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EX-32.2 - EXHIBIT 32.2 - AMERICAN APPAREL, INCappex32263015.htm
EX-31.1 - EXHIBIT 31.1 - AMERICAN APPAREL, INCappex31163015.htm
EX-32.1 - EXHIBIT 32.1 - AMERICAN APPAREL, INCappex32163015.htm
EX-31.2 - EXHIBIT 31.2 - AMERICAN APPAREL, INCappex31263015.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File No. 001-32697  
 
American Apparel, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 

Delaware
20-3200601
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
 
 
747 Warehouse Street, Los Angeles, California
90021
(Address of Principal Executive Offices)
(Zip Code)
Registrant's Telephone Number, including area code: (213) 488-0226
 
 
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x    No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer” and “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  
Large accelerated filer
o
Accelerated filer
x
 
 
 
 
Non-accelerated filer
o (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o    No  x

At August 11, 2015, the Registrant had issued and outstanding 182,525,253 and 182,246,264 shares of its common stock, respectively.



AMERICAN APPAREL, INC.
TABLE OF CONTENTS
 
 
 
Page
Item 1.
 
Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014
 
Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2015 and 2014
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014
 
Notes to Condensed Consolidated Financial Statements
Item 2.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Mine Safety Disclosures
Item 5.
Item 6.
 
 
 
 
 

 

2


Unless the context requires otherwise, all references in this Quarterly Report on Form 10-Q to the "Company," "Registrant," "we," and "our," refer to American Apparel, Inc., a Delaware corporation, together with its 100% owned subsidiary, American Apparel (USA) LLC, and its other direct and indirect subsidiaries.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including the documents incorporated by reference herein, contains forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. All statements in this Quarterly Report on Form 10-Q other than statements of historical fact are "forward-looking statements" for purposes of these provisions. Statements that include the use of terminology such as "may," "will," "expect," "believe," "plan," "estimate," "potential," "continue," or the negative thereof or other and similar expressions are forward-looking statements. In addition, in some cases, you can identify forward-looking statements by words or phrases such as "trend," "opportunity," "comfortable," "anticipate," "current," "intention," "position," "assume," "outlook," "remain," "maintain," "sustain," "seek," "achieve," and similar expressions.
Any statements that refer to projections of our future financial performance, anticipated growth and trends in our business, goals, strategies, focuses and plans, and other characterizations of future events or circumstances, including statements expressing general expectations or beliefs, whether positive or negative, about future operating results or the development of our products and any statement of assumptions underlying any of the foregoing are forward-looking statements. Forward-looking statements in this report may include, without limitation, statements about:
our future financial condition, results of operations, plans and prospects, expectations, operating improvements and cost savings, and the timing of any of the foregoing;
our ability to make debt payments; ability to remain in compliance with financial covenants under financing arrangements; and ability to obtain appropriate waivers or amendments with respect to any noncompliance;
liquidity and projected cash flows;
consequences of the termination of Dov Charney ("Mr. Charney"), our former chief executive officer, including any litigation or regulatory investigations, any alleged actions of Mr. Charney, or any impact on our sales or brand related thereto;
ability to hire and/or retain qualified employees, including executive officers;
growth, expansion and acquisition prospects and strategies, the success of such strategies, and the benefits we believe can be derived from such strategies; 
plans to make continued investments in advertising and marketing; 
the outcome of investigations, enforcement actions and litigation matters, including exposure that could exceed expectations;
intellectual property rights and those of others, including actual or potential competitors, our personnel, consultants, and collaborators; 
trends in raw material costs and other costs both in the industry and specific to us;
the supply of raw materials and the effects of supply shortages on our financial condition, results of operations, and cash flows;
economic and political conditions; 
currency fluctuations and the impact thereof;
overall industry and market performance; 
operations outside the U.S.; 
the impact of accounting pronouncements; 
ability to maintain compliance with the listing requirements of NYSE MKT LLC;
ability to improve efficiency and control costs at our production and supply chain facilities; and
other assumptions described in this Quarterly Report on Form 10-Q underlying or relating to any forward-looking statements.
The forward-looking statements in this report speak only as of the date of this report and caution should be taken not to place undue reliance on any such forward-looking statements, which are qualified in their entirety by this cautionary statement. Forward-looking statements are subject to numerous assumptions, events, risks, uncertainties and other factors, including those that may be outside of our control and that change over time. As a result, actual results and/or the timing of events could differ materially from those expressed in or implied by the forward-looking statements and future results could differ materially from historical performance and those expressed in or implied by the forward-looking statements. Such assumptions, events, risks, uncertainties

3


and other factors are found in "Item 1A. Risk Factors" in Part II and elsewhere in this Quarterly Report on Form 10-Q, the Annual Report on Form 10-K for the year ended December 31, 2014, as amended, and other reports and documents we file with the Securities and Exchange Commission (the "SEC") and include, without limitation, the following:
our ability to remain in compliance with, or obtain waivers in respect of, certain financial covenants under our existing financing agreements and the consequences of the acceleration of our debt obligations;
our liquidity and ability to continue as a going concern;
ability to generate or obtain from external sources sufficient liquidity for operations and debt service;
consequences of the termination of Mr. Charney, our former chief executive officer, including any litigation or regulatory investigations, any alleged actions of Mr. Charney, or any impact on our sales or brand related thereto;
changes in key personnel, our ability to hire and retain key personnel, and our relationship with our employees;
voting control by our directors, lenders and other affiliates, including Standard General Group and Mr. Charney;
ability to successfully implement our strategic, operating, financial and personnel initiatives;
ability to maintain the value and image of our brand and protect our intellectual property rights;
general economic conditions, geopolitical events, other regulatory changes, and inflation or deflation;
disruptions in the global financial markets;
the highly competitive and evolving nature of our industry in the U.S. and internationally;
risks associated with fluctuations and trends of consumer apparel spending in the U.S.;
changes in consumer preferences or demand for our products;
our ability to attract customers to our retail and online stores;
loss or reduction in sales to wholesale or retail customers or financial nonperformance by our wholesale customers;
seasonality and fluctuations in comparable store sales and wholesale net sales and associated margins;
ability to improve manufacturing efficiency at our production facilities;
changes in the price of materials and labor, including increases in the price of raw materials in the global market and minimum wages;
ability to pass on the added cost of raw materials and labor to customers;
ability to effectively manage inventory levels;
risks that our suppliers or distributors may not timely produce or deliver products;
ability to renew leases on economic terms;
risks associated with our facilities being concentrated in one geographic area;
ability to identify new store locations and the availability of store locations at appropriate terms; ability to negotiate new store leases effectively; and ability to open new stores and expand internationally;
adverse changes in our credit ratings and any related impact on financial costs and structure;
continued compliance with U.S. and foreign government regulations and legislation, including environmental, immigration, labor, and occupational health and safety laws and regulations;
loss of U.S. import protections or changes in duties, tariffs and quotas, risks associated with our foreign operations and supply sources such as market disruption, changes in import and export laws, and currency restrictions and exchange rate fluctuations;
litigation and other inquiries and investigations, including the risks that we, our officers or directors in cases where indemnification applies, will not be successful in defending any proceedings, lawsuits, disputes, claims or audits, and that exposure could exceed expectations or insurance coverage;
tax assessments by domestic or foreign governmental authorities, including import or export duties on our products and the applicable rates for any such taxes or duties;
ability to maintain compliance with the exchange rules of the NYSE MKT LLC;
the adoption of new accounting standards or changes in interpretations of accounting principles;
adverse weather conditions or natural disaster, including those which may be related to climate change;
technological changes in manufacturing, wholesaling, or retailing;
the risk, including costs and timely delivery issues associated therewith, that information technology systems changes may disrupt our supply chain or operations and could impact cash flow and liquidity, and ability to upgrade information technology infrastructure and other risks associated with the systems that operate our online retail operations; and

4


the risk of failure to protect the integrity and security of our information systems and customers' information.
All forward-looking statements included in this document are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statements.

5


PART I-FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
American Apparel, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands)
 
 
June 30, 2015
 
December 31, 2014
ASSETS
(unaudited)
 
 
Current assets:
 
 
 
     Cash
$
6,852

 
$
8,343

     Trade accounts receivable (net of allowances $317; $458)
26,591

 
25,298

     Prepaid expenses and other current assets
15,854

 
16,442

     Inventories, net
114,961

 
147,578

     Income taxes receivable and prepaid income taxes
388

 
648

     Deferred income taxes, net of valuation allowance
663

 
681

     Total current assets
165,309

 
198,990

Property and equipment, net
37,016

 
49,317

Deferred income taxes, net of valuation allowance
2,519

 
2,194

Other assets, net
45,211

 
43,888

TOTAL ASSETS
$
250,055

 
$
294,389

LIABILITIES AND STOCKHOLDERS' DEFICIT
 

 
 

Current liabilities:
 

 
 

     Cash overdraft
$
1,799

 
$
5,714

     Revolving credit facilities and current portion of long-term debt
38,424

 
34,312

     Accounts payable
35,086

 
35,554

Accrued expenses and other current liabilities
58,968

 
61,369

Fair value of warrant liability
7,318

 
19,239

Income taxes payable
1,723

 
2,063

Deferred income tax liability, current
1,213

 
1,045

Current portion of capital lease obligations
3,024

 
2,978

Total current liabilities
147,555

 
162,274

Long-term debt (net of unamortized discount $5,572; $5,965)
234,895

 
217,388

Capital lease obligations, net of current portion
452

 
1,982

Deferred tax liability
198

 
200

Deferred rent, net of current portion
12,363

 
13,346

Other long-term liabilities
15,635

 
14,715

TOTAL LIABILITIES
411,098

 
409,905

COMMITMENTS AND CONTINGENCIES


 


STOCKHOLDERS' DEFICIT
 

 
 

Preferred stock, $0.0001 par value per-share: authorized 1,000 shares; none issued
0

 
0

Common stock, $0.0001 par value per-share: authorized 230,000 shares;
Issued 182,534; 176,566, Outstanding 182,079; 176,194

18

 
18

Additional paid-in capital
221,176

 
218,779

Accumulated other comprehensive loss
(9,065
)
 
(6,915
)
Accumulated deficit
(371,015
)
 
(325,241
)
Less: Treasury stock, 304 shares at cost
(2,157
)
 
(2,157
)
TOTAL STOCKHOLDERS' DEFICIT
(161,043
)
 
(115,516
)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
$
250,055

 
$
294,389



See accompanying notes to condensed consolidated financial statements.

6


American Apparel, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except per share amounts)
(unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net sales
$
134,394

 
$
162,397

 
$
258,657

 
$
299,493

Cost of sales
72,848

 
80,010

 
149,649

 
145,132

Gross profit
61,546

 
82,387

 
109,008

 
154,361

Selling and distribution expenses
45,430

 
52,443

 
90,902

 
106,505

General and administrative expenses (including related party charges of $156, $222; $311, $382)
25,992

 
27,135

 
50,854

 
52,044

Retail store impairment
3,120

 
229

 
3,178

 
728

(Loss) income from operations
(12,996
)
 
2,580

 
(35,926
)
 
(4,916
)
Interest expense
10,467

 
10,019

 
20,248

 
20,058

Foreign currency transaction loss
79

 
0

 
704

 
132

Unrealized (gain) loss on change in fair value of warrants
(4,413
)
 
8,202

 
(11,921
)
 
(4,465
)
Other expense (income)
30

 
60

 
(111
)
 
52

Loss before income taxes
(19,159
)
 
(15,701
)
 
(44,846
)
 
(20,693
)
Income tax provision
191

 
504

 
928

 
978

Net loss
$
(19,350
)
 
$
(16,205
)
 
$
(45,774
)
 
$
(21,671
)
 
 
 
 
 
 
 
 
Basic and diluted net loss per-share (a)
$
(0.11
)
 
$
(0.09
)
 
$
(0.26
)
 
$
(0.14
)
Weighted-average basic and diluted shares outstanding (a)
177,856

 
173,643

 
177,062

 
152,987

 
 
 
 
 
 
 
 
Net loss (from above)
$
(19,350
)
 
$
(16,205
)
 
$
(45,774
)
 
$
(21,671
)
    Other comprehensive income (loss) items:
 
 
 
 
 
 
 
    Foreign currency translation
303

 
873

 
(2,150
)
 
402

        Other comprehensive income (loss), net of tax
303

 
873

 
(2,150
)
 
402

Comprehensive loss
$
(19,047
)
 
$
(15,332
)
 
$
(47,924
)
 
$
(21,269
)
(a) The dilutive impact of incremental shares is excluded from loss position in accordance with U.S. generally accepted accounting principles ("GAAP")

See accompanying notes to condensed consolidated financial statements.
 

7


American Apparel, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

 
Six Months Ended June 30,
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Cash received from customers
$
257,045

 
$
295,135

Cash paid to suppliers, employees and others
(254,567
)
 
(276,024
)
Income taxes paid
(840
)
 
(902
)
Interest paid
(15,737
)
 
(16,938
)
Other
136

 
32

Net cash (used in) provided by operating activities
(13,963
)
 
1,303

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Capital expenditures
(1,942
)
 
(7,087
)
Proceeds from sale of fixed assets
0

 
29

   Restricted cash
0

 
178

Net cash used in investing activities
(1,942
)
 
(6,880
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Cash overdraft
(3,915
)
 
(3,993
)
Borrowings (repayments) under current revolving credit facilities, net
4,112

 
(13,457
)
Borrowings (repayments) of term loans and notes payable
14,996

 
(53
)
Payments of debt issuance costs
(323
)
 
(699
)
Net proceeds from issuance of common stock
1,998

 
28,446

Payment of payroll statutory tax withholding on share-based compensation associated with issuance of common stock
(24
)
 
(301
)
Repayments of capital lease obligations
(1,486
)
 
(1,828
)
Net cash provided by financing activities
15,358

 
8,115

 
 
 
 
Effect of foreign exchange rate on cash
(944
)
 
(1,054
)
Net (decrease) increase in cash
(1,491
)
 
1,484

Cash, beginning of period
8,343

 
8,676

Cash, end of period
$
6,852

 
$
10,160


See accompanying notes to condensed consolidated financial statements.

8



American Apparel, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(in thousands)
(unaudited)
 
Six Months Ended June 30,
 
2015
 
2014
RECONCILIATION OF NET LOSS TO NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
 
 
 
Net loss
$
(45,774
)
 
$
(21,671
)
Depreciation and amortization of property and equipment, and other assets
10,727

 
13,418

Retail store impairment
3,178

 
728

Loss on disposal of property and equipment
27

 
76

Share-based compensation expense
414

 
2,658

Unrealized gain on change in fair value of warrants
(11,921
)
 
(4,465
)
Amortization of debt discount and deferred financing costs
1,918

 
1,264

Accrued interest paid-in-kind
2,132

 
2,078

Foreign currency transaction loss
704

 
132

Allowance for inventory shrinkage and obsolescence
136

 
818

Bad debt expense
261

 
517

Deferred income taxes
(235
)
 
108

Deferred rent
1

 
(3,141
)
Changes in cash due to changes in operating assets and liabilities:
 
 
 
Trade accounts receivables
(1,873
)
 
(4,876
)
Prepaid expenses and other current assets
395

 
(107
)
Inventories
31,007

 
18,118

Other assets
(3,245
)
 
(157
)
Accounts payable
(246
)
 
(2,560
)
Accrued expenses and other liabilities
(1,416
)
 
(1,603
)
Income taxes receivable / payable
(153
)
 
(32
)
Net cash (used in) provided by operating activities
$
(13,963
)
 
$
1,303

 
 
 
 
NON-CASH INVESTING AND FINANCING ACTIVITIES
 
 
 
Property and equipment acquired, and included in accounts payable
$
77

 
$
628


See accompanying notes to condensed consolidated financial statements.


9


American Apparel, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(unaudited)

Note 1. Organization and Business
American Apparel, Inc. including its subsidiaries (collectively the "Company") is a manufacturer, distributor, and retailer of branded fashion basic apparel products and designs. The Company manufactures and sells clothing and accessories for women, men, children and babies. The Company sells its products through the wholesale distribution channel supplying t-shirts and other casual wear to distributors and screen printers, as well as directly to customers through its retail stores located in the U.S. and internationally. In addition, the Company operates an online retail e-commerce website. At June 30, 2015, the Company operated a total of 237 retail stores in 20 countries including the U.S. and Canada.
Recent Developments - On May 11, 2015, the Company commenced a $10,000 "at-the-market" offering program. Under the program, the Company may, from time to time and at its discretion, offer and sell shares of its common stock having an aggregate gross sales price of up to $10,000 (but in no event more than 15,000 shares). The Company has used the net proceeds generated through the program for working capital and general corporate purposes. As of June 30, 2015, the Company had issued 4,121 shares of its common stock for net proceeds of $1,998. Sales of common stock under the "at-the-market" offering program are at the Company's sole discretion and subject to the terms and conditions of the sales agreement related thereto, and there are no assurances that such sales will continue in the future.
On July 27, 2015, the Company entered into a second amendment to the lease agreement for its headquarters and manufacturing facility in Los Angeles, California. Under the terms of the amendment, the Company will vacate one of the leased buildings (an under-utilized building not occupied by any manufacturing or distribution operations) by April 1, 2016, which, assuming timely payments, would result in a fifty percent, or $2,100, reduction in annual base rent starting on April 1, 2016. Additionally, the amendment reduces certain rent, fees, interest and reimbursements incurred primarily from the first half of 2014 from $2,995 to $1,800, which will be paid in eleven monthly installments from April 1, 2016 through February 1, 2017.
On May 17, 2015, Jeffrey Kolb, a stockholder of the Company, notified the Company that he was nominating two candidates for election as directors at the Company's 2015 annual meeting of stockholders (the "2015 Annual Meeting"). The first nominee was Adrian Kowalewski, who served in various executive and consulting positions at the Company under Dov Charney from 2006 to 2014, including as Chief Financial Officer from 2008 to 2011, and as a director of the Company from 2007 to 2011. The second nominee was Gene Montesano, who had previously been proposed, but was then withdrawn, by Lion Capital LLP as one of its board designees in accordance with the Lion Investment Agreement. Mr. Kolb also proposed that the Company adopt a resolution that would repeal any provision of the Company's bylaws in effect at the time of the annual meeting that was not included in the Company's bylaws as of December 22, 2014.
On June 7, 2015, the Company and Mr. Kolb entered into a letter agreement pursuant to which, among other things, (i) the Company will form a new advisory committee comprised of industry executives, Company employees and other qualified personnel that will provide insights, guidance and strategic input for the Company's Chief Executive Officer ("CEO"), (ii) the Company will use reasonable efforts to identify a new independent director with significant experience as a member of senior management of retail and/or apparel companies and appoint the new director to fill a vacancy on the Company's Board of Directors (the "Board") prior to the Company's 2016 annual meeting of stockholders, and (iii) Mr. Kolb withdrew his notice of intent to nominate persons for election as directors of the Company and to present a proposal at the 2015 Annual Meeting. Gene Montesano, the co-founder of Lucky Brand Jeans and one of the candidates proposed by Mr. Kolb, will head the new advisory committee if he is willing and able to do so and has withdrawn as a candidate for election to the Board at the Company's 2015 Annual Meeting. In addition, Adrian Kowalewski, the second candidate proposed by Mr. Kolb, also informed the Company that he withdrew as a candidate for election to the Board at the Company's 2015 Annual Meeting effective as of June 7, 2015.
On June 14, 2015, a member resigned from the Board, and the Board appointed Paula Schneider, CEO, to fill that vacancy.
Liquidity, Going Concern and Management's Plan - As of June 30, 2015, the Company had $6,852 in cash, $38,412 outstanding on the Capital One Credit Facility (as defined below) and $6,143 of availability for additional borrowings as of such date. On August 11, 2015, the Company had $11,207 in cash.
As of June 30, 2015, the Company had $210,564 aggregate principal amount of senior secured notes (the "Notes") outstanding. On April 14, 2015, the Company paid $13,803 in interest on the Notes. The next scheduled interest payment on the Notes due on October 15, 2015 is approximately $13,900.

10


On March 25, 2015, the Company entered into the Sixth Amendment to the Capital One Credit Facility ("the Sixth Amendment") which (i) waived any defaults under the Capital One Credit Facility due to the failure to meet the obligation to maintain the maximum leverage ratio and minimum adjusted EBITDA required for the measurement periods ended December 31, 2014, as defined in the credit agreement, (ii) waived the obligation to maintain the minimum fixed charge coverage ratios, maximum leverage ratios and minimum adjusted EBITDA required for the twelve months ending March 31, 2015, (iii) included provisions to permit the Company to enter into the Standard General Credit Agreement (as defined in Note 7), (iv) reset financial covenants relating to maintaining minimum fixed charge coverage ratios, maximum leverage ratios and minimum adjusted EBITDA and (v) permitted the Company to borrow $15,000 under the Standard General Credit Agreement.
As of June 30, 2015, the Company was not in compliance with the minimum fixed charge coverage ratio and the minimum adjusted EBITDA covenants under the Capital One Credit Facility. For the April 1, 2015 through June 30, 2015 covenant reference period, its fixed charge coverage ratio (as defined in the Capital One Credit Facility) was 0.07 to 1.00 as compared with the covenant minimum of 0.33 to 1.00, and its adjusted EBITDA (as defined in the Capital One Credit Facility) was $4,110 as compared with the covenant minimum of $7,350.
On August 17, 2015, Capital One Business Credit Corp. ("Capital One" and such facility, the "Capital One Credit Facility") assigned its rights and obligations as a lender to a syndicate of lenders that included certain of the Company's existing creditors, including funds associated with Standard General L.P., Monarch Alternative Capital L.P., Coliseum Capital LLC and Goldman Sachs Asset Management, L.P., and was replaced by Wilmington Trust, National Association ("Wilmington Trust") as administrative agent. Additionally, on August 17, 2015, the Capital One Credit Facility was amended pursuant to an amended and restated credit agreement among the Company, the new syndicate of lenders and Wilmington Trust (the "Wilmington Trust Credit Facility"). In connection with such amendment, the syndicate of lenders received certain amendment and closing fees and reimbursement of closing expenses. The covenant violations existing at June 30, 2015 were waived under the Wilmington Trust Credit Facility.
The Wilmington Trust Credit Facility provides for a $90,000 asset-based revolving credit facility and matures on April, 4, 2018, subject to a January 15, 2018 maturity in limited circumstances. Borrowings under the Wilmington Trust Credit Facility are subject to specified borrowing base requirements which is increased by $15,000, but such $15,000 increase cannot increase the borrowing base above $60,000. Amounts repaid under the Wilmington Trust Credit Facility cannot be re-borrowed.
Borrowings currently outstanding under the Capital One Credit Facility will continue under the Wilmington Trust Credit Facility and bear interest at a LIBOR based rate plus 5.0% or a rate based on the prime rate plus 4.0%. New borrowings under the Wilmington Trust Credit Facility bear interest at a LIBOR based rate plus 7.0% or a rate based on the prime rate plus 6.0%.
On August 17, 2015, the Company also entered into amendments to the indenture agreement governing the Notes and the Standard General Loan Agreement to permit the Company to enter into the Wilmington Trust Credit Facility. See Note 7.
The Company incurred losses from operations and negative cash flows from operating activities for the six months ended June 30, 2015 and such losses might continue for the remainder of 2015. Based upon the trends occurring in the Company's operations since June 30, 2015 and through the date of this Quarterly Report on Form 10-Q ("Report"), together with the Company's current expectations and projections for the next four fiscal quarters, the Company believes that it may not have sufficient liquidity necessary to sustain operations for the next twelve months. These factors, among others, raise substantial doubt that the Company will be able to continue as a going concern.
As a result of the Capital One Credit Facility covenant default and the liquidity uncertainty described above, the Company has been working with its advisers and has begun discussions with certain key financial stakeholders to analyze potential strategic and financial alternatives, which may include, among other things, refinancing or new capital raising transactions, amendments to or restructuring of its existing indebtedness and other obligations, and consideration of other restructuring and recapitalization transactions. As of the date of this Report, substantial uncertainty exists as to the ultimate outcome of those discussions, and there are no assurances that such efforts will result in any transaction or agreement, or that any such transaction or agreement, if proposed and/or implemented, will be successful. In addition, whether or not any such transactions or agreements were implemented or successful, the Company's existing and any new investors could suffer substantial or total losses of their investment in its common stock.
The Company continues to focus on implementing a turnaround strategy and has started implementing additional operational and financial processes and disciplines to improve liquidity and profitability. On July 6, 2015, the Company announced the next phase of its strategic turnaround plan including approximately $30 million in cost-cutting initiatives over the next 18 months. Cost-cutting measures will include closing underperforming retail locations to drive productivity improvements. In connection with these store closures, the Company will streamline its workforce to reflect a smaller store footprint and general industry conditions. Going forward, the Company will look to add new stores in profitable fast-growing territories while reducing its footprint in unprofitable and over-saturated markets. The Company is also implementing initiatives to improve working capital management, which includes stronger receivables collections, inventory reductions and improved vendor management.

11


In addition, the Company continues to drive productivity from its manufacturing and distribution operations and consolidate its administrative and manufacturing functions. The Company is also implementing a merchandising calendar to improve new product assortment and availability for its retail and online stores. These new product initiatives, which did not exist during the first half of 2015, are expected to improve sales and inventory turnover at the stores. To that end, the Company added new members to the management team in the areas of planning and forecasting, operations, marketing, technology, wholesale, retail and e-commerce.
Although the Company believes it has made progress under these programs, it operates in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. The Company's cash flows are dependent upon meeting future sales growth projections and reducing certain expenses. Accordingly, there can be no assurance that the Company's planned operational improvements will be successful.
The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability of assets or the amounts of liabilities that may result should the Company be unable to continue as a going concern.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The condensed consolidated financial statements include the accounts of American Apparel, Inc. and its 100% owned subsidiaries. The condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and are presented in accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. All intercompany balances and transactions have been eliminated upon consolidation.
The financial data of the Company included herein is unaudited. The condensed consolidated financial statements do not contain certain information that was included in the annual financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014. Readers are urged to review the Company's Annual Report on Form 10-K for the year ended December 31, 2014 as well as other publicly filed documents for more complete descriptions and discussions. In the opinion of management, the condensed consolidated financial statements included herein contain all adjustments, including normal recurring adjustments, considered necessary to present fairly the Company's financial position, the results of operations, and cash flows for the periods presented. The operating results and cash flows of the interim periods presented herein are not necessarily indicative of the results to be expected for any other interim period or the full year.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The most significant estimates include: revenue recognition, inventory valuation and obsolescence; valuation and recoverability of long-lived assets, including the values assigned to goodwill, intangible assets, and property and equipment; fair value calculations, including derivative liabilities; contingencies, including accruals for the outcome of current litigation and assessments and self-insurance; and income taxes, including uncertain income tax positions and recoverability of deferred income taxes and any limitations as to net operating losses. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash (the amounts of which may, at times, exceed Federal Deposit Insurance Corporation limits on insurable amounts) and trade accounts receivable (including credit card receivables) relating substantially to the Company's U.S. Wholesale segment. Cash is managed within established guidelines, and the Company mitigates its risk by investing through major financial institutions. The Company had $5,429 and $6,361 held in foreign banks at June 30, 2015 and December 31, 2014, respectively.
Concentration of credit risk with respect to trade accounts receivable is limited by performing on-going credit evaluations of its customers and adjusting credit limits based upon payment history and the customer's current credit worthiness. The Company also maintains an insurance policy for certain customers based on a customer's credit rating and established limits. Collections and payments from customers are continuously monitored. Two customers in the Company's U.S. Wholesale segment combined accounted for 41.4% of its total trade accounts receivable as of June 30, 2015. One customer in the Company's U.S. Wholesale segment combined accounted for 16.6% of its total trade accounts receivable as of December 31, 2014. The Company maintains an allowance for doubtful accounts which is based upon historical experience and specific customer collection issues that have been identified. While bad debt expenses have historically been within expectations and allowances established, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has in the past.

12


Fair Value Measurements
The financial instruments recorded in the condensed consolidated balance sheets include cash, trade accounts receivable (including credit card receivables), accounts payable, revolving credit facilities, senior secured notes, term loans and warrants. Due to their short-term maturity, the carrying values of cash, trade accounts receivables, and accounts payable approximate their fair market values. In addition, the carrying amount of the revolving credit facility from Capital One approximates its fair value because of the variable market interest rate charged to the Company.
The Company employs a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date using the exit price. Accordingly, when market observable data is not readily available, the Company's own assumptions are used to reflect those that market participants would be presumed to use in pricing the asset or liability at the measurement date. Assets and liabilities recorded on the consolidated balance sheets at fair value are categorized based on the level of judgment associated with inputs used to measure their fair value and the level of market price observability, as follows:
Level 1 – Unadjusted quoted prices are available in active markets for identical assets or liabilities as of the reporting date.
Level 2 – Pricing inputs are other than unadjusted quoted prices in active markets, which are based on the following:
Quoted prices for similar assets or liabilities in active markets;
Quoted prices for identical or similar assets or liabilities in non-active markets; or
Either directly or indirectly observable inputs as of the reporting date.
Level 3 – Pricing inputs are unobservable and significant to the overall fair value measurement, and the determination of fair value requires significant management judgment or estimation. The valuation policies and procedures underlying are determined by the Company's accounting and finance team and are approved by the Chief Financial Officer.
In certain cases, inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Thus, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) and unobservable (Level 3). The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset or liability.
The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2, or from Level 2 to Level 3. The Company recognizes transfers between levels at either the actual date of the event or a change in circumstances that caused the transfer.
As of June 30, 2015, there were no transfers between Levels 1, 2, and 3 of the fair value hierarchy.
Summary of Significant Valuation Techniques
Level 2 Measurements:
Senior secured notes: Estimated based on quoted prices for identical senior secured notes in non-active market.
Level 3 Measurements:
Term loans: Estimated using a projected discounted cash flow analysis based on unobservable inputs including principal and interest payments and discount rate. A yield rate was estimated using yields rates for publicly traded debt instruments of comparable companies with similar features. An increase or decrease in the stock price and the discount rate assumption can significantly decrease or increase the fair value of team loans. See Note 8.
Warrants: Estimated using the Binomial Lattice option valuation model. Significant observable and unobservable inputs include stock price, exercise price, annual risk free rate, term, and expected volatility. An increase or decrease in these inputs could significantly increase or decrease the fair value of the warrant. See Notes 8 and 11.
Indefinite-lived assets - goodwill: Estimated using a projected discounted cash flow analysis based on unobservable inputs including gross profit, discount rate, working capital requirements, capital expenditures, depreciation and terminal value assumptions. An increase or decrease in the discount rate assumption and/or the terminal value assumption, in isolation, can have a significant effect on the fair value of the reporting unit.
Retail stores: Estimated using a projected discounted cash flow analysis based on unobservable inputs including gross profit and discount rate. The key assumptions used in the estimates of projected cash flows were sales, gross margins, and payroll costs.

13


These forecasts were based on historical trends and take into account recent developments as well as the Company's plans and intentions. An increase or decrease in the discount rate assumption and/or projected cash flows, in isolation, can significantly decrease or increase the fair value of the assets, which would have an effect on the impairment recorded.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial reporting basis and the respective tax basis of its assets and liabilities, and are measured using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company estimates the degree to which tax assets and credit carryforwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such tax assets and loss carryforwards is provided when it is determined that such amounts will more likely than not go unrealized. Significant weight is given to evidence that can be objectively verified. The determination to record a valuation allowance is based on the recent history of cumulative losses and current operating performance and includes an assessment of the degree to which any losses are driven by items that are unusual in nature or incurred to improve future profitability. In addition, the Company reviews changes in near-term market conditions and any other factors arising during the period which may impact its future operating results. If it becomes more likely than not that a tax asset will be realized, any related valuation allowance of such assets would be reversed.
Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. Management believes that adequate provisions have been made for all years, but the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company's tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs.
The Company's foreign domiciled subsidiaries are subject to foreign income taxes on earnings in their respective jurisdictions. The Company elected to have its foreign subsidiaries, except for its subsidiaries in Brazil, Canada, China, Ireland, Italy, South Korea, and Spain, consolidated in the Company's U.S. federal income tax return. The Company is generally eligible to receive tax credits on its U.S. federal income tax return for most of the foreign taxes paid by the Company's subsidiaries included in the U.S. federal income tax return.
For financial statement purposes, the Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. Once this threshold has been met, the Company's measurement of its expected tax benefits is recognized in its financial statements. Gross unrecognized tax benefits are included in current liabilities in the consolidated balance sheets, and interest and penalties on unrecognized tax benefits are recorded in the income tax provision in the consolidated statements of operations.
Recently Issued Accounting Standards
On July 22, 2015, the Financial Accounting Standards Board ("FASB") issued a new standard that requires entities to measure most inventory "at the lower of cost and net realizable value," thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The new standard will not apply to inventories that are measured by using either the last-in, first-out (LIFO) method or the retail inventory method. The new standard will be effective for fiscal years beginning after December 15, 2016, and interim periods in fiscal years beginning after December 15, 2016. The Company is in the process of evaluating the impact of adoption on its condensed consolidated financial statements.
In April 2015, the FASB issued a new standard that requires an entity to determine whether a cloud computing arrangement contains a software license. If the arrangement contains a software license, the entity would account for the fees related to the software license element in a manner consistent with how the acquisition of other software licenses is accounted for. If the arrangement does not contain a software license, the customer would account for the arrangement as a service contract. The new standard will be effective for fiscal years beginning after December 15, 2015, and interim periods in fiscal years beginning after December 15, 2016. The Company is in the process of evaluating the impact of adoption on its condensed consolidated financial statements.
In April 2015, the FASB issued a new standard on simplifying the presentation of debt issuance costs. The new standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this new standard. The new standard will be effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company is in the process of evaluating the impact of adoption on its condensed consolidated financial statements.
Other recently issued accounting standards are not expected to have a material effect on the Company's condensed consolidated financial statements.

14


Note 3. Inventories
The components of inventories are as follows:  
 
June 30, 2015
 
December 31, 2014
Raw materials
$
20,313

 
$
17,738

Work in process
2,394

 
2,805

Finished goods
101,156

 
135,813

 
123,863

 
156,356

Less reserve for inventory shrinkage and obsolescence
(8,902
)
 
(8,778
)
Total, net of reserves
$
114,961

 
$
147,578

Inventories consist of material, labor, and overhead, and are stated at the lower of cost or market. Cost is primarily determined on the first-in, first-out (FIFO) method. No supplier provided more than 10% of the Company's raw material purchases as of June 30, 2015 and December 31, 2014.
The Company identifies potentially excess and slow-moving inventories by evaluating turn rates, inventory levels and other factors and records lower of cost or market reserves for such identified excess and slow-moving inventories. The Company also establishes reserves for inventory shrinkage for each of its retail locations and warehouse based on the historical results of physical inventory cycle counts.
The Company had a lower of cost or market reserves for excess and slow-moving inventories of $7,112 and $6,684 at June 30, 2015 and December 31, 2014, respectively. As part of its valuation analysis of inventory, the Company identified certain slow-moving, second quality finished goods and raw materials inventory for additional reserves in the fourth quarter of 2014. Inventory shrinkage reserves were $1,790 and $2,094 as of June 30, 2015 and December 31, 2014, respectively.
Note 4. Property and Equipment
Depreciation and amortization expense relating to property and equipment (including capitalized leases) is recorded in cost of sales and general and administrative expenses in the consolidated statements of operations. Depreciation and amortization expenses were $5,395 and $6,703 for the three months ended June 30, 2015 and 2014, respectively, and $10,727 and $13,418 for the six months ended June 30, 2015 and 2014, respectively.
Based on its retail store impairment analysis, the Company recorded impairment charges of $3,120 and $229 for the three months ended June 30, 2015 and 2014, respectively, and $3,178 and $728 for the six months ended June 30, 2015 and 2014, respectively.
Note 5. Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities are as follows:
 
June 30, 2015
 
December 31, 2014
Compensation, bonuses and related taxes
$
11,917

 
$
13,026

Accrued interest
6,916

 
5,932

Workers' compensation and other self-insurance reserves (Note 14)
7,348

 
6,760

Taxes and duties
6,155

 
6,102

Gift cards and store credits
7,282

 
8,462

Loss contingencies
1,056

 
2,360

Deferred revenue
503

 
962

Deferred rent
4,162

 
3,422

Other
13,629

 
14,343

Total accrued expenses and other current liabilities
$
58,968

 
$
61,369


15


Note 6. Revolving Credit Facilities and Current Portion of Long-Term Debt
The following table presents revolving credit facilities and current portion of long-term debt:
 
Lender
 
Expiration
 
June 30, 2015
 
December 31, 2014
Revolving credit facility
Capital One
 
April 14, 2018
 
$
38,412

 
$
34,299

Current portion of long-term debt
 
 
 
 
12

 
13

Total
 
 
 
 
$
38,424

 
$
34,312

The Company incurred interest expense of $10,467 and $10,019 for the three months ended June 30, 2015 and 2014, respectively, and $20,248 and $20,058 for the six months ended June 30, 2015 and 2014, respectively, for all outstanding borrowings. None of the interests are subject to capitalization for the three and six months ended June 30, 2015 and 2014.
Revolving Credit Facility - Wilmington Trust
On August 17, 2015, Capital One assigned its rights and obligations as a lender to a syndicate of lenders that included certain of the Company's existing creditors, including funds associated with Standard General L.P., Monarch Alternative Capital L.P., Coliseum Capital LLC and Goldman Sachs Asset Management, L.P., and was replaced by Wilmington Trust, National Association ("Wilmington Trust") as administrative agent. Additionally, on August 17, 2015, the Capital One Credit Facility was amended pursuant to an amended and restated credit agreement among the Company, the new syndicate of lenders and Wilmington Trust (the "Wilmington Trust Credit Facility"). In connection with such amendment, the syndicate of lenders received certain amendment and closing fees and reimbursement of closing expenses.
The Wilmington Trust Credit Facility provides for a $90,000 asset-based revolving credit facility and matures on April, 4, 2018, subject to a January 15, 2018 maturity in limited circumstances. Borrowings under the Wilmington Trust Credit Facility are subject to specified borrowing base requirements which is increased by $15,000, but such $15,000 increase cannot increase the borrowing base above $60,000. Amounts repaid under the Wilmington Trust Credit Facility cannot be re-borrowed.
Borrowings currently outstanding under the Capital One Credit Facility will continue under the Wilmington Trust Credit Facility and bear interest at a LIBOR based rate plus 5.0% or a rate based on the prime rate plus 4.0%. New borrowings under the Wilmington Trust Credit Facility bear interest at a LIBOR based rate plus 7.0% or a rate based on the prime rate plus 6.0%, and was subject to specified borrowing requirements and covenants.
The Wilmington Trust Credit Facility is secured by a lien on substantially all of the assets of the Company's and its domestic subsidiaries, subject to some restrictions. Among other provisions, the Wilmington Trust Credit Facility requires that the Company maintain a lockbox arrangement and contains certain subjective acceleration clauses. In addition, the Wilmington Trust Credit Facility may at its discretion, adjust the advance restrictions and criteria for eligible inventory and accounts receivable. The Wilmington Trust Credit Facility contains cross-default provisions whereby an event of default under the indenture governing the Notes or other indebtedness, in each case of an amount greater than a specified threshold, would cause an event of default under the Wilmington Trust Credit Facility. If an event of default occurs and is continuing under the Wilmington Trust Credit Facility, the Wilmington Trust Credit Facility may, among other things, terminate the obligations of the lenders to make loans, and the obligation of the letter of credit issuer to make letter of credit extensions, and require the Company to repay all outstanding amounts.
On August 17, 2015, the Company also entered into amendments to the indenture agreement governing the Notes and the Standard General Loan Agreement to permit the Company to enter into the Wilmington Trust Credit Facility. See Note 7.
Revolving Credit Facility - Capital One
As of June 30, 2015, the Company was party to a credit agreement, maturing on April 4, 2018, with Capital One, and other lenders party thereto, that provided the Company with a $50,000 asset-backed revolving credit facility.
The Company had $38,412 and $34,299 outstanding the Capital One Credit Facility as of June 30, 2015 and December 31, 2014, respectively. Additionally, as of June 30, 2015, the Company had $1,080 of outstanding letters of credit secured against the Capital One Credit Facility. The amount available for additional borrowings on June 30, 2015 was $6,143. As of June 30, 2015, interest rates on borrowings under the Capital One Credit Facility were equal to LIBOR plus 5.0% or the bank's prime rate plus 4.0% at the Company's option and was subject to specified borrowing requirements and covenants.
On March 25, 2015, the Company entered into the Six Amendment which (i) waived any defaults under the Capital One Credit Facility due to the failure to meet the obligation to maintain the maximum leverage ratio and minimum adjusted EBITDA required for the measurement periods ended December 31, 2014, as defined in the credit agreement, (ii) waived the obligation to maintain the minimum fixed charge coverage ratios, maximum leverage ratios and minimum adjusted EBITDA required for the twelve months ended March 31, 2015, (iii) included provisions to permit the Company to enter into the Standard General Credit Agreement (as

16


defined in Note 7), (iv) reset financial covenants relating to maintaining minimum fixed charge coverage ratios, maximum leverage ratios and minimum adjusted EBITDA and (v) permitted the Company to borrow $15,000 under the Standard General Credit Agreement.
As of June 30, 2015, the Company was not in compliance with the minimum fixed charge coverage ratio and the minimum adjusted EBITDA covenants under the Capital One Credit Facility. For the April 1, 2015 through June 30, 2015 covenant reference period, its fixed charge coverage ratio (as defined in the Capital One Credit Facility) was 0.07 to 1.00 as compared with the covenant minimum of 0.33 to 1.00, and its adjusted EBITDA (as defined in the Capital One Credit Facility) was $4,110 as compared with the covenant minimum of $7,350.
On August 17, 2015, the Company replaced the Capital One Credit Facility with the Wilmington Trust Credit Facility. The covenant violations existing at June 30, 2015 were waived under the Wilmington Trust Credit Facility.
Note 7. Long-Term Debt
Long-term debt consists of the following:
 
June 30, 2015
 
December 31, 2014
Senior Secured Notes due 2020 (a)
$
210,564

 
$
208,084

Standard General Loan Agreement (b)
9,095

 
9,049

Standard General Credit Agreement
15,000

 
0

Other
248

 
268

Total long-term debt
234,907

 
217,401

Current portion of debt
(12
)
 
(13
)
Long-term debt, net of current portion
$
234,895

 
$
217,388

______________________
(a) Includes accrued interest paid in-kind of $9,366 and $7,233 and net of unamortized discount of $4,802 and $5,149 at June 30, 2015 and December 31, 2014, respectively.
(b) Net of unamortized discount of $770 and $816 at June 30, 2015 and December 31, 2014, respectively.
      
Senior Secured Notes due 2020
The Company has outstanding Notes issued at 97% of the $206,000 par value on April 4, 2013. The Notes mature on April 15, 2020 and bear interest at 15% per annum, of which 2% is payable in-kind until April 14, 2018 and in cash on subsequent interest dates. On April 14, 2015, the Company paid $13,803 in interest on the Notes. The scheduled interest payment on the Notes due on October 15, 2015 is approximately $13,900.
On or after April 15, 2017, the Company may, at its option, redeem some or all of the Notes at a premium, decreasing ratably over time to zero as specified in the Indenture, plus accrued and unpaid interest to, but not including, the redemption date. Prior to April 15, 2017, the Company may, at its option, redeem up to 35% of the aggregate principal amount of the Notes with the net cash proceeds of certain equity offerings at a redemption price of 113% of the aggregate principal amount of the redeemed notes plus accrued and unpaid interest to, but not including, the redemption date. In addition, at any time prior to April 15, 2017, the Company may, at its option, redeem some or all of the Notes by paying a "make whole" premium, plus accrued and unpaid interest to, but not including, the redemption date. If the Company experiences certain change of control events, the holders of the Notes will have the right to require the Company to purchase all or a portion of the Notes at a price in cash equal to 101% of the principal amount of such Notes, plus accrued and unpaid interest to, but not including, the date of purchase. In addition, the Company is required to use the net proceeds of certain asset sales, if not used for specified purposes, to purchase some of the Notes at 100% of the principal amount, plus accrued and unpaid interest to, but not including, the date of purchase. On each interest payment date after April 4, 2018, the Company will be required to redeem, for cash, a portion of each Note then outstanding equal to the amount necessary to prevent such Note from being treated as an "applicable high yield discount obligation" within the meaning of the Internal Revenue Code. The redemption price will be 100% of the principal amount plus accrued and unpaid interest thereon on the date of redemption.
The Notes are guaranteed, jointly and severally, on a senior secured basis by the Company's existing and future domestic subsidiaries. The Notes and the related guarantees are secured by a first-priority lien on the Company's and its domestic subsidiaries' assets (other than the Credit Facility Priority Collateral, as defined below, subject to some exceptions and permitted liens). The Notes and the related guarantees also are secured by a second-priority lien on all of Company's and its domestic subsidiaries' cash, trade accounts receivable, inventory and certain other assets (collectively, the "Credit Facility Priority Collateral"), subject to certain exceptions and permitted liens. The Notes and the guarantees, respectively, rank equal in right of payment with the Company's and its domestic subsidiaries' senior indebtedness, including indebtedness under the Capital One Credit Facility, before giving effect to collateral arrangements.

17


The Notes impose certain limitations on the ability of the Company and its domestic subsidiaries to, among other things, and subject to a number of important qualifications and exceptions, incur additional indebtedness or issue disqualified capital stock or preferred stock (with respect to restricted subsidiaries), grant liens, make payments in respect of their capital stock or certain indebtedness, enter into transactions with affiliates, create dividend or other payment restrictions affecting subsidiaries, merge or consolidate with any other person, sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its assets or adopt a plan of liquidation. The Company must annually report to the trustee on compliance with such limitations. The Notes also contain cross-default provisions whereby a payment default or acceleration of any indebtedness in an aggregate amount greater than a specified threshold would cause an event of default with respect to the Notes.
On August 17, 2015, the Company also entered into an amendment to the indenture agreement governing the Notes to permit the Company to enter into the Wilmington Trust Credit Facility. See Note 6.
As of June 30, 2015, the Company was in compliance with the covenants of the Indenture.
Standard General Loan Agreement
On July 16, 2014, Lion Capital LLP ("Lion") assigned its rights and obligations as a lender to an entity affiliated with Standard General (the "Standard General Loan Agreement"). On September 8, 2014, the Company entered into an amendment of the Standard General Loan Agreement to lower the applicable interest rate to 17%, extend the maturity to April 15, 2021, and make certain other technical amendments. The principal amount of the term loan is $9,865. Interest under the loan agreement is payable quarterly in cash or, to the extent permitted by the Company's other debt agreements, in-kind.
The Standard General Loan Agreement contains cross-default provisions whereby a payment default or acceleration of any indebtedness in an aggregate amount greater than a specified threshold would cause an event of default.
On August 17, 2015, in connection with the Wilmington Trust Credit Facility, the Company entered into the Third Amendment to the Standard General Loan Agreement ("the Third Amendment") which amends certain provision of the Standard General Loan Agreement to permit the transaction contemplated by the Wilmington Trust Credit Facility and provides for the payment of consent fees and certain releases and equity registration rights in favor of Standard General.
Standard General Credit Agreement
On March 25, 2015, as contemplated by the Standstill Agreement, one of the Company's subsidiaries borrowed $15,000 under an unsecured credit agreement with Standard General (the "Standard General Credit Agreement"). The Standard General Credit Agreement is guaranteed by the Company, bears interest at 14% per annum, and will mature on October 15, 2020. Interest under the credit agreement is payable quarterly in cash or, to the extent permitted by the Company's other debt agreements, in-kind.
The Standard General Credit Agreement contains customary defaults, including cross events of default with respect to defaults under the Notes and the Standard General Loan Agreement and cross acceleration to other indebtedness above a threshold amount.
If the Company experiences certain change of control events, the Company is required to offer to prepay the Standard General Credit Agreement at 101% of the outstanding principal amount plus accrued and unpaid interest on the date of the prepayment. The Company will be required to prepay loans under the Standard General Credit Agreement to the extent necessary to avoid the loan being characterized as an "applicable high yield discount obligation" within the meaning of the Internal Revenue Code by June 30, 2020.
Note 8. Fair Value of Financial Instruments
The Company's financial instruments at fair value are measured on a recurring basis. Related unrealized gains or losses are recognized in unrealized (gain) loss on change in fair value of warrants in the consolidated statements of operations. For additional disclosures regarding methods and assumptions used in estimating fair values of these financial instruments, see Note 2.

18


The following tables present carrying amounts and fair values of the Company's financial instruments as of June 30, 2015 and December 31, 2014, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. The Company did not have any assets or liabilities categorized as Level 1 as of June 30, 2015.
 
 
June 30, 2015
 
 
Carrying Amount
 
Fair Value
Senior Secured Notes due 2020
Level 2 Liability
$
210,564

 
$
190,655

Standard General Loan Agreement
Level 3 Liability
9,095

 
9,198

Standard General Credit Agreement
Level 3 Liability
15,000

 
14,251

Lion Warrant
Level 3 Liability
(a)

 
7,318

 
 
$
234,659

 
$
221,422

 
 
 
 
 
 
 
December 31, 2014
 
 
Carrying Amount
 
Fair Value
Senior Secured Notes due 2020
Level 2 Liability
$
208,084

 
$
211,538

Standard General Loan Agreement
Level 3 Liability
9,049

 
8,868

Lion Warrant
Level 3 Liability
(a)

 
19,239

 
 
$
217,133

 
$
239,645

______________________
(a) No cost is associated with these liabilities (see Note 11).

The following table presents a summary of changes in fair value of the Lion Warrant (Level 3 financial liabilities), which are marked to market on a recurring basis:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Beginning balance
$
11,731

 
$
8,287

 
$
19,239

 
$
20,954

Adjustments included in earnings (a)
(4,413
)
 
8,202

 
(11,921
)
 
(4,465
)
Balance at June 30
$
7,318

 
$
16,489

 
$
7,318

 
$
16,489

______________________
(a) The amount of total gains or losses for the period attributable to the change in unrealized gains or losses relating to liabilities held at the reporting date. The unrealized gains or losses are recorded in unrealized (gain) loss on change in fair value of warrants in the consolidated statements of operations.
At June 30, 2015, the Company did not have any nonrecurring fair value measurements of nonfinancial assets or nonfinancial liabilities.
Note 9. Income Taxes
Income taxes for the three and six months ended June 30, 2015 and 2014 were computed using an effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management.
The Company incurred losses from operations for the three and six months ended June 30, 2015 and 2014. Based upon these results and the recent history of cumulative losses for the prior three years, as well as trends in the Company's performance projected through 2015, the Company's management believes that it is more likely than not deferred tax assets in certain jurisdictions are not fully realizable. Accordingly, the Company will not record any income tax benefits in the condensed consolidated financial statements until it is determined that the Company will generate sufficient taxable income in the respective jurisdictions to realize the deferred income tax assets. As a result of the analysis, the Company determined that a full valuation allowance against the net deferred tax assets in certain jurisdictions, primarily in the U.S., and partial valuation allowances in certain foreign jurisdictions, is required.
The Company is subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions. Tax years that remain subject to examination by the Internal Revenue Service are 2012 through 2014. The Company's state and foreign tax returns are open to audit for the calendar years 2010 through 2014.

19


Note 10. Related Party Transactions
Personal Guarantees by Mr. Charney
As of June 30, 2015, Mr. Charney personally guaranteed the Company's obligations under two property leases aggregating $4,059.
Lease Agreement between the Company and a Related Party
The Company has an operating lease expiring in November 2016 for its knitting facility with American Central Plaza LLC, which is partially owned by Mr. Charney and Marty Bailey, the Company's Chief Manufacturing Officer. Mr. Charney holds an 18.75% ownership interest in American Central Plaza LLC while Mr. Bailey holds a 6.25% interest. The remaining members of American Central Plaza LLC are not affiliated with the Company. Rent expenses (including property taxes and insurance payments) related to this lease were $156 and $207 for three months ended June 30, 2015 and 2014, respectively, and $311 for both the six months ended June 30, 2015 and 2014.
Agreements between Mr. Charney and Standard General
As of June 30, 2015, Mr. Charney owned 40.9% of the Company's outstanding common stock, and Mr. Charney and Standard General collectively controlled the right to vote such common stock as described below.
On June 25, 2014, Mr. Charney entered into a letter agreement with Standard General in which, if Standard General was able to acquire at least 10% of the Company's outstanding shares, Standard General would loan Mr. Charney the funds needed for him to purchase those acquired shares from Standard General (the "SG-Charney Loan"). Between June 26, 2014 and June 27, 2014, Standard General acquired 27,351 of the Company's outstanding shares, and Mr. Charney purchased those shares at a price of $0.715 per share using the proceeds from the SG-Charney Loan. According to Mr. Charney's Schedule 13D/A, dated June 25, 2014, the loan bears interest at 10% per annum, payable in-kind and matures on July 15, 2019, with no prepayment penalty. The loan is collateralized by the newly acquired shares as well as by Mr. Charney's original shares of the Company's outstanding common stock.
According to Mr. Charney's Schedule 13D/A, dated June 25, 2014, on July 9, 2014, Mr. Charney and Standard General, on behalf of one or more of its funds, entered into a cooperation agreement, which provides, among other things, that neither Mr. Charney nor Standard General will vote the common stock owned by Mr. Charney except in a manner approved by the parties in writing, except that, notwithstanding the terms of the Standstill Agreement, Mr. Charney may vote certain of his shares in favor of his own election to the Board and may vote all of such shares pursuant to the Investment Voting Agreement, dated March 13, 2009. In the Standstill Agreement, however, Mr. Charney agreed not to serve as a director, officer, or employee of the Company. In addition, Mr. Charney agreed to enter into warrant agreements with Standard General that would give Standard General the right exercisable, on or prior to July 15, 2017, to purchase from Mr. Charney 32,072 shares (consisting of the 27,351 shares purchased by using the proceeds from the SG-Charney Loan and 10% of Mr. Charney's 47,209 original shares).
Warrants held by Lion
See Note 11 for a description of the warrants issued by the Company to Lion.
Loans held by Standard General
See Note 7 for a description of the Standard General Loan Agreement assigned to Standard General on July 16, 2014 and Standard General Credit Agreement between the Company and Standard General in March 2015.
Note 11. Stockholders' Deficit
Rights Plan
On December 21, 2014, the Board adopted a stockholders rights plan, as amended (the "Rights Plan"). Under the Rights Plan, the Company declared a dividend of one preferred share purchase right for each share of its common stock held by shareholders of record as of January 2, 2015. Each right entitles the registered holder to purchase from the Company a unit consisting of one ten-thousandth of a share (a "Unit") of Series B Junior Participating Preferred Stock, par value $0.0001 per share, at a purchase price of $3.25 per Unit, subject to adjustment.
At-The-Market Offering
On May 11, 2015, the Company commenced a $10,000 "at-the-market" offering program. Under the program, the Company may, from time to time and at its discretion, offer and sell shares of its common stock having an aggregate gross sales price of up to $10,000 (but in no event more than 15,000 shares). The Company has used the net proceeds generated through the program for working capital and general corporate purposes. As of June 30, 2015, the Company had issued 4,121 shares of its common stock for net proceeds of $1,998. Sales of common stock under the "at-the-market" offering program are at the Company's sole discretion

20


and subject to the terms and conditions of the sales agreement related thereto, and there are no assurances that such sales will continue in the future.
Common Stock Warrants
Lion-held warrants (the "Lion Warrants") contain certain anti-dilution protections in favor of Lion providing for proportional adjustment of the warrant price and, under certain circumstances, the number of shares of the Company's common stock issuable upon exercise of the Lion Warrants, in connection with, among other things, stock dividends, subdivisions and combinations and the issuance of additional equity securities at less than fair market value, as well as providing for the issuance of additional warrants to Lion in the event of certain equity sales or debt for equity exchanges.
As a result of the at-the-market offering program, Lion received the right to purchase an additional 12 shares of the Company's common stock with an adjusted exercise price of all of the Lion Warrants at $0.66. Such adjustments were required by the terms of the existing Lion warrants.
As of June 30, 2015, the fair value of the 24,523 Lion Warrants, estimated using the Binomial Lattice option valuation model, was $7,318 and was recorded as a current liability in the consolidated balance sheets. The calculation assumed a stock price of $0.49, exercise price of $0.66, volatility of 71.31%, annual risk free interest rate of 2.07%, a contractual remaining term of 6.7 years and no dividends. These warrants will expire on February 18, 2022.
The following table presents a summary of common stock warrants activity as of June 30, 2015:
 
Shares
(in thousands)
 
Weighted-Average Exercise Price
 
Weighted-Average Contractual Life
(in years)
Outstanding - January 1, 2015
24,511

 
$
0.66

 
7.2
Issued (a)
24,523

 
$
0.66

 
6.7
Forfeited (a)
(24,511
)
 
$
0.66

 
 
Expired
0

 
 
 
 
Outstanding - June 30, 2015
24,523

 
$
0.66

 
6.7
Fair value - June 30, 2015
$
7,318

 
 
 
 
______________________
(a) Issued and forfeited warrants represent repriced shares.
Earnings Per Share
The Company presents earnings per share ("EPS") utilizing a dual presentation of basic and diluted EPS. Basic EPS excludes dilution and reflects net loss divided by the weighted-average shares of common stock outstanding for the period presented. Diluted EPS includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
The Company had common stock under various options, warrants and other agreements at June 30, 2015 and December 31, 2014. The effects of approximately 33,403 and 40,018 shares at June 30, 2015 and 2014, respectively, were excluded from the calculation of net loss per share for three and six months ended June 30, 2015 and 2014 because their impact would have been anti-dilutive.
A summary of the potential stock issuances under various options, warrants and other agreements that could have a dilutive effect on the shares outstanding are as follows:
 
June 30,
 
2015
 
2014
Lion warrants
24,523

 
24,511

Shares issuable to Mr. Charney based on market conditions (a)
6,806

 
13,611

Employee options and restricted shares
2,074

 
1,896

 
33,403

 
40,018

______________________
(a) Charney Anti-Dilution Rights pursuant to the April 26, 2011 Investor Purchase Agreement, of which each 6,805 expired unexercised on April 15, 2015 and 2014 (Note 12).

21


Note 12. Share-Based Compensation
The American Apparel, Inc. 2011 Omnibus Stock Incentive Plan (the "2011 Plan") authorizes the granting of a variety of incentive awards, the exercise or vesting of which would allow up to an aggregate of 17,500 shares of the Company's common stock to be acquired by the holders of such awards and authorizes up to 3,000 shares that may be awarded to any one participant during any calendar year. The purpose of the 2011 Plan is to provide an incentive to selected employees, directors, independent contractors, and consultants of the Company or its affiliates, and provides that the Company may grant options, stock appreciation rights, restricted stock, and other stock-based and cash-based awards. As of June 30, 2015, there were 9,949 shares available for future grants under the 2011 Plan.
The Company had identified a clerical discrepancy in its records pertaining to the total historic number of shares issued in connection with grants of common stock to employees under its stock incentive plans, which resulted in an immaterial adjustment to issued and outstanding shares as of June 30, 2015.
Restricted Share Awards - The following table presents a summary of the restricted share awards activity as of June 30, 2015:
 
Shares
(in thousands)
 
Weighted-Average Grant Date Fair Value Per Share
 
Weighted-Average Remaining Vesting Period (in years)
Non-vested - January 1, 2015
103

 
$
1.17

 
0.3
Granted
265

 
$
0.60

 
 
Vested
(191
)
 
$
0.87

 
 
Forfeited
(8
)
 
$
1.88

 
 
Non-vested - June 30, 2015
169

 
$
0.58

 
0.0
On January 2, 2015, the Company issued quarterly stock grants to six directors for services performed ranging from approximately 10 to 19 shares each based on grant date fair value of $1.05 per share. On April 2, 2015, the Company issued quarterly stock grants to six directors for services performed ranging from approximately 15 to 29 shares each based on the grant date fair value of $0.69 per share. On July 10, 2015, the Company issued quarterly stock grants to six directors for services performed ranging from approximately 16 to 38 shares each based on the grant date fair value of $0.52 per share.
Vesting of the restricted share awards is immediate in the case of members of the Board. Share-based compensation is recognized over the vesting period based on the grant-date fair value.
Restricted Stock Units - The following table presents a summary of the restricted stock units activity as of June 30, 2015:
 
Shares
(in thousands)
 
Weighted-Average Grant Date Fair Value Per Share
 
Weighted-Average Remaining Vesting Period (in years)
Non-vested - January 1, 2015
0

 
$
0.00

 
0.0
Granted
1,123

 
$
0.71

 
 
Vested
(191
)
 
$
0.71

 
 
Forfeited
0

 
$
0.00

 
 
Non-vested - June 30, 2015
932

 
$
0.71

 
1.8
On March 30, 2015, the Company granted 973 shares of restricted stock units to certain employees under the 2011 Plan. These awards will vest, subject to each employee's continued service, over three years, with one-third of the total number of shares subject to each award vesting on the first anniversary of the date of grant. In addition, the Company granted a one-time award of restricted stock units for 150 shares of common stock each to three senior management in recognition of their services to the Company, which vested on April 15, 2015. The fair value of the restricted share grant was determined based on the market price on the date of grant. Share-based compensation is recognized over the vesting period based on the grant-date fair value.

22


Stock Option Awards - The following table presents a summary of the stock option activity as of June 30, 2015:
 
Shares
(in thousands)
 
Weighted-Average Exercise Price
 
Weighted-Average Contractual Remaining Life
(in years)
 
Aggregate Intrinsic Value (in thousands)
Outstanding - January 1, 2015
0

 
$
0.00

 
0.0
 
 
Granted
973

 
$
0.71

 
 
 
 
Exercised
0

 
$
0.00

 
 
 
 
Forfeited
0

 
$
0.00

 
 
 
 
Expired
0

 
$
0.00

 
 
 
 
Outstanding - June 30, 2015
973

 
$
0.71

 
9.4
 
$
0

Vested - June 30, 2015
41

 
$
0.71

 
0.2
 
$
0

Non-vested - June 30, 2015
932

 
$
0.71

 
9.8
 
$
0

On March 30, 2015, the Company awarded stock options for 973 shares of its common stock to certain employees under the 2011 Plan. These awards will vest, subject to each employee's continued service, over three years, with one-third of the total number of shares subject to each award vesting on the first anniversary of the date of grant, and remain exercisable for ten years from the date of grant. The fair value of the stock option awards is estimated using the Black-Scholes option pricing model at the grant date.
The fair value of stock options granted during the six months ended June 30, 2015 was $375. The calculation assumed a stock price of $0.71, exercise price of $0.71, volatility of 60.59%, annual risk free interest rate of 0.93%, expected option life of six years and no dividends.
Share-Based Compensation Expense - The Company recorded share-based compensation expenses of $311 and $1,543 for the three months ended June 30, 2015 and 2014, respectively, and $414 and $2,658 for the six months ended June 30, 2015 and 2014, respectively, related to its share-based compensation awards that are expected to vest. No amounts have been capitalized. As of June 30, 2015, unrecorded compensation cost related to non-vested awards was $936, which is expected to be recognized over a weighted average period of 1.8 years.
Mr. Charney Anti-Dilution Rights - On December 16, 2014, the Board terminated Dov Charney for cause in accordance with the terms of his employment agreement. Despite the termination, the unexercised anti-dilution rights remain exercisable under the 2011 Investor Purchase Agreement but are immediately vested. The remaining unrecognized compensation cost of $233 was recognized as of December 31, 2014. The Company determined that the issuing requirements for the first and second measurement periods were not met and each 6,805 anti-dilution rights expired unexercised on April 15, 2015 and 2014.
Note 13. Commitments and Contingencies
Operating Leases
The Company conducts retail operations under operating leases that expire at various dates through 2034. The Company's primary manufacturing facilities and executive offices are currently under a long-term lease that expires on July 31, 2019. The rent expenses (including real estate taxes and common area maintenance costs) were $16,835 and $18,328 for the three months ended June 30, 2015 and 2014, respectively, and $33,730 and $37,340 for the six months ended June 30, 2015 and 2014. The Company did not incur any significant contingent rent during these periods. Rent expense is allocated to cost of sales for production-related activities, selling expenses for retail stores, and the remainder to general and administrative expenses in the consolidated statements of operations.
Real Estate Matter
On July 27, 2015, the Company entered into a second amendment to the lease agreement for its headquarters and manufacturing facility in Los Angeles, California, resolving certain alleged breaches under the lease agreement with the landlord. Under the terms of the amendment, the Company will vacate one of the leased buildings (an under-utilized building not occupied by any manufacturing or distribution operations) by April 1, 2016, which, assuming timely payments, would result in a fifty percent, or $2,100, reduction in annual base rent starting on April 1, 2016. Additionally, the amendment reduces certain rent, fees, interest and reimbursements incurred primarily from the first half of 2014 from $2,995 to $1,800, which will be paid in eleven monthly installments from April 1, 2016 through February 1, 2017.

23


Advertising
The Company had approximately $745 in open advertising commitments at June 30, 2015, which were primarily allocated among print advertisements in newspapers, magazines and outdoor advertising. The majority of these commitments are expected to be paid during the remainder of 2015.
Note 14. Workers' Compensation and Other Self-Insurance Reserves
The Company uses a combination of third-party insurance and self-insurance for a number of risks including workers' compensation, medical benefits provided to employees, and general liability claims. General liability primarily relates to litigation that arises from store operations.
Estimating liability is a difficult process as many factors can ultimately affect the final settlement of a claim and, therefore, the reserve required. Changes in future inflation rates, litigation trends, legal interpretations, benefit levels, and settlement patterns, among other factors, can impact ultimate claim costs. The Company estimates liability by utilizing loss development factors based on its specific data to project the future development of incurred losses. Loss estimates are adjusted based upon actual claim settlements and reported claims. Although the Company does not expect ultimate claim costs to significantly differ from its estimates, self-insurance reserves could be affected if actual developed claims fluctuate considerably from the historical trends and the assumptions applied. The Company's estimated claims are discounted using a rate of 1.55% with a duration that approximates the duration of its self-insurance reserve portfolio. The undiscounted liabilities were $21,811 and $20,409 as of June 30, 2015 and December 31, 2014, respectively.
The workers' compensation liability is based on an estimate of losses for claims incurred but not paid at the end of the period. Funding is made directly to the providers and/or claimants by the insurance company. To guarantee performance under the workers' compensation program, the Company issued standby letters of credit of $300 in favor of insurance companies' beneficiaries as of both June 30, 2015 and December 31, 2014, and cash deposits of $19,499 and $16,124 in favor of insurance company beneficiaries as of June 30, 2015 and December 31, 2014, respectively. At June 30, 2015, the Company recorded a total reserve of $20,893, of which $5,734 is included in accrued expenses and $15,159 is included in other long-term liabilities on the consolidated balance sheets. At December 31, 2014, the Company recorded a total reserve of $19,560, of which $5,321 is included in accrued expenses and $14,239 is included in other long-term liabilities on the consolidated balance sheets.
The Company self-insures its health insurance benefit obligations while the claims are administered through a third party administrator. The medical benefit liability is based on estimated losses for claims incurred but not paid at the end of the period. Funding is made directly to the providers and/or claimants by the insurance company. The Company's total reserve of $1,614 and $1,439 was included in accrued expenses in the consolidated balance sheets at June 30, 2015 and December 31, 2014, respectively.
Note 15. Business Segment and Geographic Area Information
The Company reports the following four operating segments based on the management approach: U.S. Wholesale, U.S. Retail, Canada, and International. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company's reportable segments.
The U.S. Wholesale segment consists of the Company's wholesale operations of undecorated apparel products sold to distributors and third party screen printers in the U.S. as well as its online consumer sales. The Retail segment consists of the Company's retail operations in the U.S., which comprised 133 retail stores as of June 30, 2015. The Canada segment includes wholesale, retail, and online consumer operations in Canada. As of June 30, 2015, the retail operations in the Canada segment comprised 30 retail stores. The International segment includes wholesale, retail, and online consumer operations outside of the U.S. and Canada. As of June 30, 2015, the retail operations in the International segment comprised 74 retail stores operating in 18 countries outside the U.S. and Canada. All of the Company's retail stores sell its apparel products directly to consumers.
The Company evaluates performance of its operating segments primarily based on net sales and operating income or loss from operations. Operating income or loss for each segment does not include corporate general and administrative expenses, interest expense and other miscellaneous income/expense items. Corporate general and administrative expenses include, but are not limited to, human resources, legal, finance, information technology, accounting, executive compensation and various other corporate level expenses.

24


The following tables present key financial information of the Company's reportable segments before unallocated corporate expenses:
 
Three Months Ended June 30, 2015
 
U.S. Wholesale 
 
U.S. Retail
 
Canada
 
International
 
Consolidated
Wholesale net sales
$
44,701

 
$
0

 
$
1,932

 
$
1,871

 
$
48,504

Retail net sales
0

 
40,643

 
7,718

 
25,956

 
74,317

Online consumer net sales
7,604

 
0

 
549

 
3,420

 
11,573

Total net sales to external customers
52,305

 
40,643

 
10,199

 
31,247

 
134,394

Gross profit
12,311

 
25,974

 
5,317

 
17,944

 
61,546

Income (loss) from segment operations
7,364

 
(2,105
)
 
191

 
(1,991
)
 
3,459

Depreciation and amortization
2,043

 
2,007

 
209

 
1,136

 
5,395

Capital expenditures
443

 
(3
)
 
250

 
132

 
822

Retail store impairment
0

 
1,631

 
222

 
1,267

 
3,120

Deferred rent (benefit) expense
(31
)
 
1,131

 
(46
)
 
(141
)
 
913

 
 
 
Three Months Ended June 30, 2014
 
U.S.
 Wholesale
 
U.S. Retail
 
Canada
 
International
 
Consolidated
Wholesale net sales
$
48,945

 
$
0

 
$
2,826

 
$
2,200

 
$
53,971

Retail net sales
0

 
48,970

 
9,421

 
35,534

 
93,925

Online consumer net sales
9,309

 
0

 
770
 
4,422

 
14,501

Total net sales to external customers
58,254

 
48,970

 
13,017

 
42,156

 
162,397

Gross profit
16,056

 
32,033

 
7,051

 
27,247

 
82,387

Income from segment operations
9,147

 
1,919

 
941

 
3,550

 
15,557

Depreciation and amortization
2,187

 
3,051

 
454

 
1,011

 
6,703

Capital expenditures
952

 
1,333

 
81

 
763

 
3,129

Retail store impairment
0

 
66

 
0

 
163

 
229

Deferred rent expense (benefit)
47

 
(720
)
 
(51
)
 
(195
)
 
(919
)

25


 
Six Months Ended June 30, 2015
 
U.S. Wholesale 
 
U.S. Retail
 
Canada
 
International
 
Consolidated
Wholesale net sales
$
82,411

 
$
0

 
$
3,725

 
$
3,272

 
$
89,408

Retail net sales
0

 
77,945

 
14,224

 
49,037

 
141,206

Online consumer net sales
18,931

 
0

 
1,561

 
7,551

 
28,043

Total net sales to external customers
101,342

 
77,945

 
19,510

 
59,860

 
258,657

Gross profit
21,629

 
46,072

 
8,138

 
33,169

 
109,008

Income (loss) from segment operations
10,113

 
(9,393
)
 
(2,040
)
 
(4,780
)
 
(6,100
)
Depreciation and amortization
4,233

 
4,250

 
498

 
1,746

 
10,727

Capital expenditures
1,013

 
224

 
519

 
186

 
1,942

Retail store impairment
0

 
1,689

 
222

 
1,267

 
3,178

Deferred rent (benefit) expense
(17
)
 
584

 
(79
)
 
(487
)
 
1

 
 
 
Six Months Ended June 30, 2014
 
U.S.
 Wholesale
 
U.S. Retail
 
Canada
 
International
 
Consolidated
Wholesale net sales
$
87,182

 
$
0

 
$
4,735

 
$
4,000

 
$
95,917

Retail net sales
0

 
91,435

 
17,180

 
65,212

 
173,827

Online consumer net sales
19,809

 
0

 
1,562

 
8,378

 
29,749

Total net sales to external customers
106,991

 
91,435

 
23,477

 
77,590

 
299,493

Gross profit
33,361

 
58,799

 
12,660

 
49,541

 
154,361

Income (loss) from segment operations
18,867

 
(2,795
)
 
596

 
2,651

 
19,319

Depreciation and amortization
4,365

 
6,165

 
855

 
2,033

 
13,418

Capital expenditures
2,157

 
2,472

 
193

 
2,265

 
7,087

Retail store impairment
0

 
115

 
0

 
613

 
728

Deferred rent benefit
(400
)
 
(2,352
)
 
(99
)
 
(290
)
 
(3,141
)
Reconciliation of reportable segments combined income (loss) from operations to the consolidated loss before income taxes is as follows:  
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Consolidated income (loss) from operations of reportable segments
$
3,459

 
$
15,557

 
$
(6,100
)
 
$
19,319

Unallocated corporate expenses
(16,455
)
 
(12,977
)
 
(29,826
)
 
(24,235
)
Interest expense
(10,467
)
 
(10,019
)
 
(20,248
)
 
(20,058
)
Foreign currency transaction loss
(79
)
 
0

 
(704
)
 
(132
)
Unrealized gain (loss) on change in fair value of warrants
4,413

 
(8,202
)
 
11,921

 
4,465

Other (expense) income
(30
)
 
(60
)
 
111

 
(52
)
Consolidated loss before income taxes
$
(19,159
)
 
$
(15,701
)
 
$
(44,846
)
 
$
(20,693
)


26


Net sales by geographic location of customers are as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
United States
$
92,948

 
$
107,224

 
$
179,287

 
$
198,426

Europe (excluding the United Kingdom)
12,011

 
17,644

 
22,609

 
32,665

Canada
10,199

 
13,017

 
19,510

 
23,477

United Kingdom
8,046

 
10,908

 
15,591

 
20,369

South Korea
3,747

 
3,249

 
7,189

 
5,580

Japan
2,231

 
3,726

 
4,539

 
7,063

Australia
1,667

 
2,493

 
3,427

 
4,585

China
2,242

 
2,212

 
3,878

 
3,740

Other foreign countries
1,303

 
1,924

 
2,627

 
3,588

Total consolidated net sales
$
134,394

 
$
162,397

 
$
258,657

 
$
299,493

Note 16. Litigation
The Company is subject to various claims and contingencies in the ordinary course of business that arise from litigation, business transactions, operations, employee-related matters, or taxes. The Company establishes reserves when it believes a loss is probable and is able to estimate its potential exposure. For loss contingencies believed to be reasonably possible, the Company also discloses the nature of the loss contingency and an estimate of the possible loss or range of loss, or a statement that such an estimate cannot be made. Insurance may cover a portion of such losses; however, certain matters could arise for which we do not have insurance coverage or for which insurance provides only partial coverage. These matters could have a material negative effect on the Company's business, financial position, results of operations, or cash flows. In all cases, the Company vigorously defends itself unless a reasonable settlement appears appropriate.
SEC Investigation
On February 5, 2015, the Company learned that the Securities and Exchange Commission had issued a formal order of investigation to determine whether, during Mr. Charney's tenure as CEO of the Company, there were any violations of federal securities laws. The SEC's investigation is a non-public, fact-finding inquiry to determine whether any violations of law have occurred. The Company intends to cooperate fully with the SEC in its investigation.
Shareholder Litigation
In 2010, two shareholder derivative lawsuits were filed in the United States District Court for the Central District of California (the "Court") that were subsequently consolidated for all purposes into a case entitled In re American Apparel, Inc. Shareholder Derivative Litigation, Lead Case No. CV106576 (the "First Derivative Action"). Plaintiffs in the First Derivative Action alleged a cause of action for breach of fiduciary duty arising out of (i) the Company's alleged failure to maintain adequate accounting and internal control policies and procedures; (ii) the Company's alleged violation of state and federal immigration laws in connection with the previously disclosed termination of employees following an Immigration and Customs Enforcement inspection; and (iii) the Company's alleged failure to implement controls sufficient to prevent a sexually hostile and discriminatory work environment. The Company does not maintain any direct exposure to loss in connection with these shareholder derivative lawsuits. The Company's status as a "Nominal Defendant" in the actions reflects that the lawsuits are purportedly maintained by the named plaintiffs on behalf of American Apparel and that plaintiffs seek damages on the Company's behalf. The Company filed a motion to dismiss the First Derivative Action which was granted with leave to amend on July 31, 2012. Plaintiffs did not amend the complaint and subsequently filed a motion to dismiss each of their claims, with prejudice, for the stated purpose of taking an immediate appeal of the Court's July 31, 2012 order. On October 16, 2012, the Court granted the plaintiffs' motion to dismiss and entered judgment accordingly. On November 12, 2012, plaintiffs filed a Notice of Appeal to the Ninth Circuit Court of Appeals where the case is currently pending.
In 2010, four shareholder derivative lawsuits were filed in the Superior Court of the State of California for the County of Los Angeles (the "Superior Court") which were subsequently consolidated for all purposes into a case entitled In re American Apparel, Inc. Shareholder Derivative Litigation, Lead Case No. BC 443763 (the "State Derivative Action"). Three of the matters comprising the State Derivative Action alleged causes of action for breach of fiduciary duty arising out of (i) the Company's alleged failure to maintain adequate accounting and internal control policies and procedures; and (ii) the Company's alleged violation of state and federal immigration laws in connection with the previously disclosed termination of employees following an Immigration and Customs Enforcement inspection. The fourth matter alleges seven causes of action for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets also arising out of the same allegations. On April 12, 2011,

27


the Superior Court issued an order granting a stay (which currently remains in place) of the State Derivative Action on the grounds that, among other reasons, the case is duplicative of the First Derivative Action.
In July 2014, two shareholder derivative lawsuits were filed in the Court that were subsequently consolidated for all purposes into a case entitled In re American Apparel, Inc. 2014 Shareholder Derivative Litigation, Lead Case No. CV1405230 (the "Second Derivative Action," and together with the First Derivative Action, the "Federal Derivative Actions"). Plaintiffs in the Second Derivative Action alleged similar causes of action for breach of fiduciary duty by failing to (i) maintain adequate internal control and exercise proper oversight over Mr. Charney, whose alleged misconduct and mismanagement has purportedly harmed the Company's operations and financial condition, (ii) ensure Mr. Charney's suspension as CEO did not trigger material defaults under two of the Company's credit agreements, and (iii) prevent Mr. Charney from increasing his ownership percentage of the Company. The Second Derivative Action primarily seeks to recover damages and reform corporate governance and internal procedures. The Company does not maintain any direct exposure to loss in connection with these shareholder derivative lawsuits. The Company's status as a "Nominal Defendant" in the actions reflects that the lawsuits are purportedly maintained by the named plaintiffs on behalf of American Apparel and that plaintiffs seek damages on the Company's behalf. On April 28, 2015, the Court granted the Company's motion to dismiss, with leave to amend. On July 17, 2015, the Court dismissed the action, without prejudice, for failure to prosecute and to comply with court rules and orders.
Both the Federal Derivative Actions and State Derivative Action are covered under the Company's Directors and Officers Liability insurance policy, subject to a deductible and a reservation of rights. Should the above matters (i.e., the Federal Derivative Actions or the State Derivative Action) ultimately be decided against the Company in an amount that exceeds the Company's insurance coverage, or if liability is imposed on grounds that fall outside the scope of the Company's Directors and Officers Liability insurance coverage, the Company could not only incur a substantial liability, but also experience an increase in similar suits and suffer reputational harm. The Company is unable to predict the financial outcome of these matters at this time, and any views formed as to the viability of these claims or the financial exposure which could result may change from time to time as the matters proceed through their course. Accordingly, adjustments, if any, that might result from the resolution of this matter have not been reflected in the consolidated financial statements. However, no assurance can be made that these matters, either individually or together with the potential for similar suits and reputational harm, will not result in a material financial exposure, which could have a material adverse effect on the Company's financial condition, results of operations, or cash flows.
On April 21, 2015, former employee and purported shareholder Jan Willem Hubner and purported shareholder Eric Ribner filed suit against Company directors and the Company in the Court (Case No. 15-2965). This matter was filed as a related case with respect to In re American Apparel, Inc. 2014 Derivative Shareholder Litigation. The lawsuit alleges the following counts: (1) violation of Section 14(a) of the Securities Exchange Act and Rule 14a-9 promulgated thereunder; (2) violation of Section 20(a) of the Securities Exchange Act; (3) breach of the duty of disclosure/candor; and (4) aiding and abetting breaches of the duty of disclosure/candor. Both of plaintiffs’ claims are premised on the ground that American Apparel’s April 28, 2014, Proxy Statement (Schedule 14-A) issued in advance of the Company’s 2014 Annual Meeting contained misrepresentations and omissions. On May 1, 2015, plaintiffs filed a motion for preliminary injunction seeking relief substantially similar to that sought by the complaint itself (the "Motion"). On June 8, 2015, the Court denied the Motion. On June 18, 2015, plaintiffs stipulated to dismissal of this action, with prejudice. On June 26, 2015, plaintiffs filed a Notice of Appeal. The Company believes that all such claims are without merit and intends to vigorously dispute the validity of these claims on appeal. The Company is unable to predict the financial outcome of this matter at this time, and any views formed as to the viability of these claims or the financial exposure which could result may change from time to time as the matter proceeds through its course. Accordingly, adjustments, if any, that might result from the resolution of this matter have not been reflected in the consolidated financial statements. However, no assurance can be made that this matter together with the potential for reputational harm, will not result in a material financial exposure, which could have a material adverse effect on the Company's financial condition, results of operations, or cash flows.
On April 30, 2015, former employee and purported shareholder Eliana Gil Rodriguez filed a putative class action lawsuit against Company directors, a former Company officer, and Standard General L.P. in the Delaware Chancery Court (Case No. 10944). The lawsuit alleges breach of fiduciary duty claims in connection with the Company's 2014 annual meeting, its secondary offering, the Standstill Agreement, the 2014 adoption of a rights plan, and certain amendments to the bylaws against the former and current Company directors and the named former Company officer. In addition, the lawsuit alleges that Standard General aided and abetted the alleged breaches of fiduciary duty. Plaintiff seeks declaratory relief and requests that the Court order a revote of the Class A directors. The Company believes that all such claims are without merit and intends to vigorously dispute the validity of these claims. The Company is unable to predict the financial outcome of this matter at this time, and any views formed as to the viability of these claims or the financial exposure which could result may change from time to time as the matter proceeds through its course. Accordingly, adjustments, if any, that might result from the resolution of this matter have not been reflected in the consolidated financial statements. However, no assurance can be made that this matter together with the potential for reputational harm, will not result in a material financial exposure, which could have a material adverse effect on the Company's financial condition, results of operations, or cash flows.

28


Employment Matters
On April 16, 2015, former employees Carlos Hirschberg, Cesar Antonio Palma Cordero, and Dominga Valencia filed a putative class action lawsuit against the Company in the United States District Court for the Central District of California (Case No. 2:15-CV-02827), asserting: (i) violation of the WARN Act (29 U.S.C. § 2101 et seq.); (ii) violation of the California WARN Act (Labor Code §1400 et seq.), and (iii) unfair business practices under California Business and Professions Code §17200 et seq.). The judge in this matter has since dismissed Mr. Hirschberg as a plaintiff. The Company believes that all such claims are without merit and intends to vigorously dispute the validity of these claims. The Company is unable to predict the financial outcome of this matter at this time, and any views formed as to the viability of these claims or the financial exposure which could result may change from time to time as the matter proceeds through its course. Accordingly, adjustments, if any, that might result from the resolution of this matter have not been reflected in the consolidated financial statements. However, no assurance can be made that this matter together with the potential for reputational harm, will not result in a material financial exposure, which could have a material adverse effect on the Company's financial condition, results of operations, or cash flows.
On April 20, 2015, former employee David Nisenbaum filed a lawsuit against the Company in Los Angeles Superior Court (Case No. BC579342) asserting: (1) religious discrimination in violation of the California Fair Employment and Housing Act (FEHA); (2) failure to prevent discrimination in violation of FEHA; (3) retaliation in violation of FEHA; (4) wrongful termination in violation of public policy; (5) violation of Labor Code § 1102.5; (6) violation of Labor Code § 1198.5; (7) intentional infliction of emotional distress; and (8) violation of California Business & Professions Code §§ 17200 et seq. The Company believes that all such claims are without merit and intends to vigorously dispute the validity of these claims. The Company is unable to predict the financial outcome of this matter at this time, and any views formed as to the viability of these claims or the financial liability which could result may change from time to time as the matter proceeds through its course. Accordingly, adjustments, if any, that might result from the resolution of this matter have not been reflected in the consolidated financial statements. However, no assurance can be made that this matter together with the potential for reputational harm, will not result in a material financial liability, which could have a material adverse effect on the Company's financial condition, results of operations, or cash flows.
On or about June 23, 2014, Mr. Charney submitted a demand in arbitration against the Company in connection with his suspension, which had been stayed pending the determination of the Suitability Committee in the Internal Investigation. As a result of Mr. Charney's termination for cause, such stay is no longer in effect. On March 26, 2015, Mr. Charney submitted correspondence to the arbitration body requesting a reinstatement of his demand for arbitration. Mr. Charney has indicated that he intends to seek damages of up to $35 million in connection with claims allegedly arising from his termination for cause. The Company believes that all such claims are without merit and intends to vigorously dispute the validity of these claims. The Company is unable to predict the financial outcome of this matter at this time, and any views formed as to the viability of these claims or the financial liability which could result may change from time to time as the matter proceeds through its course. Accordingly, adjustments, if any, that might result from the resolution of this matter have not been reflected in the consolidated financial statements. However, no assurance can be made that this matter together with the potential for reputational harm, will not result in a material financial liability, which could have a material adverse effect on the Company's financial condition, results of operations, or cash flows.
On May 12, 2015, Mr. Charney filed a lawsuit against the Company and a Company director in the Superior Court of the State of California for the County of Los Angeles, asserting: (1) defamation; and (2) false light. Mr. Charney alleges that he was defamed and painted in a false light in an April 2015 letter written by the Company director and disseminated to American Apparel employees that states that Mr. Charney was terminated for cause and agreed that he would not return to the Company if he was found not to be suitable pursuant to an independent investigation conducted by the Board. Mr. Charney seeks damages in excess of $20 million. The Company believes that all such claims are without merit and intends to vigorously dispute the validity of these claims. The Company is unable to predict the financial outcome of this matter at this time, and any views formed as to the viability of these claims or the financial liability which could result may change from time to time as the matter proceeds through its course. Accordingly, adjustments, if any, that might result from the resolution of this matter have not been reflected in the consolidated financial statements. However, no assurance can be made that this matter together with the potential for reputational harm, will not result in a material financial liability, which could have a material adverse effect on the Company's financial condition, results of operations, or cash flows.
On June 4, 2015, Mr. Charney filed a lawsuit against the Company in Delaware Chancery Court (Case No. 11098-CB) asserting counts for: (1) advancement; and (2) fees on fees. Mr. Charney seeks indemnification for fees and expenses incurred in the lawsuit captioned American Apparel, Inc. v. Dov Charney, Case No. 11033-CB, also filed in Delaware Chancery Court, alleging counts for: (1) breach of contract; and (2) breach of the implied covenant of good faith and fair dealing (the "Breach of Contract Action"). The Breach of Contract Action alleges that Mr. Charney violated a Nomination, Standstill and Support Agreement entered into on July 9, 2014, by, among other things, seeking the removal of members of the Board elected at the Company's 2014 annual meeting or by instigating, encouraging, joining, acting in concert with and assisting third parties seeking such removal, and by disparaging the Company by making negative comments about the Company at employee meetings and to the media. The Company believes that all such claims are without merit and intends to vigorously dispute the validity of these claims. The Company is unable to

29


predict the financial outcome of this matter at this time, and any views formed as to the viability of these claims or the financial liability which could result may change from time to time as the matter proceeds through its course. Accordingly, adjustments, if any, that might result from the resolution of this matter have not been reflected in the consolidated financial statements. However, no assurance can be made that this matter together with the potential for reputational harm, will not result in a material financial liability, which could have a material adverse effect on the Company's financial condition, results of operations, or cash flows.
On June 19, 2015, Mr. Charney filed a lawsuit against the Company and a Company director in the Superior Court of the State of California for the County of Los Angeles (Case No. BC585664), asserting: (1) defamation; (2) false light; (3) intentional interference with actual economic relations; (4) intentional interference with prospective economic relations; and (5) violation of Business & Professions Code §§ 17200 et seq. Mr. Charney alleges that he was defamed by the Company director who Mr. Charney alleges told a large shareholder that he was being investigated for matters "criminal" in nature. Mr. Charney seeks damages in excess of $30 million. The Company believes that all such claims are without merit and intends to vigorously dispute the validity of these claims. The Company is unable to predict the financial outcome of this matter at this time, and any views formed as to the viability of these claims or the financial liability which could result may change from time to time as the matter proceeds through its course. Accordingly, adjustments, if any, that might result from the resolution of this matter have not been reflected in the consolidated financial statements. However, no assurance can be made that this matter together with the potential for reputational harm, will not result in a material financial liability, which could have a material adverse effect on the Company's financial condition, results of operations, or cash flows.
On June 24, 2015, Mr. Charney filed a lawsuit against the Company, Standard General, L.P. (and certain of its funds), Company directors and a former Company officer in the Superior Court of the State of California for the County of Los Angeles (Case No. BC586119), asserting: (1) violation of California Corporations Code § 25401; (2) intentional misrepresentation; (3) negligent misrepresentation; (4) breach of fiduciary duty; (5) fraud in the inducement/rescission; (6) conspiracy; (7) intentional infliction of emotional distress; (8) negligent infliction of emotional distress; and (9) declaratory relief. Mr. Charney alleges that certain Company officers and directors engaged in fraud and conspiracy to induce Mr. Charney to dilute his equity in the Company such that defendant parties could control the Company. Mr. Charney seeks damages in excess of $100 million. The Company believes that Mr. Charney's claims in his June 4, 2015 lawsuit are without merit and intends to vigorously dispute the validity of these claims. The Company is unable to predict the financial outcome of this matter at this time, and any views formed as to the viability of these claims or the financial liability which could result may change from time to time as the matter proceeds through its course. Accordingly, adjustments, if any, that might result from the resolution of this matter have not been reflected in the consolidated financial statements. However, no assurance can be made that this matter together with the potential for reputational harm, will not result in a material financial liability, which could have a material adverse effect on the Company's financial condition, results of operations, or cash flows.
In the first quarter of 2015, several unfair labor practices charges were filed against the Company with the National Labor Relations Board alleging violations of the National Labor Relations Act. The majority of the unfair labor practice charges that were filed have since been dismissed, but several remain. The Company believes that all such charges are without merit and intends to vigorously dispute the validity of these charges. While the charges will not result in direct financial liability, the Company is unable to predict the outcome of the charges at this time. Any views formed as to the viability of these charges or the financial liability, if any, which could result may change from time to time as the matters proceed through their course. Accordingly, adjustments, if any, that might result from the resolution of this matter have not been reflected in the consolidated financial statements. However, no assurance can be made that these charges together with the potential for reputational harm, will not result in a material financial liability, which could have a material adverse effect on the Company's financial condition, results of operations, or cash flows.
In addition, the Company is currently engaged in other employment-related claims incidental to its business. The Company believes that all such claims are without merit or not material and intends to vigorously dispute the validity of these claims. While the final resolution of such claims cannot be determined based on information at this time, the Company believes, but cannot provide assurance that, the amount and ultimate liability, if any, with respect to these actions will not materially affect its business, financial position, results of operations, or cash flows. Should any of these matters be decided against the Company, it could not only incur liability but also experience an increase in similar suits and suffer reputational harm.
OSHA Matters
In the first quarter of 2015, an industrial accident at the Company's dyeing facility in Hawthorne, California resulted in injuries to one of our employees. California OSHA completed an investigation and assessed penalties in a non-material amount. The Company is unable to predict the financial outcome, if any, of any potentially remaining legal issues pertaining to this matter at this time. No assurance can be made that this matter, together with the potential for reputational harm, will not result in a material financial liability, which could have a material adverse effect on the Company's financial condition, results of operations, or cash flows.

30


Other Matters
On April 2, 2015, a purported customer of the Company filed a putative class action, (in San Diego Superior Court (Case No. 37-2015-00011243), for violations of California Civil Code § 1747.08 relating to the Company’s alleged practices for collecting e-mail addresses in connection with credit card transactions at its retail stores. The Company intends to aggressively defend against this matter. The Company is unable to predict the financial outcome of this matter at this time, and any views formed as to the viability of these claims or the financial liability which could result may change from time to time as the matter proceeds through its course. Accordingly, adjustments, if any, that might result from the resolution of this matter have not been reflected in the consolidated financial statements. However, no assurance can be made that this matter together with the potential for reputational harm, will not result in a material financial liability, which could have a material adverse effect on the Company's financial condition, results of operations, or cash flows.
Note 17. Condensed Consolidating Financial Information
The Notes, which constitute debt obligations of American Apparel Inc. (the "Parent"), are fully and unconditionally guaranteed, jointly and severally, by the Parent's existing and future 100% owned direct and indirect domestic subsidiaries. The Notes are subject to customary automatic release provisions, including the satisfaction and discharge, or defeasance, or full payment of the principal, premium, if any, accrued and unpaid interests. In certain circumstances, the Notes are subject to the sale or substantial disposition of the subsidiary guarantor's assets. No guarantor subsidiaries are less than 100% owned, directly or indirectly, by the Parent.
The following presents the Parent's condensed consolidating balance sheets as of June 30, 2015 and December 31, 2014 and its condensed consolidating statements of operations for the three and six months ended June 30, 2015 and 2014, condensed consolidating statements of cash flows for the six months ended June 30, 2015 and 2014, the Parent's material guarantor subsidiaries and the non-guarantor subsidiaries, and the elimination entries necessary to present the Company's financial statements on a consolidated basis. This condensed consolidating financial information should be read in conjunction with the Company's consolidated financial statements.




31


Condensed Consolidating Balance Sheets
June 30, 2015
(in thousands)
(unaudited)
 
Parent
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Elimination Entries
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
CURRENT ASSETS
 
 
 
 
 
 
 
 
 
Cash
$
0

 
$
813

 
$
6,039

 
$
0

 
$
6,852

Trade accounts receivable, net
0

 
23,037

 
3,554

 
0

 
26,591

Intercompany accounts receivable, net
223,578

 
(238,958
)
 
15,380

 
0

 
0

Inventories, net
0

 
92,416

 
22,545

 
0

 
114,961

Other current assets
352

 
11,458

 
5,095

 
0

 
16,905

Total current assets
223,930

 
(111,234
)
 
52,613

 
0

 
165,309

Property and equipment, net
0

 
29,937

 
7,079

 
0

 
37,016

Investments in subsidiaries
(153,803
)
 
14,175

 
0

 
139,628

 
0

Other assets, net
8,054

 
30,483

 
9,193

 
0

 
47,730

TOTAL ASSETS
$
78,181

 
$
(36,639
)
 
$
68,885

 
$
139,628

 
$
250,055

LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
 
 
 
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
 
 
 
 
 
Revolving credit facilities and current portion of long-term debt
$
0

 
$
38,412

 
$
12

 
$
0

 
$
38,424

Accounts payable
0

 
31,753

 
3,333

 
0

 
35,086

Accrued expenses and other current liabilities
11,759

 
33,102

 
14,107

 
0

 
58,968

Fair value of warrant liability
7,318

 
0

 
0

 
0

 
7,318

Other current liabilities
0

 
6,013

 
1,746

 
0

 
7,759

Total current liabilities
19,077

 
109,280

 
19,198

 
0

 
147,555

Long-term debt, net
219,659

 
0

 
15,236

 
0

 
234,895

Other long-term liabilities
488

 
24,518

 
3,642

 
0

 
28,648

TOTAL LIABILITIES
239,224

 
133,798

 
38,076

 
0

 
411,098

STOCKHOLDERS' (DEFICIT) EQUITY
 
 
 
 
 
 
 
 
 
Common stock
18

 
100

 
493

 
(593
)
 
18

Additional paid-in capital
221,176

 
6,727

 
8,133

 
(14,860
)
 
221,176

Accumulated other comprehensive (loss) income
(9,065
)
 
(3,362
)
 
(5,847
)
 
9,209

 
(9,065
)
(Accumulated deficit) retained earnings
(371,015
)
 
(173,902
)
 
28,030

 
145,872

 
(371,015
)
Less: Treasury stock
(2,157
)
 
0

 
0

 
0

 
(2,157
)
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY
(161,043
)
 
(170,437
)
 
30,809

 
139,628

 
(161,043
)
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
$
78,181

 
$
(36,639
)
 
$
68,885

 
$
139,628

 
$
250,055


32



Condensed Consolidating Balance Sheets
December 31, 2014
(in thousands)
 
Parent
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Elimination Entries
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
CURRENT ASSETS
 
 
 
 
 
 
 
 
 
Cash
$
0

 
$
1,370

 
$
6,973

 
$
0

 
$
8,343

Trade accounts receivable, net
0

 
19,422

 
5,876

 
0

 
25,298

Intercompany accounts receivable, net
240,989

 
(229,956
)
 
(11,033
)
 
0

 
0

Inventories, net
0

 
116,335

 
31,137

 
106

 
147,578

Other current assets
90

 
11,290

 
6,391

 
0

 
17,771

Total current assets
241,079

 
(81,539
)
 
39,344

 
106

 
198,990

Property and equipment, net
0

 
38,932

 
10,385

 
0

 
49,317

Investments in subsidiaries
(115,109
)
 
15,874

 
0

 
99,235

 
0

Other assets, net
8,861

 
27,463

 
9,758

 
0

 
46,082

TOTAL ASSETS
$
134,831

 
$
730

 
$
59,487

 
$
99,341

 
$
294,389

LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
 
 
 
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
 
 
 
 
 
Revolving credit facilities and current portion of long-term debt
$
0

 
$
34,299

 
$
13

 
$
0

 
$
34,312

Accounts payable
0

 
32,508

 
3,046

 
0

 
35,554

Accrued expenses and other current liabilities
13,498

 
31,855