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Home Accessories Segment | 12 Months Ended
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May 02, 2021
Discontinued Operations And Disposal Groups [Abstract] |
Home Accessories Segment |
3. | HOME ACCESSORIES SEGMENT
Acquisition Overview Effective June 22, 2018, we entered into an Equity Purchase Agreement (the “Equity Agreement”) in which we acquired an 80% ownership interest in eLuxury, LLC (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, as well as other bedding items sourced from other suppliers. Its products are available on eLuxury’s own branded website, eLuxury.com, Amazon, and other leading online retailers for specialty home goods. This acquisition provided a new sales channel for eLuxury’s bedding accessories and an opportunity for us to participate in the e-commerce direct-to-consumer space. 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 estimated fair value of contingent consideration associated with an earn-out obligation. 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 |
As of the acquisition date, we recorded the tradename at fair market value based on the relief from royalty method. The goodwill related to this acquisition was attributable to eLuxury’s reputation with the products it offered and management’s experience in e-commerce, online brand building, and direct-to-consumer shopping and fulfillment expertise. Other Acquisition costs totaling $270,000 were included in selling, general, and administrative expenses in our fiscal 2019 Consolidated Statement of Net Income. Disposal Overview On March 31, 2020, we sold our entire ownership interest in eLuxury to eLuxury’s noncontrolling interest holder in consideration of an accelerated settlement of certain financial obligations due and payable by eLuxury to us and the entry into supply and royalty arrangements designed to preserve an additional sales channel for our core products. Also, this sale was expected to increase our liquidity and allow us to focus on our core businesses of upholstery and mattress fabrics and was part of our comprehensive response to the challenging business conditions arising from the COVID-19 global pandemic. In connection with the sale of our entire ownership interest in eLuxury, (i) we received $509,500 at closing as an accelerated repayment of principal amounts previously loaned to eLuxury, together with outstanding interest, under a loan agreement between us and eLuxury; (ii) we forgave $300,000 of borrowings payable by eLuxury to us under this loan agreement; (iii) we entered into an amended and restated credit and security agreement with eLuxury and the buyer (former noncontrolling interest holder) (together, the “Borrowers”), pursuant to which the Borrowers agreed to repay an additional $1 million previously loaned to eLuxury within thirty days of the closing of the sale transaction (and which amount was secured by the assets of both Borrowers); and (iv) eLuxury agreed to pay $613,000 within sixty days of the sale transaction in satisfaction of certain trade accounts payable due from eLuxury to us. The remaining $1 million we previously loaned to eLuxury and the outstanding trade accounts payable balance of $613,000 due from eLuxury to us has been paid in full in accordance with the terms of the sale agreement outlined above. Discontinued Operation Financial Statement Presentation and Disclosures Financial Statement Presentation Due to the sale of our entire ownership interest in eLuxury, our home accessories segment was eliminated as a result of our strategic decision to focus on our core products that we believed would increase our liquidity and assist with our comprehensive response to the COVID-19 global pandemic. Consequently, we determined that the results from operations and assets and liabilities associated with our home accessories segment were to be excluded from our continuing operations and presented as a discontinued operation in our consolidated financial statements in accordance with ASC Topic 205-20-45. As a result, we classified the results from operations of our home accessories segment separately in captions titled “Discontinued Operations” on our Consolidated Statements of Net Income (Loss) for the prior year periods. Consolidated Balance Sheet The following is a summary of the assets and liabilities that were sold on March 31, 2020:
|  |  | March 31, |
(dollars in thousands) |  |  | 2020 |
ASSETS |  |  |  |  |
current assets: |  |  |  |  |
cash and cash equivalents |  |  | $ | 285 |
accounts receivable |  |  |  | 588 |
inventories |  |  |  | 3,344 |
other current assets |  |  |  | 170 |
total current assets held for sale - discontinued operation |  |  |  | 4,387 |
property, plant, and equipment |  |  |  | 1,694 |
goodwill |  |  |  | — |
intangible asset |  |  |  | — |
right of use assets |  |  |  | 918 |
total noncurrent assets held for sale - discontinued operation |  |  |  | 2,612 |
total assets |  |  | $ | 6,999 |
LIABILITIES AND NET ASSETS |  |  |  |  |
current liabilities: |  |  |  |  |
accounts -payable trade |  |  | $ | 1,394 |
operating lease liability - current |  |  |  | 195 |
accrued expenses |  |  |  | 351 |
total current liabilities held for sale - discontinued operation |  |  |  | 1,940 |
loan payable - Culp Inc. |  |  |  | 1,500 |
subordinated loan payable - noncontrolling interest |  |  |  | 925 |
operating lease liability - long-term |  |  |  | 743 |
total noncurrent liabilities held for sale - discontinued operation |  |  |  | 3,168 |
total liabilities |  |  |  | 5,108 |
total net assets of discontinued operation |  |  | $ | 1,891 |
Net Loss from Discontinued Operation The following is a reconciliation of the major classes of financial statement line items constituting loss before income taxes from discontinued operation that are disclosed in the notes to the financial statements to loss from discontinued operation that are presented in the Consolidated Statements of Net Income (Loss) for fiscal years 2020 and 2019:
(dollars in thousands) |  |  | 2020 |  |  | 2019 |
net sales |  |  | $ | 13,763 |  |  | $ | 15,956 |
cost of sales |  |  |  | (10,953 | ) |  |  | (11,527 | )
gross profit |  |  |  | 2,810 |  |  |  | 4,429 |
selling, general and administrative expenses |  |  |  | (4,100 | ) |  |  | (5,162 | )
asset impairments (1) |  |  |  | (20,202 | ) |  |  | — |
reversal of contingent consideration - earn-out obligation (2) |  |  |  | 5,856 |  |  |  | — |
interest expense (3) |  |  |  | (84 | ) |  |  | (30 | )
other income |  |  |  | 34 |  |  |  | 37 |
loss from discontinued operation related to major classes of loss before income taxes |  |  |  | (15,686 | ) |  |  | (726 | )
loss on disposal of discontinued operation (4) |  |  |  | (1,891 | ) |  |  | — |
loss before income taxes from discontinued operation |  |  |  | (17,577 | ) |  |  | (726 | )
income tax benefit |  |  |  | 68 |  |  |  | 113 |
net loss from discontinued operation |  |  | $ | (17,509 | ) |  | $ | (613 | )
(1) | During fiscal 2020, we recorded asset impairment charges totaling $20.2 million, of which $13.6 million and $6.6 million pertained to the goodwill and tradename, respectively. See Notes 8, 9, and 15 of the notes to the consolidated financial statements for further details of our assessments that resulted in the impairment of the goodwill and tradename associated with this discontinued operation.
(2) | See separate section below titled “Contingent Consideration” for further details.
(3) | Interest expense is directly attributable to our discontinued operations as it pertains to loans payable assumed by the buyer, (the noncontrolling interest) or required to be paid to Culp Inc. based on the terms of the sale agreement.
(4) | See separate section below titled “Consolidation and Deconsolidation” for further details.
The following is a summary of net income (loss) from continuing operations, loss from discontinued operation, and net income (loss) attributable Culp Inc. common shareholders and the noncontrolling interest for fiscal years 2021, 2020, and 2019:
(dollars in thousands) |  | 2021 |  |  | 2020 |  |  | 2019 |
net income (loss) from continuing operations |  | $ | 3,218 |  |  | $ | (11,158 | ) |  | $ | 6,071 |
net income (loss) from continuing operations attributable to noncontrolling interest |  |  | — |  |  |  | — |  |  |  | — |
net income (loss) from continuing operations attributable to Culp Inc. common shareholders |  | $ | 3,218 |  |  | $ | (11,158 | ) |  | $ | 6,071 |
net loss from discontinued operation |  | $ | — |  |  | $ | (17,509 | ) |  | $ | (613 | )
net loss from discontinued operation attributable to noncontrolling interest |  |  | — |  |  |  | 4,674 |  |  |  | 218 |
net loss from discontinued operation attributable to Culp Inc. common shareholders |  | $ | — |  |  | $ | (12,835 | ) |  | $ | (395 | )
net income (loss) |  | $ | 3,218 |  |  | $ | (28,667 | ) |  | $ | 5,458 |
net loss from noncontrolling interest |  |  | — |  |  |  | 4,674 |  |  |  | 218 |
net income (loss) attributable to Culp Inc. common shareholders |  | $ | 3,218 |  |  | $ | (23,993 | ) |  | $ | 5,676 |
Cash Flow Disclosures Our discontinued operation had net cash used in operating activities totaling $(2.3) million and $(1.5) million for fiscal 2020 and 2019, respectively. Our discontinued operation had net cash used in investing activities totaling $(134,000) and $(54,000) for fiscal 2020 and 2019, respectively. Our discontinued operation had net cash provided by financing activities all of which were loan proceeds and capital contributions from Culp Inc. and the noncontrolling interest of eLuxury totaling $2.4 million and $1.5 million during fiscal 2020 and 2019, respectively. We believe our liquidity has been positively affected in the absence of our home accessories segment due to the significant losses that were incurred and the funding of working capital requirements though loans and capital contributions. We incurred a $1.9 million loss on disposal of discontinued operation that was reported within loss before income taxes from discontinued operation in the fiscal 2020 Consolidated Statement of Net Loss. In addition, we reported a loss on disposal of discontinued operation of $1.6 million in the fiscal 2020 Consolidated Statement of Cash Flows, as the buyer (former noncontrolling interest holder) retained the cash held with eLuxury totaling $285,000. Contingent Consideration The Equity Agreement related to the acquisition of our ownership interest in eLuxury contained a contingent consideration arrangement that required us to pay the seller, who was 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 were required to assess the fair value of this earn-out obligation each quarterly reporting period. Based on management’s assessment as of the end of our third quarter of fiscal 2020, we determined it was necessary to adjust forecasted EBITDA as it related to this earn-out obligation. This determination was based on the future outlook of our former 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 at the end of our third quarter of fiscal 2020. In connection with the sale agreement of our entire ownership interest in eLuxury, this contingent consideration arrangement was nullified on March 31, 2020. Since the earn-out obligation was solely based on the financial performance of our home accessories segment and the contingent consideration arrangement was nullified as a result of the disposal, the reversal of this earn-out obligation is directly attributable to our discontinued operation. Consolidation and Deconsolidation Consolidation As a result of the acquisition of our 80% ownership interest and prior to the disposal of eLuxury, we included all of its accounts in our consolidated financial statements and eliminated all significant intercompany balances and transactions. Substantive Profit-Sharing Provisions The Equity Agreement related to the acquisition of our ownership interest in eLuxury contained substantive profit-sharing provisions which explicitly stated the ownership interests as of the acquisition date and the allocation of net income or loss between us, as the controlling interest holder, and the noncontrolling interest holder. The Equity Agreement stated as of the acquisition date, we acquired an 80% ownership interest in eLuxury, with the seller retaining a 20% noncontrolling interest. Additionally, eLuxury’s net income or loss, future capital contributions and equity distributions were allocated at a percentage of 70% to or from us and 30% to or from the noncontrolling interest holder. Also, the Equity Agreement included certain loss limitations pursuant to which net losses allocated pursuant to the Equity Agreement would not exceed the maximum amount of net loss that could be allocated without causing any owners to have a capital account deficit as defined in the Equity Agreement. The carrying value of our controlling interest and the noncontrolling interest was recorded based on the terms of the substantive profit-sharing provisions of the Equity Agreement. As a result, eLuxury’s total net asset balance of $1.9 million as of March 31, 2020, (the disposal date) represented the carrying value of our interest (the controlling interest holder) in eLuxury. Deconsolidation In accordance with ASC Topic 810-10-40, a parent company must deconsolidate a subsidiary as of the date the parent ceases to have a controlling interest in that subsidiary and recognize a gain or loss in net income at that time. As a result, we deconsolidated eLuxury from our consolidated financial statements on March 31, 2020, and recognized a loss on disposal of discontinued operation totaling $1.9 million. The $1.9 million loss on disposal of discontinued operation represented the entire carrying amount of eLuxury’s assets less liabilities as of the disposal date of March 31, 2020. Based on the terms of the sale agreement, we did not receive any consideration for eLuxury’s net assets associated with the sale of our entire ownership interest in eLuxury, and we did not retain a noncontrolling interest holder in eLuxury. Additionally, based on the terms of the substantive profit-sharing provisions stated in the Equity Agreement, the noncontrolling interest holder did not have a carrying amount for its interest in eLuxury. Continuing Obligations, Financial Commitments, and Continuing Relationships with the Discontinued Operation Supply and Royalty Agreements In connection with the sale of our entire ownership interest in eLuxury, we entered into supply and royalty agreements with eLuxury to preserve an additional sales channel for our core products – upholstery and mattress fabrics. The supply agreement requires eLuxury to purchase all its requirements at fair market prices for mattress and upholstery fabrics products of the type we were supplying to eLuxury at the time of the sale transaction, as well as certain home accessories and soft products, subject to our ability to provide competitive pricing and delivery terms for such products. The royalty agreement requires eLuxury to pay us a royalty fee based on a percentage of sales, as defined in the royalty agreement, for sales of eLuxury’s products to certain business-to-business customers, including customers for which we referred to eLuxury prior to the sale transaction and new customer relationships we develop for eLuxury going forward, as well of eLuxury products generated by sales representatives that we develop or introduce to eLuxury. There are no guarantees or provisions under either the supply or royalty agreements that require eLuxury to purchase a minimum amount of our products or sell a certain amount of eLuxury products to customers or through sales representatives developed or introduced by us. As a result, the success of these agreements and the period of time in which our involvement with eLuxury is expected to continue are based on eLuxury’s ability to sell products that require mattress and upholstery fabrics and our ability to provide an additional sales channel for eLuxury to grow its business-business sales platform. As a result of our continuing involvement with eLuxury, we reported net sales and the related cost of sales associated with our inventory shipments to eLuxury in accordance with Topic 205-20-50-4B, which requires us to report these transactions in continuing operations for all periods presented in our Consolidated Statement of Income (Loss). Therefore, we reported both net sales and cost of sales totaling $968,000 during fiscal 2020 and $612,000 during fiscal 2019 that were previously eliminated in consolidation prior to the disposal date of March 31, 2020. During fiscal 2021, shipments to eLuxury pursuant to the supply agreement were $331,000. After the disposal date of March 31, 2020, and through our fiscal year end date of May 3, 2020, shipments to eLuxury pursuant to the supply agreement totaled $7,000. Shipments for the fiscal month April 2020 were severely affected by the COVID-19 global pandemic. During fiscal 2021, we received payments pursuant to the royalty agreement totaling $154,000. After the disposal date of March 31, 2020, and through our fiscal year end date of May 3, 2020, no payments were received pursuant to the royalty agreement. Financial Guarantee Currently, we have an agreement that guarantees 70% of any unpaid lease payments associated with eLuxury’s facility located in Evansville, Indiana. The lease agreement expires in September 2024 and requires monthly payments of $18,865. Under the terms of the sale of our controlling interest in eLuxury, the buyer (the former noncontrolling interest holder) must use commercially reasonable efforts to cause the lessor to release us from this financial guarantee of eLuxury’s lease agreement. Additionally, eLuxury, and its sole owner following the sale have indemnified us from any liabilities and obligations that we would be required to pay regarding this lease agreement.

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