Virco(VIRC) - 2023 Q1 - Quarterly Report

Part I. Financial Information This section provides the company's unaudited condensed consolidated financial statements and management's analysis for the quarter Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, cash flows, and notes, reflecting increased sales but a wider net loss Unaudited Condensed Consolidated Balance Sheets Total assets increased to $139.4 million driven by a $18.9 million inventory rise, while liabilities grew to $96.7 million, leading to a decrease in equity Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | 4/30/2022 | 1/31/2022 | 4/30/2021 | | :--- | :--- | :--- | :--- | | Assets | | | | | Total current assets | $82,538 | $68,847 | $59,988 | | Inventories | $66,297 | $47,373 | $42,875 | | Total assets | $139,407 | $126,445 | $133,672 | | Liabilities & Equity | | | | | Total current liabilities | $54,215 | $36,284 | $29,642 | | Total liabilities | $96,657 | $79,000 | $82,814 | | Total stockholders' equity | $42,750 | $47,446 | $50,858 | Unaudited Condensed Consolidated Statements of Operations Net sales increased 13.1% to $32.1 million, but net loss widened to $5.1 million due to higher costs and increased SG&A expenses Statements of Operations Highlights (in thousands, except per share data) | Metric | Three months ended 4/30/2022 | Three months ended 4/30/2021 | | :--- | :--- | :--- | | Net sales | $32,084 | $28,367 | | Gross profit | $9,707 | $7,688 | | Operating loss | $(4,744) | $(4,295) | | Net loss | $(5,084) | $(3,909) | | Net loss per share (Basic & Diluted) | $(0.32) | $(0.25) | Unaudited Condensed Consolidated Statements of Cash Flows Net cash used in operating activities increased to $19.0 million due to inventory build-up, offset by $18.8 million from financing activities, resulting in a slight cash decrease Condensed Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Three months ended 4/30/2022 | Three months ended 4/30/2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(18,966) | $(6,958) | | Net cash used in investing activities | $(609) | $(233) | | Net cash provided by financing activities | $18,755 | $7,345 | | Net (decrease) increase in cash | $(820) | $154 | | Cash at end of period | $539 | $556 | Notes to Unaudited Condensed Consolidated Financial Statements Notes detail accounting policies, business seasonality requiring debt-financed inventory, a waived debt covenant violation, and a $10.1 million valuation allowance against deferred tax assets - The educational furniture market's extreme seasonality requires the company to build significant inventory during its first and second quarters, typically financed through third-party debt, in anticipation of peak sales from June to August[31] - The company was in violation of its financial covenants as of January 31, 2022, due to losses from supply chain disruptions. On April 15, 2022, it entered into an amendment that waived the violation, extended the credit facility's maturity to 2027, and increased borrowing limits[50][54] - Due to cumulative operating losses over the last three fiscal years, the company recorded a valuation allowance of $10.1 million against its deferred tax assets as of April 30, 2022, as their realization is no longer more-likely-than-not[55] Inventory Breakdown (in thousands) | Category | 4/30/2022 | 1/31/2022 | 4/30/2021 | | :--- | :--- | :--- | :--- | | Finished goods | $29,919 | $16,731 | $16,887 | | Work in process | $21,719 | $14,732 | $14,630 | | Raw materials | $14,659 | $15,910 | $11,358 | | Total inventories | $66,297 | $47,373 | $42,875 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses performance impacted by seasonality and supply chain issues, with net sales up 13.1% but increased losses, while order backlog grew to $85.7 million and credit facility was amended - The company experienced a 27.9% increase in orders during the quarter, leading to a year-over-year increase in the unshipped order backlog of nearly $36 million, from $49.7 million to $85.7 million[74] - Gross profit margin improved to 30.3% from 27.1% YoY. However, this was not enough to offset cost increases, as a price hike implemented in January 2022 did not fully impact the quarter due to a large backlog of lower-priced orders[82] - SG&A expenses increased by approximately $2.5 million compared to the prior year, driven by higher variable freight costs, selling expenses, and legal fees related to intellectual property enforcement and advising a special committee on a rejected acquisition proposal[84] - Inventory increased by $23.4 million compared to April 30, 2021. Approximately 40% of this increase was due to higher material and labor costs, while 60% was due to increased quantities in anticipation of higher summer sales[88] - Following a covenant violation, the company amended its credit agreement on April 15, 2022, extending the maturity to April 2027 and increasing the borrowing limit to $70 million for the peak summer months[90][91] Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, Virco Mfg. Corporation is exempt from providing quantitative and qualitative disclosures about market risk - The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is therefore not required to provide the information under this item[98] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of April 30, 2022, with no material changes to internal control over financial reporting - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of April 30, 2022[99] - There have been no changes in the Company's internal control over financial reporting during the fiscal quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting[102] Part II. Other Information This section covers legal proceedings, risk factors, and other required disclosures not included in the financial statements Legal Proceedings Management believes ongoing legal proceedings from ordinary business operations will not materially impact the company's financial position or results - Management is of the opinion that legal proceedings arising from normal business operations will not materially affect the Company's financial position, results of operations or cash flows[105] Risk Factors No material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for the fiscal year ended January 31, 2022 - The risk factors associated with the business have not materially changed from those disclosed in the Form 10-K for the fiscal year ended January 31, 2022[106] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the period - None[107] Defaults Upon Senior Securities The company reported no defaults upon senior securities - None[108] Mine Safety Disclosures This item is not applicable to the company - Not applicable[109] Other Information The company reported no other information for the period - None[110] Exhibits This section lists exhibits filed with the Form 10-Q, including credit agreement amendments, CEO/CFO certifications, and XBRL data files - Lists exhibits filed with the report, including Amendment No. 2 to the Revolving Credit and Security Agreement, CEO and CFO certifications (31.1, 31.2, 32.1), and XBRL instance documents[111]