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Business Combinations | 9 Months Ended
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Feb. 02, 2020
Business Combinations [Abstract] |
Business Combinations | 3. Business Combinations eLuxury, LLC (eLuxury) Overview Effective June 22, 2018, we entered into an Equity Purchase Agreement (Equity Agreement), pursuant to which we acquired an 80% ownership interest in eLuxury, a company that offers bedding accessories and home goods directly to consumers. eLuxury’s primary products include a line of mattress pads manufactured at eLuxury’s facility located in Evansville, Indiana. eLuxury also offers handmade platform beds, cotton bed sheets, and other bedding items sourced from other suppliers. Its products are available on eLuxury’s own branded website, eLuxury.com, as well as Amazon and other leading online retailers for specialty home goods. This acquisition brought together eLuxury’s experience in e-commerce, online brand building, and direct-to-consumer shopping and fulfillment expertise with our global production, sourcing, and distribution capabilities. The estimated consideration given for the 80% ownership interest in eLuxury totaled $18.1 million, of which $12.5 million represented the estimated purchase price and $5.6 million represented the fair value for contingent consideration associated with an earn-out obligation (see below for further details). Of the $12.5 million estimated purchase price, $11.6 million was paid at closing on June 22, 2018, $185,000 was paid in August 2018, and $749,000 was paid in September 2019. Assets Acquired and Liabilities Assumed The following table presents the final allocation of the acquisition cost to the assets acquired and liabilities assumed based on their fair values.
(dollars in thousands) |  | Fair Value |
Goodwill |  | $ | 13,653 |
Tradename |  |  | 6,549 |
Equipment |  |  | 2,179 |
Inventory |  |  | 1,804 |
Accounts receivable and other current assets |  |  | 108 |
Accounts payable |  |  | (1,336 | )
Accrued expenses |  |  | (295 | )
Non-controlling interest in eLuxury |  |  | (4,532 | )
|  | $ | 18,130 |
We recorded the tradename at fair market value based on the relief from royalty method. This tradename was determined to have an indefinite useful life and, therefore, is not being amortized. Equipment will be depreciated on a straight-line basis over useful lives ranging from five to ten years. The goodwill related to this acquisition is attributable to eLuxury’s reputation with the products it offers and management’s experience in e-commerce, online brand building, and direct-to-consumer shopping and fulfillment expertise. Goodwill is deductible for income tax purposes over the statutory period of fifteen years. During the third quarter of fiscal 2020, this goodwill was assessed for impairment as we believed indicators of impairment existed during this reporting period. See note 8 located in the notes to consolidated financial statements for further details. Contingent Consideration As mentioned above, the Equity Agreement contains a contingent consideration arrangement that requires us to pay the seller, who is also the owner of the noncontrolling interest, an earn-out payment based on a multiple of adjusted EBITDA, as defined in the Equity Agreement, for the twelve-month period ending August 31, 2021, less $12.0 million We recorded a contingent liability at the acquisition date for this earn-out obligation at its fair value totaling $5.6 million based on the Black Scholes pricing model. We are required to assess the fair value of this earn-out obligation each quarterly reporting period. Based on management’s assessment as of February 2, 2020, we determined it was necessary to adjust forecasted EBITDA as it relates to this earn-out obligation. This determination was based on the future outlook of our home accessories segment and its slower than expected business improvement, as well as updated assumptions on economic conditions in the e-commerce space, combined with the upcoming timeframe for determining the amount associated with this contingent consideration arrangement. As a result of these factors, we recorded a reversal of $6.1 million for the full amount of our earn-out obligation during the third quarter of fiscal 2020. Non-Controlling Interest The Equity Agreement contains substantive profit-sharing arrangement provisions which explicitly state the ownership interests at the effective date of this business combination and the allocation of net income or loss between the company, as the controlling interest holder, and the noncontrolling interest holder. The Equity Agreement states that at the effective date of this acquisition (June 22, 2018), we acquired an 80% ownership interest in eLuxury, with the seller retaining a 20% noncontrolling interest. Additionally, the Equity Agreement states that eLuxury’s net income or loss, future capital contributions, and equity distributions will be allocated at a percentage of 70% and 30% to the company and the noncontrolling interest holder, respectively. Based on the terms of the Equity Agreement, we believe the related risks associated with the ownership interests are aligned and therefore, the total consideration of $18.1 million for the 80% controlling interest provides information for the equity value of eLuxury as a whole, and is useful in estimating the fair value of the 20% noncontrolling interest. In order to determine the carrying value of the noncontrolling interest in eLuxury, we applied the Hypothetical-Liquidation-At-Book-Value method (HLBV). HLBV is an approach that is used in practice to determine the carrying value of a noncontrolling interest if it is consistent with an existing profit-sharing arrangement such as the Equity Agreement. Therefore, the carrying amount of the noncontrolling interest of $253,000 at February 2, 2020, mostly represents its $4.6 million fair value determined at the acquisition date, minus its allocation of net losses which includes a charge for asset impairments of $4.1 million incurred during the third quarter of fiscal 2020, slightly offset by capital contributions totaling $360,000. Other Acquisition costs totaling $270,000 were included in selling, general, and administrative expenses in our Consolidated Statement of Net Income for the nine-month period ending January 27, 2019. Pro Forma Financial Information The following unaudited pro forma consolidated results of operations for the three-month and nine-month periods ending February 2, 2020, and January 27, 2019, have been prepared as if the acquisition of eLuxury had occurred on May 1, 2017.
|  | Three Months Ended |
(dollars in thousands, except per share data) |  | February 2, 2020 |  |  | January 27, 2019 |
Net Sales |  | $ | 71,998 |  |  | $ | 77,226 |
(Loss) income from operations |  |  | (5,091 | ) |  |  | 4,299 |
Net (loss) income |  |  | (4,207 | ) |  |  | 3,060 |
Net loss - noncontrolling interest |  |  | 4,149 |  |  |  | 94 |
Net (loss) income – Culp Inc. common shareholders |  |  | (58 | ) |  |  | 3,154 |
Net (loss) income per share (basic) – Culp Inc. common shareholders |  |  | 0.00 |  |  |  | 0.25 |
Net (loss) income per share (diluted) – Culp Inc. common shareholders |  |  | 0.00 |  |  |  | 0.25 |
|  | Nine Months Ended |
(dollars in thousands, except per share data) |  | February 2, 2020 |  |  | January 27, 2019 |
Net Sales |  | $ | 219,465 |  |  | $ | 228,830 |
Income from operations |  |  | 1,582 |  |  |  | 10,657 |
Net (loss) income |  |  | (841 | ) |  |  | 6,943 |
Net loss - noncontrolling interest |  |  | 4,421 |  |  |  | 83 |
Net income – Culp Inc. common shareholders |  |  | 3,580 |  |  |  | 7,026 |
Net income per share (basic) – Culp Inc. common shareholders |  |  | 0.29 |  |  |  | 0.56 |
Net income per share (diluted) – Culp Inc. common shareholders |  |  | 0.29 |  |  |  | 0.56 |
The unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that would actually have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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