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Home Accessories Segment - Discontinued Operation | 9 Months Ended
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Jan. 31, 2021
Discontinued Operations And Disposal Groups [Abstract] |
Home Accessories Segment - Discontinued Operation |
3. | HOME ACCESSORIES SEGMENT – DISCONTINUED OPERATION
Overview On March 31, 2020, we sold our entire ownership interest in eLuxury, LLC (“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, which was part of our comprehensive response to the challenging business conditions arising from the COVID-19 global pandemic, has allowed us to focus on our core businesses of upholstery and mattress fabrics and has been a factor in the increase of our liquidity during fiscal 2021. 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 (the 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 th e 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. 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 Operation” on our Consolidated Statement of Net Income (Loss) for the three-month and nine-month periods ending February 2, 2020. Additionally, assets and liabilities associated with our home accessories segment as of February 2, 2020, were reclassified from certain amounts reported in the prior period to present separately in captions titled “current assets – discontinued operation”, “noncurrent assets – discontinued operation”, “current liabilities - discontinued operation”, and “noncurrent liabilities – discontinued operation” to conform to current year financial statement presentation. Consolidated Balance Sheet The following is a summary of the assets and liabilities of the disposal group that are presented separately as a discontinued operation on the Consolidated Balance Sheet as of February 2, 2020.
|  | February 2, |
(dollars in thousands) |  | 2020 |
ASSETS |  |  |  |
current assets: |  |  |  |
cash and cash equivalents |  | $ | 232 |
accounts receivable |  |  | 766 |
inventories |  |  | 3,566 |
other current assets |  |  | 174 |
total current assets - discontinued operation |  |  | 4,738 |
property, plant, and equipment |  |  | 1,728 |
goodwill |  |  | 2,442 |
intangible asset |  |  | 4,121 |
right of use asset |  |  | 950 |
total noncurrent assets - discontinued operation |  |  | 9,241 |
total assets |  | $ | 13,979 |
LIABILITIES AND NET ASSETS |  |  |  |
current liabilities: |  |  |  |
accounts payable |  | $ | 1,415 |
operating lease liability - current |  |  | 194 |
accrued expenses |  |  | 485 |
total current liabilities - discontinued operation |  |  | 2,094 |
loan payable - Culp Inc. |  |  | 1,800 |
subordinated loan payable - noncontrolling interest |  |  | 925 |
operating lease liability - long-term |  |  | 776 |
total noncurrent liabilities - discontinued operation |  |  | 3,501 |
total liabilities |  |  | 5,595 |
total net assets of discontinued operation |  | $ | 8,384 |
Net Loss from Discontinued Operation The following is a summary of the major classes of financial statement line items constituting loss before income taxes from discontinued operation that are presented in the Consolidated Statements of Net Income (Loss) for the three-month and nine-month periods ending February 2, 2020:
|  | Three Months Ended |
|  | February 2, |
(dollars in thousands) |  | 2020 |
net sales |  | $ | 3,906 |
cost of sales |  |  | (3,042 | )
gross profit |  |  | 864 |
selling, general and administrative expenses |  |  | (1,121 | )
asset impairments (1) |  |  | (13,639 | )
reversal of contingent consideration (2) |  |  | 6,081 |
interest expense (3) |  |  | (24 | )
other income |  |  | 15 |
loss before income taxes from discontinued operation |  |  | (7,824 | )
income tax benefit |  |  | 2,592 |
net loss from discontinued operation |  | $ | (5,232 | )
|  | Nine Months Ended |
|  | February 2, |
(dollars in thousands) |  | 2020 |
net sales |  | $ | 11,484 |
cost of sales |  |  | (9,090 | )
gross profit |  |  | 2,394 |
selling, general and administrative expenses |  |  | (3,686 | )
asset impairments (1) |  |  | (13,639 | )
reversal of contingent consideration (2) |  |  | 6,081 |
interest expense (3) |  |  | (71 | )
other income |  |  | 35 |
loss before income taxes from discontinued operation |  |  | (8,886 | )
income tax benefit |  |  | 2,984 |
net loss from discontinued operation |  | $ | (5,902 | )
(1) | During the three-month and nine-month periods ended February 2, 2020, we recorded asset impairment charges totaling $13.6 million, of which $11.2 million and $2.4 million pertained to goodwill and tradename, respectively. See Notes 7, 8, and 12 of 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 operation as it pertains to loans payable assumed by the buyer (the former noncontrolling interest holder) or required to be paid to Culp Inc. based on the terms of the sale agreement.
The following is a summary of net income from continuing operations, net loss from discontinued operation, and net income (loss) attributable to Culp, Inc. common shareholders and the noncontrolling interest associated with our discontinued operation for the three-month and nine-month periods ending January 31, 2021, and February 2, 2020:
|  | Three Months Ended |
|  | January 31, |  |  | February 2, |
(dollars in thousands) |  | 2021 |  |  | 2020 |
net income from continuing operations |  | $ | 2,082 |  |  | $ | 1,025 |
net loss from continuing operations attributable to noncontrolling interest |  |  | — |  |  |  | — |
net income from continuing operations attributable to Culp, Inc. common shareholders |  | $ | 2,082 |  |  | $ | 1,025 |
net loss from discontinued operation |  | $ | — |  |  | $ | (5,232 | )
net loss from discontinued operation attributable to noncontrolling interest |  |  | — |  |  |  | 4,149 |
net loss from discontinued operation attributable to Culp, Inc. common shareholders |  | $ | — |  |  | $ | (1,083 | )
net income (loss) |  | $ | 2,082 |  |  | $ | (4,207 | )
net loss from noncontrolling interest associated with a discontinued operation |  |  | — |  |  |  | 4,149 |
net income (loss) attributable to Culp, Inc. common shareholders |  | $ | 2,082 |  |  | $ | (58 | )
|  | Nine Months Ended |
|  | January 31, |  |  | February 2, |
(dollars in thousands) |  | 2021 |  |  | 2020 |
net income from continuing operations |  | $ | 1,733 |  |  | $ | 5,061 |
net loss from continuing operations attributable to noncontrolling interest |  |  | — |  |  |  | — |
net income from continuing operations attributable to Culp, Inc. common shareholders |  | $ | 1,733 |  |  | $ | 5,061 |
net loss from discontinued operation |  | $ | — |  |  | $ | (5,902 | )
net loss from discontinued operation attributable to noncontrolling interest |  |  | — |  |  |  | 4,421 |
net loss from discontinued operation attributable to Culp, Inc. common shareholders |  | $ | — |  |  | $ | (1,481 | )
net income (loss) |  | $ | 1,733 |  |  | $ | (841 | )
net loss from noncontrolling interest associated with a discontinued operation |  |  | — |  |  |  | 4,421 |
net income attributable to Culp, Inc. common shareholders |  | $ | 1,733 |  |  | $ | 3,580 |
Cash Flow Disclosures Our discontinued operation had net cash used in operating activities totaling $2.1 million during the nine-months ending February 2, 2020. Our discontinued operation had net cash used in investing activities totaling $104,000 during the nine-months ending February 2, 2020. Our discontinued operation had net cash provided by financing activities, all of which were loan proceeds and capital contributions from Culp, Inc. and the former noncontrolling interest holder of eLuxury, totaling $2.4 million during the nine-months ending February 2, 2020. We believe our liquidity has improved during fiscal 2021 in the absence of our former home accessories segment due to the significant losses that were incurred by that segment and the funding of its working capital requirements primarily by us through loans and capital contributions that are no longer required. Contingent Consideration Effective June 22, 2018, we entered into an Equity Purchase Agreement (the “Equity Agreement”), pursuant to which we acquired an 80% ownership interest in eLuxury. The Equity Agreement contained a contingent consideration arrangement that required us to pay the former non-controlling interest holder of eLuxury 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 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 environment, 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 the earn-out obligation at the end of our third quarter of fiscal 2020. In connection with the subsequent sale agreement of our entire ownership interest in eLuxury, this contingent consideration arrangement was nullified on March 31, 2020. Since this earn-out obligation was solely based on the financial performance of our home accessories segment and the contingent consideration was nullified as a result of the disposal, the reversal of this earn-out obligation is directly attributed to our discontinued operation. 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 fabric products of the type we were supplying to eLuxury at the time of the sale transaction, as well as certain home accessories and soft good 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 which we referred to eLuxury prior to the sale transaction and new customer relationships we develop for eLuxury going forward, as well as sales 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-to-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 in our Consolidated Statement of Net Income (Loss) for the three-month and nine-month periods ending February 2, 2020. Therefore, we reported both net sales and cost of sales from continuing operations totaling $426,000 and $807,000 during the three-month and nine-month periods ending February 2, 2020, respectively, that were previously eliminated in consolidation. During the three-month and nine-month periods ending January 31, 2021, shipments to eLuxury under the supply agreement totaled $40,000 and $325,000, respectively. During the three-month and nine-month periods ending January 31, 2021, we received payments pursuant to the royalty agreement totaling $38,000 and $118,000, respectively. 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. Following the sale transaction, eLuxury and its sole owner have indemnified us from any liabilities and obligations that we would be required to pay regarding this lease agreement.

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- Definition The entire disclosure related to a disposal group. Includes, but is not limited to, a discontinued operation, disposal classified as held-for-sale or disposed of by means other than sale or disposal of an individually significant component. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 360 -URI http://asc.fasb.org/topic&trid=2155823 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 205 -SubTopic 20 -URI http://asc.fasb.org/subtopic&trid=2122178 + Details
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