Daily Journal Corporation — Q1 FY2020 Form 10-Q
Reporting period: Three months ended December 31, 2019; comparisons are with the three months ended December 31, 2018. Daily Journal operates a Traditional Business (newspapers and related services) and Journal Technologies (justice-sector case-management software and services).
Financial results and liquidity
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $11.677 million | $10.428 million |
| Operating loss | $1.518 million | $2.521 million |
| Net income (loss) | $14.210 million | ($21.533 million) |
| Net income (loss) per share | $10.29 | ($15.60) |
| Cash used in operating activities | $3.126 million | $2.497 million |
- Revenue increased 12%. Journal Technologies revenue rose 21% to $7.545 million and represented about 65% of consolidated revenue; Traditional Business revenue declined 2% to $4.132 million.
- Consolidated operating expenses increased 2% to $13.195 million. The operating loss narrowed; the operating margin was approximately negative 13%, compared with negative 24% in the prior-year quarter.
- Net income reflected $19.531 million of unrealized investment gains, versus $28.640 million of unrealized losses in the prior-year quarter. Thus, the large year-over-year earnings swing was primarily investment-market driven, not a change to operating profitability.
- Cash and cash equivalents were $7.376 million at quarter-end. Marketable securities were $214.112 million, with $160.223 million of accumulated pretax unrealized gains. The portfolio was concentrated in six companies, with most unrealized gains in three U.S. financial institutions and one foreign manufacturer.
- Working capital was $201.231 million. Total liabilities were $102.949 million, including $29.493 million in investment-margin borrowings and approximately $1.804 million in real-estate debt. The margin borrowings are secured by marketable securities, bear a floating rate (2.25% at December 31, 2019), and have no maturity date.
- Cash declined $3.254 million during the quarter. Capital expenditures were $97,000; the company paid $31,000 of real-estate loan principal. Management said existing working capital and operating cash flows should fund operations for the foreseeable future.
Changes, outlook, and key risks
- Journal Technologies’ revenue increased by $1.316 million, led by $748,000 growth in public-service fees, $420,000 growth in licensing and maintenance fees, and $148,000 growth in consulting fees. Its pretax loss narrowed to $1.652 million from $2.512 million. Management attributed higher public-service fees primarily to additional e-filings and higher consulting fees to more project go-lives.
- Traditional Business pretax income was $112,000 versus a $32,000 loss. Management said foreclosure notices published declined 13% year over year and expects fewer foreclosure and other public-notice advertisements, with declining revenue for fiscal 2020. It also warned that changes to legal publication requirements or loss of a newspaper’s adjudicated status could materially harm revenue.
- The company gave no quantified full-year earnings or revenue guidance. Management noted quarterly results are not necessarily indicative of full-year results. Investment-price fluctuations can materially affect reported income and equity.
- Other stated risks include software development and implementation execution, dependence on government-agency engagements, cybersecurity breaches, declines in circulation or commercial advertising, and dependence on the CEO, who had reduced his work schedule because of a health issue.
- Management concluded disclosure controls and procedures were not effective as of December 31, 2019, in light of material weaknesses previously discussed in the FY2019 Form 10-K. No material changes to internal control were reported during the quarter.
- The company adopted lease accounting (ASC 842) in the quarter and recorded a $390,000 operating lease right-of-use asset and lease liability; it reported no significant effect on financial condition or results. Management did not believe pending ordinary-course contingencies would materially affect results or financial position.
Important facts for investors to verify
- How much of future reported earnings is likely to depend on investment gains or losses, and whether the concentrated securities portfolio or margin borrowing changes.
- Whether Journal Technologies can sustain revenue growth and improve profitability as implementation projects reach go-live.
- The pace of decline in public-notice advertising and circulation, including any legal or adjudication changes affecting publication eligibility.
- Progress in remediating the disclosed material weaknesses and restoring effective disclosure controls.
- Cash conversion and operating cash use, particularly as deferred customer obligations and e-filing-related payments fluctuate.