VIRCO MFG CORPORATION 10-Q

Item 1. Financial Statements Virco Mfg. Corporation Unaudited Condensed Consolidated Balance Sheets 10/31/2021 1/31/2021 10/31/2020 (In thousands) Assets Current assets Cash $ 1,742 $ 402 $ 1,202 Trade accounts receivables, net 24,824 9,759 16,877 Other receivables 60 26 60 Income tax receivable 108 199 322 Inventories 40,483 38,270 36,872 Prepaid expenses and other current assets 1,839 2,311 1,608 Total current assets 69,056 50,967 56,941 Non-current assets Property, plant and equipment Land 3,731 3,731 3,731 Land improvements 734 734 734 Buildings and building improvements 51,308 51,262 51,191 Machinery and equipment 113,816 112,098 111,844 Leasehold improvements 1,017 1,004 1,003 Total property, plant and equipment 170,606 168,829 168,503 Less accumulated depreciation and amortization 134,659 132,003 130,808 Net property, plant and equipment 35,947 36,826 37,695 Operating lease right-of-use assets 14,685 17,596 18,645 Deferred tax assets, net 10,364 11,716 10,682 Other assets, net 8,034 7,931 7,949 Total assets $ 138,086 $ 125,036 $ 131,912 See accompanying notes to unaudited condensed consolidated financial statements. 3 Virco Mfg. Corporation Unaudited Condensed Consolidated Balance Sheets 10/31/2021 1/31/2021 10/31/2020 (In thousands, except share and par value data) Liabilities Current liabilities Accounts payable $ 15,786 $ 8,421 $ 11,509 Accrued compensation and employee benefits 5,547 4,576 5,514 Current portion of long-term debt 504 887 885 Current portion operating lease liability 4,686 4,672 4,662 Other accrued liabilities 6,983 3,550 4,121 Total current liabilities 33,506 22,106 26,691 Non-current liabilities Accrued self-insurance retention 1,121 935 1,313 Accrued pension expenses 18,654 21,889 21,445 Income tax payable 68 65 72 Long-term debt, less current portion 12,547 9,553 5,185 Operating lease liability, less current portion 12,402 15,619 16,745 Other long-term liabilities 687 682 655 Total non-current liabilities 45,479 48,743 45,415 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 16,102,023 shares at 10/31/2021 and 15,918,642 at 1/31/2021 and 10/31/2020 161 159 159 Additional paid-in capital 120,238 119,655 119,402 Accumulated deficit ( 50,866 ) ( 52,042 ) ( 46,475 ) Accumulated other comprehensive loss ( 10,432 ) ( 13,585 ) ( 13,280 ) Total stockholders’ equity 59,101 54,187 59,806 Total liabilities and stockholders’ equity $ 138,086 $ 125,036 $ 131,912 See accompanying notes to unaudited condensed consolidated financial statements. 4 Virco Mfg. Corporation Unaudited Condensed Consolidated Statements of Income Three months ended 10/31/2021 10/31/2020 (In thousands, except per share data) Net sales $ 57,331 $ 57,221 Costs of goods sold 37,032 34,946 Gross profit 20,299 22,275 Selling, general and administrative expenses 17,782 16,457 Gain on sale of property, plant & equipment — ( 7 ) Operating income 2,517 5,825 Pension expense 570 542 Interest expense 327 419 Income before income taxes 1,620 4,864 Income tax expense 295 384 Net income $ 1,325 $ 4,480 Net income per common share: Basic $ 0.08 $ 0.28 Diluted $ 0.08 $ 0.28 Weighted average shares of common stock outstanding: Basic 16,033 15,733 Diluted 16,082 15,767 See accompanying notes to unaudited condensed consolidated financial statements. 5 Virco Mfg. Corporation Unaudited Condensed Consolidated Statements of Income Nine months ended 10/31/2021 10/31/2020 (In thousands, except per share data) Net sales $ 144,720 $ 134,494 Costs of goods sold 94,414 84,112 Gross profit 50,306 50,382 Selling, general and administrative expenses 46,016 43,876 Gain on sale of property, plant & equipment — ( 7 ) Operating income 4,290 6,513 Pension expense 1,800 1,626 Interest expense 979 1,317 Income before income taxes 1,511 3,570 Income tax expense 335 235 Net income $ 1,176 $ 3,335 Net income per common share: Basic $ 0.07 $ 0.21 Diluted $ 0.07 $ 0.21 Weighted average shares of common stock outstanding: Basic 15,927 15,566 Diluted 15,963 15,586 See accompanying notes to unaudited condensed consolidated financial statements. 6 Virco Mfg. Corporation Unaudited Condensed Consolidated Statements of Comprehensive Income Three months ended 10/31/2021 10/31/2020 (In thousands) Net income $ 1,325 $ 4,480 Other comprehensive income: Pension adjustments (net of tax expense of $ 186 and $ 124 at October 31, 2021 and 2020, respectively) 566 341 Net comprehensive income $ 1,891 $ 4,821 See accompanying notes to unaudited condensed consolidated financial statements. 7 Virco Mfg. Corporation Unaudited Condensed Consolidated Statements of Comprehensive Income Nine months ended 10/31/2021 10/31/2020 (In thousands) Net income $ 1,176 $ 3,335 Other comprehensive income: Pension adjustments (net of tax expense of $ 1,105 and $ 364 at October 31, 2021 and 2020, respectively) 3,153 1,031 Net comprehensive income $ 4,329 $ 4,366 See accompanying notes to unaudited condensed consolidated financial statements. 8 Virco Mfg. Corporation Unaudited Condensed Consolidated Statements of Cash Flows Nine months ended 10/31/2021 10/31/2020 (In thousands) Operating activities Net income $ 1,176 $ 3,335 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,431 3,895 Non-cash lease expense ( 294 ) 645 Provision for doubtful accounts 70 60 Gain on sale of property, plant and equipment — ( 7 ) Deferred income taxes 247 184 Stock-based compensation 759 759 Defined pension plan settlement 285 — Amortization of net actuarial loss for pension plans 1,192 1,395 Surrender of life insurance policies ( 584 ) — Changes in operating assets and liabilities: Trade accounts receivable ( 15,134 ) ( 5,177 ) Other receivables ( 34 ) — Inventories ( 2,213 ) 6,457 Income taxes 94 ( 23 ) Prepaid expenses and other current assets 591 388 Accounts payable and accrued liabilities 11,234 741 Net cash provided by operating activities 820 12,652 Investing activities: Capital expenditures ( 2,280 ) ( 1,900 ) Proceeds from sale of property, plant and equipment — 82 Proceeds from life insurance policy 483 — Net cash used in investing activities ( 1,797 ) ( 1,818 ) Financing activities: Borrowing from long-term debt 20,554 23,885 Repayment of long-term debt ( 17,943 ) ( 34,512 ) Payment on deferred financing costs ( 118 ) — Tax withholding payments on share-based compensation ( 176 ) ( 155 ) Net cash provided by (used in) financing activities 2,317 ( 10,782 ) Net increase in cash 1,340 52 Cash at beginning of period 402 1,150 Cash at end of period $ 1,742 $ 1,202 See accompanying notes to unaudited condensed consolidated financial statements. 9 Virco Mfg. Corporation Unaudited Consolidated Statements of Changes in Stockholders' Equity Three-Month Period Ended October 31, 2021 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 August 1, 2021 16,102,023 $ 161 $ 119,985 $ ( 52,191 ) $ ( 10,998 ) $ 56,957 Net income — — — 1,325 — 1,325 Cash dividends — — — — — — Pension adjustments, net of tax effect of $ 186 — — — — 566 566 Shares vested and others — — — — — — Stock compensation expense — — 253 — — 253 Balance at October 31, 2021 16,102,023 $ 161 $ 120,238 $ ( 50,866 ) $ ( 10,432 ) $ 59,101 Three-Month Period Ended October 31, 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 August 1, 2020 15,918,642 $ 159 $ 119,149 $ ( 50,955 ) $ ( 13,621 ) $ 54,732 Net income — — — 4,480 — 4,480 Cash dividends — — — — — — Pension adjustments, net of tax effect of $ 124 — — — — 341 341 Shares vested and others — — — — — — Stock compensation expense — — 253 — — 253 Balance at October 31, 2020 15,918,642 $ 159 $ 119,402 $ ( 46,475 ) $ ( 13,280 ) $ 59,806 Nine-Month Period Ended October 31, 2021 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, 2021 15,918,642 $ 159 $ 119,655 $ ( 52,042 ) $ ( 13,585 ) $ 54,187 Net income — — — $ 1,176 — 1,176 Cash dividends — — — — — — Pension adjustments, net of tax effect of $ 1,105 — — — — 3,153 3,153 Shares vested and others 183,381 2 ( 176 ) — — ( 174 ) Stock compensation expense — — 759 — — 759 Balance at October 31, 2021 16,102,023 $ 161 $ 120,238 $ ( 50,866 ) $ ( 10,432 ) $ 59,101 10 Nine-Month Period Ended October 31, 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 income — — — $ 3,335 — 3,335 Cash dividends — — — — — — Pension adjustments, net of tax effect of $ 364 — — — — 1,031 1,031 Shares vested and others 205,093 2 ( 139 ) — — ( 137 ) Stock compensation expense — — 759 — — 759 Balance at October 31, 2020 15,918,642 $ 159 $ 119,402 $ ( 46,475 ) $ ( 13,280 ) $ 59,806 See accompanying notes to unaudited condensed consolidated financial statements. 11 VIRCO MFG. CORPORATION Notes to unaudited Condensed Consolidated Financial Statements October 31, 2021 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, 2021 (“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, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2022. The balance sheet at January 31, 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 reclassification of certain prior year sales allowances of approximately $ 480,000 and $ 869,000 was made for the three and nine months ended October 31, 2020, respectively. The amounts of reclassification representing the replacement of damaged goods, previously presented in net sales, is presented in costs of goods sold in the accompanying prior period statements of income or operations, which conform 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 after the interim financial statements are issued. The Company has experienced an overall decline in net sales and net income for the fiscal year ended January 31, 2021. For the first nine-months of fiscal 2022 the Company experienced an increase in shipments and material increase in orders as schools received funding to support a return to classroom instruction. However, as a result of severe supply chain disruptions and labor shortages, the Company has experienced an increase in raw material prices and an increase in backlog which negatively impacted the Company’s net income for the nine months ended October 31, 2021. As a result the Company was in violation of its financial covenants under the Restated Credit Agreement as of October 31, 2021. On December 7, 2021, the Company successfully negotiated and entered into Amendment No. 1 to the Restated Credit Agreement (“Amendment No. 1”) with PNC Bank. Amendment No. 1 provided a limited waiver of the Company’s violation of the covenant to maintain a fixed charge coverage ratio of at least 1.10 to 1.00 for the four fiscal quarter periods ended October 31, 2021, and amended the fixed charge coverage ratio as follows: (i) 1.00 to 1.00 for each of the consecutive four fiscal quarter periods of Borrowers ending January 31, 2022 and April 30, 2022, and (ii) 1.10 to 1.00 for each consecutive four fiscal quarter periods of Borrowers ending thereafter. In connection with Amendment No. 1, the Company also agreed to pay to PNC Bank a non-refundable fee of $ 50,000 (see Note 7 ). The Company expects the impact of supply chain constraints and 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 raw material costs, and its ability to introduce price increases and manage certain controllable expenditures, management believes it will maintain compliance with the financial covenants for the next 12 months after the interim financial statements are issued 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 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 12 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. For the three and nine months ended October 31, 2021, management believes that the traditional peak season has been and will continue to be impacted by economic conditions related to COVID 19. The Company has experienced difficulty sourcing desired levels of temporary labor and permanent hires in the manufacturing and distribution facilities. In addition, the Company is experiencing supply chain disruptions for raw materials. These conditions have adversely impacted sales volume for the months of June, July, August, and September. In October, sales increased compared to the prior year. The Company anticipates that a larger portion of its annual sales will occur in fourth quarter of the current fiscal year compared to prior years. 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 October 31, 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 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 ASU 2019-10, 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. 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. 13 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. We do not consider our revenue generated through direct-to-customers and resellers 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. 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 records valuation adjustments for the excess cost of the inventory over its estimated net realizable value. Valuation adjustments for slow-moving and obsolete inventory are calculated using an estimated percentage applied to inventories based on a physical inspection of the product in connection with a physical inventory, a review of slow-moving products and component stage, inventory category, historical and forecasted consumption of sales, 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 adjustments 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, 2021, January 31, 2021 and October 31, 2020: 10/31/2021 1/31/2021 10/31/2020 (in thousands) Finished goods $ 14,053 $ 15,606 $ 15,442 Work in process 14,299 11,907 11,440 Raw materials 12,131 10,757 9,990 Total inventories $ 40,483 $ 38,270 $ 36,872 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. In accordance with ASC 842, quantitative information regarding our leases is as follows: 14 Three-Months Ended Nine-Months Ended 10/31/2021 10/31/2020 10/31/2021 10/31/2020 (in thousands, except lease term and discount rate) Operating lease cost $ 1,358 $ 1,431 $ 3,878 $ 4,343 Short-term lease cost 93 55 258 214 Short-term sublease income ( 10 ) ( 10 ) ( 30 ) ( 30 ) Variable lease cost 14 ( 18 ) 621 352 Total lease cost $ 1,455 $ 1,458 $ 4,727 $ 4,879 Other operating leases information: Cash paid for amounts included in the measurement of lease liabilities $ 4,172 $ 3,697 Right-of-use assets obtained in exchange for new lease liabilities $ 330 $ 587 Weighted-average remaining lease term (years) 3.4 4.3 Weighted-average discount rate 6.4 % 6.4 % Minimum future lease payments for operating leases in effect as of October 31, 2021, are as follows: Operating Lease (in thousands) Remaining of 2022 $ 1,452 2023 5,523 2024 5,381 2025 5,402 2026 1,350 Thereafter — Remaining balance of lease payments $ 19,108 Short-term lease liabilities $ 4,686 Long-term lease liabilities 12,402 Total lease liabilities $ 17,088 Difference between undiscounted cash flows and discounted cash flows $ 2,020 Note 7. Debt Outstanding balances for the Company’s long-term debt were as follows: 10/31/2021 1/31/2021 10/31/2020 (in thousands) Revolving credit line $ 7,866 $ 4,590 $ — Other 5,185 5,850 6,070 Total debt 13,051 10,440 6,070 Less current portion 504 887 885 Non-current portion $ 12,547 $ 9,553 $ 5,185 15 The Company and Virco Inc., its wholly-owned subsidiary (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 was amended numerous times since its origination in December 2011. On September 28, 2021, the Borrowers entered into an Amended and Restated Revolving Credit and Security Agreement (the “Restated Credit Agreement”) with PNC Bank, which amended and restated the prior Credit Agreement. The material terms of the Restated Credit Agreement are substantially the same as those of the prior Credit Agreement. The Restated Credit Agreement permits the Company to issue dividends or make payments with respect to the Company’s capital stock in an aggregate amount up to $ 3,000,000 during any fiscal year, provided that no default shall have occurred or is continuing or would result from any such payment, and the Company must demonstrate pro forma compliance with a 12-month trailing fixed charge coverage ratio of not less than 1.20 :1.00 as of the fiscal quarter immediately preceding the date of any such dividend or payment. The Restated Credit Agreement also requires the Company to maintain a minimum fixed charge coverage ratio, and contains numerous other covenants that limit under certain circumstances the ability of the Borrowers and their subsidiaries to, among other things, merge with or acquire other entities, incur new liens, incur additional indebtedness, sell assets outside of the ordinary course of business, enter into transactions with affiliates, or substantially change the general nature of the business of the Borrowers. In connection with the Restated Credit Agreement, the Company also agreed to pay to PNC Bank a non-refundable fee of $ 50,000 . The maturity date of the Restated Credit Agreement is March 19, 2023. The other material terms of the Restated Credit Agreement are substantially the same as those of the original Credit Agreement, 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 through July of each year, minus undrawn amounts of letters of credit and reserves and (ii) an equipment loan of $ 2,000,000 . The Restated Credit Agreement is secured by substantially all of the Borrowers’ personal property and certain of the Borrowers’ 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 Restated Credit Agreement is subject to certain prepayment penalties upon earlier termination of the Restated Credit Agreement. Prior to the maturity date, principal amounts outstanding under the Restated 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, 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 Restated Credit Agreement also contains certain financial covenants, including a fixed charge coverage ratio beginning on February 1 st , 2021 of not less than 1.10 to 1.00, and capital expenditures not to exceed $ 8,000,000 . The Company was in violation of its financial covenants under the Restated Credit Agreement as of October 31, 2021 due to a decline in the Company’s net income primarily attributable to the effects of severe supply chain disruptions and labor shortages due to COVID-19. On December 7, 2021, the Company successfully negotiated and entered into Amendment No. 1 to the Restated Credit Agreement (“Amendment No. 1”) with PNC Bank. Amendment No. 1 provided a limited waiver of the Company’s violation of the covenant to maintain a fixed charge coverage ratio of at least 1.10 to 1.00 for the four fiscal quarter periods ended October 31, 2021, and amended the fixed charge coverage ratio as follows: (i) 1.00 to 1.00 for each of the consecutive four fiscal quarter periods of Borrowers ending January 31, 2022 and April 30, 2022, and (ii) 1.10 to 1.00 for each consecutive four fiscal quarter periods of Borrowers ending thereafter. In connection with Amendment No. 1, the Company also agreed to pay to PNC Bank a non-refundable fee of $ 50,000 . The Revolving Credit Facility bears interest, at the Borrowers’ option, at either the Alternate Base Rate (as defined in the Credit Agreement) or the LIBOR 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 1.25 % to 1.75 %, and the applicable margin for LIBOR Rate loans is a percentage within a range of 2.25 % to 2.75 %, and may be increased at the Lender’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 LIBOR Rate loans. The interest rate as of October 31, 2021 was 4.5 %. The Company also incurs a fee on the unused portion of the revolving line of credit at a rate of 0.375 %. 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 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 is subject to an early termination fee upon an earlier termination of the Revolving Credit Facility. During the fiscal year ending January 31, 2021, the impact of COVID-19 on liquidity was to moderate the seasonal increase in accounts receivable and production of inventory for summer delivery. Seasonal increases in accounts receivable and inventory 16 are traditionally financed through the Company’s line of credit with PNC Bank. Reductions in inventory were substantially offset by a reduction in borrowing under the revolving line with PNC Bank. In addition to the financial covenants, the Restated Credit Agreement contains events of default as disclosed in Note 3 to our Annual Report on Form 10-K for the year-ended January 31, 2021. Substantially all of the Borrowers' accounts receivable are automatically and promptly swept to repay amounts outstanding under the Restated Credit Agreement upon receipt by the Borrowers. Due to this automatic liquidating nature of the Restated 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. The Company's revolving line of credit with PNC is structured to provide seasonal credit availability during the Company's peak summer season. Approximately $ 13,741,000 was available for borrowing as of October 31, 2021. Management believes that the carrying value of debt approximated fair value at October 31, 2021, as all of the long-term debt bears interest at variable rates based on prevailing market conditions. Note 8. Income Taxes In assessing the realizability of deferred tax assets, the Company considers whether it is more-likely-than-not that some portion or all of its deferred tax 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. As a part of this evaluation, the Company assesses 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, the effects of seasonality on the Company’s business and the effects of severe supply chain disruptions and labor shortages due to COVID-19, the Company determined that its U.S. federal deferred tax assets are more-likely-than-not to be realizable, but that valuation allowances of $ 1,237,000 , $ 1,064,000 and $ 1,133,000 as of October 31, 2021, January 31, 2021 and October 31, 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 three months ended October 31, 2021 and 2020, the effective tax rates were 18.2 % and 7.9 %, respectively. For the nine months ended October 31, 2021 and 2020, the effective tax rates were 22.2 % and 6.6 %, respectively. Effective tax rates for the three months and nine months ended October 31, 2021 and 2020 were 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 on net deferred tax assets. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed. 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 provides 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. The new limitation has increased from 30 to 50 percent of adjusted taxable income. 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. 17 Note 9. Net income per Share Three Months Ended Nine Months Ended 10/31/2021 10/31/2020 10/31/2021 10/31/2020 (In thousands, except per share data) Net income $ 1,325 $ 4,480 $ 1,176 $ 3,335 Weighted average shares of common stock outstanding 16,033 15,733 15,927 15,566 Net effect of dilutive shares - based on the treasury stock method using average market price 49 34 36 20 Totals 16,082 15,767 15,963 15,586 Net income per share - basic $ 0.08 $ 0.28 $ 0.07 $ 0.21 Net income per share - diluted $ 0.08 $ 0.28 $ 0.07 $ 0.21 18 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 Company's 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 period ended October 31, 2021, the Company granted 68,870 awards to non-employee directors, vested 140,295 shares according to their terms and forfeited 0 shares under the 2019 Plan. As of October 31, 2021, there were approximately 628,435 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 period ended October 31, 2021, the Company granted 0 restricted awards to non-employee directors and 0 units to its employees; vested 0 stock awards and 119,200 units according to their terms and forfeited 0 stock units under the 2011 Plan. As of October 31, 2021, there were approximately 12,892 shares available for future issuance under the 2011 Plan. During the three months ended October 31, 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 $ 54,000 and $ 199,000 , respectively. During the three months ended October 31, 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 $ 65,000 and $ 188,000 , respectively. During the nine months ended October 31, 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 $ 164,000 and $ 595,000 , respectively. During the nine months ended October 31, 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 $ 193,000 and $ 566,000 , respectively. As of October 31, 2021, there was $ 1,415,000 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 3 years. 19 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 Annual Report on 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, 2021, benefit accruals under this plan were frozen since December 31, 2003. During the second quarter ended July 31, 2021, the Company, at the retirees request, paid lump-sum distributions for the related benefit obligations. As the amount of the lump-sum settlement exceeded the sum of the service and interest cost for the year, the distribution was treated as a settlement in accordance with U.S. GAAP, resulting in plan settlement loss of $ 285,000 recorded in pension expense in the accompanying condensed consolidated statements of operations and an actuarial gain on the plan re-measurement of $ 2,059,000 , net of tax, recorded to accumulated other comprehensive income for the three and nine months ended October 31, 2021. The net periodic pension cost for the Pension Plan and the VIP Plan for the three and nine months ended October 31, 2021 and 2020 were as follows: Combined Employee Retirement Plans Three Months Ended Nine Months Ended 10/31/2021 10/31/2020 10/31/2021 10/31/2020 (in thousands) Service cost $ — $ — $ — $ — Interest cost 281 301 841 903 Expected return on plan assets ( 218 ) ( 224 ) ( 654 ) ( 672 ) Plan settlement 65 — 285 — Amortization of prior service cost — — — — Recognized net actuarial loss 442 465 1,328 1,395 Benefit cost $ 570 $ 542 $ 1,800 $ 1,626 401(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, 2021 and 2020, the plan held 1,026,096 shares and 893,811 shares of Virco stock, respectively. For the three months ended October 31, 2021 and 2020, the compensation costs incurred for employer match, which is paid in the form of Company stock, was $ 217,000 and $ 182,000 , respectively. For the nine months ended October 31, 2021 and 2020, the compensation costs incurred for employer match, which is paid in the form of Company stock, was $ 608,000 and $ 587,000 , respectively. Note 12. Warranty Accrual The Company provides a warranty against all substantial defects in material and workmanship. The standard warranty offered on products sold through January 31, 2013 is ten 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. Effective January 1, 2017, the Company modified the standard warranty offered on products sold after January 1, 2017 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, 2021 and 2020: 20 Three Months Ended Nine Months Ended 10/31/2021 10/31/2020 10/31/2021 10/31/2020 (in thousands) Beginning balance $ 700 $ 750 $ 700 $ 800 Provision 28 ( 46 ) 84 ( 3 ) Costs incurred ( 28 ) ( 4 ) ( 84 ) ( 97 ) Ending balance $ 700 $ 700 $ 700 $ 700 Note 13. Contingencies The Company has a self-insured retention for product losses up to $ 250,000 per occurrence, workers’ compensation liability losses up to $ 250,000 per occurrence, general liability losses up to $ 50,000 and 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 14. Delivery Costs For the three months ended October 31, 2021 and 2020, shipping and classroom delivery costs of approximately $ 6,209,000 and $ 6,014,000 , respectively, were included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income. For the nine months ended October 31, 2021 and 2020, shipping and classroom delivery costs of approximately $ 14,242,000 and $ 12,999,000 , 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. Through April 30, 2021, the Company operated 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. Appropriate measures are being taken to protect the health of employees performing essential on-site operations. Office employees and others who can work from home continued to work from home. The Company’s Conway, Arkansas facilities, which represent approximately two thirds of the Company’s production and distribution capacity, has been fully operational 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. Note 16. Subsequent Events As discussed in Notes 1 and 7, the Company executed Amendment No. 1 to the Restated Credit Agreement. 21