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Home Accessories Segment | 12 Months Ended
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May 01, 2022
Discontinued Operations And Disposal Groups [Abstract] |
Home Accessories Segment |
3. | HOME ACCESSORIES SEGMENT
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. 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 was 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. As a result, we classified the results from operations of our home accessories segment separately in captions titled “Discontinued Operations” within our fiscal 2020 Consolidated Statements of Net Loss. Consolidated Balance Sheet as of Disposal Date 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 fiscal 2020 Consolidated Statements of Net Loss:
(dollars in thousands) |  |  | 2020 |
net sales |  |  | $ | 13,763 |
cost of sales |  |  |  | (10,953 | )
gross profit |  |  |  | 2,810 |
selling, general and administrative expenses |  |  |  | (4,100 | )
asset impairments (1) |  |  |  | (20,202 | )
reversal of contingent consideration - earn-out obligation (2) |  |  |  | 5,856 |
interest expense (3) |  |  |  | (84 | )
other income |  |  |  | 34 |
loss from discontinued operation related to major classes of loss before income taxes |  |  |  | (15,686 | )
loss on disposal of discontinued operation (4) |  |  |  | (1,891 | )
loss before income taxes from discontinued operation |  |  |  | (17,577 | )
income tax benefit |  |  |  | 68 |
net loss from discontinued operation |  |  | $ | (17,509 | )
(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 operation 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 loss from continuing operations, net loss from discontinued operation, and net loss attributable Culp Inc. common shareholders and the noncontrolling interest for fiscal year 2020:
(dollars in thousands) |  | 2020 |
net loss from continuing operations |  | $ | (11,158 | )
net loss from continuing operations attributable to noncontrolling interest |  |  | — |
net loss from continuing operations attributable to Culp Inc. common shareholders |  | $ | (11,158 | )
net loss from discontinued operation |  | $ | (17,509 | )
net loss from discontinued operation attributable to noncontrolling interest |  |  | 4,674 |
net loss from discontinued operation attributable to Culp Inc. common shareholders |  | $ | (12,835 | )
net loss |  | $ | (28,667 | )
net loss from noncontrolling interest |  |  | 4,674 |
net loss attributable to Culp Inc. common shareholders |  | $ | (23,993 | )
Cash Flow Disclosures Our discontinued operation had net cash used in operating activities totaling $(2.3) million during fiscal 2020. Our discontinued operation had net cash used in investing activities totaling $(134,000) during fiscal 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 noncontrolling interest holder of eLuxury totaling $2.4 million during fiscal 2020. 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 Prior to the disposal of eLuxury, we included all the accounts of eLuxury in our consolidated financial statements and eliminated all significant intercompany balances and transactions during the first nine months of fiscal 2020. Net loss attributable to the noncontrolling interest in eLuxury was excluded from net loss attributable to Culp Inc. common shareholders during the first nine months of fiscal 2020. 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 of June 22, 2018, and the allocation of net income or loss between us, as the controlling interest holder, and the noncontrolling interest holder. The Equity Agreement stated that 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 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 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 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 Agreement In connection with the sale of our entire ownership interest in eLuxury, we entered into a supply agreement 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 goods products, subject to our ability to provide competitive pricing and delivery terms for such products. There are no guarantees or provisions under the supply agreement that require eLuxury to purchase a minimum amount of our products. On January 12, 2022, we entered into an agreement with eLuxury that extended the term of the supply agreement from its original expiration date of March 31, 2022, to March 31, 2027. During fiscal 2022 and 2021, shipments to eLuxury pursuant to the supply agreement were $103,000 and $331,000, respectively. During the three-month period 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. 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, which required us to report these transactions in continuing operations for all periods presented in our Consolidated Statements of Net (Loss) Income. During fiscal 2020, we reported both net sales and cost of sales totaling $968,000 that were previously eliminated in consolidation and occurred prior to the March 31, 2020, disposal date. Royalty Agreement Also in connection with the sale of our entire ownership interest in eLuxury, we entered into a royalty agreement with eLuxury that required eLuxury to pay us a royalty fee based on a percentage of sales, as defined in the royalty agreement. On January 12, 2022, we entered into an agreement with eLuxury that terminated this royalty agreement and required eLuxury to pay us a termination fee of $150,000. During fiscal years 2022, 2021, and 2020, royalty payments received pursuant to the royalty agreement were immaterial. Financial Guarantee As of May 2, 2021, we had an agreement that guaranteed 70% of any unpaid lease payments associated with eLuxury’s facility located in Evansville, Indiana. The lease agreement expires during September 2024 and requires monthly payments of $18,865. In connection with the termination of the royalty agreement noted above, we were fully released from our guarantee associated with this lease.

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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 https://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 https://asc.fasb.org/subtopic&trid=2122178 + Details
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