Daily Journal Corp: Form 10-Q for the period ended Dec 31, 2025

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 e-filing and a website to pay traffic citations and fees online. These products are licensed or subscribed to in approximately 37 states and internationally.

Reportable Segments

The Company’s Traditional Business is one reportable segment and the other is Journal Technologies which includes Journal Technologies, Inc. and Journal Technologies (Canada) Inc. All inter-segment transactions were eliminated. Additional details about each of the reportable segments and the Company’s corporate income and expenses for the three months ended December 31, 2025 and 2024, are set forth below (in thousands):

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Comparison of the three months ended December 31, 2025 to the three months ended December 31, 2024

Consolidated Financials Comparison

Consolidated revenues were $19.5 million and $17.7 million for three months ended December 31, 2025 and 2024, respectively. This increase of $1.8 million (9.4%) was primarily from increases in (i) Journal Technologies’ other public service fees of $1.0 million, and license and maintenance fees of $1.0 million, and (ii) the Traditional Business’ advertising revenues of $0.3 million.

Approximately 78% and 77% of our revenues during the three months ended December 31, 2025 and 2024 were derived from Journal Technologies. In addition, our revenues during the three months ended December 31, 2025 were primarily from the United States, with approximately $1.1 million (5.8%) from foreign countries. Almost all of Journal Technologies’ revenues are from governmental agencies.

Consolidated operating expenses increased by $2.1 million (12%) to $19.1 million from $17.0 million. Total salaries and employee benefits increased by $1.1 million (9%) to $13.0 million from $11.9 million primarily due to annual salary adjustments and the hiring of additional staff members to strengthen operational efficiencies, conduct product development and address technical debt, and bolster teams working on our installation projects. Outside services increased by $0.8 million (42%) to $2.6 million from $1.8 million mainly because of additional contractor services and increased third-party hosting fees which were billed to clients. Other general and administrative expenses increased by $0.7 million (43%) to $2.1 million from $1.4 million, primarily due to higher accounting and consulting fees associated with remediation of material weaknesses in internal controls.

Other expenses for the three months ended December 31, 2025 increased by $24.7 million, resulting in $10.6 million of other expense, compared with $14.2 million of other income for the three months ended December 31, 2024. This change was primarily driven by unrealized losses on marketable securities of $11.7 million, compared with unrealized gains of $13.4 million in the prior-year period.

During the three months ended December 31, 2025 and 2024, consolidated pretax loss was $10.1 million and pretax income was $14.9 million, respectively, and consolidated net loss was $8.0 million and net income was $10.9 million, respectively.

As of December 31, 2025, the aggregate fair market value of the Company’s marketable securities was $481.3 million. These securities had approximately $342.2 million of cumulative unrealized gains before taxes of $89.0 million. Most of the unrealized gains were in the common stocks of three U.S. financial institutions and one foreign manufacturer.

Taxes

During the three months ended December 31, 2025, the Company recorded an income tax benefit of $2.1 million on the pretax loss of $10.1 million. The income tax benefit and expense consisted primarily of tax benefit of $2.4 million related to unrealized losses on marketable securities, and $0.3 million on income from US operations and dividend income. Consequently, the overall effective tax rate for the three months ended December 31, 2025 was 21.3%, after including the taxes on the unrealized gains on marketable securities.

For the three months ended December 31, 2024, the Company recorded an income tax provision of $4.0 million on pretax income of $14.9 million. The income tax provision consisted of $3.5 million related to unrealized gains on marketable securities, $0.02 million related to income from foreign operations, $0.3 million related to income from U.S. operations and dividend income, $0.01 million related to the dividends received deduction and other permanent book and tax differences, and $0.2 million related to the effect of a change in state apportionment on the beginning-of-year deferred tax liability. Consequently, the overall effective tax rate for the three months ended December 31, 2024 was 26.9%, after including taxes on unrealized gains on marketable securities.

The Company files consolidated federal income tax returns, with its domestic subsidiary, in the United States and with various state jurisdictions and is no longer subject to examinations for fiscal years before fiscal year 2021 with regard to federal income taxes and fiscal year 2020 for state income taxes. The Canadian subsidiary files a federal and provincial tax return in Canada.

Journal Technologies

For the three months ended December 31, 2025, Journal Technologies’ pretax income increased by $0.6 million (140%) to $1.1 million, compared to $0.5 million for the three months ended December 31, 2024. The increase was primarily attributable to higher revenues of $1.6 million, partially offset by increased operating expenses of $0.9 million.

Revenues increased by $1.6 million (12%) to $15.2 million from $13.6 million during the prior-year quarter. Licensing and maintenance fees increased by $1.0 million (13%) to $8.5 million, while other public service fees increased by $1.0 million (30%) to $4.5 million, primarily due to increased e-filing revenues. Consulting fees decreased by $0.4 million (17%) to $2.2 million, primarily due to the timing of project go-lives and deferred revenue recognition.

Operating expenses increased by $0.9 million (7%) to $14.1 million, primarily due to increased personnel costs, higher contractor utilization, and increased hosting costs billed to customers.

Traditional Business

For the three months ended December 31, 2025, the Traditional Business reported a pretax loss of $0.6 million, compared to pretax income of $0.3 million for the three months ended December 31, 2024. This decrease was primarily attributable to increased personnel costs and other operating expenses.

Total revenues increased by $0.3 million (6%) to $4.4 million from $4.1 million in the prior-year quarter. Advertising revenues increased by $0.3 million (8%) to $3.3 million, while circulation revenues remained consistent.

The Daily Journals accounted for approximately 94% of the Traditional Business’ total circulation revenues, which remained consistent year-over-year.

The Traditional Business segment operating expenses increased by $1.2 million (31%) to $5.0 million from $3.8 million, primarily resulting from increased personnel costs, merchant discount fees, additional promotional expenses, and accounting advisory fees primarily associated with the remediation of material weaknesses in our internal controls and higher legal expenses associated with proxy solicitation and stockholder outreach activities.

Liquidity and Capital Resources

During the three months ended December 31, 2025, our cash and cash equivalents, restricted cash, and marketable securities decreased by $15.7 million, reflecting net pretax unrealized losses on marketable securities of $11.7 million. The investments in marketable securities, which had an adjusted cost basis of approximately $139.1 million and a market value of approximately $481.3 million as of December 31, 2025, generated approximately $1.3 million in dividends and interest income during the three months ended December 31, 2025. These securities had approximately $342.2 million of cumulative unrealized gains before estimated taxes of $89.0 million which will become due only when we sell securities in which there is realized appreciation.

No marketable securities were sold during the three months ended December 31, 2025. The margin loan principal balance was paid down by $2.0 million using excess cash from operations. The loan balance was $20.0 million and $22.0 million as of December 31, 2025 and September 30, 2025, respectively.

As of December 31, 2025, we had working capital of $486.6 million, including the liabilities for deferred revenue of $18.0 million.

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

Cash Flows

The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below (in thousands):

Operating Activities

For the three months ended December 31, 2025, net cash used in operating activities was $1.9 million. Cash used in operating activities during the quarter consisted of a net loss of $8.0 million, adjusted for non-cash items of $9.6 million, and cash used for working capital of $3.5 million. Adjustments for non-cash items consisted primarily of $11.7 million of net unrealized losses on marketable securities, $2.2 million of deferred income tax benefit, and $0.1 million of depreciation and amortization expenses. The use of cash from changes in operating assets and liabilities was primarily attributable to a $7.6 million decrease in accrued liabilities, including non-qualified deferred compensation, $0.3 million decrease in deferred revenue, and $0.2 million increase prepaid expenses and other assets, partially offset by a $3.9 million decrease in accounts receivable, reflecting improved collections, and a $0.6 million increase in accounts payable.

For the three months ended December 31, 2024, net cash provided by operating activities was $2.2 million. Cash provided by operating activities during the quarter consisted of net income of $10.9 million, adjusted for non-cash items of $9.3 million, partially offset by cash used for working capital of $0.6 million. Adjustments for non-cash items consisted primarily of $13.4 million of net realized and unrealized gains on marketable securities, $4.0 million of deferred income tax expense, and $0.1 million of depreciation and amortization expense. The use of cash from changes in operating assets and liabilities was primarily attributable to a $3.7 million decrease in deferred revenue, reflecting the recognition of previously deferred license, maintenance, and consulting revenues, and a $2.8 million decrease in accrued liabilities, including non-qualified deferred compensation. These uses of cash were partially offset by a $6.6 million decrease in accounts receivable, reflecting improved collections, and a $0.4 million increase in accounts payable.

Investing Activities

For the three months ended December 31, 2025 and 2024, net cash used in investing activities was was negligible or nil.

Financing Activities

For the three months ended December 31, 2025, net cash used in financing activities totaled $2.0 million, consisting primarily of a $2.0 million repayment on the outstanding balance of the Company’s investment margin loan.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions.

There were no material changes to our critical accounting policies in the three months ended December 31, 2025 from those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our 2025 Annual Report.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are not required to provide the information required under this item.

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, 2025, management continued the execution of its remediation plan and substantially enhanced the Company’s internal control framework. During the quarter ended December 31, 2025, management continued the implementation of the key remediation measures designed to address the previously identified material weaknesses.

Management has obtained evidence supporting the design and implementation of the enhanced controls and has commenced testing of their design and operating effectiveness. While management believes the material weaknesses have been addressed through these remediation efforts, final validation is subject to the completion of testing procedures and demonstration of sustained operating effectiveness over a sufficient period of time.

Accordingly, as of December 31, 2025, management concluded that the Company’s disclosure controls and procedures were not yet effective.

Specifically, during the first quarter of fiscal 2026, the Company:

• Finalized enhancements to its enterprise resource planning (ERP) system to strengthen system-based segregation of duties, user access governance, and workflow approvals.
• Completed the expansion and realignment of finance and accounting personnel to reinforce segregation of responsibilities and strengthen supervisory review controls.
• Formalized and implemented enhanced revenue recognition review protocols, including standardized documentation and layered review procedures over deferred revenue.
• Continued engagement with a third-party consulting firm to validate control design, support operating effectiveness testing, and benchmark the Company’s internal control framework against accelerated filer standards.
• Enhanced executive management and Audit Committee oversight through structured reporting and periodic internal control review sessions.

There were no material changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2025, except for the remediation activities described above.