UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| (Mark One) |
| ☑ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended December 31, |
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)
| 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 | (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: X No:
| Yes: ☒ | No: ☐ |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes: X No:
| 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 defineddefined in Rule 12b-2 of the Exchange Act). Yes: ☐ No: X☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.date: 1,380,746 shares outstanding at January 31, 2021
DAILY JOURNAL CORPORATION
INDEX
| Page Nos. | ||
| PART I | Financial Information | |
| Item 1. Financial Statements (Unaudited) | ||
| Consolidated Balance Sheets - | ||
| December 31, | 3 | |
| Consolidated Statements of Income and Comprehensive Income - | ||
| Three months ended December 31, | 4 | |
| Consolidated Statements of Shareholders' Equity - Three months ended December 31, 2020 and 2019 | 5 | |
| Consolidated Statements of Cash Flows - | ||
| Three months ended December 31, | ||
| Notes to Consolidated Financial Statements | ||
| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | ||
| Item 4. Controls and Procedures | ||
| Part II | Other Information | |
| Item 6. Exhibits |
PART I
Item 1. FINANCIAL STATEMENTS
DAILY JOURNAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31 | September 30 | December 31 | September 30 | |||||||||||||
2017 | 2017 | 2020 | 2020 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | $ | 2,508,000 | $ | 3,384,000 | $ | 9,622,000 | $ | 26,922,000 | ||||||||
Marketable securities at fair value, including common stocks of $236,387,000 and bonds of $8,547,000 at December 31, 2017 and common stocks of $220,973,000 and bonds of $8,292,000 at September 30, 2017 | 244,934,000 | 229,265,000 | ||||||||||||||
Accounts receivable, less allowance for doubtful accounts of $200,000 at December 31, 2017 and September 30, 2017 | 4,192,000 | 5,358,000 | ||||||||||||||
Restricted cash | 2,042,000 | 2,041,000 | ||||||||||||||
Marketable securities at fair value -- common stocks | 260,580,000 | 179,368,000 | ||||||||||||||
Accounts receivable, less allowance for doubtful accounts of $250,000 at December 31, 2020 and September 30, 2020 | 6,855,000 | 6,727,000 | ||||||||||||||
Inventories | 40,000 | 40,000 | 27,000 | 36,000 | ||||||||||||
Prepaid expenses and other current assets | 641,000 | 798,000 | 552,000 | 613,000 | ||||||||||||
Income tax receivable | 987,000 | 909,000 | 597,000 | 601,000 | ||||||||||||
Total current assets | 253,302,000 | 239,754,000 | 280,275,000 | 216,308,000 | ||||||||||||
Property, plant and equipment, at cost | ||||||||||||||||
Land, buildings and improvements | 16,396,000 | 16,396,000 | 16,572,000 | 16,572,000 | ||||||||||||
Furniture, office equipment and computer software | 2,724,000 | 2,724,000 | 1,782,000 | 1,782,000 | ||||||||||||
Machinery and equipment | 1,818,000 | 1,799,000 | 1,524,000 | 1,524,000 | ||||||||||||
| 20,938,000 | 20,919,000 | 19,878,000 | 19,878,000 | |||||||||||||
Less accumulated depreciation | (9,433,000 | ) | (9,292,000 | ) | (9,537,000 | ) | (9,422,000 | ) | ||||||||
| 11,505,000 | 11,627,000 | 10,341,000 | 10,456,000 | |||||||||||||
Intangibles, net | 1,996,000 | 3,058,000 | ||||||||||||||
Goodwill | 13,400,000 | 13,400,000 | ||||||||||||||
Operating lease right-of-use assets | 210,000 | 140,000 | ||||||||||||||
Deferred income taxes - Federal | 7,436,000 | 10,652,000 | 12,517,000 | 11,137,000 | ||||||||||||
Deferred income taxes - States | 2,251,000 | 2,217,000 | ||||||||||||||
Deferred income taxes - State |
| 0 | 534,000 | |||||||||||||
| $ | 289,890,000 | $ | 280,708,000 | $ | 303,343,000 | $ | 238,575,000 | |||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable | $ | 2,951,000 | $ | 3,049,000 | $ | 3,683,000 | $ | 3,926,000 | ||||||||
Accrued liabilities | 2,411,000 | 3,112,000 | 3,995,000 | 5,005,000 | ||||||||||||
Note payable collateralized by real estate | 117,000 | 115,000 | 144,000 | 133,000 | ||||||||||||
Deferred subscriptions | 3,135,000 | 3,284,000 | 2,584,000 | 2,899,000 | ||||||||||||
Deferred installation contracts | 4,364,000 | 5,072,000 | 140,000 | 140,000 | ||||||||||||
Deferred professional fees | 4,783,000 | 4,728,000 | ||||||||||||||
Deferred maintenance agreements and others | 10,040,000 | 9,442,000 | 9,954,000 | 11,159,000 | ||||||||||||
Total current liabilities | 23,018,000 | 24,074,000 | 25,283,000 | 27,990,000 | ||||||||||||
Long term liabilities | ||||||||||||||||
Investment margin account borrowings | 29,493,000 | 29,493,000 | ||||||||||||||
Investment margin account borrowings | 15,000,000 | 29,493,000 | ||||||||||||||
Note payable collateralized by real estate | 1,926,000 | 1,956,000 | 1,542,000 | 1,576,000 | ||||||||||||
Deferred maintenance agreements | 580,000 | 759,000 | 338,000 | 450,000 | ||||||||||||
Accrued liabilities | 135,000 | 135,000 | 1,281,000 | 1,455,000 | ||||||||||||
Deferred income taxes, net | 48,140,000 | 64,550,000 | ||||||||||||||
Deferred income taxes - State | 658,000 | 0 | ||||||||||||||
Deferred income taxes | 58,230,000 | 35,870,000 | ||||||||||||||
Total long term liabilities | 80,274,000 | 96,893,000 | 77,049,000 | 68,844,000 | ||||||||||||
Commitments and contingencies (Notes 10 and 11) | --- | --- | ||||||||||||||
Debts and commitments and contingencies (Notes 9 and 10) | - | - | ||||||||||||||
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 December 31, 2017 and September 30, 2017 | 14,000 | 14,000 | ||||||||||||||
Preferred stock, $.01 par value, 5,000,000 shares authorized and no shares issued | 0 | 0 | ||||||||||||||
Common stock, $.01 par value, 5,000,000 shares authorized; 1,805,053 shares issued, including 424,307 treasury shares, at December 31, 2020 and September 30, 2020 | 14,000 | 14,000 | ||||||||||||||
Additional paid-in capital | 1,755,000 | 1,755,000 | 1,755,000 | 1,755,000 | ||||||||||||
Retained earnings | 71,889,000 | 57,150,000 | 199,242,000 | 139,972,000 | ||||||||||||
Accumulated other comprehensive income | 112,940,000 | 100,822,000 | ||||||||||||||
Total shareholders' equity | 186,598,000 | 159,741,000 | 201,011,000 | 141,741,000 | ||||||||||||
| $ | 289,890,000 | $ | 280,708,000 | $ | 303,343,000 | $ | 238,575,000 | |||||||||
See accompanying Notes to Consolidated Financial Statements
DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Three months ended December 31 | Three months ended December 31 | |||||||||||||||
2017 | 2016 | 2020 | 2019 | |||||||||||||
Revenues | ||||||||||||||||
Advertising | $ | 2,116,000 | $ | 2,310,000 | $ | 1,692,000 | $ | 2,126,000 | ||||||||
Circulation | 1,363,000 | 1,449,000 | 1,203,000 | 1,312,000 | ||||||||||||
Advertising service fees and other | 602,000 | 638,000 | 634,000 | 694,000 | ||||||||||||
Licensing and maintenance fees | 4,350,000 | 3,966,000 | 5,033,000 | 5,210,000 | ||||||||||||
Consulting fees | 995,000 | 848,000 | 244,000 | 689,000 | ||||||||||||
Other public service fees | 826,000 | 779,000 | 1,614,000 | 1,646,000 | ||||||||||||
| 10,252,000 | 9,990,000 | 10,420,000 | 11,677,000 | |||||||||||||
Costs and expenses | ||||||||||||||||
Salaries and employee benefits | 8,197,000 | 7,641,000 | 7,892,000 | 8,887,000 | ||||||||||||
Outside services | 1,039,000 | 980,000 | 723,000 | 1,214,000 | ||||||||||||
Postage and delivery expenses | 217,000 | 278,000 | 169,000 | 210,000 | ||||||||||||
Newsprint and printing expenses | 212,000 | 209,000 | 154,000 | 178,000 | ||||||||||||
Depreciation and amortization | 1,218,000 | 1,392,000 | 115,000 | 128,000 | ||||||||||||
Equipment maintenance and software | 253,000 | 322,000 | ||||||||||||||
Credit card merchant discount fees | 450,000 | 382,000 | ||||||||||||||
Rent expenses | 72,000 | 172,000 | ||||||||||||||
Accounting and legal fees | 350,000 | 256,000 | ||||||||||||||
Other general and administrative expenses | 2,814,000 | 2,343,000 | 557,000 | 1,446,000 | ||||||||||||
| 13,697,000 | 12,843,000 | 10,735,000 | 13,195,000 | |||||||||||||
Loss from operations | (3,445,000 | ) | (2,853,000 | ) | ||||||||||||
Loss from operations | (315,000 | ) | (1,518,000 | ) | ||||||||||||
Other income (expense) | ||||||||||||||||
Dividends and interest income | 1,483,000 | 1,171,000 | 638,000 | 1,680,000 | ||||||||||||
Gain on sale of capital asset | 2,000 | - | ||||||||||||||
Other income | 9,000 | 15,000 | - | 3,000 | ||||||||||||
Interest expense on note payable collateralized by real estate | (24,000 | ) | (26,000 | ) | ||||||||||||
Interest expense on margin loans | (136,000 | ) | (79,000 | ) | ||||||||||||
Interest accrual for uncertain and unrecognized tax benefits | - | (9,000 | ) | |||||||||||||
Loss before income taxes | (2,111,000 | ) | (1,781,000 | ) | ||||||||||||
Benefit from income taxes | 16,850,000 | 310,000 | ||||||||||||||
Net income (loss) | $ | 14,739,000 | $ | (1,471,000 | ) | |||||||||||
Net unrealized gains on marketable securities | 81,212,000 | 19,531,000 | ||||||||||||||
Interest expense on note payable collateralized by real estate | (21,000 | ) | (22,000 | ) | ||||||||||||
Interest expense on margin loans and others | (64,000 | ) | (184,000 | ) | ||||||||||||
Income before income taxes | 81,450,000 | 19,490,000 | ||||||||||||||
Provision for income taxes | (22,180,000 | ) | (5,280,000 | ) | ||||||||||||
Net income | $ | 59,270,000 | $ | 14,210,000 | ||||||||||||
Weighted average number of common shares outstanding - basic and diluted | 1,380,746 | 1,380,746 | ||||||||||||||
Basic and diluted net income (loss) per share | $ | 10.67 | $ | (1.07 | ) | |||||||||||
Weighted average number of common shares outstanding - basic and diluted | 1,380,746 | 1,380,746 | ||||||||||||||
Basic and diluted net income per share | $ | 42.93 | $ | 10.29 | ||||||||||||
Comprehensive income | $ | 59,270,000 | $ | 14,210,000 | ||||||||||||
Net income (loss) | $ | 14,739,000 | $ | (1,471,000 | ) | |||||||||||
Net increase in unrealized appreciation of marketable securities (net of taxes) | 12,118,000 | 15,019,000 | ||||||||||||||
| $ | 26,857,000 | $ | 13,548,000 | |||||||||||||
See accompanying Notes to Consolidated Financial Statements.
DAILY JOURNAL CORPORATIONCORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
Additional | Total | |||||||||||||||||||||||||||
Common Stock | Treasury Stock | Paid-in | Retained | Shareholders' | ||||||||||||||||||||||||
Share | Amount | Share | Amount | Capital | Earnings | Equity | ||||||||||||||||||||||
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 | - | 0 | - | 0 | 0 | 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 | ||||||||||||||
Balance at September 30, 2020 | 1,805,053 | $ | 18,000 | (424,307 | ) | $ | (4,000 | ) | $ | 1,755,000 | $ | 139,972,000 | $ | 141,741,000 | ||||||||||||||
Net income | - | 0 | - | 0 | 0 | 59,270,000 | 59,270,000 | |||||||||||||||||||||
Balance at December 31, 2020 | 1,805,053 | $ | 18,000 | (424,307 | ) | $ | (4,000 | ) | $ | 1,755,000 | $ | 199,242,000 | $ | 201,011,000 | ||||||||||||||
See accompanying Notes to Consolidated Financial Statements
DAILY JOURNAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended December 31 | Three months ended December 31 | |||||||||||||||
2017 | 2016 | 2020 | 2019 | |||||||||||||
Cash flows from operating activities | ||||||||||||||||
Net income (loss) | $ | 14,739,000 | $ | (1,471,000 | ) | |||||||||||
Adjustments to reconcile net income (loss) to net cash used in operations | ||||||||||||||||
Net income | $ | 59,270,000 | $ | 14,210,000 | ||||||||||||
Adjustments to reconcile net income to net cash used in operations | ||||||||||||||||
Depreciation and amortization | 1,218,000 | 1,392,000 | 115,000 | 128,000 | ||||||||||||
Net unrealized gains on marketable securities | (81,212,000 | ) | (19,531,000 | ) | ||||||||||||
Deferred income taxes | (16,778,000 | ) | (917,000 | ) | 22,172,000 | 5,197,000 | ||||||||||
Discounts earned on bonds | (1,000 | ) | (1,000 | ) | ||||||||||||
Changes in operating assets and liabilities | ||||||||||||||||
Changes in operating assets and liabilities | ||||||||||||||||
(Increase) decrease in current assets | ||||||||||||||||
Accounts receivable, net | 1,166,000 | (891,000 | ) | (128,000 | ) | (496,000 | ) | |||||||||
Inventories | --- | (9,000 | ) | 9,000 | (9,000 | ) | ||||||||||
Prepaid expenses and other assets | 157,000 | 5,000 | 61,000 | (250,000 | ) | |||||||||||
Income tax receivable | (78,000 | ) | 645,000 | 4,000 | 81,000 | |||||||||||
Increase (decrease) in liabilities | ||||||||||||||||
Accounts payable | (98,000 | ) | 18,000 | (243,000 | ) | (663,000 | ) | |||||||||
Accrued liabilities | (701,000 | ) | (373,000 | ) | (1,254,000 | ) | (495,000 | ) | ||||||||
Income taxes | --- | (68,000 | ) | |||||||||||||
Deferred subscriptions | (149,000 | ) | (106,000 | ) | ||||||||||||
Deferred subscriptions | (315,000 | ) | (303,000 | ) | ||||||||||||
Deferred installation contracts |
| 0 | 80,000 | |||||||||||||
Deferred professional fees | 55,000 | 242,000 | ||||||||||||||
Deferred maintenance agreements and others | 419,000 | 678,000 | (1,317,000 | ) | (1,317,000 | ) | ||||||||||
Deferred installation contracts | (708,000 | ) | (213,000 | ) | ||||||||||||
Net cash used in operating activities | (814,000 | ) | (1,311,000 | ) | (2,783,000 | ) | (3,126,000 | ) | ||||||||
Cash flows from investing activities | ||||||||||||||||
Purchases of marketable securities | --- | (5,013,000 | ) | |||||||||||||
Purchases of property, plant and equipment | (34,000 | ) | (187,000 | ) |
| 0 | (97,000 | ) | ||||||||
Net cash used in investing activities | (34,000 | ) | (5,200,000 | ) | ||||||||||||
Net cash used in investing activities | 0 | (97,000 | ) | |||||||||||||
Cash flows from financing activities | ||||||||||||||||
Payment to margin loan principal | (14,493,000 | ) | 0 | |||||||||||||
Payment of real estate loan principal | (28,000 | ) | (27,000 | ) | (23,000 | ) | (31,000 | ) | ||||||||
Net cash used in financing activities | (28,000 | ) | (27,000 | ) | (14,516,000 | ) | (31,000 | ) | ||||||||
Decrease in cash and cash equivalents | (876,000 | ) | (6,538,000 | ) | ||||||||||||
Decrease in cash and restricted cash and cash equivalents | (17,299,000 | ) | (3,254,000 | ) | ||||||||||||
Cash and cash equivalents | ||||||||||||||||
Cash and restricted cash and cash equivalents | ||||||||||||||||
Beginning of period | 3,384,000 | 11,411,000 | 28,963,000 | 10,630,000 | ||||||||||||
End of period | $ | 2,508,000 | $ | 4,873,000 | $ | 11,664,000 | $ | 7,376,000 | ||||||||
Interest paid during period | $ | 169,000 | $ | 111,000 | $ | 90,000 | $ | 220,000 | ||||||||
Net income taxes paid during period | $ | 6,000 | $ | 3,000 | ||||||||||||
Net income taxes paid | $ | 5,000 | $ | 1,000 | ||||||||||||
See accompanying Notes to Consolidated Financial Statements.
DAILY JOURNAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - The Corporation and Operations
DailyDaily Journal Corporation (the “Company”) publishes newspapers and web sites coveringwebsites reporting California and Arizona news 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”.
JournalJournal Technologies, Inc. (“Journal Technologies”), a wholly-owned subsidiary of the Company, 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 online, and bar members.fees online. These products are licensed to more than 500 organizations in 42 states and internationally.
Essentially all of the Company’sCompany’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 three 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 recurringrecurring accruals) considered necessary for a fair presentation of its financial position as of December 31, 2017,2020, its results of operations and cash flows for the three-month periods ended December 31, 20172020 and 2016.2019, its consolidated statements of shareholders’ equity for the three months ended December 31, 2020 and 2019 and cash flows for the three months ended December 31, 2020 and 2019. The results of operations for the three months ended December 31, 20172020 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 SecuritiesSecurities 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, 2017.2020.
Certain reclassifications of previously reported amounts have been made to conform to the current year’syear’s presentation.
Note 3 – New Accounting Pronouncement
No new accounting pronouncement issued or effective has had, or is expected to have, a material impact on the Company’s consolidated financial statements.
Note 34 - Accounting Standards Adopted in Fiscal 2018 and Recent Accounting Pronouncements– Right-of-Use (ROU) Asset
Accounting Standards Adopted in Fiscal 2018
In November 2015, At the Financial Accounting Standards Board (FASB) issuedbeginning of fiscal 2020, the Company adopted Accounting Standards Update (ASU)(“ASU”) No.20152016-17,02,Income Taxes Leases (Topic 740842): Balance Sheet Classification of Deferred Taxes. This updatewhich requires deferred tax liabilitiesthat all leases be recognized by lessees on the balance sheet through a right-of-use (ROU) asset and assets to be classified as noncurrent in the consolidated balance sheet. The Companycorresponding lease liability, including today’s operating leases. There has adopted this guidance effective October 1, 2017 and concluded that it hasbeen no significant impact on the Company’s financial condition, results of operations or disclosures because it is simplydisclosures. At December 31, 2020, the Company recorded a reclassificationright-of-use asset and lease liability of approximately $210,000 for its operating office leases, including approximately $86,000 beyond one year. Operating office and equipment leases are included in operating lease ROU assets, current deferred taxes to non-current deferred taxes with an itemization of federalaccrued liabilities and state deferred taxes.
In May 2014, the FASB issued ASU No.2014-09,Revenue from Contracts with Customers (ASC Topic 606) which requires that revenues be recognizedlong-term accrued liabilities in an amount reflecting the consideration an entity expects to receive in exchange for those goods or services when a customer obtains control of promised goods or services. The Company elected to adopt early the ASC Topic 606 effective October 1, 2017 using the modified retrospective method.
The Company has concluded that the adoption of the ASC Topic 606 in fiscal 2018 has no significant impact on the Company’s financial condition or results of operations. The Company’s traditional publishing business revenue recognition related to advertising, circulation, and public fees remains unchanged. For the software business, the Company previously utilized the completed performance method of accounting, pursuant to which the Company did not recognize revenues for implementation services or licenses, maintenance, support and hosting services until after the services were performed and accepted by the customer (go-live), due to the fact that the customer’s acceptance was typically unpredictable and reliable estimates of the progress towards completion could not be made. Thus, the Company’s past revenue recognition policy was already in conformity with ASU Topic 606, which calls for revenue recognition at the point of delivery when a performance obligation is fulfilled. Consequently, the Company believes there are no required material retrospective or accumulated catch-up adjustments with respect to prior years’ financial figures, as revenues have been recognized consistently in the same manner throughout the comparative reporting periods.accompanying Consolidated Balance Sheets.
The adoption of 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. The Company incurs an immaterial amount of sales commission costs for its software contracts 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.
Other Recent Accounting Pronouncements
The Company will continue to evaluate the other new accounting pronouncements as detailed in its Annual Report on Form 10-K for the year ended September 30, 2017.
Note 45 – 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 publishing business,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 (professional fees) to configure the system to go live andgo-live, (ii) subscription software license, maintenance including(including updates and upgrades,upgrades) and support fees, and (iii) third-party hosting fees when used. Revenues for consulting are generally recognized at point of delivery (go-live) upon completion of services and customer acceptance, and subscription fees are recognized ratably (using the output method based on time-elapsed) after the go-live.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 (go-live), and maintenance revenues are recognized ratably after the go-live. (See Note 12 for additional disclosures related to ASC Topic 606 adoption.)
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.
The adoption of 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 generally recognizes revenuesrevenues when it can invoice the customer pursuant to the contract for the value of completed performance. Asperformance, 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 fees (i.e. 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 56 - Basic and Diluted Net Income Per Share
The Company does not have any common stock equivalents, and therefore basic and diluted net income (loss) per share are the same.
Note 67 - Investments in Marketable Securities
Investments inAll investments are classified as “Current assets” because they are available for sale at any time. These “available-for-sale” marketable securities categorized as “available-for-sale” 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 December 31, 20172020 and September 30, 2017,2020, there were net accumulated pretax unrealized gains of $181,540,000$218,805,000 and $165,872,000,$137,593,000, respectively, were recorded before taxes of $48,140,000 and $64,550,000, respectively, in “Accumulated other comprehensive income” in the accompanying Consolidated Balance Sheets. Most of the accumulated pretax unrealized gains were in the common stocks of three U.S. financial institutions and one foreign manufacturer.
Investments in equity securities and securities with fixed maturity as of December 31, 2017 and September 30, 2017 are summarized below.
December 31, 2017 | September 30, 2017 | |||||||||||||||||||||||
Aggregate fair value | (Unaudited) Amortized/ Adjusted cost basis | Pretax unrealized gains | Aggregate fair value | Amortized/ Adjusted cost basis | Pretax unrealized gains | |||||||||||||||||||
Marketable securities | ||||||||||||||||||||||||
Common stocks | $ | 236,387,000 | $ | 58,449,000 | $ | 177,938,000 | $ | 220,973,000 | $ | 58,449,000 | $ | 162,524,000 | ||||||||||||
Bonds | 8,547,000 | 4,945,000 | 3,602,000 | 8,292,000 | 4,944,000 | 3,348,000 | ||||||||||||||||||
| $ | 244,934,000 | $ | 63,394,000 | $ | 181,540,000 | $ | 229,265,000 | $ | 63,393,000 | $ | 165,872,000 | |||||||||||||
All investments are classified as “Current assets” because they are available for sale at any time. The bonds mature in 2039.
As of December 31, 2017, the Company performed an evaluation for an equity security with a fair value below cost to determine if the unrealized loss was other-than-temporary. This evaluation considers a number of factors including, but not limited to, the length of time and extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer and the Company’s ability and intent to hold the security until fair value recovers. The assessment of the ability and intent to hold this security to recovery focuses on liquidity needs, asset/liability management objectives and security portfolio objectives. Based on the result of the evaluation, the Company concluded that as of December 31, 2017, the unrealized loss related to an equity security it owns was temporary.
Note 7 - Intangible Assets
Intangible Assets | ||||||||||||||||||||||||
December 31, 2017 | September 30, 2017 | |||||||||||||||||||||||
Customer Relationships | Developed Technology |
Total | Customer Relationships | Developed Technology |
Total | |||||||||||||||||||
Gross intangibles | $ | 21,950,000 | $ | 2,525,000 | $ | 24,475,000 | $ | 21,950,000 | $ | 2,525,000 | $ | 24,475,000 | ||||||||||||
Accumulated amortization | (20,130,000 | ) | (2,349,000 | ) | (22,479,000 | ) | (19,174,000 | ) | (2,243,000 | ) | (21,417,000 | ) | ||||||||||||
| $ | 1,820,000 | $ | 176,000 | $ | 1,996,000 | $ | 2,776,000 | $ | 282,000 | $ | 3,058,000 | |||||||||||||
These intangible assets are being amortized over five years for financial statement purposes due to the short life cycle of technology on which customer relationships depend and over 15 years on a straight-line basis for tax purposes. The intangible amortization expenses were $1,062,000 for the three-month period ended December 31, 2017, as compared with $1,224,000 in the prior year period, primarily because the intangibles of one of the two acquisitions in fiscal 2013 were fully amortized during this quarter.
Note 8 – Goodwillmanufacturer.
The Company accounts for goodwill in accordance with Accounting Standards Codification (ASC) 350,Intangibles — Goodwill and Other. Goodwill, which is not amortized for financial statement purposes, is amortized over a 15-year period for tax purposes, but evaluated for impairment annually, or whenever events or changes in circumstances indicate that the value may not be recoverable. Considered factors for potential goodwill impairment evaluation with respect to Journal Technologies include, among other things, the current year’s business profitability before intangible amortization, fluctuations of revenues, changes in the marketplace, the status of deferred installation contracts and new business.
In addition,adopted ASU 2011No.2016-08,01, Intangible – Goodwill and Others -- Testing Goodwill for Impairment, allows for the option of performing a qualitative assessment before calculating the fair value of a reporting unit. If it is determined based on qualitative factors that there isSubtopic no825 impairment to goodwill, then the fair value of a reporting unit is -not10 needed. If a quantitative analysis is required and the unit’s carrying amount exceeds its fair value, then the second step is performed to measure the amount of potential impairment. The Company’s annual goodwill impairment analysis in fiscal 20172019. did not result in an impairment charge based on the qualitative assessment. There was no indicator of impairment during the three-month periods ended December 31, 2017 and 2016.
Note 9 - Income Taxes
The December 2017 Tax Cuts and Jobs Act (“Tax Act”) reduced the maximum corporate tax rate from 35% to 21% effective January 1, 2018. The Company has completed its review of the Tax Act. The impact to its financial statements is as follows: (i) current income tax expense or benefit is calculated on a blended rate of 24.28% pursuant to IRC Section 15, (ii) deferred tax expense includes a discrete net tax benefit of approximately $16 million resulting from a revaluation of deferred tax assets and liabilities to the expected tax rate that will be applied when temporary differences are expected to reverse, (iii) items that are expected to reverse during fiscal 2018 are valued at the blended rate of 24.28% while temporary differences that will reverse after fiscal 2018 are valued at 21%, and (iv) approximately $20 million of the revaluation of deferred taxes relates to items that were initially recorded as accumulated other comprehensive income (“AOCI”). This revaluation is recorded as a component of income tax expense or benefit in continuing operations.
For the three months ended December 31, 2017,2020, the Company recorded anand included in its net income the net unrealized gains on marketable securities of $81,212,000 as compared with $19,531,000 in the prior year period. At December 31, 2020, there were 0 unrealized losses related to the marketable securities.
Investments in marketable securities as of December 31, 2020 and September 30, 2020 are summarized below.
Investment in Marketable Securities
December 31, 2020 | September 30, 2020 | |||||||||||||||||||||||
Aggregate fair value | Amortized/ Adjusted cost basis | Pretax unrealized gains |
Aggregate fair value | Amortized/ Adjusted cost basis | Pretax unrealized gains | |||||||||||||||||||
Marketable securities | ||||||||||||||||||||||||
Common stocks | $ | 260,580,000 | $ | 41,775,000 | $ | 218,805,000 | $ | 179,368,000 | $ | 41,775,000 | $ | 137,593,000 | ||||||||||||
Note 8 - Income Taxes
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 $16,850,000three months ended December 31, 2020 was 27%, after including the taxes on the unrealized gains on marketable securities.
For the three months ended December 31, 2019, the Company recorded a provision for income taxes of $5,280,000 on pretax lossincome of $2,111,000. The income tax benefit$19,490,000. This was the net result of applying the 19% effective tax rate that had been anticipated for fiscal 20182020 to the pretax loss, before the unrealized gains on marketable securities, for the three-month period months ended December 31, 2017.2019. The19% effective tax rate (before the discrete item discussed above) was greaterless than the statutory rate primarily due to the dividends received deduction which increasesand state tax benefits. In addition, the loss forCompany recorded taxes on its unrealized gains on marketable securities of $19,531,000 during the three months ended December 31, 2019. The overall effective tax purposes. On pretax loss of $1,781,000rate for the three months ended December 31, 2016,2019 was 27%, after including the Company recorded an income tax benefit of $310,000 which wastaxes on the net result of applying the effective tax rate anticipated for fiscal 2017 to pretax loss for the three months ended December 31, 2016. The effective tax rate was greater than the statutory rate mainly resulting from the dividends received deduction. The Company’s effective tax rate was 798% and 17% for the three months ended December 31, 2017 and 2016, respectively. 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 20152017 with regard to federal income taxes and fiscal 20132016 for state income taxes.
Note 109 - Debt and Commitments
During fiscal 2013, the Company borrowed from its investment margin account the aggregate purchase price of $29.5 million$29,500,000 for two acquisitions, in each case pledging its marketable securities as collateral. During this quarter, the Company decided to pay down this investment margin account by $14,493,000 reducing the balance to $15,000,000 as of December 31, 2020. 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 December 31, 20172020 was 2%0.75%. These investment margin account borrowings do not mature.
In fiscal November 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$1,240,000 and financed the balance with a real estate bank loan of $2.26 million$2,260,000, which bearsbore a fixed interest rate of 4.66% with a monthly installment of $17,600. In 4.66%October 2020, and is repayable inthe Company executed an amendment to lower the interest rate of this loan to a fixed rate of 3.33% for the remaining of its 10 years with equal monthly installments of about $17,600$16,600 through 2030. This loan is secured by the Logan facility and can be paid off at any time without prepayment penalty.time. This real estate loan had a balance of approximately $2.04 million$1,686,000 as of December 31, 2017.2020.
The Company also owns its facilities in Los Angeles andand leases space for its other offices under operating leases which expire at various dates through fiscal 2021.2022. During fiscal 2014, the Company renewed its office lease for its San Francisco office for five years (expiring in October 2019) with a current monthly rent of approximately $25,000 for about 6,200 square feet. In fiscal 2017, the Company leased approximately 9,800 square feet of office space (expiring in August 2020) in Englewood, Colorado.
The Company is responsible for a portion of maintenance, insurance and property tax expenses relating to the leased properties. Rental expenses were $237,000 for the three-month period ended December 31, 2017, as compared with $174,000 in the prior year period.
Note 1110 - 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.
Note 1211 - Operating Segments
The Company’sCompany’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 | Reportable Segments | |||||||||||||||||||||||||||||||
Traditional Business | Journal Technologies | Corporate income and expenses |
Total | Traditional Business | Journal Technologies | Corporate income and expenses |
Total | |||||||||||||||||||||||||
Three months ended December 31, 2017 | ||||||||||||||||||||||||||||||||
Three months ended December 31, 2020 | ||||||||||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||
Advertising | $ | 2,116,000 | $ | --- | $ | --- | $ | 2,116,000 | $ | 1,692,000 | $ | 0 | $ | 0 | $ | 1,692,000 | ||||||||||||||||
Circulation | 1,363,000 | --- | --- | 1,363,000 | 1,203,000 | 0 | 0 | 1,203,000 | ||||||||||||||||||||||||
Advertising service fees and other | 602,000 | --- | --- | 602,000 | 634,000 | 0 | 0 | 634,000 | ||||||||||||||||||||||||
Licensing and maintenance fees | --- | 4,350,000 | --- | 4,350,000 | 0 | 5,033,000 | 0 | 5,033,000 | ||||||||||||||||||||||||
Consulting fees | --- | 995,000 | --- | 995,000 | 0 | 244,000 | 0 | 244,000 | ||||||||||||||||||||||||
Other public service fees | --- | 826,000 | --- | 826,000 | 0 | 1,614,000 | 0 | 1,614,000 | ||||||||||||||||||||||||
Operating expenses | 4,314,000 | 9,383,000 | --- | 13,697,000 | 2,981,000 | 7,754,000 | 0 | 10,735,000 | ||||||||||||||||||||||||
Loss from operations | (233,000 | ) | (3,212,000 | ) | --- | (3,445,000 | ) | |||||||||||||||||||||||||
Income (loss) from operations | 548,000 | (863,000 | ) | 0 | (315,000 | ) | ||||||||||||||||||||||||||
Dividends and interest income | --- | --- | 1,483,000 | 1,483,000 | 0 | 0 | 638,000 | 638,000 | ||||||||||||||||||||||||
Gain on sale of capital asset | --- | --- | 2,000 | 2,000 | ||||||||||||||||||||||||||||
Other income | --- | --- | 9,000 | 9,000 | ||||||||||||||||||||||||||||
Net unrealized gains on marketable securities | 0 | 0 | 81,212,000 | 81,212,000 | ||||||||||||||||||||||||||||
Interest expenses on note payable collateralized by real estate | (24,000 | ) | --- | --- | (24,000 | ) | (21,000 | ) | 0 | 0 | (21,000 | ) | ||||||||||||||||||||
Interest expenses on margin loans | --- | --- | (136,000 | ) | (136,000 | ) | ||||||||||||||||||||||||||
Pretax (loss) income | (257,000 | ) | (3,212,000 | ) | 1,358,000 | (2,111,000 | ) | |||||||||||||||||||||||||
Income tax benefit (expense) | (680,000 | ) | (2,185,000 | ) | 19,715,000 | 16,850,000 | ||||||||||||||||||||||||||
Interest expenses on margin loans and others | 0 | 0 | (64,000 | ) | (64,000 | ) | ||||||||||||||||||||||||||
Pretax income (loss) | 527,000 | (863,000 | ) | 81,786,000 | 81,450,000 | |||||||||||||||||||||||||||
Income tax (expense) benefit | (105,000 | ) | 405,000 | (22,480,000 | ) | (22,180,000 | ) | |||||||||||||||||||||||||
Net income (loss) | (937,000 | ) | (5,397,000 | ) | 21,073,000 | 14,739,000 | 422,000 | (458,000 | ) | 59,306,000 | 59,270,000 | |||||||||||||||||||||
Total assets | 18,188,000 | 26,768,000 | 244,934,000 | 289,890,000 | 21,799,000 | 19,923,000 | 261,621,000 | 303,343,000 | ||||||||||||||||||||||||
Capital expenditures | 34,000 | --- | --- | 34,000 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Amortization of intangible assets | --- | 1,062,000 | --- | 1,062,000 | ||||||||||||||||||||||||||||
Reportable Segments | Reportable Segments | |||||||||||||||||||||||||||||||
Traditional Business | Journal Technologies | Corporate income and expenses |
Total | Traditional Business | Journal Technologies | Corporate income and expenses |
Total | |||||||||||||||||||||||||
Three months ended December 31, 2016 | ||||||||||||||||||||||||||||||||
Three months ended December 31, 2019 | ||||||||||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||
Advertising | $ | 2,310,000 | $ | --- | $ | --- | $ | 2,310,000 | $ | 2,126,000 | $ | 0 | $ | 0 | $ | 2,126,000 | ||||||||||||||||
Circulation | 1,449,000 | --- | --- | 1,449,000 | 1,312,000 | 0 | 0 | 1,312,000 | ||||||||||||||||||||||||
Advertising service fees and other | 638,000 | --- | --- | 638,000 | 694,000 | 0 | 0 | 694,000 | ||||||||||||||||||||||||
Licensing and maintenance fees | --- | 3,966,000 | --- | 3,966,000 | 0 | 5,210,000 | 0 | 5,210,000 | ||||||||||||||||||||||||
Consulting fees | --- | 848,000 | --- | 848,000 | - | 689,000 | 0 | 689,000 | ||||||||||||||||||||||||
Other public service fees | --- | 779,000 | --- | 779,000 | 0 | 1,646,000 | 0 | 1,646,000 | ||||||||||||||||||||||||
Operating expenses | 4,400,000 | 8,443,000 | --- | 12,843,000 | 3,858,000 | 9,337,000 | 0 | 13,195,000 | ||||||||||||||||||||||||
Loss from operations | (3,000 | ) | (2,850,000 | ) | --- | (2,853,000 | ) | |||||||||||||||||||||||||
Income (loss) from operations | 274,000 | (1,792,000 | ) | 0 | (1,518,000 | ) | ||||||||||||||||||||||||||
Dividends and interest income | --- | --- | 1,171,000 | 1,171,000 | 0 | 0 | 1,680,000 | 1,680,000 | ||||||||||||||||||||||||
Other income | 15,000 | --- | --- | 15,000 | 0 | 0 | 3,000 | 3,000 | ||||||||||||||||||||||||
Interest expenses on note payable collateralized by real estate | (26,000 | ) | --- | --- | (26,000 | ) | ||||||||||||||||||||||||||
Net unrealized gains on marketable securities | 0 | 0 | 19,531,000 | 19,531,000 | ||||||||||||||||||||||||||||
Interest expenses on note payable collateralized by real estate | (22,000 | ) | 0 | 0 | (22,000 | ) | ||||||||||||||||||||||||||
Interest expenses on margin loans | --- | --- | (79,000 | ) | (79,000 | ) | 0 | 0 | (184,000 | ) | (184,000 | ) | ||||||||||||||||||||
Interest expense accrued for uncertain and unrecognized tax benefits | --- | (9,000 | ) | --- | (9,000 | ) | ||||||||||||||||||||||||||
Pretax income (loss) | (14,000 | ) | (2,859,000 | ) | 1,092,000 | (1,781,000 | ) | 252,000 | (1,792,000 | ) | 21,030,000 | 19,490,000 | ||||||||||||||||||||
Income tax (expense) benefit | --- | 775,000 | (465,000 | ) | 310,000 | (30,000 | ) | 510,000 | (5,760,000 | ) | (5,280,000 | ) | ||||||||||||||||||||
Net income (loss) | (14,000 | ) | (2,084,000 | ) | 627,000 | (1,471,000 | ) | |||||||||||||||||||||||||
Net income (loss) | 222,000 | (1,282,000 | ) | 15,270,000 | 14,210,000 | |||||||||||||||||||||||||||
Total assets | 14,294,000 | 37,981,000 | 196,486,000 | 248,761,000 | 17,541,000 | 20,993,000 | 216,325,000 | 254,859,000 | ||||||||||||||||||||||||
Capital expenditures | 160,000 | 27,000 | --- | 187,000 | 35,000 | 62,000 | 0 | 97,000 | ||||||||||||||||||||||||
Amortization of intangible assets | --- | 1,224,000 | --- | 1,224,000 | ||||||||||||||||||||||||||||
During the three months ended December 31, 2017,2020 and 2019,the Traditional Business had total operating revenues of $4,081,000$3,529,000 and $4,132,000 of which $2,718,000$2,326,000 and $2,820,000, respectively, were recognized after services were provided while $1,203,000 and $1,363,000$1,312,000, respectively, were recognized ratably over the subscription terms. Total operating revenues for the Company’s software business were $6,171,000$6,891,000 and $7,545,000, of which $2,064,000$1,869,000 and $2,454,000, respectively, were recognized upon completion of services with customer acceptance while $4,107,000$5,022,000 and $5,091,000, respectively, were recognized ratably over the subscription periods.
Approximately 60%66% of the Company’s revenues during the three-month periodsperiod ended December 31, 20172020 were derived from Journal Technologies, as compared with 56%65% in the prior year period. In addition, the Company’s revenues have been primarily from the United States with approximately 1%4% from foreign countries. countries during the three-months ended December 31, 2020. Journal Technologies’ revenues are allprimarily from governmental agencies.
The following table sets forth certain deferred obligations from October 1, 2017 through December 31, 2017:
Beginning Balance | Addition | Recognized | Ending Balance | |||||||||||||
Deferred subscriptions | $ | 3,284,000 | $ | 1,214,000 | $ | (1,363,000 | ) | $ | 3,135,000 | |||||||
Deferred installation contracts | 5,072,000 | 530,000 | (1,238,000 | ) | 4,364,000 | |||||||||||
Deferred maintenance agreements and others | 9,442,000 | 4,705,000 | (4,107,000 | ) | 10,040,000 | |||||||||||
Note 1312 - Subsequent Events
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 or cash flows.Statements.
Item 2. MANAGEMENT’SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of OperationsOperations
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 online, and bar members.fees online. These products are licensed to more than 500 organizations in 42 states and internationally.
Comprehensive IncomeImpact of the COVID-19 Pandemic
Comprehensive income includes net income (loss)On March 13, 2020, the United States declared the outbreak of COVID-19 to be a national emergency, and unrealized net gains on investments, netseveral 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 taxes, as summarized below: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 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 operations and spending.
Comprehensive Income | ||||||||
Three months ended December 31 | ||||||||
2017 | 2016 | |||||||
Net income (loss) | $ | 14,739,000 | $ | (1,471,000 | ) | |||
Net increase in unrealized appreciation of marketable securities (net of taxes) | 12,118,000 | 15,019,000 | ||||||
| $ | 26,857,000 | $ | 13,548,000 | |||||
In light of this extraordinary situation, on April 30, 2020, the Company made a 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.
Comparable three-month periods ended December 31, 2017Management believes that the COVID-19 pandemic has had, and, 2016with the continued surge of COVID-19 cases, will continue to have a significant impact on the Company’s business operations. This might include a substantial decrease in the value of the Company’s marketable securities portfolio, which is concentrated in the common stocks of three U.S. financial institutions and one foreign manufacturer, or at least a fair degree of volatility. Dividends from the Company’s portfolio have declined and are expected to remain lower than in the past as some banks reduce their dividends. It might also include the unprecedented continued closure, renewed 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 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 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 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 is being delayed. In addition, there has been a reduction in efiling revenues and delayed client payments as many courts and other justice agencies were closed for most of the period. On the other side of the coin, the Company has seen a reduction in operating costs due to less business travel.
Consolidated revenues were $10,252,000Comparable three-month periods ended December 31, 2020 and $9,990,0002019
The Company’s reportable segments, and its corporate income and expenses, for the three months ended December 31, 20172020 and 2016,2019, are set forth below:
Overall Financial Results (000) | |||||||||||
For the three months ended December 31 |
Reportable Segments | ||||||||||||||||||||||||||||||||
Traditional Business | Journal Technologies | Corporate income and expenses |
Total | |||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||
Advertising | $ | 1,692 | $ | 2,126 | $ | - | $ | - | $ | - | $ | - | $ | 1,692 | $ | 2,126 | ||||||||||||||||
Circulation | 1,203 | 1,312 | - | - | - | - | 1,203 | 1,312 | ||||||||||||||||||||||||
Advertising service fees and other | 634 | 694 | - | - | - | - | 634 | 694 | ||||||||||||||||||||||||
Licensing and maintenance fees | - | - | 5,033 | 5,210 | - | - | 5,033 | 5,210 | ||||||||||||||||||||||||
Consulting fees | - | - | 244 | 689 | - | - | 244 | 689 | ||||||||||||||||||||||||
Other public service fees | - | - | 1,614 | 1,646 | - | - | 1,614 | 1,646 | ||||||||||||||||||||||||
Total revenues | 3,529 | 4,132 | 6,891 | 7,545 | - | - | 10,420 | 11,677 | ||||||||||||||||||||||||
Operating expenses | ||||||||||||||||||||||||||||||||
Salaries and employee benefits | 1,920 | 2,537 | 5,972 | 6,350 | - | - | 7,892 | 8,887 | ||||||||||||||||||||||||
Others | 1,061 | 1,321 | 1,782 | 2,987 | - | - | 2,843 | 4,308 | ||||||||||||||||||||||||
Total operating expenses | 2,981 | 3,858 | 7,754 | 9,337 | - | - | 10,735 | 13,195 | ||||||||||||||||||||||||
Income (loss) from operations | 548 | 274 | (863 | ) | (1,792 | ) | - | - | (315 | ) | (1,518 | ) | ||||||||||||||||||||
Dividends and interest income | - | - | - | - | 638 | 1,680 | 638 | 1,680 | ||||||||||||||||||||||||
Other income | - | - | - | - | - | 3 | - | 3 | ||||||||||||||||||||||||
Net unrealized gains on marketable securities | - | - | - | - | 81,212 | 19,531 | 81,212 | 19,531 | ||||||||||||||||||||||||
Interest expenses on note payable collateralized by real estate | (21 | ) | (22 | ) | - | - | - | - | (21 | ) | (22 | ) | ||||||||||||||||||||
Interest expenses on margin loans | - | - | - | - | (64 | ) | (184 | ) | (64 | ) | (184 | ) | ||||||||||||||||||||
Pretax (loss) income | $ | 527 | $ | 252 | $ | (863 | ) | $ | (1,792 | ) | $ | 81,786 | $ | 21,030 | $ | 81,450 | $ | 19,490 | ||||||||||||||
Consolidated revenues were $10,420,000 and $11,677,000 for the three months ended December 31, 2020 and 2019, respectively. This increasedecrease of $262,000$1,257,000 (11%) was primarily from increased(i) decreased Journal Technologies’ license and maintenance fees of $384,000,$177,000, consulting fees of $147,000$445,000 and public service fees of $47,000, partially offset by the$32,000, and (ii) a reduction in Thethe Traditional Business’sBusiness’ display advertising net revenues of $164,000, classified advertising net revenues of $65,000, trustee sale notice and its related service feeadvertising net revenues of $57,000, commercial$102,000, legal notice advertising net revenues of $64,000,$53,000, government notice advertising net revenues of $50,000 and circulation revenues of $86,000.$109,000. The Company’s revenues derived from Journal Technologies’ operations constituted about 60%66% and 56%65% of the Company’s total revenues for the three months ended December 31, 20172020 and 2016,2019, respectively.
Consolidated operating expenses increaseddecreased by $854,000 (7%$2,460,000 (19%) to $13,697,000$10,735,000 from $12,843,000,$13,195,000. Total salaries and employee benefits decreased by $995,000 (11%) to $7,892,000 from $8,887,000 primarily resulting from additional personnel costs andthe pandemic layoff in April 2020. Outside services for Journal Technologies. Total personnel costs increaseddecreased by $556,000 (7%$491,000 (40%) to $8,197,000$723,000 from $7,641,000. Outside services increased by $59,000 (6%) to $1,039,000 from $980,000$1,214,000 mainly because of increased contractor’sdecreased contractor costs for Journal Technologies. Depreciation and amortization costs, which included primarily the amortization of Journal Technologies’ intangible assets,Rent expenses decreased by $174,000$100,000 (58%) to $1,218,000$72,000 from $1,392,000.$172,000 because of the closure of Colorado office in August 2020. Accounting and legal fees increased by $94,000 (37%) to $350,000 from $256,000 primarily because of increased legal fees. Other general and administrative expenses increaseddecreased by $471,000 (20%$889,000 (61%) to $2,814,000$557,000 from $2,343,000$1,446,000 mainly because of increased accounting and legal fees and office equipment and software maintenance fees for Journal Technologies.resulting from reduced business travel expenses due to the pandemic.
The Company’s non-operating income, net of expenses, increased by $262,000 (24%$60,757,000 (289%) to $1,334,000$81,765,000 from $1,072,000$21,008,000 primarily because of more dividend income, partially offset by increases in the interest raterecording of net unrealized gains on the two acquisition margin loans.
During marketable securities of $81,212,000 during the three months ended December 31, 2017, consolidated pretax loss was $2,111,000,2020 as compared with $1,781,000$19,531,000 during the prior fiscal year period.
During the three months ended December 31, 2020, consolidated pretax income was $81,450,000, as compared $19,490,000 in the prior fiscal year period. There was a consolidated net income of $14,739,000$59,270,000 ($10.6742.93 per share) after tax benefits, primarily due to tax cuts, for the three months ended December 31, 2017,2020, as compared with net loss of $1,471,000 (-$1.07$14,210,000 ($10.29 per share) in the prior fiscal year period. (See Taxes.)
At During the three months ended December 31, 2017,2020, the Company’s cash and restricted cash and cash equivalents decreased by $17,299,000 to $11,664,000 from $28,963,000, primarily because of the payment of $14,493,000 to the margin loan account. At December 31, 2020, the aggregate fair market value of the Company’s marketable securities was $244,934,000.$260,580,000. These securities had approximately $181,540,000$218,805,000 of net unrealized gains before taxes of $48,140,000 and$58,230,000. They generated approximately $1,483,000$638,000 in dividends and interest income during the three months ended December 31, 2017,2020, 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:Taxes
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. |
|
Reportable Segments | ||||||||||||||||||||||||||||||||
Traditional Business | Journal Technologies | Corporate income and expenses |
Total | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||
Advertising | $ | 2,116 | $ | 2,310 | $ | --- | $ | --- | $ | --- | $ | --- | $ | 2,116 | $ | 2,310 | ||||||||||||||||
Circulation | 1,363 | 1,449 | --- | --- | --- | --- | 1,363 | 1,449 | ||||||||||||||||||||||||
Advertising service fees and other | 602 | 638 | --- | --- | --- | --- | 602 | 638 | ||||||||||||||||||||||||
Licensing and maintenance fees | --- | --- | 4,350 | 3,966 | --- | --- | 4,350 | 3,966 | ||||||||||||||||||||||||
Consulting fees | --- | --- | 995 | 848 | --- | --- | 995 | 848 | ||||||||||||||||||||||||
Other public service fees | --- | --- | 826 | 779 | --- | --- | 826 | 779 | ||||||||||||||||||||||||
Total revenues | 4,081 | 4,397 | 6,171 | 5,593 | --- | --- | 10,252 | 9,990 | ||||||||||||||||||||||||
Operating expenses | ||||||||||||||||||||||||||||||||
Salaries and employee benefits | 2,568 | 2,565 | 5,629 | 5,076 | --- | --- | 8,197 | 7,641 | ||||||||||||||||||||||||
Amortization of intangible assets | --- | --- | 1,062 | 1,224 | --- | --- | 1,062 | 1,224 | ||||||||||||||||||||||||
Others | 1,746 | 1,835 | 2,692 | 2,143 | --- | --- | 4,438 | 3,978 | ||||||||||||||||||||||||
Total operating expenses | 4,314 | 4,400 | 9,383 | 8,443 | --- | --- | 13,697 | 12,843 | ||||||||||||||||||||||||
Loss from operations | (233 | ) | (3 | ) | (3,212 | ) | (2,850 | ) | --- | --- | (3,445 | ) | (2,853 | ) | ||||||||||||||||||
Dividends and interest income | --- | --- | --- | --- | 1,483 | 1,171 | 1,483 | 1,171 | ||||||||||||||||||||||||
Gain on sale of capital asset | --- | --- | --- | --- | 2 | --- | 2 | --- | ||||||||||||||||||||||||
Other income (net) | --- | 15 | --- | --- | 9 | --- | 9 | 15 | ||||||||||||||||||||||||
Interest expenses on note payable collateralized by real estate | (24 | ) | (26 | ) | --- | --- | --- | --- | (24 | ) | (26 | ) | ||||||||||||||||||||
Interest expenses on margin loans | --- | --- | --- | --- | (136 | ) | (79 | ) | (136 | ) | (79 | ) | ||||||||||||||||||||
Interest expenses accrual for uncertain and unrecognized tax benefits | --- | --- | --- | (9 | ) | --- | --- | --- | (9 | ) | ||||||||||||||||||||||
Pretax (loss) income | $ | (257 | ) | $ | (14 | ) | $ | (3,212 | ) | $ | (2,859 | ) | $ | 1,358 | $ | 1,092 | $ | (2,111 | ) | $ | (1,781 | ) | ||||||||||
For the three months ended December 31, 2019, the Company recorded a provision for income taxes of $5,280,000 on pretax income of $19,490,000. This was the net result of applying the 19% effective tax rate that had been anticipated for fiscal 2020 to the pretax loss, before the unrealized gains on marketable securities, for the three months ended December 31, 2019. The 19% effective tax rate was less than the statutory rate primarily due to the dividends received deduction and state tax benefits. In addition, the Company recorded taxes on its unrealized gains on marketable securities of $19,531,000 during the three months ended December 31, 2019. The overall effective tax rate for the three months ended December 31, 2019 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 2017 with regard to federal income taxes and fiscal 2016 for state income taxes.
The Traditional Business
The Traditional Business segment’sBusiness’ pretax lossincome increased by $243,000$275,000 (109%) to $257,000$527,000 from $14,000.$252,000 in the prior fiscal year period.
Advertising revenues decreased by $194,000$434,000 (20%) to $2,116,000$1,692,000 from $2,310,000,$2,126,000, primarily resulting from the declines inbecause of decreased display advertising net revenues of $164,000, classified advertising net revenues of $65,000, trustee sale notice advertising and its related service feenet revenues of $57,000 and commercial$102,000, legal notice advertising net revenues of $64,000.$53,000 and government notice advertising net revenues of $50,000.
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 15%61% during the three months ended December 31, 20172020 as compared to the prior fiscal year period. Because this slowing is expectedUnless the economic impact of the efforts to continue, the Companycontain 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 infor fiscal 2018, and the Company’s print-based earnings will also likely decline significantly because it will be impractical for the Company to offset all revenue losses by expense reduction.2021. The Company’s smaller newspapers, those other than the Los Angeles and San Francisco Daily Journals (“The Daily Journals”), accounted for about 88%87% of the total public notice advertising revenues in the three months ended December 31, 2017.30, 2020. Public notice advertising revenues and related advertising and other service fees constituted about 20% and 22%19% of the Company’s total revenues for each of the three monthsthree-month periods ended December 31, 20172020 and 2016, respectively.2019. 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 had been recentlywas implemented in Arizona in 2017 for one notice type.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.
The Daily Journals accounted for about 89%90% of Thethe Traditional Business’ total circulation revenues, which declined by $86,000$109,000 (8%) to $1,363,000$1,203,000 from $1,449,000.$1,312,000. The court rule and judicial profile services generated about 8%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 $86,000 (2%$877,000 (23%) to $4,314,000$2,981,000 from $4,400,000,$3,858,000, primarily due to decreased delivery servicepersonnel costs.
Journal Technologies
During the three months ended December 31, 2020, Journal Technologies’ business segment pretax loss increaseddecreased by $353,000 (12%$929,000 (9%) to $3,212,000$863,000 from $2,859,000, after$1,792,000 in the amortization costs of intangible assets of $1,062,000 and $1,224,000 for the three months ended December 31, 2017 and 2016, respectively.prior fiscal year period.
Revenues increaseddecreased by $578,000 (10%$654,000 (9%) to $6,171,000$6,891,000 from $5,593,000$7,545,000 in the prior fiscal year period. Licensing and maintenance fees increaseddecreased by $384,000 (10%$177,000 (3%) to $4,350,000$5,033,000 from $3,966,000.$5,210,000 primarily due to the non-renewal of some legacy software products’ maintenance and support contracts. (To focus on supporting the Company’s main eSeries products, the Company has announced an end to the maintenance of its legacy software products purchased as part of the New Dawn and ISD acquisitions in fiscal 2013 effective July 1, 2021.) Consulting fees also increaseddecreased by $147,000 (17%$445,000 (65%) to $995,000$244,000 from $848,000.$689,000 due to fewer 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 increaseddecreased by $47,000 (6%$32,000 (2%) to $826,000$1,614,000 from $779,000$1,646,000 primarily due to an increase in the number of traffic tickets processed online for the public to pay traffic citations.reduced efiling revenues.
Operating expenses increaseddecreased by $940,000 (11%$1,583,000 (17%) to $9,383,000$7,754,000 from $8,443,000,$9,337,000 primarily due to increasedbecause of decreased personnel costs and computer services for Journal Technologies.
Intangible assets, including customer relationships and developed technology, are being amortized on a straight-line basis over five years for financial statement purposes, due to the short life cycle of technology on which customer relationships dependpandemic layoff and over 15 years for tax purposes. Goodwill, which is not amortized for financial statement purposes, is amortized over 15 years for tax purposes. Goodwill represents the expected synergies in expanding the Company’s software business. Goodwill is evaluated for impairment annually, or whenever events or changes in circumstances indicate that the value may not be recoverable. Considered factors for potential goodwill impairment evaluation include the current year’s operating financial results before intangible amortization, fluctuations of revenues, changes in the market place, the status of installation contracts and newreduced business among other things. There was no indicator of impairment during the three-month periods ended December 31, 2017 and 2016. travel expenses.
Journal Technologies is continuingcontinues to update and upgrade its software products. These costs are expensed as incurred and will impact earnings at least through the foreseeable future.
Taxes
The December 2017 Tax Cuts and Jobs Act (“Tax Act”) reduced the maximum corporate tax rate from 35% to 21% effective January 1, 2018. The Company has completed its review of the Tax Act. The impact to its financial statements is as follows: (i) current income tax expense or benefit is calculated on a blended rate of 24.28% pursuant to IRC Section 15, (ii) deferred tax expense includes a discrete net tax benefit of approximately $16 million resulting from a revaluation of deferred tax assets and liabilities to the expected tax rate that will be applied when temporary differences are expected to reverse, (iii) items that are expected to reverse during fiscal 2018 are valued at the blended rate of 24.28% while temporary differences that will reverse after fiscal 2018 are valued at 21%, and (iv) approximately $20 million of the revaluation of deferred taxes relates to items that were initially recorded as accumulated other comprehensive income (“AOCI”). This revaluation is recorded as a component of income tax expense or benefit in continuing operations.
For the three months ended December 31, 2017, the Company recorded an income tax benefit of $16,850,000 on pretax loss of $2,111,000. The income tax benefit was the result of applying the effective tax rate anticipated for fiscal 2018 to pretax loss for the three-month period ended December 31, 2017. The effective tax rate (before the discrete item discussed above) was greater than the statutory rate primarily due to the dividends received deduction which increases the loss for tax purposes. On pretax loss of $1,781,000 for the three months ended December 31, 2016, the Company recorded an income tax benefit of $310,000 which was the net result of applying the effective tax rate anticipated for fiscal 2017 to pretax loss for the three months ended December 31, 2016. The effective tax rate was greater than the statutory rate mainly resulting from the dividends received deduction. The Company’s effective tax rate was 798% and 17% for the three months ended December 31, 2017 and 2016, respectively.
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 2015 with regard to federal income taxes and fiscal 2013 for state income taxes.
Liquidity and Capital Resources
During the three months ended December 31, 2017,2020, the Company’s cash and restricted cash and cash equivalents and marketable security positions increased by $14,793,000 to $247,442,000.$63,913,000, including net pretax unrealized gains on marketable securities of $81,212,000. Cash and cash equivalents were used forto pay down the purchasemargin loan principal of capital assets$14,493,000 as well as the real estate loan principal of $34,000 and$23,000. There was cash used in operating activities of $814,000$2,783,000 which included net decreases of $797,000$1,577,000 in deferred subscriptions, deferred installation contractsprofessional fees and deferred maintenance agreements and others.
The investments in marketable securities, which had an adjusted cost basis of approximately $63,394,000$41,775,000 and a market value of about $244,934,000$260,580,000 at December 31, 2017,2020, generated approximately $1,483,000$638,000 in dividends income during the three months ended December 31, 2020. These securities had approximately $218,805,000 of net unrealized gains before estimated taxes of $58,230,000 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 marketable securities are now included in the Company’s net income (loss) and interest income.thus may have a significant impact depending on the fluctuations of the market prices of the invested securities.
Cash flows from operating activities increased by $497,000$343,000 during the three months ended December 31, 20172020 as compared to the prior fiscal year period, primarily resulting fromdue to increases in net income of $16,210,000,$45,060,000, decreases in deferred tax assets of $16,975,000 and decreases in accounts receivable of $368,000 primarily resulting from more payment collections, partially offset by (i) increases in deferred income taxesunrealized gains on marketable securities of $15,861,000, mainly$61,681,000 and (ii) decreases in accounts payable and accrued liabilities of $339,000 because of the discrete tax items mentioned above.timing difference in remitting efiling fees to the courts and net deferred subscriptions, deferred professional fees, deferred installation contracts and deferred maintenance agreements and others of $279,000.
As of December 31, 2017,2020, the Company had working capital of $230,284,000,$254,992,000, including the liabilities for deferred subscriptions, deferred installation, deferred professional fees and deferred maintenance agreements and others of $17,539,000.$17,461,000.
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. The Company also may entertain additional business acquisition opportunities. Any excess cash flows could be used to reduce the investment margin account liability or note payable collateralized by real estate or invested as managementsecurities and, the Board of Directors deem appropriate at the time.
Such investments may include additional securities of the companies in which the Company has already invested, securities ofamong other companies, government securities (including U.S. Treasury Notes and Bills) or other instruments. The decision as to particular investments will be driven by the Company’s belief about the risk/reward profile of the various investment choices at the time, andpossibilities, it may utilize governmentbe required to consider selling some of those securities as a defaultto generate cash if attractive opportunities for a better return are not available. The Company’s Chairman of the Board, Charles Munger, is also the vice chairman of Berkshire Hathaway Inc., which maintains a substantial investment portfolio. The Company’s Board of Directors has utilized his judgment and suggestions, as well as those of J.P. Guerin, the Company’s vice chairman, when selecting investments, and both of them will continueneeded to play an important role in monitoring existing investments and selecting any future investments.fund ongoing operations.
As of December 31, 2017,2020, the investments were concentrated in just sevenfive 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 under certain circumstances, in the recognitionnet income.
The Company is not a smaller version of impairment losses in the Company’s income statement.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’sCompany’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), accounting for business combinations, testing for goodwill impairment and income taxes are critical accounting policies and estimates.
The Company’sCompany’s critical accounting policies are detailed in its Annual Report on Form 10-K for the year ended September 30, 2017.2020. 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“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, including California courts, for a substantial portion of its revenues;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;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, 2017.2020.
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, 2017. There have been no material changes to the Company’s market risk exposures since September 30, 2017.
Item 4. CONTROLS AND PROCEDURES
Changes In light of the material weaknesses in Internal Controlthe Company’s internal control over Financial Reporting
During this quarter,financial reporting discussed in the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606) effective October 2017 which management believes remediated the previously identified material weakness on revenue recognition mentioned in itsCompany’s Form 10-K for the fiscal year ended September 30, 2017. (See accompanying Notes 3 and 4 to Consolidated Financial Statements.) In addition,2020, management has improved certain internal controls over its Information Technology (IT) function such as maintaining sufficient documentations and records to evidence its review of IT controls, better monitoring IT activities and system change requests, etc. Management believes this addressed certain aspects of this material weakness previously identified. Management will continue to assess the effectiveness of its remediation efforts in connection with management's future evaluations of internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures
Based on the evaluation performed under the supervision and with the participation of the Company’s management, including Gerald L. Salzman, its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2017, Mr. Salzman concluded that the Company’s disclosure controls and procedures were effective.not effective as of December 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 December 31, 2020.
PART II
Item 6. Exhibits
| 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. | ||
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| Inline XBRL Taxonomy Extension Schema | |||
| Inline XBRL Taxonomy Extension Calculation | |||
| Inline XBRL Taxonomy Extension Definition | |||
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| Cover Page Interactive Data File (formatted as Inline XBRL |
SIGNATURE
Pursuant to the requirementsrequirements 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 12, 2021 | |||
DATE: February 8, 2018