Daily Journal Corporation — Q2 FY2020 Form 10-Q
Reporting period: The quarter and six months ended March 31, 2020; balance-sheet comparisons are to September 30, 2019. The company operates a Traditional newspaper and public-notice business and Journal Technologies, which provides case-management software and services to justice agencies.
Financial results
| Metric | Three months ended Mar. 31, 2020 | Six months ended Mar. 31, 2020 | Comparable 2019 period |
|---|---|---|---|
| Revenue | $12.356 million, up 15% | $24.033 million, up 14% | $10.712 million and $21.140 million, respectively |
| Operating loss | $1.098 million | $2.616 million | $2.671 million and $5.192 million, respectively |
| Net income (loss) | $(56.326) million; $(40.79) per share | $(42.116) million; $(30.50) per share | $5.018 million income and $(16.515) million loss, respectively |
| Net unrealized investment loss | $77.211 million | $57.680 million | $8.497 million gain and $20.143 million loss, respectively |
| Operating cash flow | Not separately provided for the quarter | $(4.578) million | $(3.375) million for six months |
- Segment trends: Six-month Journal Technologies revenue rose 23% to $15.969 million, while its operating loss narrowed to $2.774 million from $5.048 million. Traditional Business revenue declined 2% to $8.064 million; it recorded $158,000 of operating income versus a $144,000 loss.
- Liquidity and assets: At March 31, cash was $5.822 million and marketable securities were $136.901 million, down from $10.630 million and $194.581 million, respectively, at September 30. Working capital was $124.574 million. Six-month cash used in investing and financing was $168,000 and $62,000, respectively.
- Debt: Investment-margin borrowings were $29.493 million, secured by marketable securities, with a 0.75% rate at March 31 and no stated maturity. The real-estate loan balance was approximately $1.77 million.
- Investments and taxes: The portfolio had $83.012 million of accumulated unrealized gains at March 31, before taxes, despite the period’s sharp unrealized losses. The six-month income-tax benefit was $15.580 million, including benefits related to investment losses and the CARES Act.
Changes, outlook and risks
- Revenue growth came primarily from Journal Technologies’ licensing and maintenance, consulting, and public-service fees. The software business represented about 68% of quarterly and 66% of six-month revenue, versus 63% and 61% a year earlier.
- Management said COVID-19 had materially affected operations and was expected to continue affecting results and cash flows. Courts and other government customers had closed or curtailed activity, delaying procurement, implementations, go-lives, e-filing revenue, and customer payments. Traditional advertising and subscription revenue also faced pressure.
- The company said it could not estimate the pandemic’s future magnitude and cautioned that first-half results were unlikely to be replicated in the second half. It expects continued declines in the newspaper business; management also cited fewer foreclosure notices and possible further declines in public-notice revenue.
- On April 30, 2020, the company reorganized its workforce, including layoffs and temporary furloughs. This occurred after the reporting date.
- The investment portfolio was concentrated in six companies, with substantial positions in three U.S. financial institutions and one foreign manufacturer. Further market declines could materially affect earnings, equity, liquidity, and dividend income. The company said it might need to sell securities if operating cash needs require it.
- Management believed available working capital and operating cash flows could fund operations for the foreseeable future, but acknowledged COVID-19 had significantly affected cash flows and portfolio value. No quantified earnings or revenue guidance was provided.
- Management concluded disclosure controls were not effective as of March 31, 2020, in light of previously disclosed material weaknesses in internal control over financial reporting. Routine contingencies, including litigation, were not believed likely to have a material effect.
Investor verification priorities
- Track investment portfolio value, concentration, realized versus unrealized losses, and dividend income; the large reported net loss was driven principally by unrealized marks.
- Monitor COVID-19 effects on court operations, implementation timing and go-lives, e-filing activity, customer collections, and Traditional Business advertising and circulation.
- Verify subsequent-period operating cash flow, liquidity needs, and whether securities are sold or additional borrowing is pursued.
- Assess the effects of the April workforce changes and progress in remediating the disclosed control weaknesses.
- Review public-notice advertising exposure, including foreclosure trends and legal requirements affecting newspaper eligibility.