

|  |  |  |
| --- | --- | --- |
| 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 | Inline XBRL Instance |
|  | 101.SCH | Inline XBRL Taxonomy Extension Schema |
|  | 101.CAL | Inline XBRL Taxonomy Extension Calculation |
|  | 101.DEF | Inline XBRL Taxonomy Extension Definition |
|  | 101.LAB | Inline XBRL Taxonomy Extension Labels |
|  | 101.PRE | Inline XBRL Taxonomy Extension Presentation |
|  | 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101 |

SIGNATURE

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

DAILY JOURNAL CORPORATION

(Registrant)

/s/ Gerald L. Salzman

Chief Executive Officer

President

Chief Financial Officer

Treasurer

(Principal Executive Officer,

Principal Financial Officer and

Principal Accounting Officer)

DATE: February 11, 2022

20

Filed Feb 11, 2022.
Source: SEC EDGAR, the filing index for accession 0001437749-22-003100. Last ingested by Listed: Oct 27, 2026, 17:30 ET. No prices; not investment advice.