VIRC 10-K & 10-Q changes, risk factors and insider trading

Our sales are significantly impacted by the level of education funding primarily in North America, which,which in turn is a function of the general economic environment. In a weak economy, state and local tax revenues for many of our customers are flat or decline, restricting funding for K-12 education spending, which typically leads to a decrease in demand for school furniture. Sustained declines in the per-student funding levels provided for in state and local budgets in the future could have a materially adverse impact on our business, financial condition, and results of operations as they have in the past.

We require substantial amounts of raw materials and components to manufacture our products, which we purchase from a global network of third-party suppliers. Materials comprised our single largest total cost. Contracts with most of our suppliers are short-term. These suppliers may not continue to provide raw materials and components to us at attractive prices, or at all, and we may not be able to obtain the raw materials we need in the future from these or other providers on the scale and within the time frames we require. In a deteriorating economic environment, including the economic disruption caused by the pandemic, tariffs, and global supply chain disruptions, many of the Company's suppliers may experience difficulty obtaining financing and may go out of business. The Company may have difficulty replacing these suppliers, especially if the supplier fails as the Company is entering the seasonal summer shipping season. Moreover, we do not carry significant inventories of raw materials, components or finished goods that could mitigate an interruption or delay in the availability of raw materials and components. In addition, because we purchase components from international sources, primarily China, we are subject to tariffs, fluctuations in currency exchange rates as well as the impact of natural disasters, war and other factors that may disrupt the transportation systems, ports, or shipping lines used by our suppliers, and other uncontrollable factors such as changes in foreign regulation or economic conditions. In fiscal 2026 and 2025, the cost of commodities was relatively stable.

We utilize a nationwide contract/price list for the pricing of a significant portion of our sales. This contract/price list allows schools and school districts to purchase furniture without bidding and is sponsored by a nationwide purchasing organization that does not purchase products from the Company. By providing a public bid specification and authorization service to publicly funded agencies, the organization's contract/price list enables such agencies to make authorized expenditures of taxpayer funds. For all sales under this contract/price list, Virco has a direct selling relationship with the purchaser, whether it is a school, a district, or another publicly funded agency. In addition, Virco can ship directly to the purchaser; perform delivery services at the purchaser's location; and finally bill directly to, and collect from, the purchaser. Although Virco sells direct to hundreds of individual schools and school districts, these schools and school districts can purchase our products and services under several bids and contracts available to them. Approximately 65% of Virco's sales in 2026 and 59% of Virco's sales in fiscal 2025 and 64% of Virco's sales in fiscal 2024 were priced under this nationwide contract/price list. In November 2017, the Company was awarded a five-year contract extending through December 2022 along with two two-year extensions through December 31, 2026. If Virco were to lose its exclusive supplier status under this contract/price list, and other manufacturers were allowed to sell under this contract/price list, it could cause Virco's sales, or growth in sales, to decline.

Our recent revenue growth may not be sustainablesustainable.

Fluctuations in the price, availability and quality of the commodities, raw materials and components used in manufacturing our products could have an adverse effect on our costs of sales, profitability and our ability to meet customers' demand. The price of commodities, raw materials and components, including steel and plastics, our largest raw material categories, have been volatile in prior years, and the cost, quality and availability of such commodities have been significantly affected in recent years by, among other things, changes in global supply and demand, changes in laws and regulations (including tariffs and duties), changes in exchange rates and worldwide price levels, natural disasters, public health issues, labor disputes, terrorism and political unrest or instability. These factors could lead to further price increases or supply chain interruptions in the future. As discussed above, in the short term, rapid changes in raw material costs can be very difficult for us to offset with price increases because, in the case of many of our contracts, we have committed to selling prices for goods and services for periods of one year, and occasionally longer. Our profit margins could be adversely affected if commodity, raw material, and component costs remain high or escalate further, and we are unable to pass along a portion of the higher costs to our customers.

The profitability of our operations is sensitive to the cost of fuel, which materially affects our transportation costs, the costs of petroleum-based materials (like plastics) and the costs of energy (including electricity and natural gas) used in operating our manufacturing facilities. Ongoing conflict in the Middle East has contributed to volatility in crude oil and natural gas markets. Because many plastic resins are petroleum- and natural gas-based, disruptions in these markets may reduce supply availability and increase material costs. Energy price volatility may also increase transportation and logistics costs. Petroleum prices have fluctuated significantly in recent years and could rise from current levels. Prices and availability of petroleum products are subject to political, economic and market factors that are generally outside our control. Political events in petroleum-producing regions, as well as hurricanes and other weather-related events may cause petroleum prices to increase. If such prices increase, our transportation costs may be adversely affected in the form of increased operation costs for our fleet and surcharges on freight paid to third-party carriers. If our transportation costs increase or, the price of petroleum-based products and cost of operating our manufacturing facilities increase and we are unable to pass a material portion of these increased costs to our customers, our gross margins and profitability would be adversely affected.

The occurrence of an international trade war, or other governmental action related to tariffs or trade agreements or policies has the potential to adversely impact demand for products, costs, customers, suppliers, and the United States economy generally, which could have a material adverse effect on the Company’s business, operating results, and financial condition. InSince early 2025, there have been significant changes and proposed changes to U.S. trade policies, including new tariffs on foreign imported goods announced by President Trump on April 2, 2025.goods. These tariffs are likely to result in increased prices for imported components and materials supplied locally. The Company cannot predict the extent to which the United States or other countries will impose quotas, duties, tariffs, taxes, or other similar restrictions upon the import or export of products in the future, nor can the Company predict their impact on the business. The Company may be challenged in effectively increasing the prices of its products to offset these factors, and its business and results of operations may be adversely affected. The tariffs that have been announced and the potential escalation thereof, including reciprocal tariffs, could adversely affect the ability of the Company to sell products into foreign markets, including Canada, and could adversely affect profitability.

Our past and present ownership and operation of manufacturing plants are subject to extensive and changing federal, state and local environmental laws and regulations, including those relating to discharges to air, water and land, the handling and disposal of solid and hazardous waste and the cleanup of properties affected by hazardous substances. As a result, we are involved from time to time in administrative and judicial proceedings and inquiries relating to environmental matters and could become subject to fines or penalties related thereto. We cannot predict what environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted or what environmental conditions may be found to exist. 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. If new environmental laws and regulations are introduced and enforced domestically, but not implemented or enforced internationally, we will operate at a competitive disadvantage compared to competitors who source product primarily from international sources. In addition, in the past we have been identified as a potentially responsible party pursuant to the Comprehensive Environmental Response Compensation and Liability Act (“CERCLA”) for remediation costs associated with waste disposal sites previously used by us. In general, CERCLA can impose liability for costs to investigate and remediate contamination without regard to fault or the legality of disposaldisposal, and,and under certain circumstances, liability may be joint and several, resulting in one party being held responsible for the entire obligation. Liability may also include damages for harm to natural resources. We may also be subject to claims for personal injury or contribution relating to CERCLA sites. We reserve amounts for such matters when expenditures are probable and reasonably estimable.

InThe additionCompany is subject to environmental laws and regulations affecting both our manufacturing activities, the Company is subject to lawsactivities and regulations related to consumer product regulation. The Company sells products that are subject to the Consumer Product Safety Improvement Act of 2008 and the California Air Resources Board rule and Toxic Control Substances Act rule, concerning formaldehyde emissions from composite wood products.

Certain shares of the Company's common stock received by the holders thereof as gifts from Julian A. Virtue, including shares received in subsequent stock dividends, are subject to an agreement that restricts the sale or transfer of those shares. Because of the share ownership and representation on the board and in management, the parties to the agreement have significant influence onover affairs and actions of the Company, including matters requiring stockholder approval such as the election of directors and approval of significant corporate transactions. In addition, these transfer restrictions and concentration of ownership could have the effect of impeding an acquisition of the Company.

Provisions in our certificate of incorporation and our amended and restated bylaws may discourage, delay or prevent a merger or acquisition involving usthe Company that our stockholders may consider favorable. For example, our certificate of incorporation currently provides for a staggered board of directors, whereby directors serve for three-year terms, with approximately one-third of the directors coming up for reelection each year. Having a staggered board will make it more difficult for a third party to obtain control of our board of directors through a proxy contest, which may be a necessary step in an acquisition of usthe Company that is not favored by our board of directors. In addition, provisions in our certificate of incorporation require the affirmative vote of the holders of at least 75% of our outstanding shares for any business combination with a shareholder who beneficially holds, directly or indirectly, 5% or more of our outstanding stock, except where such transaction is approved by the Board of Directors of the Company prior to the acquisition of the 5% ownership position.

Our ability to execute our business plan and maintain operations depends on the continued and uninterrupted performance of our information technology systems. These systems are vulnerable to risks and damages from a variety of sources, including telecommunications or network failures, malicious human acts, and natural disasters. Some of these systems are dependent on services provided by third parties. Moreover, despite network security and backup measures, some of our computer servers and those of our vendors are potentially vulnerable to physical or electronic break-ins, including cyberattacks, ransomware attacks, computer viruses and similar disruptive problems. Insider or employee cyber and security threats are also of concern and are considered by the Company. These events could lead to the unauthorized access, disclosure and use of non-public information and disruption of our accounting, sales and purchasing systems and overall operations. Cybersecurity incidents or other unauthorized access to systems may result in disruption to our operations, corruption or theft of critical data, confidential information, or intellectual property. As reliance on technology continues to grow and more business activities have shifted online, the risk associated with any cybersecurity incidents havehas grown. While we and our third-party vendors have implemented security systems and infrastructure to prevent, detect and/or mitigate the risk of unauthorized access to technology systems or platforms, there can be no assurance that these measures will be effective. The techniques used by criminal elements to attack computer systems are sophisticated,increasing in frequency, sophistication, and unpredictability, change frequently and may originate from less regulated and remote areas of the world. As a result, we may not be able to address these techniques proactively or implement adequate preventative measures. If any of our computer systems are compromised, our business could be interrupted and we could be subject to fines, damages, litigation and enforcement actions and we could lose trade secrets, the occurrence of which could harm our business. In addition, any cybersecurity or data breach involving confidential information of our business, or our customers could result in negative publicity, damage to our reputation, loss of revenues, disruption of our business, litigation, and regulatory actions. Additional capital investments or expenditures may also be required to remediate any problems, infringements, misappropriations, or other third-party claims.

In the currentprior fiscal year, the Company has benefited from a large series of disaster recovery orders that were received at the end of the prior fiscal year2024 and the first quarter of thefiscal current year.2025. During fiscal 2025, the Company shipped and recognized revenue related to these orders of approximately $9$23.0 million in the first quarter, $4 million in the second quarter, $6 million in the third quarter and $4 million in the fourth quarter.million. These shipments positively affected the Company’s traditional seasonal cycle this fiscal year,cycle, with positive impacts on production, overhead absorption, accounts receivable, collections, as well as lower borrowings to support that inventory. The Company believes that thisThis project was substantially completed at the end of fiscal year 2025. The Company further believes that the timing and related positive impacts of this project arewere unusualnon-recurring and that more typical seasonal and financial patterns are likely to return aftermoving this project concludes.forward.

Following a downturn during the COVID pandemic, order rates recovered during fiscal 2022, 2023, and 2024. Initially, the Company had difficulty sourcing adequate new permanent and temporary workers. The Company remedied this by providing significant raises to its hourly work force, and for fiscal years 2023,2023 2024,- and 20252026 our ability to support the seasonal business model returned to pre-COVID capabilities, with the Company delivering 47% - 49% of annual revenue during June, July, and August.

Virco's product offering consists primarily of items manufactured by Virco, complemented with products sourced from other furniture manufacturers to fill any gaps in product manufactured by the Company. The Company has served the education industry for over 7576 years and over this time developed products to address a variety of classroom management trends, from collaborative learning to individual and combination desks facilitating distancing and classroom control. The pandemic caused a noticeable change in the types of products requested by educators. In fiscal 2021, we experienced an increase in the demand for individual desks. In fiscal 2022, demand began to return to products supporting collaborative learning. This trend continued through fiscal 2023, 2024, 2025 and 2025.2026. Our product offerings are continually enhanced with an ongoing new product development program that incorporates internally developed products as well as product lines developed with accomplished designers. Finally, management continues to hone Virco's ability to forecast, finance, manufacture, warehouse, deliver and install furniture within the relatively narrow delivery window associated with the highly seasonal demand for education sales. The educational sales market is extremely seasonal. In fiscal 20242025 and 2025,2026, approximately 47% - 49%50% of the Company's total sales were delivered in June, July, and August. During periods of traditional seasonality, average weekly shipments during July and August can be as great as six times the level of average weekly shipments in the winter months. Virco's substantial warehouse space allows the Company to build and ship adequate inventories to service this narrow delivery window for the education market.

While the Company anticipates challenging economic conditions to continue to impact its core customer base in the near term, there are certain underlying demographics, customer responses and changes in the competitive landscape that provide opportunities. First, the underlying demographics of the student population are relatively stable compared to the volatility of school budgets and the related impact on furniture and equipment purchases. This volatility is attributable to the financial health of the school systems. Virco management believes that there is a pent-up demand for quality school furniture (though it is unclear when and to what extent that pent-up demand will be converted into a meaningful increase in purchases). Second, management believes that parents and voters will make quality education an ongoing priority for future government spending. The disruption related to COVID-19 school closures reinforced the need for learning in classroom settings. Third, many schools have responded to the budget strains by reducing their support infrastructure. This change provides opportunities to provide services to schools, such as project management for new or renovated schools, delivery to individual school sites rather than truckload deliveries to central warehouses, and delivery of furniture into classrooms. Moreover, this change offers opportunities for Virco to promote its complete product assortment which allows one-stop shopping as opposed to sourcing furniture needs from a variety of suppliers. Fourth, many suppliers previously shut down or dramatically curtailed their domestic manufacturing capabilities, making it difficult for competitors to adapt to dynamic fluctuations in demand or provide custom colors or finishes during a narrow seasonal summer delivery window when they are reliant upon a supply chain extending to Asia or elsewhere. Meanwhile, Virco has continued to invest in automation at its domestic manufacturing facilities, adding flat metal forming processes to its manufacturing capabilities and bringing production into its factories of items formerly sourced from other suppliers (both domestic and international). Domestic production facilitates our product development process, enabling the Company to more rapidly develop new products, release extensions of product families, and offer customized variants of our product offerings. Virco views its domestic factories as a strategic resource for providing its customers with timely delivery of a broad selection of colors, finishes, laminates, and product styles. Finally, many of our domestic competitors, especially small dealerships, may be undercapitalized and less capable of supporting the significant seasonal nature of our business. We believe that our financial strength, which allows us to build material quantities of inventory in advance of the summer delivery season, is a significant competitive advantage.

This discussion and analysis of Virco's financial condition and results of operations is based upon the Company's consolidated financial statements (“financial statements”), which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires Virco management to make estimates and judgments that affect the Company's reported assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Certain of these estimates are considered critical accounting estimates.estimates (slow-moving and obsolete inventories). On an ongoing basis, management evaluates estimates, including those related to valuation of inventory and related excessslow-moving and obsolete inventories, self-insured retention for workers' compensation insurance, liabilities under defined benefit and other compensation programs,insurance and estimates related to deferred tax assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. This forms the basis of judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Factors that could cause or contribute to these differences include the factors discussed above under “Item 1A. Risk Factors”, and elsewhere in this Annual Report on Form 10-K. Virco's critical accounting policies and estimates are as follows:

Slow-Moving and Obsolete Inventories: InventoryInventories isare valued at the lower of cost or net realizable value (determined on a first-in, first-out basis (“FIFO”)) basis and includesinclude 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 involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the Company's financial condition or results of operations. 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 educational 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.

While we believe that adequate adjustments for inventory obsolescence have been made in the consolidated financial statements, our obsolescence adjustments calculations contain estimates that require management to make assumptions based on several factors, including market conditions, the selling environment, historical results, supply-chain environment, current inventory trends and customer behavior. There have been no changes to our policies for establishing adjustments throughout the year, and we do not expect significant changes to our historical obsolescence levels. A 10% increase in our year-end inventory adjustments would decrease our net income by approximately $0.4 million,$400,000, on an after-tax basis. The net income would increase by similar amounts if the inventory adjustments waswere to decrease by a comparable percentage. As of January 31, 20252026 and January 31, 2024,2025, our inventory obsolescence adjustments were $5.6$5.0 million and $6.0$5.6 million, respectively, representing 9.1%8.1% and 10.8%,9.1%, respectively, of our inventories on a FIFO basis.

At January 31, 2025,2026, the Company recorded a partial valuation allowancesallowance of $236,000$231,000 on certain state NOLnet operating losses ("NOLs") 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, 2025,2026, was a decrease of $15,000.$5,000. At January 31, 2025,2026, the Company has no NOLNOLs for U.S. federal tax purposes and $6.3$8.2 million for state income tax purposes, expiring at various dates through January 31, 2041.2045.

The Company earned a pre-tax profit of $3.5 million on net sales of $199.7 million for fiscal 2026, compared to pre-tax profit of $28.4 million on net sales of $266.2 million for fiscal 2025, compared to pre-tax profit of $29.2 million on net sales of $269.1 million in fiscal 2024.2025. Net income per diluted share was $1.32$0.16 for fiscal 2025,2026, compared to $1.34$1.32 per diluted share in the prior year. Cash flow providedused byin operations was $33.1$0.8 million in fiscal 2025,2026, compared to cash provided by operations of $27.0$33.1 million in fiscal 2024.2025.

The Company has effectively increased selling prices under its largest contracts to recover volatile commodity, energy, freight, and labor costs incurred in recent years. The Company does not anticipate material margin growth as recent price increases have restored profitability. As we have gone through this economic cycle, the Company continues to focus on strategies to develop and strengthen its brand with emphasis on product quality, product selection, and service. We will continue to use our domestic factories to provide greater flexibility for custom specifications such as laminates, colors, and on-time delivery. The Company will continue to emphasize theproduct value, design,design and variety; the strength of its products,distribution theand valuedelivery ofnetwork; its distribution, delivery, classroom delivery and project management capabilities,capabilities; and the importance of timely deliveriesdelivery during thepeak peak-seasonalseasonal delivery period.periods. To increase or maintain market share during fiscal 2026,2027, when market conditions warrant, the Company may selectively compete based on direct prices to build or maintain its market share.prices. Estimates of sales volume for the next year may continue to be impacted by global events.

During fiscal 2025,2027, the Company anticipates continued uncertainty and volatility in commodity costs, particularly with respect to certain raw materials, transportation, energy, and tariffs due to potential macroeconomic events, including global economic sanctions.events. The Company also anticipates continued and possibly increased supply chain disruptions from both domestic and international suppliers. Due in part to volatile transportation and energy costs, we may incur higher commodity costs in fiscal 2026.2027. For more information, please see the section below entitled “Inflation and Future Change in Prices.”

Pension expense decreased due to increased discount rates and becausehigher priorexpected yearreturn includedon plan settlementassets. expenses.Discount rates decreased from approximately 5.6% in fiscal 2025 to a range of 3.9% - 5.4% in fiscal 2026. Expected return on plant assets increased from approximately 5.2% in fiscal 2025 to approximately 5.6% in fiscal 2026. Interest expense was $2.3 million$49,000 lower in fiscal 20252026 compared to fiscal 20242025 because of decreased levels of borrowing.

Our effective tax rate was 23.9%25.8% for fiscal 2025,2026, and is based on recurring factors, including the forecasted mix of income before taxes in various jurisdictions, estimated permanent differences and the recording of a partial valuation allowance on net deferred tax asset.assets. The OBBB did not have a material impact on the Company's effective income tax rate for fiscal 2026, which the Company believes is representative of rates that will affect fiscal 2027.

The following table shows summarysummarizes cash flowsflow information for the fiscal years ended January 31, 20252026 and 20242025:

Operating activities. Our cash flows from operating activities are primarily collections from the sale and distribution of furniture to our customers in the education market. Net cash (used in) provided inby operations was $(0.8) million in fiscal 2026 and $33.1 million in 2025fiscal and $27.0 million in 2024.2025. The increasechange in cash providedfrom operating activities was primarily attributable to the decrease in net income and the change in cash used in accounts receivablepayable offsetand byaccrued an increase in income tax payments.liabilities.

Investing activities. Investing activities include two distinct categories. Financial transactions are related to the purchase or sale of investments held in the Rabbi Trust which funds and secures employee benefits related to the non-qualified VIP pension and Split Dollar Life Insurance programs. The net investing activity from these transactions were immaterial. Our net investments primarily consist of investments in our factories and technology to support our business activities. Capital expenditures have been financed using borrowings under our line of credit with PNC Bank. There were no material commitments for capital expenditures as of January 31, 2025.2026.

Financing activities. Our financing activities primarily consist of the proceeds and repayments of borrowings under our line of credit with PNC Bank, payment of cash dividends, and repurchases of Company stock. Due to the seasonal nature of our business, the Company typicallymaintains borrows material amounts under thea line of credit to financesupport seasonal buildingworking ofcapital inventoryneeds and financing of accounts receivable. The Company typically repays the seasonal borrowings at the conclusion of the peak summer busy season. InDuring fiscal years 2025 and 20242026, the Company materiallydid reducednot itshave year endany borrowings under the line of credit,credit primarilyand due toused cash flows from operations.operations to fund its operating and investing activities.

For fiscal 2026,2027, the Company anticipates continuedpotential volatility in costs, particularly with respect to energy and transportation costs, as well as imported components from China, freight from China, certain raw materials including steel, transportation, energy, and potential impacts of escalating labor costs. Anticipated adverse volatility for fiscal 20262027 could be severe in light of global supply chain and economic sanctions, tariffs imposed or threatened on imported commodities and other disruptions affecting our suppliers. There is continued uncertainty with respect to steel and other raw material costs, including plastics, thatwhich are affected by the price of oil. TransportationOngoing costsconflict in the Middle East has contributed to volatility in crude oil and natural gas markets. Because many plastic resins are petroleum- and natural gas-based, disruptions in these markets may bereduce adverselysupply affectedavailability byand increasedincrease oilmaterial prices,costs. Energy price volatility may also increase transportation and logistics costs, in the form of increased operation costs for our fleet, and surcharges on freight paid to third-party carriers. Virco depends upon third-party carriers for more than 90% of customer deliveries. Recent regulationregulations and more stringent enforcement of federal regulations governing the transportation industry (especially regarding drivers) have adversely impacted the cost and availability of freight services. Virco expects to incur continued pressure on employee compensation and benefit costs. The Company has renewed health insurance contracts for its employees through December 2025,2026, but costs after that date may be adversely impacted by current legislation, claim costs and industry consolidation.

As part of Virco's efforts to address seasonality, financial performance, and quality without sacrificing service or market share, management has been refining the Company's assemble-to-ship ("ATS") operating model. ATS is Virco's version of mass-customization, which assembles standard, stocked components into customized configurations before shipment. The Company's ATS program reduces the total amount of inventory and working capital needed to support a given level of sales. It does this by increasing the inventory's versatility, delaying assembly until the last moment, and reducing the amount of warehouse space needed to store finished goods. In order to provide “one-stop shopping” for all FF&E needs, Virco purchases and re-sells certain finished goods from other furniture manufacturers. When practical, these furniture items are drop shipped from the Company's supplier. Where cost effective, the Company will bring the item into the Virco warehouse, and the third-party products will be shipped along with productproducts manufactured by Virco. The Company did not carry material amounts of vendor inventory during the fiscal years ended January 31, 20252026 and 2024.2025.

The Restated Credit Agreement as currently in effect provides the Borrowers with a secured revolving line of credit (“Revolving Credit Facility”) of up to $65.0 million, with seasonal adjustments to the credit limit (up to $70.0 million during the months of June, July and August 2024) and subject to borrowing base limitations and includes a sub-limit of up to $3.0 million for issuances of letters of credit. In addition, the Restated Credit Agreement provides an 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 an Equipment Line for purchases of equipment of up to $2.0 million. The Revolving Credit Facility is an asset-based line of credit that is subject to a borrowing base limitationlimitations 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$10.0 million for the period from DecemberJanuary tothrough JulyJune of each yearyear, minus undrawn amounts of letters of credit and reserves.reserves; (ii) inventory sublimit of $35.0 million and ATS inventory sublimit of $15.0 million during the months of May through August; and (iii) an equipment loan of $2.0 million. The Revolving Credit Facility is secured by substantially all of the Borrowers' personal property and certain of the Borrowers' real property. The scheduled maturity date of the Restated Credit Agreement is April 15, 2027, at which point the principal amount outstanding under the Restated Credit Agreement and any accrued and unpaid interest is due and payable, subject to certain prepayment penalties upon earlier termination. 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.

The Restated Credit Agreement permits the Company to issue dividends or make payments with respect to the Company’s capital stock in an aggregate amount up to $3.0$8.0 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 fixedFixed chargeCharge coverageCoverage ratioRatio ("FCCR") of not less than 1.20:1.00 as of the fiscal quarter immediately preceding the date of any such dividend or payment.

Pursuant to the Restated Credit Agreement, substantially all of the Borrowers' accounts receivable are automatically and promptly swept to repay amounts outstanding under the Revolving Credit Facility upon receipt by the Borrowers. Due to this automatic liquidating nature of the Revolving Credit Facility, 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. In addition, certain of the covenants and representations and warranties set forth in the Restated Credit Agreement contain limited or no materiality thresholds, and many of the representations and warranties must be true and correct in all material respects upon each borrowing, which the Borrowers expect to occur on an ongoing basis. Based on the Company’s current projections, raw material costs and its ability to introduce price increases, management believes it will maintain compliance with these financial covenants, although there are uncertainties therewithin,there within, such as raw material costs and supply chain challenges.

The Company provides retirement benefits to employees under two defined benefit retirement plans;: the Employee Plan and the VIP Plan. The Employee Plan is a qualified retirement plan that is funded through a trust held at PNC Bank ("Trustee"). The other plan is non-qualified retirement plan. Benefits payable under the VIP Plan are secured by life insurance policies and marketable securities held in a Rabbirabbi Trust.trust. The Company obtains annual actuarial valuations for both retirement plans.

Because the plans have been frozen since 2003, there is no service cost related to the plans. In the past, due to a large number of lump sum benefits paid to retired and terminated employees, the Company has incurred settlement costs for the Employee Plan. In an effort to de-risk the Employee Plan, the Company intends to continue to reach out to and offer lump sum benefits to terminated and retired employees, which may result in settlement costs in the future. With the recent increase in interest rates during recent years, the Company was able to purchase approximately $5.0 million of annuities in the third quarter ended October 31, 2023, resulting in a settlement charge in that quarter. In the future, the Company may purchase additional annuities from third parties to further de-risk the Plan. The Company incurred $26,000 in settlement costs in fiscal 2026 and did not incur settlement costs in fiscal 2025. The Company incurred settlement costs in the third and fourth quarters of fiscal 2024. 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 and to minimize PBGC related expenses. Contributions to the Qualified Plan Trust and benefit payments under the VIP Plan totaled $623,000$357,000 and $676,000$623,000 in fiscal 20252026 and 2024,2025, respectively.

Contributions during fiscal 20262027 will depend upon actual investment results and benefit payments; buthowever, arethe anticipatedCompany does not expect to bemake lesscontributions thanduring $500,000.fiscal 2027. At January 31, 2025,2026, accumulated other comprehensive incomeloss of $422,000,$112,000, net of tax, is attributable to the pension plans.

The Company does not anticipate making any significant changes to the pension assumptions in the near future. If the Company were to have used different assumptions in the fiscal year ended January 31, 2025,2026, a 1% reduction in investment return would have increased pension expense by approximately $180,000,$170,000, a 1% change in the rate of compensation increase would have no impact, and a 1% reduction in discount rates would cause obligations under the Plans to increase by approximately $2.7$1.9 million and increase pension expense would decrease by approximately $190,000.$63,000.

Historically it has been the board of directors' policy to periodically review the payment of cash and stock dividends in light of the Company's earnings and liquidity. The Company declared a cash dividend in the fourth quarter of 2024 and in each quarter of 2025.2025 and 2026.

Virco issued a 10% stock dividend or 3/2 stock split every yearyear, beginning in 1983 through 2003. Although the stock dividend had no cash consequences to the Company, the accounting methodology required for 10% dividends has affected the equity section of the balance sheet. When the Company records a 10% stock dividend, 10% of the market capitalization of the Company on the date of the declaration is reclassified from retained earnings to additional paid-in capital. During the period from 1983 through 2003, the cumulative effect of the stock dividends has been to reclassify over $122.0 million from retained earnings to additional paid-in capital. The equity section of the balance sheet on January 31, 20252026 reflects additional paid-in capital of approximately $117.5$113.8 million and accumulated deficit of approximately $8.9$7.9 million. The majority of the accumulated deficit is a result of the accounting reclassification and is not the result of accumulated losses.

In addition to these awards and commendations, Virco's ZUMA and ZUMAfrd product lines were the first classroom furniture collections to earn indoor air quality certification through the stringent GREENGUARD® Children & Schools Program, now known as GREENGUARD Gold certification. As a follow-up to the certification of ZUMA and ZUMAfrd models in 2006, hundreds of other Virco furniture items - including Analogy™ furniture models and Textameter™ instructor workstations - have earned GREENGUARD certification. Moreover, all Virco products covered by the Consumer Product Safety Improvement Act of 2008 are in compliance with this legislation. All affected Virco models are also in compliance with the California Air Resources Board rule and Toxic Control Substances Act rule concerning formaldehyde emissions from composite wood products. Environmental laws have changed rapidly in recent years, and Virco may be subject to more stringent environmental laws in the future. The Company has expended, and may be expected to continue to expend, significant amounts in the future for compliance with environmental rules and regulations, for the investigation of environmental conditions, for the installation of environmental control equipment or remediation of environmental contamination. Normal recurringRecurring expenses relating to operating our factories in a manner that meets or exceeds environmental laws are matched to the cost of producing inventory. It is possible that the Company's operations may result in noncompliance with, or liability for remediation pursuant to, environmental laws. Should such eventualities occur, the Company records liabilities for remediation costs when remediation costs are probable and can be reasonably estimated. See “Item 1A. Risk Factors: We could be required to incur substantial costs to comply with environmental and other legal requirements.” Violations of, and liabilities under, these laws and regulations may increase our costs or require us to change our business practices."

In fiscal 20252026 and 2024,2025, the Company was self-insured for product liability losses of up to $250,000 per occurrence, general liability losses of up to $50,000 per occurrence, workers' compensation losses up to $250,000 per accident and auto liability up to $50,000 per accident. In prior years the Company has been partially self-insured for workers' compensation, automobile, product, and general liability losses. The Company has purchased insurance to cover losses in excess of the self-insured retention or deductible up to a limit of $30.0 million. For the insurance year beginning April 1, 2025, the Company will be self-insured for product liability losses up to $250,000 per occurrence, general liability losses up to $50,000 per occurrence, workers' compensation losses up to $250,000 per occurrence, and auto liability up to $50,000 per occurrence. In future years, the Company's exposure to self-insured retentions will vary depending upon the market conditions in the insurance industry and the availability of cost-effective insurance coverage.

During the three and six months ended AprilJuly 30,31, 2026, the Company experienced a decrease in net sales of 9.1%5.0% and 6.1%, respectively, compared to the same periodperiods in the prior fiscal year. Net sales for the threesix months ended AprilJuly 30,31, 2025 were favorably impacted by a series of disaster recovery and counter-seasonal shipments totaling approximately $2.7$2.8 million, compared to approximately $190,000$0.2 million of such shipments in the threesix months ended AprilJuly 30,31, 2026. Excluding this series of shipments, net sales for the threesix months ended AprilJuly 30,31, 2026 decreased by 1.7%.approximately 4%. Disaster recovery sales for the three months ended July 31, 2026 and 2025 did not materially impact the change in sales for those periods.

The current dynamic macroeconomic environment and uncertainty surrounding state and local governments' budget and spending levels have adversely affected the demand for the Company's school furniture. As of AprilJuly 30,31, 2026, the Company’s shipments plus backlog was approximately 2% lower than as of the same date last year. Despite these macroeconomic headwinds, incoming order rates have begun to normalize, with the Company's order backlog at AprilJuly 30,31, 2026 comparablefavorable to the backlog at AprilJuly 30,31, 2025.2025 by approximately 13%. Management has moderated production levels and will continue to monitor incoming order rates in pursuit of an appropriate balance between on-time summercustomer deliveries and inventory investment. The Company believes that the majority of the current backlog will be delivered and recognized as revenue during June,the Julythird and Augustquarter of the current fiscal year.

As discussed in the Risk Factors section of the Company’s Form 10-K for the fiscal year ended January 31, 2026, the Company’s revenue growth since 2023 was partly a result of the delayed recovery from COVID-related school closures and subsequent supply-chain disruptions. Management cautions that future growth rates are unlikely to match those of the past several years. As with the unpredictable outcomes of school closures, supply chain disruptions, and school funding decisions, future events beyond the Company’s control—such as tariffs, trade realignments and geopolitical conflicts—may have both negative and positive impacts on the Company’s revenue and operating margins. Management intends to position the Company to respond to these uncertainties by continuing to reinvest in operating systems, employee training, and customer development and retention. Management estimates that more than 85% of public schoolpublic-school funding and virtually all bond-funded new-school construction derives from state and local sources. Recent school bond election results have resulted in the approval of additional funding for school construction, renovation and modernization projects in certain of the Company's key markets. The timing and extent to which such funding may ultimately result in customer orders will depend on the timing of project development, construction and related procurement activities.

Ongoing conflict in the Middle East has contributed to volatility in crude oil and natural gas markets, resulting in higher material and transportation costs. Because many plastic resins are petroleum- and natural gas-based, disruptions in these markets may reduce supply availability and increase material costs. Energy price volatility has also contributed to higher transportation and logistics costs. These events are expected to impact material costs during the fiscal year ending January 31, 2027. Although the Company increased product prices slightly in fiscal 2027 to offset higher costs, it may not be able to fully pass through increases in transportation, energy, and raw materials, transportation, and energy, including steel and plastics.

In February 2026, the U.S. Supreme Court ruled that tariffs imposed under IEEPA wereexceeded unconstitutional.the President's authority. Subsequently, in March 2026, the U.S. Court of International Trade ("CIT") issued orders directing U.S. CustomersCustoms and Border Protection ("CBP") to process related refunds. In response to these rulings, CBP launched a refund claims process for qualifying importers. Since the IEEPA tariffs were first imposed in February 2025, the Company has paid approximately $1.0 million in related tariffs and has now begun the process of requesting refunds of eligible amounts paid. As of AprilJuly 30,31, 2026, the Company has not recognized any tariff refunds in its unaudited condensed consolidated financial statements because the Company was unable to assert that the realization of such recovery is probable as of such date, due to uncertainties surrounding the refund process and collectability of claims. Should the circumstances surrounding the refund process become more certain and the likelihood of collection become probable, we may recognize a receivable for the amount of the IEEPA tariffs paid. We may also be entitled to interest on the amounts recovered. As of the date of this Quarterly Report on Form 10-Q, the Company has not received any portion of the requested refunds.

Three Months Ended AprilJuly 30,31, 2026

For the three months ended AprilJuly 30,31, 2026, the Company incurredearned a net lossincome of $2.8$8.6 million on sales of $30.7$87.5 million, compared to net income of $0.7$10.2 million on sales of $33.8$92.1 million in the same period of the prior year. Sales for the three months ended AprilJuly 30,31, 2026 decreased by approximately $3.1$4.6 million or 9.1%,5.0%, compared to the prior year. FirstThe quarterdecrease sales in the prior year were boosted by the previously noted disaster recovery orders, which contributed approximately $2.7 million in additional shipments compared to approximately $190,000 during the first fiscal quarter this year. Excluding these shipments, net sales for the current period decreased by 1.7%,was driven by the current dynamic macroeconomic environment and uncertainty surrounding state and local governments' budget and spending levels, which adversely affected the demand for the Company's products.

Cost of goods sold was 58.6%60.0% of net sales for the quarter ended AprilJuly 30,31, 2026, compared to 52.5%55.6% for the same quarter last year. Gross margin for the firstsecond quarter was 41.4%40.0% compared to 47.5%44.4% in the prior year. Gross margin declined in the current period primarily due to lower sales volume,volume partiallyand offsethigher bymaterial aand slightoverhead reduction in manufacturing spending.costs. The Company reduced production levels in order to maintain control over inventory levels. Lower production levels resultedcontributed into a slightly unfavorable overhead variance. The material portion of our costs as a percentage of sales was 31.9% for the quarter ended April 30, 2026 and 29.8% for the same quarter last year, reflecting effects of the ongoing conflict in the Middle East.

Selling, general and administrative ("SG&A") expenses for the three months ended AprilJuly 30,31, 2026 increaseddecreased by $0.2$1.0 million. SG&A expenses as a percentage of sales for the three months ended AprilJuly 30,31, 2026 were 53.3%28.0% compared to 47.7%27.7% in the same period last year. ThisThe slight increase was the result of changes to product mix, as business shifted to a higher percentage of fullsales servicewas deliveries.primarily Fulldue serviceto higher delivery orders are more service oriented and as such the associated expenses are recorded in SG&A instead of cost of sales. Additionally, a certain portion of SG&A is fixed in nature and as such does not fluctuate with sales volume.costs.

The Company holds equity securities in a rabbi trust to fund benefits under its Virco Important Performers Retirement Plan ("VIP Plan"). The Company recorded approximately $0.1 million of unrealized loss and $1.2$0.7 million of unrealized gain during the three months ended AprilJuly 30,31, 2026 andcompared 2025,to respectively.$1.0 million of unrealized loss recognized during the same period last year.

During the quarter ended AprilJuly 30,31, 2026, the Company recorded approximately $189,000$203,000 in net pension benefit, compared to $27,000 in pension expense in the same period last year. As a result of the expected settlement of the VIP Plan during the fourth quarter of the fiscal year ending January 31, 2027, the Company recognized increased amortization of actuarial gains previously recorded in accumulated other comprehensive (loss) income.

For the three months ended AprilJuly 30,31, 2026 and 2025, the effective income tax rates were 25.0%23.3% and 26.4%,28.1%, respectively. The change in effective tax rates was due to a change in the forecasted mix of income before actual federal and state income taxes and estimated permanent differences.

Accounts receivable increaseddecreased by $2.7$1.3 million at AprilJuly 30,31, 2026 compared to last year. The increasechange is primarily due to a the timing of customer payments and collections around the fiscal quarter end, offset by lower salesdecrease in theshipments current(as year.discussed above under "Overview").

Inventory decreased by $5.7$6.8 million at AprilJuly 30,31, 2026 compared to last year. The decrease is primarily driven by lower production levels, offset slightly by higher material costs. Management moderated production levels in order to maintain control over inventory levels.

Accrual basis capital expenditures for the threesix months ended AprilJuly 30,31, 2026 were $0.6$1.7 million compared to $1.6$2.8 million for the same period last year. Capital expenditures are being financed through the Company's operating cash flow and are restricted to $8.0 million per year by covenant.

Despite recording a net loss forFor the threesix months ended AprilJuly 30, 2026, the Company improved net cash used in operating activities by $9.7 million compared to the same period last year. Moderation of production and inventory levels led to favorable cash flow activity for inventories and accounts payable compared to last year. For the three months ended April 30,31, 2026, the Company spent $0.7$1.3 million for capital expenditures, issued $0.4$0.8 million of cash dividends and spent $0.2 million to repurchase 31,598 shares of its common stock. As of AprilJuly 30,31, 2026, $7.0 million was authorized by the Board and available for repurchase of shares by the Company, subject to the restrictions on share repurchases under its Credit Agreement with PNC Bank, National Association ("PNC"). The Company may elect to opportunistically purchase shares based on excess cash generationavailability and share price considerations.

During the quarter ended October 31, 2025, the Company’s Board of Directors approved the termination of the VIP Plan, a supplemental retirement plan for certain key employees. This decision was part of the Company's ongoing efforts to reduce benefit obligations and ongoing administrative costs. The termination is expected to be settled through lump sum distributions to participants funded by the liquidation of assets held in a rabbi trust, which are expected to occur during the fourth quarter of fiscal year 2027. Management anticipates these distributions will not materially impact the Company's current and long-term liquidity and that the termination will not materially impact the Company's consolidated financial statements.

The Company is subject to risks and uncertainties arising from general economic conditions, changes in raw material costs, and supply chain disruptions, which could adversely affect its operations and financial flexibility. Such risks and uncertainties are discussed in more detail in the Company's Form 10-K for the fiscal year ended January 31, 2026, under the caption "Item 1A. Risk Factors—Strategic and Operational Risks”. The Company was in compliance with all financial covenants as of AprilJuly 30,31, 2026. As of that date, the Company had no outstanding borrowings under its credit facility.

From time to time, including in this Quarterly Report on Form 10-Q for the quarterly period ended AprilJuly 30,31, 2026, 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, 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, 2026, including under the caption "Item 1A. Risk Factors".