10-Q 1 app0930201510-q.htm 10-Q Q3 9.30.2015 10-Q
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 September 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 January 22, 2016, the Registrant had issued and outstanding 182,837,753 and 182,568,764 shares of its common stock, respectively.



AMERICAN APPAREL, INC.
TABLE OF CONTENTS
 
 
 
Page
Item 1.
 
Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014
 
Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2015 and 2014
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 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 Chapter 11 Cases and our proposed restructuring transactions in the Chapter 11 Cases, including the execution of our restructuring Plan (as defined below);
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 to remain in compliance with financial covenants under financing arrangements, and to obtain appropriate court approval, waivers or amendments with respect to any noncompliance or other actions under such arrangements;
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 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

3


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 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, our Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, and other reports and documents we file with the Securities and Exchange Commission (the "SEC") and include, without limitation, the following:
our ability to operate and reorganize under the Chapter 11 Cases, including obtaining Bankruptcy Court approval with respect to motions filed in the Chapter 11 Cases from time to time, complying with the terms and restrictions of the DIP Credit Agreement or other financing arrangements, and consummating the Plan;
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;
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;

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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
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)
 
 
September 30, 2015
 
December 31, 2014
ASSETS
(unaudited)
 
 
Current assets:
 
 
 
     Cash
$
13,372

 
$
8,343

     Trade accounts receivable (net of allowances $401; $458)
20,625

 
25,298

     Prepaid expenses and other current assets
19,157

 
16,442

     Inventories, net
107,223

 
147,578

     Income taxes receivable and prepaid income taxes
751

 
648

     Deferred income taxes, net of valuation allowance
709

 
681

     Total current assets
161,837

 
198,990

Property and equipment, net
31,592

 
49,317

Deferred income taxes, net of valuation allowance
2,623

 
2,194

Other assets, net
48,445

 
43,888

TOTAL ASSETS
$
244,497

 
$
294,389

LIABILITIES AND STOCKHOLDERS' DEFICIT
 

 
 

Current liabilities:
 

 
 

     Cash overdraft
$
0

 
$
5,714

     Revolving credit facilities and current portion of long-term debt
56,968

 
34,312

     Accounts payable
37,042

 
35,554

Accrued expenses and other current liabilities
67,954

 
61,369

Fair value of warrant liability
724

 
19,239

Income taxes payable
1,753

 
2,063

Deferred income tax liability, current
1,213

 
1,045

Current portion of capital lease obligations
2,596

 
2,978

Total current liabilities
168,250

 
162,274

Long-term debt (net of unamortized discount $5,373; $5,965)
235,930

 
217,388

Capital lease obligations, net of current portion
126

 
1,982

Deferred tax liability
188

 
200

Deferred rent, net of current portion
11,606

 
13,346

Other long-term liabilities
16,073

 
14,715

TOTAL LIABILITIES
432,173

 
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 182,838; 176,566, Outstanding 182,569; 176,194

18

 
18

Additional paid-in capital
221,311

 
218,779

Accumulated other comprehensive loss
(10,273
)
 
(6,915
)
Accumulated deficit
(396,575
)
 
(325,241
)
Less: Treasury stock, 304 shares at cost
(2,157
)
 
(2,157
)
TOTAL STOCKHOLDERS' DEFICIT
(187,676
)
 
(115,516
)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
$
244,497

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net sales
$
126,052

 
$
155,869

 
$
384,709

 
$
455,362

Cost of sales
72,394

 
73,330

 
222,043

 
218,462

Gross profit
53,658

 
82,539

 
162,666

 
236,900

Selling and distribution expenses
42,812

 
52,640

 
133,714

 
159,145

General and administrative expenses (including related party charges of $155; $155; $466; $537)
29,909

 
38,785

 
80,763

 
90,829

Retail store impairment
1,203

 
1,193

 
4,381

 
1,921

Loss from operations
(20,266
)
 
(10,079
)
 
(56,192
)
 
(14,995
)
Interest expense
10,349

 
9,858

 
30,597

 
29,916

Foreign currency transaction loss
463

 
616

 
1,167

 
748

Unrealized gain on change in fair value of warrants
(6,594
)
 
(1,785
)
 
(18,515
)
 
(6,250
)
Loss (gain) on extinguishment of debt
362

 
(171
)
 
362

 
(171
)
Other expense (income)
251

 
(57
)
 
140

 
(5
)
Loss before income taxes
(25,097
)
 
(18,540
)
 
(69,943
)
 
(39,233
)
Income tax provision
463

 
644

 
1,391

 
1,622

Net loss
$
(25,560
)
 
$
(19,184
)
 
$
(71,334
)
 
$
(40,855
)
 
 
 
 
 
 
 
 
Basic and diluted net loss per-share (a)
$
(0.14
)
 
$
(0.11
)
 
$
(0.40
)
 
$
(0.27
)
Weighted-average basic and diluted shares outstanding (a)
182,231

 
173,769

 
178,804

 
153,354

 
 
 
 
 
 
 
 
Net loss (from above)
$
(25,560
)
 
$
(19,184
)
 
$
(71,334
)
 
$
(40,855
)
    Other comprehensive loss items:
 
 
 
 
 
 
 
    Foreign currency translation
(1,208
)
 
(1,919
)
 
(3,358
)
 
(1,517
)
        Other comprehensive loss, net of tax
(1,208
)
 
(1,919
)
 
(3,358
)
 
(1,517
)
Comprehensive loss
$
(26,768
)
 
$
(21,103
)
 
$
(74,692
)
 
$
(42,372
)
(a) The dilutive impact of incremental shares is excluded from the net loss per share 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)

 
Nine Months Ended September 30,
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Cash received from customers
$
388,925

 
$
450,079

Cash paid to suppliers, employees and others
(387,749
)
 
(427,640
)
Income taxes paid
(1,749
)
 
(1,335
)
Interest paid
(16,692
)
 
(17,852
)
Other
57

 
55

Net cash (used in) provided by operating activities
(17,208
)
 
3,307

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Capital expenditures
(2,500
)
 
(8,675
)
Proceeds from sale of fixed assets
0

 
52

   Restricted cash
93

 
219

Net cash used in investing activities
(2,407
)
 
(8,404
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Cash overdraft
(5,714
)
 
(102
)
Payments of prior revolving credit facilities, net
(34,299
)
 
(16,965
)
Borrowings under current revolving credit facilities, net
56,968

 
0

Borrowings (payments) of term loans and notes payable
14,753

 
(57
)
Payments of debt issuance costs
(4,993
)
 
(2,099
)
Proceeds from issuance of common stock, net
1,998

 
28,446

Payment of payroll statutory tax withholding on share-based compensation associated with issuance of common stock
(35
)
 
(414
)
Payments of capital lease obligations
(2,232
)
 
(1,932
)
Net cash provided by financing activities
26,446

 
6,877

 
 
 
 
Effect of foreign exchange rate on cash
(1,802
)
 
(1,067
)
Net increase in cash
5,029

 
713

Cash, beginning of period
8,343

 
8,676

Cash, end of period
$
13,372

 
$
9,389


See accompanying notes to condensed consolidated financial statements.

8



American Apparel, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(in thousands)
(unaudited)
 
Nine Months Ended September 30,
 
2015
 
2014
RECONCILIATION OF NET LOSS TO NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
 
 
 
Net loss
$
(71,334
)
 
$
(40,855
)
Depreciation and amortization of property and equipment, and other assets
15,163

 
19,822

Retail store impairment
4,381

 
1,921

Loss on disposal of property and equipment
197

 
48

Share-based compensation expense
561

 
3,764

Unrealized gain on change in fair value of warrants
(18,515
)
 
(6,250
)
Amortization of debt discount and deferred financing costs
4,958

 
1,893

Loss (gain) on extinguishment of debt
362

 
(171
)
Accrued interest paid-in-kind
3,225

 
3,129

Foreign currency transaction loss
1,167

 
748

Allowance for inventory shrinkage and obsolescence
5,351

 
1,719

Bad debt expense
504

 
635

Deferred income taxes
(391
)
 
(24
)
Deferred rent
(703
)
 
(3,661
)
Changes in cash due to changes in operating assets and liabilities:
 
 
 
Trade accounts receivables
3,713

 
(5,918
)
Prepaid expenses and other current assets
(3,061
)
 
2

Inventories
32,611

 
15,161

Other assets
(4,922
)
 
115

Accounts payable
1,781

 
(3,181
)
Accrued expenses and other liabilities
8,192

 
14,098

Income taxes receivable / payable
(448
)
 
312

Net cash (used in) provided by operating activities
$
(17,208
)
 
$
3,307

 
 
 
 
NON-CASH INVESTING AND FINANCING ACTIVITIES
 
 
 
Property and equipment acquired, and included in accounts payable
$
80

 
$
471


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 September 30, 2015, the Company operated a total of 227 retail stores in 19 countries including the U.S. and Canada.
Recent Developments - As of September 30, 2015, the Company had $13,372 in cash, $56,968 outstanding on the Wilmington Trust Credit Facility (as defined below) and $3,032 of availability for additional borrowings as of such date.
As of September 30, 2015, the Company had $211,817 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 Company did not make the scheduled interest payment on the Notes due on October 15, 2015, which was approximately $13,900.
On October 5, 2015, American Apparel, Inc. and certain of its domestic subsidiaries (the "Debtors") filed voluntary petitions in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") seeking relief under Chapter 11 of the United States Code (the "Bankruptcy Code"). The cases are being administered under the caption "In re American Apparel, Inc., et al.," Case Nos. 15-12055 (BLS) (the "Chapter 11 Cases"). The Debtors continue to operate their businesses and manage their properties as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Company's foreign subsidiaries were not part the Chapter 11 cases. The Company's common stock has been delisted from the NYSE MKT LLC.
The Chapter 11 Cases were filed in response to the Company's continuing losses and negative cash flows from operations and debt. The Company plans to continue implementing its strategic plan, which is focused on improving product selection, cost-cutting measures, improving supply chain efficiencies, SKU rationalization, and maximizing retail, e-commerce and wholesale opportunities.
On October 4, 2015, the Company entered into a Restructuring Support Agreement with the syndicate of lenders of the revolving credit facility, which are also the majority holders of the Notes ("the Supporting Parties"). Under the terms of the Restructuring Support Agreement, the holders of the Notes will be entitled to receive on a pro rata basis, 100% of the equity interest in the reorganized Company after the conclusion of the Chapter 11 Cases, subject to certain exceptions and additional equity interests being issued or reserved under the Equity Commitment Agreement (described below). The Company also entered into an Equity Commitment Agreement on October 4, 2015 (the "Equity Commitment Agreement"), which provides for the Supporting Parties to acquire equity interests in the Company of at least $10,000 and up to $40,000 after conclusion of the Chapter 11 Cases.
On October 6, 2015, the Company obtained approval from the Bankruptcy Court of the Debtor-in-Possession Credit Agreement ("DIP Credit Agreement") between the Company and the Supporting Parties. The DIP Credit Agreement provides for a senior secured, super-priority delayed draw term loan and consists of approximately $90,000 for the purposes of (i) refinancing in full the borrowings outstanding under the Wilmington Trust Credit Facility (as defined in Note 6) and (ii) providing additional funding of $30,000, which carries a commitment fee of 2%. On the effective date of the Plan (as defined below), the DIP Credit Agreement will convert to an Exit Term Loan Facility (the "Exit Term Loan Facility") providing for an additional $30,000 in financing, which carries a commitment fee of 2%. The facility is secured by a first priority senior lien on substantially all assets of the Company. Wilmington Trust, National Association ("Wilmington Trust") will continue to act as administrative agent for both the DIP Credit Agreement and the Exit Term Loan Facility. See Note 6.
On October 15, 2015, the Debtors filed with the Bankruptcy Court a proposed disclosure statement (the "Disclosure Statement"), including a Joint Plan of Reorganization by the Debtors and the Debtors in Possession (as amended and supplemented from time to time, including the Plan Amendments described below, the "Plan"). On the Effective Date (defined below) of the Plan, the Company's current outstanding common stock, any preferred stock purchase rights and any options, warrants or any other equity interests will be extinguished with no consideration. In addition, holders of general unsecured claims against the Debtors will receive a distribution equal to their pro rata share of (i) units in a litigation trust established for the benefit of the general unsecured creditors and (ii) for each voting class that accepts the Plan, cash distribution provided under the Plan which shall be paid in semi-annual installments for one year from the Effective Date of the Plan. On January 11, 2016, the Company obtained approval of all voting classes to accept the Plan.

10


In addition, on January 11, 2016, the Debtors, the Official Committee of Unsecured Creditors (the "Creditors' Committee") and the Supporting Parties reached an agreement on key terms of an amended plan of reorganization (the "Plan Amendments"). The Plan Amendments provide for (i) an increase to the funding of the litigation trust, (ii) an increase to the cash distribution provided under the Plan, which is now available to all unsecured creditors, regardless of whether any voting class accepts or rejects the Plan, and (iii) a waiver from the Supporting Parties of their rights to receive the cash distribution for their general unsecured claims, further increasing the recoveries to the general unsecured creditors. Finally, the Plan Amendments provide for a commitment of $40,000 in additional exit capital through an asset-based credit facility from either a third party lender or the Supporting Parties. This additional commitment will be in addition to the $40,000 of new capital previously contemplated by the Equity Commitment Agreement and the Exit Term Loan Facility discussed above.
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 from the Plan or should the Company be unable to continue as a going concern. The Company's ability to continue as a going concern is contingent upon the consummation of its Plan and its ability to comply with the financial and other covenants contained in the Restructuring Support Agreement, the DIP Credit Agreement and the Equity Commitment Agreement.
On January 27, 2016 (the "Confirmation Date"), the Bankruptcy Court entered an order (the "Confirmation Order") confirming the Plan. The Company plans to emerge from the Chapter 11 Cases after satisfying the remaining conditions to effectiveness contemplated under the Plan (defined in the Plan as the "Effective Date"). See Part II, Item 5 of this Quarterly Report on Form 10-Q.
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 $7,769 and $6,361 held in foreign banks at September 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

11


payments from customers are continuously monitored. Three customers in the Company's U.S. Wholesale segment combined accounted for 36.3% of its total trade accounts receivable as of September 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.
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.
During the three and nine months ended September 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 term loans. See Note 8.

12


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. 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 November 20, 2015, the Financial Accounting Standards Board ("FASB") issued a new standard that requires entities to present deferred tax assets and liabilities as non-current in a classified balance sheet. The new standard simplifies the current guidance which requires entities to separately present deferred tax assets and liabilities as current and non-current. The new standard will be effective for fiscal years beginning after December 16, 2016, 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.
On August 18, 2015, the FASB issued a new standard that clarifies presentation and measurement of debt issuance costs incurred in connection with line of credit arrangements. The Company adopted the new standard which became effective upon issuance. The adoption of the new standard did not have any impact on the Company's consolidated financial statements.
On August 12, 2015, the FASB issued a new standard that defers the effective date of its revenue standard issued in May 2014 by one year for all entities and permits early adoption on a limited basis. The standard will be effective for fiscal years and interim

13


periods within those fiscal years, beginning after December 15, 2017. The Company is in the process of evaluating the impact of adoption on the Company's consolidated financial statements.
On July 22, 2015, the 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.
Note 3. Inventories
The components of inventories are as follows:  
 
September 30, 2015
 
December 31, 2014
Raw materials
$
21,237

 
$
17,738

Work in process
3,463

 
2,805

Finished goods
96,607

 
135,813

 
121,307

 
156,356

Less reserve for inventory shrinkage and obsolescence
(14,084
)
 
(8,778
)
Total, net of reserves
$
107,223

 
$
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 September 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.
As part of its valuation analysis of inventory, the Company identified certain slow-moving finished goods and raw materials inventory for additional reserves of $5,131 during the third quarter of 2015. As a result, the Company increased its lower of cost or market reserve for excess and slow-moving inventories to $12,210 at September 30, 2015 from $6,684 at December 31, 2014, respectively. Inventory shrinkage reserves were $1,874 and $2,094 as of September 30, 2015 and December 31, 2014, respectively.

14


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 $4,436 and $6,404 for the three months ended September 30, 2015 and 2014, respectively, and $15,163 and $19,822 for the nine months ended September 30, 2015 and 2014, respectively.
Based on its retail store impairment analysis, the Company recorded impairment charges of $1,203 and $1,193 for the three months ended September 30, 2015 and 2014, respectively, and $4,381 and $1,921 for the nine months ended September 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:
 
September 30, 2015
 
December 31, 2014
Compensation and related taxes
$
12,024

 
$
13,026

Accrued interest
14,308

 
5,932

Workers' compensation and other self-insurance reserves (Note 14)
7,349

 
6,760

Taxes and duties
6,495

 
6,102

Gift cards and store credits
7,328

 
8,462

Loss contingencies
1,059

 
2,360

Deferred revenue
658

 
962

Deferred rent
4,099

 
3,422

Other
14,634

 
14,343

Total accrued expenses and other current liabilities
$
67,954

 
$
61,369

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
 
September 30, 2015
 
December 31, 2014
Revolving credit facility(a)
Wilmington Trust
 
April 4, 2018
 
$
56,968

 
$
0

Revolving credit facility
Capital One
 
August 17, 2018
 
0

 
34,299

Current portion of long-term debt
 
 
 
 
0

 
13

Total
 
 
 
 
$
56,968

 
$
34,312

______________________
(a) Includes accrued interest paid in-kind of $20 at September 30, 2015.
The Company incurred interest expense of $10,349 and $9,858 for the three months ended September 30, 2015 and 2014, respectively, and $30,597 and $29,916 for the nine months ended September 30, 2015 and 2014, respectively, for all outstanding borrowings. None of the interest is subject to capitalization for the three and nine months ended September 30, 2015 and 2014.
Debtor-in-Possession Credit Agreement
On October 5, 2015, the Company filed voluntary petitions in the United States Bankruptcy Court for the District of Delaware seeking relief under Chapter 11 of the Bankruptcy Code. See Note 1.
On October 6, 2015, the Company obtained approval from the Bankruptcy Court of the DIP Credit Agreement between the Company and the Supporting Parties. The DIP Credit Agreement provides for a senior secured, super-priority delayed draw term loan and consists of approximately $90,000 for the purposes of (i) refinancing in full the borrowings outstanding under the Wilmington Trust Credit Facility and (ii) providing additional funding of $30,000, which carries a commitment fee of 2%. The DIP Credit Agreement bears interest at 7.0% for Eurodollar rate loans and 6.0% for base rate loans. Subject to certain conditions, the maturity date of the DIP Credit Agreement is the earlier to occur of April 5, 2016 or the Effective Date of the Plan.
On the Effective Date of the Plan, the DIP Credit Agreement will convert to an Exit Term Loan Facility providing for an additional $30,000 in financing, which carries a commitment fee of 2%. The facility bears interest at the LIBOR based rate plus 10.0% and matures four years after conversion. The facility is secured by a first priority senior lien on substantially all assets of the Company.

15


Wilmington Trust will continue to act as administrative agent for both the DIP Credit Agreement and the Exit Term Loan Facility. See Note 1.
On January 11, 2016, the Company, the Creditors' Committee and the Supporting Parties reached an agreement on key terms of the Plan which includes a commitment of $40,000 in additional exit capital through an asset-based credit facility from either a third party lender or the Supporting Parties. This additional commitment will be in addition to the $40,000 of new capital previously contemplated by the Equity Commitment Agreement and the Exit Term Loan Facility. See Note 1.
Revolving Credit Facility - Wilmington Trust
On October 5, 2015, the Wilmington Trust Credit Facility was replaced by the DIP Credit Agreement.
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 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 provided for a $90,000 asset-based revolving credit facility and was scheduled to mature on April 4, 2018, subject to a January 15, 2018 maturity in limited circumstances. Borrowings under the Wilmington Trust Credit Facility were subject to specified borrowing base requirements not to exceed $60,000. Amounts repaid under the Wilmington Trust Credit Facility could not be re-borrowed.
Borrowings under the Capital One Credit Facility continued under the Wilmington Trust Credit Facility and bore 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 bore 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 Company recorded a loss of $362 on extinguishment of the Capital One Credit Facility.
The Wilmington Trust Credit Facility was 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 required that the Company maintain a lockbox arrangement and contained certain subjective acceleration clauses. In addition, the Wilmington Trust Credit Facility may have, at its discretion, adjusted the advance restrictions and criteria for eligible inventory and accounts receivable. The Wilmington Trust Credit Facility contained 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 have caused an event of default under the Wilmington Trust Credit Facility. If an event of default occurred and was continuing under the Wilmington Trust Credit Facility, the Wilmington Trust Credit Facility may have, among other things, terminated the obligations of the lenders to make loans, and the obligation of the letter of credit issuer to make letter of credit extensions, and required 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.
As of September 30, 2015, the Company was not in compliance with the minimum fixed charge coverage ratio and the minimum adjusted EBITDA covenants under the Wilmington Trust Credit Facility. For the July 1, 2015 through September 30, 2015 covenant reference period, its fixed charge coverage ratio (as defined in the Wilmington Trust Credit Facility) was (0.43) to 1.00 as compared with the covenant minimum of 1.27 to 1.00, and its adjusted EBITDA (as defined in the Wilmington Trust Credit Facility) was $(5,056) as compared with the covenant minimum of $25,071.
Additionally, the commencement of the Chapter 11 Cases as described in Note 1 constitutes an event of default and all commitments under the Wilmington Trust Credit Facility were terminated and all loans (including accrued interest and all other amounts outstanding under this facility) became immediately due and payable. As a result of the filing of the Chapter 11 Cases, the Company believes that the ability of the Debtors' creditors to seek remedies to enforce their respective rights against the Debtors under this and other agreements are stayed and creditor rights of enforcement against the Debtors are subject to the applicable provisions of the Bankruptcy Code and certain contractual agreements.
Revolving Credit Facility - Capital One
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.
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. 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.

16


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 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.
Note 7. Long-Term Debt
Long-term debt consists of the following:
 
September 30, 2015
 
December 31, 2014
Senior Secured Notes due 2020 (a)
$
211,817

 
$
208,084

Standard General Loan Agreement (b)
9,113

 
9,049

Standard General Credit Agreement
15,000

 
0

Other
0

 
268

Total long-term debt
235,930

 
217,401

Current portion of debt
0

 
(13
)
Long-term debt, net of current portion
$
235,930

 
$
217,388

______________________
(a) Includes accrued interest paid in-kind of $10,438 and $7,233 and net of unamortized discount of $4,621 and $5,149 at September 30, 2015 and December 31, 2014, respectively.
(b) Net of unamortized discount of $752 and $816 at September 30, 2015 and December 31, 2014, respectively.
      
Bankruptcy Filing and Support Agreement
On October 5, 2015, the Company filed voluntary petitions in the United States Bankruptcy Court for the District of Delaware seeking relief under Chapter 11 of the Bankruptcy Code. See Note 1.
The commencement of the Chapter 11 Cases constitutes an event of default under the indenture, dated April 4, 2013, that governs the Notes as well as the Standard General Credit Agreement and the Standard General Loan Agreement. As a result of the filing of the Chapter 11 Cases, all commitments under the various facilities were terminated and all loans (with accrued interest thereon) and all other amounts outstanding under such facilities became immediately due and payable.
As a result of the filing of the Chapter 11 Cases, the Company believes that the ability of the Debtors' creditors to seek remedies to enforce their respective rights against the Debtors under these and other agreements are stayed and creditor rights of enforcement against the Debtors are subject to the applicable provisions of the Bankruptcy Code and certain contractual agreements.
On October 4, 2015, the Company entered into a Restructuring Support Agreement with the syndicate of lenders of the Wilmington Trust Credit Facility, which are also the majority holders of the Notes. Under the terms of the Restructuring Support Agreement, the holders of the Notes will be entitled to receive on a pro rata basis, 100% of the equity interest in the reorganized Company after the conclusion of the Chapter 11 Cases, subject to certain exceptions and additional equity interests being issued or reserved under the Equity Commitment Agreement. See Note 1.
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 Company did not make the scheduled interest payment on the Notes due on October 15, 2015, which was approximately $13,900.
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 September 30, 2015, the Company was in compliance with the covenants of the Indenture. The commencement of the Chapter 11 Cases on October 5, 2015 constituted an event of default under 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, 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.
Additionally, under the Restructuring Support Agreement discussed above, Standard General agreed to waive any defaults under this credit agreement (other than defaults arising from the Company's subsidiary's failure to pay principal and interest as they become due) necessary to implement treatment of this credit agreement under the Plan contemplated under the Restructuring Support Agreement and to make reasonable modifications to this credit agreement so long as the Company does not take any action that materially adversely affects the rights of Standard General under this credit agreement and the Plan provides for the reinstatement of Standard General's claims under this credit agreement.
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 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 September 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 September 30, 2015.
 
 
September 30, 2015
 
 
Carrying Amount
 
Fair Value
Senior Secured Notes due 2020
Level 2 Liability
$
211,817

 
$
163,099

Standard General Loan Agreement
Level 3 Liability
9,113

 
8,795

Standard General Credit Agreement
Level 3 Liability
15,000

 
13,590

Lion Warrant
Level 3 Liability
(a)

 
724

 
 
$
235,930

 
$
186,208

 
 
 
 
 
 
 
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 September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Beginning balance
$
7,318

 
$
16,489

 
$
19,239

 
$
20,954

Adjustments included in earnings (a)
(6,594
)
 
(1,785
)
 
(18,515
)
 
(6,250
)
Balance at September 30
$
724

 
$
14,704

 
$
724

 
$
14,704

______________________
(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 are recorded in unrealized gain on change in fair value of warrants in the consolidated statements of operations.
At September 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 nine months ended September 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 nine months ended September 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 September 30, 2015, Mr. Charney personally guaranteed the Company's obligations under two property leases aggregating $3,984.
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 $155 for both the three months ended September 30, 2015 and 2014, respectively, and $466 for both the nine months ended September 30, 2015 and 2014.
Agreements between Mr. Charney and Standard General
As of September 30, 2015, Mr. Charney owned 40.8% 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
On October 5, 2015, the Debtors filed voluntary petitions seeking relief under Chapter 11 of the Bankruptcy Code. In connection with the Restructuring Support Agreement entered into on October 4, 2015, the Supporting Parties will receive on a pro rata basis, 100% of the equity interest in the reorganized Company after the conclusion of the Chapter 11 cases. In addition, on the Effective Date of the Plan, the Company's current outstanding common stock, any preferred stock purchase rights and any options, warrants or any other equity interests will be extinguished with no consideration. See Note 1.
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.


20


At-The-Market Offering
On May 11, 2015, the Company commenced a $10,000 "at-the-market" offering program. Under the program, the Company offered and sold 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). As of September 30, 2015, the Company had issued 4,121 shares of its common stock for net proceeds of $1,998. The Company used the net proceeds generated through the program for working capital and general corporate purposes.
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 September 30, 2015, the fair value of the 24,523 Lion Warrants, estimated using the Binomial Lattice option valuation model was $724 and was recorded as a current liability in the consolidated balance sheets. The calculation assumed a stock price of $0.11, exercise price of $0.66, volatility of 67.20%, annual risk free interest rate of 1.75%, a contractual remaining term of 6.5 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 September 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

 
6.5
Forfeited (a)
(24,511
)
 
$
0.66

 
 
Expired
0

 
 
 
 
Outstanding - September 30, 2015
24,523

 
$
0.66

 
6.5
Fair value - September 30, 2015
$
724

 
 
 
 
______________________
(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 September 30, 2015 and December 31, 2014. The effects of 33,462 and 39,627 shares at September 30, 2015 and 2014, respectively, were excluded from the calculation of net loss per share for three and nine months ended September 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:
 
September 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 stock units
2,133

 
1,505

 
33,462

 
39,627

______________________
(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
On October 5, 2015, the Debtors filed voluntary petitions seeking relief under Chapter 11 of the Bankruptcy Code. In connection with the Restructuring Support Agreement entered into on October 4, 2015, the Supporting Parties will receive on a pro rata basis, 100% of the equity interest in the reorganized Company after the conclusion of the Chapter 11 cases. In addition, on the Effective Date of the Plan, the Company's current outstanding common stock, any preferred stock purchase rights and any options, warrants or any other equity interests will be extinguished with no consideration. See Note 1.
The American Apparel, Inc. 2011 Omnibus Stock Incentive Plan (the "2011 Plan") authorized 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 authorized up to 3,000 shares that might be awarded to any one participant during any calendar year. The purpose of the 2011 Plan was to provide an incentive to selected employees, directors, independent contractors, and consultants of the Company or its affiliates, and provided that the Company might grant options, stock appreciation rights, restricted stock, and other stock-based and cash-based awards. As of September 30, 2015, there were 9,408 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 in the second quarter of 2015.
Restricted Share Awards - The following table presents a summary of the restricted share awards activity as of September 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
578

 
$
0.36

 
 
Vested
(673
)
 
$
0.47

 
 
Forfeited
(8
)
 
$
1.88

 
 
Non-vested - September 30, 2015
0

 
0

 
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. On September 30, 2015, the Company issued quarterly stock grants to five directors for services performed of approximately 63 shares each based on the grant fair value of $0.16 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 September 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
1,237

 
$
0.70

 
 
Vested
(191
)
 
$
0.71

 
 
Forfeited
0

 
$
0.00

 
 
Non-vested - September 30, 2015
1,046

 


 
1.6
In 2015, the Company granted 1,237 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 September 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
1,087

 
$
0.70

 
 
 
 
Exercised
0

 
$
0.00

 
 
 
 
Forfeited
0

 
$
0.00

 
 
 
 
Expired
0

 
$
0.00

 
 
 
 
Outstanding - September 30, 2015
1,087

 
$
0.70

 
9.5
 
$
0

Vested - September 30, 2015
41

 
$
0.71

 
9.5
 
$
0

Non-vested - September 30, 2015
1,046

 
$
0.70

 
9.5
 
$
0

In 2015, the Company awarded stock options for 1,087 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 nine months ended September 30, 2015 was $400. The calculation assumed a stock price of $0.70, exercise price of $0.70, volatility of 61.28%, 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 $147 and $1,106 for the three months ended September 30, 2015 and 2014, respectively, and $561 and $3,764 for the nine months ended September 30, 2015 and 2014, respectively, related to its share-based compensation awards that are expected to vest. No amounts have been capitalized. As of September 30, 2015, unrecorded compensation cost related to non-vested awards was $946, which is expected to be recognized within a year.
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 $18,601 and $18,271 for the three months ended September 30, 2015 and 2014, respectively, and $52,331 and $55,611 for the nine months ended September 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 $414 in open advertising commitments at September 30, 2015, which were primarily allocated among print advertisements in newspapers, magazines and outdoor advertising. The majority of these commitments were paid in 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 $22,379 and $20,409 as of September 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 September 30, 2015 and December 31, 2014, and cash deposits of $21,053 and $16,124 in favor of insurance company beneficiaries as of September 30, 2015 and December 31, 2014, respectively. At September 30, 2015, the Company recorded a total reserve of $21,428, of which $5,832 is included in accrued expenses and $15,596 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 $1,517 and $1,439 was included in accrued expenses in the consolidated balance sheets at September 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 130 retail stores as of September 30, 2015. The Canada segment includes wholesale, retail, and online consumer operations in Canada. As of September 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 September 30, 2015, the retail operations in the International segment comprised 67 retail stores operating in 17 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 September 30, 2015
 
U.S. Wholesale 
 
U.S. Retail
 
Canada
 
International
 
Consolidated
Wholesale net sales
$
37,197

 
$
0

 
$
2,380

 
$
1,594

 
$
41,171

Retail net sales
0

 
39,842

 
8,008

 
26,357

 
74,207

Online consumer net sales
7,257

 
0

 
436

 
2,981

 
10,674

Total net sales to external customers
44,454

 
39,842

 
10,824

 
30,932

 
126,052

Gross profit
5,176

 
24,754

 
5,920

 
17,808

 
53,658

(Loss) income from segment operations
(4,746
)
 
(702
)
 
1,355

 
(1,075
)
 
(5,168
)
Depreciation and amortization
2,019

 
1,610

 
157

 
650

 
4,436

Capital expenditures
316

 
96

 
50

 
96

 
558

Retail store impairment
0

 
211

 
60

 
932

 
1,203

Deferred rent (benefit) expense
(57
)
 
(782
)
 
264

 
(129
)
 
(704
)
 
 
 
Three Months Ended September 30, 2014
 
U.S.
 Wholesale
 
U.S. Retail
 
Canada
 
International
 
Consolidated
Wholesale net sales
$
41,179

 
$
0

 
$
2,699

 
$
3,007

 
$
46,885

Retail net sales
0

 
50,277

 
9,957

 
35,588

 
95,822

Online consumer net sales
8,797

 
0

 
558
 
3,807

 
13,162

Total net sales to external customers
49,976

 
50,277

 
13,214

 
42,402

 
155,869

Gross profit
13,761

 
32,722

 
7,343

 
28,713

 
82,539

Income (loss) from segment operations
7,178

 
2,235

 
1,316

 
(937
)
 
9,792

Depreciation and amortization
2,132

 
2,807

 
414

 
1,051

 
6,404

Capital expenditures
(24
)
 
1,024

 
160

 
428

 
1,588

Retail store impairment
0

 
581

 
114

 
498

 
1,193

Deferred rent benefit
(15
)
 
(284
)
 
(56
)
 
(165
)
 
(520
)

25


 
Nine Months Ended September 30, 2015
 
U.S. Wholesale 
 
U.S. Retail
 
Canada
 
International
 
Consolidated
Wholesale net sales
$
119,608

 
$
0

 
$
6,105

 
$
4,866

 
$
130,579

Retail net sales
0

 
117,787

 
22,232

 
75,394

 
215,413

Online consumer net sales
26,188

 
0

 
1,997

 
10,532

 
38,717

Total net sales to external customers
145,796

 
117,787

 
30,334

 
90,792

 
384,709

Gross profit
26,805

 
70,826

 
14,058

 
50,977

 
162,666

Income (loss) from segment operations
5,367

 
(10,095
)
 
(685
)
 
(5,855
)
 
(11,268
)
Depreciation and amortization
6,252

 
5,860

 
655

 
2,396

 
15,163

Capital expenditures
1,329

 
320

 
569

 
282

 
2,500

Retail store impairment
0

 
1,900

 
282

 
2,199

 
4,381

Deferred rent (benefit) expense
(74
)
 
(198
)
 
185

 
(616
)
 
(703
)
 
 
 
Nine Months Ended September 30, 2014
 
U.S.
 Wholesale
 
U.S. Retail
 
Canada
 
International
 
Consolidated
Wholesale net sales
$
128,361

 
$
0

 
$
7,434

 
$
7,007

 
$
142,802

Retail net sales
0

 
141,712

 
27,137

 
100,800

 
269,649

Online consumer net sales
28,606

 
0

 
2,120

 
12,185

 
42,911

Total net sales to external customers
156,967

 
141,712

 
36,691

 
119,992

 
455,362

Gross profit
47,122

 
91,521

 
20,003

 
78,254

 
236,900

Income (loss) from segment operations
26,045

 
(560
)
 
1,912

 
1,714

 
29,111

Depreciation and amortization
6,497

 
8,972

 
1,269

 
3,084

 
19,822

Capital expenditures
2,133

 
3,496

 
353

 
2,693

 
8,675

Retail store impairment
0

 
696

 
114

 
1,111

 
1,921

Deferred rent benefit
(415
)
 
(2,636
)
 
(155
)
 
(455
)
 
(3,661
)
Reconciliation of reportable segments combined income (loss) from operations to the consolidated loss before income taxes is as follows:  
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Consolidated income (loss) from operations of reportable segments
$
(5,168
)
 
$
9,792

 
$
(11,268
)
 
$
29,111

Unallocated corporate expenses
(15,098
)
 
(19,871
)
 
(44,924
)
 
(44,106
)
Interest expense
(10,349
)
 
(9,858
)
 
(30,597
)
 
(29,916
)
Foreign currency transaction loss
(463
)
 
(616
)
 
(1,167
)
 
(748
)
Unrealized gain on change in fair value of warrants
6,594

 
1,785

 
18,515

 
6,250

(Loss) gain on extinguishment of debt
(362
)
 
171

 
(362
)
 
171

Other (expense) income
(251
)
 
57

 
(140
)
 
5

Consolidated loss before income taxes
$
(25,097
)
 
$
(18,540
)
 
$
(69,943
)
 
$
(39,233
)


26


Net sales by geographic location of customers are as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
United States
$
84,296

 
$
100,253

 
$
263,583

 
$
298,679

Europe (excluding the United Kingdom)
12,245

 
17,440

 
34,854

 
50,105

Canada
10,824

 
13,214

 
30,334

 
36,691

United Kingdom
7,967

 
11,158

 
23,558

 
31,527

South Korea
3,906

 
4,287

 
11,095

 
9,867

Japan
2,192

 
3,203

 
6,731

 
10,266

China
1,963

 
2,262

 
5,841

 
6,002

Australia
1,377

 
2,306

 
4,804

 
6,891

Other foreign countries
1,282

 
1,746

 
3,909

 
5,334

Total consolidated net sales
$
126,052

 
$
155,869

 
$
384,709

 
$
455,362

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. On January 27, 2016, the Bankruptcy Court entered the Confirmation Order confirming the Plan. Under the Plan, the Company's financial responsibility for the following claims will be discharged and/or permanently enjoined, subject to ongoing obligations to indemnify certain parties named as co-defendants in some of the listed litigation.
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

27


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, 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. A Notice of Appeal to the Ninth Circuit Court of Appeals was filed on August 17, 2015.
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. On July 28, 2015, defendants filed a motion to dismiss the appeal for lack of jurisdiction (the "Motion to Dismiss"). On November 19, 2015, the Ninth Circuit denied the Motion to Dismiss, without prejudice to renewing arguments in the answering brief. 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. On September 18, 2015, the Court granted plaintiff's voluntary dismissal of this action without prejudice.

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. This matter is currently stayed with respect to the Company, pursuant to the automatic stay effected by its bankruptcy filing on October 5, 2015. 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. On August 11, 2015, the parties stipulated to arbitration. The Company believes that all such claims are without merit and intends to vigorously dispute the validity of these claims. This matter is currently stayed with respect to the Company, pursuant to the automatic stay effected by its bankruptcy filing on October 5, 2015. 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. Arbitration has been scheduled for February 2017. The Company believes that all such claims are without merit and intends to vigorously dispute the validity of these claims. This matter is currently stayed with respect to the Company, pursuant to the automatic stay effected by its bankruptcy filing on October 5, 2015. 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. On June 19, 2015, the Company filed an anti-SLAPP Motion seeking to strike the Complaint. On September 30, 2015, the Court granted the anti-SLAPP Motion, effectively dismissing claims as to the Company. On November 20, 2015, Mr. Charney filed a notice of appeal with the California Court of Appeal. The Company believes that all such claims are without merit and intends to vigorously dispute the validity of these claims. This matter is currently stayed with respect to the Company, pursuant to the automatic stay effected by its bankruptcy filing on October 5, 2015. 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.

29


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 Court entered judgment dismissing Mr. Charney's action for advancement and fees on fees, with prejudice, on September 25, 2015.
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. On August 13, 2015, the Company filed a motion seeking to strike the complaint. The motion was set for hearing on November 2, 2015. However, this matter is currently stayed with respect to the Company, pursuant to the automatic stay effected by its bankruptcy filing on October 5, 2015. 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. On July 29, 2015, defendants, Standard General, L.P., Standard General Master Fund L.P., and P Standard General Ltd., filed a motion to stay on the ground of inconvenient forum. The Company filed a notice of joinder to the motion this same day. On December 22, 2015, the Court granted the motion in part and stayed the matter in its entirety until all appeals are exhausted, dismissal or final judgment is entered in any case initiated in Delaware, involving all the same issues and parties, or further order of the court. On January 14, 2016, Mr. Charney filed a notice of appeal. 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 three quarters of 2015, a number of unfair labor practices charges were filed against the Company with the National Labor Relations Board alleging violations of the National Labor Relations Act. All of the unfair labor practice charges that were filed have since been dismissed. Nine of these charges have been appealed and remain pending. The Company believes that all such charges are without merit and intends to vigorously dispute the validity of these charges. The Company is unable to predict the outcome of the nine charges at this time, and 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. These matters are currently stayed with respect to the Company, pursuant to the automatic stay effected by the Company's bankruptcy filing on October 5, 2015. 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

30


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.
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. This matter is currently stayed with respect to the Company, pursuant to the automatic stay effected by its bankruptcy filing on October 5, 2015. 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
On October 5, 2015, the Debtors filed voluntary petitions seeking relief under Chapter 11 of the Bankruptcy Code. In connection with the Restructuring Support Agreement entered into on October 4, 2015, the Supporting Parties and other holders of the Notes will be entitled to receive on a pro rata basis, 100% of the equity interest in the reorganized Company after the conclusion of the Chapter 11 Cases, subject to certain exceptions and additional equity interests being issued or reserved under the Equity Commitment Agreement. The Company's current outstanding common stock, any preferred stock purchase rights and any options, warrants or any other equity interests will be extinguished with no consideration. See Note 1.
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 September 30, 2015 and December 31, 2014 and its condensed consolidating statements of operations for the three and nine months ended September 30, 2015 and 2014, condensed consolidating statements of cash flows for the nine months ended September 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
September 30, 2015
(in thousands)
(unaudited)
 
Parent
 
Combined Guarantor Subsidiaries
 
Combined Non-Guarantor Subsidiaries
 
Elimination Entries
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
CURRENT ASSETS
 
 
 
 
 
 
 
 
 
Cash
$
0

 
$
5,333

 
$
8,039

 
$
0

 
$
13,372

Trade accounts receivable, net
0

 
17,057

 
3,568

 
0

 
20,625

Intercompany accounts receivable, net
219,640

 
(234,914
)
 
15,274

 
0

 
0

Inventories, net
0

 
86,632

 
20,591

 
0

 
107,223

Other current assets
451

 
15,084

 
5,082

 
0

 
20,617

Total current assets
220,091

 
(110,808
)
 
52,554

 
0

 
161,837

Property and equipment, net
0

 
26,526

 
5,066

 
0

 
31,592

Investments in subsidiaries
(170,138
)
 
13,733

 
0

 
156,405

 
0

Other assets, net
10,443

 
31,317

 
9,308

 
0

 
51,068

TOTAL ASSETS
$
60,396

 
$
(39,232
)
 
$
66,928

 
$
156,405

 
$
244,497

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

 
$
56,968

 
$
0

 
$
0

 
$
56,968

Accounts payable
0

 
34,118

 
2,924

 
0

 
37,042

Accrued expenses and other current liabilities
25,930

 
26,961

 
15,063

 
0

 
67,954

Fair value of warrant liability
724

 
0

 
0

 
0

 
724

Other current liabilities
0

 
3,787

 
1,775

 
0

 
5,562

Total current liabilities
26,654

 
121,834

 
19,762

 
0

 
168,250

Long-term debt, net
220,930

 
0

 
15,000

 
0

 
235,930

Other long-term liabilities
488

 
23,902

 
3,603

 
0

 
27,993

TOTAL LIABILITIES
248,072

 
145,736

 
38,365

 
0

 
432,173

STOCKHOLDERS' (DEFICIT) EQUITY
 
 
 
 
 
 
 
 
 
Common stock
18

 
100

 
493

 
(593
)
 
18

Additional paid-in capital
221,311

 
6,727

 
8,164

 
(14,891
)
 
221,311

Accumulated other comprehensive (loss) income
(10,273
)
 
(2,536
)
 
(6,452
)
 
8,988

 
(10,273
)
(Accumulated deficit) retained earnings
(396,575
)
 
(189,259
)
 
26,358

 
162,901

 
(396,575
)
Less: Treasury stock
(2,157
)
 
0

 
0

 
0

 
(2,157
)
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY
(187,676
)
 
(184,968
)
 
28,563

 
156,405

 
(187,676
)
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
$
60,396

 
$
(39,232
)
 
$
66,928

 
$
156,405

 
$
244,497


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

 
16,016

 
0

 
61,369

Fair value of warrant liability
19,239

 
0

 
0

 
0

 
19,239

Other current liabilities
0

 
9,762

 
2,038

 
0

 
11,800

Total current liabilities
32,737

 
108,424

 
21,113

 
0

 
162,274

Long-term debt, net
217,133

 
0

 
255

 
0


217,388

Other long-term liabilities
477

 
25,431

 
4,335

 
0

 
30,243

TOTAL LIABILITIES
250,347

 
133,855

 
25,703

 
0

 
409,905

STOCKHOLDERS' (DEFICIT) EQUITY
 
 
 
 
 
 
 
 
 
Common stock
18

 
100

 
494

 
(594
)
 
18

Additional paid-in capital
218,779

 
6,726

 
7,967

 
(14,693
)