VIRCO MFG CORPORATION 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Numbers Report of Independent Registered Public Accounting Firm ( Moss Adams L L P Los Angeles, CA, PCAOB ID: 659 ) 38 Report of Independent Registered Public Accounting Firm for the year ended January 31, 2022 (PCAOB ID: 34 ) 41 Consolidated Balance Sheets as of January 31, 2023 and 2022 42 Consolidated Statements of Operations for the Years Ended January 31, 2023 and 2022 44 Consolidated Statements of Comprehensive Income (Loss) for the Years Ended January 31, 2023 and 2022 45 Consolidated Statements of Stockholders' Equity for the Years Ended January 31, 2023 and 2022 46 Consolidated Statements of Cash Flows for the Years Ended January 31, 2023 and 2022 47 Notes to Consolidated Financial Statements 48 37 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Virco Mfg. Corporation Opinion on the Financial Statements 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 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. 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 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 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 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: 38 • 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. 39 ◦ 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 April 28, 2023 We have served as the Company's auditor since 2022. 40 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Virco Mfg. Corporation 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. 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 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. 41 Virco Mfg. Corporation Consolidated Balance Sheets January 31, 2023 2022 (In thousands, except share and par value data) Assets Current assets Cash $ 1,057 $ 1,359 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 Income tax receivable 19 152 Inventories 67,406 47,373 Prepaid expenses and other current assets 2,083 2,076 Total current assets 89,068 68,847 Property, plant, and equipment Land 3,731 3,731 Land improvements 686 653 Buildings and building improvements 51,310 51,334 Machinery and equipment 113,662 113,315 Leasehold improvements 983 1,009 Total property, plant, and equipment 170,372 170,042 Less accumulated depreciation and amortization 135,810 134,715 Net property, plant, and equipment 34,562 35,327 Operating lease right-of-use assets 10,120 13,870 Deferred income tax assets, net 7,800 399 Other assets 8,576 8,002 Total assets $ 150,126 $ 126,445 See accompanying notes to consolidated financial statements. 42 Virco Mfg. Corporation Consolidated Balance Sheets January 31, 2023 2022 (In thousands, except share and par value data) Liabilities Current liabilities Accounts payable $ 19,448 $ 19,785 Accrued compensation and employee benefits 9,554 5,596 Current portion of long-term debt 7,360 340 Current portion of operating lease liability 5,082 4,734 Other accrued liabilities 7,081 5,829 Total current liabilities 48,525 36,284 Non-current liabilities Accrued self-insurance 1,050 965 Accrued retirement benefits 10,676 15,430 Income tax payable 79 71 Long-term debt, less current portion 14,384 14,173 Operating lease liability, less current portion 6,796 11,437 Other long-term liabilities 555 639 Total non-current liabilities 33,540 42,715 Commitments and contingencies 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 in 2023 and 16,102,023 shares in 2022 162 161 Additional paid-in capital 120,890 120,492 Accumulated deficit ( 50,631 ) ( 67,178 ) Accumulated other comprehensive loss ( 2,360 ) ( 6,029 ) Total stockholders’ equity 68,061 47,446 Total liabilities and stockholders’ equity $ 150,126 $ 126,445 See accompanying notes to consolidated financial statements. 43 Virco Mfg. Corporation Consolidated Statements of Operations Year ended January 31, 2023 2022 (In thousands, except per share data) Net sales $ 231,064 $ 184,828 Costs of goods sold 145,723 123,899 Gross profit 85,341 60,929 Selling, general, and administrative expenses 74,503 61,265 Operating income (loss) 10,838 ( 336 ) Pension expense 816 2,197 Interest expense, net 1,979 1,195 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 ) Diluted $ 1.02 $ ( 0.95 ) Weighted average shares outstanding: Basic 16,142 15,954 Diluted 16,192 15,954 See accompanying notes to consolidated financial statements. 44 Virco Mfg. Corporation Consolidated Statements of Comprehensive Income (Loss) Years ended January 31, 2023 2022 (In thousands) 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) 3,669 7,556 Comprehensive income (loss) $ 20,216 $ ( 7,580 ) See accompanying notes to consolidated financial statements. 45 Virco Mfg. Corporation Consolidated Statements of Stockholders’ Equity Common Stock In thousands, except share data Shares Amount Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Stockholders' Equity Balance at February 1, 2021 15,918,642 $ 159 $ 119,655 $ ( 52,042 ) $ ( 13,585 ) $ 54,187 Net loss — — — ( 15,136 ) — ( 15,136 ) Pension adjustments, net of tax expense of $ 0 — — — — 7,556 7,556 Shares vested 183,381 2 ( 176 ) — — ( 174 ) Stock compensation expense — — 1,013 — — 1,013 Balance at January 31, 2022 16,102,023 161 120,492 ( 67,178 ) ( 6,029 ) 47,446 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 ) Stock compensation expense — — 612 — — 612 Balance at January 31, 2023 16,210,985 $ 162 $ 120,890 $ ( 50,631 ) $ ( 2,360 ) $ 68,061 See accompanying notes to consolidated financial statements. 46 Virco Mfg. Corporation Consolidated Statements of Cash Flows Year Ended January 31, 2023 2022 (In thousands) 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 ( 543 ) ( 395 ) Provision for doubtful accounts 56 53 Gain on sale of property, plant, and equipment ( 2 ) — Deferred income taxes ( 8,711 ) 11,316 Stock-based compensation 612 1,013 Defined benefit plan, recognized net loss due to settlements 70 298 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 ) Changes in operating assets and liabilities: Trade accounts receivable ( 720 ) ( 8,063 ) Other receivables 50 ( 92 ) Inventories ( 20,033 ) ( 9,103 ) Income taxes 141 55 Prepaid expenses and other current assets ( 106 ) 221 Accounts payable and accrued liabilities 4,022 13,858 Net cash used in operating activities ( 3,788 ) ( 401 ) Investing activities 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 Investments in life insurance — ( 40 ) Net cash used in investing activities ( 3,332 ) ( 2,371 ) Financing activities Proceeds from long-term debt 49,579 29,750 Repayment of long-term debt ( 42,348 ) ( 25,676 ) Tax withholding payments on share-based compensation ( 213 ) ( 176 ) Payment on deferred financing costs ( 200 ) ( 169 ) 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 Cash at end of year $ 1,057 $ 1,359 Supplemental disclosures of cash flow information 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. 47 VIRCO MFG. CORPORATION Notes to Consolidated Financial Statements January 31, 2023 1. Summary of Business and Significant Accounting Policies Business Virco Mfg. Corporation (the “Company”), which operates in one business segment, is engaged in the design, production, and distribution of quality furniture for the commercial and education markets. Over 73 years of manufacturing operations have resulted in a wide product assortment. Major products include mobile tables, mobile storage equipment, desks, computer furniture, chairs, activity tables, folding chairs and folding tables. The Company manufactures its products in Torrance, California, and Conway, Arkansas, for sale primarily in the United States. The Company operates in a seasonal business and requires significant amounts of working capital under its credit facility to fund acquisitions of inventory and finance receivables during the summer delivery season. The educational sales market is extremely seasonal. 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 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 ). Principles of Consolidation and Reclassification The consolidated financial statements include the accounts of Virco Mfg. Corporation and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Management Use of Estimates Preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities - and disclosure of contingent assets and liabilities - at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Estimates made by management include, but are not limited to, valuation of inventory; recoverability of deferred tax assets and liabilities; useful lives of property, plant and equipment; liabilities under pension, warranty, self-insurance, and environmental claims; and the accounts receivable allowance for doubtful accounts. Fiscal Year End Fiscal years 2023 and 2022 refer to the fiscal years ended January 31, 2023 and 2022, respectively. Concentration of Credit Risk Financial instruments, which potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses. Sales to the Company’s recurring customers are generally made on open account with terms consistent with the industry. Credit is extended based on an evaluation of the customer’s financial condition and payment history. Past due accounts are determined based on how recently payments have been made in relation to the terms granted. Amounts are written off against the allowance in the period that the Company determines that the receivable is not collectable. The Company purchases insurance on receivables from certain commercial customers to minimize the Company’s credit risk. The Company does not typically obtain collateral to secure credit risk. Customers with inadequate credit are required to provide cash in advance or letters of credit. The Company does not assess interest on receivable balances. 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, 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 48 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. Cash Cash consists of cash on hand, and the Company has no cash equivalents. Outstanding checks, representing a book overdraft, are classified in accounts payable on the accompanying consolidated balance sheets and in operating activities in the accompanying consolidated statements of cash flows. Fair Values of Financial Instruments 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 . Financial assets and liabilities measured at fair value on a recurring basis are classified in one of the three following categories, which are described below: Level 1 — Valuations based on unadjusted quoted prices for identical assets in an active market. Level 2 — Valuations based on quoted prices in markets where trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets. 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, and assets held in the Rabbi Trust securing the VIP Pension (see Note 4 ). Inventories 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 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. The Company records the cost of excess capacity as a period expense, not as a component of capitalized inventory valuation. The following table presents an updated breakdown of the Company’s net inventory (in thousands) as of January 31, 2023 and 2022 : January 31, 2023 2022 Finished goods $ 25,740 $ 16,731 Work in Process 25,303 14,732 Raw materials 16,363 15,910 Inventories $ 67,406 $ 47,373 Property, Plant, and Equipment 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: 49 Land improvements 5 to 25 years Buildings and building improvements 5 to 40 years Machinery and equipment 3 to 10 years Leasehold improvements shorter of lease or useful life The Company capitalizes the cost of betterments that extend the life of an asset. Repairs and maintenance that do not extend the life of an asset are expensed as incurred. 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 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. Asset retirement obligations, included in other non-current liabilities were $ 205,000 and $ 198,000 at January 31, 2023 and 2022, respectively. January 31, 2023 2022 Balance at beginning of period $ 198,000 $ 192,000 Decrease in obligation — — Accretion expense 7,000 6,000 Balance at end of period $ 205,000 $ 198,000 Impairment of Long-Lived Assets An impairment loss is recognized in the event facts and circumstances indicate the carrying amount of a long-lived asset may not be recoverable, and an estimate of future undiscounted cash flows is less than the carrying amount of the asset. Impairment is recorded based on the excess of the carrying amount of the impaired asset over the fair value. Generally, fair value represents the Company’s expected future cash flows from the use of an asset or group of assets, discounted at a rate commensurate with the risks involved. There were no impairments for fiscal years ended January 31, 2023 and 2022. 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: January 31, 2023 2022 (In thousands, except per share) Numerator Net income (loss) $ 16,547 $ ( 15,136 ) Denominator Weighted-average shares — basic 16,142 15,954 Dilutive effect of common stock equivalents from equity incentive plans 50 — Weighted-average shares 16,192 15,954 Net income (loss) per common share Basic $ 1.03 $ ( 0.95 ) Diluted $ 1.02 $ ( 0.95 ) Environmental Costs 50 The Company is subject to numerous environmental laws and regulations in the various jurisdictions in which it operates that (a) govern operations that may have adverse environmental effects, such as the discharge of materials into the environment, as well as handling, storage, transportation and disposal practices for solid and hazardous wastes, and (b) impose liability for response costs and certain damages resulting from past and current spills, disposals or other releases of hazardous materials. Normal, recurring expenses related to operating the Company's factories in a manner that meets or exceeds environmental laws and regulations are matched to the cost of producing inventory. Despite our efforts to comply with existing laws and regulations, compliance with more stringent laws or regulations or stricter interpretation of existing laws, may require additional expenditures by us, some of which may be material. We reserve amounts for such matters when expenditures are probable and reasonably estimable. Costs incurred to investigate and remediate environmental waste are expensed, unless the remediation extends the useful life of the assets employed at the site. At January 31, 2023 and 2022, the Company had not capitalized any remediation costs and had not recorded any amortization expense in fiscal years 2023 and 2022. Advertising Costs Advertising costs are expensed in the period during which the advertising space is run. 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. 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. Product Warranty Expense The Company provides a product warranty on most products. 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. Effective January 1, 2017, the Company modified the warranty offered to provide specific warranty periods by product component, with no warranty period longer than ten years . The Company generally provides that customers can return a defective product during the specified warranty period following purchase in exchange for a replacement product or the repair of the product by the Company at no charge to the customer. The Company determines whether replacement or repair is appropriate in each circumstance. The Company uses historical data to estimate appropriate levels of warranty reserves. 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 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 In fiscal 2023 and 2022, the Company was self-insured for product liability losses up to $ 250,000 per occurrence, workers’ compensation losses up to $ 250,000 per occurrence, general liability losses up to $ 50,000 per occurrence and auto liability losses up to $ 50,000 per occurrence. 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. 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 The following table summarizes the changes in accumulated balances of other comprehensive loss (in thousands) for the years ended January 31, 2023 and 2022: 51 January 31, 2023 2022 Balance as of beginning of year $ ( 6,029 ) $ ( 13,585 ) 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 Balance as of end of year $ ( 2,360 ) $ ( 6,029 ) 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 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. For product produced by and sourced from third parties, management has determined that it is the principal in all cases, since it (i) bears primary responsibility for fulfilling the promise to the customer; (ii) bears inventory risk before and/or after the good or service is transferred to the customer; and (iii) has discretion in establishing the price for the sale of good or service to the customer. Delivery Costs 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. 52 Accounting for Income Taxes The Company recognizes deferred income taxes under the asset and liability method of accounting for income taxes in accordance with the provisions of FASB ASC Topic 740, Accounting for Income Taxes . Deferred income taxes are recognized for differences between the financial statement and tax basis of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance against deferred tax assets is recorded when it is determined to be more-likely-than-not that the asset will not be realized. 2. New Accounting Pronouncements Recently Issued Accounting Updates 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. 3. Debt Outstanding balances (in thousands) for the Company’s long-term debt were as follows: 53 January 31, 2023 2022 Revolving credit line $ 17,122 $ 9,551 Other 4,622 4,962 Total debt 21,744 14,513 Less current portion 7,360 340 Non-current portion $ 14,384 $ 14,173 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 $ 3.0 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 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. 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 $ 65.0 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; 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 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 (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; 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. 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 54 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 $ 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. 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. 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, 2024 $ 7,360 2025 248 2026 258 2027 269 2028 10,280 Thereafter 3,329 $ 21,744 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 %. 4. Retirement Plans Pension Plans The Company maintains two defined benefit pension plans, the Virco Employees Retirement Plan (“Employee Plan”), and the Virco Important Performers Retirement Plan (“VIP Plan”). 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 55 qualified noncontributory defined benefit retirement plan. Benefits under the Employee Plan are based on years of service and career average earnings. Benefit accruals under the Employee Plan were frozen effective December 31, 2003. All benefits were fully vested as of January 31, 2023 and 2022. The Company also provides a supplementary retirement plan for certain key employees, the VIP Plan. The VIP Plan provides a benefit up to 50 % of average compensation for the last five years in the VIP Plan offset by benefits earned under the Employee Plan. Benefit accruals under the VIP Plan were frozen effective December 31, 2003. 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 $ 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. Three primary economic assumptions influence the reported values of plan liabilities and pension costs. The Company takes the following factors into consideration: discount rate, assumed rate of return, and plan settlements. 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. 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 rates for the Employee Plan and the VIP Plan were 4.85 % and 3.20 % at January 31, 2023 and 2022, 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 years ended January 31, 2023 or 2022. 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. When setting its expected return on plan asset assumptions, the Company considers long-term rates of return on various asset classes (both historical and forecasted, using data collected from various sources generally regarded as authoritative) in the context of expected long-term average asset allocations for its defined benefit pension plan. The Company maintains a trust for and funds the pension obligations for the Employee Plan. The Board of Directors appoints a Retirement Plan Committee that establishes a policy for investment and funding strategies. Approximately 50 % of the trust assets are managed by investment advisors and held in common trust funds with the balance managed by the Retirement Plan Committee. The Retirement Plan Committee has established target asset allocations for its investment advisors, who invest the trust assets in a variety of institutional collective trust funds. The Company’s investment advisors have developed a funding strategy that moves fund asset allocation from equity and other investments to fixed income instruments designed to mirror the changes in discount rates as the Plan becomes more fully funded. At January 31, 2023, approximately 28 % of the trust assets were held in these investments. The Retirement Plan Committee receives quarterly reports addressing investment returns, funded status of the plan and progress on the glidepath to fully funded status from the investment advisors and meets periodically with them to discuss investment performance. At January 31, 2023 and 2022, the amount of the plan assets invested in bond or short-term investment funds was 29 % and 13 %, respectively, and the balance of the trust was held in equity funds or other investments. The trust does not hold any Company stock. 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 $ 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. The following tables set forth (in thousands) the combined funded status of the Company’s pension plans at January 31, 2023 and 2022: 56 Combined Employee Retirement Plans 1/31/2023 1/31/2022 Change in Benefit Obligation Benefit obligation at beginning of year $ 40,586 $ 44,178 Service cost — — Interest cost 1,295 1,113 Participant contributions — — Amendments — — Actuarial losses (gains) ( 6,892 ) ( 2,373 ) Plan settlement — — Benefits paid ( 2,004 ) ( 2,332 ) Benefit obligation at end of year 32,985 40,586 Change in Plan Assets Fair value at beginning of year 26,429 23,972 Actual return on plan assets ( 1,428 ) 4,099 Company contributions 631 690 Settlements — — Benefits paid ( 2,004 ) ( 2,332 ) Fair value at end of year 23,628 26,429 Funded Status Unfunded status of the plans $ ( 9,357 ) $ ( 14,157 ) Amounts Recognized in Statement of Financial Position Current liabilities $ ( 324 ) $ ( 344 ) Non-current liabilities ( 9,033 ) ( 13,813 ) Accrued benefit cost $ ( 9,357 ) $ ( 14,157 ) Amounts Recognized in Statement of Financial Position and Operations Accrued benefit liability $ ( 9,357 ) $ ( 14,157 ) Accumulated other compensation loss 1,910 6,889 Net amount recognized $ ( 7,447 ) $ ( 7,268 ) Items not yet Recognized as a Component of Net Periodic Pension Expense, included in AOCI Unrecognized net actuarial loss $ 1,910 $ 6,889 Unamortized prior service costs — — Net initial asset recognition — — $ 1,910 $ 6,889 57 Combined Employee Retirement Plans 1/31/2023 1/31/2022 Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income Net loss $ ( 4,472 ) $ ( 5,782 ) Prior service cost — — Amortization of loss ( 507 ) ( 1,774 ) Amortization of prior service cost (credit) — — Amortization of initial asset — — Total recognized in other comprehensive loss $ ( 4,979 ) $ ( 7,556 ) Items to be Recognized as a Component of Periodic Pension Cost for next fiscal year Prior service cost $ — $ — Net actuarial loss 6 536 $ 6 $ 536 Supplemental Data Projected benefit obligation $ 32,985 $ 40,586 Accumulated benefit obligation $ 32,985 $ 40,586 Fair value of plan assets $ 23,628 $ 26,429 Components of Net Cost Service cost $ — $ — Interest cost 1,295 1,113 Expected return on plan assets ( 1,000 ) ( 690 ) Amortization of transition amount — — Recognized (gain) loss due to settlement — — Amortization of prior service cost — — Recognized net actuarial loss 521 1,774 Benefit cost $ 816 $ 2,197 Estimated Future Benefit Payments FYE 01-31-2024 $ 6,234 FYE 01-31-2025 3,272 FYE 01-31-2026 2,581 FYE 01-31-2027 2,449 FYE 01-31-2028 2,397 FYE 01-31-2029 to 2033 10,289 Total $ 27,222 Weighted Average Assumptions to Determine Benefit Obligations at Year-End Discount rate 4.85 % 3.20 % Rate of compensation increase N/A N/A Weighted Average Assumptions to Determine Net Periodic Pension Cost Discount rate 3.20 % 2.75 % - 2.80 % Expected return on plan assets 6.00 % 6.00 % Rate of compensation increase N/A N/A 58 The Employee Plan held no Level 2 or 3 investments at January 31, 2023 and 2022. The following table sets for the fair value of the Level 1 investments for the Employee Plan as of January 31, 2023 and 2022 (in thousands): Fair Value Measurements of Plan Assets Employee Plan 1/31/2023 1/31/2022 Level 1 Measurement Common Stock $ 9,389 $ 14,094 Principal Money Market 233 523 Federated Herme Gove Oblig 722 — PNC Govt Money Fund — 204 Vanguard INTM Term Investment 930 394 Vanguard LT Investment 2,382 983 Ishares Russell 2000 718 1,457 Ishares Russell MID-CAP 738 1,958 Ishares Emerging Markets 748 1,091 Ishares MCSI RAFE 1,857 1,713 Ishares S&P Index 483 781 Vanguard INTM Term Treasury 2,352 404 Vanguard LT Treasury 921 1,036 Total Level 1 Investments $ 21,473 $ 24,638 In addition to the holdings above, the Employee Plan has a holding in a mutual fund investment, Managed Investment Fund. 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 $ 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. Events that may lead to a restriction to transact with the fund is not considered probable. 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 continues to include Virco stock as one of the investment options. At January 31, 2023 and 2022, the plan held 1,265,586 shares and 1,077,995 shares of the Company’s common stock, respectively. Effective January 1, 2021, the Company initiated an employer match. 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 The Company provided post-retirement life insurance to certain retired employees under the Dual Option Life Insurance Plan (the "Plan"). Effective January 2004, the Company terminated this plan for active employees. The Company has purchased split-dollar life insurance on the lives of the remaining covered participants. 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 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): 59 1/31/2023 1/31/2022 Liability beginning of year $ 1,616 $ 2,034 Accretion expense 27 60 Death benefits paid — ( 478 ) Liability end of year $ 1,643 $ 1,616 5. Stock-Based Compensation Stock Incentive Plans The Company's two stock plans are the 2019 Employee Stock Incentive Plan (the “2019 Plan”) and the 2011 Employee Incentive Stock Plan (the “2011 Plan”). Under the 2019 Plan, the Company may grant an aggregate of 1,000,000 shares to its employees in the form of restricted stock units and non-employee directors in the form of restricted stock awards. Restricted stock units and awards granted under the 2019 Plan are expensed ratably over the vesting period of the awards. The Company determines the fair value of its restricted stock units or awards and related compensation expense as the difference between the market value of the units or awards on the date of grant less the exercise price of the units or awards granted. During fiscal year 2023, the Company granted 0 awards to non-employee directors, vested 114,470 shares according to their terms and forfeited 0 shares under the 2019 Plan. As of January 31, 2023, there were approximately 608,435 shares available for future issuance under the 2019 Plan. Under the 2011 Plan, the Company may grant an aggregate of 2,000,000 shares to its employees in the form of restricted stock units and non-employee directors in the form of restricted stock awards. Restricted stock units and awards granted under the 2011 Plan are expensed ratably over the vesting period of the awards. The Company determines the fair value of its restricted stock units or awards and related compensation expense as the difference between the market value of the units or awards on the date of grant less the exercise price of the units or awards granted. 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: 2023 2022 (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,: 60 2023 2022 Restricted stock units Weighted- Average Exercise Price Restricted stock units Weighted- Average Exercise Price Outstanding at beginning of year 420,870 $ 4.37 611,495 $ 4.26 Granted — — 68,870 3.63 Exercised ( 233,670 ) 3.82 ( 259,495 ) 3.55 Forfeited — — — — Outstanding at end of year 187,200 4.40 420,870 4.37 Weighted-average fair value of restricted stock units granted during the year — 3.63 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. The Company records forfeitures as incurred. 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. 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. To satisfy employee minimum statutory tax withholding requirements for restricted stock awards that vest, the Company withholds and retires a portion of the vesting common shares, unless an employee elects to pay cash. In fiscal 2023 and 2022, the Company withheld 55,838 and 50,289 common shares, respectively, with a total value of approximately $ 213,000 and $ 176,000 , respectively. These amounts are presented as a cash outflow from financing activities in the accompanying consolidated statement of cash flows. 6. Income Taxes 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): 2023 2022 Statutory $ 1,689 $ ( 782 ) State taxes (net of federal tax) 746 14 Change in valuation allowance ( 10,546 ) 12,303 State rate adjustment ( 397 ) ( 197 ) Change in unrecognized tax benefits 6 5 Stock compensation 35 48 Expirations of attributes 17 55 Permanent differences ( 13 ) ( 31 ) Return to provision ( 41 ) ( 7 ) 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): 61 2023 2022 Current Federal $ 82 $ — State 125 92 207 92 Deferred Federal 1,524 ( 731 ) State 311 ( 256 ) 1,835 ( 987 ) Change in valuation allowance ( 10,546 ) 12,303 ( 8,711 ) 11,316 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): 2023 2022 Deferred tax assets Accrued vacation and sick leave $ 1,925 $ 943 Retirement plans 2,729 3,930 Insurance reserves 325 300 Warranty 156 154 Net operating loss carryforwards 1,949 4,445 Right of use liability 3,087 4,159 Inventory 1,820 2,124 Other 401 361 12,392 16,416 Deferred tax liabilities Tax in excess of book depreciation ( 987 ) ( 984 ) Right of use assets ( 2,630 ) ( 3,567 ) Other ( 111 ) ( 54 ) ( 3,728 ) ( 4,605 ) Valuation allowance ( 864 ) ( 11,412 ) 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 be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income or reversal of deferred tax liabilities during the periods in which those temporary differences become deductible. As a part of this evaluation, the Company assesses all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, the availability of tax 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 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. At 62 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): 2023 2022 Balances as of February 1, $ 57 $ 54 Increases related to prior year tax positions — — Decreases related to prior year tax positions ( 5 ) ( 1 ) Increases related to current year tax positions 19 10 Decreases related to lapsing of statute of limitations ( 9 ) ( 6 ) Balance as of January 31, $ 62 $ 57 At January 31, 2023, the Company’s unrecognized tax benefits associated with uncertain tax positions were $ 62,000 , of which $ 49,000 if recognized, would favorably affect the effective tax rate. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense which is consistent with the recognition of the items in prior reporting. The Company had recorded a liability for interest and penalties related to unrecognized tax benefits of $ 16,000 at January 31, 2023, and $ 13,000 at January 31, 2022. The year ended January 31, 2018 and subsequent years remain open for examination by the IRS and state tax authorities. 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. 7. Leases and Commitments 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. Beginning on the first day of fiscal 2020, the Company adopted ASC 842 to account for its leases. Pursuant to ASC 842, the Company uses the implicit rate when readily determinable, or the incremental borrowing rate. Our incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments using Company specific credit spreads. The Company’s lease terms include options to extend or terminate the lease only when it is reasonably certain that we will exercise that option. Lease expense for our operating leases is recognized on a straight-line basis over the lease term. The Company has an operating lease for its corporate office, manufacturing and distribution facility located in Torrance, CA, currently with a remaining lease term through April 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 and automobiles under 63 Table of Contents operating leases that include certain fleet management and maintenance services. Certain of the leases contain renewal or purchase options and require payment for property taxes and insurance. The Company records lease expense on a straight-line basis based on the contractual lease payments. In accordance with ASC 842, the Company recognizes the present value of the future lease commitments as an operating lease liability, and a corresponding right-of-use asset (“ROU asset”), net of tenant allowances. Tenant improvements and related tenant allowances are recorded as a reduction to the ROU asset. The Company elected to account for leases with an original term of 12 months or less that do not contain a purchase option as short-term leases. Additionally, certain of the leases provide for variable payment for property taxes, insurance, and common area maintenance payments among others. The Company recognizes variable lease expenses for these leases in the period incurred. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. In accordance with ASC 842, quantitative information regarding our leases is as follows: Twelve-Months Ended 1/31/2023 1/31/2022 (in thousands) Operating lease cost $ 5,174 $ 5,086 Short-term lease cost 388 332 Sublease income ( 40 ) ( 40 ) Variable lease cost 883 1,033 Total lease cost $ 6,405 $ 6,411 Other operating leases information: 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 Weighted-average discount rate 6.30 % 6.40 % Minimum future lease payments (in thousands) for operating leases in effect as of January 31, 2023, are as follows: Operating Lease Year ending January 31, 2024 $ 5,679 2025 5,674 2026 1,432 2027 — 2028 — Thereafter — Remaining balance of lease payments 12,785 Short-term lease liabilities 5,082 Long-term lease liabilities 6,796 Total lease liabilities 11,878 Difference between undiscounted cash flows and discounted cash flows $ 907 8. Contingencies 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 64 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. Despite the Company’s significant dedication to operating in compliance with applicable laws, there is a risk that the Company could fail to comply with a regulation or that applicable laws and regulations change. On these occasions, the Company records liabilities for remediation costs when remediation costs are probable and can be reasonably estimated. The Company is subject to contingencies pursuant to environmental laws and regulations that in the future may require the Company to take action to correct the effects on the environment of prior disposal practices or releases of chemical or petroleum substances by the Company or other parties. 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 $ 30.0 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. Management does not anticipate that any related settlement, after consideration of the existing reserve for claims incurred and potential insurance recovery, would have a material adverse effect on the Company’s financial position, results of operations or cash flows. Estimated payments under the self-insurance programs are as follows (in thousands): Year ending January 31, 2024 $ 225 2025 275 2026 275 2027 275 2028 275 Thereafter — Total 1,325 Discount to net present value ( 75 ) 1,250 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. 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. 9. Warranty The Company provides a warranty against all substantial defects in material and workmanship. 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 warranty offered to provide specific warranty periods by product component, with no warranty period longer than ten years . The Company’s warranty is not a guarantee of service life, which depends upon events outside the Company’s control and may be different from the warranty period. The Company accrues an estimate of its exposure to warranty claims based upon both product sales data and an analysis of actual warranty claims incurred. The following is a summary of the Company’s warranty-claim activity during for the years ended January 31 (in thousands): 65 Table of Contents 2023 2022 Beginning balance $ 600 $ 700 Provision for current year 350 370 Benefits from prior years ( 140 ) ( 340 ) Costs incurred ( 210 ) ( 130 ) Ending balance 600 600 Less current portion ( 250 ) $ ( 250 ) Non-current portion $ 350 $ 350 10. Subsequent Events None. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.