DAILY JOURNAL CORP 10-Q

Item 1. FINANCIAL STATEMENTS DAILY JOURNAL CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) December 31 September 30 2023 2023 ASSETS Current assets Cash and cash equivalents $ 14,432,000 $ 20,844,000 Restricted cash 2,121,000 2,100,000 Non-qualified deferred compensation plan - trust account asset value 379,000 194,000 Marketable securities at fair value -- common stocks 317,818,000 303,128,000 Accounts receivable, less allowance for doubtful accounts of $ 250,000 at December 31, 2023 and September 30, 2023 12,742,000 18,687,000 Inventories 58,000 72,000 Income tax receivable 21,000 — Prepaid expenses and other current assets 411,000 380,000 Total current assets 347,982,000 345,405,000 Property, plant and equipment, at cost Land, buildings and improvements 16,400,000 16,400,000 Furniture, office equipment and computer software 1,708,000 1,703,000 Machinery and equipment 1,521,000 1,521,000 19,629,000 19,624,000 Less accumulated depreciation ( 10,330,000 ) ( 10,264,000 ) 9,299,000 9,360,000 Operating lease right-of-use assets 82,000 95,000 $ 357,363,000 $ 354,860,000 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 6,019,000 $ 6,643,000 Accrued liabilities 5,032,000 8,789,000 Income tax payable — 1,069,000 Note payable collateralized by real estate 160,000 158,000 Deferred subscriptions 2,623,000 2,678,000 Deferred consulting fees 5,744,000 5,828,000 Deferred maintenance agreements and others 15,131,000 17,033,000 Total current liabilities 34,709,000 42,198,000 Long term liabilities Investment margin account borrowings 70,000,000 75,000,000 Note payable collateralized by real estate 1,079,000 1,120,000 Deferred maintenance agreements 714,000 1,000,000 Accrued liabilities 3,841,000 4,274,000 Accrued non-qualified deferred compensation 387,000 200,000 Deferred income taxes 33,549,000 30,599,000 Total long-term liabilities 109,570,000 112,193,000 Commitments and contingencies (Notes 10 and 11) 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 treasury shares, at December 31, 2023 and September 30, 2023 14,000 14,000 Additional paid-in capital 1,755,000 1,755,000 Retained earnings 211,315,000 198,700,000 Total shareholders' equity 213,084,000 200,469,000 $ 357,363,000 $ 354,860,000 See accompanying Notes to Consolidated Financial Statements. 3 DAILY JOURNAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited) Three months ended December 31 2023 2022 Revenues Advertising $ 2,087,000 $ 1,990,000 Circulation 1,095,000 1,098,000 Advertising service fees and other 705,000 699,000 Licensing and maintenance fees 6,557,000 4,395,000 Consulting fees 3,302,000 2,322,000 Other public service fees 2,247,000 1,797,000 15,993,000 12,301,000 Costs and expenses Salaries and employee benefits 11,347,000 9,631,000 Decrease to the long-term supplemental compensation accrual ( 420,000 ) ( 520,000 ) Agency commissions 243,000 211,000 Outside services 1,667,000 1,230,000 Postage and delivery expenses 176,000 167,000 Newsprint and printing expenses 205,000 199,000 Depreciation and amortization 66,000 75,000 Equipment maintenance and software 376,000 303,000 Credit card merchant discount fees 552,000 425,000 Rent expenses 70,000 69,000 Accounting and legal fees 256,000 273,000 Other general and administrative expenses 832,000 954,000 15,370,000 13,017,000 Income from operations 623,000 ( 716,000 ) Other income (expense) Dividends and interest income 1,569,000 1,069,000 Realized gains on sales of marketable securities — 422,000 Net unrealized gains on marketable securities 14,690,000 24,025,000 Interest expense on margin loans and others ( 1,131,000 ) ( 861,000 ) Interest expense on note payable collateralized by real estate ( 11,000 ) ( 12,000 ) Income before income taxes 15,740,000 23,927,000 Income tax provisions ( 3,125,000 ) ( 6,100,000 ) Net income $ 12,615,000 $ 17,827,000 Weighted average number of common shares outstanding - basic and diluted 1,377,026 1,377,026 Basic and diluted net income per share $ 9.16 $ 12.95 Comprehensive income $ 12,615,000 $ 17,827,000 See accompanying Notes to Consolidated Financial Statements. 4 DAILY JOURNAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited) Additional Total Common Stock Treasury Stock Paid-in Retained Shareholders' Share Amount Share Amount Capital Earnings Equity Balance at September 30, 2022 1,805,053 $ 18,000 ( 428,027 ) $ ( 4,000 ) $ 1,755,000 $ 177,248,000 $ 179,017,000 Net income — — — — — 17,827,000 17,827,000 Balance at December 31, 2022 1,805,053 $ 18,000 ( 428,027 ) $ ( 4,000 ) $ 1,755,000 $ 195,075,000 $ 196,844,000 Balance at September 30, 2023 1,805,053 $ 18,000 ( 428,027 ) $ ( 4,000 ) $ 1,755,000 $ 198,700,000 $ 200,469,000 Net income — — — — — 12,615,000 12,615,000 Balance at December 31, 2023 1,805,053 $ 18,000 ( 428,027 ) $ ( 4,000 ) $ 1,755,000 $ 211,315,000 $ 213,084,000 See accompanying Notes to Consolidated Financial Statements. 5 DAILY JOURNAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three months ended December 31 2023 2022 Cash flows from operating activities Net income $ 12,615,000 $ 17,827,000 Adjustments to reconcile net income to net cash (used in) provided from operations Depreciation and amortization 66,000 75,000 Net unrealized gains on marketable securities ( 14,690,000 ) ( 24,025,000 ) Realized gains on sales of marketable securities — ( 422,000 ) Deferred income taxes 2,950,000 6,097,000 Changes in operating assets and liabilities (Increase) decrease in current assets Accounts receivable, net 5,945,000 5,553,000 Inventories 14,000 ( 25,000 ) Prepaid expenses and other assets ( 18,000 ) 68,000 Income tax receivable ( 21,000 ) 2,000 Increase (decrease) in liabilities Accounts payable ( 624,000 ) 207,000 Accrued liabilities, including non-qualified deferred compensation ( 4,003,000 ) ( 3,408,000 ) Income tax payable ( 1,069,000 ) — Deferred subscriptions ( 55,000 ) ( 143,000 ) Deferred consulting fees ( 84,000 ) 1,105,000 Deferred maintenance agreements and others ( 2,188,000 ) ( 513,000 ) Net cash (used in) provided from operating activities ( 1,162,000 ) 2,398,000 Cash flows from investing activities Proceeds from sales of marketable securities — 2,826,000 Purchases of marketable securities — ( 10,001,000 ) Purchases of property, plant and equipment ( 5,000 ) ( 36,000 ) Net cash used in investing activities ( 5,000 ) ( 7,211,000 ) Cash flows from financing activities Proceeds from margin loan borrowing — 6,011,000 Payment to margin loan borrowing ( 5,000,000 ) — Payment of real estate loan principal ( 39,000 ) ( 23,000 ) Net cash (used in) provided from financing activities ( 5,039,000 ) 5,988,000 (Decrease) increase in cash and restricted cash and cash equivalents ( 6,206,000 ) 1,175,000 Cash and restricted cash and cash equivalents Beginning of period 23,138,000 15,468,000 End of period $ 16,932,000 $ 16,643,000 Interest paid during period $ 1,232,000 $ 917,000 Net income taxes paid $ 1,265,000 $ — See accompanying Notes to Consolidated Financial Statements. 6 DAILY JOURNAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 - The Corporation 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 the Company, supplies case management software systems and related products to courts, prosecutor and public defender offices, probation departments and other justice agencies, including administrative law organizations, city and county governments and bar associations. These organizations use the Journal Technologies family of products to help manage cases and information electronically, to interface with other critical justice partners and to extend electronic services to the public, including e-filing and a website to pay traffic citations and fees online. These products are licensed or subscribed to in approximately 30 states, and internationally. 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 and in British Columbia, Canada, where the Company established a new wholly-owned subsidiary, Journal Technologies (Canada) Inc., in August 2022. Note 2 - Basis of Presentation In the opinion of the Company, the accompanying interim unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of its financial position as of December 31, 2023, its results of operations for the three-month periods ended December 31, 2023 and 2022, its consolidated statements of shareholders’ equity for the three-month periods ended December 31, 2023 and 2022 and cash flows for the three-month periods ended December 31, 2023 and 2022. The results of operations for the three months ended December 31, 2023 are not necessarily indicative of the results to be expected for the full year. The consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2023. Certain reclassifications of previously reported amounts have been made to conform to the current year’s presentation. 7 Note 3 - Accounting Standards Adopted in Fiscal 2024 On October 1, 2023, the Company adopted Current Expected Credit Losses, a credit loss accounting standard (model) issued by the Financial Accounting Stands Board, requiring financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The standard eliminates the threshold for initial recognition in current U.S. GAAP and reflects an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets. The adoption of this guidance has no material effect on the Company’s consolidated financial statements. Note 4 – Right-of-Use (ROU) Asset At December 31, 2023, the Company had a ROU asset and lease liability of approximately $ 82,000 for its operating office and equipment leases, including approximately $ 31,000 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. Note 5 – 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 e-file cases and pay traffic citations and other fees. 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. 8 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. 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. Note 6 - Treasury stock and net income per common share In June 2022, the Company received from the late 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 is subject to shareholders’ approval at the Company’s 2024 Annual Meeting. 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 at December 31, 2023. The net income per common share is based on the weighted average number of shares outstanding during each year. The shares used in the calculation were 1,377,026 for both the three-month periods ended December 31, 2023 and 2022. Note 7 - Basic and Diluted Net Income Per Share The Company does not have any common stock equivalents, and therefore basic and diluted net income per share are the same. Note 8 - Investments in Marketable Securities All investments are classified as “Current assets” because they are available for sale at any time. These “available-for-sale” marketable securities are stated at fair value. 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 ASC 820, Fair Value Measurement . As of December 31, 2023 and September 30, 2023, there were net accumulated pretax unrealized gains of $ 152,406,000 and $ 137,716,000 , respectively, recorded in the accompanying consolidated balance sheets. Most of the accumulated pretax unrealized gains were in the common stocks of three U.S. financial institutions and one foreign manufacturer. In the three months ended December 31, 2023, the Company recorded and included in its net income the net unrealized gains on marketable securities of $ 14,690,000 , as compared with the net unrealized gains on marketable securities of $ 24,025,000 , in the prior year period. In December 2022, the Company sold part of its marketable securities for approximately $ 2,826,000 , realizing net gains of $ 422,000 , and borrowed an additional $ 6,011,000 from the margin loan account to purchase additional marketable securities with a total cost of approximately $ 10,001,000 . (The Company repaid $ 11,000 in the subsequent quarter.) There was no purchase or sale of marketable securities during the three months ended December 31, 2023. Our long-serving director and former chairman, Charles T. Munger, had managed the Company’s marketable securities portfolio since the original purchases were made with the Company’s excess cash in 2009 as an alternative to near-zero interest rate investments. Following Mr. Munger’s death in November 2023, the Company remains committed to using the portfolio as a source of strength in support of its operating businesses, and the Board is in the process of considering ways to ensure the prudent and effective management of these assets in the context of the current market and the needs of the businesses. 9 Investments in marketable securities as of December 31, 2023 and September 30, 2023 are summarized below. Investment in Financial Instruments December 31, 2023 September 30, 2023 Aggregate fair value Amortized/ Adjusted cost basis Pretax unrealized gains Aggregate fair value Amortized/ Adjusted cost basis Pretax unrealized gains Marketable securities Common stocks $ 317,818,000 $ 165,412,000 $ 152,406,000 $ 303,128,000 $ 165,412,000 $ 137,716,000 Note 9 - Income Taxes For the three months ended December 31, 2023, the Company recorded an income tax provision of $ 3,125,000 on the pretax income of $ 15,740,000 . The income tax provision consisted of tax provisions of $ 3,765,000 on the unrealized gains on marketable securities, $ 30,000 on income from foreign operations, and $ 270,000 on income from US operations and dividend income, partially offset by a tax benefit of $ 120,000 for the dividends received deduction and other permanent book and tax differences, and a tax benefit of $ 820,000 for the effect of a change in state apportionment on the beginning of the year’s deferred tax liability. Consequently, the overall effective tax rate for the three months ended December 31, 2023 was 19.9 %, after including the taxes on the unrealized gains on marketable securities. For the three months ended December 31, 2022, the Company recorded an income tax provision of $ 6,100,000 on the pretax income of $ 23,927,000 . The income tax provision consisted of a tax provision of $ 110,000 on the realized gains on marketable securities and $ 6,360,000 on the unrealized gains on marketable securities, partially offset by a tax benefit of $ 140,000 on loss from operations, $ 80,000 for the dividends received deduction and other permanent book and tax differences, and $ 150,000 for the effect of a change in state apportionment on the beginning of the year’s deferred tax liability. Consequently, the overall effective tax rate for the three months ended December 31, 2022 was 25.49 %, after including the taxes on the realized and unrealized gains on marketable securities. The Company files consolidated federal income tax returns in the United States and with various state jurisdictions and is no longer subject to examinations for fiscal years before fiscal 2021 with regard to federal income taxes and fiscal 2020 for state income taxes. Note 10 - Debt 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. There also have been subsequent net borrowings of $ 40.5 million to purchase additional marketable securities bringing the margin loan balance to $ 70 million as of December 31, 2023. 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 December 31, 2023 was 6 %. These investment margin account borrowings do not mature. 10 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 $ 1.24 million as of December 31, 2023. Each monthly installment payment is approximately $ 16,700 . 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 2025. Effective January 1, 2023, the Company began sponsoring a 401(k) retirement plan and a 409(A) non-qualified deferred compensation plan for its employees. As of December 31, 2023, there were deferred compensation liabilities of approximately $ 387,000 , of which $ 379,000 were held under a trust account for the 409(A) plan. Note 11 - Contingencies From time to time, the Company is subject to contingencies, including litigation, arising in the normal course of its business. While it is not possible to predict the results of such contingencies, 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. 11 Note 12 - Operating Segments The Company’s Traditional Business is one reportable segment and the other is Journal Technologies which includes Journal Technologies, Inc. and Journal Technologies (Canada) Inc. All inter-segment transactions were eliminated. Additional detail about each of the reportable segments and its income and expenses is set forth below: Overall Financial Results (000) For the three months ended December 31, 2023 and 2022 Reportable Segments Traditional Business Journal Technologies Corporate Total 2023 2022 2023 2022 2023 2022 2023 2022 Revenues Advertising $ 2,087 $ 1,990 $ — $ — $ — $ — $ 2,087 $ 1,990 Circulation 1,095 1,098 — — — — 1,095 1,098 Advertising service fees and other 705 699 — — — — 705 699 Licensing and maintenance fees — — 6,557 4,395 — — 6,557 4,395 Consulting fees — — 3,302 2,322 — — 3,302 2,322 Other public service fees — — 2,247 1,797 — — 2,247 1,797 Total operating revenues 3,887 3,787 12,106 8,514 — — 15,993 12,301 Operating expenses Salaries and employee benefits 2,549 2,218 8,798 7,413 — — 11,347 9,631 Decrease to the long-term supplemental compensation accrual ( 420 ) ( 500 ) — ( 20 ) — — ( 420 ) ( 520 ) Others 1,471 1,134 2,972 2,772 — — 4,443 3,906 Total operating expenses 3,600 2,852 11,770 10,165 — — 15,370 13,017 Income (loss) from operations 287 935 336 ( 1,651 ) — — 623 ( 716 ) Dividends and interest income — — — — 1,569 1,069 1,569 1,069 Interest expenses on note payable collateralized by real estate and other — — — — ( 11 ) ( 12 ) ( 11 ) ( 12 ) Interest expense on margin loans — — — — ( 1,131 ) ( 861 ) ( 1,131 ) ( 861 ) Gains on sales of marketable securities, net — — — — — 422 — 422 Net unrealized gains (losses) on marketable securities — — — — 14,690 24,025 14,690 24,025 Pretax income (loss) 287 935 336 ( 1,651 ) 15,117 24,643 15,740 23,927 Income tax (expense) benefit ( 55 ) ( 235 ) ( 250 ) 350 ( 2,820 ) ( 6,215 ) ( 3,125 ) ( 6,100 ) Net income (loss) $ 232 $ 700 $ 86 $ ( 1,301 ) $ 12,297 $ 18,428 $ 12,615 $ 17,827 Total assets $ 15,483 $ 45,288 $ 24,062 $ 25,202 $ 317,818 $ 275,781 $ 357,363 $ 346,271 Capital expenditures $ 5 $ 32 $ — $ 4 $ — $ — $ 5 $ 36 During the three months ended December 31, 2023, the Traditional Business had total operating revenues of $ 3,887,000 with $ 2,792,000 recognized after services were provided and $ 1,095,000 recognized ratably over the publication subscription terms, as compared with total operating revenues of $ 3,787,000 with $ 2,689,000 recognized after services were provided and $ 1,098,000 recognized ratably over the publication subscription terms in the prior year period. Total operating revenues for the Company’s software business were $ 12,106,000 with $ 5,570,000 recognized upon completion of services and $ 6,536,000 recognized ratably over the subscription periods, as compared with total operating revenues of $ 8,514,000 with $ 4,121,000 recognized upon completion of services and $ 4,393,000 recognized ratably over the subscription periods in the prior year period. 12 Approximately 76 % of the Company’s revenues during the three-month period ended December 31, 2023 were derived from Journal Technologies, as compared with 69 % in the prior year period. In addition, the Company’s revenues during the quarter were primarily from the United States with approximately 21 % from foreign countries during the three-months ended December 31, 2023. Journal Technologies’ revenues are primarily from governmental agencies. Note 13 - Subsequent Events The Company has completed an evaluation of all subsequent events through the issuance date of these financial statements and concluded that no subsequent events occurred that required recognition to the financial statements or disclosures in the Notes to Consolidated Financial Statements. 13