DAILY JOURNAL CORP (DJCO)

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. (“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 e-filing and a website to pay traffic citations and fees online. These products are licensed or subscribed to in approximately 37 states and internationally.

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 details about each of the reportable segments and the Company’s corporate income and expenses for the nine months ended June 30, 2026 and 2025, are set forth below (in thousands):

Comparison of the nine months ended June 30, 2026 to the nine months ended June 30, 2025

*Other segment items within net income (loss) include rental income, net unrealized gains on non-qualified compensation plan, interest expense on note payable collateralized by real estate, agency commissions, outside services, postage and delivery expenses, newsprint and printing expenses, depreciation and amortization, equipment maintenance and software, credit card merchant discount fees, rent expenses, accounting and legal fees, and other general and administrative expenses.

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Consolidated Financials Comparison

Consolidated revenues were $69.2 million and $59.3 million for the nine months ended June 30, 2026 and 2025, respectively. This increase of $9.9 million (16.8%) was primarily from increases in Journal Technologies’ other public service fees of $3.9 million, license and maintenance fees of $3.3 million, and consulting fees of $2.4 million, and the Traditional Business’ advertising revenues of $0.2 million.

Approximately 80% and 77% of our revenues during the nine months ended June 30, 2026 and 2025, respectively, were derived from Journal Technologies. In addition, our revenues during the nine months ended June 30, 2026 were primarily from the United States, with approximately $6.3 million (9.1%) from foreign countries and U.S. territories. Almost all of Journal Technologies’ revenues are from governmental agencies.

Consolidated operating expenses increased by $6.1 million (11.3%) to $60.5 million from $54.4 million. Total salaries and employee benefits increased by $1.8 million (4.6%) to $41.4 million from $39.6 million 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 our installation projects. Outside services increased by $0.4 million (8.4%) to $5.8 million from $5.3 million mainly because of additional contractor services and increased third-party hosting fees which were billed to clients. Other general and administrative expenses increased by $4.4 million (104.0%) to $8.7 million from $4.3 million, primarily driven by a $1.5 million increase in accounting and legal fees, including higher accounting costs associated with efforts to remediate previously identified material weaknesses in internal control over financial reporting and higher legal and service provider expenses related to proxy solicitation and stockholder outreach activities, as well as a $0.4 million increase in costs related to the adoption and implementation of software and related process changes supporting the Company’s modernization initiatives. The Company expects these costs to remain elevated in the near term as these initiatives continue.

Other income (expense) for the nine months ended June 30, 2026 decreased by $171.3 million, resulting in $81.8 million of other expense, compared with $89.5 million of other income for the nine months ended June 30, 2025. This change was primarily driven by unrealized losses on marketable securities of $87.0 million, compared with unrealized gains of $84.3 million in the prior-year period.

During the nine months ended June 30, 2026 and 2025, consolidated pretax loss was $73.1 million and pretax income was $94.4 million, respectively, and consolidated net loss was $53.5 million and net income was $70.0 million, respectively.

As of June 30, 2026, the aggregate fair market value of the Company’s marketable securities was $406.0 million. These securities had approximately $266.9 million of cumulative unrealized gains before estimated taxes of $68.7 million. Most of the unrealized gains were in the common stocks of three U.S. financial institutions and one foreign manufacturer.

Taxes

During the nine months ended June 30, 2026, the Company recorded an income tax benefit of $19.6 million on the pretax loss of $73.1 million. The income tax benefit and expense consisted primarily of tax benefit of $22.4 million related to unrealized losses on marketable securities, and tax expense of $3.2 million on income from U.S. operations and dividend income. Consequently, the overall effective tax rate for the nine months ended June 30, 2026 was 26.8% after including the taxes on the unrealized losses on marketable securities.

For the nine months ended June 30, 2025, the Company recorded an income tax provision of $24.4 million on pretax income of $94.4 million. The income tax provision consisted of $22.0 million related to unrealized gains on marketable securities, $2.5 million related to income from U.S. operations and dividend income, and a tax provision of $0.2 million 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 $0.3 million for the dividends received deduction and other permanent book and tax differences. Consequently, the overall effective tax rate for the nine months ended June 30, 2025 was 25.9%, after including the taxes on the unrealized gains on marketable securities.

The Company files consolidated federal income tax returns, with its domestic subsidiary, in the United States and with various state jurisdictions and is no longer subject to examinations for fiscal years before fiscal year 2022 with regard to federal income taxes and fiscal year 2021 for state income taxes.  The Canadian subsidiary files a federal and provincial tax return in Canada.

Journal Technologies

For the nine months ended June 30, 2026, Journal Technologies’ pretax income increased by $5.1 million to $9.8 million, compared to $4.7 million for the nine months ended June 30, 2025. The increase was primarily attributable to higher revenues of $9.6 million, partially offset by increased operating expenses of $4.6 million.

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Revenues increased by $9.6 million (21.0%) to $55.6 million from $45.9 million during the prior-year period. Licensing and maintenance fees increased by $3.3 million (14.3%) to $26.3 million, while other public service fees increased by $3.9 million (34.9%) to $15.0 million, primarily due to increased e-filing revenues. Consulting fees increased by $2.4 million (20.7%) to $14.2 million, primarily due to the timing of project go-lives and deferred revenue recognition.

Operating expenses increased by $4.6 million (11.1%) to $45.8 million, primarily due to higher accounting and consulting fees, increased personnel costs, higher contractor utilization, and increased hosting costs billed to customers.

Traditional Business

For the nine months ended June 30, 2026, the Traditional Business reported a pretax loss of $0.6 million, compared to pretax income of $0.2 million for the nine months ended June 30, 2025. This decrease was primarily attributable to increased accounting and consulting fees and other operating expenses.

Total revenues increased by $0.3 million (2.4%) to $13.7 million from $13.4 million in the prior-year period. Advertising revenues increased by $0.2 million (2.4%) to $10.4 million, while circulation revenues increased by $0.1 million (2.4% ).

The Daily Journals accounted for approximately 95% of the Traditi

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Item 7.  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. (“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 e-filing and a website to pay traffic citations and fees online. These products are licensed or subscribed to in approximately 37 states and internationally.

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 details about each of the reportable segments and the Company’s corporate income and expenses are set forth below:

* Other segment items within net income include rental income, net unrealized gains on non-qualified compensation plan, interest expense on note payable collateralized by real estate, decrease in fair value of derivative asset, agency commissions, outside services, postage and delivery expenses, newsprint and printing expenses, depreciation and amortization, equipment maintenance and software, credit card merchant discount fees, rent expenses, accounting and legal fees, and other general and administrative expenses.

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Comparison of the fiscal year ended September 30, 2025 to the fiscal year ended September 30, 2024

Consolidated Financials Comparison

Consolidated revenues were $87.7 million and $69.9 million for fiscal years 2025 and 2024, respectively. This increase of $17.8 million (25%) was primarily from increases in (i) Journal Technologies’ consulting fees of $7.6 million, other public service fees of $5.7 million, and license and maintenance fees of $3.5 million, and (ii) the Traditional Business’ advertising revenues of $0.7 million.

Approximately 80% of our revenues during fiscal years 2025 and 2024 were derived from Journal Technologies.  In addition, our revenues during fiscal year 2025 were primarily from the United States, with approximately $10.0 million (11%) from foreign countries.  Almost all of Journal Technologies’ revenues are from governmental agencies.

Consolidated operating expenses increased by $12.3 million (19%) to $78.1 million from $65.9 million. Total salaries and employee benefits increased by $3.4 million (7%) to $50.6 million from $47.2 million 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 our installation projects. Outside services increased by $0.9 million (13%) to $8.1 million from $7.2 million mainly because of additional contractor services and increased third-party hosting fees which were billed to clients. Accounting and legal fees increased by $0.4 million (36%) to $1.4 million from $1.0 million primarily resulting from increased accounting advisory and legal fees primarily associated with the remediation of material weaknesses in our internal controls.

Our other income, net of expenses, rose by $40.4 million (40%) to $140.6 million from $100.2 million in the previous fiscal year. This increase was primarily driven by unrealized gains on marketable securities, totaling $134.3 million compared to $96.1 million, which included realized gains of $14.3 million, as well as a reduction in interest expense by $1.7 million (55%) to $1.4 million from $3.1 million, after our repayment of $5.5 million against the outstanding balance during the fiscal year ended September 30, 2025.

During fiscal year 2025, our consolidated pretax income was $150.1 million, as compared to $104.3 million in the prior fiscal year.  Consolidated net income was $112.1 million ($81.41 per both basic and diluted shares, respectively) for fiscal year 2025, as compared with $78.1 million ($56.73 per share) in the prior fiscal year.

As of September 30, 2025, the aggregate fair market value of the Company’s marketable securities was $493.0 million. These securities had approximately $353.9 million of cumulative unrealized gains before taxes of $91.4 million.  Most of the unrealized gains were in the common stocks of three U.S. financial institutions and one foreign manufacturer.

Taxes

During fiscal year 2025, the Company recorded an income tax provision of $38.0 million on pretax income of $150.1 million. The income tax provision consisted of tax expense of $34.3 million on unrealized gains on marketable securities, and $4.2 million on operating income, partially offset by a tax benefit of $0.5 million for the dividends received deduction and other permanent differences.  Consequently, the overall effective tax rate for fiscal year 2025 was 25.3%, after including the taxes on the unrealized gains on marketable securities.

During fiscal year 2024, the Company recorded an income tax provision of $26.2 million on pretax income of $104.3 million.   The income tax provision consisted of tax expense of $24.5 million on the realized and unrealized gains on marketable securities, and $2.2 million on operating income, partially offset by a tax benefit of $0.5 million for the dividends received deduction and other permanent differences.  Consequently, the overall effective tax rate for fiscal year 2024 was 25.1%, after including the taxes on the realized and unrealized gains on marketable securities.

The Company files consolidated federal income tax returns, with its domestic subsidiary, in the United States and with various state jurisdictions and is no longer subject to examinations for fiscal years before fiscal year 2020 with regard to federal income taxes and fiscal year 2019 for state income taxes.  The Canadian subsidiary files a federal and provincial tax return in Canada.

Journal Technologies

During fiscal year 2025, Journal Technologies’ business segment pretax income increased by $10.2 million (408%) to $12.7 million from $2.5 million in the prior fiscal year primarily resulting from increased revenue of $16.8 million, which were partially offset by increased operating expenses of $6.7 million.

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Revenues increased by $16.8 million (32%) to $69.9 million from $53.1 million in the prior fiscal year. Licensing and maintenance fees increased by $3.5 million (12%) to $31.7 million from $28.3 million. Consulting fees increased by $7.6 million (51%) to $22.7 million from $15.1 million mainly due to timing of deferred revenue recognition and more project go-lives.  Other public service fees increased by $5.7 million (59%) to $15.5 million from $9.8 million primarily because of increased e-filing fee revenues.

Deferred consulting fees primarily represent 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 periods.

Operating expenses increased by $6.7 million (13%) to $57.3 million from $50.6 million primarily due to: (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.

Traditional Business

The Traditional Business’ pretax income decreased by $2.1 million (108%) to a pretax loss of $0.2 million from pretax income of $2.0 million in the prior fiscal year. This decrease was primarily resulting from an increase in long-term supplemental compensation accrual, increased personnel costs, additional merchant discount fees, and promotional expenses.

During fiscal year 2025

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