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 April 30, 20202021


OR
¨☐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.MFG CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware95-1613718
(State or Other Jurisdiction of

Incorporation or Organization)
(I.R.S. Employer

Identification No.)
2027 Harpers Way, Torrance, CA90501
(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 classTrading SymbolName of each exchange on which registered
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, $0.01 par value per shareVIRCThe 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.:

Large accelerated filer¨☐Accelerated filer¨☐
Non-accelerated filerýSmaller reporting companyý☒
Emerging growth company¨☐


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 — 15,713,54915,918,642 shares as of June 8, 2020.

2, 2021.


TABLE OF CONTENTS





TABLE OF CONTENTS

3
3
3
5
6
Unaudited condensed consolidated statements of cash flows - Three months ended April 30 2020, 2021 and 20192020
7
Unaudited condensed consolidated statements of changes in stockholders' equity and accumulated other comprehensive income (loss) - Three months ended April 30, 20202021 and 20192020
8
Notes to unaudited condensed consolidated financial statements - April 30, 202030, 2021
9
18
20
20
2122
2122
2122
2122
Item 3. Defaults Upon Senior Securities
2122
Item 4. Mine Safety Disclosures
2122
Item 5. Other Information
2122
22
EX-3.3EX-31.1
EX-31.1EX-31.2
EX-31.2EX-32.1
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


 



2

PART I. Financial Information
Item 1. Financial Statements




Virco Mfg. Corporation
Unaudited Condensed Consolidated Balance Sheets
 
4/30/20211/31/20214/30/2020
(In thousands)


Assets
Current assets
Cash$556 $402 $327 
Trade accounts receivables, net14,334 9,759 7,564 
Other receivables39 26 57 
Income tax receivable85 199 469 
Inventories42,875 38,270 58,190 
Prepaid expenses and other current assets2,099 2,311 2,413 
Total current assets59,988 50,967 69,020 
Non-current assets
Property, plant and equipment
Land3,731 3,731 3,731 
Land improvements734 734 734 
Buildings and building improvements51,262 51,262 51,159 
Machinery and equipment111,779 112,098 111,250 
Leasehold improvements989 1,004 1,072 
Total property, plant and equipment168,495 168,829 167,946 
Less accumulated depreciation and amortization132,392 132,003 128,520 
Net property, plant and equipment36,103 36,826 39,426 
Operating lease right-of-use assets16,682 17,596 20,487 
Deferred tax assets, net12,879 11,716 14,481 
Other assets, net8,020 7,931 8,078 
Total assets$133,672 $125,036 $151,492 
 4/30/2020 1/31/2020 4/30/2019
(In thousands)
 
   
Assets     
Current assets     
Cash$327
 $1,150
 $553
Trade accounts receivables, net7,564
 11,762
 12,375
Other receivables57
 57
 64
Income tax receivable469
 298
 263
Inventories58,190
 43,329
 63,511
Prepaid expenses and other current assets2,413
 1,746
 2,532
Total current assets69,020
 58,342
 79,298
Non-current assets     
Property, plant and equipment     
Land3,731
 3,731
 3,731
Land improvements734
 717
 688
Buildings and building improvements51,159
 51,200
 51,176
Machinery and equipment111,250
 110,610
 109,087
Leasehold improvements1,072
 990
 830
Total property, plant and equipment167,946
 167,248
 165,512
Less accumulated depreciation and amortization128,520
 127,351
 124,159
Net property, plant and equipment39,426
 39,897
 41,353
Operating lease right-of-use assets20,487
 21,325
 23,295
Deferred tax assets, net14,481
 11,230
 11,086
Other assets, net8,078
 8,198
 8,276
Total assets$151,492
 $138,992
 $163,308

See accompanying notes to unaudited condensed consolidated financial statements.



3

Virco Mfg. Corporation
Unaudited Condensed Consolidated Balance Sheets
 
4/30/2020 1/31/2020 4/30/2019 4/30/20211/31/20214/30/2020
(In thousands, except share and par value data)(In thousands, except share and par value data)

   


Liabilities     Liabilities
Current liabilities     Current liabilities
Accounts payable$16,656
 $10,587
 $16,354
Accounts payable$12,976 $8,421 $16,656 
Accrued compensation and employee benefits5,979
 6,392
 4,631
Accrued compensation and employee benefits4,597 4,576 5,979 
Current portion of long-term debt10,618
 878
 24,226
Current portion of long-term debt2,990 887 10,618 
Current portion operating lease liability4,527
 3,654
 2,939
Current portion operating lease liability4,715 4,672 4,527 
Other accrued liabilities4,606
 3,607
 5,552
Other accrued liabilities4,364 3,550 4,606 
Total current liabilities42,386
 25,118
 53,702
Total current liabilities29,642 22,106 42,386 
Non-current liabilities     Non-current liabilities
Accrued self-insurance retention1,802
 1,410
 1,773
Accrued self-insurance retention1,530 935 1,802 
Accrued pension expenses21,365
 21,310
 14,218
Accrued pension expenses21,520 21,889 21,365 
Income tax payable74
 70
 55
Income tax payable71 65 74 
Long-term debt, less current portion15,630
 15,818
 16,508
Long-term debt, less current portion14,795 9,553 15,630 
Operating lease liability, less current portion18,854
 19,787
 22,221
Operating lease liability, less current portion14,573 15,619 18,854 
Other long-term liabilities662
 661
 555
Other long-term liabilities683 682 662 
Total non-current liabilities58,387
 59,056
 55,330
Total non-current liabilities53,172 48,743 58,387 
Commitments and contingencies (Notes 6, 7 and 13)
 
 
Commitments and contingencies (Notes 6, 7 and 13)000
Stockholders’ equity     Stockholders’ equity
Preferred stock:     Preferred stock:
Authorized 3,000,000 shares, $0.01 par value; none issued or outstanding—
 —
 —
Authorized 3,000,000 shares, $0.01 par value; NaN issued or outstandingAuthorized 3,000,000 shares, $0.01 par value; NaN issued or outstanding0 0 0 
Common stock:     Common stock:
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 4/30/2019157
 157
 155
Authorized 25,000,000 shares, $0.01 par value; issued and outstanding 15,918,642 shares at 4/30/2021 and 1/31/2021 and 15,713,549 at 4/30/2020Authorized 25,000,000 shares, $0.01 par value; issued and outstanding 15,918,642 shares at 4/30/2021 and 1/31/2021 and 15,713,549 at 4/30/2020159 159 157 
Additional paid-in capital119,036
 118,782
 118,292
Additional paid-in capital119,908 119,655 119,036 
Accumulated deficit(54,508) (49,810) (55,259)Accumulated deficit(55,951)(52,042)(54,508)
Accumulated other comprehensive loss(13,966) (14,311) (8,912)Accumulated other comprehensive loss(13,258)(13,585)(13,966)
Total stockholders’ equity50,719
 54,818
 54,276
Total stockholders’ equity50,858 54,187 50,719 
Total liabilities and stockholders’ equity$151,492
 $138,992
 $163,308
Total liabilities and stockholders’ equity$133,672 $125,036 $151,492 
See accompanying notes to unaudited condensed consolidated financial statements.



4

Virco Mfg. Corporation
Unaudited Condensed Consolidated Statements of Operations
 
 Three months ended
 4/30/20214/30/2020
(In thousands, except per share data)
Net sales$28,367 $17,817 
Costs of goods sold20,679 12,913 
Gross profit7,688 4,904 
Selling, general and administrative expenses11,983 11,931 
Operating loss(4,295)(7,027)
Pension expense506 542 
Interest expense293 404 
Loss before income taxes(5,094)(7,973)
Income tax benefits(1,185)(3,275)
Net loss$(3,909)$(4,698)
Net loss per common share:
Basic$(0.25)$(0.30)
Diluted$(0.25)$(0.30)
Weighted average shares of common stock outstanding:
Basic15,824 15,654 
Diluted15,824 15,654 
 Three months ended
 4/30/2020 4/30/2019
 (In thousands, except per share data)
Net sales$17,599
 $26,893
Costs of goods sold12,695
 17,809
Gross profit4,904
 9,084
Selling, general and administrative expenses11,931
 12,681
Loss (gain) on sale of property, plant & equipment—
 —
Operating loss(7,027) (3,597)
Pension expense542
 188
Interest expense404
 700
Loss before income taxes(7,973) (4,485)
Income tax benefits(3,275) (1,418)
Net loss$(4,698) $(3,067)
    
    
Net loss per common share:   
Basic$(0.30) $(0.20)
Diluted (a)(0.30) (0.20)
Weighted average shares of common stock outstanding:   
Basic15,654
 15,486
Diluted (a)15,654
 15,486

(a) Net loss per common share was calculated based on basic shares outstanding due to the anti-dilutive effect on the inclusion of common stock equivalent shares.
See accompanying notes to unaudited condensed consolidated financial statements.





5


Virco Mfg. Corporation
Unaudited Condensed Consolidated Statements of Comprehensive Loss

Three months ended Three months ended
4/30/2020 4/30/2019 4/30//20214/30/2020
(In thousands) (In thousands)
   
Net loss$(4,698) $(3,067)Net loss$(3,909)$(4,698)
Other comprehensive income:   Other comprehensive income:
Pension adjustments (net of tax expense of $120 and $46 at April 30, 2020 and 2019, respectively)345
 130
Pension adjustments (net of tax expense of $116 and $120 at April 30, 2021 and 2020, respectively)Pension adjustments (net of tax expense of $116 and $120 at April 30, 2021 and 2020, respectively)327 345 
Net comprehensive loss$(4,353) $(2,937)Net comprehensive loss$(3,582)$(4,353)
See accompanying notes to unaudited condensed consolidated financial statements.



6

Virco Mfg. Corporation
Unaudited Condensed Consolidated Statements of Cash Flows
Three months ended Three months ended
4/30/2020 4/30/20194/30/20214/30/2020
(In thousands)(In thousands)
Operating activities   Operating activities
Net loss$(4,698) $(3,067)Net loss$(3,909)$(4,698)
Adjustments to reconcile net loss to net cash used in operating activities:   Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization1,393
 1,452
Depreciation and amortization1,151 1,393 
Non-cash lease expense778
 89
Non-cash lease expense(90)778 
Provision for doubtful accounts15
 15
Provision for doubtful accounts15 15 
Loss (gain) on sale of property, plant and equipment—
 —
Deferred income taxes(3,251) (1,488)Deferred income taxes(1,279)(3,251)
Stock-based compensation254
 186
Stock-based compensation253 254 
Defined pension plan settlement—
 —
Amortization of net actuarial loss for pension plans345
 130
Amortization of net actuarial loss for pension plans443 345 
Changes in operating assets and liabilities:   Changes in operating assets and liabilities:
Trade accounts receivable4,183
 863
Trade accounts receivable(4,590)4,183 
Other receivables—
 (24)Other receivables(13)0 
Inventories(14,861) (16,222)Inventories(4,605)(14,861)
Income taxes(167) (77)Income taxes120 (167)
Prepaid expenses and other current assets(546) (709)Prepaid expenses and other current assets124 (546)
Accounts payable and accrued liabilities6,668
 566
Accounts payable and accrued liabilities5,422 6,668 
Net cash used in operating activities(9,887) (18,286)Net cash used in operating activities(6,958)(9,887)
Investing activities:   Investing activities:
Capital expenditures(488) (1,219)Capital expenditures(233)(488)
Proceeds from sale of property, plant and equipment—
 —
Net cash used in investing activities(488) (1,219)Net cash used in investing activities(233)(488)
Financing activities:   Financing activities:
Borrowing from long-term debt11,413
 19,564
Borrowing from long-term debt8,505 11,413 
Repayment of long-term debt(1,861) (244)Repayment of long-term debt(1,160)(1,861)
Payment on deferred financing costs—
 —
Tax withholding payments on share-based compensation—
 —
Cash dividends paid—
 —
Net cash provided by financing activities9,552
 19,320
Net cash provided by financing activities7,345 9,552 
   
Net decrease in cash(823) (185)
Net increase (decrease) in cashNet increase (decrease) in cash154 (823)
Cash at beginning of period1,150
 738
Cash at beginning of period402 1,150 
Cash at end of period$327
 $553
Cash at end of period$556 $327 
See accompanying notes to unaudited condensed consolidated financial statements.



7

Virco Mfg. Corporation
Unaudited Consolidated Statements of Changes in Stockholders' Equity and Accumulated Other Comprehensive Income (Loss)

Three-Month Period Ended April 30, 2021
Common Stock
In thousands, except share dataSharesAmountAdditional Paid-in CapitalAccumulated DeficitAccumulated Other Comprehensive LossTotal Stockholder's Equity
Balance at February 1, 202115,918,642 $159 $119,655 $(52,042)$(13,585)$54,187 
Net loss— — — (3,909)— (3,909)
Cash dividends— — — — — — 
Pension adjustments, net of tax effect of $116— — — — 327 327 
Shares vested and others0 0 0 — — 0 
Stock compensation expense— — 253 — — 253 
Balance at April 30, 202115,918,642 $159 $119,908 $(55,951)$(13,258)$50,858 
Three-Month Period Ended April 30, 2020
Common Stock
In thousands, except share dataSharesAmountAdditional Paid-in CapitalAccumulated DeficitAccumulated Other Comprehensive LossTotal Stockholder's Equity
Balance at February 1, 202015,713,549 $157 $118,782 $(49,810)$(14,311)$54,818 
Net loss— — — (4,698)— (4,698)
Cash dividends— — — — — — 
Pension adjustments, net of tax effect of $120— — — — 345 345 
Shares vested and others0 0 0 — — 0 
Stock compensation expense— — 254 — — 254 
Balance at April 30, 202015,713,549 $157 $119,036 $(54,508)$(13,966)$50,719 
  Three-Month Period Ended April 30, 2020
           
  Common Stock        
In thousands, except share data Shares Amount Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Stockholder's Equity
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 $120 —
 —
 —
 —
 345
 345
Shares vested and others —
 —
 —
 —
 —
 —
Stock compensation expense —
 —
 254
 —
 —
 254
Balance at April 30, 2020 15,713,549
 $157
 $119,036
 $(54,508) $(13,966) $50,719


  Three-Month Period Ended April 30, 2019
           
  Common Stock        
In thousands, except share data 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
Net loss —
 —
 —
 (3,067) —
 (3,067)
Cash dividends —
 —
 —
 —
 —
 —
Pension adjustments, net of tax effect of $46 —
 —
 —
 —
 130
 130
Shares vested and others —
 —
 —
 —
 —
 —
Stock compensation expense —
 —
 186
 —
 —
 186
Balance at April 30, 2019 15,541,956
 $155
 $118,292
 $(55,259) $(8,912) $54,276



See accompanying notes to unaudited condensed consolidated financial statements.

8


VIRCO MFG. CORPORATION
Notes to unaudited Condensed Consolidated Financial Statements
April 30, 20202021
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, 20202021 (“Form 10-K”).  In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three months ended April 30, 2020,2021 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2021.2022. The balance sheet at January 31, 2020,2021 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.

Principles of Consolidation and Reclassification

The consolidated financial statements include the accounts of Virco Mfg. Corporation and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The classification of certain prior year sales allowances of approximately $218,000, representing the replacement of damaged goods, previously presented in net sales, is presented in costs of goods sold in the accompanying prior period statement of operations, which conforms to current period presentation.

Liquidity

Management evaluated whether there are any conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern over the next 12 months through June 30, 2022. The Company has experienced an overall decline in net sales and net income for the fiscal year ended January 31, 2021. For the first three-months of fiscal 2022 the Company experienced a material increase in orders and shipments as schools received funding to support a return to classroom instruction.

As a result of the reduced revenue in the prior fiscal year, the Company was not in compliance with its fixed-charge coverage ratio under its revolving and secured credit agreement with PNC Bank, as of July 31, 2020, prior to an amendment and waiver negotiated to satisfy the event of default that also reduced the ratio required for the rolling four-quarter period ended October 31, 2020 from 1.10:1.00 to 1.00:1.00. However, the Company was not in compliance with this amended fixed-charge ratio of 1.00:1.00 as of October 31, 2020 due to the continuing decline in net sales and net income. The Company successfully negotiated a waiver and amendment on December 11, 2020 to the agreement to satisfy the event of default and amend the fixed-charge coverage ratio covenant. The amended covenant allows the Company to add back certain COVID-19 related costs incurred between May 1, 2020 through April 30, 2021, not to exceed $2 million, to adjusted EBITDA and retains a minimum fixed-charge coverage ratio of 1.10:1.00 beginning with the quarter ended January 31, 2021 (see Note 7).

The Company expects the impact of COVID-19 to continue to be a challenge for the foreseeable future and believes the economy will be adversely impacted for an indeterminate period, including the demand for its products and supply of materials and labor required to manufacture products. The extent of the impact will depend on numerous factors that are unknown, uncertain and cannot be reasonably predicted. Based on the Company’s current projections, including COVID-19 related costs, and its ability to manage certain controllable expenditures, management believes it will maintain compliance with the financial covenants for the next 12 months and that the Company’s existing cash, projected operating cash flows and available credit facilities, described in Note 7, are adequate to meet its operating needs, liabilities and commitments over the next 12 months from the issuance of the interim financial statements.

Note 2. Seasonality and Management Use of Estimates
9

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, 2020,2021, including those resulting from the continuing 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 this ASU as of February 1, 2020 and the adoption of this standard did not have a material effect on our condensed consolidated financial statements.

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 Company adopted this ASU as of February 1, 2020 and the adoption of this standard did not have a 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 the removal of certain disclosures, while adding certain new disclosure requirements. This standard is effective for fiscal years beginning after December 15, 2020 and allows for early adoption. The Company is currently evaluating the effect the standard will have on the consolidated financial statements and related disclosures.

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 is currently evaluating the effect the standard will have on the consolidated financial statements 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.


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


Note 4. 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
10

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 generatesWe do not consider our revenue primarily by manufacturing and distributing productsgenerated through direct-to-customers and 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 April 30, 2020,2021, January 31, 20202021 and April 30, 2019:2020:
4/30/20211/31/20214/30/2020
(in thousands)
 Finished goods$16,887 $15,606 $27,348 
 WIP14,630 11,907 19,159 
 Raw materials11,358 10,757 11,683 
Total inventories$42,875 $38,270 $58,190 
  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. 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:


11

Three-Months EndedThree-Months Ended
4/30/2020 4/30/20194/30/20214/30/2020
(in thousands)(in thousands, except lease term and discount rate)
Operating lease cost$1,440
 $1,380
Operating lease cost$1,238 $1,440 
Short-term lease cost36
 54
Short-term lease cost96 36 
Short-term sublease income(10) (10)Short-term sublease income(10)(10)
Variable lease cost (1)455
 448
Variable lease costVariable lease cost530 455 
Total lease cost$1,921
 $1,872
Total lease cost$1,854 $1,921 
   
Other operating leases information:   Other operating leases information:
Cash paid for amounts included in the measurement of lease liabilities$662,000
 $1,291,000
Cash paid for amounts included in the measurement of lease liabilities$1,328 $662 
Right-of-use assets obtained in exchange for new lease liabilities$270,000
 394,000
Right-of-use assets obtained in exchange for new lease liabilities$165 $270 
Weighted-average remaining lease term (years)4.7
 5.7
Weighted-average remaining lease term (years)3.84.7
Weighted-average discount rate6.4% 6.4%Weighted-average discount rate6.40 %6.40 %

(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 for operating leases in effect as of April 30, 2020,2021, are as follows:
Operating Lease
(in thousands)
Remaining of 2022$4,386 
20235,460 
20245,319 
20255,371 
20261,350 
Thereafter0 
Remaining balance of lease payments$21,886 
Short-term lease liabilities$4,715 
Long-term lease liabilities14,573 
Total lease liabilities$19,288 
Difference between undiscounted cash flows and discounted cash flows$2,598 
 Operating Lease
 (in thousands)
Remaining of 2021$4,414
20225,708
20235,275
20245,214
20255,370
Thereafter
1,350
Remaining balance of lease payments$27,331
  
Short-term lease liabilities$4,527
Long-term lease liabilities18,854
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:

4/30/20211/31/20214/30/2020
(in thousands)
Revolving credit line$12,157 $4,590 $19,740 
Other5,628 5,850 6,508 
Total debt17,785 10,440 26,248 
Less current portion2,990 887 10,618 
Non-current portion$14,795 $9,553 $15,630 

12
 4/30/2020 1/31/2020 4/30/2019
 (in thousands)
Revolving credit line$19,740
 $9,969
 $33,354
Other6,508
 6,727
 7,380
Total debt$26,248
 $16,696
 $40,734
Less current portion10,618
 878
 24,226
Non-current portion$15,630
 $15,818
 $16,508


The Company (the “Borrowers”) has a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association, as administrative agent and lender (“PNC”). The Credit Agreement has been amended twentytwenty-two times since it’s origination in 2011 through fiscal 2019,2021, which, among other things, extended the maturity date of the Credit Agreement for three years until March 19, 2023.


The Credit Agreement is an asset-based loan consisting of (i) a revolving line of credit with a Maximum Revolving Advance Amount of $65,000,000 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 July of each year, minus undrawn amounts of letters of credit and reserves.reserves and (ii) an equipment loan of $2,000,000. The Credit Agreement is secured by substantially all of the Company's, as defined, personal property and certain of the 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 Credit Agreement is subject to certain prepayment penalties upon earlier termination of the Credit 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.conditions, including reduced borrowings under the revolving line to less than or equal $10,000,000 for a period of 30 consecutive days during the fourth quarter of each fiscal year. The Credit Agreement also contains certain financial covenants, including a fixed charge coverage ratio beginning on February 1st, 2020 of not less than 1.10 to 1.00, and capital expenditures not to exceed $8,000,000. The Company was in violation with its financial covenants as of July 31, 2020. On September 8, 2020, the Company entered into Amendment No. 21 to the Credit Agreement (“Amendment No. 21”) with its lender, PNC Bank. Amendment No. 21 provided a limited waiver of the Company’s violation of the covenant to maintain a fixed charge coverage ratio of at least 1.00 to 1.00 for the four fiscal quarter period ended July 31, 2020, and amended the fixed charge coverage ratio as follows: (i) 1.00 to 1.00 for the consecutive four fiscal quarter period ended October 31, 2020, and (ii) 1.10 to 1.00 for each consecutive four fiscal quarter period ending thereafter. In connection with Amendment No. 21, the Company also agreed to pay to PNC Bank a non-refundable fee of $75,000. However, the Company was not in compliance with this amended fixed-charge ratio of 1.00:1.00 as of October 31, 2020 due to the continuing decline in net sales and net income. The Company successfully negotiated and entered into Amendment No. 22 on December 11, 2020 to the Revolving Credit and Security Agreement (“Amendment No. 22”) with its lender, PNC Bank. Amendment No. 22 provided a limited waiver of the fixed-charge coverage Ratio for the four fiscal quarter period ended October 31, 2020 and amended the fixed-charge coverage calculation to allow for the add back of certain COVID-19 related costs incurred from May 1, 2020 through April 30, 2021 not to exceed $2 million to adjusted EBITDA beginning with the four fiscal quarter period ended January 31, 2021, and retains the required minimum coverage ratio of 1.10:1.00. In connection with Amendment No. 22, the Company also agreed to pay PNC Bank a non-refundable fee of $40,000. The Company was in compliance with the covenants as of April 30, 2021.


The Credit Agreement bears interest, at the Borrowers'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%1.25% to 1.25%1.75%, and the applicable margin for Eurodollar Currency Rate loans is a percentage within a range of 1.75%2.25% to 2.25%2.75%, in each case based on the EBITDA of the 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 April 30, 2020 was 4.50%.
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) 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 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 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, 2020.2021 was 5.0%. The Company also incurs a fee on the unused portion of the revolving line of credit at a rate of 0.375%.


To dateLast year the impact of COVID-19 on liquidity has beenwas to moderate the seasonal increase in accounts receivable and production of inventory for summer delivery. Both the increaseSeasonal increases 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 revolving line with PNC Bank.


Events of default (subjectIn addition to certain cure periods and other limitations) underthe financial covenants, 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 eventcontains events of default under agreements governing certain indebtedness ofas disclosed in Note 3 to our Annual Report on Form 10-K for 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.
Pursuant to the Credit Agreement, substantiallyyear-ended January 31, 2021. Substantially all of the Borrowers' accounts receivable are automatically and promptly swept to repay amounts outstanding under the Credit Agreement upon receipt by the Borrowers. Due to this automatic liquidating nature of the Credit 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 revolving line of credit with PNC is structured to provide seasonal credit availability during the Company's peak summer season. Approximately $12,343,000$22,121,000 was available for borrowing as of April 30, 2020.2021.

Management believes that the carrying value of debt approximated fair value at April 30, 20202021 and 2019,2020, as all of the long-term debt bears interest at variable rates based on prevailing market conditions.


13

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 reversalwhether it is more-likely-than-not that some portion or all of its deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. assets will not be realized.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. TheAs a part of this evaluation, the Company maintainsassesses all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, the availability of tax carrybacks, tax-planning strategies, and results of recent operations (including cumulative losses in recent years), to determine whether sufficient future taxable income will be generated to realize existing deferred tax assets. On the basis of this evaluation, and after considering future reversals of existing taxable temporary differences and the effects of seasonality on the Company’s business, the Company determined that its U.S. federal deferred tax assets are more-likely-than-not to be realizable, but that valuation allowances of $996,000, $1,064,000 and $1,075,000 as of April 30, 2021, January 31, 2021 and April 30, 2020, respectively, are needed for certain state NOL’s to reduce the carrying amount of deferred tax assets to an amount that is more-likely-than-not to be realized.

For the first quarter ended April 30, 2021 and 2020, the effective tax rates were 23.3% and 41.1%, respectively. Effective tax rate for the first quarter ended April 30, 2021 is less than the prior year, primarily due to the change in forecasted mix of income before taxes in various jurisdictions, estimated permanent differences and the recording of 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 stateon net deferred tax assets that the Company does not believe it is more-likely-than-not to realize.assets.


On March 27, 2020, the then President signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)("CARES Act"). The Company has performed an analysis of the impact of the CARES Act and have determined that the impact would not be significant. The CARES Act modifiedprovides single-employer pension companies additional time to meet the funding obligations. Consequently, the tax deduction related to such contributions will be deferred until the funding payment is made. The CARES Act also modifies the limitation for business interest expense deduction and thededuction.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 loss per Share
Three Months Ended Three Months Ended
4/30/2020 4/30/2019 4/30/20214/31/2020
(In thousands, except per share data) (In thousands, except per share data)
   
Net loss$(4,698) $(3,067)Net loss$(3,909)$(4,698)
   
Weighted average shares of common stock outstanding15,654
 15,486
Weighted average shares of common stock outstanding15,824 15,654 
Net effect of dilutive shares - based on the treasury stock method using average market price—
 —
Net effect of dilutive shares - based on the treasury stock method using average market price0 0 
Totals15,654
 15,486
Totals15,824 15,654 
   
Net loss per share - basic$(0.30) $(0.20)Net loss per share - basic$(0.25)$(0.30)
Net loss per share - diluted (a)$(0.30) $(0.20)Net loss per share - diluted (a)$(0.25)$(0.30)
(a) All exercisableAt April 30, 2021 and non-exercisable restricted2020, approximately 155,000 and 75,000 shares of common stock awards and/or unitsequivalents were not includedexcluded in the computation of diluted net loss per share, at April 30, 2020 and 2019, because their inclusionas the effect would have been anti-dilutive. The number of stock awards and/or units outstanding, which met thisbe anti-dilutive criterion forsince the three months ended April 30, 2020 and 2019, was 75,000 and 180,000, respectively.Company reported a net loss.


14

Note 10. Stock-Based Compensation
Stock Incentive Plan
The Company's two stock incentive 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 three-month periodsperiod ended April 30, 2020,2021, the Company granted 0 awards to non-employee directors, vested 0 shares according to their terms and forfeited 0 shares under the 2019 Plan. As of April 30, 2020,2021, there were approximately 772,000677,305 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 three-month periodsperiod ended April 30, 2020,2021, the Company granted 0 restricted awards to non-employee directors and 0 units to its employees; vested 0 stock awards and 0 units according to their terms and forfeited 0 stock units under the 2011 Plan. As of April 30, 2020,2021, there were approximately 32,892 shares available for future issuance under the 2011 Plan.


During the three months ended April 30, 2020,2021, stock-based compensation expense related to restricted stock units and awards recognized in cost of goods sold and selling, general and administrative expenses was $63,000$55,000 and 191,000,$198,000, respectively. During the three months ended April 30, 2019,2020, 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 $59,000$63,000 and 127,000,$191,000, respectively.


As of April 30, 2020,2021, there was $2,435,000$1,672,000 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 23 years.


15

Note 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”). 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”). As more fully described in the Annual Report on Form 10-K for the year ended January 31, 2019,2021, 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 months ended April 30, 20202021 and 20192020 were as follows:
Combined Employee Retirement Plans
Three Months Ended
4/30/20214/30/2020
(in thousands)
Service cost$0$0
Interest cost281301
Expected return on plan assets(218)(224)
Plan settlement00
Amortization of prior service cost00
Recognized net actuarial loss443465
Benefit cost$506$542
 Combined Employee Retirement Plans
 Three Months Ended
 4/30/2020 4/30/2019
 (in thousands)
Service cost$—
 $—
Interest cost301
 355
Expected return on plan assets(224) (343)
Plan settlement—
 —
Amortization of prior service cost—
 —
Recognized net actuarial loss465
 176
Benefit cost$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 April 30, 20202021 and 2019,2020, the plan held 763,586970,632 shares and 673,964763,586 shares of Virco stock, respectively. For the three months ended April 30, 20202021 and 2019,2020, the compensation costs incurred for employer match, which is paid in the form of Company stock, was $210,000$184,000 and $187,000,$210,000, respectively.


Note 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 after January 1, 2017 was modified 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 months ended April 30, 20202021 and 2019:2020:
 Three Months Ended
4/30/20214/30/2020
(in thousands)
Beginning balance$700 $800 
Provision43 60 
Costs incurred(43)(60)
Ending balance$700 $800 
 Three Months Ended
 4/30/2020 4/30/2019
 (in thousands)
Beginning balance$800
 $700
Provision60
 71
Costs incurred(60) (71)
Ending balance$800
 $700
Note 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

16

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 14. Delivery Costs
For the quarter ended April 30, 20202021 and 2019,2020, shipping and classroom delivery costs of approximately $2,078,000$2,921,000 and $2,761,000,$2,078,000, respectively, were included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.


Note 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. TheThrough the first quarter ended April 30, 2021 the Company has been operatingoperated 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. Subsequent to April 30, 2021 and after vaccinations were available, the Company required all manufacturing and distribution employees to return to work. Office employees and others who can work from home continuecontinued to do so.so through April 30, 2021, but are anticipated to return during the Company’s second quarter. 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.during the pandemic. In accordance with 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 estimates that the 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 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 it may report lower sales and earnings than would otherwise have been expected for the remainder of fiscal year 2021.  The extent of the impact will depend on numerous factors that are unknown, uncertain and cannot be predicted.

Note 16. Subsequent Events

None.

17






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

Results of Operations


Three Months Ended April 30, 2020The effects of COVID-19


ResultsThe results of operations for the three monthsthree-months ended April 30, 20202021 have been significantly impacted by economic conditions driven by the COVID-19 epidemic. pandemic.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. SubsequentMost school districts continued with remote learning for the academic year beginning August 2020, with a minority of districts attempting hybrid or on-site learning.

During the first quarter ended April 30, 2021, many school districts announced hybrid or on-site learning beginning approximately April 2021.The Company received a large volume of orders for immediate delivery during the first quarter ended April 30, 2021.Orders received for the quarter increased by 26.7% compared to that date there have been significant impacts on the Companies business operations. Selling activities have been significantly impacted. Our direct sales force, onesame period of the Companies distinct competitive advantages, have been unableprior year.Sales volume for the quarter increased by 59.2% compared 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 severitysame period 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 backlogprior year.Backlog of orders at April 30, 2020 was2021 were approximately $8,324,000$2.1 million greater than the prior year.


The market for educational furniture is extremely seasonal, but there has traditionally been stability to this seasonal cycle.In the prior year, the timing of orders did not follow the traditional seasonal trends.Orders of educational furniture are traditionally very strong in May and June.In the fiscal 2021, these months were uncharacteristically slow. This reduction adversely impacted both second and third quarter sales revenue in fiscal 2021.In the current conditionyear, the Company experienced strong orders in the first quarter.Subsequent to April 30, 2021, the Company continued to experience strong order rates through May 2021.Nevertheless, management is not able to predict whether and to what extent the return to full time classroom learning will result in a return to the traditional seasonal sales cycle for educational furniture.

Due to uncertainty created by COVID-19 during fiscal 2021 the Company moderated production levels to reflect the reduced order activity and maintained conservative inventory levels going into the first quarter ended April 30, 2021.Because the first quarter of the K-12 education marketyear is onea seasonally slow period, sales activity during the first quarter was not significantly affected by supply chain considerations that have impacted the economy.

The Company imports a number of significant disruption. key components from manufacturers in China.The vast majoritycost and timely delivery 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 businessthese components has been intensely seasonal, butadversely affected by difficulties at the seasonal curveports and by cost increases from China.The cost of steel and a variety of other raw materials has been extremely stablevolatile, and the supply chain considerations have been challenging.The severe weather experienced in significant portions of the United States in February 2021 has also interrupted the supply and increased cost for many years. plastic and utilities.The current COVID-19 affected conditions are having an impact onavailability of labor, both permanent employees and temporary employees, has been adversely impacted.In response to the labor shortage, and to reward employees who will be working substantial overtime hours during 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,summer peak, the Company has not incurred significant disruptionsannounced that for all factory and warehouse hourly employees, all overtime hours will be paid at double time rather than the traditional time and one-half for hours worked between June 1 and Labor Day.This is anticipated to cost the Company an additional $1.5 million during the second and third quarters. The Company anticipates that this increased cost will be offset, in its supply chain that hadwhole or in part, by the increased efficiency of using experienced Virco employees with a material impact on operations. Thesubstantial reduction in temporary labor. Inventory levels at April 30, 2021 are significantly lower than the prior year, and the Company may incur additional costs for expediting to satisfy customer orders.While these challenges are substantial, the Company believes that some competitors may failthe benefits of domestic manufacturing compared to successfully deliver furniturean import model will be realized during the current fiscal year.

Three Months Ended April 30, 2021

Order rates and sales for the first three months of 2021 increased significantly compared to customers this summer. Resellersthe prior year, as schools reopen and effects of furniture may be less likelyCOVID-19 are moderating.Orders for the first quarter increased by 26.7%, and sales increased by 59.2% compared to commit to large inventoriesthe same period of unsold furniture sourced from China. The China supply chainthe prior year.Backlog of orders at April 30, 2021 is more challengedapproximately $2.1 million greater than inthe 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, 2021, there are meaningful opportunities to take market share without having to do so through pricing tactics.year.


For the three months ended April 30, 2020,2021, the Company incurred a pre-tax loss of $7,973,000$5,094,000 on net sales of $17,599,000$28,367,000 compared to a pre-tax loss of $4,485,000$7,973,000 on net sales of $26,893,000$17,817,000 in the prior year.

18

Gross Margin for the first quarter was 27.1% of sales compared to 27.5% in the prior year.The gross margin was favorably affected by a modest price increase at the beginning of the year, a favorable change in product mix, and an increase in the proportion of product sold with full service relative to sold FOB factory.These improvements were offset by an increase in the cost of commodities used to manufacture product and reduced levels of production.The Company was required to close the Conway, Arkansas factory for more than one week in February due to severe weather and increased utility bills related to the same period in 2019. Net salessevere weather.

Selling, general and administrative expenses for the three months ended April 30, 2020 decreased2021 increased by $9,294,000, a 34.6% decrease,less than 1% compared to the same period last year. Netyear and decreased as a percentage of sales decreased largely due to the impact of COVID-19 as described above.42.2% from 67.0%. The decrease in sales was substantially all volume related with the volume decline very slightly offset by an increase in selling, prices.general and administrative expenses was primarily attributable to increased variable freight expense.


Order rates for the first quarterInterest expense decreased by approximately 2.1% compared to the prior year period. Because orders declined slightly while deliveries were delayed due to COVID-19, order backlog at April 30, 2020 increased by approximately 21.2%. Backlog at April 30, 2020 was $47,578,000 compared to $39,254,000 at April 30, 2019.

Gross margin$111,000 for the three months ended April 30, 2020 decreased as a percentage of sales to 27.9% in the current quarter compared to 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. 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 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 first quarter of fiscal 2021 compared to the prior year. The reduced production levels adversely impacted factory efficiency.

Selling, general and administrative expenses decreased by approximately $750,000 compared to the prior year but increased as a percentage of sales. The decrease in spending is attributable to variable selling and service costs.


Interest expense decreased for the quarter ended April 30, 2020 compared to the same period last year.The Company has borrowed less money to finance accounts receivable and production of inventoryseasonal working capital in anticipation of increased summer shipping activity.the first quarter.


Income Taxes for the three-months ended April 30, 2021

Income tax benefit for the first quarter ended April 30, 2020 increased compared2021 is less than the prior year, primarily due to the prior year. The effective tax rate for the first quarter of 2021 was 41.1% compared to 31.6% for the same period last year.decrease in pre-tax loss.


Liquidity and Capital Resources
The impactApproximately 50% of COVID-19 on liquidity has been to moderate the seasonal increaseCompany's annual sales volume is shipped in accounts receivable and productionthe months of inventory for summer delivery. Both the increase in accounts receivable and inventory are traditionally financedJune through the Company’s lineAugust 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 ended April 30, 2020 was $9,887,000 compared to $18,286,000 for the same period lasteach 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 buildsmanufactures large quantities of inventory during the first quarterand second quarters of each fiscal year in anticipation of seasonally high summer shipments. DuringIn addition, the Company finances a large balance of accounts receivable during the peak season.

Accounts receivable increased by $6,770,000 at April 30, 2021 compared to the same date in the prior year.A portion of the increase was attributable to increased volume of sales, and a portion due to the timing of sales.Sales in the month of April 2021 were more than double sales in April 2020 due to the timing of school closures.Inventory decreased by $15,315,000 at April 30, 2021 compared to the prior year.The reduction was due to cautious inventory management combined with a significant increase in first quarter sales activity.The net reduction in working capital enabled the Company to reduce its borrowing under its revolving line of credit with PNC Bank as of April 30, 2021.Outstanding debt at April 30, 2021 includes an equipment loan from PNC in the amount of $611,000 and a seller financed mortgage on a manufacturing facility in Conway, Arkansas.

Interest expense for the three months ended April 30, 2020, the Company increased inventory by approximately $14.9 million compared to January 31, 2020, approximately $1.4 million2021 is less than what was added in the first quarter of 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 dateperiod last year. The increase in inventory during the first quarter of this year was financed through the Company's credit facility with PNC Bank, National Association ("PNC").

Borrowingdue to lower average outstanding borrowings under the Company's revolving line of credit with PNC 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. Bank.

Accrual basis capital expenditures were $922,000 for the three months ended April 30, 20202021 was $428,000 compared to $884,000$922,000 for the same period last year.The reduction in capital spending was a direct result of management controlling the expenditures to preserve cash due to the adverse impact that the COVID-19 pandemic had on the Company’s operations. Capital expenditures are being financed through the Company's credit facility with PNC.PNC Bank and operating cash flow and restricted to not exceed $8,000,000 by covenant.


Due to the adverse impact of the COVID-19 pandemic upon the Company’s operations, the Company violated its fixed-charge coverage ratio contained in the credit agreement with PNC Bank for the quarterly periods ended July 31, 2020 and October 31, 2020. The Company obtained limited waivers and amendments from PNC Bank for both events of default, Amendment No. 21 and 22 (see Note 7 to the condensed consolidated financial statements). Amendment No. 22 amended the ongoing fixed-charge coverage calculation to allow for the add back of certain COVID-19 related costs incurred from May 1, 2020 through April 30, 2021, not to exceed $2,000,000, to adjusted EBITDA and retained the minimum fixed-charge coverage ratio of 1.10:1.00 beginning with the four quarter period ending January 31, 2021.Based on the add back allowance for certain COVID-19 related costs, and the current forecasts through April 30, 2022, management believes the Company will maintain compliance with its financial covenants.

19

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 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.months.



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, 2020.  There have been no significant changes in the quarter ended April 30, 2020. New Accounting Pronouncements in the Notes to unaudited Condensed Consolidated Financial Statements in Item 1 to this Quarterly Report on Form 10-Q.2021.


Forward-Looking Statements
From time to time, including in this Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2020,2021, 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, 20202021 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 a smaller reporting company as defined by Rule 12b-2 of the Exchange Act as of our second quarter of fiscal 20202021 and are not required to provide the information under 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 April 30, 2020.2021. 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


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 disclosure controls and procedures. 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 such term
20

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.





21

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, 20202021 (the “Form 10-K”), which was filed with the SEC on April 30, 2020.28, 2021. 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


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:None.

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
3.331.1
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
32.1


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.
22

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

23




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: June 12, 202011, 2021By:/s/ Robert E. Dose
Robert E. Dose
Vice President — Finance
(Principal Financial Officer)



23
24