DAILY JOURNAL CORP 10-K

Item 8. Financial Statements and Supplementary Data   Report of Independent Registered Public Accounting Firm   To The Board of Directors and Shareholders of Daily Journal Corporation   Opinion on the Financial Statements   We have audited the accompanying consolidated balance sheets of Daily Journal Corporation (the Company) as of September 30, 2022 and 2021, the related consolidated statements of comprehensive (loss) income, shareholders’ equity and cash flows for the 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, 2022 and 2021, and the results of its operations and its cash flows for 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 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.   We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.   Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.   Critical Audit Matters   The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.   26       Software Revenue Recognition   As discussed in Notes 2 to the consolidated financial statements, the Company generates revenue from the sale of products that include software licenses, maintenance, support fees, and services. The Company’s contracts with customers often include promises to transfer multiple products and services to a customer related to the Journal Technologies segment. Arrangements with customers can involve multiple performance obligations and rights. The Company recognized $19.2 million of licensing and maintenance fees for the year ended September 30, 2022.   We identified the evaluation of the Company’s analysis of terms and conditions in significant software and license contracts with customers and their effect on revenue recognition as a critical audit matter. Complex auditor judgment was required to assess the Company’s determination of the performance obligations and allocation of transaction price.   The primary procedures we performed to address this critical audit matter included:     • Obtaining an understanding of the Company’s revenue recognition policy and evaluated for appropriateness.     • Evaluating the design and implementation of certain internal controls related to the Company’s revenue recognition process, including controls related to the Company’s analysis of terms and conditions in software and license contracts with customers and their effect on revenue recognition.     • Inquiring of personnel outside of the accounting function to corroborate our understanding of certain terms and conditions for a selection of revenue transactions.     • Testing a sample of software and license transactions by inspecting the underlying customer agreements and invoices, and evaluating the Company’s recognition in accordance with revenue recognition policy.     /s/ Baker Tilly US, LLP   We have served as the Company's auditor since 2016.   Los Angeles, California December 16, 2022   27      DAILY JOURNAL CORPORATION   CONSOLIDATED BALANCE SHEETS         September 30 2022     September 30 2021   ASSETS                 Current assets                 Cash and cash equivalents   $ 13,423,000     $ 12,596,000   Restricted cash     2,045,000       2,043,000   Marketable securities at fair value -- common stocks     275,529,000       347,573,000   Accounts receivable, less allowance for doubtful accounts of $ 250,000 at September 30, 2022 and 2021     16,931,000       9,524,000   Inventories     56,000       43,000   Prepaid expenses and other current assets     451,000       557,000   Income tax receivable     1,019,000       ---   Total current assets     309,454,000       372,336,000                     Property, plant and equipment, at cost                 Land, buildings and improvements     16,330,000       16,499,000   Furniture, office equipment and computer software     1,688,000       1,688,000   Machinery and equipment     1,521,000       1,524,000         19,539,000       19,711,000   Less accumulated depreciation     ( 9,986,000 )     ( 9,706,000 )       9,553,000       10,005,000   Operating lease right-of-use assets     104,000       215,000       $ 319,111,000     $ 382,556,000                     LIABILITIES AND SHAREHOLDERS' EQUITY                 Current liabilities                 Accounts payable   $ 5,062,000     $ 4,239,000   Accrued liabilities     7,066,000       6,052,000   Income tax payable     ---       6,244,000   Note payable collateralized by real estate     146,000       147,000   Deferred subscriptions     2,679,000       2,694,000   Deferred consulting fees     6,394,000       5,498,000   Deferred maintenance agreements and others     12,272,000       9,138,000   Total current liabilities     33,619,000       34,012,000                     Long term liabilities                 Investment margin account borrowings     75,000,000       32,000,000   Note payable collateralized by real estate     1,285,000       1,431,000   Deferred maintenance agreements     370,000       995,000   Accrued liabilities     4,547,000       3,383,000   Deferred income taxes     25,273,000       56,094,000   Total long-term liabilities     106,475,000       93,903,000                     Commitments and contingencies (Notes 4 and 5)     ---         ---                       Shareholders' equity                 Preferred stock, $.01 par value, 5,000,000 shares authorized and no shares issued     ---       ---   Common stock, $.01 par value, 5,000,000 shares authorized; 1,805,053 shares issued, including 428,027 and 424,307 treasury shares, at September 30, 2022 and September 30, 2021, respectively     14,000       14,000   Additional paid-in capital     1,755,000       1,755,000   Retained earnings     177,248,000       252,872,000   Total shareholders' equity     179,017,000       254,641,000       $ 319,111,000     $ 382,556,000     See accompanying Notes to Consolidated Financial Statements   28     DAILY JOURNAL CORPORATION   CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME         2022     2021   Revenues                 Advertising   $ 8,591,000     $ 8,171,000   Circulation     4,394,000       4,576,000   Advertising service fees and other     2,937,000       2,684,000   Licensing and maintenance fees     19,192,000       21,044,000   Consulting fees     11,865,000       6,319,000   Other public service fees     7,030,000       7,131,000         54,009,000       49,925,000   Costs and expenses                 Salaries and employee benefits     36,935,000       34,230,000   Increase to the long-term supplemental compensation accrual     1,245,000       1,835,000   Agency commissions     905,000       536,000   Outside services     4,001,000       3,084,000   Postage and delivery expenses     668,000       654,000   Newsprint and printing expenses     739,000       625,000   Depreciation and amortization     379,000       480,000   Equipment maintenance and software     1,029,000       1,039,000   Credit card merchant discount fees     1,679,000       1,831,000   Rent expenses     249,000       286,000   Accounting and legal fees     833,000       937,000   Other general and administrative expenses     3,358,000       2,236,000         52,020,000       47,773,000   Income from operations     1,989,000       2,152,000   Other income (expenses)                 Dividends and interest income     5,451,000       2,908,000   Other income     ---       69,000   Net unrealized (losses) gains on investments     ( 123,401,000 )     106,499,000   Interest expense on note payable collateralized by real estate and others     ( 83,000 )     ( 94,000 ) Interest expense on margin loans     ( 1,026,000 )     ( 233,000 ) Gains on land sale     272,000       ---   Gains on sales of marketable securities, net     14,249,000       41,749,000   (Loss) income before taxes     ( 102,549,000 )     153,050,000   Benefit (provision) for income taxes     26,925,000       ( 40,150,000 ) Net (loss) income   $ ( 75,624,000 )   $ 112,900,000   Weighted average number of common shares outstanding – basic and diluted     1,379,655       1,380,746   Basic and diluted net (loss) income per share   $ ( 54.81 )   $ 81.77     See accompanying Notes to Consolidated Financial Statements   29     DAILY JOURNAL CORPORATION   CONSOLIDATED STATEMENTS OF SHAREHOLDERS ’ EQUITY                                         Additional             Total       Common Stock     Treasury Stock     Paid-in     Retained     Shareholders'       Share     Amount     Share     Amount     Capital     Earnings     Equity                                                             Balance at September 30, 2020     1,805,053     $ 18,000       ( 424,307 )   $ ( 4,000 )   $ 1,755,000     $ 139,972,000     $ 141,741,000   Net income     ---       ---       ---       ---       ---       112,900,000       112,900,000   Balance at September 30, 2021     1,805,053     $ 18,000       ( 424,307 )     ( 4,000 )     1,755,000       252,872,000       254,641,000   Receipt of donated treasury stock     ---       ---       ( 3,720 )     ---       ---       ---       ---   Net loss     ---       ---       ---       ---       ---       ( 75,624,000 )     ( 75,624,000 ) Balance at September 30, 2022     1,805,053     $ 18,000       ( 428,027 )   $ ( 4,000 )   $ 1,755,000     $ 177,248,000     $ 179,017,000     See accompanying Notes to Consolidated Financial Statements   30     DAILY JOURNAL CORPORATION   CONSOLIDATED STATEMENTS OF CASH FLOWS         2022     2021   Cash flows from operating activities                 Net (loss) income   $ ( 75,624,000 )   $ 112,900,000   Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities                 Depreciation and amortization     379,000       480,000   Gains on land sale     ( 272,000 )     ---   Gains on sales of marketable securities, net     ( 14,249,000 )     ( 41,749,000 ) Deferred income taxes     ( 30,821,000 )     31,895,000   Unrealized losses (gains) on marketable securities     123,401,000       ( 106,499,000 ) Changes in assets and liabilities                 (Increase) decrease in current assets                 Accounts receivable, net     ( 7,407,000 )     ( 2,797,000 ) Inventories     ( 13,000 )     ( 7,000 ) Prepaid expenses and other current assets     217,000       56,000   Income tax receivable     ( 1,019,000 )     601,000   Increase (decrease) in liabilities                 Accounts payable     823,000       313,000   Accrued liabilities     2,178,000       2,900,000   Income tax payable     ( 6,244,000 )     6,244,000   Deferred subscriptions     ( 15,000 )     ( 205,000 ) Deferred consulting fees     896,000       630,000   Deferred maintenance agreements and others     2,509,000       ( 1,476,000 ) Net cash (used in) provided by operating activities     ( 5,261,000 )     3,286,000                     Cash flows from investing activities                 Sales of marketable securities     80,570,000       45,033,000   Purchases of marketable securities     ( 117,678,000 )     ( 64,990,000 ) Sale of land     381,000       ---   Purchases of property, plant and equipment, net     ( 36,000 )     ( 29,000 ) Net cash used in investing activities     ( 36,763,000 )     ( 19,986,000 )                   Cash flows from financing activities                 Proceeds from margin loan borrowing     43,014,000       17,000,000   Payment to margin loan borrowing     ( 14,000 )     ( 14,493,000 ) Payment of real estate loan principal     ( 147,000 )     ( 131,000 ) Net cash provided by financing activities     42,853,000       2,376,000                     Increase (decrease) in cash and cash equivalents and restricted cash     829,000       ( 14,324,000 )                   Cash and cash equivalents and restricted cash                 Beginning of year     14,639,000       28,963,000   End of year   $ 15,468,000     $ 14,639,000                     Interest paid during year   $ 1,053,000     $ 329,000   Income taxes paid during year   $ 11,140,000     $ 1,946,000     See accompanying Notes to Consolidated Financial Statements   31     DAILY JOURNAL CORPORATION   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     1. 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. This is sometimes referred to as the Company’s “Traditional Business”.   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. These products are licensed in approximately 30 states and internationally. In August 2022, the Company established a new wholly-owned subsidiary, Journal Technologies (Canada) Inc., in Victoria BC, Canada.   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.     2. 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.   Concentrations of Credit Risk: The Company extends unsecured credit to most of its advertising customers. The Company recognizes that extending credit and setting appropriate reserves for receivables is largely a subjective decision based on knowledge of the customer and the industry. 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. If the financial condition of its customers were to deteriorate or its judgments about their abilities to pay are incorrect, additional allowances might be required and its results of operations could be materially affected.   Cash Equivalents: The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.   32     Restricted Cash:   The Company considers cash to be restricted when withdrawal or general use is legally restricted. Restricted cash of $ 2,045,000 and $ 2,043,000 at September 30, 2022 and 2021, 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. 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 $ 75,624,000 for fiscal 2022, included net unrealized losses on marketable securities of $ 123,401,000 . In fiscal 2021, the Company’s net income of $ 112,900,000 included net unrealized gains on marketable securities of $ 106,499,000 . 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 marketable securities on a recurring basis pursuant to Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement and Disclosures . At September 30, 2022, the aggregate fair market value of the Company’s marketable securities was $ 275,529,000 . These marketable securities had approximately $ 120,692,000 of net unrealized gains before taxes of $ 32,120,000 . Most of the unrealized net gains were in the common stocks of three U.S. financial institutions and one foreign manufacturer. At September 30, 2021, the Company had marketable securities at fair market value of approximately $ 347,573,000 , including approximately $ 244,093,000 of unrealized net gains before taxes of $ 64,115,000 .   All marketable securities are classified as “Current assets” because they are available for sale at any time. During fiscal 2022, the Company sold part of its marketable securities for approximately $ 80,570,000 , realizing a total net gain of approximately $ 14,249,000 , and simultaneously bought some other companies’ marketable securities for an aggregated cost of approximately $ 117,678,000 with additional borrowings of $ 43,014,000 from the margin loan account. During the prior fiscal year, the Company sold part of its marketable securities for approximately $ 45,033,000 , realizing a total gain of approximately $ 41,749,000 , and simultaneously bought some other companies’ marketable securities for an aggregated cost of approximately $ 64,990,000 with additional borrowings of $ 17,000,000 from the margin loan account.   Investment in Financial Instruments       September 30, 2022     September 30, 2021       Aggregate fair value     Amortized/ Adjusted cost basis     Pretax unrealized gains     Aggregate fair value     Amortized/ Adjusted cost basis     Pretax unrealized gains   Marketable securities                                                 Common stocks   $ 275,529,000     $ 154,837,000     $ 120,692,000     $ 347,573,000     $ 103,480,000     $ 244,093,000     Inventories: 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.   33     Property, plant and equipment: 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, 2022, 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. Assets are depreciated using the straight-line method for financial statements and accelerated method for tax purposes. Depreciation and amortization expenses were $ 379,000 and $ 480,000 for fiscal 2022 and 2021, respectively.   Significant expenditures which extend the useful lives of existing assets are capitalized. Maintenance and repair costs are expensed as incurred. Gains or losses on dispositions of assets are reflected in current earnings.   Impairment of Long-Lived Assets: The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. There were no such impairments identified during fiscal 2022 and 2021.   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. Thereafter, until the product is released for sale, software development costs are capitalized and reported at the lower of unamortized cost or net realizable value of the related product. The establishment of technological feasibility and the ongoing assessment of recoverability of costs require considerable judgment by the Company with respect to certain internal and external factors, including, but not limited to, anticipated future product revenue, estimated economic life and changes in hardware and software technology.   The Company believes its process for developing software is essentially completed concurrent with the establishment of technological feasibility, and accordingly, no software development costs have been capitalized to date.   Revenue Recognition:   The Company recognizes revenues in accordance with the provisions of ASU No. 2014 - 09, Revenue from Contracts with Customers (ASC Topic 606 ) .   For the Traditional Business, proceeds from the sale of subscriptions for newspapers, court rule books and other publications and other services are recorded as deferred revenue and are included in earned revenue only when the services are provided, generally over the subscription term. Advertising revenues are recognized when advertisements are published.   Journal Technologies contracts may include several products and services, which are generally distinct and include separate transaction pricing and performance obligations. Most are one -transaction contracts. These current subscription-type contract revenues include (i) implementation consulting fees to configure the system to go-live, (ii) subscription software license, maintenance (including updates and upgrades) and support fees, and (iii) third -party hosting fees when used. Revenues for consulting are recognized at point of delivery (go-live) upon completion of services. These contracts include assurance warranty provisions for limited periods and do not include financing terms. For some contracts, the Company acts as a principal with respect to certain services, such as data conversion, interfaces and hosting that are provided by third -parties, and recognizes such revenues on a gross basis. For legacy contracts with perpetual license arrangements, licenses and consulting services are recognized at point of delivery (go-live), and maintenance revenues are recognized ratably after the go-live. Other public service fees are earned and recognized as revenues when the Company processes credit card payments on behalf of the courts via its websites through which the public can efile cases and pay traffic citations and other fees.   34     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.   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. Also, as a practical expedient, the Company has elected not to include its evaluation of variable consideration of certain usage-based fees (i.e. public service fees) that are included in some contracts. 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 71 % and 69 % of the Company’s revenues in fiscal 2022 and 2021, 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   Description   Balance at Beginning of Year     Additions (Reductions) charged to Costs and Expenses     Accounts charged off less Recoveries     Balance at End of Year                                     Fiscal 2022                                 Allowance for doubtful accounts   $ 250,000     $ 18,000     $ ( 18,000 )   $ 250,000   Fiscal 2021                                 Allowance for doubtful accounts   $ 250,000     $ ( 3,000 )   $ 3,000     $ 250,000     35     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 for ten years. During fiscal 2022, this plan was expanded to include the participation of all Journal Technologies employees.   Certificate interests entitled participants to receive 5.15 % and 4.96 % (amounting to $ 474,300 and $ 332,940 , respectively) of Daily Journal non-consolidated income before taxes, workers’ compensation, supplemental compensation and certain other items, 21.7 % and 12.33 % (amounting to $ 455,700 and $ 255,300 , respectively) for Journal Technologies and 11.69 % and 12.24 % (amounting to $ 1,295,540 and $ 1,049,750 , respectively) for Daily Journal consolidated in fiscal 2022 and 2021, respectively. The Company accrued $ 4,525,000 and $ 3,280,000 as of September 30, 2022 and 2021, 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 2022 of $ 1,245,000 or $. 90 per outstanding share on an adjusted pretax basis as compared with an increase in fiscal 2021 of $ 1,835,000 or $ 1.33 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 % because each granted Certificate will expire over its remaining life term of up to 10 years.   Income taxes: The Company accounts for income taxes using an asset and liability approach which requires the recognition of deferred tax liabilities and assets for the expected future consequences of temporary differences between the carrying amounts for financial reporting purposes and the tax basis of the assets and liabilities. The Company accounts for uncertainty in income taxes under ASC 740 - 10 which prescribes a recognition threshold and measurement methodology to recognize and measure an income tax position taken, or expected to be taken, in a tax return. 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 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.   Treasury stock and net (loss) income per common share:   In June 2022, the Company received from Director Charles T. Munger 3,720 shares of Daily Journal common stock as his gracious personal gift (worth approximately $ 1 million on the date of the gift) for the purpose of establishing a new senior management equity incentive plan, which has yet to be established. These donated shares were considered treasury stock, and the Company accounted for them using the par method which resulted in an immaterial effected amount on Treasury Stock and Additional Paid-in Capital. In addition, the number of outstanding shares of the Company was reduced by these 3,720 shares to reflect the actual number of outstanding shares of 1,377,026 as of September, 2022. The net (loss) income per common share is based on the weighted average number of shares outstanding during each year. The shares used in the calculation were 1,379,655 and 1,380,746 for fiscal 2022 and 2021, respectively. The Company does not have any common stock equivalents, and therefore basic and diluted net income per share is the same.   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.   36     Right-of-Use (ROU) Asset   At the beginning of fiscal 2020, the Company adopted ASU 2016 - 02, Leases (Topic 842 ) which requires that all leases be recognized by lessees on the balance sheet through a right-of-use (ROU) 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, 2022, the Company recorded a ROU asset and lease liability of approximately $ 104,000 for its operating office and equipment leases, including approximately $ 22,000 beyond one year.  (In the prior fiscal year, there were ROU asset and lease liability of $ 215,000 with $ 103,000 beyond one year.) Operating office and equipment leases are included in operating lease ROU assets, current accrued liabilities and long-term accrued liabilities in the Company’s accompanying Consolidated Balance Sheets.    Accrued Liabilities   Accrued liabilities primarily consisted of accrued payroll at September 30, 2022 and 2021.   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.   37        3. INCOME TAXES   The (benefit) provision from income taxes consists of the following:       2022     2021   Current:                 Federal   $ 2,688,000     $ 5,420,000   State     1,208,000       2,835,000         3,896,000       8,255,000   Deferred:                 Federal     ( 23,200,000 )     24,385,000   State     ( 7,621,000 )     7,510,000         ( 30,821,000 )     31,895,000       $ ( 26,925,000 )   $ 40,150,000     The difference between the statutory federal income tax rate and the Company’s effective rate is summarized below:       2022     2021                     Statutory federal income tax rate     21.0 %     21.0 % State franchise taxes (net of federal tax benefit)     5.7       5.2   Effect of state rate change on beginning balance of deferred tax liabilities     ( 0.7 )     0.1   Dividends received deduction     0.4       ( 0.2 ) Others     ( 0.1 )     0.1   Effective tax rate     26.3 %     26.2 %   The Company’s deferred income tax assets and liabilities were comprised of the following:       2022     2021   Deferred tax assets attributable to:                 Accrued liabilities, including supplemental compensation and vacation pay accrual   $ 1,792,000     $ 1,603,000   Impairment losses on marketable securities     ( 182,000 )     113,000   Bad debt reserves not yet deductible     56,000       55,000   Depreciation and amortization     2,686,000       3,065,000   Deferred revenues     1,316,000       1,836,000   Goodwill     451,000       520,000   Net operating losses     657,000       561,000   Credits and other     71,000       268,000   Total deferred tax assets     6,847,000       8,021,000                     Deferred tax liabilities attributable to:                 Unrealized gains on marketable securities     ( 32,120,000 )     ( 64,115,000 ) Net deferred income taxes   $ ( 25,273,000 )   $ ( 56,094,000 )   During fiscal 2022, the Company recorded an income tax benefit of $ 26,925,000 on the pretax loss of $ 102,549,000 .   The income tax benefit consisted of a tax benefit of $ 32,840,000 on the unrealized losses on marketable securities and a benefit of $ 340,000 for the dividends received deduction and other permanent book and tax differences, offset by tax provisions of $ 3,790,000 on the realized gains on marketable securities, $ 1,735,000 on income from operations, and $ 730,000 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 fiscal 2022 was 26.3 %, after including the taxes on the realized gains and unrealized losses on marketable securities.   38     For fiscal 2021, the Company recorded a provision for income taxes of $ 40,150,000 on pretax income of $ 153,050,000 .   The effective rate of 26.2 % was higher than the statutory rate of 21 % primarily due to the recording of (i) state taxes, which were offset by the dividends received deduction, resulting in a tax provision of $ 1,260,000 on pretax income before the unrealized and realized gains on marketable securities, (ii) a tax provision of $ 27,938,000 on the unrealized gains on marketable securities and (iii) a tax provision of $ 10,952,000 on the realized 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 2019 with regard to federal income taxes and fiscal 2018 for state income taxes.    * * * * * * * * * * * *   During fiscal 2021, the Company utilized all of its federal and certain state net operating losses (NOL). California has suspended the use of NOLs for fiscal years beginning in 2020, 2021 and 2022. As a result, the Company has $ 5.5 million of California NOLs expiring in fiscal years 2038 and 2039. The Company also has NOLs in other states, expiring as follows:   Fiscal Year ended   California NOLs     Other State NOLs                     September 30, 2032   $ ---     $ .1   September 30, 2037     ---       .1   September 30, 2038     4.8       .2   September 30, 2039     .7       .1   No expiration     ---       2.1   Total   $ 5.5     $ 2.6     39        4. DEBTS AND COMMITMENTS   During fiscal 2013, the Company borrowed from its investment margin account the aggregate purchase price of $ 29.5 million for two acquisitions, in each case pledging its marketable securities as collateral. In addition, there were subsequent borrowings of $ 45.5 million to purchase additional marketable securities bringing the margin loan balance up to $ 75 million as of September 30, 2022.   The interest rate for these investment margin account borrowings fluctuates based on the Federal Funds Rate plus 50 basis points with interest only payable monthly. The interest rate as of September 30, 2022 was 3 %, and it may increase in the future, particularly if the Federal Reserve continues to increase interest rates to help combat inflation. These investment margin account borrowings do not mature.   In November 2015, the Company purchased a 30,700 square foot office building constructed in 1998 on about 3.6 acres in Logan, Utah that had been previously leased for Journal Technologies. The Company paid $ 1.24 million and financed the balance with a real estate bank loan of $ 2.26 million which had a fixed interest rate of 4.66 %. This loan is secured by the Logan facility and can be paid off at any time without prepayment penalty. 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 10 years. This real estate loan had a balance of approximately $ 1.43 million as of September 30, 2022. Each monthly installment payment is approximately $ 16,600 . In April 2022, the Company sold approximately 17,564 square feet of the land along the front of its Logan building to the City of Logan for approximately $ 381,000 in connection with the City of Logan’s street widening project. (In October 2022, the Company again amended this real estate loan contract as the bank transferred its index to Secured Overnight Financing Rate from London Interbank Offered Rate which was ceased by the Federal Reserve and the Alternative Reference Rates Committee in the United States. The term of the loan, including the interest rate and the balance, remains unchanged.)   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 October 2023.   The Company is responsible for a portion of maintenance, insurance and property tax expenses relating to the leased properties. Rental expenses, inclusive of these expenses, for fiscal years 2022 and 2021 were $ 249,000 and $ 286,000 , respectively.   The following table represents the Company ’ s future obligations       Payments due by Fiscal Year       2023     2024     2025     2026     2027     2028 and after     Total   Real estate loan   $ 146,000     $ 158,000     $ 164,000     $ 169,000     $ 175,000     $ 619,000     $ 1,431,000   Obligations under operating leases     140,000       3,000       ---       ---       ---       ---       143,000   Long-term accrued liabilities*     ---       1,818,000       720,000       616,000       508,000       863,000       4,525,000       $ 286,000     $ 1,979,000     $ 884,000     $ 785,000     $ 683,000     $ 1,482,000     $ 6,099,000     * The long-term accrued liabilities for the Management Incentive Plan are discounted to the present value using a discount rate of 6 %.     5. CONTINGENCIES   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.   40        6. 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 which includes Journal Technologies, Inc. and Journal Technologies (Canada) Inc. (In August 2022, the Company established a new wholly-owned subsidiary, Journal Technologies (Canada) Inc., in Victoria BC, Canada. Except for a nominal founding cost of approximately $ 4,000 , there were no business activities for this new Canadian company during fiscal 2022. ) All inter-segment transactions were eliminated.   Additional details about each of the reportable segments and its corporate income and expenses is set forth below:   Overall Financial Results (000)   For the twelve months ended September 30                                                                         Reportable Segments                                       Traditional Business     Journal Technologies     Corporate     Total       2022     2021     2022     2021     2022     2021     2022     2021   Revenues                                                                 Advertising   $ 8,591     $ 8,171     $ ---     $ ---     $ ---     $ ---     $ 8,591     $ 8,171   Circulation     4,394       4,576       ---       ---       ---       ---       4,394       4,576   Advertising service fees and other     2,937       2,684       ---       ---       ---       ---       2,937       2,684   Licensing and maintenance fees     ---       ---       19,192       21,044       ---       ---       19,192       21,044   Consulting fees     ---       ---       11,865       6,319       ---       ---       11,865       6,319   Other public service fees     ---       ---       7,030       7,131       ---       ---       7,030       7,131   Total operating revenues     15,922       15,431       38,087       34,494       ---       ---       54,009       49,925   Operating expenses                                                                 Salaries and employee benefits     9,618       8,226       27,317       26,004       ---       ---       36,935       34,230   Increase to the long-term Supplemental compensation accrual     1,130       1,795       115       40       ---       ---       1,245       1,835   Others     4,472       4,967       9,368       6,741       ---       ---       13,840       11,708   Total operating expenses     15,220       14,988       36,800       32,785       ---       ---       52,020       47,773   Income from operations     702       443       1,287       1,709       ---       ---       1,989       2,152                                                                     Dividends and interest income     ---       ---       ---       ---       5,451       2,908       5,451       2,908   Gains on sale of land     ---       ---       ---       ---       272       ---       272       ---   Other income     ---       ---       ---       ---       ---       69       ---       69   Interest expenses on note payable collateralized by real estate and other     ---       ---       ---       ---       ( 83 )     ( 94 )     ( 83 )     ( 94 ) Interest expense on margin loans     ---       ---       ---       ---       ( 1,026 )     ( 233 )     ( 1,026 )     ( 233 ) Gains on sales of marketable securities, net     ---       ---       ---       ---       14,249       41,749       14,249       41,749   Net unrealized (losses) gains on marketable securities     ---       ---       ---       ---       ( 123,401 )     106,499       ( 123,401 )     106,499   Pretax income (loss)     702       443       1,287       1,709       ( 104,538 )     150,898       ( 102,549 )     153,050   Income tax (expense) benefit     ( 185 )     ( 115 )     ( 205 )     ( 425 )     27,315       ( 39,610 )     26,925       ( 40,150 ) Net income (loss)   $ 517     $ 328     $ 1,082     $ 1,284     $ ( 77,223 )   $ 111,288     $ ( 75,624 )   $ 112,900   Total assets   $ 22,743     $ 22,412     $ 27,868     $ 20,480     $ 268,500     $ 339,664     $ 319,111     $ 382,556   Capital expenditures   $ 3     $ 22     $ 33     $ 7       ---       ---     $ 36     $ 29     41     During fiscal 2022 and 2021, the Traditional Business had total operating revenues of $ 15,922,000 and $ 15,431,000 of which $ 11,528,000 and $ 10,855,000 , respectively, were recognized after services were provided while $ 4,394,000 and $ 4,576,000 , respectively, were recognized ratably over the subscription terms. Total operating revenues for the Company’s software business were $ 38,087,000 and $ 34,494,000 , of which $ 19,459,000 and $ 14,787,000 , respectively, were recognized upon completion of services while $ 18,628,000 and $ 19,707,000 , respectively, were recognized ratably over the subscription periods.     7. SUBSEQUENT EVENTS   The Company has completed an evaluation of all subsequent events through the issuance date of these financial statements and concluded that no additional subsequent events occurred that required recognition in the financial statements or disclosures in the Notes to Consolidated Financial Statements.   42        Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   None.