DAILY JOURNAL CORP 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The Company continues to operate as two different businesses: (1) The Traditional Business, being the business of newspaper publishing and related services that the Company had before 1999 when it purchased a software development company, and (2) Journal Technologies, Inc., which supplies case management software systems and related products to courts, prosecutor and public defender offices, probation departments and other justice agencies, including administrative law organizations, city and county governments and bar associations. These organizations use the Journal Technologies family of products to help manage cases and information electronically, to interface with other critical justice partners and to extend electronic services to the public, including e-filing and a website to pay traffic citations and fees online. These products are licensed or subscribed to in approximately 32 states and internationally. 18 Reportable Segments The Company’s Traditional Business is one reportable segment and the other is Journal Technologies which includes Journal Technologies, Inc. and Journal Technologies (Canada) Inc. All inter-segment transactions were eliminated. Additional detail about each reportable segment and its income and expenses is set forth below: Overall Financial Results (000) For the six months ended March 31 Reportable Segments Traditional Business Journal Technologies Corporate Total 2025 2024 2025 2024 2025 2024 2025 2024 Revenues Advertising $ 4,844 $ 4,403 $ --- $ --- $ --- $ --- $ 4,844 $ 4,403 Circulation 2,127 2,194 --- --- --- --- 2,127 2,194 Advertising service fees and other 1,500 1,402 --- --- --- --- 1,500 1,402 Licensing and maintenance fees --- --- 15,026 13,411 --- --- 15,026 13,411 Consulting fees --- --- 5,263 6,501 --- --- 5,263 6,501 Other public service fees --- --- 7,120 4,653 --- --- 7,120 4,653 Total operating revenues 8,471 7,999 27,409 24,565 --- --- 35,880 32,564 Operating expenses Salaries and employee benefits 5,010 5,173 19,732 18,013 --- --- 24,742 23,186 Stock-based compensation 14 --- 75 --- --- --- 89 --- Decrease to the long-term supplemental compensation accrual (635 ) (800 ) --- (30 ) --- --- (635 ) (830 ) Others 2,911 2,765 7,068 6,187 --- --- 9,979 8,952 Total operating expenses 7,300 7,138 26,875 24,170 --- --- 34,175 31,308 Income from operations 1,171 861 534 395 --- --- 1,705 1,256 Dividends and interest income --- --- --- --- 2,362 2,786 2,362 2,786 Rental income --- --- --- --- 9 --- 9 --- Interest expenses on note payable collateralized by real estate --- --- --- --- (18 ) (21 ) (18 ) (21 ) Interest expense on margin loans and others --- --- --- --- (727 ) (2,187 ) (727 ) (2,187 ) Increase in fair value of derivative asset --- --- --- --- 88 --- 88 --- Net unrealized (losses) gains on non-qualified compensation plan --- --- --- --- (53 ) 72 (53 ) 72 Net realized and unrealized gains on marketable securities --- --- --- --- 72,799 34,454 72,799 34,454 Pretax income 1,171 861 534 395 74,460 35,104 76,165 36,360 Income tax expense (315 ) (200 ) (185 ) (90 ) (20,100 ) (8,040 ) (20,600 ) (8,330 ) Net income $ 856 $ 661 $ 349 $ 305 $ 54,360 $ 27,064 $ 55,565 $ 28,030 Total assets $ 13,519 $ 14,807 $ 23,041 $ 23,937 $ 431,490 $ 297,003 $ 468,050 $ 335,747 Capital expenditures $ --- $ 23 $ --- $ --- $ --- $ --- $ --- $ 23 19 Comparable six-month periods ended March 31, 2025 and 2024 Consolidated Financial Comparison Consolidated revenues were $35,880,000 and $32,564,000 for the six months ended March 31, 2025 and 2024, respectively. This increase of $3,316,000 (10%) was primarily from increases in (i) Journal Technologies’ license and maintenance fees of $1,615,000, and other public service fees of $2,467,000, partially offset by decreased consulting fees of $1,238,000, and (ii) the Traditional Business’ advertising revenues of $441,000 and advertising service fees and other of $98,000. Approximately 76% of the Company’s revenues during the six months ended March 31, 2025 were derived from Journal Technologies. In addition, the Company’s revenues during the six months ended March 31, 2025 were primarily from the United States, with approximately $1,753,000 (5%) from foreign countries. Almost all of Journal Technologies’ revenues are from governmental agencies. Consolidated operating expenses increased by $2,867,000 (9%) to $34,175,000 from $31,308,000. Total salaries and employee benefits increased by $1,556,000 (7%) to $24,742,000 from $23,186,000 primarily due to the annual salary adjustments and the hiring of additional staff members to strengthen operational efficiencies, conduct product development and address technical debt, and bolster teams working on the Company’s installation projects. Outside services increased by $190,000 (6%) to $3,612,000 from $3,422,000 mainly because of additional contractor services and increased third-party hosting fees which were billed to clients. Equipment and maintenance and software went up by $331,000 (46%) to $1,043,000 from $712,000 primarily because of purchases of additional equipment for new hires. Accounting and legal fees increased by $176,000 (43%) to $587,000 from $411,000 primarily resulting from increased legal fees. Other general and administrative expenses increased by $175,000 (10%) to $1,932,000 from $1,757,000 mainly because there were increased business travel expenses, the purchase of directors and officers insurance and additional accruals for the directors’ stipends. The Company’s non-operating income, net of expenses, increased by $39,356,000 (112%) to $74,460,000 from $35,104,000 in the prior fiscal year period primarily because of the recording of net unrealized gains on marketable securities of $72,799,000 as compared with realized and unrealized gains on marketable securities of $34,454,000 in the prior fiscal year period. There was also a decrease in dividends and interest income of $424,000 (15%) to $2,362,000 from $2,786,000. During the six months ended March 31, 2025, the Company’s consolidated pretax income was $76,165,000, as compared to $36,360,000 in the prior fiscal year period. There was consolidated net income of $55,565,000 ($40.34 per share) for the six months ended March 31, 2025, as compared with $28,030,000 ($20.36 per share) in the prior fiscal year period. At March 31, 2025, the aggregate fair market value of the Company’s marketable securities was $431,490,000. These securities had approximately $292,396,000 of net unrealized gains before taxes of $76,930,000. Most of the unrealized gains were in the common stocks of three U.S. financial institutions and one foreign manufacturer. Taxes For the six months ended March 31, 2025, the Company recorded an income tax provision of $20,600,000 on the pretax income of $76,165,000. The income tax provision consisted of tax provisions of $19,155,000 on the unrealized gains on marketable securities, $35,000 on income from foreign operations, $910,000 on income from US operations and dividend income, and a tax provision of $640,000 for the effect of a change in state apportionment on the beginning of the year’s deferred tax liability. These tax liabilities were partially offset by a tax benefit of $140,000 for the dividends received deduction and other permanent book and tax differences. Consequently, the overall effective tax rate for the six months ended March 31, 2025 was 27%, after including the taxes on the unrealized gains on marketable securities. 20 For the six months ended March 31, 2024, the Company recorded an income tax provision of $8,330,000 on the pretax income of $36,360,000. The income tax provision consisted of tax provisions of $3,660,000 on the realized gains on marketable securities, $5,180,000 on the unrealized gains on marketable securities, $40,000 on income from foreign operations, and $480,000 on income from US operations and dividend income, partially offset by a tax benefit of $210,000 for the dividends received deduction and other permanent book and tax differences, and a tax benefit of $820,000 for the effect of a change in state apportionment on the beginning of the year’s deferred tax liability. Consequently, the overall effective tax rate for the six months ended March 31, 2024 was 22.9%, after including the taxes on the realized and 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 2021 with regard to federal income taxes and fiscal 2020 for state income taxes. The Traditional Business The Traditional Business’ pretax income increased by $310,000 (36%) to $1,171,000 from $861,000. This increase was primarily resulted from increased revenues of $472,000. During the six months ended March 31, 2025, the Traditional Business had total operating revenues of $8,471,000, as compared with $7,999,000 in the prior fiscal year period. Advertising revenues increased by $441,000 (10%) to $4,844,000 from $4,403,000, primarily resulting from increased commercial advertising revenues of $225,000, legal notice advertising revenues of $64,000, trustee sale notice advertising revenues of $81,000, and government notice advertising revenues of $71,000. In addition, advertising service fees and other revenues increased by $98,000 to $1,500,000 from $1,402,000. 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 increased by 13% during the six months ended March 31, 2025 as compared to the prior fiscal year period. The Company’s smaller newspapers, those other than the Los Angeles and San Francisco Daily Journals (“The Daily Journals”), accounted for about 84% of the total public notice advertising revenues during the six-month period ended March 31, 2025. Public notice advertising revenues and related advertising and other service fees, including trustee sales legal advertising revenues, constituted about 13% of the Company's total operating revenues for the six months ended March 31, 2025 and 14% for the six months ended March 31, 2024. The Daily Journals accounted for about 94% of the Traditional Business’ total circulation revenues, which decreased by $67,000 (3%) to $2,127,000 from $2,194,000. The court rule and judicial profile services generated about 4% 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, excluding the adjustments to the long-term supplemental compensation accrual, decreased slightly by $3,000 to $7,935,000 from $7,938,000. 21 Journal Technologies During the six months ended March 31, 2025, Journal Technologies’ business segment pretax income increased by $139,000 (35%) to $534,000 from $395,000 in the prior fiscal year period primarily resulting from increased operating revenues of $2,844,000, which were partially offset by increased operating expenses of $2,705,000. Revenues increased by $2,844,000 (12%) to $27,409,000 from $24,565,000 in the prior fiscal year period. Licensing and maintenance fees increased by $1,615,000 (12%) to $15,026,000 from $13,411,000. Consulting fees decreased by $1,238,000 (19%) to $5,263,000 from $6,501,000 mainly due to fewer customer projects being completed during the fiscal 2025 period. Other public service fees increased by $2,467,000 (53%) to $7,120,000 from $4,653,000 primarily because of increased e-filing fee revenues. Deferred consulting fees primarily represent advances from customers of Journal Technologies for installation services that are recognized upon the completion of service obligations. Deferred revenues on license and maintenance contracts represent prepayments of annual license and maintenance fees and are recognized ratably over the maintenance periods. Operating expenses increased by $2,705,000 (11%) to $26,875,000 from $24,170,000 primarily because of (i) increased personnel costs because of annual salary adjustments, (ii) additional contractor services and the hiring of additional staff members to strengthen operational efficiencies, conduct product development and address technical debt, and bolster teams working on the Company’s installation projects, and (iii) increased third-party hosting fees which were billed to clients. Journal Technologies continues to update and upgrade its software products, which includes work deemed necessary by management to strengthen product management and quality assurance/quality control, as well as update aspects like user experience, documentation, regionalization, and ease of ongoing customer upgrades (which the Company believes should correspondingly reduce costs for Journal Technologies over the longer term). These costs are expensed as incurred and will impact earnings at least through the foreseeable future. 22 Comparable Segments (for the three-month periods ended March 31, 2025 and 2024) Overall Financial Results (000) For the three months ended March 31 Reportable Segments Traditional Business Journal Technologies Corporate Total 2025 2024 2025 2024 2025 2024 2025 2024 Revenues Advertising $ 2,565 $ 2,316 $ --- $ --- $ --- $ --- $ 2,565 $ 2,316 Circulation 1,047 1,099 --- --- --- --- 1,047 1,099 Advertising service fees and other 768 697 --- --- --- --- 768 697 Licensing and maintenance fees --- --- 7,501 6,854 --- --- 7,501 6,854 Consulting fees --- --- 2,664 3,199 --- --- 2,664 3,199 Other public service fees --- --- 3,631 2,406 --- --- 3,631 2,406 Total operating revenues 4,380 4,112 13,796 12,459 --- --- 18,176 16,571 Operating expenses Salaries and employee benefits 2,520 2,624 10,186 9,179 --- --- 12,706 11,803 Stock-based compensation 10 --- 55 --- --- --- 65 --- Decrease to the long-term supplemental compensation accrual (450 ) (380 ) --- (30 ) --- --- (450 ) (410 ) Others 1,415 1,294 3,477 3,251 --- --- 4,892 4,545 Total operating expenses 3,495 3,538 13,718 12,400 --- --- 17,213 15,938 Income from operations 885 574 78 59 --- --- 963 633 Dividends and interest income --- --- --- --- 1,178 1,217 1,178 1,217 Rental income --- --- --- --- 9 --- 9 --- Interest expenses on note payable collateralized by real estate --- --- --- --- (9 ) (10 ) (9 ) (10 ) Interest expense on margin loans and other --- --- --- --- (342 ) (1,056 ) (342 ) (1,056 ) Increase in fair value of derivative asset --- --- --- --- 88 --- 88 --- Net unrealized (losses) gains on non-qualified compensation plan --- --- --- --- (3 ) 72 (3 ) 72 Net realized and unrealized gains on marketable securities --- --- --- --- 59,386 19,764 59,386 19,764 Pretax income 885 574 78 59 60,307 19,987 61,270 20,620 Income tax expense (240 ) (145 ) (10 ) 160 (16,350 ) (5,220 ) (16,600 ) (5,205 ) Net income $ 645 $ 429 $ 68 $ 219 $ 43,957 $ 14,767 $ 44,670 $ 15,415 Total assets $ 13,519 $ 14,807 $ 23,041 $ 23,937 $ 431,490 $ 297,003 $ 468,050 $ 335,747 Capital expenditures $ --- $ 18 $ --- $ --- $ --- $ --- $ --- $ 18 Consolidated revenues were $18,176,000 and $16,571,000 for the three months ended March 31, 2025 and 2024, respectively. This increase of $1,605,000 (10%) was primarily from increases in (i) Journal Technologies’ license and maintenance fees of $647,000, and other public service fees of $1,225,000, partially offset by decreased consulting fees of $535,000, and (ii) the Traditional Business’ advertising revenues of $249,000, advertising service fees and other of $71,000, and circulation revenues of $52,000. Approximately 76% of the Company’s revenues during the three months ended March 31, 2025 were derived from Journal Technologies. In addition, the Company’s revenues during the three months ended March 31, 2025, were primarily from the United States, with approximately $148,000 (1%) from foreign countries. Almost all of Journal Technologies’ revenues are from governmental agencies. 23 Consolidated operating expenses increased by $1,275,000 (8%) to $17,213,000 from $15,938,000. Total salaries and employee benefits increased by $903,000 (8%) to $12,706,000 from $11,803,000 primarily due to annual salary adjustments and the hiring of additional staff members to strengthen operational efficiencies, conduct product development and address technical debt, and bolster teams working on and supporting the Company’s installation projects. Outside services increased by $11,000 (1%) to $1,802,000 from $1,791,000 mainly because of increased third-party hosting fees which were billed to clients. Accounting and legal fees increased by $112,000 (72%) to $267,000 from $155,000 primarily resulting from increased legal fees. The Company’s non-operating income, net of expenses, increased by $40,320,000 (202%) to $60,039,000 from $19,987,000 in the prior fiscal year period primarily because of the recording of net unrealized gains on marketable securities of $59,386,000 as compared with $19,764,000 in the prior fiscal year period. There was a decrease in dividends and interest income of $39,000 (3%) to $1,178,000 from $1,217,000. During the three months ended March 31, 2025, the Company’s consolidated pretax income was $61,270,000, as compared to $20,620,000 in the prior fiscal year period. There was consolidated net income of $44,670,000 ($32.43 per share) for the three months ended March 31, 2025, as compared with $15,415,000 ($11.19 per share) in the prior fiscal year period. The Traditional Business The Traditional Business’ pretax income increased by $311,000 (54%) to $885,000 from $574,000. This increase primarily resulted from increased revenues of $268,000 and decreased expenses of $43,000. During the three months ended March 31, 2025, the Traditional Business had total operating revenues of $4,380,000, as compared with $4,112,000 in the prior fiscal year period. Advertising revenues increased by $249,000 (11%) to $2,565,000 from $2,316,000, primarily resulting from increased commercial advertising revenues of $162,000, legal notice advertising revenues of $4,000, trustee sale notice advertising revenues of $5,000, and government notice advertising revenues of $78,000. Journal Technologies During the three months ended March 31, 2025, Journal Technologies’ business segment pretax income increased by $19,000 (32%) to $78,000 from $59,000 in the prior fiscal year period primarily resulting from increased operating revenues of $1,337,000, which were partially offset by increased operating expenses of $1,318,000. During this quarter, Journal Technologies’ revenues included a reversal of approximately $426,000 consulting fee revenues associated with the previous quarter ended December 31, 2024. These revenues should have been recorded as deferred revenues but were inadvertently coded as revenues, thus overstating Journal Technologies’ segment profit in the first fiscal quarter by $426,000 and understating its second fiscal quarterly profit by the same amount as we reflected this change. There was no impact to Journal Technologies’ six-month revenues and its segment profit taken as a whole. Revenues increased by $1,337,000 (11%) to $13,796,000 from $12,459,000 in the prior fiscal year period. Licensing and maintenance fees increased by $647,000 (9%) to $7,501,000 from $6,854,000. Consulting fees decreased by $535,000 (17%) to $2,664,000 from $3,199,000 mainly due to fewer customer projects being completed. Other public service fees increased by $1,225,000 (51%) to $3,631,000 from $2,406,000 primarily because of increased e-filing fee revenues. 24 Operating expenses increased by $1,318,000 (11%) to $13,718,000 from $12,400,000 primarily because of (i) increased personnel costs because of annual salary adjustments, (ii) additional contractor services and the hiring of additional staff members to strengthen operational efficiencies, conduct product development and address technical debt, and bolster teams working on and supporting the Company’s installation projects, and (iii) increased third-party hosting fees which were billed to clients. Liquidity and Capital Resources During the three months ended March 31, 2025, the Company’s cash and cash equivalents, restricted cash, and marketable security positions increased by $71,853,000 after the recording of net pretax unrealized gains on marketable securities of $72,799,000, and a payment of $2.5 million to reduce the margin loan balance to $25 million at March 31, 2025. The investments in marketable securities, which had an adjusted cost basis of approximately $139,094,000 and a market value of about $431,490,000 at March 31, 2025, generated approximately $2,362,000 in dividends and interest income during the six months ended March 31, 2025. These securities had approximately $292,396,000 of net unrealized gains before estimated taxes of $76,930,000 that will become due only when we sell securities in which there is unrealized appreciation. The balance on the Company’s margin loan secured by the securities portfolio was $25,000,000 at March 31, 2025, as compared to $27,500,000 at September 30, 2024. Cash flows from operating activities increased by $6,449,000 during the six months ended March 31, 2025, as compared to the prior fiscal year period, primarily due to (i) decreases in the Company’s accounts receivable of $4,368,000, (ii) increases in accounts payable of $335,000, accrued liabilities (which included non-qualified deferred compensation) of $739,000 and deferred income tax payable of $15,238,000. This was partially offset by decreases in income tax payable of $1,250,000, deferred revenues of $2,362,000 and net income of $10,898,000, after excluding the increases in realized and unrealized gains on marketable securities of $38,345,000. As of March 31, 2025, the Company had working capital of $428,646,000, including the liabilities for deferred subscriptions, deferred consulting fees and deferred maintenance agreements and others of $17,698,000. 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 and, among other possibilities, it may be required to consider selling additional securities to generate cash if needed to fund ongoing operations. The amount available for borrowing is based on the market value of the Company’s investment portfolio and fluctuates depending on the value of the underlying securities. In addition, the Company could be subject to margin calls should the balance of the investment decrease significantly. Critical Accounting Policies and Estimates The Company’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, and income taxes are critical accounting policies and estimates. 25 The Company’s critical accounting policies are detailed in its Annual Report on Form 10-K for the year ended September 30, 2024. 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 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, and disruptive new technologies like artificial intelligence; Journal Technologies’ reliance on professional services engagements with justice agencies; material changes in the costs of postage and paper; additional 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; a decline in subscriber revenues; possible security breaches of the Company’s software or websites; 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, 2024.