VIRCO MFG CORPORATION 10-Q

Item 1. Financial Statements Virco Mfg. Corporation Unaudited Condensed Consolidated Balance Sheets 7/31/2022 1/31/2022 7/31/2021 (In thousands) Assets Current assets Cash $ 2,179 $ 1,359 $ 641 Trade accounts receivables, net 44,286 17,769 34,400 Other receivables 95 118 51 Income tax receivable 111 152 124 Inventories 61,228 47,373 42,393 Prepaid expenses and other current assets 2,068 2,076 2,151 Total current assets 109,967 68,847 79,760 Non-current assets Property, plant and equipment Land 3,731 3,731 3,731 Land improvements 653 653 734 Buildings and building improvements 51,456 51,334 51,263 Machinery and equipment 115,029 113,315 112,544 Leasehold improvements 1,012 1,009 993 Total property, plant and equipment 171,881 170,042 169,265 Less accumulated depreciation and amortization 136,973 134,715 133,517 Net property, plant and equipment 34,908 35,327 35,748 Operating lease right-of-use assets 12,115 13,870 15,602 Deferred tax assets, net 488 399 10,840 Other assets, net 8,051 8,002 7,972 Total assets $ 165,529 $ 126,445 $ 149,922 See accompanying notes to unaudited condensed consolidated financial statements. 3 Virco Mfg. Corporation Unaudited Condensed Consolidated Balance Sheets 7/31/2022 1/31/2022 7/31/2021 (In thousands, except share and par value data) Liabilities Current liabilities Accounts payable $ 27,290 $ 19,785 $ 18,821 Accrued compensation and employee benefits 6,873 5,596 5,502 Current portion of long-term debt 22,736 340 5,526 Current portion operating lease liability 4,909 4,734 4,678 Other accrued liabilities 10,057 5,829 9,147 Total current liabilities 71,865 36,284 43,674 Non-current liabilities Accrued self-insurance retention 1,436 965 1,374 Accrued pension expenses 15,238 15,430 19,000 Income tax payable 73 71 65 Long-term debt, less current portion 14,504 14,173 14,738 Operating lease liability, less current portion 9,241 11,437 13,429 Other long-term liabilities 667 639 685 Total non-current liabilities 41,159 42,715 49,291 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 16,210,985 shares at 7/31/2022 and 16,102,023 at 1/31/2022 and 7/31/2021 162 161 161 Additional paid-in capital 120,684 120,492 119,985 Accumulated deficit ( 62,582 ) ( 67,178 ) ( 52,191 ) Accumulated other comprehensive loss ( 5,759 ) ( 6,029 ) ( 10,998 ) Total stockholders’ equity 52,505 47,446 56,957 Total liabilities and stockholders’ equity $ 165,529 $ 126,445 $ 149,922 See accompanying notes to unaudited condensed consolidated financial statements. 4 Virco Mfg. Corporation Unaudited Condensed Consolidated Statements of Income Three months ended 7/31/2022 7/31/2021 (In thousands, except per share data) Net sales $ 82,797 $ 59,022 Costs of goods sold 50,952 36,703 Gross profit 31,845 22,319 Selling, general and administrative expenses 20,671 16,251 Operating income 11,174 6,068 Unrealized loss on investment in trust account 305 — Pension expense 196 724 Interest expense 698 359 Income before income taxes 9,975 4,985 Income tax expense 295 1,225 Net income $ 9,680 $ 3,760 Net income per common share: Basic $ 0.60 $ 0.24 Diluted $ 0.60 $ 0.24 Weighted average shares of common stock outstanding: Basic 16,108 15,920 Diluted 16,108 15,929 See accompanying notes to unaudited condensed consolidated financial statements. 5 Virco Mfg. Corporation Unaudited Condensed Consolidated Statements of Operations Six months ended 7/31/2022 7/31/2021 (In thousands, except per share data) Net sales $ 114,881 $ 87,389 Costs of goods sold 73,329 57,382 Gross profit 41,552 30,007 Selling, general and administrative expenses 35,122 28,234 Operating income 6,430 1,773 Unrealized loss on investment in trust account 305 — Pension expense 391 1,230 Interest expense 1,125 652 Income (loss) before income taxes 4,609 ( 109 ) Income tax expense 13 40 Net income (loss) $ 4,596 $ ( 149 ) Net income (loss) per common share: Basic $ 0.29 $ ( 0.01 ) Diluted $ 0.29 $ ( 0.01 ) Weighted average shares of common stock outstanding: Basic 16,071 15,872 Diluted 16,071 15,872 See accompanying notes to unaudited condensed consolidated financial statements. 6 Virco Mfg. Corporation Unaudited Condensed Consolidated Statements of Comprehensive Income Three months ended 7/31/2022 7/31/2021 (In thousands) Net income $ 9,680 $ 3,760 Other comprehensive income: Pension adjustments (net of tax expense of $ 0 and $ 803 at July 31, 2022 and 2021, respectively) 135 2,260 Net comprehensive income $ 9,815 $ 6,020 See accompanying notes to unaudited condensed consolidated financial statements. 7 Virco Mfg. Corporation Unaudited Condensed Consolidated Statements of Comprehensive Income Six months ended 7/31/2022 7/31/2021 (In thousands) Net income (loss) $ 4,596 $ ( 149 ) Other comprehensive income: Pension adjustments (net of tax expense of $ 0 and $ 919 at July 31, 2022 and 2021, respectively) 270 2,587 Net comprehensive income $ 4,866 $ 2,438 See accompanying notes to unaudited condensed consolidated financial statements. 8 Virco Mfg. Corporation Unaudited Condensed Consolidated Statements of Cash Flows Six months ended 7/31/2022 7/31/2021 (In thousands) Operating activities Net income (loss) $ 4,596 $ ( 149 ) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 2,259 2,289 Non-cash lease benefits ( 265 ) ( 192 ) Provision for doubtful accounts 35 46 Amortization of debt issuance costs 69 — Deferred income taxes ( 89 ) ( 42 ) Stock-based compensation 406 506 Defined pension plan settlement — 220 Amortization of net actuarial loss for pension plans 270 885 Non-cash unrealized loss on investment 305 — Changes in operating assets and liabilities: Trade accounts receivable ( 26,552 ) ( 24,687 ) Other receivables 23 ( 25 ) Inventories ( 13,855 ) ( 4,124 ) Income taxes 43 75 Prepaid expenses and other current assets ( 91 ) 9 Accounts payable and accrued liabilities 12,876 16,632 Net cash used in operating activities ( 19,970 ) ( 8,557 ) Investing activities: Capital expenditures ( 1,524 ) ( 963 ) Purchases of marketable securities in trust accounts ( 4,856 ) — Proceeds from sale of marketable securities in trust accounts 2,112 — Proceeds for surrendering life insurance policies 2,744 110 Net cash used in investing activities ( 1,524 ) ( 853 ) Financing activities: Borrowing from long-term debt 28,352 14,865 Repayment of long-term debt ( 5,625 ) ( 5,040 ) Payment on deferred financing costs ( 200 ) — Tax withholding payments on share-based compensation ( 213 ) ( 176 ) Net cash provided by financing activities 22,314 9,649 Net increase in cash 820 239 Cash at beginning of period 1,359 402 Cash at end of period $ 2,179 $ 641 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 July 31, 2022 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 May 1, 2022 16,102,023 $ 161 $ 120,745 $ ( 72,262 ) $ ( 5,894 ) $ 42,750 Net income — — — 9,680 — 9,680 Cash dividends — — — — — — Pension adjustments, net of tax effect of $ 0 — — — — 135 135 Shares vested and others 108,962 1 ( 214 ) — — ( 213 ) Stock compensation expense — — 153 — — 153 Balance at July 31, 2022 16,210,985 $ 162 $ 120,684 $ ( 62,582 ) $ ( 5,759 ) $ 52,505 Three-Month Period Ended July 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 May 1, 2021 15,918,642 $ 159 $ 119,908 $ ( 55,951 ) $ ( 13,258 ) $ 50,858 Net income — — — 3,760 — 3,760 Cash dividends — — — — — — Pension adjustments, net of tax effect of $ 803 — — — — 2,260 2,260 Shares vested and others 183,381 2 ( 176 ) — — ( 174 ) Stock compensation expense — — 253 — — 253 Balance at July 31, 2021 16,102,023 $ 161 $ 119,985 $ ( 52,191 ) $ ( 10,998 ) $ 56,957 Six-Month Period Ended July 31, 2022 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, 2022 16,102,023 $ 161 $ 120,492 $ ( 67,178 ) $ ( 6,029 ) $ 47,446 Net income — — — 4,596 — 4,596 Cash dividends — — — — — — Pension adjustments, net of tax effect of $ 0 — — — — 270 270 Shares vested and others 108,962 1 ( 214 ) — — ( 213 ) Stock compensation expense — — 406 — — 406 Balance at July 31, 2022 16,210,985 $ 162 $ 120,684 $ ( 62,582 ) $ ( 5,759 ) $ 52,505 10 Six-Month Period Ended July 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 loss — — — ( 149 ) — ( 149 ) Cash dividends — — — — — — Pension adjustments, net of tax effect of $ 919 — — — — 2,587 2,587 Shares vested and others 183,381 2 ( 176 ) — — ( 174 ) Stock compensation expense — — 506 — — 506 Balance at July 31, 2021 16,102,023 $ 161 $ 119,985 $ ( 52,191 ) $ ( 10,998 ) $ 56,957 See accompanying notes to unaudited condensed consolidated financial statements. 11 VIRCO MFG. CORPORATION Notes to unaudited Condensed Consolidated Financial Statements July 31, 2022 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, 2022 (“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 and six months ended July 31, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2023. The balance sheet at January 31, 2022 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. Liquidity 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. Note 2. Seasonality and Management Use of Estimates The market for educational furniture is marked by extreme seasonality, with approximately 50 % of the Company’s total sales typically occurring from June to August each year, the Company’s peak season. Hence, the Company typically builds and carries significant amounts of inventory during and in anticipation of this peak summer season to facilitate the rapid delivery requirements of customers in the educational market. This requires a large up-front investment in inventory, labor, storage and related costs as inventory is built in anticipation of peak sales during the summer months. As the capital required for this build-up generally exceeds cash available from operations, the Company has generally relied on third-party bank financing to meet cash flow requirements during the build-up period immediately preceding the peak season. In addition, the Company typically is faced with a large balance of accounts receivable during the peak season. This occurs for two primary reasons. First, accounts receivable balances typically increase during the peak season as shipments of products increase. Second, many customers during this period are educational institutions and government entities, which tend to pay accounts receivable slower than commercial customers. For the three and six months ended July 31, 2022, management believes that the traditional peak season has been and will continue to be impacted by economic conditions related to supply chain disruption and COVID 19, although not as severely as in the prior year. The Company continues to experience supply chain disruptions for raw materials. In addition, the Company's customers are experiencing supply chain disruption impacting the completion of new school construction and renovation. 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 and self-insurance; 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 July 31, 2022, including those resulting from the continuing impacts of the COVID-19 pandemic and supply chain disruption, may result in actual outcomes that differ from those contemplated by our assumptions and estimates. Note 3. New Accounting Pronouncements Recently Issued Accounting Updates 12 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 beginning 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. Sales are recorded net of discounts, sales incentives and rebates, sales taxes and estimated returns and allowances. The Company offers sales incentives and discounts through various regional and national programs to our customers. These programs include product rebates, product returns allowances and trade promotions. Variable consideration for these programs is estimated in the transaction price at contract inception based on current sales levels and historical experience using the expected value method, subject to constraint. The Company generates revenue primarily by manufacturing and distributing products through resellers and direct-to-customers. 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. 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 material 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 July 31, 2022, January 31, 2022 and July 31, 2021: 13 7/31/2022 1/31/2022 7/31/2021 (in thousands) Finished goods $ 26,336 $ 16,731 $ 14,163 Work in process 19,138 14,732 14,061 Raw materials 15,754 15,910 14,169 Total inventories $ 61,228 $ 47,373 $ 42,393 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 quantitative information regarding our leases is as follows: Three Months Ended Six Months Ended 7/31/2022 7/31/2021 7/31/2022 7/31/2021 (in thousands, except lease term and discount rate) Operating lease cost $ 1,288 $ 1,283 $ 2,615 $ 2,520 Short-term lease cost 79 68 176 165 Sublease income ( 10 ) ( 10 ) ( 20 ) ( 20 ) Variable lease cost 278 77 531 607 Total lease cost $ 1,635 $ 1,418 $ 3,302 $ 3,272 Other operating leases information: Cash paid for amounts included in the measurement of lease liabilities $ 2,880 $ 2,712 Right-of-use assets obtained in exchange for new lease liabilities $ 398 $ 165 Weighted-average remaining lease term (years) 2.7 3.6 Weighted-average discount rate 6.38 % 6.40 % Minimum future lease payments for operating leases in effect as of July 31, 2022, are as follows: 14 Operating Lease For the year ending January 31, (in thousands) Remaining of 2023 $ 2,829 2024 5,617 2025 5,615 2026 1,401 2027 — Thereafter — Remaining balance of lease payments $ 15,462 Short-term lease liabilities 4,909 Long-term lease liabilities 9,241 Total lease liabilities $ 14,150 Difference between undiscounted cash flows and discounted cash flows $ 1,312 Note 7. Debt Outstanding balances for the Company’s long-term debt were as follows: 7/31/2022 1/31/2022 7/31/2021 (in thousands) Revolving credit line $ 32,502 $ 9,551 $ 14,857 Other 4,738 4,962 5,407 Total debt 37,240 14,513 20,264 Less current portion 22,736 340 5,526 Non-current portion $ 14,504 $ 14,173 $ 14,738 The Company and Virco Inc., its wholly-owned subsidiary (the “Borrowers”) have 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 and effectively incorporated all of the prior amendments into an amended and restated form of 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. 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. The Restated 15 Credit Agreement is secured by substantially all of the Borrowers’ personal property and certain of the Borrowers’ real property. The Restated Credit Agreement is subject to certain prepayment penalties upon early 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 and limits on capital expenditures. The Company was in violation of its financial covenants under the Restated Credit Agreement as of January 31, 2022, due to an increase in the Company’s net loss primarily attributable to the effects of supply chain disruptions and labor shortages. On April 15, 2022, the Company entered into Amendment No. 2 to the Credit Agreement (“Amendment No. 2”), which implemented the following changes to the Credit Agreement and Revolving Credit Facility: i. extended the final maturity date of the Revolving Credit Facility from March 19, 2023 to April 15, 2027; ii. increased the borrowing limit from $ 65,000,000 to $ 70,000,000 in July 2022 and August 2022, and increased the borrowing limit from $ 40,000,000 to $ 45,000,000 in October 2022; iii. waived the Company’s violation of the covenant to maintain a fixed charge coverage ratio of at least 1.00 for the period ended January 31, 2022; iv. for the first and second quarters of fiscal year ending January 31, 2023, implemented a temporary year-to-date adjusted EBITDA covenant in lieu of testing the fixed charge coverage ratio covenant as of such quarters, with quarterly testing of the fixed charge coverage ratio to resume for the third fiscal quarter and thereafter; v. permits a sale and leaseback transaction of the Company’s property at 1655 Amity Road and release of the lender’s pledge on the property, with the net proceeds to be used for a proposed share repurchase; vi. retired LIBOR pricing on the Revolving Credit Facility and replaced with BSBY index, with pricing tiers and spreads to remain the same; vii. extended the P-card, ACH Credit, and ACH debit facilities for an additional year beyond their current maturities; and viii. Borrowers to pay a $ 250,000 extension fee and $ 75,000 waiver and amendment fee, with $ 200,000 due at closing and $ 125,000 due on the first anniversary of closing. Based on the Company’s current projections, including COVID-19 related costs, raw material costs and its ability to introduce price increases, management believes it will maintain compliance with the financial covenants within Amendment No. 2, although there are uncertainties there within, such as raw material costs and supply chain challenges. The Company was in compliance with its debt covenants as of July 31, 2022. In addition to the financial covenants, the Restated Credit Agreement provides for customary events of default, subject to certain cure periods and other limitations. 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 $ 37,498,000 was available for borrowing as of July 31, 2022. The interest rate as of July 31, 2022 was 7.25 %. The Company also incurs a fee on the unused portion of the revolving line of credit at a rate of 0.375 %. Management believes that the carrying value of debt approximated fair value at July 31, 2022, 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 16 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 carry backs, 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. The Company incurred operating losses for fiscal years ended January 31, 2022 and 2021 and when combined with operating results from fiscal year ended January 31, 2020, the Company had incurred a cumulative operating loss for the last three fiscal years. As a result, the Company identified objective and verifiable negative evidence in the form of cumulative losses in the U.S. and in certain state jurisdictions over the preceding twelve quarters ended January 31, 2022. While the Company has taken significant measures to return to profitability, and order rates at the beginning of the year are favorable, the short-term outlook for the school furniture market is challenging, particularly relating to ongoing supply chain difficulties. During the fourth quarter of the year ended January 31, 2022, based on 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 the realization of a majority of the net deferred tax assets no longer met the more likely than not criteria and a valuation allowance was recorded against the majority of the net deferred tax assets. Valuation allowances of $ 9,241,000 , $ 11,412,000 and $ 1,144,000 as of July 31, 2022, January 31, 2022 and July 31, 2021, respectively, are needed for federal deferred tax assets and certain state net operating loss carryforwards to reduce the carrying amount of deferred tax assets to an amount that is more likely than not to be realized. The Company has taken significant measures to return to profitability, order rates for the first six months of the year were favorable, and the second quarter and year-to-date results are showing significant improvement compared to the prior year. Despite these improvements the Company is still operating at a cumulative twelve quarter operating loss at July 31, 2022. If the current favorable trends in operating income continue through the balance of the year, the Company will utilize a material portion of the net operating losses and will re-evaluate the balance of the valuation allowance on a quarterly basis. For the three months ended July 31, 2022 and 2021, the effective income tax rates were 3.0 % and 24.6 %, respectively. For the six months ended July 31, 2022 and 2021, the effective income tax rates were 0.3 % and ( 36.7 )%, respectively. The change in effective tax rates for the three and six months ended July 31, 2022, was primarily due to the recording of a valuation allowance needed for federal deferred tax assets and certain state net operating loss carryforwards which commenced in the fourth quarter of fiscal year ended January 31, 2022 and continued through the period ended July 31, 2022. The effective tax rate for the three and six months ended July 31, 2021 was 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. The January 31, 2017 and subsequent fiscal years remain open for examination by the IRS and state tax authorities. The Company is not currently under any state examination. The Company is currently under IRS examination for its fiscal year ended January 31, 2016 Federal tax return. Note 9. Net Income (loss) per Share Three Months Ended Six Months Ended 7/31/2022 7/31/2021 7/31/2022 7/31/2021 (In thousands, except per share data) Net income (loss) $ 9,680 $ 3,760 $ 4,596 $ ( 149 ) Weighted average shares of common stock outstanding 16,108 15,920 16,071 15,872 Dilutive effect of common stock equivalents from equity incentive plans — 9 — — Totals 16,108 15,929 16,071 15,872 Net income (loss) per share - basic $ 0.60 $ 0.24 $ 0.29 $ ( 0.01 ) Net income (loss) per share - diluted (a) $ 0.60 $ 0.24 $ 0.29 $ ( 0.01 ) (a) For periods ended July 31, 2022, there were 0 dilutive shares of common stock equivalent included in the computation of net income per share. For the six-month period ended July 31, 2021, approximately 1,500 shares of common stock equivalents were excluded in the computation of diluted net loss per share, as the effect would be anti-dilutive since the Company reported a net loss. 17 Note 10. Stock-Based Compensation Stock Incentive Plan The Company's two stock incentive plans are the 2019 Omnibus Equity Incentive Plan (the “2019 Plan”) and the 2011 Stock Incentive Plan (the “2011 Plan”). Under the 2019 Plan, the Company may grant an aggregate of up to 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 six-month period ended July 31, 2022, the Company granted 0 awards, vested 114,470 shares according to their terms and forfeited 0 shares under the 2019 Plan. As of July 31, 2022, there were approximately 608,435 shares available for future issuance under the 2019 Plan. Under the 2011 Plan, the Company was originally allowed to grant an aggregate of up to 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. The 2011 Plan expired in 2021 and no new awards may be made under the 2011 Plan. During the six-month period ended July 31, 2022, the Company vested 119,200 shares according to their terms and forfeited 0 shares under the 2011 Plan. During the three months ended July 31, 2022, 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 $ 37,000 and $ 116,000 , respectively. During the three months ended July 31, 2021, 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 $ 55,000 and $ 198,000 , respectively. During the six months ended July 31, 2022, 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 $ 92,000 and $ 314,000 , respectively. During the six months ended July 31, 2021, 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 $ 110,000 and $ 396,000 , respectively. As of July 31, 2022, there was $ 755,000 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 2 years. 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, 2022, benefit accruals under this plan were frozen since December 31, 2003. The net periodic pension cost for the Pension Plan and the VIP Plan for the three and six months ended July 31, 2022 and 2021 were as follows: 18 Combined Employee Retirement Plans Three Months Ended Six Months Ended 7/31/2022 7/31/2021 7/31/2022 7/31/2021 (in thousands) Service cost $ — $ — $ — $ — Interest cost 299 280 597 561 Expected return on plan assets ( 237 ) ( 218 ) ( 474 ) ( 436 ) Plan settlement — 220 — 220 Amortization of prior service cost — — — — Recognized net actuarial loss 134 442 268 885 Benefit cost $ 196 $ 724 $ 391 $ 1,230 401(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 July 31, 2022 and 2021, the plan held 1,221,095 shares and 991,899 shares of Virco stock, respectively. For the three months ended July 31, 2022 and 2021, the compensation costs incurred for employer match, which is paid in the form of Company stock, was $ 322,000 and $ 207,000 respectively. For the six months ended July 31, 2022 and 2021, the compensation costs incurred for employer match, which is paid in the form of Company stock, was $ 652,000 and $ 391,000 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 six months ended July 31, 2022 and 2021: Three Months Ended Six Months Ended 7/31/2022 7/31/2021 7/31/2022 7/31/2021 (in thousands) Beginning balance $ 600 $ 700 $ 600 $ 700 Provision 116 13 150 56 Costs incurred ( 66 ) ( 13 ) ( 100 ) ( 56 ) Ending balance $ 650 $ 700 $ 650 $ 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 per occurrence and automobile liability losses up to $ 50,000 per occurrence. The Company has purchased insurance to cover losses in excess of the self-insurance retention or deductible 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. 19 Note 14. Delivery Costs For the three months ended July 31, 2022 and 2021, shipping and classroom delivery costs of approximately $ 7,129,000 and $ 5,112,000 , respectively, were included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. For the six months ended July 31, 2022 and 2021, shipping and classroom delivery costs of approximately $ 10,383,000 and $ 8,033,000 , respectively, were included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. Note 15. Subsequent Events None. 20