Daily Journal Corporation — Form 10-Q Summary
Reporting period: Third quarter of fiscal 2022, three months ended June 30, 2022; year-to-date figures cover the nine months ended June 30, 2022. Comparison periods are the corresponding 2021 periods. Amounts are in U.S. dollars.
Business context
The company operates two businesses: its Traditional Business, which publishes newspapers and provides related services, and Journal Technologies, which supplies case-management software and services to courts and other justice agencies. Journal Technologies generated approximately 68% of nine-month revenue, down from 71% a year earlier.
Financial results and liquidity
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $12.552 million, down 7% | $34.797 million, down 8% |
| Operating income (loss) | $(2.103) million; prior year $1.324 million | $(1.674) million; prior year $2.314 million |
| Net income (loss) | $(9.862) million; $(7.15) per share | $(30.797) million; $(22.31) per share |
| Operating cash flow | Not reported quarterly in the filing | $(9.865) million; prior year $0.022 million |
- Quarterly revenue fell mainly because Journal Technologies’ licensing and maintenance fees declined $969,000. Year-to-date software revenue was $23.639 million, down 12%, largely reflecting the company’s decision to end maintenance of legacy products effective July 1, 2021.
- Year-to-date operating expenses rose 2% to $36.471 million. The quarter included a $1.985 million increase in the long-term supplemental compensation accrual, versus $655,000 a year earlier.
- Investment valuation swings drove reported earnings: the nine-month period included $57.075 million of unrealized losses on marketable securities, compared with $131.754 million of unrealized gains a year earlier. The quarter included $12.666 million of unrealized losses, versus $55.686 million of gains in the prior-year quarter.
- At June 30, cash and cash equivalents were $8.879 million; restricted cash was $2.044 million; and marketable securities were $341.855 million. Securities had $187.018 million of pretax unrealized gains and generated $4.251 million in dividends and interest income year to date.
- Working capital was $337.803 million. Total liabilities included $75 million of investment margin borrowings and approximately $1.468 million of real-estate debt. The margin borrowing rate was 2.25% at June 30, was variable, and the borrowings were secured by marketable securities.
- Year-to-date investing cash outflow was $36.741 million and financing cash inflow was $42.890 million. The company sold about $80.570 million of securities and purchased about $117.678 million, primarily funded by sale proceeds and approximately $43 million of additional net margin borrowing.
Changes, outlook, risks and unusual items
- The Traditional Business’ year-to-date revenue was broadly stable at $11.158 million. Journal Technologies’ operating loss was $3.116 million for the nine months, compared with operating income of $2.244 million a year earlier; higher expenses and lower licensing and maintenance revenue contributed to the change.
- The company reported no quantitative earnings guidance. Management said it expects to fund operations for the foreseeable future from operating cash flows and working capital, but may need to sell securities or borrow against them if cash is needed. Borrowing capacity varies with portfolio values, and a significant decline could trigger margin calls.
- Management said COVID-19 and variants may continue to affect customers, advertisers and subscribers. Court procurement delays and limits on in-person implementation and training can delay software project go-lives and related revenue. Management could not estimate the pandemic’s future impact and expects the newspaper industry’s longer-term decline to continue.
- Other identified risks include software development and implementation, government-customer dependence, cybersecurity, changes to public-notice advertising requirements, paper and postage costs, and declines in securities prices.
- In June 2022, Director Charles T. Munger donated 3,720 shares, valued at approximately $1 million on the gift date, for a planned senior-management equity incentive plan. The shares were recorded as treasury stock.
- Management concluded disclosure controls and procedures were ineffective as of June 30, 2022, in light of material weaknesses previously disclosed in the fiscal 2021 Form 10-K. The filing reported no material changes in internal control during the quarter.
- Management stated that ordinary-course contingencies, including litigation, were not expected to have a material adverse effect. No subsequent event requiring recognition or disclosure was identified through the issuance date.
Important facts for investors to verify
- Portfolio composition, concentration, valuation changes and the effect of any further declines on collateral availability or margin-call exposure.
- Whether Journal Technologies can stabilize licensing and maintenance revenue and deliver implementations on schedule, including conversion of deferred consulting fees to revenue at project go-live.
- Progress in remediating the material weaknesses underlying ineffective disclosure controls.
- The assumptions, measurement and potential future cost of the supplemental compensation accrual and planned equity incentive plan.
- Whether pandemic-related customer delays and the secular decline in newspaper operations continue to affect revenue and cash generation.