DAILY JOURNAL CORP

CONSOLIDATED BALANCE SHEETS

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

CONSOLIDATED STATEMENTS OF CASH FLOWS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - The Corporation and Operations

Daily Journal Corporation (“Daily Journal” or “the Company”) 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 e-filing and a website to pay traffic citations and fees online. These products are licensed or subscribed to in approximately 32 states and internationally.

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 wholly-owned subsidiary, Journal Technologies (Canada) Inc., since August 2022.* *

Note 2 – Summary of Significant Accounting Policies

In the opinion of the Company, the accompanying interim unaudited consolidated financial statements present fairly the financial position of the Company as of December 31, 2024 and September 30, 2024, its results of operations and consolidated statements of shareholders’ equity for the three-month periods ended December 31, 2024 and 2023, and cash flows for the three-month periods ended December 31, 2024 and 2023. The results of operations for the three months ended December 31, 2024 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 and in accordance with the generally accepted accounting principles in the United States. 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, 2024.

Certain reclassifications of previously reported amounts have been made to conform to the current year’s presentation. Financial monetary figures presented in the tables are reported in thousands except for the number for shares and the per share price.

The change in allowance for doubtful accounts is as follows:

Allowance for Doubtful Accounts (000)

Advertising: The Company’s policy is to expense advertising expenses as incurred, if any. There were no advertising expenses during both the three months ended December 31, 2024 and 2023 as the Company advertises itself via its own newspapers and websites.

Stock-based Compensation: In fiscal 2024, the Company implemented an Equity Incentive Plan, a share-based award plan that provides for the grant of incentive stock options, non-qualified stock options, restricted stock units, and other equity-based awards to key employees. As of December 31, 2024, there were 3,320 shares available for future grants from the 3,720 shares authorized for grant under the Equity Incentive Plan. Restricted stock unit grants generally vest ratably over two years of continuous services from the date of grant. We account for share-based compensation using the fair market value on the grant day pursuant to ASC 718.

For restricted stock units, we use the closed market price on the date of grant as their fair market value. We have not historically paid any cash dividends on our common stock and as a result do not reduce the grant-date fair value per share by the present value of dividends expected to be paid during the requisite service period for restricted stock units. We amortize the fair value of all awards on a straight-line basis over the requisite service periods, which are generally the vesting periods.

We will recognize the effect of awards for which the requisite service period is not rendered when the award is forfeited. That is, we recognize the effect of forfeitures in compensation cost when they occur. Previously recognized compensation cost for an award is reversed in the period the award is forfeited.

The following table summarized stock unit activity during the periods presented:

As of December 31, 2024, we had total unrecognized compensation cost of approximately $145,000 related to unvested restricted stock units which is expected to be amortized over a weighted average amortization period of approximately 1.56 years.

The following table summarizes stock-based compensation expense related to share-based awards which is recorded in the consolidated statements of comprehensive income:

Note 3 - New Accounting Pronouncement

During November 2023, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2023-07,Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. ASU No. 2023-07 improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses on an annual and interim basis. The amendments enable investors to develop more decision-useful financial analyses.** **ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company believes that the adoption of ASU No. 2023-07 does not have a material effect on its consolidated financial statements.

Note 4 – Right-of-Use (ROU) Asset and Liabilities

ROU: At December 31, 2024, the Company recorded a ROU asset and lease liabilities of approximately $101,000 for its operating office and equipment leases, including approximately $22,000 beyond one year. (At December 31, 2023, there were ROU asset and lease liabilities of $82,000 with $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.

Accrued Liabilities: Accrued current liabilities primarily consisted of (i) accrued vacation of $3,330,000 and $3,140,000 at December 31, 2024 and 2023, respectively, (ii) current portion of the supplemental compensation accrual of $345,000 and $355,000 at December 31, 2024 and 2023, respectively, and (iii) accrued payroll, including non-qualified compensation, and others of $2,091,000 and $1,537,000 at December 31, 2024 and 2023, respectively. Accrued long-term liabilities primarily consist of the long-term portion of the supplemental compensation accruals at December 31, 2024 and 2023, respectively.

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 service fees and other revenues, which represent primarily agency commissions received from outside newspapers in which the advertising is placed, are recognized when advertisements are published and are recorded on a net basis.

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 revenue contracts 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. For contracts containing multiple performance obligations, the Company allocates the transaction price on the basis of the relative standalone selling price of each distinct good or service, and utilizes the residual approach to estimate the standalone selling price of implementation consulting fees, whereby the standalone selling price is estimated by reference to the total transaction price less the sum of the observable standalone selling prices of its subscription software licenses, maintenance and support fees, and third-party hosting fees. These contracts include assurance-type 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 and related costs on a gross basis. The Company considers several factors to determine if it controls the good or service and therefore is the principal. These factors include (1) if we have primary responsibility for fulfilling the promise; and (2) if we have discretion in establishing price for the specified good or service. For legacy contracts with perpetual license arrangements, licenses and consulting services are recognized at point of delivery, and maintenance revenues are recognized ratably after the go-live.

The Traditional Business and Journal Technologies issue invoices that have payment terms which require payment within 30 days. Contracts do not have a significant financing component and do not have variable consideration. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the required performance services have been completed. Proceeds from subscription-type revenues, including circulation revenue, license, maintenance and support services, and hosting services, are deferred at the time of sale and are recognized on a pro-rata basis over the terms of the subscriptions or service period, and unearned proceeds are recognized within deferred subscriptions and deferred maintenance agreements and others in the consolidated balance sheets. Proceeds from consulting fees are recognized at point of delivery upon service completion, and unearned consulting fee proceeds are recorded under deferred consulting fees on the consolidated balance sheets. 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.

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. These unallocated prices primarily relate to the eFile-it™ and ePay-it™ transactions for which service fees are collected and recognized when the Company processes credit card payments on behalf of the courts via its websites through which the public e-file cases or pay traffic citations. Furthermore, there are no fulfillment costs that are capitalized for the software contracts.

Approximately 77% of the Company’s revenues for the three months ended December 31, 2024 and 76% for the three months ended December 31, 2023 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 total deferred revenues, including the long-term portion, is as follows:

Changes in total deferred revenues (000)

Note 6 - Treasury Stock and Net Income per Common Share

In June 2022, the Company received from 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. These donated shares were considered treasury stock, and the Company accounted for them using the par method which had an immaterial effect on the amount on Treasury Stock and Additional Paid-in Capital. 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 September 30, 2022. In July 2024, the Board approved the grant of 400 shares to the Company’s Chief Executive Officer, and these shares were transferred to him in December 2024. 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 1,376,852 and $1,377,026 for the three months ended December 31, 2024 and 2023, respectively.

Note 7 - Basic and Diluted Net Income Per Share

The Company did not have any common stock equivalents at December 31, 2023. At December 31, 2024, there were common stock, and restricted stock units which were about equivalent to common stocks and therefore basic and diluted net income per share were 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 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, 2024 and September 30, 2024, there were net accumulated pretax unrealized gains of $233,010,000 and $219,597,000, 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.

During the three months ended December 31, 2024, the Company recorded and included in its net income the net unrealized gains on marketable securities of $13,413,000, as compared with $14,690,000, in the prior fiscal year period. There were no purchases or sales of marketable securities during both the periods ended December 31, 2024 and 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. Mr. Munger passed away in November 2023, and the Company remains committed to using the portfolio as a source of strength in support of its operating businesses, just as it has for the past 16 years. The Board continues to work to ensure the prudent and effective management of these assets in the context of the current market and the needs of the businesses, including consultation with outside advisors to which the Board has access. The March 2024 sales of a portion of the portfolio (approximately 10%) to reduce the Company’s margin loan, are aspects of that work.

Investments in marketable securities as of December 31, 2024 and September 30, 2024 are summarized below.

Investment in Financial Instruments (000)

Note 9 - Income Taxes

For the three months ended December, 2024, the Company recorded an income tax provision of $4,000,000 on the pretax income of $14,895,000. The income tax provision consisted of tax provisions of $3,500,000 on the unrealized gains on marketable securities, $15,000 on income from foreign operations, $275,000 on income from US operations and dividend income, $10,000 for the dividends received deduction and other permanent book and tax differences, and $200,000 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, 2024 was 26.9%, after including the taxes on the unrealized gains on marketable securities.

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.

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 2022 with regard to federal income taxes and fiscal 2021 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. In addition, there were subsequent borrowings of $45.5 million to purchase additional marketable securities bringing the margin loan balance up to $75 million during fiscal 2023. In March 2024, the Company sold a portion of its marketable securities for approximately $40.6 million and used these proceeds and excess cash from operations to pay down the margin loan balance to $27.5 million at December 31, 2024.

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, 2024 was approximately 5%. 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 $1.08 million as of December 31, 2024. Each monthly installment payment is approximately $16,700.

The Company owns its facilities in Los Angeles, California. The Company also leases space for its other offices under operating leases which expire at various dates through October 2025.

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 the three months ended December 31, 2024 and 2023 were $66,000 and $70,000, respectively.

Effective January 1, 2023, the Company began sponsoring a 401(k) retirement plan and a non-qualified deferred compensation plan for its employees. The 401(k) retirement plan is a defined contribution plan available to employees meeting minimum service requirements. Eligible employees can contribute up to 100% of their current compensation to the plan subject to certain statutory limitations. The Company matches 50% of the 401(k) contribution up to 4% of total compensation. Contributions to the retirement plan were $175,000 and $176,000 for the three months ended December 31, 2024 and 2023, respectively. As of December 31, 2024, there were deferred compensation liabilities of approximately $934,000 of which $832,000 were held under a trust account for the non-qualified deferred compensation plan. There were deferred compensation liabilities of approximately $387,000 of which $379,000 were held under a trust account for the non-qualified deferred compensation plan in the prior fiscal year period.

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.

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. Corporate is presented below as a non-operating segment to reconcile segment results to the Company’s consolidated financial statement line-item totals. Additional detail about each of the reportable segments and its income and expenses is set forth below:

Overall Financial Results

For the three months ended December 31

During the three months ended December 31, 2024, the Traditional Business had total operating revenues of $4,091,000 with $3,011,000 recognized after services were provided and $1,080,000 recognized ratably over the publication subscription terms, as compared with 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 in the prior fiscal year period. Total operating revenues for the Company’s software business were $13,613,000 with $6,088,000 recognized upon completion of services and $7,525,000 recognized ratably over the subscription periods, as compared with total operating revenues of $12,106,000 with $5,570,000 recognized upon completion of services and $6,536,000 recognized ratably over the subscription periods in the prior fiscal year period.

Approximately 77% of the Company’s revenues during the three-month period ended December 31, 2024 were derived from Journal Technologies as compared with 76% in the prior fiscal year period. In addition, the Company’s revenues during the quarter were primarily from the United States with approximately 9% from foreign countries. 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.