Daily Journal Corp: Form 10-Q for the period ended Mar 31, 2026

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 six months ended March 31, 2026 and 2025, are set forth below (in thousands):

Comparison of the six months ended March 31, 2026 to the six months ended March 31, 2025

For the six months ended March 31

*Other segment items within net income (loss) include rental income, net unrealized gains on non-qualified compensation plan, interest expense on note payable collateralized by real estate, agency commissions, outside services, postage and delivery expenses, newsprint and printing expenses, depreciation and amortization, equipment maintenance and software, credit card merchant discount fees, rent expenses, accounting and legal fees, and other general and administrative expense.

Consolidated Financials Comparison

Consolidated revenues were $42.3 million and $35.9 million for the six months ended March 31, 2026 and 2025, respectively. This increase of $6.4 million (17.8%) was primarily from increases in (i) Journal Technologies’ other public service fees of $2.2 million, license and maintenance fees of $2.0 million, and consulting fees of $1.8 million, and (ii) the Traditional Business’ advertising revenues of $0.3 million.

Approximately 79% and 76% of our revenues during the six months ended March 31, 2026 and 2025 were derived from Journal Technologies. In addition, our revenues during the six months ended March 31, 2026 were primarily from the United States, with approximately $3.3 million (7.9%) from foreign countries. Almost all of Journal Technologies’ revenues are from governmental agencies.

Consolidated operating expenses increased by $4.6 million (13.5%) to $38.8 million from $34.2 million. Total salaries and employee benefits increased by $1.8 million (7.6%) to $26.0 million from $ 24.2 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 $0.7 million (19.4%) to $4.3 million from $3.6 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 $2.6 million (93.6%) to $5.4 million from $2.8 million, primarily driven by a $1.5 million increase in accounting and legal fees, including higher accounting costs associated with efforts to remediate previously identified material weaknesses in internal control over financial reporting and higher legal and service provider expenses related to proxy solicitation and stockholder outreach activities, as well as a $0.4 million increase in costs related to the adoption and implementation of software and related process changes supporting the Company’s modernization initiatives. The Company expects these costs to remain elevated in the near term as these initiatives continue

Other income (expense) for the six months ended March 31, 2026 decreased by $135.0 million, resulting in $60.6 million of other expense, compared with $74.5 million of other income for the six months ended March 31, 2025. This change was primarily driven by unrealized losses on marketable securities of $62.9 million, compared with unrealized gains of $72.8 million in the prior-year period.

During the six months ended March 31, 2026 and 2025, consolidated pretax loss was $57.1 million and pretax income was $76.2 million, respectively, and consolidated net loss was $42.6 million and net income was $55.6 million, respectively.

As of March 31, 2026, the aggregate fair market value of the Company’s marketable securities was $430.1 million. These securities had approximately $291.0 million of cumulative unrealized gains before estimated taxes of $75.7 million. Most of the unrealized gains were in the common stocks of three U.S. financial institutions and one foreign manufacturer.

Taxes

During the six months ended March 31, 2026, the Company recorded an income tax benefit of $14.5 million on the pretax loss of $57.1 million. The income tax benefit and expense consisted primarily of tax benefit of $15.8 million related to unrealized losses on marketable securities, and tax expense of $1.4 million on income from US operations and dividend income. Consequently, the overall effective tax rate for the six months ended March 31, 2026 was 25.3% after including the taxes on the unrealized gains on marketable securities.

For the six months ended March 31, 2025, the Company recorded an income tax provision of $20.6 million on pretax income of $76.2 million. The income tax provision consisted of $19.2 million related to unrealized gains on marketable securities, $0.9 million related to income from U.S. operations and dividend income, and a tax provision of $0.6 million for the effect of a change in state apportionment on the beginning of the year’s deferred tax liability. These tax liabilities were partially offset by a tax benefit of $0.1 million for the dividends received deduction and other permanent book and tax differences. Consequently, the overall effective tax rate for the six months ended March 31, 2025 was 27%, after including the taxes on the 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 six months ended March 31, 2026, Journal Technologies’ pretax income increased by $3.7 million to $4.2 million, compared to $0.5 million for the six months ended March 31, 2025. The increase was primarily attributable to higher revenues of $6.0 million, partially offset by increased operating expenses of $2.3 million.

Revenues increased by $6.0 million (22.0%) to $33.4 million from $27.4 million during the prior-year period. Licensing and maintenance fees increased by $2.0 million (13.4%) to $17.0 million, while other public service fees increased by $2.2 million (30.8%) to $9.3 million, primarily due to increased e-filing revenues. Consulting fees increased by $1.8 million (34.4%) to $7.1 million, primarily due to the timing of project go-lives and deferred revenue recognition.

Operating expenses increased by $2.3 million (8.7%) to $29.2 million, primarily due to higher accounting and consulting fees, increased personnel costs, higher contractor utilization, and increased hosting costs billed to customers.

Traditional Business

For the six months ended March 31, 2026, the Traditional Business reported a pretax loss of $1.1 million, compared to pretax income of $1.2 million for the six months ended March 31, 2025. This decrease was primarily attributable to increased accounting and consulting fees and other operating expenses.

Total revenues increased by $0.4 million (4.2%) to $8.8 million from $8.5 million in the prior-year period. Advertising revenues increased by $0.3 million (4.7%) to $6.6 million, while circulation revenues increased by $0.1 million (2.8% ).

The Daily Journals accounted for approximately 95% of the Traditional Business’ total circulation revenues, which remained consistent year-over-year.

The Traditional Business segment operating expenses increased by $2.6 million (36.0%) to $9.9 million from $7.3 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 and service provider expenses associated with proxy solicitation and stockholder outreach activities.

Comparison of the three months ended March 31, 2026 to the three months ended March 31, 2025

For the three months ended March 31

*Other segment items within net income (loss) include rental income, net unrealized gains on non-qualified compensation plan, interest expense on note payable collateralized by real estate, agency commissions, outside services, postage and delivery expenses, newsprint and printing expenses, depreciation and amortization, equipment maintenance and software, credit card merchant discount fees, rent expenses, accounting and legal fees, and other general and administrative expense.

Consolidated Financials Comparison

Consolidated revenues were $22.7 million and $18.2 million for three months ended March 31, 2026 and 2025, respectively. This increase of $4.5 million (25.0%) was primarily from increases in (i) Journal Technologies’ consulting fees of $2.3 million, other public service fees of $1.2 million, and license and maintenance fees of $1.0 million.

Approximately 80% and 76% of our revenues during the three months ended March 31, 2026 and 2025 were derived from Journal Technologies. In addition, our revenues during the three months ended March 31, 2026 were primarily from the United States, with approximately $2.2 million (9.7%) from foreign countries.

Consolidated operating expenses increased by $2.5 million (14.6%) to $19.7 million from $17.2 million. Total salaries and employee benefits increased by $0.7 million (6.1%) to $13.1 million from $12.3 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 decreased by $0.1 million (3.7%) to $1.7 million from $1.8 million. Other general and administrative expenses increased by $2.0 million (147.6%) to $3.4 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 March 31, 2026 was $50.0 million of other expense, compared with $60.3 million of other income for the three months ended March 31, 2025. This change was primarily driven by unrealized losses on marketable securities of $51.2 million, compared with unrealized gains of $59.4 million in the prior-year quarter.

During the three months ended March 31, 2026 and 2025, consolidated pretax loss was $47.0 million and pretax income was $61.3 million, respectively, and consolidated net loss was $34.6 million and net income was $44.7 million, respectively.

Journal Technologies

For the three months ended March 31, 2026, Journal Technologies’ pretax income was $3.1 million compared to $0.1 million for the three months ended March 31, 2025. The increase was primarily attributable to higher revenues of $4.4 million, partially offset by increased operating expenses of $1.4 million.

Revenues increased by $4.4 million (32.2%) to $18.2 million from $13.8 million during the prior-year quarter. Licensing and maintenance fees increased by $1.0 million (13.7%) to $8.5 million, while other public service fees increased by $1.2 million (32.0%) to $4.8 million, primarily due to increased e-filing revenues. Consulting fees increased by $2.3 million (84.5%) to $4.9 million, primarily due to the timing of project go-lives and deferred revenue recognition.

Operating expenses increased by $1.4 million (10.2%) to $15.1 million, primarily due to increased personnel costs, higher contractor utilization, and increased hosting costs billed to customers.

Traditional Business

For the three months ended March 31, 2026, the Traditional Business reported a pretax loss of $0.5 million, compared to pretax income of $0.9 million for the three months ended March 31, 2025. This decrease was primarily attributable to other operating expenses.

Total revenues increased by $0.1 million (2.3%) to $4.5 million from $4.4 million in the prior-year quarter. Advertising and circulation revenues increased by $0.1 million (5.3% ).

The Traditional Business segment operating expenses increased by $1.5 million (42.0%) to $5.0 million from $3.5 million, primarily resulting from increased merchant discount fees, additional promotional expenses, and accounting advisory fees primarily associated with the remediation of material weaknesses in our internal controls, as well as higher legal and service provider expenses associated with proxy solicitation and stockholder outreach activities.

Liquidity and Capital Resources

During the six months ended March 31, 2026, our cash and cash equivalents, restricted cash, and marketable securities decreased by $62.8 million, reflecting net pretax unrealized losses on marketable securities of $62.9 million. The investments in marketable securities, which had an adjusted cost basis of approximately $139.1 million and a market value of approximately $430.1 million as of March 31, 2026, generated approximately $2.6 million in dividends and interest income during the six months ended March 31, 2026. These securities had approximately $291.0 million of cumulative unrealized gains before estimated taxes of $75.7 million which will become due only when we sell securities in which there is realized appreciation.

No marketable securities were sold during the six months ended March 31, 2026. 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 March 31, 2026 and September 30, 2025, respectively.

As of March 31, 2026, we had working capital of $441.7 million, including the liabilities for deferred revenue of $16.4 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 six months ended March 31, 2026, net cash provided by operating activities was $2.2 million. Cash provided by operating activities consisted of a net loss of $42.6 million, adjusted for non-cash items of $48.3 million, and cash used for working capital of $3.5 million. Adjustments for non-cash items consisted primarily of $62.9 million of net unrealized losses on marketable securities, and $14.8 million of deferred income tax benefit. The use of cash from changes in operating assets and liabilities was primarily attributable to a $7.7 million decrease in accrued liabilities, including non-qualified deferred compensation, $0.6 million decrease in income taxes payable, $1.9 million decrease in deferred revenue, and $1.3 million increase in prepaid expenses and other assets, partially offset by a $7.4 million decrease in accounts receivable, reflecting improved collections, and a $0.7 million increase in accounts payable.

For the six months ended March 31, 2025, net cash provided by operating activities was $1.6 million. Cash provided by operating activities consisted of net income of $55.6 million, adjusted for non-cash items of $52.3 million, and cash used for working capital of $1.6 million. Adjustments for non-cash items consisted primarily of $72.8 million of net unrealized gains on marketable securities, partially offset by $20.3 million of deferred income tax expense, as well as $0.1 million of depreciation and amortization and $0.1 million of stock-based compensation. The use of cash from changes in operating assets and liabilities was primarily attributable to a $6.5 million decrease in deferred revenue and a $2.5 million decrease in accrued liabilities, including non-qualified deferred compensation, partially offset by a $7.4 million decrease in accounts receivable, reflecting improved collections.

Investing Activities

For the six months ended March 31, 2026 and 2025 , net cash used in investing activities was negligible or nil.

Financing Activities

For the six months ended March 31, 2026, net cash used in financing activities totaled $2.1 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 March 31, 2026 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 (the “Exchange Act”), and are not required to provide the information required under this item.

Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer (Principal Financial and Accounting Officer), evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of March 31, 2026.

As previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2025, management identified material weaknesses in internal control over financial reporting related to (i) segregation of duties and (ii) revenue recognition.

Based on this evaluation, and in light of these material weaknesses, management concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2026. However, management has made substantial progress in remediation. While the Company believes that the material weaknesses have been addressed through the actions described below, it must see sustained operating effectiveness over a sufficient period before concluding and declaring that the weaknesses have been fully remediated.

Changes in Internal Control Over Financial Reporting

During the quarter ended March 31, 2026, the Company continued to execute its remediation plan and made significant progress building on its prior actions. Specifically, the Company:

• Completed the implementation of enhancements to its enterprise resource planning (ERP) system, strengthening system-enforced segregation of duties, user access governance, and workflow approval controls, and expanding their consistent application across financial reporting processes.
• Completed the expansion and realignment of finance and accounting personnel and further reinforced supervisory review controls, resulting in clearer separation of preparer and reviewer responsibilities and reduced reliance on single individuals in key processes.
• Continued implementation and refinement of enhanced revenue recognition controls, including standardized documentation and layered review procedures over deferred revenue, and began applying these controls consistently across reporting periods.
• Advanced its engagement with a third-party consulting firm to support the enhancement and refinement of the Company’s control environment, including assistance with control design, implementation, and evaluation of readiness for operating effectiveness.
• Further enhanced executive management and Audit Committee oversight through structured reporting, regular review sessions, and increased visibility into remediation progress and control performance.

As noted above, the Company has completed the design and implementation of its key remediation actions and has begun testing the operating effectiveness of these controls.