UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



ý	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended ~~October 31, 2019~~April 30, 2020



¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File number 1-8777

VIRCO MFG. CORPORATION

(Exact Name of Registrant as Specified in its Charter)



Delaware		95-1613718
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

2027 Harpers Way, Torrance, CA		90501
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code: (310) 533-0474

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of each exchange on which registered

Common Stock, $0.01 par value per share	VIRC	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

The number of shares outstanding for each of the registrant’s classes of common stock, as of the latest practicable date:

Common Stock, $.01 par value — 15,713,549 shares as of ~~December 12, 2019.~~June 8, 2020.

TABLE OF CONTENTS



Part I. Financial Information		3
	Item 1. Financial Statements	3
	Unaudited condensed consolidated balance sheets - ~~October 31, 2019,~~April 30, 2020, January 31, ~~2019~~2020 and ~~October 31, 2018~~April 30, 2019	3
	Unaudited condensed consolidated statements of ~~income~~operations - Three months ended ~~October 31,~~April 30, 2020 and 2019 ~~and 2018~~	5
	Unaudited condensed consolidated statements of ~~income~~comprehensive loss - ~~Nine~~Three months ended ~~October 31,~~April 30, 2020 and 2019 ~~and 2018~~	6
	Unaudited condensed consolidated statements of ~~comprehensive income~~cash flows - Three months ended ~~October 31,~~April 30, 2020 and 2019 ~~and 2018~~	7
	~~Unaudited condensed consolidated statements of comprehensive income - Nine months ended October 31, 2019 and 2018~~	8
	~~Unaudited condensed consolidated statements of cash flows - Nine months ended October 31, 2019 and 2018~~	9
	Unaudited condensed consolidated statements of changes in equity and accumulated other comprehensive income (loss) - Three ~~and Nine~~ months ended ~~October 31,~~April 30, 2020 and 2019 ~~and 2018~~	108
	Notes to unaudited condensed consolidated financial statements - ~~October 31, 2019~~April 30, 2020	129
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2218
	Item 3. Quantitative and Qualitative Disclosures about Market Risk	2420
	Item 4. Controls and Procedures	2420
Part II. Other Information		2621
	Item 1. Legal Proceedings	2621
	Item 1A. Risk Factors	2621
	Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities	2621
	Item 3. Defaults Upon Senior Securities	2621
	Item 4. Mine Safety Disclosures	2621
	Item 5. Other Information	2621
	Item 6. Exhibits	2622
	EX-3.3
	EX-31.1
	EX-31.2
	EX-32.1
	EX-101 INSTANCE DOCUMENT
	EX-101 SCHEMA DOCUMENT
	EX-101 CALCULATION LINKBASE DOCUMENT
	EX-101 LABELS LINKBASE DOCUMENT
	EX-101 PRESENTATION LINKBASE DOCUMENT

PART I. Financial Information

Item 1. Financial Statements

Virco Mfg. Corporation

Unaudited Condensed Consolidated Balance Sheets


	10/31/2019		1/31/2019		10/31/2018		4/30/2020		1/31/2020		4/30/2019
	(In thousands)

Assets
Current assets
Cash	$	697	$	738	$	2,481	$	327	$	1,150	$	553
Trade accounts receivables, net	17,697		13,253		24,281		7,564		11,762		12,375
Other receivables	54		40		340		57		57		64
Income tax receivable	314		175		157		469		298		263
Inventories	42,907		47,289		42,670		58,190		43,329		63,511
Prepaid expenses and other current assets	1,601		1,616		1,547		2,413		1,746		2,532
Total current assets	63,270		63,111		71,476		69,020		58,342		79,298
Non-current assets
Property, plant and equipment
Land	3,731		3,731		3,731		3,731		3,731		3,731
Land improvements	694		688		688		734		717		688
Buildings and building improvements	51,200		51,176		51,176		51,159		51,200		51,176
Machinery and equipment	110,104		108,253		106,896		111,250		110,610		109,087
Leasehold improvements	978		830		828		1,072		990		830
Total property, plant and equipment	166,707		164,678		163,319		167,946		167,248		165,512
Less accumulated depreciation and amortization	126,684		122,758		121,254		128,520		127,351		124,159
Net property, plant and equipment	40,023		41,920		42,065		39,426		39,897		41,353
Operating lease right-of-use assets	22,251		—		—		20,487		21,325		23,295
Deferred tax assets, net	6,087		9,598		8,422		14,481		11,230		11,086
Other assets, net	8,234		8,484		8,563		8,078		8,198		8,276
Total assets	$	139,865	$	123,113	$	130,526	$	151,492	$	138,992	$	163,308

See accompanying notes to unaudited condensed consolidated financial statements.

Virco Mfg. Corporation

Unaudited Condensed Consolidated Balance Sheets


	10/31/2019			1/31/2019			10/31/2018			4/30/2020			1/31/2020			4/30/2019
	(In thousands, except share and par value data)									(In thousands, except share and par value data)

Liabilities
Current liabilities
Accounts payable	$	10,914		$	17,760		$	18,052		$	16,656		$	10,587		$	16,354
Accrued compensation and employee benefits	6,124			4,568			5,432			5,979			6,392			4,631
Current portion of long-term debt	872			5,504			6,232			10,618			878			24,226
Current portion operating lease liability	3,506			—			—			4,527			3,654			2,939
Other accrued liabilities	3,976			4,293			4,645			4,606			3,607			5,552
Total current liabilities	25,392			32,125			34,361			42,386			25,118			53,702
Non-current liabilities
Accrued self-insurance retention	1,617			1,190			1,952			1,802			1,410			1,773
Accrued pension expenses	13,426			14,487			14,530			21,365			21,310			14,218
Income tax payable	59			45			42			74			70			55
Long-term debt, less current portion	13,485			15,910			13,980			15,630			15,818			16,508
Operating lease liability, less current portion	20,778			—			—			18,854			19,787			22,221
Other long-term liabilities	559			2,329			2,377			662			661			555
Total non-current liabilities	49,924			33,961			32,881			58,387			59,056			55,330
Commitments and contingencies (Notes 6, 7 and 14)
Commitments and contingencies (Notes 6, 7 and 13)
Stockholders’ equity
Preferred stock:
Authorized 3,000,000 shares, $0.01 par value; none issued or outstanding	—			—			—			—			—			—
Common stock:
Authorized 25,000,000 shares, $0.01 par value; issued and outstanding 15,713,549 shares at 10/31/2019 and 15,541,956 at 1/31/2019 and 10/31/2018	157			155			155
Authorized 25,000,000 shares, $0.01 par value; issued and outstanding 15,713,549 shares at 4/30/2020 and 1/31/2020 and 15,541,956 at 4/30/2019										157			157			155
Additional paid-in capital	118,544			118,106			117,871			119,036			118,782			118,292
Accumulated deficit	(45,500		)	(52,192		)	(45,510		)	(54,508		)	(49,810		)	(55,259		)
Accumulated other comprehensive loss	(8,652		)	(9,042		)	(9,232		)	(13,966		)	(14,311		)	(8,912		)
Total stockholders’ equity	64,549			57,027			63,284			50,719			54,818			54,276
Total liabilities and stockholders’ equity	$	139,865		$	123,113		$	130,526		$	151,492		$	138,992		$	163,308

See accompanying notes to unaudited condensed consolidated financial statements.

Virco Mfg. Corporation

Unaudited Condensed Consolidated Statements of ~~Income~~Operations


	Three months ended				Three months ended
	10/31/2019		10/31/2018		4/30/2020			4/30/2019
	(In thousands, except per share data)				(In thousands, except per share data)
Net sales	$	66,998	$	76,809	$	17,599		$	26,893
Costs of goods sold	40,153		50,379		12,695			17,809
Gross profit	26,845		26,430		4,904			9,084
Selling, general and administrative expenses	20,476		21,469		11,931			12,681
Loss (gain) on sale of property, plant & equipment	—		—		—			—
Operating Income	6,369		4,961
Operating loss					(7,027		)	(3,597		)
Pension expense	188		296		542			188
Interest expense	603		630		404			700
Income before income taxes	5,578		4,035
Income tax expense	1,686		1,103
Net income	$	3,892	$	2,932
Loss before income taxes					(7,973		)	(4,485		)
Income tax benefits					(3,275		)	(1,418		)
Net loss					$	(4,698	)	$	(3,067	)


Net income per common share:
Net loss per common share:
Basic	$	0.25	$	0.19	$	(0.30	)	$	(0.20	)
Diluted(a)	0.25		0.19		(0.30		)	(0.20		)
Weighted average shares of common stock outstanding:
Basic	15,654		15,486		15,654			15,486
Diluted(a)	15,710		15,582		15,654			15,486

~~See accompanying notes~~(a) Net loss per common share was calculated based on basic shares outstanding due to ~~unaudited condensed consolidated financial statements.~~

~~Virco Mfg. Corporation~~

~~Unaudited Condensed Consolidated Statements~~the anti-dilutive effect on the inclusion of ~~Income~~

Nine months ended
10/31/2019 10/31/2018
(In thousands, except per share data)
Net sales $ 164,250
$ 174,180
Costs of goods sold 99,582
112,933
Gross profit 64,668
61,247
Selling, general and administrative expenses 51,714
51,900
Loss (gain) on sale of property, plant & equipment 3
(1 )
Operating income 12,951
9,348
Pension expense 564
856
Interest expense, net 2,210
1,898
Income before income taxes 10,177
6,594
Income tax expense 3,485
1,759
Net lncome $ 6,692
$ 4,835

Net income per common share:
Basic $ 0.43
$ 0.31
Diluted 0.43
0.31
Weighted average shares outstanding:
Basic 15,568
15,399
Diluted 15,621
15,491
common stock equivalent shares.

See accompanying notes to unaudited condensed consolidated financial statements.

Virco Mfg. Corporation

Unaudited Condensed Consolidated Statements of Comprehensive ~~Income~~Loss

Three months ended
10/31/2019 10/31/2018
(In thousands)

Net income $ 3,892
$ 2,932
Other comprehensive income:
Pension adjustments (net of tax of $45 and $487 at October 31, 2019 and 2018, respectively) 130
1,376
Net comprehensive income $ 4,022
$ 4,308

~~See accompanying notes to unaudited condensed consolidated financial statements.~~

~~Virco Mfg. Corporation~~

~~Unaudited Condensed Consolidated Statements of Comprehensive Income~~

Nine months ended
10/31/2019 10/31/2018
(In thousands)

Net income $ 6,692
$ 4,835
Other comprehensive income :
Pension adjustments (net of tax of $137 and $10 at October 31, 2019 and 2018, respectively) 390
27
Net comprehensive income $ 7,082
$ 4,862



	Three months ended
	4/30/2020			4/30/2019
	(In thousands)

Net loss	$	(4,698	)	$	(3,067	)
Other comprehensive income:
Pension adjustments (net of tax expense of $120 and $46 at April 30, 2020 and 2019, respectively)	345			130
Net comprehensive loss	$	(4,353	)	$	(2,937	)

See accompanying notes to unaudited condensed consolidated financial statements.

Virco Mfg. Corporation

Unaudited Condensed Consolidated Statements of Cash Flows


	Nine months ended						Three months ended
	10/31/2019			10/31/2018			4/30/2020			4/30/2019
	(In thousands)						(In thousands)
Operating activities
Net income	$	6,692		$	4,835
Adjustments to reconcile net income to net cash provided by operating activities:
Net loss							$	(4,698	)	$	(3,067	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	4,350			4,288			1,393			1,452
Non-cash lease expense	258			—			778			89
Provision for doubtful accounts	60			60			15			15
Loss (gain) on sale of property, plant and equipment	3			(1		)	—			—
Deferred income taxes	3,511			1,671			(3,251		)	(1,488		)
Stock-based compensation	686			673			254			186
Defined pension plan settlement	—			341			—			—
Amortization of net actuarial loss for pension plans	528			600			345			130
Changes in operating assets and liabilities:
Trade accounts receivable	(4,504		)	(12,956		)	4,183			863
Other receivables	(15		)	(311		)	—			(24		)
Inventories	4,382			(613		)	(14,861		)	(16,222		)
Income taxes	(124		)	13			(167		)	(77		)
Prepaid expenses and other current assets	265			(199		)	(546		)	(709		)
Accounts payable and accrued liabilities	(5,869		)	4,418			6,668			566
Net cash provided by operating activities	10,223			2,819
Net cash used in operating activities							(9,887		)	(18,286		)
Investing activities:
Capital expenditures	(2,963		)	(3,319		)	(488		)	(1,219		)
Proceeds from sale of property, plant and equipment	—			3			—			—
Net cash used in investing activities	(2,963		)	(3,316		)	(488		)	(1,219		)
Financing activities:
Borrowing from long-term debt	30,923			51,033			11,413			19,564
Repayment of long-term debt	(37,980		)	(47,503		)	(1,861		)	(244		)
Payment on deferred financing costs	—			(124		)	—			—
Tax withholding payments on share-based compensation	(244		)	(265		)	—			—
Cash dividends paid	—			(697		)	—			—
Net cash (used in) provided by financing activities	(7,301		)	2,444
Net cash provided by financing activities							9,552			19,320

Net (decrease) increase in cash	(41		)	1,947
Net decrease in cash							(823		)	(185		)
Cash at beginning of period	738			534			1,150			738
Cash at end of period	$	697		$	2,481		$	327		$	553

See accompanying notes to unaudited condensed consolidated financial statements.

Virco Mfg. Corporation

Unaudited Consolidated Statements of Changes in Equity and Accumulated Other Comprehensive Income (Loss)


	Three-Month Period Ended October 31, 2019													Three-Month Period Ended April 30, 2020

	Common Stock													Common Stock
In thousands, except share data	Shares	Amount		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive income			Total Stockholder's Equity		Shares	Amount		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholder's Equity
Balance at August 1, 2019	15,713,549	$	157	$	118,282	$	(49,392	)	$	(8,782	)	$	60,265
Net income	—	—		—		3,892			—			3,892
Balance at February 1, 2020														15,713,549	$	157	$	118,782	$	(49,810	)	$	(14,311	)	$	54,818
Net loss														—	—		—		(4,698		)	—			(4,698		)
Cash dividends	—	—		—		—			—			—		—	—		—		—			—			—
Pension adjustments, net of tax effect of $45	—	—		—		—			130			130
Pension adjustments, net of tax effect of $120														—	—		—		—			345			345
Shares vested and others	—	—		—		—			—			—		—	—		—		—			—			—
Stock compensation expense	—	—		262		—			—			262		—	—		254		—			—			254
Balance at October 31, 2019	15,713,549	$	157	$	118,544	$	(45,500	)	$	(8,652	)	$	64,549
Balance at April 30, 2020														15,713,549	$	157	$	119,036	$	(54,508	)	$	(13,966	)	$	50,719

Three-Month Period Ended October 31, 2018

Common Stock
In thousands, except share data Shares Amount Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive income Total Stockholder's Equity
Balance at August 1, 2018 15,541,956
$ 155
$ 117,636
$ (48,208 ) $ (10,608 ) $ 58,975
Net income
—
—
—
2,932
—
2,932
Cash dividends —
—
—
(234 ) —
(234 )
Pension adjustments, net of tax effect of $487 —
—
—
—
1,376
1,376
Shares vested and others —
—
—
—
—
—
Stock compensation expense —
—
235
—
—
235
Balance at October 31, 2018 15,541,956
$ 155
$ 117,871
$ (45,510 ) $ (9,232 ) $ 63,284


	Nine-Month Period Ended October 31, 2019															Three-Month Period Ended April 30, 2019

	Common Stock															Common Stock
In thousands, except share data	Shares	Amount		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive income			Total Stockholder's Equity			Shares	Amount		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholder's Equity
Balance at February 1, 2019	15,541,956	$	155	$	118,106		$	(52,192	)	$	(9,042	)	$	57,027		15,541,956	$	155	$	118,106	$	(52,192	)	$	(9,042	)	$	57,027
Net income	—	—		—			6,692			—			6,692
Net loss																—	—		—		(3,067		)	—			(3,067		)
Cash dividends	—	—		—			—			—			—			—	—		—		—			—			—
Pension adjustments, net of tax effect of $137	—	—		—			—			390			390
Pension adjustments, net of tax effect of $46																—	—		—		—			130			130
Shares vested and others	171,593	2		(248		)	—			—			(246		)	—	—		—		—			—			—
Stock compensation expense	—	—		686			—			—			686			—	—		186		—			—			186
Balance at October 31, 2019	15,713,549	$	157	$	118,544		$	(45,500	)	$	(8,652	)	$	64,549
Balance at April 30, 2019																15,541,956	$	155	$	118,292	$	(55,259	)	$	(8,912	)	$	54,276

Nine-Month Period Ended October 31, 2018

Common Stock
In thousands, except share data Shares Amount Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive income Total Stockholder's Equity
Balance at February 1, 2018 15,357,457
$ 154
$ 117,465
$ (49,648 ) $ (9,259 ) $ 58,712
Net income
—
—
—
4,835
—
4,835
Cash dividends —
—
—
(697 ) —
(697 )
Pension adjustments, net of tax effect of $10 —
—
—
—
27
27
Shares vested and others 184,499
1
(267 ) —
—
(266 )
Stock compensation expense —
—
673
—
—
673
Balance at October 31, 2018 15,541,956
$ 155
$ 117,871
$ (45,510 ) $ (9,232 ) $ 63,284

See accompanying notes to unaudited condensed consolidated financial statements.

VIRCO MFG. CORPORATION

Notes to unaudited Condensed Consolidated Financial Statements

~~October 31, 2019~~April 30, 2020

Note 1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements and are presented in accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, ~~2019~~2020 (“Form 10-K”). In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three ~~and nine~~ months ended ~~October 31, 2019,~~April 30, 2020, are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, ~~2020.~~2021. The balance sheet at January 31, ~~2019,~~2020, has been derived from the audited consolidated financial statements at that date, but does not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. All references to the “Company” refer to Virco Mfg. Corporation and its subsidiaries.

Note 2. Seasonality and Management Use of Estimates

The market for educational furniture is marked by extreme seasonality, with approximately 50% of the Company’s total sales typically occurring from June to August each year, the Company’s peak season. Hence, the Company typically builds and carries significant amounts of inventory during and in anticipation of this peak summer season to facilitate the rapid delivery requirements of customers in the educational market. This requires a large up-front investment in inventory, labor, storage and related costs as inventory is built in anticipation of peak sales during the summer months. As the capital required for this build-up generally exceeds cash available from operations, the Company has generally relied on third-party bank financing to meet cash flow requirements during the build-up period immediately preceding the peak season. In addition, the Company typically is faced with a large balance of accounts receivable during the peak season. This occurs for two primary reasons. First, accounts receivable balances typically increase during the peak season as shipments of products increase. Second, many customers during this period are educational institutions and government entities, which tend to pay accounts receivable slower than commercial customers.

The Company’s working capital requirements during and in anticipation of the peak summer season require management to make estimates and judgments that affect assets, liabilities, revenues and expenses, and related contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to market demand, labor costs and stocking inventory. Significant estimates made by management include, but are not limited to, valuation of inventory; deferred tax assets and liabilities; useful lives of property, plant and equipment; liabilities under pension, warranty, self-insurance and environmental claims; and the accounts receivable allowance for doubtful accounts. Due to the inherent uncertainty involved in making assumptions and estimates, events and changes in circumstances arising after April 30, 2020, including those resulting from the impacts of the COVID-19 pandemic, may result in actual outcomes that differ from those contemplated by our assumptions and estimates.

Note 3. New Accounting Pronouncements

Recently Adopted Accounting Updates

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. This update simplifies various aspects related to accounting for income taxes, removes certain exceptions to the general principles in ASC 740, and clarifies and amends existing guidance to improve consistent application. The Company adopted ~~Accounting Standards Codification (“ASC”) 842 -~~ ~~Leases~~,this ASU as of February 1, ~~2019, using transition relief to~~2020 and the modified retrospective approach. The transition relief to the modified retrospective approach allows the recording of existing leases at adoption and recognizing a cumulative-effect adjustment to the opening balance of retained earnings on the adoption date. As a result, the Company did not restate comparative periods in transition to ASC 842 and instead reported comparative periods under ASC 840 - ~~Leases~~. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. Further, the Company did not elect the practical expedient to use hindsight in determining the lease term and in assessing impairment of right-of-use (“ROU”) assets. The Company has elected to account for leases with an original term of 12 months or less that do not contain a purchase option as short-term leases.

Adoption of the new standard resulted in the recording of ROU assets and lease liabilities of approximately $23.9 million and $25.6 million respectively, as of February 1, 2019. The difference between the ROU assets and lease liabilities was due to previous deferred rent balances that were removed and offset against the ROU asset under ASC 842. The adoption of this standard did not ~~materially impact~~have a material effect on our ~~interim unaudited consolidated statement of operations, shareholders’ equity or cash flows. See~~ ~~Note 6~~ ~~for additional disclosures.~~

~~Leases~~

The Company determines if an arrangement is a lease at inception. Operating leases in which the Company is the lessee are included in operating lease ROU assets and operating lease liabilities in the interim unaudited condensed consolidated ~~balance sheet. The Company does not have any finance leases, as a lessee, and no long-term leases for which it is the lessor.~~

ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the reasonably certain lease term. As most of the Company’s leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and reduced by lease incentives, such as tenant improvement allowances. The Company’s lease terms include options to extend or terminate the lease only when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

The Company has elected the practical expedient to account for non-lease components and the lease components to which they relate, as a single lease component for the following asset classes: (i) Buildings, (ii) Equipment, and (iii) Automobiles.financial statements.

In ~~June~~August 2018, the FASB issued ASU ~~2018-07,~~2018-13, ~~Compensation - Stock compensation~~Fair Value Measurement (Topic ~~718~~820) which ~~simplifies several aspects~~modifies the disclosure requirements of fair value measurements in Topic 820, Fair Value Measurement. For public companies the ASU removes disclosure requirements for transfers between Level 1 and Level 2 of the ~~accounting~~fair value hierarchy, the policy for ~~nonemployee share-based payment transactions resulting from expanding~~timing of transfers between levels and the ~~scope of Topic 718~~valuation process for Level 3 fair value measurements. The ASU modifies the disclosure requirements

for investments in certain entities that calculate net asset value and clarifies that the measurement uncertainty disclosure is to ~~include share-based payment transactions for acquiring goods and services from nonemployees. Some~~communicate information about the uncertainty in measurement as of the ~~areas~~reporting date. The ASU adds the disclosure requirement for ~~simplification apply only to nonpublic entities. The amendments specify that Topic 718 applies to all share-based payment transactions~~changes in ~~which a grantor acquires goods or services to be used or consumed~~unrealized gains and losses for the period included in ~~a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments~~other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to ~~effectively provide (1) financing to~~develop Level 3 fair value measurements. The Company adopted this ASU as of February 1, 2020 and the ~~issuer or (2) awards granted in conjunction with selling goods or services to customers as part~~adoption of this standard did not have a ~~contract accounted~~material effect on our condensed consolidated financial statements.

Recently Issued Accounting Updates

In August 2018, the FASB issued Accounting Standards Update No. 2018-14 (ASU 2018-14), Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20), which amends the current disclosure requirements regarding defined benefit pensions and other post retirement plans, and allows for ~~under Topic 606,~~ ~~Revenue from Contracts with Customers. The amendments in this Update are~~the removal of certain disclosures, while adding certain new disclosure requirements. This standard is effective ~~for public business entities~~ for fiscal years beginning after December 15, ~~2018, including interim periods within that fiscal year. Early adoption is permitted.~~2020 and allows for early adoption. The Company ~~adopted this ASU effective February 1, 2019. The adoption of~~is currently evaluating the effect the standard ~~did not materially impact~~will have on the ~~Condensed Consolidated Statements of Operations, Comprehensive Income or Cash Flows~~consolidated financial statements and ~~Statement of Stockholders' Equity and Comprehensive Income (Loss).~~related disclosures.

~~Recently Issued Accounting Updates~~

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaces the incurred loss impairment methodology for measuring and recognizing credit losses with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The adoption date, as modified by the recently issued ASU 2019-10 discussed below, will be for the fiscal year ending after December 15, 2022 and interim periods therein. The Company ~~does not believe there~~is currently evaluating the effect the standard will ~~be a material impact to~~have on the consolidated financial statements ~~as a result of adopting this ASU.~~and related disclosures.

In November 2019, the FASB issued ASU 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates. ASU 2019-10 moves the effective date for certain previously issued amendments to later dates, depending on the filing status of the respective entity. Specifically, due to the amendment and the Company’s status as a smaller reporting company, the new effective dates for relevant previously issued amendments not yet adopted by the Company relate to ASU 2016-13 as described above.

~~In August 2018, the FASB issued ASU 2018-13,~~ ~~Fair Value Measurement~~ (~~Topic 820) which modifies the disclosure requirements of fair value measurements in Topic 820,~~ ~~Fair Value Measurement~~. For public companies the ASU removes disclosure requirements for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation process for Level 3 fair value measurements. The ASU modifies the disclosure requirements for investments in certain entities that calculate net asset value and clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The ASU adds the disclosure requirement for changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2019 including interim periods within that fiscal year. Early adoption is permitted. The Company does not believe there will be a material impact to the financial statements as a result of adopting this ASU.

Other recently issued accounting updates are not expected to have a material impact on the Company’s consolidated financial statements.

Note 4. ~~Revenue Recognition~~

~~Adoption of ASC Topic 606, “Revenues from Contracts with Customers”~~

On February 1, 2018, the Company adopted ASC Topic 606 with no significant impact to its financial position or results of operations, using the modified retrospective method. Results for reporting periods beginning after February 1, 2018 are presented under ASC Topic 606. The Company had no adjustment to opening retained earnings as of February 1, 2018 as a result of adopting ASC Topic 606. The adoption of the standard did not materially impact the Condensed Consolidated Statements of Operations and Comprehensive Income or Cash Flows.

Revenue Recognition

The Company manufactures, markets and distributes a wide variety of school and office furniture to wholesalers, distributors, educational institutions and governmental entities. Revenue is recorded for promised goods or services when control is transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.

The Company's sales generally involve a single performance obligation to deliver goods pursuant to customer purchase orders. Prices for our products are based on published price lists and customer agreements. The Company has determined that the performance obligations are satisfied at a point in time when the Company completes delivery per the customer contract. The majority of sales are free on board ("FOB") destination where the destination is specified per the customer contract and may include delivering the furniture into the classroom, school site or warehouse. Sales of furniture that are sold FOB factory are typically made to resellers of our product who in turn provide logistics to the ultimate customer. Once a product has been delivered per the shipping terms, the customer is able to direct the use of, and obtain substantially all of the remaining benefits from, the asset. The Company considers control to have transferred upon shipment or delivery in accordance with shipping terms because the Company has a present right to payment at that time, the customer has legal title to the asset, the Company has transferred physical possession of the asset, and the customer has significant risks and rewards of ownership of the asset.

Sales are recorded net of discounts, sales incentives and rebates, sales taxes and estimated returns and allowances. The Company offers sales incentives and discounts through various regional and national programs to our customers. These programs include product rebates, product returns allowances and trade promotions. Variable consideration for these programs is estimated in the transaction price at contract inception based on current sales levels and historical experience using the expected value method, subject to constraint.

The Company generates revenue primarily by manufacturing and distributing products through ~~resellers~~direct-to-customers and ~~direct-to-customers.~~resellers. Control transfers to both resellers and direct customers at a point in time when the delivery process is complete as determined by the corresponding shipping terms. Therefore, we do not consider them to be meaningfully different revenue streams given similarities in the nature of the products, performance obligation and distribution processes. Sales are predominately in the United States and to a similar class of customer. We do not manage or evaluate the business based on product line or any other discernable category.

For product produced by and sourced from third parties, management has determined that it is the principal in all cases, since it (i) bears primary responsibility for fulfilling the promise to the customer; (ii) bears inventory risk before and/or after the good or service is transferred to the customer; and (iii) has discretion in establishing the price for the sale of good or service to the customer.

Note 5. Inventories

Inventories are valued at the lower of cost (determined on a first-in, first-out basis) or net realizable value and includes material, labor and factory overhead. The Company maintains valuation allowances for estimated slow-moving and obsolete inventory to reflect the difference between the cost of inventory and the estimated net realizable value. Valuation allowances for slow-moving and obsolete inventory are determined through a physical inspection of the product in connection with a physical inventory, a review of slow-moving product and consideration of active marketing programs. The market for education furniture is traditionally driven by value, not style, and the Company has not typically incurred significant obsolescence expenses. If market conditions are less favorable than those anticipated by management, additional valuation allowances may

be required. Due to reductions in sales volume in the past years, the Company’s manufacturing facilities are operating at reduced levels of capacity. The Company records the cost of excess capacity as a period expense, not as a component of capitalized inventory valuation.

The following table presents a breakdown of the Company’s inventories as of ~~October 31, 2019,~~April 30, 2020, January 31, ~~2019~~2020 and ~~October 31, 2018:~~April 30, 2019:

10/31/2019 1/31/2019 10/31/2018
(in thousands)

Finished goods $ 15,380
$ 15,908
$ 14,552
WIP 15,567
18,820
16,633
Raw materials 11,960
12,561
11,485
Inventories $ 42,907
$ 47,289
$ 42,670

~~Management continually monitors production costs, material costs and inventory levels to determine that inventories are fairly stated.~~



	4/30/2020		1/31/2020		4/30/2019
	(in thousands)

Finished goods	$	27,348	$	15,401	$	26,546
WIP	19,159		15,957		24,009
Raw materials	11,683		11,971		12,956
Total inventories	$	58,190	$	43,329	$	63,511

Note 6. Leases

The Company has operating leases on real property, equipment, and automobiles that expire at various dates. The Company determines if an arrangement is a lease at inception and assesses classification of the lease at commencement. All of the Company’s leases are classified as operating leases, as a lessee. The Company uses the implicit rate when readily determinable, or the incremental borrowing rate. Our incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments using company specific credit spreads. The Company’s lease terms include options to extend or terminate the lease only when it is reasonably certain that we will exercise that option. Lease expense for our operating leases is recognized on a straight-line basis over the lease term.

The Company has an operating lease for its corporate office, manufacturing and distribution facility located in Torrance, CA, currently with a remaining lease term through April 30, 2025. The Company leases equipment under a 5-year operating lease arrangement. The Company has the option of buying the assets at the end of the lease period at a price that does not result in the Company being reasonably certain of exercising the option. In addition, the Company leases trucks, automobiles, and forklifts under operating leases that include certain fleet management and maintenance services. Certain of the leases contain renewal or purchase options and require payment for property taxes and insurance. ~~The Company records lease expense on a straight-line basis based on the contractual lease payments.~~ Tenant improvements are capitalized and depreciated over the remaining life of the applicable lease, and related tenant allowances are recorded as a reduction to the ROU asset.

In accordance with ASC 842, quantitative information regarding our leases is as follows:


	Three-Months Ended			Nine-Months Ended
	10/31/2019			10/31/2019			Three-Months Ended
	(in thousands)						4/30/2020			4/30/2019
							(in thousands)
Operating lease cost	$	1,365		$	4,065		$	1,440		$	1,380
Short-term lease cost	115			251			36			54
Short-term sublease income	(30		)	(60		)	(10		)	(10		)
Variable lease cost (1)							455			448
Total lease cost	$	1,450		$	4,256		$	1,921		$	1,872

Other operating leases information:

Cash paid for amounts included in the measurement of lease liabilities				$	1,365,000		$	662,000		$	1,291,000
Right-of-use assets obtained in exchange for new lease liabilities				$	384,000		$	270,000		394,000
Weighted-average remaining lease term (years)				5.2			4.7			5.7
Weighted-average discount rate				6.37		%	6.4		%	6.4		%

(1) Subsequent to the issuance of the Company’s condensed consolidated financial statements as of April 30, 2019, management identified an immaterial correction related to the disclosure of certain variable lease payments. Variable lease expense for the three-months ended April 30, 2019 did not previously include $448,000 of variable lease payments for property taxes, insurance and common area maintenance related to triple net leases. Management corrected the disclosure related to variable lease expense in the table above for the three-months ended April 30, 2019 and, except for this change, the correction had no impact upon the Company’s condensed consolidated financial statements

Minimum future lease payments ~~(in thousands)~~ for operating leases in effect as of ~~October 31, 2019,~~April 30, 2020, are as follows:

Operating Lease

Remaining of 2020 $ 1,370
2021 4,973
2022 5,582
2023 5,149
2024 5,192
Thereafter
6,687
Remaining balance of lease payments $ 28,953

Short-term lease liabilities $ 3,506
Long-term lease liabilities 20,778
Total lease liabilities $ 24,284

Difference between undiscounted cash flows and discounted cash flows $ 4,669

~~In accordance with ASC 840, future minimum lease payments under non-cancelable leases as of January 31, 2019 were as follows (in thousands):~~

Year ending January 31,
2020 $ 5,045
2021 4,405
2022 5,041
2023 5,040
2024 5,192
Thereafter 6,687
Total minimum lease payments $ 31,410

~~In accordance with ASC 840, rent expense for operating leases for the three and nine months ended October 31, 2018 was $1,543,000 and $4,512,000 , respectively.~~



	Operating Lease
	(in thousands)
Remaining of 2021	$	4,414
2022	5,708
2023	5,275
2024	5,214
2025	5,370
Thereafter	1,350
Remaining balance of lease payments	$	27,331

Short-term lease liabilities	$	4,527
Long-term lease liabilities	18,854
Total lease liabilities	$	23,381

Difference between undiscounted cash flows and discounted cash flows	$	3,950

Note 7. Debt

Outstanding balances for the Company’s long-term debt were as ~~follows (in thousands):~~follows:


	10/31/2019		1/31/2019		10/31/2018		4/30/2020		1/31/2020		4/30/2019
							(in thousands)
Revolving credit line	$	7,412	$	14,858	$	13,245	$	19,740	$	9,969	$	33,354
Other	6,945		6,556		6,967		6,508		6,727		7,380
Total debt	$	14,357	$	21,414	$	20,212	$	26,248	$	16,696	$	40,734
Less current portion	872		5,504		6,232		10,618		878		24,226
Non-current portion	$	13,485	$	15,910	$	13,980	$	15,630	$	15,818	$	16,508

The Company has a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association, as administrative agent and lender (“PNC”). The ~~credit agreement~~Credit Agreement has been amended twenty times since it’s origination in 2011 through fiscal 2019, which, among other things, extended the maturity date of the Credit Agreement for three years until March 19, 2023.

The ~~Revolving~~ Credit ~~Facility~~Agreement is an asset-based line of credit that is subject to a borrowing base limitation and generally provides for advances of up to 85% of eligible accounts receivable, plus a percentage equal to the lesser of 60% of the value of eligible inventory or 85% of the liquidation value of eligible inventory, plus $15,000,000 from January 1 through ~~June 30~~July of each year, minus undrawn amounts of letters of credit and reserves. The ~~Revolving~~ Credit ~~Facility~~Agreement is secured by substantially all of the ~~Borrowers',~~Company's, as defined, personal property and certain of the ~~Borrowers'~~Company's real property. The principal amount outstanding under the Credit Agreement and any accrued and unpaid interest is due no later than March 19, 2023, and the ~~Revolving~~ Credit ~~Facility~~Agreement is subject to certain prepayment penalties upon earlier termination of the ~~Revolving~~ Credit ~~Facility.~~Agreement. Prior to the maturity date, principal amounts outstanding under the Credit Agreement may be repaid and reborrowed at the option of the Borrowers without premium or penalty, subject to borrowing base limitations, seasonal adjustments and certain other conditions.

The ~~Revolving~~ Credit ~~Facility~~Agreement bears interest, at the Borrowers' option, at either the Alternate Base Rate (as defined in the Credit Agreement) or the Eurodollar Currency Rate (as defined in the Credit Agreement), in each case plus an applicable margin. The applicable margin for Alternate Base Rate loans is a percentage within a range of 0.75% to 1.25%, and the applicable margin for Eurodollar Currency Rate loans is a percentage within a range of 1.75% to 2.25%, in each case based on the EBITDA of the ~~Borrowers~~Borrower's at the end of each fiscal quarter and may be increased at PNC's option by 2.0% during the continuance of an event of default. Accrued interest with respect to principal amounts outstanding under the Credit Agreement is payable in arrears on a monthly basis for Alternative Base Rate loans, and at the end of the applicable interest period but at most every three months for Eurodollar Currency Rate loans. The interest rate at ~~October 31, 2019~~April 30, 2020 was ~~5.75%~~4.50%.

On March 19, 2018, the Company entered into Amendment No. 17, which amended the Credit Agreement by (i) extending the maturity date of the Credit Agreement for three years until March 19, 2023. In connection with the Seventeenth Amendment, the Borrowers also agreed to pay to PNC Bank a non-refundable extension fee of $250,000.

In March 2019, the Company entered into Amendment No. 19 which, among other things, (i) increased the Maximum Revolving Advance Amount to $65,000,000 with seasonal adjustments to the credit limit and subject to borrowing base limitations, (ii) increased seasonal advance to $15,000,000 from January to July of each year, (iii) increased equipment loan to $2,000,000, (iv) ~~to reduce~~reduced borrowings under the line to less than or equal to $10,000,000 for a period of 30 consecutive days during the fourth quarter of each fiscal year. In ~~connection with~~April 2019, the Company entered into Amendment No. ~~19,~~20 which, among other things, waived the ~~Borrowers also agreed~~covenant violation for the fourth quarter of fiscal 2019, amended the minimum EBITDA covenant and the fixed charge coverage ratio for fiscal 2020, and eliminated the Company’s ability to pay dividends or repurchase stock during fiscal 2020. For fiscal year beginning February 1st, 2020, the covenant for the fixed charge coverage ratio is 1.10 to 1.00 for each consecutive four fiscal quarter period of Borrowers ending thereafter. The Company was in compliance with its financial covenants as of April 30, 2020.

To date the impact of COVID-19 on liquidity has been to moderate the seasonal increase in accounts receivable and production of inventory for summer delivery. Both the increase in accounts receivable and inventory are traditionally financed through the Company’s line of credit with PNC ~~Bank~~Bank. Reductions in receivables and inventory were substantially offset by a non-refundable fee of $24,000. The clean-down provision allows the Company to maintain a minimum outstanding balance to be carried on an uninterrupted period extending beyond one year and ultimately due at the scheduled maturity datereduction in ~~March 2023. As a result of Amendment No. 19, the clean-down limit was increased to $10,000,000, thereby allowing the Company to refinance an additional $2,000,000 of its short-term borrowings~~borrowing under the line ~~of credit on a long-term basis at January 31, 2019.~~with PNC Bank.

Events of default (subject to certain cure periods and other limitations) under the Credit Agreement include, but are not limited to, (i) non-payment of principal, interest or other amounts due under the Credit Agreement, (ii) the violation of terms, covenants, representations or warranties in the Credit Agreement or related loan documents, (iii) any event of default under

agreements governing certain indebtedness of the Borrowers and certain defaults by the Borrowers under other agreements that would materially adversely affect the Borrowers, (iv) certain events of bankruptcy, insolvency or liquidation involving the Borrowers, (v) judgments or judicial actions against the Borrowers in excess of $250,000, subject to certain conditions, (vi) the failure of the Company to comply with Pension Benefit Plans (as defined in the Credit Agreement), (vii) the invalidity of loan

documents pertaining to the Credit Agreement, (viii) a change of control of the Borrowers and (ix) the interruption of operations of any of the Borrowers' manufacturing facilities for five consecutive days during the peak season or 15 consecutive days during any other time, subject to certain conditions. ~~For the year ended January 31, 2019, the Company was in violation of the minimum fixed charge coverage ratio resulting in an Event of Default.~~

In April 2019, the Company entered into Amendment No. 20 which, among other things, waived the covenant violation for the fourth quarter of fiscal 2019, amended the minimum EBITDA covenant and the fixed charge coverage ratio for fiscal 2020, and eliminated the Company’s ability to pay dividends or repurchase stock commencing on February 1, 2019 and ending on January 31, 2020. The fixed charge coverage ratio is as follows: (i) for the consecutive two fiscal quarter period ending July 31, 2019, 2.25 to 1.00, and (ii) for each consecutive four fiscal quarter period of Borrowers ending thereafter, 1.10 to 1.00. Minimum EBITDA for the three consecutive fiscal month period ending on April 30, 2019, may not be less than (negative) $5,000,000. In addition, certain restrictions were placed upon the Company’s capital expenditures limiting the amount: (a) in the first fiscal quarter ending April 30, 2019 in an aggregate amount in excess of $900,000, (b) in the consecutive two fiscal quarter periods ending July 31, 2019 in an aggregate amount in excess of $1,900,000, (c) in the consecutive three fiscal quarter period ended October 31, 2019 in an aggregate amount in excess of (i) $3,900,000, if an only if, the Borrowers’ EBITDA for the consecutive two fiscal quarter period ending July 31, 2019 exceeds $8,500,000 or (ii) $2,900,000 if Borrowers’ EBITDA for such period is less than or equal to $8,500,000 and (d) in the consecutive four fiscal quarter period ending January 31, 2020 or any fiscal year thereafter, in an aggregate amount for all Borrowers in excess of $8,000,000. In connection with Amendment No. 20 the Borrowers also agreed to pay to PNC Bank a non-refundable fee of $125,000. The Company believes that normal operating cash flow will allow it to meet the clean down requirement with no adverse impact on the Company's liquidity. The Company was in compliance with its financial covenants as of October 31, 2019.

Pursuant to the Credit Agreement, substantially all of the Borrowers' accounts receivable are automatically and promptly swept to repay amounts outstanding under the ~~Revolving~~ Credit ~~Facility~~Agreement upon receipt by the Borrowers. Due to this automatic liquidating nature of the ~~Revolving~~ Credit ~~Facility,~~Agreement, if the Borrowers breach any covenant, violate any representation or warranty or suffer a deterioration in their ability to borrow pursuant to the borrowing base calculation, the Borrowers may not have access to cash liquidity unless provided by PNC at its discretion. In addition, certain of the covenants and representations and warranties set forth in the Credit Agreement contain limited or no materiality thresholds, and many of the representations and warranties must be true and correct in all material respects upon each borrowing, which the Borrowers expect to occur on an ongoing basis. There can be no assurance that the Borrowers will be able to comply with all such covenants and be able to continue to make such representations and warranties on an ongoing basis.

The Company's line of credit with PNC is structured to provide seasonal credit availability during the Company's peak summer season. Approximately ~~$10,700,000~~$12,343,000 was available for borrowing as of ~~October 31, 2019.~~April 30, 2020.

Management believes that the carrying value of debt approximated fair value at ~~October 31,~~April 30, 2020 and 2019, ~~and 2018,~~ as all of the long-term debt bears interest at variable rates based on prevailing market conditions.

Note 8. Income Taxes

The Company recognizes deferred income taxes under the asset and liability method of accounting for income taxes in accordance with the provisions of ASC No. 740, Accounting for Income Taxes. Deferred income taxes are recognized for differences between the financial statement and tax basis of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the realizability of deferred tax assets, the Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income or reversal of deferred tax liabilities during the periods in which those temporary differences become deductible. The Company maintains a partial valuation allowance of $1,075,000, $1,183,000 and $1,907,000 as of April 30, 2020, January 31, 2020 and April 30, 2019 to reduce against certain state deferred tax assets that the Company does not believe it is more-likely-than-not to realize.

On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The CARES Act modified the limitation for business interest expense deduction and the new limitation has increased from 30 to 50 percent of adjusted taxable income. Historically deferred taxes related to interest expense limitation were fully offset by a valuation allowance. The Company performed an analysis of the impact of the CARES Act and calculated a tax benefit of approximately

$200,000 which was driven by the release of the valuation allowance related to the business interest limitation.

The January 31, 2016 and subsequent years remain open for examination by the IRS and state tax authorities. The Company is not currently under any state examination. The Company is currently under IRS examination for its fiscal year ended January 31, 2016 Federal tax return.

Note 9. Net ~~income~~loss per Share


	Three Months Ended				Nine Months Ended				Three Months Ended
	10/31/2019		10/31/2018		10/31/2019		10/31/2018		4/30/2020			4/30/2019
	(In thousands, except per share data)								(In thousands, except per share data)

Net income	$	3,892	$	2,932	$	6,692	$	4,835
Net loss									$	(4,698	)	$	(3,067	)

Weighted average shares of common stock outstanding	15,654		15,486		15,568		15,399		15,654			15,486
Net effect of dilutive shares - based on the treasury stock method using average market price	56		96		53		92		—			—
Totals	15,710		15,582		15,621		15,491		15,654			15,486

Net income per share - basic	$	0.25	$	0.19	$	0.43	$	0.31
Net income per share - diluted	$	0.25	$	0.19	$	0.43	$	0.31
Net loss per share - basic									$	(0.30	)	$	(0.20	)
Net loss per share - diluted (a)									$	(0.30	)	$	(0.20	)

(a) All exercisable and non-exercisable restricted stock awards and/or units were not included in the computation of diluted net loss per share at April 30, 2020 and 2019, because their inclusion would have been anti-dilutive. The number of stock awards and/or units outstanding, which met this anti-dilutive criterion for the three months ended April 30, 2020 and 2019, was 75,000 and 180,000, respectively.

Note 10. Stock-Based Compensation

Stock Incentive Plan

The Company's two stock plans are the 2019 Employee Stock Incentive Plan (the “2019 Plan”) and the 2011 Employee Incentive Stock Plan (the “2011 Plan”).

Under the 2019 Plan, the Company may grant an aggregate of 1,000,000 shares to its employees in the form of restricted stock units and non-employee directors in the form of restricted stock awards. Restricted stock units and awards granted under the 2019 Plan are expensed ratably over the vesting period of the awards. The Company determines the fair value of its restricted stock units or awards and related compensation expense as the difference between the market value of the units or awards on the date of grant less the exercise price of the units or awards granted. During the ~~nine-month~~three-month periods ended ~~October 31, 2019,~~April 30, 2020, the Company granted ~~228,000 units,~~0 awards, vested 0 shares according to their terms and forfeited 0 shares under the 2019 Plan. As of ~~October 31, 2019,~~April 30, 2020, there were approximately 772,000 shares available for future issuance under the 2019 Plan.

Under the 2011 Plan, the Company may grant an aggregate of 2,000,000 shares to its employees in the form of restricted stock units and non-employee directors in the form of restricted stock awards. Restricted stock units and awards granted under the 2011 Plan are expensed ratably over the vesting period of the awards. The Company determines the fair value of its restricted stock units or awards and related compensation expense as the difference between the market value of the units or awards on the date of grant less the exercise price of the units or awards granted. During the ~~nine-month~~three-month periods ended ~~October 31, 2019,~~April 30, 2020, the Company granted ~~59,385~~0 restricted awards to non-employee directors and ~~260,000~~0 units to its employees; vested ~~55,555~~0 stock awards and ~~168,000~~0 units according to their terms and forfeited ~~24,000~~0 stock units under the 2011 Plan. As of ~~October 31, 2019,~~April 30, 2020, there were approximately ~~892~~32,892 shares available for future issuance under the 2011 Plan.

During the three months ended ~~October 31, 2019,~~April 30, 2020, stock-based compensation expense related to restricted stock units and awards recognized in cost of goods sold and selling, general and administrative expenses was ~~$74,000~~$63,000 and ~~$189,000,~~191,000, respectively. During the three months ended ~~October 31, 2018,~~April 30, 2019, stock-based compensation expense related to restricted stock units and/or awards recognized in cost of goods sold and selling, general and administrative expenses was ~~$60,000~~$59,000 and ~~$175,000,~~127,000, respectively.

During the nine months ended October 31, 2019, stock-based compensation expense related to restricted stock awards recognized in cost of goods sold and selling, general and administrative expenses was $190,000 and $496,000, respectively. During the nine months ended October 31, 2018, stock-based compensation expense related to restricted stock awards recognized in cost of goods sold and selling, general and administrative expenses was $178,000 and $495,000, respectively.

As of ~~October 31, 2019,~~April 30, 2020, there was ~~$3,073,000~~$2,435,000 of unrecognized compensation expense related to unvested restricted stock units and/or awards, which is expected to be recognized over a weighted average period of approximately 32 years.

~~Note 11. Statement of Changes in Equity and Accumulated Other Comprehensive Income (Loss)~~

The Company’s Credit Agreement with PNC currently restricts the Company from issuing dividends or making payments with respect to the Company's capital stock through January 31, 2020. The Company did not declare a cash dividend during quarter ended October 31, 2019. The Company declared a quarterly cash dividend of $0.015 per share, payable January 10, 2019 to shareholders of record as of December 27, 2018, during the same period last year.

Note ~~12.~~11. Retirement Plans

The Company and its subsidiaries cover certain employees under a noncontributory defined benefit retirement plan, entitled the Virco Employees’ Retirement Plan (the “Pension Plan”). ~~Benefits under the Employees Retirement Plan are based on years of service and career average earnings.~~ As more fully described in the Form 10-K, benefit accruals under the Employees Retirement Plan were frozen effective December 31, 2003. There is no service cost incurred under this plan.

The Company also provides a supplementary retirement plan for certain key employees, the VIP Retirement Plan (the “VIP Plan”). ~~The VIP Plan provides a benefit of up to 50% of average compensation for the last 5 years in the VIP Plan, offset by benefits earned under the Pension Plan.~~ As more fully described in the Annual Report on Form 10-K for the year ended January 31, 2019, benefit accruals under this plan were frozen since December 31, 2003. There is no service cost incurred under this plan.

The net periodic pension cost for the Pension Plan and the VIP Plan for the three ~~and nine~~ months ended ~~October 31,~~April 30, 2020 and 2019 ~~and 2018~~ were as ~~follows (in thousands):~~follows:


	Combined Employee Retirement Plans												Combined Employee Retirement Plans
	Three Months Ended						Nine Months Ended						Three Months Ended
	10/31/2019			10/31/2018			10/31/2019			10/31/2018			4/30/2020			4/30/2019
													(in thousands)
Service cost	$	—		$	—		$	—		$	—		$	—		$	—
Interest cost	355			370			1,065			1,080			301			355
Expected return on plan assets	(343		)	(348		)	(1,029		)	(1,162		)	(224		)	(343		)
Plan settlement	—			22			—			341			—			—
Amortization of prior service cost	—			—			—			—			—			—
Recognized net actuarial loss	176			252			528			597			465			176
Benefit cost	$	188		$	296		$	564		$	856		$	542		$	188

401(k) Retirement Plan

The Company’s retirement plan, which covers all U.S. employees, allows participants to defer from 1% to 75% of their eligible compensation through a 401(k)-retirement program. The plan includes Virco stock as one of the investment options. At ~~October 31,~~April 30, 2020 and 2019, ~~and 2018,~~ the plan held ~~710,319~~763,586 shares and ~~646,984~~673,964 shares of Virco stock, respectively. For the three months ended ~~October 31,~~April 30, 2020 and 2019, ~~and 2018,~~ the compensation costs incurred for employer match was ~~204,000~~$210,000 and ~~190,000, respectively. For the nine months ended October 31, 2019 and 2018, the compensation costs incurred for employer match was $578,000 and $553,000,~~$187,000, respectively.

Note ~~13.~~12. Warranty Accrual

The Company provides an assurance type warranty against all substantial defects in material and workmanship. The standard warranty offered on products sold through January 31, 2013 is 10 years. Effective February 1, 2014, the Company modified its warranty to a limited lifetime warranty. The warranty effective February 1, 2014 is not anticipated to have a significant effect on warranty expense. Effectiveafter January 1, 2017 ~~the Company~~was modified ~~the warranty offered~~ to provide specific warranty periods by product component, with no warranty period longer than ten years. The Company’s warranty is not a guarantee of service life, which depends upon events outside the Company’s control and may be different from the warranty period. The Company accrues an estimate of its exposure to warranty claims based upon both product sales data and an analysis of actual warranty claims incurred.

The following is a summary of the Company’s warranty-claim activity for the three ~~and nine~~ months ended ~~October 31, 2019~~April 30, 2020 and ~~2018 (in thousands):~~2019:


	Three Months Ended						Nine Months Ended						Three Months Ended
	10/31/2019			10/31/2018			10/31/2019			10/31/2018			4/30/2020			4/30/2019
													(in thousands)
Beginning balance	$	800		$	925		$	700		$	925		$	800		$	700
Provision	71			77			387			219			60			71
Costs incurred	(71		)	(77		)	(287		)	(219		)	(60		)	(71		)
Ending balance	$	800		$	925		$	800		$	925		$	800		$	700

Note ~~14.~~13. Contingencies

The Company has a self-insured retention for product and general liability losses up to $250,000 per occurrence, workers’ compensation liability losses up to $250,000 per occurrence and for automobile liability losses up to $50,000 per occurrence. The Company has purchased insurance to cover losses in excess of the retention up to a limit of $30,000,000. The Company

has obtained an actuarial estimate of its total expected future losses for liability claims and recorded a liability equal to the net present value.

The Company and its subsidiaries are defendants in various legal proceedings resulting from operations in the normal course of business. It is the opinion of management, in consultation with legal counsel, that the ultimate outcome of all such matters will not materially affect the Company’s financial position, results of operations or cash flows.

Note ~~15. Reclassification of Prior Year Presentation~~

Certain prior year amounts have been reclassified for consistency with the current year presentation. We have reclassified the pension costs from selling, general and administrative expense to non-operating pension expense in the Company's Condensed Consolidated Statement of Income for the three and nine months ended October 31, 2018. This reclassification had no impact upon the reported net income. This change in classification does not affect previously reported cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows.

~~Note 16.~~14. Delivery Costs

For the quarter ended ~~October 31,~~April 30, 2020 and 2019, ~~and 2018,~~ shipping and classroom delivery costs of approximately ~~$7,897,000, $9,295,000, respectively, were included in selling, general~~$2,078,000 and ~~administrative expenses in the accompanying consolidated statements of operations.~~

~~For the nine months ended October 31, 2019 and 2018, shipping and classroom delivery costs of approximately $17,154,000, $18,406,000,~~$2,761,000, respectively, were included in selling, general and administrative expenses in the accompanying consolidated statements of operations.

Note ~~17. Subsequent Events~~15. COVID-19

On March 11, 2020, the World Health Organization declared the current coronavirus (COVID-19) outbreak to be a global pandemic. In response to this declaration and the rapid spread of COVID-19 within the United States, federal, state and local governments throughout the country have imposed varying degrees of restriction on social and commercial activity to promote social distancing in an effort to slow the spread of the illness. The Company has been operating its manufacturing and distribution facilities on a voluntary basis to give employees the flexibility to remain at home with children who are out of school or for other personal reasons as they deem necessary. Office employees and others who can work from home continue to do so. Appropriate measures are being taken to protect the health of employees performing essential on-site operations.

The Company’s Conway, Arkansas facilities, which represent approximately two thirds of the Company’s production and distribution capacity, has been fully operational for this period of time. In accordance with ~~ASC 855 “Subsequent Events”~~State of California and local orders that include guidance on the definition and responsibilities of “essential businesses,” the Company has been operating its Torrance facility. During May, the Company closed its Torrance facility for several days before and after Memorial Day to perform comprehensive cleaning of production and office areas. Management ~~evaluated subsequent events through~~estimates that the ~~date~~Torrance facility is currently staffed at approximately 50% of its normal level.

The impacts of COVID-19 are expected to continue to be a challenge for the ~~condensed consolidated financial statements were issued. Management concluded~~foreseeable future. The Company believes the economy will be adversely impacted for an indeterminate period, including the demand for our products. Consequently, the Company believes that ~~no subsequent events~~it may report lower sales and earnings than would otherwise have ~~occurred~~been expected for the remainder of fiscal year 2021. The extent of the impact will depend on numerous factors that ~~would require recognition or disclosure in the condensed consolidated financial statements.~~are unknown, uncertain and cannot be predicted.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Three Months Ended ~~October~~April 30, 2020

Results of operations for the three months ended April 30, 2020 have been significantly impacted by economic conditions driven by the COVID-19 epidemic. The majority of our primary customers, the K-12 public school systems, closed school campuses and initiated remote learning on or about March 15, 2020. Subsequent to that date there have been significant impacts on the Companies business operations. Selling activities have been significantly impacted. Our direct sales force, one of the Companies distinct competitive advantages, have been unable to make in person sales calls and has been required to call on customers using telephonic or other electronic methods. Our primary customers, educators and district business officials are typically working remotely. Orders of furniture were impacted, but the severity of the impact varied by funding source. Transactional orders, which are typically smaller, sometimes made through internet and other resellers, and are frequently for more immediate delivery, fell sharply. Project orders; typically larger, frequently requiring project management and full-service, characterized by a longer selling process - typically months in advance of the order - remained strong. Funding sources for project orders are frequently bond funded, precluding funding from being diverted to alternative expenditures. Delivery of furniture to customers has been adversely impacted. Customers deferred deliveries of furniture during the initial school closures. This caused a reduction in first quarter shipments, but because orders were stable, our backlog of orders at April 30, 2020 was approximately $8,324,000 greater than the prior year.

The current condition of the K-12 education market is one of significant disruption. The vast majority of schools closed on or about March 15, 2020. The vast majority of schools are remaining closed for the balance of the school year, with the current academic year being completed remotely. Public schools are expected to begin the next school year under normal or slightly accelerated schedules, but the balance of on-site versus remote learning has not been determined. The Company’s business has been intensely seasonal, but the seasonal curve has been extremely stable for many years. The current COVID-19 affected conditions are having an impact on the seasonal nature of our business, and also on the competitive landscape of suppliers of furniture for schools. The Company is operating both manufacturing and distribution facilities, utilizing all reasonable methods to protect the health of our employees. Activity levels in the facilities has been moderated to reflect the level of business activity. At this time, the Company has not incurred significant disruptions in its supply chain that had a material impact on operations. The Company believes that some competitors may fail to successfully deliver furniture to customers this summer. Resellers of furniture may be less likely to commit to large inventories of unsold furniture sourced from China. The China supply chain is more challenged than in prior years, both by these uncertain times as well as the impact of tariffs imposed in recent years. Management believes that while the market for school furniture may decline in the fiscal year ending January 31, ~~2019~~2021, there are meaningful opportunities to take market share without having to do so through pricing tactics.

For the three months ended ~~October 31, 2019,~~April 30, 2020, the Company ~~earned~~incurred a pre-tax ~~profit~~loss of ~~$5,578,000~~$7,973,000 on net sales of ~~$66,998,000~~$17,599,000 compared to a pre-tax ~~profit~~loss of ~~$4,035,000~~$4,485,000 on net sales of ~~$76,809,000~~$26,893,000 in the ~~prior year.~~

same period in 2019. Net sales for the three months ended ~~October 31, 2019~~April 30, 2020 decreased by ~~$9,811,000 or 12.8%,~~$9,294,000, a 34.6% decrease, compared to the same period last year. ~~The Company began the quarter with an order backlog that was more than $18 million lower than the prior year~~Net sales decreased largely due to ~~slow order rates for~~ the ~~first and second quarters.~~ impact of COVID-19 as described above. The decrease in sales was substantially all volume related with the volume decline very slightly offset by an increase in selling prices.

Order rates for the first ~~six months declined~~quarter decreased by approximately ~~14%~~2.1% compared to the ~~same period last year. Order rates for the third quarter reflected a significant improvement, increasing~~prior year period. Because orders declined slightly while deliveries were delayed due to COVID-19, order backlog at April 30, 2020 increased by ~~over 27%~~approximately 21.2%. Backlog at April 30, 2020 was $47,578,000 compared to ~~the same period last year. The decrease in revenue for the quarter was attributable to the reduced beginning backlog, partially offset by the increased order rate for the third quarter. Order backlog~~$39,254,000 at ~~October 31, 2019 is approximately $19.0 million and is $3 million greater than the prior year.~~April 30, 2019.

The third quarter results reflect continued seasonality of the Company’s business. School districts in many parts of the Country have accelerated the beginning of back to school to mid-August, impacting the summer delivery window. At the beginning of the fiscal year, the Company substantially revised its production stocking program in order to facilitate the timeliness and completeness of order fulfillment during the summer. This new production stocking program was very successful with an improvement in the timeliness of deliveries and a greater portion of orders filled in the second quarter.

In the prior year the Company was adversely affected by increased cost of commodities, particularly steel and components imported from China. In addition, the Company was adversely impacted by increased costs for labor, employee benefits, and freight. The Company anticipated continued pressure on these costs during the fiscal year ending January 31, 2020, including additional tariff related costs incurred in the second quarter of the fiscal year ending January 31, 2020. To compensate for these increased costs, the Company raised selling prices at the beginning of the year. The amount of price increase varied based upon the type of product and competitive considerations, but no product increased by less than 10%. Gross margin for the ~~third~~three months ended April 30, 2020 decreased as a percentage of sales to 27.9% in the current quarter ~~was 40.1%~~ compared to ~~34.4%~~33.8% in the prior quarter. Last year the Company reduced the level of standard product produced to inventory for summer delivery and prioritized product targeted to specific customer project orders. This tactic enabled the Company to achieve improved levels of on-time delivery and customer satisfaction during the summer in the prior year. ~~The gross margin~~For the current year, the Company is more aggressively pursuing the same tactic. Production and the related investment in inventory were delayed to receipt of specific orders, and production of standard product, which more often supplies transactional orders, was ~~favorably affected~~reduced. Our production strategy combined with a cautious approach to building inventory in this current economic environment caused factory production levels to decline by approximately 20% for the ~~price increase described above, partially offset by unfavorable manufacturing overhead variances incurred when production rates declined in response~~first quarter of fiscal 2021 compared to the ~~decrease in unit volume.~~prior year. The reduced production levels adversely impacted factory efficiency.

Selling, general and administrative expenses ~~for the three months ended October 31, 2019~~ decreased by ~~$993,000~~approximately $750,000 compared to the ~~same period last~~prior year ~~and~~but increased as a percentage of ~~sales to 30.6% from 28.0%.~~sales. The decrease in ~~selling, general and administrative expenses was primarily~~spending is attributable to ~~decreased freight expense.~~variable selling and service costs.

Interest expense decreased ~~by $27,000~~ for the ~~three months~~quarter ended ~~October 31, 2019~~April 30, 2020 compared to the same period last year. The Company has borrowed less money to finance ~~seasonal working capital~~accounts receivable and production of inventory in ~~the third quarter.~~anticipation of increased summer shipping activity.

~~Nine Months Ended October 31, 2019~~

~~For~~Income tax benefit for the ~~nine months~~quarter ended ~~October 31, 2019, the Company earned a pre-tax profit of $10,177,000 on net sales of $164,250,000~~April 30, 2020 increased compared to ~~a pre-tax profit~~the prior year. The effective tax rate for the first quarter of ~~$6,594,000 on net sales of $174,180,000 in~~2021 was 41.1% compared to 31.6% for the same period last year. Net sales for the nine months ended October 31, 2019 decreased by approximately $9,930,000 or 5.7% compared to the same period last year. This net decrease was primarily the result of a reduction in unit volume offset by an increase in selling prices. The Company began the year with a backlog of orders that was approximately $4.2 million greater than the prior year. Order rates for the first six months decreased by approximately 14% compared to the prior year. Order rates for the third quarter reflected a significant improvement, increasing by over 27% compared to the same period last year. Because the third quarter is traditionally a slow period for orders, strong third quarter order rates mitigated the reduction for the first two quarters, but as of October 31, 2019 orders trailed the prior year by approximately $13 million, a 7.3% reduction compared to the same period last year.

As described above the Company increased selling prices at the beginning of the year to recover increased commodity and other costs incurred during 2018. The impact of the price increase was not fully effective until the second quarter as the beginning backlog at January 31, 2019 reflected selling prices in effect prior to the price increase.

Gross margin as a percentage of sales improved to 39.4% for the nine months ended October 31, 2019 compared to 35.2% in the same period last year. The gross margin was favorably affected by the price increase described above, partially offset by unfavorable manufacturing overhead variances incurred when production rates declined in response to the decrease in unit volume.

Selling, general and administrative expenses for the nine months ended October 31, 2019 decreased by approximately $186,000 compared to the same period last year and increased as a percentage of sales by 1.7%.

Interest expense increased by $312,000 for the nine months ended October 31, 2019 compared to the same period last year. The Company has borrowed slightly more money to finance seasonal working capital in the first six months of the year and increased as a result of higher interest rates.

~~Income Taxes for the three- and nine-months ended October 31, 2019~~

~~Income tax expense for the third quarter and nine months ended October 31, 2019 is greater than the prior year, primarily due to the increase in pre-tax income.~~

Liquidity and Capital Resources

~~Approximately 50%~~The impact of COVID-19 on liquidity has been to moderate the ~~Company's annual sales volume is shipped~~seasonal increase in accounts receivable and production of inventory for summer delivery. Both the increase in accounts receivable and inventory are traditionally financed through the Company’s line of credit with PNC Bank. Reductions in receivables and inventory were substantially offset by a reduction in borrowing under the line. Net cash used in operating activities for the three months ~~of June through August of each~~ended April 30, 2020 was $9,887,000 compared to $18,286,000 for the same period last year. The reduction was attributable to reduced inventory and accounts receivable in addition to an increase in accounts payable

Accounts receivable were lower at April 30, 2020 than at April 30, 2019 due to decreased sales during the quarter. Due to the seasonal nature of our business, the Company traditionally ~~manufactures~~builds large quantities of inventory during the first ~~and second quarters~~quarter of each fiscal year in anticipation of seasonally high summer shipments. ~~In addition,~~During the first quarter ended April 30, 2020, the Company finances a large balance of accounts receivable during the peak season. During the last two months of the third quarter, the Company typically repays significant portions of the seasonal working capital borrowed to finance the summer activity. Accounts receivable increased by $4,504,000 from January 31, 2019 to October 31, 2019. This compares to prior year when accounts receivable grew by $12,896,000 during the same period. The accounts receivable balance was approximately $6.6 million lower at October 31, 2019 than at October 31, 2018 due to lower third quarter sales. The decrease in accounts receivable at October 31, 2019 compared to the January 31, 2019, was offset in part by a reduction in account payable.

~~For the first nine months, the Company decreased~~ inventory by approximately ~~$4,382,000 at October 31, 2019~~$14.9 million compared to January 31, ~~2019. This compares to an increase~~2020, approximately $1.4 million less than what was added in the first quarter of ~~$613,000 during~~the prior year. Because the Company started the year with less inventory, and produced less, inventory levels at April 30, 2020 were approximately $5.3 million less than at the same ~~period~~date last ~~year. Inventory at October 31, 2019 was $238,000 greater than the prior~~ year. The increase in inventory ~~compared to~~during the ~~prior~~first quarter of this year ~~is primarily due an increase in valuation due to increased commodity and tariffs costs.~~was financed through the Company's credit facility with PNC Bank, National Association ("PNC").

~~Interest expense for the nine months ended October 31, 2019 is slightly higher the same period last year. Borrowings~~Borrowing under the Company's revolving line of credit with PNC ~~Bank~~at April 30, 2020 is approximately $13.6 million lower compared to the same quarter last year. The decrease in borrowing is primarily attributable to decreased accounts receivable and decreased levels of inventory. Accrual basis capital expenditures were ~~higher in the first six months of the year.~~

~~Capital spending~~$922,000 for the ~~nine~~three months ended ~~October 31, 2019 was $2,963,000~~April 30, 2020 compared to ~~$3,319,000~~$884,000 for the same period last year. Capital expenditures are being financed through the Company's credit facility with ~~PNC Bank and operating cash flow.~~PNC.

The Company believes that cash flows from operations, together with the Company's unused borrowing capacity under its revolving line of credit with PNC ~~Bank~~ will be sufficient to fund the Company's debt service requirements, capital expenditures and working capital needs for at least the next twelve ~~months.~~months and that it will be in compliance with debt covenants during that same period. However, we are not able to estimate the full impact of the COVID-19 outbreak on our financial condition and results of operations given the inherent uncertainty as to when the COVID-19 pandemic will end, and businesses and schools will begin operations. Approximately $12,343,000 was available for borrowing as of April 30, 2020.

Off Balance Sheet Arrangements

None.

Critical Accounting Policies and Estimates

The Company's critical accounting policies are outlined in its Annual Report on Form 10-K for the fiscal year ended January 31, ~~2019.~~

~~Operating Lease Liabilities~~

~~On February 1, 2019, the Company adopted ASU No. 2016-02-Leases (Topic 842)~~, using the modified retrospective approach and applying the transitional relief allowing entities to initially apply the requirements at the adoption date by recognizing a cumulative-effect adjustment to the opening balance of retained earnings2020. There have been no significant changes in the ~~period of adoption.~~

In accordance with ASC 842, the Company determines if an arrangement is a lease at inception. Operating leases in which the Company is the lessee are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilitiesquarter ended April 30, 2020. New Accounting Pronouncements in the ~~consolidated balance sheets. Operating lease ROU assets and liabilities are recognized at commencement date based~~Notes to unaudited Condensed Consolidated Financial Statements in Item 1 to this Quarterly Report on the present value of lease payments over the lease term. The Company’s lease terms include options to extend or terminate the lease only when it is reasonably certain that we will exercise that option. As most of the Company’s leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our incremental borrowing rate is estimated to approximate the interest rate

on a collateralized basis with similar terms and payments using company specific credit spreads. The Company uses the implicit rate when readily determinable. The incremental borrowing rate used is 6.39%.

~~Adoption of the new standard resulted in the recording of ROU assets and lease liabilities of approximately $23.9 million and $25.6 million respectively, as of February 1, 2019.~~Form 10-Q.

Forward-Looking Statements

From time to time, including in this Quarterly Report on Form 10-Q for the quarterly period ended ~~October 31, 2019,~~April 30, 2020, the Company or its representatives have made and may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, without limitation, reports to stockholders, press releases, oral statements made with the approval of an authorized executive officer of the Company and filings with the Securities and Exchange Commission ("SEC"). The words or phrases “anticipates,” “expects,” “will continue,” “believes,” “estimates,” “projects,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The results contemplated by the Company's forward-looking statements are subject to certain risks and uncertainties that could cause actual results to vary materially from anticipated results, including without limitation, availability of funding for educational institutions, availability and cost of materials, especially steel, availability and cost of labor, demand for the Company's products, competitive conditions affecting selling prices and margins, capital costs and general economic

conditions. Such risks and uncertainties are discussed in more detail in the Company's Form 10-K for the fiscal year ended January 31, ~~2019~~2020 under the caption "Risk Factors".

The Company's forward-looking statements represent its judgment only on the dates such statements were made. By making any forward-looking statements, the Company assumes no duty to update them to reflect new, changed or unanticipated events or circumstances.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company is ~~subject~~a smaller reporting company as defined by Rule 12b-2 of the Exchange Act as of our second quarter of fiscal 2020 and are not required to ~~interest rate risk related to its seasonal borrowings used to finance additional inventory and receivables. Rising interest rates may adversely affect~~provide the ~~Company's results of operations and cash flows related to its variable-rate bank borrowings~~information under its credit line with PNC. Accordingly, a 100-basis point upward fluctuation in PNC's base rate would have caused the Company to incur additional interest charges of approximately $77,000 and $272,000 for the three and nine months ended October 31, 2019, respectively. The Company would have benefited from a similar interest savings if the base rate were to have fluctuated downward by a like amount.this item.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including its Principal Executive Officer along with its Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”) as of ~~October 31, 2019.~~April 30, 2020. Based upon the foregoing, the Company's Principal Executive Officer along with the Company's Principal Financial Officer concluded that the Company's disclosure controls and procedures as of such date were effective to ensure that the information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to Company management, including its Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, Company management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Changes in Internal Control Over Financial Reporting

is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

There have been no changes in the Company's internal control over financial reporting during the fiscal quarter covered by this quarterly report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

PART II — Other Information

Virco Mfg. Corporation

Item 1. Legal Proceedings

The Company is a party to various legal actions arising in the ordinary course of business which, in the opinion of the Company, are not material in that management either expects that the Company will be successful on the merits of the pending cases or that any liabilities resulting from such cases will be substantially covered by insurance. While it is impossible to estimate with certainty the ultimate legal and financial liability with respect to these actions, management believes that the aggregate amount of such liabilities will not be material to the results of operations, financial position, or cash flows of the Company.

Item 1A. Risk Factors

You should carefully consider and evaluate the information in this Quarterly Report and the risk factors set forth under the caption “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 31, ~~2019~~2020 (the “Form 10-K”), which was filed with the SEC on ~~May 1, 2019.~~April 30, 2020. The risk factors associated with our business have not materially changed compared to the risk factors disclosed in the Form 10-K.

Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

~~None.~~

On June 9, 2020, the Board of Directors of the Company approved and adopted amendments to the Company’s Bylaws to help facilitate the conduct of a virtual annual meeting of stockholders in 2020 as a result of the COVID-19 pandemic. The Bylaws, as amended and restated, clarify that stockholder meetings may be held by means of remote communications. The Third Amended and Restated Bylaws provide, among other things:

that stockholder meetings may be held solely by means of remote communications;

that the presence of a stockholder “in person” at a stockholder meeting includes presence by remote communication, if applicable; and

that the list of stockholders entitled to vote at a stockholder meeting may also be provided on a reasonably accessible electronic network.

This description of the amendments to the Bylaws is not complete and is qualified in its entirety by reference to the text of the Third Amended and Restated Bylaws, a copy of which is filed as Exhibit 3.3 to this Quarterly Report on Form 10-Q and incorporated by reference herein.

Item 6. Exhibits



Exhibit Number	Document
3.3	Third Amended and Restated Bylaws of the Company dated June 9, 2020.
31.1	Certification of Robert A. Virtue, Chief Executive Officer, pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Robert E. Dose, Vice President, Finance, pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 101.INS — XBRL Instance Document.

Exhibit 101.SCH — XBRL Taxonomy Extension Schema Document.

Exhibit 101.CAL — XBRL Taxonomy Extension Calculation Linkbase Document.

Exhibit 101.LAB — XBRL Taxonomy Extension Label Linkbase Document.

Exhibit 101.PRE — XBRL Taxonomy Extension Presentation Linkbase Document.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	VIRCO MFG. CORPORATION
Date: ~~December 13, 2019~~June 12, 2020	By:	/s/ Robert E. Dose
		Robert E. Dose
		Vice President — Finance
		(Principal Financial Officer)

2723



	Operating Lease

Remaining of 2020	$	1,370
2021	4,973
2022	5,582
2023	5,149
2024	5,192
Thereafter	6,687
Remaining balance of lease payments	$	28,953

Short-term lease liabilities	$	3,506
Long-term lease liabilities	20,778
Total lease liabilities	$	24,284

Difference between undiscounted cash flows and discounted cash flows	$	4,669



Year ending January 31,
2020	$	5,045
2021	4,405
2022	5,041
2023	5,040
2024	5,192
Thereafter	6,687
Total minimum lease payments	$	31,410

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company