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Item 8. Financial Statements and Supplementary Data

2023-04-28 compared with 2022-04-28 · 246 added, 225 removed, 597 unchanged (44% of the section changed)

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm (PCAOB ID No.

Report of Independent Registered Public Accounting Firm ( Moss Adams L L P Los Angeles, CA, PCAOB ID:

Report of Independent Registered Public Accounting Firm for the year ended January 31, 2022 (PCAOB ID:

Consolidated Balance Sheets as of January 31, 2023 and 2022

Consolidated Statements of Operation s for the Years Ended January 31, 202 2 and 202 1

Consolidated Statements of Comprehensive Loss for the Years Ended January 31, 202 2 and 20 21

Consolidated Statements of Operations for the Years Ended January 31, 2023 and 2022

Consolidated Statements of Comprehensive Income (Loss) for the Years Ended January 31, 2023 and 2022

Consolidated Statements of Stockholders' Equity for the Years Ended January 31, 2023 and 2022

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Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Virco Mfg.

Corporation and subsidiaries (the "Company") as of January 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows, for each of the two years in the period ended January 31, 2022, and the related notes and the schedule listed in the Index at Item 15(2) (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended January 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

We have audited the accompanying consolidated balance sheet of Virco Mfg.

Corporation (the “Company”) as of January 31, 2023, the related consolidated statement of operations, comprehensive income, stockholders’ equity and cash flows for the year then ended, and the related notes and schedules (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 31, 2023, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company's financial statements based on our audits.

Our responsibility is to express an opinion on the Company’s financial statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Inventories – Valuation adjustments for slow-moving and obsolete inventories — Refer to Note 1 to the financial statements

Critical Audit Matter Description

Inventory is valued at the lower of cost or net realizable value (determined on a first-in, first-out basis) and includes material, labor and factory overhead.

The Company records valuation adjustments for the excess cost of inventory over the estimated net realizable value.

Valuation adjustments for slow-moving and obsolete inventory are calculated using an estimated percentage applied to inventories based on physical inspection of the product in connection with a physical inventory, review of slow-moving products and component stage, inventory category, historical and forecasted consumption and sales, and consideration of active marketing programs.

As of January 31, 2022, the Company's inventories balance was $47,373,000.

We identified valuation adjustments for slow-moving and obsolete inventories as a critical audit matter because of the significant judgment required by management in developing its assumptions about forecasted consumption and sales, and in determining the estimated percentages applied to inventories to calculate net realizable value.

Testing management’s assumptions and estimates used in calculating the valuation adjustments required a high degree of auditor judgment and the use of more experienced audit professionals.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to valuation adjustments for slow-moving and obsolete inventories included the following, among others:

• We tested the reliability of system-generated reports used by management on a sample basis by agreeing the selected items to the underlying records.

• We observed the physical condition of inventories during physical inventory counts.

• We tested the accuracy and completeness of the valuation adjustments by selecting a sample of inventory items and recalculating the estimated net realizable value based on management’s estimated percentages.

• We tested the reasonableness of management’s assumptions about forecasted consumption and sales by:

o Performing a retrospective review to assess management’s estimated percentages by comparing the prior year inventory to current year consumption and sales

o Discussing with management to identify active marketing programs and to determine whether any changes in the business would impact forecasted consumption and sales

o Corroborating the assumptions related to slow-moving products and component stage, inventory category and forecasted consumption and sales with individuals within the Company’s production team

/s/ Deloitte & Touche LLP

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

Inventories – Valuation adjustments for slow-moving and obsolete inventories

As described in Note 1 to the financial statements, the Company’s inventories balance was $67.4 million as of January 31, 2023.

Inventories are valued at the lower of cost or net realizable value (determined on a first-in, first-out basis) and includes material, labor, and factory overhead.

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.

We identified the auditing of the inventory valuation adjustments for slow-moving and obsolete inventories as of January 31, 2023 as a critical audit matter.

The Company’s determination of the valuation adjustments for slow-moving and obsolete inventory required a high degree of management judgment and subjectivity, which in turn led to especially challenging and subjective auditor judgment when performing audit procedures and evaluating the results of those procedures.

The primary procedures we performed to address this critical audit matter included:

• Testing the design and operating effectiveness of internal controls over the valuation of slow-moving and obsolete inventories, including those related to the Company’s methodology for valuing slow-moving and obsolete inventories.

• Testing management’s process for determining the valuation of inventories, including:

◦ Evaluating management’s methodology to determine the net realizable value of inventories.

◦ Evaluating the reasonableness of the significant assumptions used by management including those related to forecasted inventory usage and backlog.

◦ Testing the completeness, accuracy, and relevance of the underlying data of the system-generated reports used by management.

◦ Testing the mathematical accuracy and calculations related to the application of Company policies specific to inventory write-down methodologies and percentages by inventory categories.

◦ Performing inquiries with non-financial personnel, including sales and production employees, regarding obsolete or discontinued inventory models, cancelled sales orders and other factors to corroborate management’s assumptions regarding qualitative judgments about discontinued, slow moving and obsolete inventories.

• Testing the reasonableness of management’s assumptions used in determining valuation adjustments for slow-moving and obsolete inventories by:

◦ Performing a retrospective review to assess management’s estimated percentages by comparing the prior years’ inventories to current year’s consumption and sales.

◦ Performing sensitivity analysis to determine the percentage increase or decrease that would materially impact the value recorded.

Valuation of Deferred Tax Assets

As described in Note 6 to the financial statements, 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 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.

During the fourth quarter of the year ended January 31, 2023, the Company determined the realization of a majority of the net deferred tax assets met the more-likely-than-not criteria and reversed a majority of its valuation allowance against its net deferred tax assets.

The net change in the valuation allowance for the year ended January 31, 2023, was a decrease of $10.5 million.

We identified the auditing of the valuation of deferred tax assets as of January 31, 2023 as a critical audit matter because of the significant judgment required by management and high degree of subjectivity involved in the determination of the realizability of the net deferred tax assets, which in turn led to especially challenging and subjective auditor judgment when performing audit procedures and evaluating the results of those procedures.

The primary procedures we performed to address this critical audit matter included:

• Evaluating the positive and negative evidence in assessing the realizability of deferred tax assets, including the evidence supporting the determination of a three-year cumulative income position as of January 31, 2023.

• Assessing the reasonableness of management’s significant assumptions by:

◦ Evaluating whether assumptions used are consistent with recent and historical results.

◦ Evaluating the methods used and the reasonableness of assumptions and judgments underlying management’s analysis with the assistance of our income tax specialists.

◦ Testing the completeness and accuracy of data used by management.

◦ Testing the amounts of unshipped sales orders by testing a selection of orders for existence as of January 31, 2023.

◦ Testing the amount of backlog disclosed as of the end of the prior year and comparing the amounts to fulfilled sales orders during the current year.

/s/ Moss Adams LLP

Los Angeles, California

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We have served as the Company's auditor since 2022.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors of Virco Mfg.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Virco Mfg.

Corporation and subsidiaries (the "Company") as of January 31, 2022, the related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for the year then ended, and the related notes and the schedule listed in the Index at Item 15(2) (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 31, 2022, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

/s/ DELOITTE & TOUCHE LLP

Los Angeles, California

April 28, 2022

We began serving as the Company's auditor in 2018.

In 2022 we became the predecessor auditor.

Consolidated Balance Sheets

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Trade accounts receivables (net of allowance for doubtful accounts of $ 200 at January 31, 2023 and 2022)

18,435 17,769

Other receivables 68 118

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Current portion of long-term debt 7,360 340

Current portion operating lease liability 4,734 4,672

Current portion of operating lease liability 5,082 4,734

Other accrued liabilities 7,081 5,829

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Selling, general, and administrative expenses 74,503 61,265

Gain on sale of property, plant & equipment — ( 7 )

Operating (loss) income ( 336 ) 735

Operating income (loss) 10,838 ( 336 )

Pension expense 816 2,197

Interest expense, net 1,979 1,195

Loss before income taxes ( 3,728 ) ( 2,976 )

Income tax expense (benefit) 11,408 ( 744 )

Net loss $ ( 15,136 ) $ ( 2,232 )

Net loss per common share:

Income (loss) before income taxes 8,043 ( 3,728 )

Income tax (benefit) expense ( 8,504 ) 11,408

Net income (loss) $ 16,547 $ ( 15,136 )

Net income (loss) per common share:

Basic $ 1.03 $ ( 0.95 )

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See accompanying notes to consolidated financial statements.

Consolidated Statements of Comprehensive Loss

Consolidated Statements of Comprehensive Income (Loss)

Years ended January 31,

(In thousands)

Net loss $ ( 15,136 ) $ ( 2,232 )

Net income (loss) $ 16,547 $ ( 15,136 )

Other comprehensive income

Pension adjustments (net of $ 1,310 tax expense in 2023 and $ 0 tax expense in 2022)

Comprehensive loss $ ( 7,580 ) $ ( 1,506 )

Comprehensive income (loss) $ 20,216 $ ( 7,580 )

See accompanying notes to consolidated financial statements.

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Comprehensive

Loss Total Stockholder's Equity

Loss Total Stockholders' Equity

Balance at February 1, 2021 15,918,642 $ 159 $ 119,655 $ ( 52,042 ) $ ( 13,585 ) $ 54,187

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Pension adjustments, net of tax expense of $ 0

— — — — 7,556 7,556

Shares vested 183,381 2 ( 176 ) — — ( 174 )

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Balance at January 31, 2022 16,102,023 161 120,492 ( 67,178 ) ( 6,029 ) 47,446

Net loss — — — ( 15,136 ) — ( 15,136 )

Pension adjustments, net of tax expense of $0 — — — — 7,556 7,556

Net income — — — 16,547 — 16,547

Pension adjustments, net of tax effect of $ 1,310

— — — — 3,669 3,669

Shares vested 108,962 1 ( 214 ) — — ( 213 )

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Operating activities

$ ( 15,136 ) $ ( 2,232 )

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

Net income (loss) $ 16,547 $ ( 15,136 )

Adjustments to reconcile net income (loss) to net cash used in operating activities:

Depreciation and amortization 4,542 4,570

Amortization of debt issuance costs 122 116

Non-cash lease (income) expense ( 395 ) 579

Non-cash lease income ( 543 ) ( 395 )

Provision for doubtful accounts 56 53

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Amortization of net actuarial loss for pension plans 437 1,476

Decrease in non cash surrender value of life insurance policies ( 78 ) —

Non cash gain on investment ( 194 ) —

Surrender of life insurance policies — ( 588 )

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Accounts payable and accrued liabilities 4,022 13,858

Net cash (used in) provided by operating activities ( 401 ) 7,799

Net cash used in operating activities ( 3,788 ) ( 401 )

Investing activities

Capital expenditures ( 2,995 ) ( 2,154 )

Proceeds from sale of property, plant and equipment — 82

Purchases of property, plant and equipment ( 3,332 ) ( 2,995 )

Purchases of marketable securities in trust accounts ( 7,280 ) —

Proceeds from sale of marketable securities in trust accounts 4,536 —

Proceeds for surrendering life insurance policies 2,744 —

Proceeds from life insurance — 664

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Payment on deferred financing costs ( 200 ) ( 169 )

Net cash provided by (used in) financing activities 3,729 ( 6,412 )

Net increase (decrease) in cash 957 ( 748 )

Net cash provided by financing activities 6,818 3,729

Net (decrease) increase in cash ( 302 ) 957

Cash at beginning of year 1,359 402

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Supplemental disclosures of cash flow information

Cash paid (received) during the year for:

Cash paid during the year for:

Interest $ 1,979 $ 1,195

Income tax $ 67 $ 37

Property, plant and equipment acquired and not yet paid at end of year $ 634 $ 189

See accompanying notes to consolidated financial statements.

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Historically Virco ships approximately 50 % of its annual revenue in the months of June, July, and August.

In fiscal 2022 the seasonal peak was distorted due to severe supply chain interruptions, labor shortages, and COVID-19 related employee absences.

The Company delivered a reduced proportion of sales during June, July, and August compared to the traditional seasonal concentration of sales.

The Company anticipates that the traditional seasonal peak will return when COVID and supply chain disruptions normalize.

Shipments during peak weeks in July and August can be as great as six times the level of shipments in the winter months.

In fiscal 2022, the seasonal peak was distorted due to severe supply chain interruptions, labor shortages, and COVID-19 related employee absences and the Company delivered less than 40 % of sales during June, July, and August.

In fiscal 2023, the Company started to return to the traditional seasonality and delivered approximately 47 % of annual sales in June, July, and August.

Restrictions imposed by the terms of the Company’s credit facility may limit the Company’s operating and financial flexibility (see Note 3 ).

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Estimates made by management include, but are not limited to, valuation of inventory;

deferred tax assets and liabilities;

recoverability of deferred tax assets and liabilities;

useful lives of property, plant and equipment;

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and the accounts receivable allowance for doubtful accounts.

As a result of the COVID-19 pandemic and its ongoing impact in the future may cause demand for our products to decline and competitive pricing pressures to increase, and other unforeseen effects, which makes these estimates more challenging and actual results could differ materially from these estimates.

In fiscal 2022 the cost of sales were volatile compared to prior years.

The Company incurred material increases in steel, plastic and other materials.

Effects of COVID-19 Pandemic

The COVID-19 pandemic had an immediate impact on the Company’s operating activities during fiscal 2021, and this impact continued through fiscal 2022.

In March 2020, most school districts that we serve closed their doors to students and initiated remote learning.

Most school districts in the United States kept campuses closed to students for the remainder of the 2019-2020 academic year, and district business officials typically operated from home offices.

During the 2020-2021 academic year many school districts and private schools successfully re-introduced in-class or hybrid learning, but the majority of students in the United States were learning remotely during the Company’s fiscal year ended January 31, 2021.

These mass closures impacted more than ten of the twelve months included in this fiscal year, including all of the traditionally busy summer season.

The demand for school furniture was adversely impacted by COVID-19 in fiscal year 2021.

School administrators were challenged by COVID-19, and purchases of furniture for empty classrooms were not a priority.

As a result, order rates declined by approximately 20 % compared to the prior year.

During the first quarter of fiscal 2022 many schools reopened and virtually all schools were reopened for the beginning of academic year beginning August 2021.

The strong rebound in order rates continued through fiscal 2022 as schools reopened.

Order rates for fiscal year 2022 increased by nearly 40 % compared to the prior year.

Going into fiscal 2022, the Company was cautious about building inventory and began the year with a reduced level of product.

The Company was able to support the first quarter increase in orders as the first quarter is a traditionally slow time of the year.

The Company experienced severe supply chain issues throughout the rest of the year.

The cost and availability of container freight adversely impacted the cost and timely delivery of components imported from China.

Domestic suppliers raised prices dramatically, with the cost of steel nearly tripling and the cost of plastic nearly doubling.

In addition to increased costs, many domestic suppliers put the Company on allocation as they did not have the production capacity to service all of their customers.

When this occurs, the supplier allocates their available capacity to existing customers based upon the customers historic purchase activity.

In addition to severe shortages of materials, the Company incurred a severe shortfall of both temporary and full-time labor.

This shortfall was exacerbated by COVID-19 related absences that caused significant portions of our workforce to be out at any time.

In order to meet required levels of production, the Company made a decision to reward our full-time workforce by paying them double-time in lieu of time and one-half for all overtime hours worked.

This successfully motivated our employees to work extended hours but cost the Company approximately $ 2 million.

Inability to hire production workers continued through the year, and in October and November the Company significantly increased the starting wages for production workers followed by raises for all hourly workers.

With these raises the Company was able to attract and retain additional workers, and as of the date of this report, the Company has an adequate workforce to support anticipated levels of business.

Factory efficiencies deteriorated as a result of these events.

Rather than execute efficient production runs, factories ran smaller less efficient production runs to utilize whatever materials were available and to fulfill urgent orders.

Customers were asked to substitute products requested for products for which materials were available.

Labor shortages and absences contributed to the inefficiencies.

The cost of materials, unavailability of materials, and labor issues adversely affected gross margins for the year.

The education system and education budgets are typically highly dependent on state and local tax revenues.

The severity of this pandemic may materially adversely impact state and local tax revenues and result in changes in spending priorities for state and local governments, which may have a material adverse effect on future school budgets.

The loss of state and local revenues may be substantially or partially offset by federal programs providing assistance to state governments, local governments and schools, although there can be no assurance that any federal funds could be used for capital expenditures or that the level of federal funding, if any, will be sufficient to maintain our historic order rates for school furniture.

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.

Fiscal Year End

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A substantial percentage of the Company’s receivables come from low-risk government entities.

No customer accounted for more than 10% of the Company's accounts receivable at January 31, 2022 and January 31, 2021.

No customer accounted for more than 10% of the Company's accounts receivable at January 31, 2023 and 2022.

Because of the short time between shipment and collection, the net carrying value of receivables approximates the fair value for these assets.

No customer exceeded 10% of the Company’s net sales for fiscal years ended January 31, 2022 and January 31, 2021.

No customer exceeded 10% of the Company’s net sales for fiscal years

ended January 31, 2023 and 2022.

Foreign net sales were approximately 4.4 % and 3.6 % of the Company’s net sales for fiscal years 2023 and 2022, respectively.

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Fair Values of Financial Instruments

The fair values of the Company’s cash, accounts receivable, accounts payable and debt approximate their carrying amounts due to their short-term nature.

The fair values of the Company’s cash, accounts receivable, accounts payable and current portion of debt approximate their carrying amounts due to their short-term nature.

For fair value of debt, see Note 3 .

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Level 3 — Valuations based on inputs that are unobservable and involve management judgment and our own assumptions about market participants and pricing.

Financial assets measured at fair value on a recurring basis include assets associated with the Virco Employees Retirement Plan (see Note 4 ).

Financial assets measured at fair value on a recurring basis include assets associated with the Virco Employees Retirement Plan, and assets held in the Rabbi Trust securing the VIP Pension (see Note 4 ).

Inventory is valued at the lower of cost or net realizable value (determined on a first-in, first-out basis) and includes material, labor, and factory overhead.

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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.

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Raw materials 16,363 15,910

Inventories, net $ 47,373 $ 38,270

Inventories $ 67,406 $ 47,373

Property, Plant, and Equipment

Property, plant and equipment are stated at cost, less accumulated depreciation.

Property, plant, and equipment are stated at cost, less accumulated depreciation and amortization.

Depreciation and amortization are computed on the straight-line method for financial reporting purposes based upon the following estimated useful lives:

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Repair and maintenance expense were $ 2,049,000 and $ 1,959,000 for fiscal years ended January 31, 2023 and 2022, respectively.

Property, plant and equipment purchased during the year that remains unpaid as of January 31, 2022 and 2021 was $ 189,000 and $ 113,000 , respectively.

The Company has established asset retirement obligations related to leased manufacturing facilities in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 410, Asset Retirement and Environmental Obligations .

Property, plant, and equipment purchased during the year that remains unpaid were $ 634,000 and $ 189,000 as of January 31, 2023 and 2022, respectively.

The Company has established asset retirement obligations related to leased manufacturing facilities.

Accrued asset retirement obligations are recorded at net present value and discounted over the life of the lease.

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There were no impairments for fiscal years ended January 31, 2023 and 2022.

Net Loss per Share

Net loss per share is calculated by dividing net loss by the basic weighted-average number of common shares outstanding.

For fiscal years 2022 and 2021, approximately 96,000 and 52,000 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.

Net Income (loss) per Share

For fiscal year 2023, net income per share is calculated by dividing net income by the diluted weighted-average number of common shares outstanding.

There were zero anti-dilutive shares in fiscal 2023.

For fiscal year 2022, approximately 96,000 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.

The following table sets forth the computation of basic and diluted loss per share:

(In thousands, except per share)

Net income (loss)

$ 16,547 $ ( 15,136 )

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Weighted-average shares 16,192 15,954

Net loss per common share

Net income (loss) per common share

Basic $ 1.03 $ ( 0.95 )

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Selling, general, and administrative expenses include advertising costs for the years ended January 31, 2023 and 2022 of $ 1,209,000 and $ 785,000 , respectively, and are expensed as incurred.

The increase in advertising expenses during fiscal year 2022 was attributable to higher participation in shows and exhibitions as compared to fiscal 2021.

Prepaid advertising costs reported as a prepaid asset on the accompanying consolidated balance sheets at January 31, 2023 and 2022, were $ 355,000 and $ 296,000 , respectively.

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The Company provides a product warranty on most products.

The standard warranty offered on products sold through January 31, 2013 is ten years .

Products sold prior to January 31, 2013 are out of warranty.

Effective February 1, 2014 through December 31, 2016, the Company modified its warranty to a limited lifetime warranty.

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Because product mix, production methods and raw material sources change over time, historic data may not always provide precise estimates for future warranty expense.

The Company recorded warranty reserves of $ 600,000 and $ 700,000 as of January 31, 2022 and 2021, respectively, as other long-term liabilities in the accompanying consolidated balance sheets.

The current portion of the warranty reserve was $ 250,000 and $ 300,000 as of January 31, 2022 and 2021, respectively;

and included in other accrued liabilities in the accompanying consolidated balance sheets.

The Company recorded warranty reserves of $ 600,000 as of January 31, 2023 and 2022, as other long-term liabilities in the accompanying consolidated balance sheets.

The current portion of the warranty reserve were $ 250,000 as of January 31, 2023 and 2022, and included in other accrued liabilities in the accompanying consolidated balance sheets.

Self-Insurance

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Actuaries assist the Company in determining its liability for the self-insured component of claims, which have been discounted to their net present value utilizing a discount rate of 4.00 % in both fiscal 2023 and fiscal 2022.

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 of $ 1.3 million at January 31, 2023 in the accompanying consolidated balance sheets.

The current portion of the self-insurance reserve was $ 200,000 as of January 31, 2023 and included in other accrued liabilities in the accompanying consolidated balance sheets.

Stock-Based Compensation Plans

The Company recognizes stock-based compensation cost for shares that are expected to vest, on a straight-line basis, over the requisite service period of the award.

Virco issued a 10 % stock dividend or 3/2 stock split every year beginning in 1983 through 2003.

Although the stock dividend had no cash consequences to the Company, the accounting methodology required for 10 % dividends affected the equity section of the balance sheet.

When the Company recorded a 10 % stock dividend, 10 % of the market capitalization of the Company on the date of the declaration was reclassified from retained earnings to additional paid-in capital.

During the period from 1983 through 2003, the cumulative effect of the stock dividends has been to reclassify over $ 122 million from retained earnings to additional paid-in capital.

The equity section of the balance sheet on January 31, 2022 reflects additional paid-in capital of approximately $ 120 million and accumulated deficit of approximately $ 67 million.

Other than the losses incurred during 2004-2006, 2011-2014, 2018-2019, 2021 and 2022, the accumulated deficit is a result of the accounting reclassification and is not the result of accumulated losses.

Between 1983 and 2003, the Company issued approximately $ 122 million in stock dividends for which the reductions in retained earnings were offset by increases to additional paid-in capital.

Accumulated Other Comprehensive Loss, Net of Tax

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Balance as of beginning of year $ ( 6,029 ) $ ( 13,585 )

Other comprehensive income (loss) before reclassifications 5,782 ( 1,105 )

Amounts reclassified from AOCI 1,774 1,831

Other comprehensive income before reclassifications 3,162 5,782

Amounts reclassified from accumulated comprehensive loss 507 1,774

Net current period other comprehensive income 3,669 7,556

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The reclassifications out of accumulated other comprehensive loss of $ 507,000 and $ 1,774,000 for the years ended January 31, 2023 and 2022, respectively, related to amortization of actuarial losses and settlements (See Note 4) .

The reclassifications were included in pension expense in the accompanying consolidated statements of operations.

Revenue Recognition

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Delivery Costs

For the fiscal years ended January 31, 2022 and 2021, shipping and classroom delivery costs of approximately $ 18,758,000 , and $ 15,090,000 , respectively, were included in selling, general and administrative expenses in the accompanying consolidated statements of operations.

For the fiscal years ended January 31, 2023 and 2022, shipping and classroom delivery costs of approximately $ 23.8 million, and $ 18.8 million, respectively, were included in selling, general and administrative expenses in the accompanying consolidated statements of operations.

Accounting for Income Taxes

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Recently Issued Accounting Updates

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.

ASU 2016-13 replaces the incurred loss impairment methodology for measuring and recognizing credit losses with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

The adoption date, as modified by the recently issued ASU 2019-10, 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.

In June 2022, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2022-03, “ Fair Value Measurement (Topic 820):

Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions .” This ASU clarifies that a contractual restriction on the sale of an equity security is not considered in measuring fair value.

The ASU also requires certain disclosures for equity securities subject to contractual sale restrictions.

The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023.

Early adoption is permitted.

As of January 31, 2023, the Company holds equity securities in the Rabbi Trust.

We do not currently expect that this guidance will have a material impact on our financial position and results of operations.

In March 2022, the FASB issued ASU No.

2022-02 – Financial Instruments – Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures, to address certain concerns identified in the Post-Implementation Review process for ASU Topic 326.

The amendments in ASU 2022-02 eliminate the accounting guidance for troubled debt restructurings by creditors in ASC Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring by creditors when a borrower is experiencing financial difficulty.

In addition, for public business entities, the amendments in ASU 2022-02 require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC Subtopic 326-20, Financial Instruments – Credit Losses – Measured at Amortized Cost.

The amendments in ASU 2022-02 will become effective for us as of the beginning of our 2024 fiscal year.

Early adoption is permitted.

We do not expect that this guidance will have a material impact on our financial position and results of operations.

In March 2020, the FASB issued ASU 2020-04 "Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting" ("ASU 2020-04").

ASU 2020-04 provides optional expedients and exceptions for applying GAAP to debt instruments, derivatives, and other contracts that reference London Interbank Offered Rate ("LIBOR") or other reference rates expected to be discontinued as a result of reference rate reform.

In December 2022, the FASB issued ASU 2022-06 "Reference Rate Reform (Topic 848) - Deferral of the Sunset Date of Topic 848" ("ASU 2022-06"), which defers the expiration of ASC 848 from December 31, 2022, to December 31, 2024.

We have loan agreements, debt agreements, and an interest rate cap that incorporate LIBOR as a referenced interest rate.

It is difficult to predict what effect, if any, the phase-out of LIBOR and the use of alternative benchmarks may have on our business or on the overall financial.

The FASB regularly issues updates to the FASB Accounting Standards Codification that are communicated through issuance of an ASU.

None of the accounting guidance issued by the FASB effective for current and future periods has had a material impact on the Company's current financial statements, and we do not believe it will have a material impact on our future financial position and results of operations.

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

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Non-current portion $ 14,384 $ 14,173

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 Company has a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association, as administrative agent and lender (“PNC”).

The Credit Agreement 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 permits the Company to issue dividends or make payments with respect to the Company’s capital stock in an aggregate amount up to $ 3.0 million 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 original maturity date of the Restated Credit Agreement was March 19, 2023, which date was extended to April 15, 2027 under Amendment No.

2 to the Restated Credit Agreement discussed below.

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 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 covenants requiring a minimum fixed charge coverage ratio and limits on capital expenditures.

Prior to the changes under Amendment No.

2 discussed below, the Revolving Credit Facility bore interest, at the Borrowers’ option, at either the Alternate Base Rate (as defined in the Restated Credit Agreement) or the LIBOR Rate (as defined in the Restated 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 Restated 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 January 31, 2022 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 %.

On December 7, 2021 the Company entered into Amendment No.

1 to the Restated Credit Agreement, which 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 the Restated Credit Agreement, the Company also agreed to pay to PNC Bank a non-refundable fee of $ 50,000 .

The Company was in violation of its financial covenants under the Restated Credit Agreement as of January 31, 2022, due to a decline in the Company’s net income primarily attributable to the effects of supply chain disruptions and labor shortages.

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extended the final maturity date of the Revolving Credit Facility from March 19, 2023 to April 15, 2027;

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;

increased the borrowing limit from $ 65.0 million to $ 70.0 million in July 2022 and August 2022, and increased the borrowing limit from $ 40.0 million to $ 45.0 million in October 2022;

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;

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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;

retired LIBOR pricing on the Revolving Credit Facility and replaced with BSBY index, with pricing tiers and spreads to remain the same;

retired LIBOR (London Inter-Bank Offered Rate) pricing on the Revolving Credit Facility and replaced with BSBY (Bloomberg Short-Term Bank Yield) index, with pricing tiers and spreads to remain the same;

extended the P-card, ACH Credit, and ACH debit facilities for an additional year beyond their current maturities;

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 therewithin, such as raw material costs and supply chain challenges.

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.

During the fiscal year ended January 31, 2022 and 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 are traditionally financed through the Company’s line of credit with PNC Bank.

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 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 $ 65.0 million 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 $ 15.0 million from January through July of each year, minus undrawn amounts of letters of credit and reserves and (ii) an equipment loan of $ 2.0 million.

The Restated 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 $ 10.0 million 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 covenants requiring a minimum fixed charge coverage ratio and limits on capital expenditures.

The Company's revolving line of credit with PNC is structured to provide seasonal credit availability during the Company's peak summer season.

Approximately $ 20,449,000 was available for borrowing as of January 31, 2022.

The long-term debt repayments have been adjusted to reflect the terms of Amendment No.

2 and are approximately as follow as of January 31, 2022 (in thousands):

Approximately $ 12.9 million and $ 20.4 million were available for borrowing as of January 31, 2023 and 2022, respectively.

Interest rates were 9.25 % and 5.00 % as of January 31, 2023 and 2022, respectively.

The Company also incurs a fee on the unused portion of the revolving line of credit at a rate of 0.375 %.

In addition to the outstanding debt balance of $ 17.1 million on the Company's revolving credit line, the Company also carries a mortgage on a manufacturing building in Conway Arkansas.

The original note was dated August 2017 for $ 5.8 million, at a fixed rate of 4 % per year and 20 years term.

The outstanding amount under this note was $ 4.6 million as of January 31, 2023.

The Company was in compliance with its debt covenants as of January 31, 2023.

On April 15, 2022, the Company entered into Amendment No.

2 to the Credit Agreement (“Amendment No.

2”), which 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.

The long-term debt repayments are approximately as follow as of January 31, 2023 (in thousands):

Year ending January 31,

Thereafter 3,329

Management believes that the carrying value of debt approximated fair value at January 31, 2022 and 2021, as all of the long-term debt bears interest at variable rates based on prevailing market conditions .

Management believes that the carrying value of debt approximated fair value at January 31, 2023 and 2022, as majority of the long-term debt bears interest at variable rates based on prevailing market conditions.

The Company also carries a mortgage on a manufacturing building in Conway Arkansas at an annual fixed rate of 4 %.

Retirement Plans

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The annual measurement date for both plans is January 31.

The Company and its subsidiaries cover all employees hired prior to December 31, 2003 under the Employee Plan, which is a qualified noncontributory defined benefit retirement plan.

The Company and its subsidiaries cover all employees hired prior to December 31, 2003 under the Employee Plan, which is a

qualified noncontributory defined benefit retirement plan.

Benefits under the Employee Plan are based on years of service and career average earnings.

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Benefit accruals under the VIP Plan were frozen effective December 31, 2003.

Substantially all assets, consisting of life insurance contracts and cash equivalents, securing the VIP Plan are held in a rabbi trust.

Substantially all assets, consisting of life insurance contracts, equity investments, and cash equivalents, securing the VIP Plan are held in a rabbi trust.

The cash surrender values of the life insurance policies are included in other assets and money market funds in the accompanying consolidated balance sheets.

The cash surrender values of the life insurance policies securing the VIP Plan were $ 3,457,000 and $ 3,430,000 at January 31, 2022 and 2021, respectively.

Death benefits payable under life insurance policies held by the Plan were approximately $ 8,762,000 and $ 8,845,000 at January 31, 2022 and 2021, respectively.

The cash surrender values of the life insurance policies securing the VIP Plan were $ 0.7 million and $ 3.5 million at January 31, 2023 and 2022, respectively.

Death benefits payable under life insurance policies held by the Plan were approximately $ 1.6 million and $ 8.8 million at January 31, 2023 and 2022, respectively.

Equity investments held in the Rabbi Trust to secure retirement benefits were $ 4.7 million as of January 31, 2023.

Assets held in the Rabbi Trust were included in the other non-current asset of the accompanying consolidated balance sheets.

Accounting policy regarding pensions requires management to make complex and subjective estimates and assumptions relating to amounts which are inherently uncertain.

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The discount rate represents an estimate of the rate of return on a portfolio of high-quality, fixed-income securities that would provide cash flows that match the expected benefit payment stream from the plans.

When setting the discount rate, the

Company utilizes a spot-rate yield curve developed from high-quality bonds currently available which reflects changes in rates that have occurred over the past year.

When setting the discount rate, the Company utilizes a spot-rate yield curve developed from high-quality bonds currently available which reflects changes in rates that have occurred over the past year.

This assumption is sensitive to movements in market rates that have occurred since the preceding valuation date, and therefore, may change from year to year.

Discount rate ranges for the Employee Plan and the VIP Plan 3.20 % and 2.75 % - 2.80 % at January 31, 2022 and 2021, respectively.

Because the Company’s future benefit accruals for both benefit plans were frozen in 2003, the compensation increase assumption had no impact on pension expense, accumulated benefit obligation or projected benefit obligation for the period ended January 31, 2022 or 2021.

Discount rates for the Employee Plan and the VIP Plan were 4.85 % and 3.20 % at January 31, 2023 and 2022, respectively.

The assumed rate of return on plan assets represents an estimate of long-term returns available to investors who hold a mixture of stocks, bonds, and cash equivalent securities.

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It is the Company's policy to contribute adequate funds to the trust accounts to cover benefit payments under the VIP Plan and to maintain the funded status of the Employee Plan at a level which is adequate to avoid significant restrictions to the Employee Plan under the Pension Protection Act of 2006.

Contributions to the Qualified Plan Trust and benefit payments under the VIP Plan totaled $ 654,000 in fiscal 2022 and $ 604,000 in fiscal 2021.

Contributions during fiscal 2023 will depend upon actual investment results and benefit payments but are anticipated to be approximately $ 615,000 .

Contributions to the Qualified Plan Trust and benefit payments under the VIP Plan totaled $ 0.6 million in fiscal 2023 and $ 0.7 million in fiscal 2022.

Contributions during fiscal 2024 will depend upon actual investment results and benefit payments but are anticipated to be approximately $ 0.5 million.

At January 31, 2023, accumulated other comprehensive loss of approximately $ 2.4 million, net of tax, is attributable to the pension plans.

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Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income

Net (gain) loss $ ( 5,782 ) $ 849

Net loss $ ( 4,472 ) $ ( 5,782 )

Prior service cost — —

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Net actuarial loss 6 536

$ 536 $ 1,771

Supplemental Data

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Principal Money Market 233 523

Federated Herme Gove Oblig 722 —

PNC Govt Money Fund — 204

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The mutual fund investment is valued using the net asset value (“NAV”) as a practical expedient and is not required to be categorized in the fair value hierarchy table.

The total fair value of this investment was $ 1,912,000 and $ 1,454,000 as of January 31, 2022 and 2021, respectively, and is not included in the table above.

The total fair value of this investment was $ 2.2 million and $ 1.9 million as of January 31, 2023 and 2022, respectively, and is not included in the table above.

In relation to this investment, there is no unfunded commitments, and the shares can be redeemed on a daily basis with minimal restrictions.

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employees, allows participants to defer from 1 % to 75 % of their eligible compensation through a 401(k)-retirement program.

Through December 31, 2001, the plan included an employee stock ownership component.

The plan continues to include Virco stock as one of the investment options.

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Effective January 1, 2021, the Company initiated an employer match.

For the fiscal years ended January 31, 2022 and 2021, the compensation costs incurred for employer match was $ 867,000 and $ 774,000 , respectively.

For the fiscal years ended January 31, 2023 and 2022, the compensation costs incurred for employer match was $ 1.4 million and $ 0.9 million, respectively.

Life Insurance

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The Company has purchased split-dollar life insurance on the lives of the remaining covered participants.

Death benefits due to participants are approximately $ 1,800,000 .

Cash surrender values of these policies, which are included in other assets in the accompanying consolidated balance sheets, were $ 1,380,000 and $ 1,895,000 at January 31, 2022 and 2021, respectively.

Death benefits payable under the policies were approximately $ 2,967,000 and $ 3,917,000 at January 31, 2022 and 2021, respectively.

Death benefits due to participants are approximately $ 1.8 million.

Cash surrender values of these policies, which are included in other assets in the accompanying consolidated balance sheets, were $ 1.5 million and $ 1.4 million at January 31, 2023 and 2022, respectively.

Death benefits payable under the policies were approximately $ 3.0 million at January 31, 2023 and 2022, respectively.

Death benefits received under the Plan in excess of the benefit obligation will be retained in the trust and used to secure and fund benefits payable under the VIP Pension Plan.

The Company maintains a rabbi trust to hold assets related to the Dual Option Life Insurance Plan.

All assets securing this plan are held in the rabbi trust.

The following sets forth the Company's change in death benefits payable during the years ended January 31, 2022 and 2021:

All securing assets held in the rabbi trust were included in the other assets of the accompanying consolidated balance sheets.

The following sets forth the Company's change in death benefits payable during the years ended January 31, 2023 and 2022 (in thousands):

1/31/2023 1/31/2022

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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 fiscal year 2022, 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 January 31, 2022, there were approximately 12,892 shares available for future issuance under the 2011 Plan.

During fiscal year 2022, stock-based compensation expense related to restricted stock units and awards recognized in cost of goods sold and selling, general and administrative expenses was $ 219,000 and $ 794,000 , respectively.

During fiscal year 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 $ 257,000 and $ 755,000 , respectively.

Accounting for the Plans

A summary of the Company’s restricted stock unit awards activity, and related information for the following years ended January 31, is as follows:

The 2011 Plan expired in 2021 and no new awards may be made under the 2011 Plan.

During fiscal year 2023, the Company vested 119,200 stock awards according to their terms and forfeited 0 stock units under the 2011 Plan.

The following table summarizes the stock-based compensation expense related to restricted stock awards recognized in the Company's statement of operations during fiscal years ended January 31, is as follows:

(in thousands)

Cost of goods sold $ 148 $ 219

Selling, general and administrative expenses 464 794

Total stock-based compensation expense $ 612 $ 1,013

The following table summarizes the Company’s restricted stock unit awards activity, and related information for fiscal years ended January 31,:

Restricted stock units Weighted- Average Exercise Price Restricted stock units Weighted- Average Exercise Price

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Weighted-average fair value of restricted stock units granted during the year — 3.63

The aggregate fair value of restricted stock awards vested during fiscal years 2022 and 2021 was $ 921,207 and $ 582,881 , respectively.

The aggregate fair value of restricted stock unit awards vested during fiscal years 2023 and 2022 was $ 892,619 and $ 921,207 , respectively.

The Company recognized compensation expense, net of forfeitures, for the restricted stock awards of $ 612,000 and $ 1,013,000 for fiscal 2023 and 2022, respectively.

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The weighted-average grant-date fair value of restricted stock awards is the quoted market price of the Company’s common stock on the date of grant, as shown in the table above.

The weighted-average grant-date fair value of restricted stock awards granted in fiscal 2022 and 2021 was $ 3.63 per share and $ 2.64 per share, respectively.

As of January 31, 2022, there was $ 1.2 million of total unrecognized compensation expense related to restricted stock awards.

There were no awards granted in fiscal 2023.

The weighted-average grant-date fair value of restricted stock awards granted in fiscal 2022 was $ 3.63 per share.

As of January 31, 2023, there was $ 549,000 of total unrecognized compensation expense related to restricted stock awards.

That expense is expected to be recognized over a weighted-average period of 1.3 years.

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These amounts are presented as a cash outflow from financing activities in the accompanying consolidated statement of cash flows.

The income tax benefit for the last two years is reconciled to the statutory federal income tax rates of 21 % for the tax years ended January 31, is as follows (in thousands):

The income tax (benefit) expense for the last two years is reconciled to the statutory federal income tax rates of 21 % for the tax years ended January 31, is as follows (in thousands):

Statutory $ 1,689 $ ( 782 )

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Return to provision ( 41 ) ( 7 )

Income tax expense (benefit) $ 11,408 $ ( 744 )

Significant components of the benefit for income taxes attributed to continuing operations are as follows for the years ended January 31, is as follows (in thousands):

Income tax (benefit) expense $ ( 8,504 ) $ 11,408

Significant components of the (benefit) expense for income taxes attributed to continuing operations are as follows for the years ended January 31, is as follows (in thousands):

Federal $ 82 $ —

State 92 ( 2 )

Federal 1,524 ( 731 )

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( 8,711 ) 11,316

Income tax expense (benefit) $ 11,408 $ ( 744 )

Income tax (benefit) expense $ ( 8,504 ) $ 11,408

Deferred tax assets and liabilities are comprised of the following as of January 31, respectively, as follows (in thousands):

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Net operating loss carryforwards 1,949 4,445

Right of use liabilities 4,159 5,237

Right of use liability 3,087 4,159

Inventory 1,820 2,124

Business interest expense limitation — —

Other 401 361

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Net long term deferred tax asset $ 7,800 $ 399

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.

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 be realized.

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.

During 2022 and 2021 the Company incurred operating losses and when combined with operating results from 2020, the Company has incurred a cumulative operating loss for the last three years.

As a result, the Company has identified objective and verifiable negative evidence in the form of cumulative losses in the U.S.

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 income (losses) in recent years), to determine whether sufficient future taxable income will be generated to realize existing deferred tax assets.

During fiscal 2022, the Company incurred operating losses, and when combined with operating results from fiscal 2021 and 2020, the Company incurred a cumulative operating loss for the last three 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.

While the Company had 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 $ 11,412,000 are needed for federal 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.

At January 31, 2022, the Company has net operating loss carryforwards of approximately $ 12,513,000 for U.S.

federal, with no expirations, and $ 31,222,000 for state income tax purposes, expiring at various dates through January 31, 2041.

At January 31, 2021, the Company recorded a partial valuation allowance of $ 1,064,000 against its net deferred tax assets.

The net change in the valuation allowance for the year ended January 31, 2022, was a n increase of $ 10,348,000 and for the year ended January 31, 2021, was a decrease of $ 119,000 .

January 31, 2022, the Company recorded a valuation allowance of $ 11.4 million against its net deferred tax assets.

At January 31, 2022, the Company has NOL of approximately $ 12.5 million for U.S.

federal tax purposes, with no expirations, and $ 31.2 million for state income tax purposes, expiring at various dates through January 31, 2041.

During the fiscal year ended January 31, 2023, the Company was profitable and returned to a cumulative 3-year profit in the fourth quarter.

The Company benefited from continued growth in order rates, growth in sales volume, and improvements in gross margin.

The Company utilized a material portion of its federal and certain state net operating loss carryforwards (“NOL”) in fiscal 2023 and anticipates that all federal NOL may be utilized by the end of fiscal 2024.

During the fourth quarter of the year ended January 31, 2023 , 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 met the more-likely-than-not criteria and reversed a majority of its valuation allowances against its net deferred tax assets.

At January 31, 2023, the Company recorded a partial valuation allowances of $ 0.9 million on certain state NOL to reduce the carrying amount of deferred tax assets to an amount that is more-likely-than-not to be realized.

The net change in the valuation allowance for the year ended January 31, 2023, was a decrease of $ 10.5 million.

At January 31, 2023, the Company has NOL of approximately $ 2.7 million for U.S.

federal tax purposes, with no expirations, and $ 25.1 million for state income tax purposes, expiring at various dates through January 31, 2041.

The following table summarizes the activity related to our gross unrecognized tax benefits for the years ended January 31, respectively, as follows (in thousands):

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The year ended January 31, 2018 and subsequent years remain open for examination by the IRS and state tax authorities.

The Company is currently under IRS examination for fiscal year ended January 31, 2016.

The Company is not currently under state examinations.

The Company is not currently under IRS or state examination.

The specific timing of when the resolution of each tax position will be reached is uncertain.

As of January 31, 2023, it is reasonably possible that unrecognized tax benefits will decrease by $ 11,000 within the next 12 months due to the expiration of the statute of limitations.

On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act").

The Company has performed an analysis of the impact of the CARES Act and determined the impact is not significant.

Leases and Commitments

The Company has operating leases on real property, equipment, and automobiles that expire at various dates.

The Company has operating leases on real property, equipment, and automobiles, expiring at various dates through 2026.

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.

All of the Company’s leases are classified as operating leases.

Beginning on the first day of fiscal 2020, the Company adopted ASC 842 to account for its leases.

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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 December 2025.

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 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.

In addition, the Company leases trucks and automobiles 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.

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Other operating leases information:

Cash paid for amounts included in the measurement of lease liabilities $ 5,482,000 $ 5,163,000

Right-of-use assets obtained in exchange for new lease liabilities $ 599,000 $ 622,000

Cash paid for amounts included in the measurement of lease liabilities (in thousands) $ 5,716 $ 5,482

Right-of-use assets obtained in exchange for new lease liabilities (in thousands) $ 545 $ 599

Weighted-average remaining lease term (years) 2.20 3.10

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The Company and other furniture manufacturers are subject to federal, state, and local laws and regulations relating to the discharge of materials into the environment and the generation, handling, storage, transportation and disposal of waste and hazardous materials.

The Company has expended, and expects to continue to spend, significant amounts in the future to comply with environmental laws.

The Company has expended, and expects to continue to spend, significant amounts in the future to comply

with environmental laws.

Normal recurring expenses relating to operating the Company factories in a manner that meets or exceeds environmental laws are matched to the cost of producing inventory.

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The Company has a self-insured retention for product liability 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 of $ 1,165,000 and $ 1,135,000 at January 31, 2022 and 2021, respectively, based upon the Company’s estimated payout period of five years using a 4.0 % and 4.0 % discount rate, respectively.

The Company has purchased insurance to cover losses in excess of the retention up to a limit of $ 30.0 million.

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 of $ 1.3 million and $ 1.2 million at January 31, 2023 and 2022, respectively, based upon the Company’s estimated payout period of five years using a 4.0 % discount rate for both years.

Workers’ compensation, automobile, general and product liability claims may be asserted in the future for events not currently known by management.

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Year ending January 31,

Total $ 1,235

Discount to net present value ( 75 )

Less current portion ( 200 )

Non-current portion $ 1,050

The Company and its subsidiaries are defendants in various legal proceedings resulting from operations in the normal course of business.

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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.

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Ending balance 600 600

Less current portion ( 250 ) $ ( 250 )

Non-current portion $ 350 $ 350

Subsequent Events

As discussed in Note 3, the Company executed Amendment No.

2 to the Restated Credit Agreement.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data