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 LLP Los Angeles, CA, PCAOB ID: 659 ) 38 Consolidated Balance Sheets as of January 31, 202 4 and 2023 40 Consolidated Statements of Income for the Years Ended January 31, 202 4 and 202 3 42 Consolidated Statements of Comprehensive Income for the Years Ended January 31, 202 4 and 20 23 43 Consolidated Statements of Stockholders' Equity for the Years Ended January 31, 202 4 and 20 23 44 Consolidated Statements of Cash Flows for the Years Ended January 31, 202 4 and 2 023 45 Notes to Consolidated Financial Statements 46 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 sheets of Virco Mfg. Corporation (the “Company”) as of January 31, 2024 and 2023, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the years 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, 2024 and 2023, and the results of its operations and its cash flows for the years 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. 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. 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. 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 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. 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. Valuation of slow-moving and obsolete inventories As described in Note 1 to the financial statements, the Company’s inventories balance was $58.4 million as of January 31, 2024. 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. The valuation adjustments of 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 of slow-moving and obsolete inventories as of January 31, 2024 as a critical audit matter. The Company’s determination of the valuation of 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 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 the valuation of 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 a sensitivity analysis to determine the percentage increase or decrease that would materially impact the value recorded. /s/ Moss Adams LLP Los Angeles, California April 12, 2024 We have served as the Company's auditor since 2022. 39 Virco Mfg. Corporation Consolidated Balance Sheets January 31, 2024 2023 (In thousands, except share and par value data) Assets Current assets Cash $ 5,286 $ 1,057 Trade accounts receivables (net of allowance of $ 200 at January 31, 2024 and 2023) 23,161 18,435 Other receivables 20 68 Income tax receivable — 19 Inventories 58,371 67,406 Prepaid expenses and other current assets 2,188 2,083 Total current assets 89,026 89,068 Property, plant, and equipment Land 3,731 3,731 Land improvements 694 686 Buildings and building improvements 51,576 51,310 Machinery and equipment 114,400 113,662 Leasehold improvements 523 983 Total property, plant, and equipment 170,924 170,372 Less accumulated depreciation and amortization 136,356 135,810 Net property, plant, and equipment 34,568 34,562 Operating lease right-of-use assets 6,508 10,120 Deferred income tax assets 6,634 7,800 Other assets 9,709 8,576 Total assets $ 146,445 $ 150,126 See accompanying notes to consolidated financial statements. 40 Virco Mfg. Corporation Consolidated Balance Sheets January 31, 2024 2023 (In thousands, except share and par value data) Liabilities Current liabilities Accounts payable $ 12,945 $ 19,448 Accrued compensation and employee benefits 10,880 9,554 Income tax payable 145 0 Current portion of long-term debt 248 7,360 Current portion of operating lease liability 5,744 5,082 Other accrued liabilities 8,570 7,081 Total current liabilities 38,532 48,525 Non-current liabilities Accrued self-insurance 650 1,050 Accrued retirement benefits 9,429 10,676 Income tax payable 128 79 Long-term debt, less current portion 4,136 14,384 Operating lease liability, less current portion 1,829 6,796 Other long-term liabilities 562 555 Total non-current liabilities 16,734 33,540 Commitments and contingencies (Note 8) 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 16,347,314 shares in 2024 and 16,210,985 shares in 2023 164 162 Additional paid-in capital 121,373 120,890 Accumulated deficit ( 29,048 ) ( 50,631 ) Accumulated other comprehensive loss ( 1,310 ) ( 2,360 ) Total stockholders’ equity 91,179 68,061 Total liabilities and stockholders’ equity $ 146,445 $ 150,126 See accompanying notes to consolidated financial statements. 41 Virco Mfg. Corporation Consolidated Statements of Income Years ended January 31, 2024 2023 (In thousands, except per share data) Net sales $ 269,117 $ 231,064 Costs of goods sold 153,059 145,723 Gross profit 116,058 85,341 Selling, general, and administrative expenses 84,181 74,697 Operating income 31,877 10,644 Unrealized gain on investment in trust account ( 1,050 ) ( 194 ) Pension expense 1,008 816 Interest expense, net 2,679 1,979 Income before income taxes 29,240 8,043 Income tax expense (benefit) 7,330 ( 8,504 ) Net income $ 21,910 $ 16,547 Cash dividends declared per common share: $ 0.02 $ — Net income per common share: Basic $ 1.34 $ 1.03 Diluted $ 1.34 $ 1.02 Weighted average shares outstanding: Basic 16,295 16,142 Diluted 16,388 16,192 See accompanying notes to consolidated financial statements. 42 Virco Mfg. Corporation Consolidated Statements of Comprehensive Income Years ended January 31, 2024 2023 (In thousands) Net income $ 21,910 $ 16,547 Other comprehensive income Pension adjustments (net of $ 365 tax expense in 2024 and $ 1,310 tax expense in 2023) 1,050 3,669 Comprehensive income $ 22,960 $ 20,216 See accompanying notes to consolidated financial statements. 43 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 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 Net income — — — 21,910 — 21,910 Pension adjustments, net of tax effect of $ 365 — — — — 1,050 1,050 Cash dividends — — — ( 327 ) — ( 327 ) Shares vested and others 136,329 2 ( 112 ) — — ( 110 ) Stock compensation expense — — 595 — — 595 Balance at January 31, 2024 16,347,314 $ 164 $ 121,373 $ ( 29,048 ) $ ( 1,310 ) $ 91,179 See accompanying notes to consolidated financial statements. 44 Virco Mfg. Corporation Consolidated Statements of Cash Flows Year Ended January 31, 2024 2023 (In thousands) Operating activities Net income $ 21,910 $ 16,547 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 5,097 4,542 Amortization of debt issuance costs 115 122 Non-cash lease income ( 694 ) ( 543 ) Provision for doubtful accounts — 56 (Gain) loss on sale of property, plant and equipment 4 ( 2 ) Deferred income taxes 800 ( 8,711 ) Stock-based compensation 595 612 Defined benefit plan, recognized net loss due to settlements 375 70 Amortization of net actuarial (gain) loss for pension plans ( 4 ) 437 Decrease in non cash surrender value of life insurance policies ( 14 ) ( 78 ) Non cash gain on investment ( 1,050 ) ( 194 ) Surrender of life insurance policies ( 634 ) — Changes in operating assets and liabilities: Trade accounts receivable ( 4,726 ) ( 720 ) Other receivables 48 50 Inventories 9,035 ( 20,033 ) Income taxes 213 141 Prepaid expenses and other current assets ( 94 ) ( 106 ) Accounts payable and accrued liabilities ( 4,016 ) 4,022 Net cash provided by (used in) operating activities 26,960 ( 3,788 ) Investing activities Purchases of property, plant and equipment ( 5,248 ) ( 3,332 ) 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 489 2,744 Net cash used in investing activities ( 4,759 ) ( 3,332 ) Financing activities Proceeds from long-term debt 42,036 49,579 Repayment of long-term debt ( 59,396 ) ( 42,348 ) Tax withholding payments on share-based compensation ( 110 ) ( 213 ) Payment on deferred financing costs ( 175 ) ( 200 ) Cash dividend paid ( 327 ) — Net cash (used in) provided by financing activities ( 17,972 ) 6,818 Net increase (decrease) in cash 4,229 ( 302 ) Cash at beginning of year $ 1,057 $ 1,359 Cash at end of year $ 5,286 $ 1,057 Supplemental disclosures of cash flow information Cash paid during the year for: Interest $ 2,679 $ 1,979 Income tax $ 6,316 $ 67 Property, plant and equipment acquired and not yet paid at end of year $ 493 $ 634 See accompanying notes to consolidated financial statements. 45 VIRCO MFG. CORPORATION Notes to Consolidated Financial Statements January 31, 2024 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 74 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 2024, the Company started to return to the traditional seasonality and delivered approximately 49 % 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 consolidated 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 consolidated 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 credit losses. Fiscal Year End Fiscal years 2024 and 2023 refer to the fiscal years ended January 31, 2024 and 2023, 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, 2024 and 2023. 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, 2024 and 2023. Foreign net sales were approximately 4.7 % and 4.4 % of the Company’s net sales for fiscal years 2024 and 2023, respectively. 46 Cash Cash consists of cash on hand, and the Company has approximately $ 5.3 million in cash and cash equivalents as of January 31, 2024. 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 Company's Important Performers Retirement Plan (“VIP Plan”) and Split-dollar life insurance benefit program (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, 2024 and 2023 : January 31, 2024 2023 Finished goods $ 18,861 $ 25,740 Work in Process 25,047 25,303 Raw materials 14,463 16,363 Inventories $ 58,371 $ 67,406 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: 47 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 $ 1.8 million and $ 2.0 million for fiscal years ended January 31, 2024 and 2023, respectively. Property, plant, and equipment purchased during the year that remains unpaid were $ 493,000 and $ 634,000 as of January 31, 2024 and 2023, 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 $ 212,000 and $ 205,000 at January 31, 2024 and 2023, respectively. January 31, 2024 2023 (In thousands) Balance at beginning of period $ 205 $ 198 Decrease in obligation — — Accretion expense 7 7 Balance at end of period $ 212 $ 205 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, 2024 and 2023. Net Income per Share For fiscal year 2024, net income per share is calculated by dividing net income by the diluted weighted-average number of common shares outstanding. The following table sets forth the computation of basic and diluted income per share: January 31, 2024 2023 (In thousands, except per share) Numerator Net income $ 21,910 $ 16,547 Denominator Weighted-average shares — basic 16,295 16,142 Dilutive effect of common stock equivalents from equity incentive plans 93 50 Weighted-average shares 16,388 16,192 Net income per common share Basic $ 1.34 $ 1.03 Diluted $ 1.34 $ 1.02 Environmental Costs 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 48 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, 2024 and 2023, the Company had not capitalized any remediation costs and had not recorded any amortization expense in fiscal years 2024 and 2023. 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, 2024 and 2023 of $ 1.4 million and $ 1.2 million, respectively, and are expensed as incurred. Prepaid advertising costs reported as a prepaid asset on the accompanying consolidated balance sheets at January 31, 2024 and 2023, were $ 432,000 and $ 355,000 , respectively. Product Warranty Expense The Company provides a product warranty on most products. Products sold prior to January 31, 2014 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 $ 350,000 as of January 31, 2024 and 2023, as other long-term liabilities in the accompanying consolidated balance sheets. The current portion of the warranty reserve were $ 150,000 and $ 250,000 as of January 31, 2024 and 2023, respectively, and included in other accrued liabilities in the accompanying consolidated balance sheets. Self-Insurance In fiscal 2024 and 2023, 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 2024 and fiscal 2023. 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 $ 770,000 at January 31, 2024 in the accompanying consolidated balance sheets. The current portion of the self-insurance reserve was $ 120,000 as of January 31, 2024 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 $ 122.0 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, 2024 and 2023: 49 January 31, 2024 2023 Balance as of beginning of year $ ( 2,360 ) $ ( 6,029 ) Other comprehensive income before reclassifications 679 3,162 Amounts reclassified from accumulated comprehensive loss 371 507 Net current period other comprehensive income 1,050 3,669 Balance as of end of year $ ( 1,310 ) $ ( 2,360 ) The reclassifications out of accumulated other comprehensive loss of $ 371,000 and $ 507,000 for the years ended January 31, 2024 and 2023, 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 income. 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, 2024 and 2023, shipping and classroom delivery costs of approximately $ 27.2 million, and $ 23.8 million, respectively, were included in selling, general and administrative expenses in the accompanying consolidated statements of income. 50 Income Taxes The Company recognizes deferred income taxes under the asset and liability method of 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 Pronouncements ASU 2023-07 "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures": This ASU requires additional disclosures about reportable segments' expenses and other items on an interim and annual basis. This guidance will be effective for annual periods beginning January 1, 2024, and interim periods beginning January 1, 2025. We do not believe it will have a material impact on our future financial statements. Accounting Standard Update 2023-09, Improvements to Income Tax Disclosures (“ASU 2023-09”). In December 2023, the FASB issued ASU 2023-09, which requires more detailed income tax disclosures. The guidance requires entities to disclose disaggregated information about their effective tax rate reconciliation as well as expanded information on income taxes paid by jurisdiction. The disclosure requirements will be applied on a prospective basis, with the option to apply them retrospectively. The standard is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. We are evaluating the disclosure requirements related to the new standard. The Company evaluates all Accounting Standards Updates ("ASUs") issued by the Financial Accounting Standards Board ("FASB") for consideration of their applicability to our condensed consolidated financial statements. We have assessed all ASUs issued but not yet adopted and concluded that those not disclosed are not relevant to the Company or are not expected to have a material impact. 3. Debt Outstanding balances (in thousands) for the Company’s long-term debt were as follows: January 31, 2024 2023 Revolving credit line $ — $ 17,122 Other 4,384 4,622 Total debt 4,384 21,744 Less current portion 248 7,360 Non-current portion $ 4,136 $ 14,384 The Company and Virco Inc., its wholly-owned subsidiary (the “Borrowers”) has a Revolving Credit and Security Agreement (the “Restated 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, most recently on May 19, 2023. The Restated Credit Agreement as currently in effect 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. 51 In addition to the financial covenants, the Restated Credit Agreement provides for customary events of default, subject to certain cure periods and other limitations. Substantially all of the Borrowers' accounts receivable are automatically and promptly swept to repay amounts outstanding under the Restated Credit Agreement upon receipt by the Borrowers. Due to this automatic liquidating nature of the Restated Credit Agreement, if the Borrowers breach any covenant, violate any representation or warranty or suffer a deterioration in their ability to borrow pursuant to the borrowing base calculation, the Borrowers may not have access to cash liquidity unless provided by PNC at its discretion. The other material terms of the Restated Credit Agreement as currently in effect include the following: (i) a revolving line of credit with a Maximum Revolving Advance Amount of $ 65.0 million (increasing to $ 70.0 million during the months of June through August 2024) 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; (ii) inventory sublimit of $ 35.0 million and Assemble-to-ship (ATS) inventory sublimit of $ 15.0 million during the months of May through August 2024; and (iii) 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 was in compliance with its debt covenants as of January 31, 2024. The Company's revolving line of credit with PNC is structured to provide seasonal credit availability during the Company's peak summer season. Approximately $ 30.0 million and $ 12.9 million were available for borrowing as of January 31, 2024 and 2023, respectively. Interest rates were 10.50 % and 9.25 % as of January 31, 2024 and 2023, respectively. The Company also incurs a fee on the unused portion of the revolving line of credit at a rate of 0.375 %. As of January 31, 2024 and 2023, the Company's outstanding debt balance on the revolving credit line were zero and 17.1 million, respectively. In addition to 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 4.00 % per year and 20 year term. The outstanding amount under this note was $ 4.4 million as of January 31, 2024. The long-term debt repayments are approximately as follow as of January 31, 2024 (in thousands): Year ending January 31, 2025 $ 248 2026 258 2027 269 2028 280 2029 291 Thereafter 3,038 $ 4,384 Management believes that the carrying value of debt approximated fair value at January 31, 2024 and 2023, 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 4.00 %. 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 qualified noncontributory defined benefit retirement plan. Benefits under the Employee Plan are based on years of service and 52 career average earnings. Benefit accruals under the Employee Plan were frozen effective December 31, 2003. All benefits were fully vested as of January 31, 2024 and 2023. 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 $ 620,000 and $ 734,000 at January 31, 2024 and 2023, respectively. Death benefits payable under life insurance policies held by the Plan were approximately $ 1.3 million and $ 1.6 million at January 31, 2024 and 2023, respectively. Equity investments held in the Rabbi Trust to secure retirement benefits were $ 5.8 million and $ 4.7 million as of January 31, 2024 and 2023. Assets held in the Rabbi Trust were included in the other non-current assets 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 5.15 % - 5.20 % and 4.85 % at January 31, 2024 and 2023, 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, 2024 or 2023. 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, 2024, 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, 2024 and 2023, the amount of the plan assets invested in bond or short-term investment funds was 26 % and 29 %, 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 $ 676,000 in fiscal 2024 and $ 631,000 in fiscal 2023. Contributions during fiscal 2025 will depend upon actual investment results and benefit payments but are anticipated to be approximately $ 386,000 . At January 31, 2024, accumulated other comprehensive loss of approximately $ 1.3 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, 2024 and 2023: 53 Combined Employee Retirement Plans 1/31/2024 1/31/2023 Change in Benefit Obligation Benefit obligation at beginning of year $ 32,985 $ 40,586 Service cost — — Interest cost 1,410 1,295 Participant contributions — — Amendments — — Actuarial gains ( 115 ) ( 6,892 ) Plan settlement — — Benefits paid ( 6,895 ) ( 2,004 ) Benefit obligation at end of year 27,385 32,985 Change in Plan Assets Fair value at beginning of year 23,628 26,429 Actual return on plan assets 1,702 ( 1,428 ) Company contributions 676 631 Settlements — — Benefits paid ( 6,895 ) ( 2,004 ) Fair value at end of year 19,111 23,628 Funded Status Unfunded status of the plans $ ( 8,274 ) $ ( 9,357 ) Amounts Recognized in Statement of Financial Position Current liabilities $ ( 314 ) $ ( 324 ) Non-current liabilities ( 7,960 ) ( 9,033 ) Accrued benefit cost $ ( 8,274 ) $ ( 9,357 ) Amounts Recognized in Statement of Financial Position and Operations Accrued benefit liability $ ( 8,274 ) $ ( 9,357 ) Accumulated other compensation loss 495 1,910 Net amount recognized $ ( 7,779 ) $ ( 7,447 ) Items not yet Recognized as a Component of Net Periodic Pension Expense, included in AOCI Unrecognized net actuarial loss $ 495 $ 1,910 Unamortized prior service costs — — Net initial asset recognition — — $ 495 $ 1,910 54 Combined Employee Retirement Plans 1/31/2024 1/31/2023 Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income Net gain $ ( 1,044 ) $ ( 4,472 ) Prior service cost — — Amortization of gain (loss) 4 ( 507 ) Recognized loss due to settlement ( 375 ) — Amortization of initial asset — — Total recognized in other comprehensive income $ ( 1,415 ) $ ( 4,979 ) Items to be Recognized as a Component of Periodic Pension Cost for next fiscal year Prior service cost $ — $ — Net actuarial loss (gain) $ ( 141 ) $ 6 $ ( 141 ) $ 6 Supplemental Data Projected benefit obligation $ 27,385 $ 32,985 Accumulated benefit obligation $ 27,385 $ 32,985 Fair value of plan assets $ 19,111 $ 23,628 Components of Net Cost Service cost $ — $ — Interest cost 1,410 1,295 Expected return on plan assets ( 789 ) ( 1,000 ) Amortization of transition amount — — Recognized loss due to settlement 375 — Amortization of prior service cost — — Recognized net actuarial loss 12 521 Benefit cost $ 1,008 $ 816 Estimated Future Benefit Payments FYE 01-31-2025 $ 6,344 FYE 01-31-2026 2,422 FYE 01-31-2027 2,241 FYE 01-31-2028 2,129 FYE 01-31-2029 1,847 FYE 01-31-2030 to 2034 8,459 Total $ 23,442 Weighted Average Assumptions to Determine Benefit Obligations at Year-End Discount rate 5.15 % - 5.20 % 4.85 % Rate of compensation increase N/A N/A Weighted Average Assumptions to Determine Net Periodic Pension Cost Discount rate 4.85 % 3.20 % Expected return on plan assets 6.00 % 6.00 % Rate of compensation increase N/A N/A 55 The Employee Plan held no Level 2 or 3 investments at January 31, 2024 and 2023. The following table sets for the fair value of the Level 1 investments for the Employee Plan as of January 31, 2024 and 2023 (in thousands): Fair Value Measurements of Plan Assets Employee Plan 1/31/2024 1/31/2023 Level 1 Measurement Common Stock $ 11,560 $ 9,389 Principal Money Market 204 233 Federated Herme Gove Oblig 327 722 PNC Govt Money Fund — — Vanguard INTM Term Investment 675 930 Vanguard LT Investment 1,744 2,382 Ishares Russell 2000 16 718 Ishares Russell MID-CAP 17 738 Ishares Emerging Markets 15 748 Ishares MCSI RAFE 39 1,857 Ishares S&P Index 15 483 Vanguard LT Treasury 1,695 2,352 Vanguard INTM Term Treasury 663 921 Total Level 1 Investments $ 16,970 $ 21,473 During the third quarter ended October 2023, the Company sold approximately $ 5.3 million of the investment assets held in the Trust and the proceed from the sale was used to purchase annuities on behalf of 49 participants currently receiving monthly benefits and 89 vested terminated participants. 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 as of January 31, 2024 and 2023, 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, 2024 and 2023, the plan held 1,286,586 shares and 1,265,586 shares of the Company’s common stock, respectively. Effective January 1, 2022, the Company initiated a discretionary employer match, in the Company Stock Fund, limited to 100 % of first 1 % and 50 % of next 5 % of the amount deferred by the employee. The Company may also make additional employer contributions to the Plan at its sole discretion. Any contribution may be made in cash or in shares of Company common stock. The total amount of Company contributions cannot exceed the amount deductible by the Company for federal income tax purposes. For the fiscal years ended January 31, 2024 and 2023, the compensation costs incurred for employer match was $ 1.5 million and $ 1.4 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 $ 1.6 million. Cash surrender values of these policies, which are included in other assets in the accompanying consolidated balance sheets, were $ 1.1 million and $ 1.5 million at January 31, 2024 and 2023, respectively. Death benefits payable under the policies were approximately $ 2.8 million and $ 3.0 million at January 31, 2024 and 2023, 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 56 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, 2024 and 2023 (in thousands): 1/31/2024 1/31/2023 Liability beginning of year $ 1,643 $ 1,616 Accretion expense 25 27 Death benefits paid ( 200 ) — Liability end of year $ 1,468 $ 1,643 5. Stock-Based Compensation Stock Incentive Plans Under the Company's two stock plans are the 2019 Employee Stock Incentive Plan (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 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 2024, the Company granted zero awards to non-employee directors, vested 93,600 shares according to their terms and forfeited 0 shares under the 2019 Plan. As of January 31, 2024, there were approximately 537,925 shares available for future issuance under the 2019 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: 2024 2023 (in thousands) Cost of goods sold $ 113 $ 148 Selling, general and administrative expenses 482 464 Total stock-based compensation expense $ 595 $ 612 The following table summarizes the Company’s restricted stock unit awards activity, and related information for fiscal years ended January 31,: 2024 2023 Restricted stock units Weighted- Average Exercise Price Restricted stock units Weighted- Average Exercise Price Outstanding at beginning of year 187,200 $ 4.40 420,870 $ 4.37 Granted 70,510 3.89 — — Vested ( 93,600 ) 4.40 ( 233,670 ) 3.82 Forfeited — — — — Outstanding at end of year 164,110 4.18 187,200 4.40 Weighted-average fair value of restricted stock units granted during the year $ 274,284 3.89 $ — — Weighted-average fair value of restricted stock units vested during the year $ 411,840 $ 892,619 57 As of January 31, 2024, there was $ 229,000 of total unrecognized compensation expense related to restricted stock awards. That expense is expected to be recognized over a weighted-average period of 0.3 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 2024 and 2023, the Company withheld 27,781 and 55,838 common shares, respectively, with a total value of approximately $ 110,000 and $ 213,000 , respectively. These amounts are presented as a cash outflow from financing activities in the accompanying consolidated statements of cash flows. 6. Income Taxes The income tax expense (benefit) for fiscal years ended January 31, 2024 and 2023 is reconciled to the statutory federal income tax rates of 21 % for the tax years ended January 31, is as follows (in thousands): 2024 2023 Statutory $ 6,140 $ 1,689 State taxes (net of federal tax) 1,346 746 Change in valuation allowance ( 613 ) ( 10,546 ) State rate adjustment 164 6 Change in unrecognized tax benefits 34 35 Stock compensation 16 ( 397 ) Expirations of attributes 56 17 Permanent differences 69 ( 13 ) Return to provision true-up 118 ( 41 ) Income tax expense (benefit) $ 7,330 $ ( 8,504 ) Significant components of the expense (benefit) for income taxes attributed to continuing operations are as follows for the years ended January 31, is as follows (in thousands): 2024 2023 Current Federal $ 5,567 $ 82 State 963 125 6,530 207 Deferred Federal 301 1,524 State 1,112 311 1,413 1,835 Change in valuation allowance ( 613 ) ( 10,546 ) 800 ( 8,711 ) Income tax expense (benefit) $ 7,330 $ ( 8,504 ) 58 Deferred tax assets and liabilities are comprised of the following as of January 31, respectively, as follows (in thousands): 2024 2023 Deferred tax assets Accrued vacation and sick leave $ 2,143 $ 1,925 Retirement plans 2,391 2,729 Insurance reserves 197 325 Warranty 128 156 Net operating loss carryforwards 599 1,949 Right of use liability 1,935 3,087 Inventory 1,878 1,820 Other 536 401 9,807 12,392 Deferred tax liabilities Tax in excess of book depreciation ( 882 ) ( 987 ) Right of use assets ( 1,663 ) ( 2,630 ) Other ( 377 ) ( 111 ) ( 2,922 ) ( 3,728 ) Valuation allowance ( 251 ) ( 864 ) Net long term deferred tax asset $ 6,634 $ 7,800 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. At January 31, 2024, the Company recorded a partial valuation allowances of $ 251,000 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, 2024, was a decrease of $ 613,000 . At January 31, 2024, the Company had no NOL for U.S. federal tax purposes and $ 9.0 million for state income tax purposes, expiring at various dates through January 31, 2042. 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 $ 864,000 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): 59 2024 2023 Beginning balances as of January 31, $ 62 $ 57 Increases related to prior year tax positions 8 — Decreases related to prior year tax positions — ( 5 ) Increases related to current year tax positions 33 19 Decreases related to lapsing of statute of limitations ( 11 ) ( 9 ) Ending balance as of January 31, $ 92 $ 62 At January 31, 2024, the Company’s unrecognized tax benefits associated with uncertain tax positions were $ 92,000 , of which $ 73,000 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 $ 37,000 at January 31, 2024, and $ 16,000 at January 31, 2023. 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, 2024, it is reasonably possible that unrecognized tax benefits will decrease by $ 7,000 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. Pursuant to ASC 842- Leases, 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 facility 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 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: 60 Table of Contents Years ended 1/31/2024 1/31/2023 (in thousands) Operating lease cost $ 5,099 $ 5,174 Short-term lease cost 421 388 Sublease income ( 40 ) ( 40 ) Variable lease cost 983 883 Total lease cost $ 6,463 $ 6,405 Other operating leases information: Cash paid for amounts included in the measurement of lease liabilities (in thousands) $ 5,793 $ 5,716 Right-of-use assets obtained in exchange for new lease liabilities (in thousands) $ 873 $ 545 Weighted-average remaining lease term (years) 1.5 2.2 Weighted-average discount rate 6.36 % 6.30 % Minimum future lease payments (in thousands) for operating leases in effect as of January 31, 2024, are as follows: Operating Lease Year ending January 31, 2025 $ 6,037 2026 1,772 2027 142 2028 — 2029 — Thereafter — Remaining balance of lease payments 7,951 Short-term lease liabilities 5,744 Long-term lease liabilities 1,829 Total lease liabilities 7,573 Difference between undiscounted cash flows and discounted cash flows $ 378 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 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 61 $ 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 $ 770,000 and $ 1.3 million at January 31, 2024 and 2023, 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, 2025 $ 120 2026 170 2027 170 2028 170 2029 170 Thereafter — Total 800 Discount to net present value ( 30 ) 770 Less current portion ( 120 ) Non-current portion $ 650 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): 2024 2023 Beginning balance $ 600 $ 600 Provision for current year 400 350 Benefits from prior years ( 285 ) ( 140 ) Costs incurred ( 215 ) ( 210 ) Ending balance 500 600 Less current portion ( 150 ) $ ( 250 ) Non-current portion $ 350 $ 350 10. Subsequent Events On February 27, 2024, Virco Mfg. Corporation (“Virco”) declared a cash dividend for the Company’s first fiscal quarter of $ 0.02 per share on each outstanding share of common stock. The dividend is payable on April 10, 2024 to stockholders of record of the common stock as of the close of business on March 7, 2024. 62 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.