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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

ý | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended July 31, 2020
OR

¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to
Commission File number 1-8777

VIRCO MFG. CORPORATION (Exact Name of Registrant as Specified in its Charter)

Delaware |  | 95-1613718
(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)
2027 Harpers Way, Torrance, CA |  | 90501
(Address of Principal Executive Offices) |  | (Zip Code)

Registrant’s Telephone Number, Including Area Code: (310) 533-0474
Securities registered pursuant to Section 12(b) of the Act:

Title of each class |  | Trading Symbol |  | Name of each exchange on which registered
Common Stock, $0.01 par value per share |  | VIRC |  | The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

Large accelerated filer | ¨ |  |  | Accelerated filer |  | ¨
Non-accelerated filer | ý |  |  | Smaller reporting company |  | ý
|  |  |  | Emerging growth company |  | ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
The number of shares outstanding for each of the registrant’s classes of common stock, as of the latest practicable date:
Common Stock, $.01 par value — 15,918,642 shares as of September 12, 2020.

TABLE OF CONTENTS

Part I. Financial Information |  | 3
| Item 1. Financial Statements | 3
| Unaudited condensed consolidated balance sheets - July 31, 2020, January 31, 2020 and July 31, 2019 | 3
| Unaudited condensed consolidated statements of income - Three months ended July 31, 2020 and 2019 | 5
| Unaudited condensed consolidated statements of (loss) income - Six months ended July 31, 2020 and 2019 | 6
| Unaudited condensed consolidated statements of comprehensive income - Three months ended July 31, 2020 and 2019 | 7
| Unaudited condensed consolidated statements of comprehensive (loss) income - Six months ended July 31, 2020 and 2019 | 8
| Unaudited condensed consolidated statements of cash flows - Six months ended July 31, 2020 and 2019 | 9
| Unaudited condensed consolidated statements of changes in equity and accumulated other comprehensive income (loss) - Three and Six months ended July 31, 2020 and 2019 | 10
| Notes to unaudited condensed consolidated financial statements - July 31, 2020 | 12
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 22
| Item 3. Quantitative and Qualitative Disclosures about Market Risk | 24
| Item 4. Controls and Procedures | 25
Part II. Other Information |  | 26
| Item 1. Legal Proceedings | 26
| Item 1A. Risk Factors | 26
| Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities | 26
| Item 3. Defaults Upon Senior Securities | 26
| Item 4. Mine Safety Disclosures | 26
| Item 5. Other Information | 26
| Item 6. Exhibits | 26
| EX-3.3 |
| EX 10.27 |
| EX-31.1 |
| EX-31.2 |
| EX-32.1 |
| EX-101 INSTANCE DOCUMENT |
| EX-101 SCHEMA DOCUMENT |
| EX-101 CALCULATION LINKBASE DOCUMENT |
| EX-101 LABELS LINKBASE DOCUMENT |
| EX-101 PRESENTATION LINKBASE DOCUMENT |

2

PART I. Financial Information
Item 1. Financial Statements
Virco Mfg. Corporation
Unaudited Condensed Consolidated Balance Sheets

| 7/31/2020 |  | 1/31/2020 |  | 7/31/2019
| (In thousands) |  |  |  |
Assets |  |  |  |  |
Current assets |  |  |  |  |
Cash | $ | 878 |  |  | $ | 1,150 |  |  | $ | 877 |
Trade accounts receivables, net | 32,688 |  |  | 11,762 |  |  | 41,105 |
Other receivables | 60 |  |  | 57 |  |  | 397 |
Income tax receivable | 535 |  |  | 298 |  |  | 340 |
Inventories | 49,444 |  |  | 43,329 |  |  | 59,017 |
Prepaid expenses and other current assets | 2,174 |  |  | 1,746 |  |  | 2,359 |
Total current assets | 85,779 |  |  | 58,342 |  |  | 104,095 |
Non-current assets |  |  |  |  |
Property, plant and equipment |  |  |  |  |
Land | 3,731 |  |  | 3,731 |  |  | 3,731 |
Land improvements | 734 |  |  | 717 |  |  | 688 |
Buildings and building improvements | 51,182 |  |  | 51,200 |  |  | 51,192 |
Machinery and equipment | 111,710 |  |  | 110,610 |  |  | 109,540 |
Leasehold improvements | 1,086 |  |  | 990 |  |  | 970 |
Total property, plant and equipment | 168,443 |  |  | 167,248 |  |  | 166,121 |
Less accumulated depreciation and amortization | 129,596 |  |  | 127,351 |  |  | 125,250 |
Net property, plant and equipment | 38,847 |  |  | 39,897 |  |  | 40,871 |
Operating lease right-of-use assets | 19,551 |  |  | 21,325 |  |  | 22,924 |
Deferred tax assets, net | 11,222 |  |  | 11,230 |  |  | 7,816 |
Other assets, net | 7,970 |  |  | 8,198 |  |  | 8,256 |
Total assets | $ | 163,369 |  |  | $ | 138,992 |  |  | $ | 183,962 |

See accompanying notes to unaudited condensed consolidated financial statements.
3

Virco Mfg. Corporation
Unaudited Condensed Consolidated Balance Sheets

| 7/31/2020 |  | 1/31/2020 |  | 7/31/2019
| (In thousands, except share and par value data) |  |  |  |
Liabilities |  |  |  |  |
Current liabilities |  |  |  |  |
Accounts payable | $ | 16,764 |  |  | $ | 10,587 |  |  | $ | 18,634 |
Accrued compensation and employee benefits | 5,595 |  |  | 6,392 |  |  | 5,322 |
Current portion of long-term debt | 18,387 |  |  | 878 |  |  | 35,457 |
Current portion operating lease liability | 4,581 |  |  | 3,654 |  |  | 3,275 |
Other accrued liabilities | 6,417 |  |  | 3,607 |  |  | 6,871 |
Total current liabilities | 51,744 |  |  | 25,118 |  |  | 69,559 |
Non-current liabilities |  |  |  |  |
Accrued self-insurance retention | 1,494 |  |  | 1,410 |  |  | 1,686 |
Accrued pension expenses | 21,419 |  |  | 21,310 |  |  | 13,951 |
Income tax payable | 71 |  |  | 70 |  |  | 55 |
Long-term debt, less current portion | 15,407 |  |  | 15,818 |  |  | 16,291 |
Operating lease liability, less current portion | 17,798 |  |  | 19,787 |  |  | 21,598 |
Other long-term liabilities | 704 |  |  | 661 |  |  | 557 |
Total non-current liabilities | 56,893 |  |  | 59,056 |  |  | 54,138 |
Commitments and contingencies (Notes 6, 7 and 13) |  |  |  |  |
Stockholders’ equity |  |  |  |  |
Preferred stock: |  |  |  |  |
Authorized 3,000,000 shares, $0.01 par value; none issued or outstanding | — |  |  | — |  |  | — |
Common stock: |  |  |  |  |
Authorized 25,000,000 shares, $0.01 par value; issued and outstanding 15,918,642 shares at 7/31/2020 and 15,713,549 at 1/31/2020 and 7/31/2019 | 159 |  |  | 157 |  |  | 157 |
Additional paid-in capital | 119,149 |  |  | 118,782 |  |  | 118,282 |
Accumulated deficit | (50,955) |  |  | (49,810) |  |  | (49,392) |
Accumulated other comprehensive loss | (13,621) |  |  | (14,311) |  |  | (8,782) |
Total stockholders’ equity | 54,732 |  |  | 54,818 |  |  | 60,265 |
Total liabilities and stockholders’ equity | $ | 163,369 |  |  | $ | 138,992 |  |  | $ | 183,962 |

See accompanying notes to unaudited condensed consolidated financial statements.
4

Virco Mfg. Corporation
Unaudited Condensed Consolidated Statements of Income

| Three months ended |  |
| 7/31/2020 |  | 7/31/2019
| (In thousands, except per share data) |  |
Net sales | $ | 59,285 |  |  | $ | 70,359 |
Costs of goods sold | 36,082 |  |  | 41,620 |
Gross profit | 23,203 |  |  | 28,739 |
Selling, general and administrative expenses | 15,488 |  |  | 18,557 |
Loss on sale of property, plant & equipment | — |  |  | 3 |
Operating income | 7,715 |  |  | 10,179 |
Pension expense | 542 |  |  | 188 |
Interest expense | 494 |  |  | 907 |
Income before income taxes | 6,679 |  |  | 9,084 |
Income tax expense | 3,126 |  |  | 3,217 |
Net income | $ | 3,553 |  |  | $ | 5,867 |
Net income per common share: |  |  |
Basic | $ | 0.23 |  |  | $ | 0.38 |
Diluted | $ | 0.23 |  |  | $ | 0.38 |
Weighted average shares of common stock outstanding: |  |  |
Basic | 15,733 |  |  | 15,561 |
Diluted | 15,746 |  |  | 15,568 |

See accompanying notes to unaudited condensed consolidated financial statements.
5

Virco Mfg. Corporation
Unaudited Condensed Consolidated Statements of (Loss) Income

| Six months ended |  |
| 7/31/2020 |  | 7/31/2019
| (In thousands, except per share data) |  |
Net sales | $ | 76,884 |  |  | $ | 97,252 |
Costs of goods sold | 48,777 |  |  | 59,429 |
Gross profit | 28,107 |  |  | 37,823 |
Selling, general and administrative expenses | 27,419 |  |  | 31,238 |
Loss on sale of property, plant & equipment | — |  |  | 3 |
Operating income | 688 |  |  | 6,582 |
Pension expense | 1,084 |  |  | 376 |
Interest expense | 898 |  |  | 1,607 |
(Loss) income before income taxes | (1,294) |  |  | 4,599 |
Income tax (benefit) expense | (149) |  |  | 1,799 |
Net (loss) income | $ | (1,145) |  |  | $ | 2,800 |
Net (loss) income per common share: |  |  |
Basic | $ | (0.07) |  |  | $ | 0.18 |
Diluted (a) | $ | (0.07) |  |  | $ | 0.18 |
Weighted average shares of common stock outstanding: |  |  |
Basic | 15,694 |  |  | 15,524 |
Diluted (a) | 15,694 |  |  | 15,529 |

(a) Net loss per common share for fiscal period ended July 31, 2020 was calculated based on basic shares outstanding due to the anti-dilutive effect on the inclusion of common stock equivalent shares.
See accompanying notes to unaudited condensed consolidated financial statements.
6

Virco Mfg. Corporation
Unaudited Condensed Consolidated Statements of Comprehensive Income

| Three months ended |  |
| 7/31//2020 |  | 7/31/2019
| (In thousands) |  |
Net income | $ | 3,553 |  |  | $ | 5,867 |
Other comprehensive income: |  |  |
Pension adjustments (net of tax expense of $120 and $45 at July 31, 2020 and 2019, respectively) | 345 |  |  | 130 |
Net comprehensive income | $ | 3,898 |  |  | $ | 5,997 |

See accompanying notes to unaudited condensed consolidated financial statements.
7

Virco Mfg. Corporation
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income

| Six months ended |  |
| 7/31/2020 |  | 7/31/2019
| (In thousands) |  |
Net (loss) income | $ | (1,145) |  |  | $ | 2,800 |
Other comprehensive income: |  |  |
Pension adjustments (net of tax expense of $240 and $91 at July 31, 2020 and 2019, respectively) | 690 |  |  | 260 |
Net comprehensive (loss) income | $ | (455) |  |  | $ | 3,060 |

See accompanying notes to unaudited condensed consolidated financial statements.
8

Virco Mfg. Corporation
Unaudited Condensed Consolidated Statements of Cash Flows

| Six months ended |  |
| 7/31/2020 |  | 7/31/2019
| (In thousands) |  |
Operating activities |  |  |
Net (loss) income | $ | (1,145) |  |  | $ | 2,800 |
Adjustments to reconcile net (loss) income to net cash used in operating activities: |  |  |
Depreciation and amortization | 2,675 |  |  | 2,916 |
Non-cash lease expense | 712 |  |  | 173 |
Provision for doubtful accounts | 35 |  |  | 35 |
Loss on sale of property, plant and equipment | — |  |  | 3 |
Deferred income taxes | 8 |  |  | 1,782 |
Stock-based compensation | 506 |  |  | 423 |
Defined pension plan settlement | — |  |  | — |
Amortization of net actuarial loss for pension plans | 690 |  |  | 352 |
Changes in operating assets and liabilities: |  |  |
Trade accounts receivable | (20,964) |  |  | (27,887) |
Other receivables | — |  |  | (357) |
Inventories | (6,114) |  |  | (11,728) |
Income taxes | (236) |  |  | (155) |
Prepaid expenses and other current assets | (200) |  |  | (515) |
Accounts payable and accrued liabilities | 8,178 |  |  | 4,516 |
Net cash used in operating activities | (15,855) |  |  | (27,642) |
Investing activities: |  |  |
Capital expenditures | (1,359) |  |  | (2,309) |
Proceeds from sale of property, plant and equipment | — |  |  | — |
Net cash used in investing activities | (1,359) |  |  | (2,309) |
Financing activities: |  |  |
Borrowing from long-term debt | 23,884 |  |  | 30,911 |
Repayment of long-term debt | (6,787) |  |  | (577) |
Payment on deferred financing costs | — |  |  | — |
Tax withholding payments on share-based compensation | (155) |  |  | (244) |
Cash dividends paid | — |  |  | — |
Net cash provided by financing activities | 16,942 |  |  | 30,090 |
Net (decrease) increase in cash | (272) |  |  | 139 |
Cash at beginning of period | 1,150 |  |  | 738 |
Cash at end of period | $ | 878 |  |  | $ | 877 |

See accompanying notes to unaudited condensed consolidated financial statements.
9

Virco Mfg. Corporation
Unaudited Consolidated Statements of Changes in Equity and Accumulated Other Comprehensive Income (Loss)

|  | Three-Month Period Ended July 31, 2020 |  |  |  |  |  |  |  |  |  |
|  | Common Stock |  |  |  |  |  |  |  |  |  |
In thousands, except share data |  | Shares |  | Amount |  | Additional Paid-in Capital |  | Accumulated Deficit |  | Accumulated Other Comprehensive Loss |  | Total Stockholder's Equity
Balance at May 1, 2020 |  | 15,713,549 |  |  | $ | 157 |  |  | $ | 119,036 |  |  | $ | (54,508) |  |  | $ | (13,966) |  |  | $ | 50,719 |
Net income |  | — |  |  | — |  |  | — |  |  | 3,553 |  |  | — |  |  | 3,553 |
Cash dividends |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Pension adjustments, net of tax effect of $120 |  | — |  |  | — |  |  | — |  |  | — |  |  | 345 |  |  | 345 |
Shares vested and others |  | 205,093 |  |  | 2 |  |  | (139) |  |  | — |  |  | — |  |  | (137) |
Stock compensation expense |  | — |  |  | — |  |  | 252 |  |  | — |  |  | — |  |  | 252 |
Balance at July 31, 2020 |  | 15,918,642 |  |  | $ | 159 |  |  | $ | 119,149 |  |  | $ | (50,955) |  |  | $ | (13,621) |  |  | $ | 54,732 |

|  | Three-Month Period Ended July 31, 2019 |  |  |  |  |  |  |  |  |  |
|  | Common Stock |  |  |  |  |  |  |  |  |  |
In thousands, except share data |  | Shares |  | Amount |  | Additional Paid-in Capital |  | Accumulated Deficit |  | Accumulated Other Comprehensive Loss |  | Total Stockholder's Equity
Balance at May 1, 2019 |  | 15,541,956 |  |  | $ | 155 |  |  | $ | 118,292 |  |  | $ | (55,259) |  |  | $ | (8,912) |  |  | $ | 54,276 |
Net income |  | — |  |  | — |  |  | — |  |  | 5,867 |  |  | — |  |  | 5,867 |
Cash dividends |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Pension adjustments, net of tax effect of $45 |  | — |  |  | — |  |  | — |  |  | — |  |  | 130 |  |  | 130 |
Shares vested and others |  | 171,593 |  |  | 2 |  |  | (247) |  |  | — |  |  | — |  |  | (245) |
Stock compensation expense |  | — |  |  | — |  |  | 237 |  |  | — |  |  | — |  |  | 237 |
Balance at July 31, 2019 |  | 15,713,549 |  |  | $ | 157 |  |  | $ | 118,282 |  |  | $ | (49,392) |  |  | $ | (8,782) |  |  | $ | 60,265 |

|  | Six-Month Period Ended July 31, 2020 |  |  |  |  |  |  |  |  |  |
|  | Common Stock |  |  |  |  |  |  |  |  |  |
In thousands, except share data |  | Shares |  | Amount |  | Additional Paid-in Capital |  | Accumulated Deficit |  | Accumulated Other Comprehensive Loss |  | Total Stockholder's Equity
Balance at February 1, 2020 |  | 15,713,549 |  |  | $ | 157 |  |  | $ | 118,782 |  |  | $ | (49,810) |  |  | $ | (14,311) |  |  | $ | 54,818 |
Net loss |  | — |  |  | — |  |  | — |  |  | $ | (1,145) |  |  | — |  |  | (1,145) |
Cash dividends |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Pension adjustments, net of tax effect of $240 |  | — |  |  | — |  |  | — |  |  | — |  |  | 690 |  |  | 690 |
Shares vested and others |  | 205,093 |  |  | 2 |  |  | (139) |  |  | — |  |  | — |  |  | (137) |
Stock compensation expense |  | — |  |  | — |  |  | 506 |  |  | — |  |  | — |  |  | 506 |
Balance at July 31, 2020 |  | 15,918,642 |  |  | $ | 159 |  |  | $ | 119,149 |  |  | $ | (50,955) |  |  | $ | (13,621) |  |  | $ | 54,732 |

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|  | Six-Month Period Ended July 31, 2019 |  |  |  |  |  |  |  |  |  |
|  | Common Stock |  |  |  |  |  |  |  |  |  |
In thousands, except share data |  | Shares |  | Amount |  | Additional Paid-in Capital |  | Accumulated Deficit |  | Accumulated Other Comprehensive Loss |  | Total Stockholder's Equity
Balance at February 1, 2019 |  | 15,541,956 |  |  | $ | 155 |  |  | $ | 118,106 |  |  | $ | (52,192) |  |  | $ | (9,042) |  |  | $ | 57,027 |
Net income |  | — |  |  | — |  |  | — |  |  | $ | 2,800 |  |  | — |  |  | 2,800 |
Cash dividends |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Pension adjustments, net of tax effect of $91 |  | — |  |  | — |  |  | — |  |  | — |  |  | 260 |  |  | 260 |
Shares vested and others |  | 171,593 |  |  | 2 |  |  | (247) |  |  | — |  |  | — |  |  | (245) |
Stock compensation expense |  | — |  |  | — |  |  | 423 |  |  | — |  |  | — |  |  | 423 |
Balance at July 31, 2019 |  | 15,713,549 |  |  | $ | 157 |  |  | $ | 118,282 |  |  | $ | (49,392) |  |  | $ | (8,782) |  |  | $ | 60,265 |

See accompanying notes to unaudited condensed consolidated financial statements.
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VIRCO MFG. CORPORATION
Notes to unaudited Condensed Consolidated Financial Statements
July 31, 2020
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements and are presented in accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2020 (“Form 10-K”). In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three months and six months ended July 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2021. The balance sheet at January 31, 2020 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. All references to the “Company” refer to Virco Mfg. Corporation and its subsidiaries.
Liquidity
Management evaluated whether there are any conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern over the next twelve months through September 30, 2021. The Company has experienced an overall decline in net sales and net income through the first six-months of fiscal 2021 as compared to fiscal 2020 as a result of the disruption to its business and its customers caused by the COVID-19 pandemic. As a result of the reduced revenue, the Company was not in compliance with its fixed-charge coverage ratio under its revolving and secured credit agreement with PNC Bank, as of July 31, 2020 (see Note 7). The Company successfully negotiated a waiver and amendment to the agreement to satisfy the event of default and reduced the ratio required for the rolling four quarter period ending October 31, 2020 from 1.10:1.00 to 1.00:1.00.
The Company expects the impact of COVID-19 to continue to be a challenge for the foreseeable future and believes the economy will be adversely impacted for an indeterminate period, including the demand for its products. The extent of the impact will depend on numerous factors that are unknown, uncertain and cannot be reasonably predicted. The Company has plans to further moderate certain selling, general and administrative expenses and capital expenditures to preserve cash and maintain compliance with its financial covenants. Based on the Company’s current projections and its ability to manage certain controllable expenditures, management believes it will maintain compliance with the financial covenants for the next 12 months and that the Company’s existing cash, projected operating cash flows and available credit facilities, described in note 7, are adequate to meet its operating needs, liabilities and commitments over the next twelve months from the issuance of the interim financial statements.
Note 2. Seasonality and Management Use of Estimates
The market for educational furniture is marked by extreme seasonality, with approximately 50% of the Company’s total sales typically occurring from June to August each year, the Company’s peak season. Hence, the Company typically builds and carries significant amounts of inventory during and in anticipation of this peak summer season to facilitate the rapid delivery requirements of customers in the educational market. This requires a large up-front investment in inventory, labor, storage and related costs as inventory is built in anticipation of peak sales during the summer months. As the capital required for this build-up generally exceeds cash available from operations, the Company has generally relied on third-party bank financing to meet cash flow requirements during the build-up period immediately preceding the peak season. In addition, the Company typically is faced with a large balance of accounts receivable during the peak season. This occurs for two primary reasons. First, accounts receivable balances typically increase during the peak season as shipments of products increase. Second, many customers during this period are educational institutions and government entities, which tend to pay accounts receivable slower than commercial customers.
The Company’s working capital requirements during and in anticipation of the peak summer season require management to make estimates and judgments that affect assets, liabilities, revenues and expenses, and related contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to market demand, labor costs and stocking
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inventory. Significant estimates made by management include, but are not limited to, valuation of inventory; deferred tax assets and liabilities; useful lives of property, plant and equipment; liabilities under pension, warranty, self-insurance and environmental claims; and the accounts receivable allowance for doubtful accounts. Due to the inherent uncertainty involved in making assumptions and estimates, events and changes in circumstances arising after July 31, 2020, including those resulting from the impacts of the COVID-19 pandemic, may result in actual outcomes that differ from those contemplated by our assumptions and estimates.
Note 3. New Accounting Pronouncements
Recently Adopted Accounting Updates
In response to the large volume of anticipated lease concessions to be granted related to the effects of the COVID-19 pandemic, and the resultant expected cost and complexity of applying the lease modification requirements in ASC 842, the FASB issued Staff Q&A—Topic 842 and Topic 840: Accounting For Lease Concessions Related to the Effects of the COVID-19 Pandemic, in April 2020 as interpretive guidance to provide clarity in response to the crisis. The FASB staff indicated that it would be acceptable for entities to make an election to account for lease concessions related to the effects of the COVID-19 pandemic consistent with how they would be accounted for as though enforceable rights and obligations for those concessions existed in the original contract. Consequently, for such lease concessions, an entity will not need to reassess each existing contract to determine whether enforceable rights and obligations for concessions exist and an entity can elect to apply or not to apply the lease modification guidance in ASC 842 to those contracts. The election is available for concessions related to the effects of the COVID-19 pandemic that result in the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract.
In accordance with this interpretive guidance, the Company elected to account for lease concessions related to the effects of the COVID-19 pandemic that resulted in the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract consistent with how they would be accounted for as though enforceable rights and obligations for those concessions existed in the original contract. Consequently, for such lease concessions, the Company did not reassess each existing contract to determine whether enforceable rights and obligations for concessions existed and elected not to apply the lease modification guidance in ASC 842 to those contracts. The Company accounted for COVID-19 lease abatements of $136,000 as reductions to variable lease expense as if no changes to the lease contract were made while continuing to recognize expense and reductions in the operating lease liability, as well as the operating lease right-of-use asset during the abatement period. There were no lease concessions recorded in the first quarter of fiscal 2021.
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. This update simplifies various aspects related to accounting for income taxes, removes certain exceptions to the general principles in ASC 740, and clarifies and amends existing guidance to improve consistent application. The Company adopted this ASU as of February 1, 2020 and the adoption of this standard did not have a material effect on our condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) which modifies the disclosure requirements of fair value measurements in Topic 820, Fair Value Measurement. For public companies the ASU removes disclosure requirements for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation process for Level 3 fair value measurements. The ASU modifies the disclosure requirements for investments in certain entities that calculate net asset value and clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The ASU adds the disclosure requirement for changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The Company adopted this ASU as of February 1, 2020 and the adoption of this standard did not have a material effect on our condensed consolidated financial statements.
Recently Issued Accounting Updates
In August 2018, the FASB issued Accounting Standards Update No. 2018-14 (ASU 2018-14), Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20), which amends the current disclosure requirements regarding defined benefit pensions and other post retirement plans, and allows for the removal of certain disclosures, while adding certain new disclosure requirements. This standard is effective for fiscal years beginning after December 15, 2020 and allows for early adoption. The Company is currently evaluating the effect the standard will have on the consolidated financial statements and related disclosures.
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In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaces the incurred loss impairment methodology for measuring and recognizing credit losses with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The adoption date, as modified by the recently issued ASU 2019-10 discussed below, will be for the fiscal year ending after December 15, 2022 and interim periods therein. The Company is currently evaluating the effect the standard will have on the consolidated financial statements and related disclosures.
In November 2019, the FASB issued ASU 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates. ASU 2019-10 moves the effective date for certain previously issued amendments to later dates, depending on the filing status of the respective entity. Specifically, due to the amendment and the Company’s status as a smaller reporting company, the new effective dates for relevant previously issued amendments not yet adopted by the Company relate to ASU 2016-13 as described above.
Other recently issued accounting updates are not expected to have a material impact on the Company’s consolidated financial statements.
Note 4. Revenue Recognition
The Company manufactures, markets and distributes a wide variety of school and office furniture to wholesalers, distributors, educational institutions and governmental entities. Revenue is recorded for promised goods or services when control is transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.
The Company's sales generally involve a single performance obligation to deliver goods pursuant to customer purchase orders. Prices for our products are based on published price lists and customer agreements. The Company has determined that the performance obligations are satisfied at a point in time when the Company completes delivery per the customer contract. The majority of sales are free on board ("FOB") destination where the destination is specified per the customer contract and may include delivering the furniture into the classroom, school site or warehouse. Sales of furniture that are sold FOB factory are typically made to resellers of our product who in turn provide logistics to the ultimate customer. Once a product has been delivered per the shipping terms, the customer is able to direct the use of, and obtain substantially all of the remaining benefits from, the asset. The Company considers control to have transferred upon shipment or delivery in accordance with shipping terms because the Company has a present right to payment at that time, the customer has legal title to the asset, the Company has transferred physical possession of the asset, and the customer has significant risks and rewards of ownership of the asset.
Sales are recorded net of discounts, sales incentives and rebates, sales taxes and estimated returns and allowances. The Company offers sales incentives and discounts through various regional and national programs to our customers. These programs include product rebates, product returns allowances and trade promotions. Variable consideration for these programs is estimated in the transaction price at contract inception based on current sales levels and historical experience using the expected value method, subject to constraint.
We do not consider our revenue generated through direct-to-customers and resellers to be meaningfully different revenue streams given similarities in the nature of the products, performance obligation and distribution processes. Sales are predominately in the United States and to a similar class of customer. We do not manage or evaluate the business based on product line or any other discernable category.
Note 5. Inventories
Inventories are valued at the lower of cost (determined on a first-in, first-out basis) or net realizable value and includes material, labor and factory overhead. The Company maintains valuation allowances for estimated slow-moving and obsolete inventory to reflect the difference between the cost of inventory and the estimated net realizable value. Valuation allowances for slow-moving and obsolete inventory are determined through a physical inspection of the product in connection with a physical inventory, a review of slow-moving product and consideration of active marketing programs. The market for education furniture is traditionally driven by value, not style, and the Company has not typically incurred significant obsolescence expenses. If market conditions are less favorable than those anticipated by management, additional valuation allowances may be required. Due to reductions in sales volume in the past years, the Company’s manufacturing facilities are operating at reduced levels of capacity. The Company records the cost of excess capacity as a period expense, not as a component of capitalized inventory valuation.
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The following table presents a breakdown of the Company’s inventories as of July 31, 2020, January 31, 2020 and July 31, 2019:

|  | 7/31/2020 |  | 1/31/2020 |  | 7/31/2019
|  | (in thousands) |  |  |  |
Finished goods |  | $ | 23,065 |  |  | $ | 15,401 |  |  | $ | 27,464 |
WIP |  | 15,430 |  |  | 15,957 |  |  | 17,989 |
Raw materials |  | 10,949 |  |  | 11,971 |  |  | 13,564 |
Total inventories |  | $ | 49,444 |  |  | $ | 43,329 |  |  | $ | 59,017 |

Note 6. Leases
The Company has operating leases on real property, equipment, and automobiles that expire at various dates. The Company determines if an arrangement is a lease at inception and assesses classification of the lease at commencement. All of the Company’s leases are classified as operating leases, as a lessee. The Company uses the implicit rate when readily determinable, or the incremental borrowing rate. Our incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments using company specific credit spreads. The Company’s lease terms include options to extend or terminate the lease only when it is reasonably certain that we will exercise that option. Lease expense for our operating leases is recognized on a straight-line basis over the lease term.
In accordance with ASC 842, quantitative information regarding our leases is as follows:

| Three-Months Ended |  |  |  | Six-Months Ended |  |
| 7/31/2020 |  | 7/31/2019 |  | 7/31/2020 |  | 7/31/2019
| (in thousands, except lease term and discount rate) |  |  |  |  |  |
Operating lease cost | $ | 1,472 |  |  | $ | 1,320 |  |  | $ | 2,912 |  |  | $ | 2,700 |
Short-term lease cost | 124 |  |  | 82 |  |  | 160 |  |  | 136 |
Short-term sublease income | (10) |  |  | (20) |  |  | (20) |  |  | (30) |
Variable lease cost (1) | (85) |  |  | 61 |  |  | 370 |  |  | 509 |
Total lease cost | $ | 1,501 |  |  | $ | 1,443 |  |  | $ | 3,422 |  |  | $ | 3,315 |
Other operating leases information: |  |  |  |  |  |  |
Cash paid for amounts included in the measurement of lease liabilities |  |  |  |  | $ | 2,201 |  |  | $ | 2,611 |
Right-of-use assets obtained in exchange for new lease liabilities |  |  |  |  | $ | 398 |  |  | $ | 1,036 |
Weighted-average remaining lease term (years) |  |  |  |  | 4.5 |  | 5.4
Weighted-average discount rate |  |  |  |  | 6.4 | % |  | 6.38 | %

(1) Subsequent to the issuance of the Company’s condensed consolidated financial statements as of July 31, 2019, management identified an immaterial correction related to the disclosure of certain variable lease payments. Variable lease expense for the three-months and six-months ended July 31, 2019 did not previously include $61,000 and $509,000, respectively of variable lease payments for property taxes, insurance and common area maintenance related to triple net leases. Management corrected the disclosure related to variable lease expense in the table above for the three-months and six-months ended July 31, 2019 and, except for this change, the correction had no impact upon the Company’s condensed consolidated financial statements.
Minimum future lease payments for operating leases in effect as of July 31, 2020, are as follows:
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| Operating Lease
| (in thousands)
Remaining of 2021 | $ | 2,942 |
2022 | 5,757 |
2023 | 5,323 |
2024 | 5,225 |
2025 | 5,370 |
Thereafter | 1,350 |
Remaining balance of lease payments | $ | 25,967 |
Short-term lease liabilities | $ | 4,581 |
Long-term lease liabilities | 17,798 |
Total lease liabilities | $ | 22,379 |
Difference between undiscounted cash flows and discounted cash flows | $ | 3,588 |

Note 7. Debt
Outstanding balances for the Company’s long-term debt were as follows:

| 7/31/2020 |  | 1/31/2020 |  | 7/31/2019
| (in thousands) |  |  |  |
Revolving credit line | $ | 27,505 |  |  | $ | 9,969 |  |  | $ | 44,585 |
Other | 6,289 |  |  | 6,727 |  |  | 7,163 |
Total debt | 33,794 |  |  | 16,696 |  |  | 51,748 |
Less current portion | 18,387 |  |  | 878 |  |  | 35,457 |
Non-current portion | $ | 15,407 |  |  | $ | 15,818 |  |  | $ | 16,291 |

The Company ("the “Borrowers”) has a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association, as administrative agent and lender (“PNC”). The Credit Agreement has been amended twenty times since it’s origination in 2011 through fiscal 2020, which, among other things, extended the maturity date of the Credit Agreement for three years until March 19, 2023.
The Credit Agreement is an asset-based loan consisting of (i) a revolving line of credit with a Maximum Revolving Advance Amount of $65,000,000 that is subject to a borrowing base limitation and generally provides for advances of up to 85% of eligible accounts receivable, plus a percentage equal to the lesser of 60% of the value of eligible inventory or 85% of the liquidation value of eligible inventory, plus $15,000,000 from January through July of each year, minus undrawn amounts of letters of credit and reserves and (2) an equipment loan of $2,000,000. The Credit Agreement is secured by substantially all of the Company's, as defined, personal property and certain of the Company's real property. The principal amount outstanding under the Credit Agreement and any accrued and unpaid interest is due no later than March 19, 2023, and the Credit Agreement is subject to certain prepayment penalties upon earlier termination of the Credit Agreement. Prior to the maturity date, principal amounts outstanding under the Credit Agreement may be repaid and reborrowed at the option of the Borrowers without premium or penalty, subject to borrowing base limitations, seasonal adjustments and certain other conditions, including reduced borrowings under the revolving line to less than or equal $10,000,000 for a period of 30 consecutive days during the fourth quarter of each fiscal year. The Credit Agreement also contains certain financial covenants, including a fixed charge coverage ratio beginning on February 1st, 2020 of not less than 1.10 to 1.00, and capital expenditures not to exceed $8,000,000. The Company was in violation with its financial covenants as of July 31, 2020. On September 8, 2020, the Company entered into Amendment No. 21 to the Revolving Credit and Security Agreement (“Amendment No. 21”) with its lender, PNC Bank, National Association. Amendment No. 21 provided a limited waiver of the Company’s violation of the covenant to maintain a Fixed Charge Coverage Ratio of at least 1.10 to 1.00 for the four fiscal quarter period ended July 31, 2020, and amended the Fixed Charge Coverage Ratio as follows: (i) 1.00 to 1.00 for the consecutive four fiscal quarter period ending October 31, 2020,
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and (ii) 1.10 to 1.00 for each consecutive four fiscal quarter period ending thereafter. In connection with Amendment No. 21, the Company also agreed to pay to PNC Bank a non-refundable fee of $75,000.
The Credit Agreement bears interest, at the Borrowers’ option, at either the Alternate Base Rate (as defined in the Credit Agreement) or the Eurodollar Currency Rate (as defined in the Credit Agreement), in each case plus an applicable margin. The applicable margin for Alternate Base Rate loans is a percentage within a range of 1.25% to 1.75%, and the applicable margin for Eurodollar Currency Rate loans is a percentage within a range of 2.25% to 2.75%, in each case based on the EBITDA of the Borrower's at the end of each fiscal quarter and may be increased at PNC's option by 2.0% during the continuance of an event of default. The interest rate as of July 31, 2020 was 4.5%. The Company also incurs a fee on the unused portion of the revolving line of credit at a rate of 0.375%.
To date the impact of COVID-19 on liquidity has been to moderate the seasonal increase in accounts receivable and production of inventory for summer delivery. Both the increase in accounts receivable and inventory are traditionally financed through the Company’s line of credit with PNC Bank. Reductions in receivables and inventory were substantially offset by a reduction in borrowing under the revolving line with PNC Bank.
In addition to the financial covenants, the Credit Agreement contains events of default as disclosed in Note 3 to our Annual Report on Form 10-K for the year-ended January 31, 2020. Substantially all of the Borrowers' accounts receivable are automatically and promptly swept to repay amounts outstanding under the Credit Agreement upon receipt by the Borrowers. Due to this automatic liquidating nature of the Credit Agreement, if the Borrowers breach any covenant, violate any representation or warranty or suffer a deterioration in their ability to borrow pursuant to the borrowing base calculation, the Borrowers may not have access to cash liquidity unless provided by PNC at its discretion.
The Company's revolving line of credit with PNC is structured to provide seasonal credit availability during the Company's peak summer season. Approximately $32,896,000 was available for borrowing as of July 31, 2020.
Management believes that the carrying value of debt approximated fair value at July 31, 2020 and 2019, as all of the long-term debt bears interest at variable rates based on prevailing market conditions.
Note 8. 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 ASC No. 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. In assessing the realizability of deferred tax assets, the Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. 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. The Company maintains a partial valuation allowance of $1,186,000, $1,183,000 and $2,003,000 as of July 31, 2020, January 31, 2020 and July 31, 2019 to reduce against certain state deferred tax assets that the Company does not believe it is more-likely-than-not to realize.
On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The CARES Act modified the limitation for business interest expense deduction and the new limitation has increased from 30 to 50 percent of adjusted taxable income. Historically deferred taxes related to interest expense limitation were fully offset by a valuation allowance. The Company performed an analysis of the impact of the CARES Act and calculated a tax benefit of approximately
$200,000 which was driven by the release of the valuation allowance related to the business interest limitation.
The January 31, 2016 and subsequent years remain open for examination by the IRS and state tax authorities. The Company is not currently under any state examination. The Company is currently under IRS examination for its fiscal year ended January 31, 2016 Federal tax return.
Income tax expense for the second quarter ended July 31, 2020 is less than the prior year, primarily due to the decrease in pre-tax income and higher effective tax rate. For the six months ended July 31, 2020 the Company recorded an income tax benefit compared to income tax expense due to the loss for the current year versus income in the prior year.
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Note 9. Net income (loss) per Share

| Three Months Ended |  |  |  | Six Months Ended |  |
| 7/31/2020 |  | 7/31/2019 |  | 7/31/2020 |  | 7/31/2019
| (In thousands, except per share data) |  |  |  |  |  |
Net income (loss) | $ | 3,553 |  |  | $ | 5,867 |  |  | $ | (1,145) |  |  | $ | 2,800 |
Weighted average shares of common stock outstanding | 15,733 |  |  | 15,561 |  |  | 15,694 |  |  | 15,524 |
Net effect of dilutive shares - based on the treasury stock method using average market price | 13 |  |  | 7 |  |  | — |  |  | 5 |
Totals | 15,746 |  |  | 15,568 |  |  | 15,694 |  |  | 15,529 |
Net income (loss) per share - basic | $ | 0.23 |  |  | $ | 0.38 |  |  | $ | (0.07) |  |  | $ | 0.18 |
Net income (loss) per share - diluted (a) | $ | 0.23 |  |  | $ | 0.38 |  |  | $ | (0.07) |  |  | $ | 0.18 |

(a) All exercisable and non-exercisable restricted stock awards and/or units were not included in the computation of diluted net loss per share for the six months and three months ended July 31, 2020, because their inclusion would have been anti-dilutive due to the net loss recorded for both periods. The number of stock awards and/or units outstanding, which met this anti-dilutive criterion for the six months ended July 31, 2020, was 5,000.
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Note 10. Stock-Based Compensation
Stock Incentive Plan
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 the six-month periods ended July 31, 2020, the Company granted 94,695 awards to non-employee directors, vested 45,600 shares according to their terms and forfeited 0 shares under the 2019 Plan. As of July 31, 2020, there were approximately 677,305 shares available for future issuance under the 2019 Plan.
Under the 2011 Plan, the Company may grant an aggregate of 2,000,000 shares to its employees in the form of restricted stock units and non-employee directors in the form of restricted stock awards. Restricted stock units and awards granted under the 2011 Plan are expensed ratably over the vesting period of the awards. The Company determines the fair value of its restricted stock units or awards and related compensation expense as the difference between the market value of the units or awards on the date of grant less the exercise price of the units or awards granted. During the six-month periods ended July 31, 2020, the Company granted 0 restricted awards to non-employee directors and 0 units to its employees; vested 59,385 stock awards and 119,200 units according to their terms and forfeited 0 stock units under the 2011 Plan. As of July 31, 2020, there were approximately 32,892 shares available for future issuance under the 2011 Plan.
During the three months ended July 31, 2020, stock-based compensation expense related to restricted stock units and awards recognized in cost of goods sold and selling, general and administrative expenses was $65,000 and $187,000, respectively. During the three months ended July 31, 2019, stock-based compensation expense related to restricted stock units and/or awards recognized in cost of goods sold and selling, general and administrative expenses was $57,000 and $180,000, respectively.
During the six months ended July 31, 2020, stock-based compensation expense related to restricted stock units and awards recognized in cost of goods sold and selling, general and administrative expenses was $128,000 and $378,000, respectively. During the six months ended July 31, 2019, stock-based compensation expense related to restricted stock units and/or awards recognized in cost of goods sold and selling, general and administrative expenses was $116,000 and $307,000, respectively.
As of July 31, 2020 there was $2,431,000 of unrecognized compensation expense related to unvested restricted stock units and/or awards, which is expected to be recognized over a weighted average period of approximately 3 years.
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Note 11. Retirement Plans
The Company and its subsidiaries cover certain employees under a noncontributory defined benefit retirement plan, entitled the Virco Employees’ Retirement Plan (the “Pension Plan”). As more fully described in the Form 10-K, benefit accruals under the Employees Retirement Plan were frozen effective December 31, 2003. There is no service cost incurred under this plan.
The Company also provides a supplementary retirement plan for certain key employees, the VIP Retirement Plan (the “VIP Plan”). As more fully described in the Annual Report on Form 10-K for the year ended January 31, 2019, benefit accruals under this plan were frozen since December 31, 2003. There is no service cost incurred under this plan.
The net periodic pension cost for the Pension Plan and the VIP Plan for the three months and six months ended July 31, 2020 and 2019 were as follows:

| Combined Employee Retirement Plans |  |  |  |  |  |
| Three Months Ended |  |  |  | Six Months Ended |  |
| 7/31/2020 |  | 7/31/2019 |  | 7/31/2020 |  | 7/31/2019
| (in thousands) |  |  |  |  |  |
Service cost | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Interest cost | 301 |  |  | 355 |  |  | 602 |  |  | 710 |
Expected return on plan assets | (224) |  |  | (343) |  |  | (448) |  |  | (686) |
Plan settlement | — |  |  | — |  |  | — |  |  | — |
Amortization of prior service cost | — |  |  | — |  |  | — |  |  | — |
Recognized net actuarial loss | 465 |  |  | 176 |  |  | 930 |  |  | 352 |
Benefit cost | $ | 542 |  |  | $ | 188 |  |  | $ | 1,084 |  |  | $ | 376 |

401(k) Retirement Plan
The Company’s retirement plan, which covers all U.S. employees, allows participants to defer from 1% to 75% of their eligible compensation through a 401(k)-retirement program. The plan includes Virco stock as one of the investment options. At July 31, 2020 and 2019, the plan held 850,789 shares and 708,345 shares of Virco stock, respectively. For the three months ended July 31, 2020 and 2019, the compensation costs incurred for employer match was $195,000 and $187,000, respectively. For the six months ended July 31, 2020 and 2019, the compensation costs incurred for employer match was $405,000 and $374,000, respectively.
Note 12. Warranty Accrual
The Company provides an assurance type warranty against all substantial defects in material and workmanship. The standard warranty offered on products sold after January 1, 2017 was modified to provide specific warranty periods by product component, with no warranty period longer than ten years. The Company’s warranty is not a guarantee of service life, which depends upon events outside the Company’s control and may be different from the warranty period. The Company accrues an estimate of its exposure to warranty claims based upon both product sales data and an analysis of actual warranty claims incurred.
The following is a summary of the Company’s warranty-claim activity for the three and six months ended July 31, 2020 and 2019:

| Three Months Ended |  |  |  | Six Months Ended |  |
| 7/31/2020 |  | 7/31/2019 |  | 7/31/2020 |  | 7/31/2019
| (in thousands) |  |  |  |  |  |
Beginning balance | $ | 800 |  |  | $ | 700 |  |  | $ | 800 |  |  | $ | 700 |
Provision | (17) |  |  | 245 |  |  | 43 |  |  | 316 |
Costs incurred | (33) |  |  | (145) |  |  | (93) |  |  | (216) |
Ending balance | $ | 750 |  |  | $ | 800 |  |  | $ | 750 |  |  | $ | 800 |

Note 13. Contingencies
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The Company has a self-insured retention for product and general liability losses up to $250,000 per occurrence, workers’ compensation liability losses up to $250,000 per occurrence and for automobile liability losses up to $50,000 per occurrence. The Company has purchased insurance to cover losses in excess of the retention up to a limit of $30,000,000. The Company has obtained an actuarial estimate of its total expected future losses for liability claims and recorded a liability equal to the net present value.
The Company and its subsidiaries are defendants in various legal proceedings resulting from operations in the normal course of business. It is the opinion of management, in consultation with legal counsel, that the ultimate outcome of all such matters will not materially affect the Company’s financial position, results of operations or cash flows.
Note 14. Delivery Costs
For the quarter ended July 31, 2020 and 2019, shipping and classroom delivery costs of approximately $4,907,000 and $6,497,000, respectively, were included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
For the six months ended July 31, 2020 and 2019, shipping and classroom delivery costs of approximately 6,985,000 and 9,258,000, respectively, were included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
Note 15. COVID-19
On March 11, 2020, the World Health Organization declared the current coronavirus (COVID-19) outbreak to be a global pandemic. In response to this declaration and the rapid spread of COVID-19 within the United States, federal, state and local governments throughout the country have imposed varying degrees of restriction on social and commercial activity to promote social distancing in an effort to slow the spread of the illness. The Company has been operating its manufacturing and distribution facilities on a voluntary basis to give employees the flexibility to remain at home with children who are out of school or for other personal reasons as they deem necessary. Office employees and others who can work from home continue to do so. Appropriate measures are being taken to protect the health of employees performing essential on-site operations.
The Company’s Conway, Arkansas facilities, which represent approximately two thirds of the Company’s production and distribution capacity, has been fully operational for this period of time. In accordance with State of California and local orders that include guidance on the definition and responsibilities of “essential businesses,” the Company has been operating its Torrance facility. During May, the Company closed its Torrance facility for several days before and after Memorial Day to perform comprehensive cleaning of production and office areas. Management estimates that the Torrance facility is currently staffed at approximately 50% of its normal level.
Note 16. Subsequent Events
On September 8, 2020, the Company entered into Amendment No. 21 to the Revolving Credit and Security Agreement (“Amendment No. 21”) with its lender, PNC Bank, National Association. Amendment No. 21 provided a limited waiver of the Company’s violation of the covenant to maintain a Fixed Charge Coverage Ratio of at least 1.10 to 1.00 for the four fiscal quarter period ended July 31, 2020, and amended the Fixed Charge Coverage Ratio as follows: (i) 1.00 to 1.00 for the consecutive four fiscal quarter period ending October 31, 2020, and (ii) 1.10 to 1.00 for each consecutive four fiscal quarter period ending thereafter. In connection with Amendment No. 21, the Company also agreed to pay to PNC Bank a non-refundable fee of $75,000.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
The effects of COVID -19
Results of operations for the three-month and six-month periods ended July 31, 2020 have been significantly impacted by economic conditions driven by the COVID-19 epidemic. The majority of our primary customers, the K-12 public school systems, closed school campuses and initiated remote learning on or about March 15, 2020. At this time, most school districts are continuing with remote learning for the academic year beginning August 2020, with a minority of districts attempting hybrid or on-site learning.
Selling activities have been significantly impacted. Our direct sales force, one of the Company’s distinct competitive advantages, was unable to make in-person sales calls and has been required to call on customers using telephonic or other electronic methods. Our primary customers, educators and district business officials, are typically working remotely which complicates selling activities. Virco traditionally displays product at a variety of shows, most of which have been cancelled or held remotely. When working on site, educators and business officials typically require appointments and many districts do not allow vendors on-site. Orders of furniture were impacted, but the severity of the impact varied by funding source. Transactional orders, which are typically smaller, sometimes made through internet and other resellers, and are frequently for more immediate delivery fell sharply. Project orders, which are typically, larger, frequently requiring project management and full-service, characterized by a longer selling process, typically months in advance of the order, remained stable compared to the prior year. Funding sources for project orders are frequently bond funded, precluding funding from being diverted to alternative expenditures. The market for educational furniture is extremely seasonal, but there has traditionally been a remarkable stability to this seasonal cycle. In the current year, the timing of orders has not followed the traditional seasonal trends. Orders of educational furniture are traditionally very strong in May and June. In the current year these months were uncharacteristically slow.
Delivery of furniture to customers has been adversely impacted. Customers deferred deliveries of furniture during the initial school closures. This caused a reduction in first quarter shipments, but because orders were stable, our backlog of orders at April 30, 2020 was approximately $8,324,000 greater than the same date in the prior year. Order backlog at July 31, 2020 was flat compared to the same date in the prior year. The Company has followed a process where we call every customer prior to shipping furniture from our warehouse to confirm that there will be school personnel on-site to accept the delivery. This has added complexity to the distribution process but has enabled effective execution of deliveries. During the second quarter, shipments of furniture started to model the traditional seasonal cycle, but at a reduced level of activity due to lower May and June orders. In typical years, shipments of furniture are scheduled to occur prior to Labor Day, when all schools are typically in session. This year does not appear to have the same hard deadline.
Manufacturing has been impacted, but operations have been successful given the circumstances. Our Arkansas factories, which represent approximately two-thirds of our annual volume have been operating the entire time. Our Torrance factory closed for one week at the inception of the pandemic when state and local shutdown orders were not coordinated. After the Company determined that our operations were essential, production re-started. The Torrance operations were closed for several days around Memorial Day to facilitate deep cleaning when a small number of employees were tested positive for COVID-19, but it quickly resumed operations and has been operating since Memorial Day. Our seasonal manufacturing cycle traditionally utilized temporary labor to address the education market seasonal cycle. The reduced production volume has been addressed by limiting temporary labor, and there have been no layoffs or furloughs of our employees. At various times our supply chain has been challenged by interruptions of imported components and by domestic suppliers’ difficulties. While challenging, the Company has performed effectively during this period.
The COVID-19 epidemic has impacted or accelerated changes in many industries, including the furniture industry. While many furniture markets may be permanently impacted, the current pandemic appears to have reinforced the need and desire to have children attend K-12 schools and be instructed in classroom settings. Furniture that facilitates social distancing has been a part of the Company’s product offering since its founding in 1950. The current condition of the K-12 education market continues to be one of significant disruption. State and local governments are anticipated to have severe budgetary concerns. Management believes that while the market for school furniture may decline in the fiscal year ending January 31, 2021 and probably beyond, our domestic manufacturing footprint provides meaningful opportunities to take market share without having to do so through pricing tactics.
Three Months Ended July 31, 2020
For the three months ended July 31, 2020, the Company earned a pre-tax profit of $6,679,000 on sales of $59,285,000 compared to a pre-tax profit of $9,084,000 on sales of $70,359,000 in the prior year.
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Net sales for the three months ended July 31, 2020 decreased by $11,074,000 or 15.7%. The Company began the quarter with an order backlog that was over $8 million higher than the prior year due to slow COVID-19 impacted sales for the first quarter. Orders for the second quarter were approximately 27.9% lower than in the second quarter of the prior year. School closures adversely impacted selling activities and order rates for the months of May and June – traditionally significant months for generating orders during the traditional seasonal market for education furniture. Order rates for the month of July partially recovered to a 12% reduction compared to the prior year. Order backlog at July 31, 2020 was flat compared to the same date last year.
Gross margin for the second quarter was 39.1% compared to 40.8% in the prior year. The gross margin was favorably affected by a modest price increase at the beginning of the year, offset by unfavorable manufacturing overhead variances incurred when production rates declined in response to the decrease in unit volume.
Selling, general and administrative expenses for the three months ended July 31, 2020 decreased by more than $3.0 million compared to the same period last year and decreased as a percentage of sales to 26.1% from 26.4%. The decrease in selling, general and administrative expenses was primarily attributable to decreased variable freight, service, and selling expenses.
Interest expense decreased by $413,000 for the three months ended July 31, 2020 compared to the same period last year. The Company has borrowed less money to finance seasonal working capital.
Income tax expense for the second quarter ended July 31, 2020 is less than the prior year, primarily due to the decrease in pre-tax income.
Six Months Ended July 31, 2020
For the six months ended July 31, 2020, the Company incurred a pre-tax loss of $1,294,000 on net sales of $76,884,000 compared to a pre-tax profit of $4,599,000 on net sales of $97,252,000 in the same period last year. Net sales for the six months ended July 31, 2020 decreased by approximately $20.4 million compared to the same period last year. This decrease was primarily the result of a reduction in unit volume offset by a modest increase in selling prices. The Company began the year with a backlog of orders that was slightly less than the prior year. Order rates for the first six months decreased by approximately 18.6% compared to the prior year.
Gross margin as a percentage of sales declined to 36.6% for the six months ended July 31, 2020 compared to 38.9% in the same period last year. The gross margin was favorably affected by the price increase described above, offset by unfavorable manufacturing overhead variances incurred when production rates declined in response to the decrease in unit volume.
Selling, general and administrative expenses for the six months ended July 31, 2020 decreased by approximately $3.8 million compared to the same period last year and increased as a percentage of sales to 35.7% compared to 32.1% in the prior year. The decrease in selling, general and administrative expenses was primarily attributable to decreased variable freight, service, and selling expenses.
Interest expense decreased by $709,000 for the six months ended July 31, 2020 compared to the same period last year. The Company has borrowed less money to finance seasonal working capital.
For the six months ended July 31, 2020 the Company recorded an income tax benefit compared to income tax expense due to the loss for the current year versus income in the prior year.
Liquidity and Capital Resources
Approximately 50% of the Company's annual sales volume is traditionally shipped in the months of June through August of each year. The Company traditionally manufactures large quantities of inventory during the first and second quarters of each fiscal year in anticipation of seasonally high summer shipments. In addition, the Company finances a large balance of accounts receivable during the peak season. Accounts receivable increased by $20,926,000 from January 31, 2020 to July 31, 2020. This compares to prior year when accounts receivable grew by $27,852,000 during the same period. The accounts receivable balance was approximately $8.4 million lower at July 31, 2020 than at July 31, 2019 due to lower second quarter sales.
For the first six months, the Company increased inventory by approximately $6,115,000 at July 31, 2020 compared to January 31, 2020. This compares to an increase of $11,728,000 during the same period last year. Inventory at July 31, 2020 was $9.6 million lower than the prior year. The decrease in inventory compared to the prior year is primarily due to decreased unit
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volume to related to slower order rates. The increase in accounts receivable and inventory at July 31, 2020 compared to the January 31, 20120, was offset in part by a reduction in payables and additional borrowings through the Company's credit facility with PNC Bank.
Interest expense for the six months ended July 31, 2020 is lower than the same period last year. This is primarily attributable to lower levels of borrowing. Borrowings under the Company's revolving line of credit with PNC Bank at July 31, 2020 is lower than the borrowings at July 31, 2019.
Capital spending for the six months ended July 31, 2020 was $1,359,000 compared to $2,309,000 for the same period last year. Capital expenditures are being financed through the Company's credit facility with PNC Bank and operating cash flow.
The Company has experienced an overall decline in net sales and net income through the first six-months of fiscal 2021 as compared to fiscal 2020 as a result of the disruption to its business and its customers caused by the COVID-19 pandemic. As a result of the reduced revenue , the Company was not in compliance with its fixed-charge coverage ratio under its revolving and secured credit agreement with PNC Bank, as of July 31, 2020 (see Note 7). The Company successfully negotiated a waiver and amendment to the agreement to satisfy the event of default and reduced the ratio required for the rolling four quarter period ending October 31, 2020 from 1.10:1.00 to 1.00:1.00.
The Company expects the impact of COVID-19 to continue to be a challenge for the foreseeable future and believes the economy will be adversely impacted for an indeterminate period, including the demand for its products. The extent of the impact will depend on numerous factors that are unknown, uncertain and cannot be reasonably predicted. The Company has plans to further moderate certain selling, general and administrative expenses and capital expenditures to preserve cash and maintain compliance with its financial covenants. Based on the Company’s current projections and its ability to manage certain controllable expenditures, management believes it will maintain compliance with the financial covenants for the next 12 months.
The Company believes that cash flows from operations, together with the Company's unused borrowing capacity with PNC Bank will be sufficient to fund the Company's debt service requirements, capital expenditures and working capital needs for the next twelve months.
Off Balance Sheet Arrangements
None.
Critical Accounting Policies and Estimates
The Company's critical accounting policies are outlined in its Annual Report on Form 10-K for the fiscal year ended January 31, 2020.
Forward-Looking Statements
From time to time, including in this Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2020, the Company or its representatives have made and may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, without limitation, reports to stockholders, press releases, oral statements made with the approval of an authorized executive officer of the Company and filings with the Securities and Exchange Commission ("SEC"). The words or phrases “anticipates,” “expects,” “will continue,” “believes,” “estimates,” “projects,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The results contemplated by the Company's forward-looking statements are subject to certain risks and uncertainties that could cause actual results to vary materially from anticipated results, including without limitation, availability of funding for educational institutions, availability and cost of materials, especially steel, availability and cost of labor, demand for the Company's products, competitive conditions affecting selling prices and margins, capital costs and general economic conditions. Such risks and uncertainties are discussed in more detail in the Company's Form 10-K for the fiscal year ended January 31, 2020 under the caption "Risk Factors".
The Company's forward-looking statements represent its judgment only on the dates such statements were made. By making any forward-looking statements, the Company assumes no duty to update them to reflect new, changed or unanticipated events or circumstances.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act as of our second quarter of fiscal 2021 and are not required to provide the information under this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including its Principal Executive Officer along with its Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”) as of July 31, 2020. Based upon the foregoing, the Company's Principal Executive Officer along with the Company's Principal Financial Officer concluded that the Company's disclosure controls and procedures as of such date were effective to ensure that the information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to Company management, including its Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, Company management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Changes in Internal Control Over Financial Reporting
The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including its Principal Executive Officer along with its Principal Financial Officer, of the effectiveness of the design and operation of disclosure controls and procedures. Based upon the foregoing, the Company's Principal Executive Officer along with the Company's Principal Financial Officer concluded that the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.
There have been no changes in the Company's internal control over financial reporting during the fiscal quarter covered by this quarterly report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
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PART II — Other Information
Virco Mfg. Corporation
Item 1. Legal Proceedings
The Company is a party to various legal actions arising in the ordinary course of business which, in the opinion of the Company, are not material in that management either expects that the Company will be successful on the merits of the pending cases or that any liabilities resulting from such cases will be substantially covered by insurance. While it is impossible to estimate with certainty the ultimate legal and financial liability with respect to these actions, management believes that the aggregate amount of such liabilities will not be material to the results of operations, financial position, or cash flows of the Company.
Item 1A. Risk Factors
You should carefully consider and evaluate the information in this Quarterly Report and the risk factors set forth under the caption “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2020 (the “Form 10-K”), which was filed with the SEC on April 30, 2020. The risk factors associated with our business have not materially changed compared to the risk factors disclosed in the Form 10-K.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
On September 8, 2020, the Company entered into Amendment No. 21 to the Revolving Credit and Security Agreement (“Amendment No. 21”) with its lender, PNC Bank, National Association. Amendment No. 21 provided a limited waiver of the Company’s violation of the covenant to maintain a Fixed Charge Coverage Ratio of at least 1.10 to 1.00 for the four fiscal quarter period ended July 31, 2020, and amended the Fixed Charge Coverage Ratio as follows: (i) 1.00 to 1.00 for the consecutive four fiscal quarter period ending October 31, 2020, and (ii) 1.10 to 1.00 for each consecutive four fiscal quarter period ending thereafter. In connection with Amendment No. 21, the Company also agreed to pay to PNC Bank a non-refundable fee of $75,000.
The foregoing description of Amendment No. 21 to the Revolving Credit and Security Agreement is not complete and is qualified in its entirety by reference to the text of Amendment No. 21, a copy of which is filed as Exhibit 10.3.20 to this Quarterly Report on Form 10-Q and incorporated by reference herein.
Item 6. Exhibits
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Exhibit Number | Document
3.3 | Third Amended and Restated Bylaws of the Company dated June 9, 2020 (incorporated by reference to Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q filed with the SEC on June 12, 2020)
10.3.20 | Twenty-First Amendment to Revolving Credit and Security Agreement, by and among Virco Mfg. Corporation and Virco, Inc., as borrowers, and PNC Bank, National Association, as the lender and administrative agent.
31.1 | Certification of Robert A. Virtue, Chief Executive Officer, pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
31.2 | Certification of Robert E. Dose, Vice President, Finance, pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
32.1 | Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 101.INS — XBRL Instance Document.
Exhibit 101.SCH — XBRL Taxonomy Extension Schema Document.
Exhibit 101.CAL — XBRL Taxonomy Extension Calculation Linkbase Document.
Exhibit 101.LAB — XBRL Taxonomy Extension Label Linkbase Document.
Exhibit 101.PRE — XBRL Taxonomy Extension Presentation Linkbase Document.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

| VIRCO MFG. CORPORATION |
Date: September 14, 2020 | By: | /s/ Robert E. Dose
|  | Robert E. Dose
|  | Vice President — Finance
|  | (Principal Financial Officer)

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