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Item 8. Financial Statements and Supplementary Data

2020-12-17 compared with 2019-12-12 · 486 added, 334 removed, 277 unchanged (75% of the section changed)

3 unchanged sentences

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Daily Journal Corporation (the Company) as of September 30, 2019 and 2018, the related consolidated statements of comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period ended September 30, 2019, and the related notes to the consolidated financial statements (collectively, the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2019, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 30, 2019, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

Our report dated December 12, 2019 expressed an opinion that the Company had not maintained effective internal control over financial reporting as of September 30, 2019, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have audited the accompanying consolidated balance sheets of Daily Journal Corporation (the Company) as of September 30, 2020 and 2019, the related consolidated statements of comprehensive income (loss), shareholders' equity and cash flows for years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2020 and 2019, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S.

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (PCAOB) and are required to be independent with respect to the Company in accordance with U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

5 unchanged sentences

We believe that our audits provide a reasonable basis for our opinion.

\s\ Squar Milner LLP

We have served as the Company's auditor since 2016.

\s\ Baker Tilly US, LLP

 We have served as the Company's auditor since 2016.

Los Angeles, California

December 12, 2019

December 17, 2020     

DAILY JOURNAL CORPORATION

2 unchanged sentences

Cash and cash equivalents

$ 26,922,000  

$ 8,615,000  

Restricted cash  

2,041,000  

2,015,000  

Marketable securities at fair value -- common stocks of $ 179,368,000 at September 30, 2020 and $ 194,581,000 at September 30, 2019

Accounts receivable, less allowance for doubtful accounts of $200,000 at September 30, 2019 and September 30, 2018

179,368,000  

194,581,000  

Accounts receivable, less allowance for doubtful accounts of $ 250,000 at September 30, 2020 and $ 200,000 at September 30, 2019

6,727,000  

7,036,000  

36,000  

40,000  

Prepaid expenses and other current assets

613,000  

508,000  

Income tax receivable

601,000  

153,000  

Total current assets

216,308,000  

212,948,000  

Property, plant and equipment, at cost

Land, buildings and improvements

16,572,000  

16,499,000  

Furniture, office equipment and computer software

1,782,000  

2,119,000  

Machinery and equipment

1,524,000  

1,750,000  

19,878,000  

20,368,000  

Less accumulated depreciation

Intangibles, net

( 9,422,000 )  

( 9,572,000 )

10,456,000  

10,796,000  

Operating lease right-of-use assets

140,000  

Deferred income taxes - Federal

11,137,000  

12,596,000  

Deferred income taxes - State

534,000  

1,036,000  

$ 238,575,000  

$ 237,376,000  

LIABILITIES AND SHAREHOLDERS' EQUITY

1 unchanged sentence

Accounts payable

$ 3,926,000  

$ 4,520,000  

Accrued liabilities

5,005,000  

5,173,000  

Note payable collateralized by real estate

133,000  

126,000  

Deferred subscriptions

2,899,000  

3,195,000  

Deferred installation contracts

140,000  

1,932,000  

Deferred maintenance agreements and others

15,887,000  

15,722,000  

Total current liabilities

27,990,000  

30,668,000  

Long term liabilities

Investment margin account borrowings

29,493,000  

Note payable collateralized by real estate

1,576,000  

1,709,000  

Deferred maintenance agreements

450,000  

335,000  

Accrued liabilities

1,455,000  

230,000  

Deferred income taxes

35,870,000  

37,241,000  

Total long term liabilities

68,844,000  

69,008,000  

Commitments and contingencies (Notes 4 and 5)

3 unchanged sentences

1,805,053 shares issued, including 424,307 treasury shares,at September 30, 2020 and September 30, 2019

14,000  

Additional paid-in capital

1,755,000  

Retained earnings

Accumulated other comprehensive income

139,972,000  

135,931,000  

Total shareholders' equity

141,741,000  

137,700,000  

$ 238,575,000  

$ 237,376,000  

See accompanying Notes to Consolidated Financial Statements

2 unchanged sentences

Advertising, net

$ 7,104,000  

$ 9,132,000  

5,090,000  

5,249,000  

Advertising service fees and other

2,501,000  

2,712,000  

Licensing and maintenance fees

21,647,000  

20,179,000  

Consulting fees

7,718,000  

5,539,000  

Other public service fees

5,882,000  

5,844,000  

49,942,000  

48,655,000  

Costs and expenses

Salaries and employee benefits

37,802,000  

35,014,000  

Outside services

3,428,000  

3,874,000  

Postage and delivery expenses

712,000  

838,000  

Newsprint and printing expenses

699,000  

727,000  

Depreciation and amortization

524,000  

589,000  

Goodwill impairment

13,400,000  

Equipment maintenance and software

1,268,000  

1,516,000  

Credit card merchant discount fees

1,393,000  

1,409,000  

Rent expenses

612,000  

1,017,000  

Accounting and legal fees

939,000  

1,605,000  

Other general and administrative expenses

3,848,000  

6,890,000  

51,225,000  

66,879,000  

Loss from operations

( 1,283,000 )  

( 18,224,000 )

Other income (expenses)

Dividends and interest income

Net unrealized (losses) gains on investments

4,965,000  

5,380,000  

38,000  

Net unrealized losses on investments

( 3,099,000 )  

( 17,715,000 )

Interest expense on note payable collateralized by real estate and others

( 119,000 )  

Interest expense on margin loans

Interest and penalty expense reversal for uncertain and unrecognized tax benefits

Capital gains on sales of marketable securities and others

Other-than-temporary impairment losses on investments

Loss before taxes

Benefit from income taxes

Net (loss) income

Weighted average number of common shares outstanding – basic and diluted

Basic and diluted net (loss) income per share

Comprehensive (loss) income

Net (loss) income

Net change in unrealized appreciation of investments (net of taxes of $0 for fiscal 2019, net of tax benefits of $1,258,000 for fiscal 2018 and net of taxes of $22,300,000 for fiscal 2017)

Reclassification adjustment of other-than-temporary impairment losses recognized in net income (net of taxes of $0, $1,210,000 and $0 for fiscal 2019, 2018 and 2017, respectively)

( 434,000 )  

Gains on sales of marketable securities, net

4,193,000  

Income (loss) before taxes

4,226,000  

( 31,476,000 )

(Provision for) benefit from income taxes

( 185,000 )  

6,260,000  

Net income (loss)

$ 4,041,000  

$ ( 25,216,000 )

Weighted average number of common shares outstanding –

basic and diluted

1,380,746  

Basic and diluted net income (loss) per share

$ 2.93  

See accompanying Notes to Consolidated Financial Statements

DAILY JOURNAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’

Treasury Stock

2 unchanged sentences

Balance at September 30, 2018

Unrealized gains on investments, net

Balance at September 30, 2017

Unrealized losses on investments, net

Sale of bond investments (net of taxes)

Reclassification of stranded tax effects

Reclassification adjustment of other-than-temporary impairment losses recognized in net income (net of taxes)

Balance at September 30, 2018

1,805,053  

$ 18,000  

( 424,307 )  

$ ( 4,000 )  

$ 1,755,000  

$ 45,361,000  

$ 115,786,000  

$ 162,916,000  

( 25,216,000 )  

Adoption of new accounting pronouncement

115,786,000  

( 115,786,000 )  

Balance at September 30, 2019

1,805,053  

18,000  

( 424,307 )  

( 4,000 )  

1,755,000  

135,931,000  

137,700,000  

4,041,000  

Balance at September 30, 2020

1,805,053  

$ 18,000  

( 424,307 )  

$ ( 4,000 )  

$ 1,755,000  

$ 139,972,000  

$ 141,741,000  

See accompanying Notes to Consolidated Financial Statements

2 unchanged sentences

Cash flows from operating activities

Net (loss) income

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities

Net income (loss)

$ 4,041,000  

$ ( 25,216,000 )

Adjustments to reconcile net income (loss) to net cash provided by operating activities

Depreciation and amortization

524,000  

589,000  

Goodwill impairment

Gains on sales of marketable securities

13,400,000  

Gains on sales of marketable securities, net

( 4,193,000 )  

Deferred income taxes

Discount earned on bonds

Other-than-temporary impairment losses on investments

Unrealized losses on investment

590,000  

( 6,392,000 )

Unrealized losses on investments

3,099,000  

17,715,000  

Changes in assets and liabilities

1 unchanged sentence

Accounts receivable, net

309,000  

( 2,233,000 )

Prepaid expenses and other assets

( 105,000 )  

Income tax receivable

( 448,000 )  

117,000  

Increase (decrease) in liabilities

Accounts payable

( 594,000 )  

1,700,000  

Accrued liabilities

917,000  

831,000  

Deferred subscription

( 296,000 )  

21,000  

Deferred installation contracts

( 1,792,000 )  

1,695,000  

Deferred maintenance agreements and others

Net cash provided by (used in) operating activities

280,000  

Net cash provided by operating activities

2,336,000  

1,615,000  

Cash flows from investing activities

Sales of marketable securities

Purchases of marketable securities

Purchases of property, plant and equipment

Net cash (used in) provided by investing activities

16,307,000  

Purchases of property, plant and equipment, net

( 184,000 )  

Net cash provided by (used in) investing activities

16,123,000  

Cash flows from financing activities

Proceeds from margin loan borrowing  

1,000,000  

Payment to margin loan borrowing  

( 1,000,000 )  

Payment of loan principal

( 126,000 )  

Net cash used in financing activities

Increase (decrease) in cash and cash equivalents

Cash and cash equivalents

( 126,000 )  

Increase in cash and restricted cash and cash equivalents

18,333,000  

1,329,000  

Cash and restricted cash and cash equivalents

Beginning of year

10,630,000  

9,301,000  

$ 28,963,000  

$ 10,630,000  

Interest paid during year

$ 529,000  

$ 963,000  

Income taxes refunded during year

$ ( 47,000 )  

$ ( 121,000 )

See accompanying Notes to Consolidated Financial Statements

2 unchanged sentences

THE COMPANY AND OPERATIONS

Daily Journal Corporation (“Daily Journal”) publishes newspapers and websites covering California and Arizona and produces several specialized information services.

It also serves as a newspaper representative specializing in public notice advertising.

Journal Technologies, Inc.

(“Journal Technologies”), a wholly-owned subsidiary of Daily Journal, 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 efiling and a website to pay traffic citations and fees online, and bar members.

These products are licensed to more than 500 organizations in 42 states and internationally.

Essentially all of the Company’s U.S.

operations are based in California, Arizona, Colorado and Utah.

The Company also has a presence in Australia where Journal Technologies is working on two important software installation projects.

Essentially all of the Company’s U.S.

operations are based in California, Arizona and Utah.

The Company also has a presence in Australia where Journal Technologies is working on three software installation projects.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation:

The consolidated financial statements include the accounts of the Daily Journal and Journal Technologies (collectively the “Company”).

All intercompany accounts and transactions have been eliminated in consolidation.

Certain reclassifications of previously reported amounts have been made to conform to the current year’s presentation.

Certain reclassifications of previously reported amounts have been made to conform to the current year's presentation. 

Concentrations of Credit Risk:

2 unchanged sentences

Credit limits, setting and maintaining credit standards, and managing the overall quality of the credit portfolio is largely centralized.

The level of credit is influenced by the customer’s credit and payment history which the Company monitors when establishing a reserve.

The Company maintains the reserve account for estimated losses resulting from the inability of its customers to make required payments.

2 unchanged sentences

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

Restricted Cash:

The Company considers cash to be restricted when withdrawal or general use is legally restricted.

Restricted cash of $2,015,000 included in the cash balance at September 30, 2019 represents cash held to secure two letters of credit issued by a bank for a software installation contract in Australia.

Restricted cash of $ 2,041,000 and $ 2,015,000  at September 30, 2020 and 2019, respectively, represents cash held to secure two letters of credit issued by a bank for a software installation contract in Australia.

Fair Value of Financial Instruments:

The carrying amounts of cash, accounts receivable and accounts payable approximate fair value because of their short maturities.

In addition, the Company has investments in marketable securities, all categorized as “available-for-sale” and stated at fair market value.

On October 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No.

2016-01, Financial Instruments – Overall (Subtopic 825-10):

In addition, the Company has investments in marketable securities, all categorized as “available-for-sale”

and stated at fair market value.

In fiscal 2019, the Company adopted Accounting Standards Update (“ASU”) No.

2016 - 01, Financial Instruments –

Overall (Subtopic 825 - 10 ):

Recognition and Measurement of Financial Assets and Financial Liabilities .

This ASU requires an entity that holds financial assets or owes financial liabilities to, among other things, measure equity investments at fair value and recognize unrealized gains (losses) through net income (loss).

Accordingly, the Company’s net loss of $25,216,000 for fiscal 2019, included net unrealized losses on investments of $17,715,000.

For the prior fiscal years, the Company recorded net unrealized (losses) gains for its available-for-sale marketable securities in “other comprehensive income”.

The Company uses quoted prices in active markets for identical assets (consistent with the Level 1 definition in the fair value hierarchy) to measure the fair value of its investments on a recurring basis pursuant to Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement and Disclosures .

At September 30, 2019, the aggregate fair market value of the Company’s marketable securities was $194,581,000.

Accordingly, the Company’s net income of $ 4,041,000 for fiscal 2020, included net unrealized losses on investments of $ 3,099,000 .

In fiscal 2019, the Company’s net loss of $ 25,216,000 included net unrealized losses on investments of $ 17,715,000 .

At September 30, 2020, the aggregate fair market value of the Company’s marketable securities was $ 179,368,000 .

These investments had approximately $ 137,593,000 of net unrealized gains before taxes of $ 35,870,000 .

Most of the unrealized net gains were in the common stocks of three U.S.

financial institutions.

At September 30, 2018, the Company had marketable securities at fair market value of approximately $212,296,000, including approximately $158,407,000 of unrealized net gains before taxes of $42,151,000.

All investments are classified as “Current assets” because they are available for sale at any time.

In February 2018, the Company sold its bond investments for $8,125,000, realizing a gain of approximately $3,180,000, and simultaneously reclassified a previously lodged tax effect of $30,000 from accumulated other comprehensive income to retained earnings.

This represented a decrease to retained earnings and an increase to accumulated other comprehensive income.

(The Company uses an “individual security approach” to release stranded tax effects for its available-for-sale securities when sold or extinguished.)

financial institutions.   At September 30, 2019, the Company had marketable securities at fair market value of approximately $ 194,581,000 , including approximately $ 140,692,000 of unrealized net gains before taxes of $ 37,241,000 .

All investments are classified as “Current assets”

because they are available for sale at any time.

In August 2020, the Company sold part of its investments for $ 16,307,000 , realizing a net gain of approximately $ 4,193,000 .

Investment in Financial Instruments

3 unchanged sentences

Common stocks

The Company performed separate evaluations for equity securities with a fair value at September 30, 2019 and 2018 below cost to determine if the unrealized losses were other-than-temporary.

This evaluation considered a number of factors including, but not limited to, the financial condition and near term prospects of the issuer, the Company’s ability and intent to hold the securities until fair value recovers, and the length of time and extent to which the fair value had been less than cost.

The assessment of the ability and intent to hold these securities to recovery focuses on liquidity needs, asset/liability management and portfolio objectives.

As of September 30, 2019, the Company concluded that the unrealized losses related to the marketable securities of one issuer were temporary.

GAAP requires that the Company recognize other-than-temporary impairment losses on investments in earnings when the security prices remain below cost for a period of time that may be deemed excessive even in instances where the Company possesses the ability and intent to hold the security.

In fiscal 2018, there were other-than-temporary impairment losses of $4,560,000 ($3,350,000 net of taxes) related to the marketable securities of one issuer.

Intangible Assets:

At September 30, 2019 and 2018, intangible assets were composed of (i) customer relationships of $0 and $0 (net of the accumulated amortization expenses of $0 and $21,950,000), respectively, and (ii) developed technology of $0 and $0 (net of accumulated amortization expenses of $0 and $2,525,000), respectively.

These intangible assets were being amortized over five years based on their estimated useful lives.

All intangible assets became fully amortized as of September 30, 2018.

Intangible amortization expense was $0, $3,058,000 and $4,895,000 for fiscal 2019, 2018 and 2017, respectively.

The Company accounts for goodwill in accordance with ASC 350, Intangibles — Goodwill and Other .

Goodwill is not amortized for financial statement purposes but evaluated for impairment annually, or whenever events or changes in circumstances indicate that the value may not be recoverable.

During the last quarter of fiscal 2019, the Company adopted early ASU 2017-04 Intangibles – Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment .

This ASU simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test and requiring impairment charges to be based on Step 1, which is to compare the fair value of a reporting unit with its carrying amount.

A goodwill impairment should be recognized in the amount by which the carrying amount exceeds the reporting unit’s fair value.

The goodwill amount reported in the consolidated balance sheets all related to Journal Technologies.

In connection with the Company’s annual impairment test, the fair value of Journal Technologies was less than the carrying value pursuant to a third-party appraiser’s valuation report.

Consequently, the entire goodwill of $13,400,000 was concluded to be impaired and thus fully written off as of September 30, 2019.

$ 179,368,000  

$ 41,775,000  

$ 137,593,000  

$ 194,581,000  

$ 53,889,000  

$ 140,692,000  

As of September 30, 2020, there were no unrealized losses related to the marketable securities. 

The entire goodwill of $ 13,400,000 was concluded to be impaired and thus fully written off as of September 30, 2019 ( fiscal 2019 ).

Inventories, comprised of newsprint and paper, are stated at cost, on a first -in, first -out basis, which does not exceed current net realizable value.

1 unchanged sentence

Property, plant and equipment are carried on the basis of cost or fair value for assets acquired in business combinations.

Depreciation of assets is provided in amounts sufficient to depreciate the cost of related assets over their estimated useful lives ranging from 3 – 39 years.

At September 30, 2019, the estimated useful lives were (i) 5 – 39 years for building and improvements, (ii) 3 – 5 years for furniture, office equipment and software, and (iii) 3 – 10 years for machinery and equipment.

Depreciation of assets is provided in amounts sufficient to depreciate the cost of related assets over their estimated useful lives ranging from 3 –

At September 30, 2020, the estimated useful lives were (i) 5 –

39 years for building and improvements, (ii) 3 –

5 years for furniture, office equipment and software, and (iii) 3 –

10 years for machinery and equipment.

Leasehold improvements are amortized over the term of the related leases or the useful life of the assets, whichever is shorter.

7 unchanged sentences

There were no such impairments identified during fiscal 2020 and 2019.

Journal Technologies’ Software Development Costs:

Journal Technologies’

Software Development Costs:

Development costs related to software products for sale or licensing are expensed as incurred until the technological feasibility of the product has been established.

16 unchanged sentences

The adoption of ASC 606 also requires the capitalization of certain costs of obtaining contracts, specifically sales commissions which are to be amortized over the expected term of the contracts.

For its software contracts, the Company incurs an immaterial amount of sales commission costs which have no significant impact on the Company’s financial condition and results of operations.

In addition, the Company’s implementation and fulfillment costs do not meet all criteria required for capitalization.

For its software contracts, the Company incurs an immaterial amount of sales commission costs which have no significant impact on the Company’s financial condition and results of operations.

In addition, the Company’s implementation and fulfillment costs do not meet all criteria required for capitalization.

Since the Company recognizes revenues when it can invoice the customer pursuant to the contract for the value of completed performance, as a practical expedient and because reliable estimates cannot be made, it has elected not to include the transaction price allocated to unsatisfied performance obligations.

2 unchanged sentences

Furthermore, there are no fulfillment costs to be capitalized for the software contracts because these costs do not generate or enhance resources that will be used in satisfying future performance obligations.

Approximately 65%, 58% and 58% of the Company’s revenues in fiscal 2019, 2018 and 2017, respectively, were derived from sales of software licenses, annual software licenses, maintenance and support agreements and consulting services that typically include implementation and training.

Approximately 71 % and 65 % of the Company’s revenues in fiscal 2020 and 2019, respectively, were derived from sales of software licenses, annual software licenses, maintenance and support agreements and consulting services that typically include implementation and training.

The change in allowance for doubtful accounts is as follows:

Allowance for Doubtful Accounts

Allowance for doubtful accounts

Fiscal 2020  

Allowance for doubtful accounts

$ 200,000  

$ 116,000  

$ ( 66,000 )  

$ 250,000  

Fiscal 2019  

Allowance for doubtful accounts

$ 200,000  

$ 8,000  

$ ( 8,000 )  

$ 200,000  

Management Incentive Plan:

In fiscal 1987, the Company implemented a Management Incentive Plan (the “Incentive Plan”) that entitles a participant to participate in pretax earnings before adjustment for certain items of the Company.

In 2003, the Company modified the Incentive Plan to provide participants with three different types of non-negotiable incentive certificates based on the nature of the particular participants’ responsibilities.

Each certificate entitles the participant to a specified share of the applicable pretax earnings in the year of grant and to receive the same percentage of pretax earnings to be generated in each of the next nine years provided they remain with the Company or are in retirement after working for the Company to age 65.

If a participant dies while any of his or her certificates remain outstanding, future payments under those certificates will be made to the deceased participant’s beneficiaries.

In fiscal 2015, after combining Sustain, New Dawn and ISD into one company, the Company converted each existing Sustain Non-negotiable Incentive Certificate along with its supplemental Addendum to a “Journal Technologies Non-negotiable Incentive Certificate” coupled with a similar supplemental Addendum which defines how the value of the Journal Technologies Certificate will be paid upon a triggering event such as a sale of Journal Technologies or an initial public offering.

Employees and consultants of Journal Technologies are eligible to participate in these “Journal Technologies Certificates”.

Payouts under the Journal Technologies Certificates are calculated based on the pretax income of Journal Technologies before supplemental compensation expenses, workers’ compensation expenses, goodwill write-offs, amortization of intangible assets, and any interest and penalty provisions for uncertain tax positions.

Also effective fiscal 2019, the calculation of payouts under the Daily Journal Non-Consolidated Certificates is based on the pretax earnings of the traditional publishing business before supplemental compensation expenses, workers’ compensation expenses, financing costs of the non-traditional business activities, realized and unrealized gains (losses) on investments, and any write-downs of unrealized losses on investments.

The calculation of payouts under the Daily Journal Consolidated Certificate is based on consolidated pretax earnings of the Company as a whole before supplemental compensation expenses, workers’ compensation expenses, realized and unrealized gains (losses) on investments, and any write-downs of unrealized losses on investments.

For any certificate held by an employee who is expected to become retirement eligible during the 10 year period of the certificate, the Company recognizes the future commitments at each fiscal year-end over the period from the grant date through retirement eligibility.

Certificate interests entitled participants to receive 6.79%, 6.09% and 5.12% (amounting to $465,500, $367,400 and $268,250, respectively) of Daily Journal non-consolidated income before taxes, workers’ compensation, supplemental compensation and certain other items, 9.00%, 8.72% and 8.53% (amounting to $0, $0 and $0 for fiscal 2019, 2018 and 2017, respectively) for Journal Technologies and 8.2%, 8.2% and 8.2% (amounting to $0, $0 and $0, respectively) for Daily Journal consolidated in fiscal 2019, 2018 and 2017, respectively.

The Company accrued $230,000 and $170,000 as of September 30, 2019 and 2018, respectively, for the Plan’s future commitment for those who will still have Certificates at the age of 65.

Certificate interests entitled participants to receive 7.51 % and 6.79 % (amounting to $ 502,700 and $ 465,500 , respectively) of Daily Journal non-consolidated income before taxes, workers’

compensation, supplemental compensation and certain other items, 9.4 % and 9.00 % (amounting to $ 0 and $ 0 for fiscal 2020 and 2019, respectively) for Journal Technologies and 8.2 % and 8.2 % (amounting to $ 452,900 and $ 0 , respectively) for Daily Journal consolidated in fiscal 2020 and 2019, respectively.

The Company accrued $ 1,445,000 and $ 230,000 as of September 30, 2020 and 2019, respectively, for the Plan’s future commitment for those who will still have Certificates at the age of 65.

This future commitment included an increase in the accrual in fiscal 2020 of $ 1,215,000 or $.88 per outstanding share on an adjusted pretax basis as compared with an increase in fiscal 2019 of $ 60,000 or $.04 per outstanding share, in each case due to increased estimated future pretax income.

The estimated Incentive Plan’s future commitment is calculated based on an average of the past year and the current year pretax earnings before certain items, discounted to the present value at 6% since each granted Certificate will expire over its remaining life term of up to 10 years.

The estimated Incentive Plan’s future commitment is calculated based on an average of the past year and the current year pretax earnings before certain items, discounted to the present value at 6 % since each granted Certificate will expire over its remaining life term of up to 10 years.

Income taxes:

2 unchanged sentences

The evaluation of a tax position is based on a two -step approach.

The first step requires an entity to evaluate whether the tax position would “more likely than not” be sustained upon examination by the appropriate taxing authority.

The first step requires an entity to evaluate whether the tax position would “more likely than not”

be sustained upon examination by the appropriate taxing authority.

The second step requires the tax position be measured at the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement.

In addition, previously recognized benefits from tax positions that no longer meet the new criteria would be derecognized.

Net (loss) income per common share :

The net (loss) income per common share is based on the weighted average number of shares outstanding during each year.

Net income (loss) per common share :

   The net income (loss) per common share is based on the weighted average number of shares outstanding during each year.

The shares used in the calculation were 1,380,746 for fiscal 2020 and 2019.

1 unchanged sentence

Use of Estimates:

The presentation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

The long-term Incentive Plan accrual is calculated using Level 3 inputs, as defined in the fair value hierarchy, based on an average of the past year’s and the current year’s pretax earnings, discounted to the present value at 6% since each granted Unit will expire over its remaining life term of up to 10 years.

Actual results could differ from these estimates.

Accounting Standards Adopted in Fiscal 20 20

On October 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No.

2016-01, Financial Instruments – Overall (Subtopic 825-10):

Recognition and Measurement of Financial Assets and Financial Liabilities .

Accordingly, the Company’s net loss of $25,216,000 for fiscal 2019, included net unrealized losses on investments of $17,715,000.

For the prior fiscal years, the Company recorded net unrealized gains for its available-for-sale marketable securities in “other comprehensive income”.

In addition, ASU 2016-01 prohibited the restatement of prior fiscal year financial statements but required that the Company reclassify net after-tax unrealized gains on investments of $115,786,000 on adoption day from “accumulated other comprehensive income” to “retained earnings”, both of which are listed under the “Shareholders’ equity” section of the Company’s Consolidated Balance Sheets.

This represented an increase to retained earnings and a decrease to accumulated other comprehensive income.

In January 2017, FASB issued ASU No.

2017-04, Intangibles – Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment .

A goodwill impairment should be recognized in the amount by which the carrying amount exceeds the reporting unit’s fair value.

The Company early adopted this ASU during the last quarter of fiscal 2019.

The goodwill amount reported in the consolidated balance sheets all related to Journal Technologies.

In connection with the Company’s annual impairment test, the fair value of Journal Technologies was less than the carrying value pursuant to a third-party appraiser’s valuation report.

Consequently, the entire goodwill of $13,400,000 was concluded to be impaired and thus fully written off as of September 30, 2019.

New Accounting Pronouncements:

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) .

This update requires that all leases be recognized by lessees on the balance sheet through a right-of-use asset and corresponding lease liability, including today’s operating leases.

This standard is required to be adopted for annual periods beginning after December 15, 2018, including interim periods within that annual period, which is the Company’s fiscal year 2020.

On October 1, 2019, the Company adopted this ASU and believes that there is no significant impact on the Company’s financial condition, results of operations or disclosures.

The Company currently has operating lease obligations of approximately $40,000 beyond one year.

No other new accounting pronouncement issued or effective has had, or is expected to have, a material impact on the Company’s consolidated financial statements.

The benefit from income taxes consists of the following:

The difference between the statutory federal income tax rate and the Company’s effective rate is summarized below:

At the beginning of fiscal 2020, the Company adopted Accounting Standards Update (“ASU”) 2016 - 02, Leases (Topic 842 ) which requires that all leases be recognized by lessees on the balance sheet through a right-of-use asset and corresponding lease liability, including today’s operating leases.

There has been no significant impact on the Company’s financial condition, results of operations or disclosures. At September 30, 2020, the Company recorded a right-of-use asset and lease liability of approximately $ 140,000 for its operating office leases, including approximately $ 10,000 beyond one year. 

Operating office leases are included in operating lease ROU assets, current accrued liabilities and long-term accrued liabilities in the Company’s accompanying Consolidated Balance Sheets.  

New Accounting Pronouncement:

No other new accounting pronouncement issued or effective has had, or is expected to have, a material impact on the Company’s consolidated financial statements.

The provision (benefit) from income taxes consists of the following:

$ ( 420,000 )  

$ 132,000  

15,000  

( 405,000 )  

132,000  

808,000  

( 4,685,000 )

( 218,000 )  

( 1,707,000 )

590,000  

( 6,392,000 )

$ 185,000  

$ ( 6,260,000 )

The difference between the statutory federal income tax rate and the Company’s effective rate is summarized below:

Statutory federal income tax rate

21.0 %  

State franchise taxes (net of federal tax benefit)

Revalue of deferred taxes due to federal rate change

Effect of federal rate change on beginning net deferred tax liabilities

Effect of state rate change on beginning balance of deferred tax liabilities

( 9.4 )  

Business meals/gifts/other permanent differences

Goodwill impairment

Domestic production activity deduction and deferred revenue

Dividends received deduction

Reversal of uncertain and unrecognized tax position

Penalties for uncertain and unrecognized tax benefits

( 11.1 )  

Revenue recognized for book but not tax

Prior year true-up

Foreign tax credits

Effect of state rate change on beginning balance of deferred tax liabilities

( 0.4 )  

CARES Act benefits

( 4.4 )  

Effective tax rate

The Company’s deferred income tax assets and liabilities were comprised of the following:

Deferred tax assets attributable to:

Accrued liabilities, including supplemental compensation and vacation pay accrual

$ 415,000  

$ 178,000  

Impairment losses on investments

1,016,000  

2,201,000  

Bad debt reserves not yet deductible

55,000  

41,000  

Depreciation and amortization

3,482,000  

3,999,000  

Deferred revenues

913,000  

885,000  

590,000  

677,000  

Net operating losses

4,768,000  

5,195,000  

Credits and other

432,000  

456,000  

Total deferred tax assets

11,671,000  

13,632,000  

Deferred tax liabilities attributable to:

Unrealized gains on investments

Total deferred tax liabilities

( 35,870,000 )  

( 37,241,000 )

Net deferred income taxes

For fiscal 2019, the Company recorded an income tax benefit of $6,260,000 on a pretax loss of $31,476,000.

$ ( 24,199,000 )  

$ ( 23,609,000 )

For fiscal 2020, the Company recorded an income tax provision of $ 185,000 on pretax income of $ 4,226,000 .  The effective tax rate was less than the statutory rate primarily due to the dividends received deduction (“DRD”), a benefit resulting from the Coronavirus Aid, Relief and Economic Security (“CARES”) Act and net state tax benefits.   The effective tax rate for the fiscal 2020 was 4.4 %, after including the DRD, the tax benefits from the CARES Act and state taxes.

The CARES Act, which was signed into law on March 27, 2020, contains two federal tax provisions beneficial to the Company. 

One provision provides that net operating losses arising in tax years beginning in 2018, that were previously only available to be carried forward, can now be carried back to the five previous years. 

In addition, any alternative minimum tax credits carried forward from prior years can be claimed as a refund in years beginning in 2018.

Consequently, the Company recorded a tax benefit resulting from carrying back a portion of the net operating loss generated in fiscal 2019 to fiscal 2014.

The Company anticipates receiving a refund for all taxes and alternative minimum taxes paid in fiscal 2014.

The tax benefit of $ 187,000 resulting from carrying back the net operating loss is primarily attributable to the difference in the federal tax rates of 34% in fiscal 2014 and 21% in fiscal 2019.

During fiscal 2020, the Company recorded net unrealized losses on investments of $ 3,099,000 .

An income tax benefit of $ 1,371,000 resulting from these losses was recorded as a temporary difference in deferred income taxes.

The Company also recorded a net gain of $ 4,193,000 on the sales of marketable securities.

For fiscal 2019, the Company recorded an income tax benefit of $ 6,260,000 on a pretax loss of $ 31,476,000 . 

The effective tax rate was below the statutory rate due to the impairment of goodwill, partially offset by the dividends received deduction and a benefit for state taxes.

During the prior fiscal year, the Tax Act reduced the maximum corporate income tax rate from 35% to 21%.

The impact to the Company’s financial statements in fiscal 2018 was as follows:

(i) fiscal 2018 income tax expense or benefit was calculated using a blended rate of 24.28% pursuant to IRC Section 15, (ii) deferred tax expense included a discrete net tax benefit of approximately $16 million resulting from a revaluation of deferred tax assets and liabilities to the expected tax rate that will be applied when temporary differences are expected to reverse, (iii) items that were expected to reverse during fiscal 2018 were valued at the blended rate of 24.28% while temporary differences that will reverse after fiscal 2018 were valued at the 21% rate, and (iv) approximately $20 million of the revaluation of deferred taxes related to items that were initially recorded as accumulated other comprehensive income.

This revaluation of approximately $20 million was recorded as a component of income tax expense or benefit in continuing operations.

Consequently, during fiscal 2018, the Company recorded an income tax benefit of $19,540,000 on a pretax loss of $11,339,000.

The effective tax rate (before the discrete item discussed above) was greater than the statutory rate primarily due to the dividends received deduction which increases the loss for tax purposes.

The Company’s effective tax rate was 20% for fiscal 2019 as compared with 172% in the prior fiscal year.

The difference in the effective tax rate was primarily due to the effect of the tax cuts in the prior fiscal period and the prior fiscal year’s revaluation of deferred taxes related to items previously recorded in other comprehensive income as discussed above.

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 2016 with regard to federal income taxes and fiscal 2015 for state income taxes.

The Company has federal and state income tax net operating losses (“NOLs”).

A portion of the fiscal 2017 federal and state NOLs were carried back to previous years.

The Company’s effective tax rate was 4.4% for fiscal 2020 as compared with 20 % in the prior fiscal year.

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 2017 with regard to federal income taxes and fiscal 2016 for state income taxes. 

The Company has federal and state income tax net operating losses (“NOLs”).

A portion of the fiscal 2017 federal and state NOLs were carried back to previous years and a portion of the fiscal 2019 federal NOL was carried back to fiscal 2014.

As of September 30, 2020, the Company had federal, California and other state NOL carryforwards of $ 20.1 million, $ 6.1 million and $ 2.6 million, respectively.

20 unchanged sentences

This real estate loan had a balance of approximately $ 1.71 million as of September 30, 2020.

( In October 2020, the Company executed an amendment to lower the interest rate of this loan to a fixed rate of 3.33 % for the remaining of its 10 years.)

The Company also owns its facilities in Los Angeles and leases space for its other offices under operating leases which expire at various dates through fiscal 2022.

The Company leased approximately 6,200 square feet of office space in San Francisco, but the Company closed its San Francisco office upon the end of the lease in October 2019.

Journal Technologies leases about 7,100 square feet of office space (expiring in May 2020) in Corona, California for a monthly rent of approximately $14,000 and 9,800 square feet of office space (expiring in August 2020) in Englewood, Colorado for a monthly rent of approximately $23,000.

The Company is responsible for a portion of maintenance, insurance and property tax expenses relating to the leased properties.

Rental expenses for fiscal years 2020 and 2019 were $ 612,000 and $ 1,017,000 , respectively.

The following table represents the Company’s future obligations:

The following table represents the Company’s future obligations

Payments due by Fiscal Year

Real estate loan

$ 131,000  

$ 148,000  

$ 153,000  

$ 158,000  

$ 164,000  

$ 955,000  

$ 1,709,000  

Obligations under operating leases

Long-term accrued liabilities*

129,000  

11,000  

140,000  

Long-term accrued liabilities and other*

10,000  

434,000  

191,000  

215,000  

160,000  

445,000  

1,455,000  

$ 270,000  

$ 593,000  

$ 344,000  

$ 373,000  

$ 324,000  

$ 1,400,000  

$ 3,304,000  

The long-term accrued liabilities for the Management Incentive Plan are discounted to the present value using a discount rate of 6 %.

1 unchanged sentence

From time to time, the Company is subject to litigation arising in the normal course of its business.

While it is not possible to predict the results of such litigation, management does not believe the ultimate outcome of these matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows.

REPORTABLE SEGMENTS

An operating segment is defined as a component of an enterprise which has discrete financial information that is evaluated regularly by the Company’s Chief Executive Officer to decide how to allocate resources and to access performance.

In accordance with ASC 280 - 10, Segment Reporting , the Company has two segments of business.

The Company’s reportable segments are:

(i) the Traditional Business and (ii) Journal Technologies.

All inter-segment transactions were eliminated.

Summarized financial information concerning the Company’s reportable segments and Corporate income and expenses is shown in the following table:

The Company’s Traditional Business is one reportable segment and the other is Journal Technologies.

Summarized financial information concerning the Company’s reportable segments and Corporate income and expenses is shown in the following table.

The Company’s Traditional Business is one reportable segment and the other is Journal Technologies.

Additional details about each of the reportable segments and its corporate income and expenses is set forth below:

Reportable Segments

$ 7,104,000  

5,090,000  

Advertising service fees and other

2,501,000  

Licensing and maintenance fees

21,647,000  

Consulting fees

7,718,000  

Other public service fees

5,882,000  

Operating expenses

16,425,000  

34,800,000  

51,225,000  

Income (loss) from operations

( 1,730,000 )  

447,000  

( 1,283,000 )

Dividends and interest income

4,965,000  

Net unrealized losses on investments

( 3,099,000 )  

Interest expenses on note payable collateralized by real estate

( 84,000 )  

( 35,000 )  

Interest expenses on margin loans

( 434,000 )  

Gains on sales of marketable securities, net

4,193,000  

Pretax income

( 1,814,000 )  

447,000  

5,593,000  

4,226,000  

Income tax expense

685,000  

100,000  

( 970,000 )  

( 1,129,000 )  

547,000  

4,623,000  

4,041,000  

35,896,000  

22,277,000  

180,402,000  

238,575,000  

Capital expenditures

* included goodwill impairment of $13,400,000

121,000  

63,000  

184,000  

Reportable Segments

Advertising, net

$ 9,132,000  

5,249,000  

Advertising service fees and other

2,712,000  

Licensing and maintenance fees

20,179,000  

Consulting fees

5,539,000  

Other public service fees

5,844,000  

Operating expenses

16,981,000  

49,898,000*  

Income (loss) from operations

Dividends and interest income

Interest expense on note payable collateralized by real estate

Interest expense on margin loans

Capital gains on sales of marketable Securities and others

Other-than-temporary impairment losses on investments

Pretax (loss) income

Income tax benefit

Net (loss) income

Capital expenditures

Amortization of intangible assets

Reportable Segments

Advertising, net

Advertising service fees and other

Licensing and maintenance fees

Consulting fees

Other public service fees

Operating expenses

Loss from operations

112,000  

( 18,336,000 )  

( 18,224,000 )

Dividends and interest income

Interest expense on note payable collateralized by real estate

Interest expense on margin loans

Interest and penalty expense reversal for uncertain and unrecognized tax benefits

Pretax (loss) income

Income tax benefit (expense)

Net (loss) income

5,380,000  

38,000  

Net unrealized losses on investments

( 17,715,000 )  

Interest expenses on note payable collateralized by real estate

( 93,000 )  

Interest expenses on margin loans

( 862,000 )  

Pretax income

19,000  

( 18,336,000 )  

( 13,159,000 )  

( 31,476,000 )

Income tax expense

( 5,000 )  

2,450,000  

3,815,000  

6,260,000  

14,000  

( 15,886,000 )  

( 9,344,000 )  

( 25,216,000 )

17,176,000  

22,741,000  

197,459,000  

237,376,000  

Capital expenditures

Amortization of intangible assets

132,000  

33,000  

165,000  

* included goodwill impairment of $ 13,400,000

During fiscal 2020 and 2019, the Traditional Business had total operating revenues of $ 14,695,000 and $ 17,093,000 of which $ 9,605,000 and $ 11,844,000 , respectively, were recognized after services were provided while $ 5,090,000 and $ 5,249,000 , respectively, were recognized ratably over the subscription terms.

Total operating revenues for Journal Technologies were $31,562,000, $23,531,000 and $23,814,000, of which $12,353,000, $7,437,000 and $8,618,000, respectively, were recognized upon completion of services while $19,209,000, $16,094,000 and $15,196,000, respectively, were recognized ratably over the subscription periods.

RESULTS OF OPERATIONS BY QUARTER (UNAUDITED)

Quarter ended

(in thousands except per share amounts)

Costs and expenses

Loss from operations

Other income, net

Unrealized (losses) gains on investments

Loss before taxes

Benefits from (provision for) income taxes

Net (loss) income

Basic and diluted net (loss) income per share

* Included goodwill impairment of $13.4 million

Costs and expenses

Loss from operations

Other income, net

Other-than-temporary impairment losses on investments

Loss before taxes

Benefits from income taxes

Net income (loss)

Basic and diluted net income (loss) per share

Total operating revenues for the Company’s software business were $ 35,247,000 and $ 31,562,000 , of which $ 14,025,000 and $ 12,353,000 , respectively, were recognized upon completion of services while $ 21,222,000 and $ 19,209,000 , respectively, were recognized ratably over the subscription periods.

SUBSEQUENT EVENTS

1 unchanged sentence

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including Gerald L.

Salzman, its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2019.

Based on that evaluation, management concluded that because of material weaknesses in its internal control over financial reporting, as further described below, the Company’s disclosure controls and procedures were not effective as of September 30, 2019.

Management’s Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.

The Company’s internal control over financial reporting has been designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of the Company’s consolidated financial statements.

All internal controls, no matter how well designed, have inherent limitations, and sometimes they can have one or more material weaknesses.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

Each year, management is required by SEC rules to evaluate the effectiveness of the Company’s internal control over financial reporting.

If management identifies any material weaknesses in the course of the evaluation, the rules do not allow us to conclude that our internal control over financial reporting is effective.

That evaluation is conducted under the supervision and with the participation of Mr.

Salzman, and is based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013, which applies to all accelerated filers regardless of size.

Based on the evaluation under that framework and applicable SEC rules, management has identified the following deficiencies that constitute material weaknesses in the Company’s internal control over financial reporting:

Segregation of duties:

As a small company, we have one long-time knowledgeable manager overseeing both our advertising and subscription departments, eight experienced employees in the accounting department and three in the IT department.

Accordingly, we are not able to segregate duties to the extent we could if we had more people.

Although the Company has remediated some of the issues associated with administrative access to specific systems, these steps have not fully remediated the control issue.

Ineffective management assessment of internal control over financial reporting:

The Company does not have an internal audit department due to the small size of its accounting department, and we have not sufficiently designed controls that support an effective assessment of our internal controls relating to the prevention of fraud and possible management override of controls.

Hiring an outside firm would certainly help complete the documentation of the internal control assessment to the level required by the COSO framework, but the Company questions whether that would be a wise use of shareholders’ money.

Recognizing our deficiencies, we use mitigating controls, including a variety of internal procedures to check and double-check the areas where one person is responsible for multiple duties.

Among other things, the Company’s monitoring activities include monthly review and comparative analysis of financial, production and public information with prior periods by the Company’s department supervisors, the CEO/CFO and the Board of Directors.

We will continue to review our compensating controls and procedures in our efforts to remediate the above mentioned material weaknesses.

In addition, we believe our most important internal control is our hiring and retention of honest and capable people, whom we trust to do their jobs well.

Accordingly, we believe our overall internal control environment is sufficient for a company of our size.

In the context of the COSO 2013 Framework, however, we believe that the above-mentioned control deficiencies constitute material weaknesses, and therefore we must conclude that our internal control over financial reporting was not effective as of September 30, 2019.

Squar Milner LLP, the Company’s independent registered public accounting firm, expressed an unqualified opinion for the audit of our consolidated financial statements as of and for the year ended September 30, 2019.

It has also issued its report on the effectiveness of our internal control over financial reporting as of September 30, 2019, which is presented below.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Daily Journal Corporation

Opinion on the Internal Control Over Financial Reporting

We have audited Daily Journal Corporation's (the Company) internal control over financial reporting as of September 30, 2019, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 2013.

In our opinion, because of the effect of the material weaknesses described below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of September 30, 2019, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013 Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of September 30, 2019 and 2018 and the related consolidated statements of comprehensive income (loss), shareholders’ equity and cash flows for each of the years ended in the three year period ended September 30, 2019 and our report dated December 12, 2019 expressed an unqualified opinion.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.

The following deficiencies in internal control have been identified as material weaknesses over the Company’s control environment and monitoring pursuant to the COSO framework:

Inadequate segregation of duties to mitigate the risk of fraud and management override of controls pertaining to access over significant accounting applications and ineffective management assessment of internal control over financial reporting, including insufficient personnel to complete the documentation of internal control assessment and documentation of management review controls.

These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of fiscal 2019 financial statements, and this report does not affect our report dated December 12, 2019.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control over Financial Reporting.

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audit also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

\s\ Squar Milner LLP

Los Angeles, California

December 12, 2019

Changes in Internal Control over Financial Reporting

In light of the material weaknesses in the Company’s internal control over financial reporting discussed above for the fiscal year ended September 30, 2019, management concluded that the Company’s disclosure controls and procedures were not effective as of September 30, 2019.

Except as described above under Management’s Report on Internal Control over Financial Reporting, there were no other changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Other Information

Directors, Executive Officers and Corporate Governance

The information set forth in the tables, the notes thereto, and the paragraphs under the captions “Election of Directors”, “Corporate Governance” and “Delinquent Section 16(a) Reports” in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on or about February 12, 2020 (the “Proxy Statement”), which Proxy Statement will be filed with the SEC within 120 days after September 30, 2019, is incorporated herein by reference.

The Company has adopted a Code of Ethics that applies to all directors, officers and employees of the Company, including the Chief Executive Officer, Chief Financial Officer and Controller.

The Company’s Code of Ethics has been filed as Exhibit 14 hereto.

Executive Compensation

The information set forth under the captions “Executive Compensation” and “Corporate Governance” in the Proxy Statement is incorporated herein by reference.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement is incorporated herein by reference.

Certain Relationships and Related Transactions, and Director Independence

The information set forth under the caption “Corporate Governance” in the Proxy Statement is incorporated herein by reference.

Principal Accounting Fees and Services

The information set forth under the caption “Other Matters Regarding Independent Registered Public Accounting Firm” in the Proxy Statement is incorporated herein by reference.

Exhibits, Financial Statement Schedules

The following documents are filed as part of this Report:

Consolidated Financial Statements:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets at September 30, 2019 and 2018

Consolidated Statements of Comprehensive Income (Loss) for the years ended September 30, 2019, 2018 and 2017

Consolidated Statements of Shareholders’ Equity for the years ended September 30, 2019, 2018 and 2017

Consolidated Statements of Cash Flows for the years ended September 30, 2019, 2018 and 2017

Notes to Consolidated Financial Statements

Articles of Incorporation of Daily Journal Corporation, as amended.

Amended and Restated Bylaws of Daily Journal Corporation (~)

Amendment to Amended and Restated Bylaws of Daily Journal Corporation

Description of Common Stock of Daily Journal Corporation

Form of Non-Negotiable Certificate Representing an Employee Participant Interest in the Daily Journal Corporation (“DJC”) Plan for Supplemental Compensation to an Employee as long as that Employee Remains Employed by DJC or one of its Subsidiaries, Based on Pre-tax Earnings of DJC and its Subsidiaries on a Consolidated Basis.

Daily Journal Corporation Code of Ethics.

Daily Journal Corporation’s List of Subsidiaries.

Certification by Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Certification by Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Filed as an Exhibit to the Company’s 2014 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on January 28, 2015.

Management Compensatory Plan.

Form 10-K Summary

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DAILY JOURNAL CORPORATION

/s/ Gerald L.

December 12, 2019

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/ Charles T.

Chairman of the Board

December 12, 2019

/s/ Gerald L.

President, Chief Executive Officer,

Chief Financial Officer,

Treasurer and Director

(Principal Executive Officer,

Principal Financial Officer and

Principal Accounting Officer)

December 12, 2019

Vice-Chairman

December 12, 2019

Peter Kaufman

/s/ Gary Wilcox

December 12, 2019

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data