Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 
 
xQUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly periodquarter ended March 31,June 30, 2014
OR
oTRANSITION 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)
 

Delaware20-3200601
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
  
747 Warehouse Street, Los Angeles, California90021
(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 fileroAccelerated filerx
    
Non-accelerated filer
o (Do not check if a smaller reporting company)
Smaller reporting companyo
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
Indicate
At August 1, 2014, the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
The number of shares of the registrant's common stockRegistrant had issued and outstanding as of May 1, 2014 was approximately 175,228,823175,533,788 and 173,497,302174,161,765, shares of its common stock, respectively.

Table of Contents

AMERICAN APPAREL, INC.
TABLE OF CONTENTS
 
Page
Part I-Financial Information
6
Item 1.
Financial Statements (unaudited)
6
 Condensed Consolidated Balance Sheets - March 31,as of June 30, 2014 and December 31, 2013
6
 Condensed Consolidated Statements of Operations and Comprehensive Loss -for the Three and Six Months Ended March 31,June 30, 2014 and 2013
7
 
Condensed Consolidated Statements of Cash Flows - Threefor the Six Months Ended March 31,June 30, 2014 and 2013
8
 
Condensed Notes to Condensed Consolidated Financial Statements
10
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
3233
Item 3.Quantitative and Qualitative Disclosures About Market Risk
44
Item 4.
Controls and Procedures
4345
Part II-Other Information
4445
Item 1.
Legal Proceedings
4445
Item 1A.
Risk Factors
4745
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
4748
Item 3.
Defaults Under Senior Securities
4748
Item 4.Mine Safety Disclosures
4748
Item 5.
Other Information
4748
Item 6.
Exhibits
4748
Signatures
 
4950
 

 

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Unless the context requires otherwise, all references in this report to the “Company,” “Registrant”, “we,” “our,”"Company," "Registrant," "we," "our," and “us”"us" refer to American Apparel, Inc., a Delaware corporation, together with its wholly100% 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”"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”"forward-looking statements" for purposes of these provisions. Statements that include the use of terminology such as “may,” “will,” “expects,” “believes,” “plans,” “estimates,” “potential,” or “continue,”"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,” “potential,” “opportunity,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve,”"trend," "potential," "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, our anticipated growth and trends in our business, our 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:
consequences of the suspension of our chief executive officer, including the pending internal investigation related thereto, any litigation or regulatory investigations or any impact on our sales or brand, and any future determinations that may be made with respect thereto;
ability to hire and/or retain qualified employees, including at the chief executive officer and other executive levels;
future financial condition, results of operations, our plans and our prospects, expectations, goals and strategies for future growth, operating improvements and cost savings, and the timing of any of the foregoing;
our ability to make our debt service payments and remain in compliance with financial covenants under our financing arrangements and obtain appropriate waivers or amendments with respect to any noncompliance;
our liquidity and projected cash flows;
our plan to make continued investments in advertising and marketing; 
our growth, expansion and acquisition prospects and strategies, the success of such strategies, and the benefits we believe can be derived from such strategies; 
ability to make debt service payments and remain in compliance with financial covenants under financing arrangements and obtain appropriate waivers or amendments with respect to any noncompliance;
liquidity and projected cash flows;
plans to make continued investments in advertising and marketing; 
the outcome of investigations, enforcement actions and litigation matters, including exposure, which could exceed expectations;
our intellectual property rights and those of others, including actual or potential competitors, our personnel, consultants, and collaborators;
operations outside the United States; 
trends in raw material costs and other costs both in the industry, and specific to the Company;
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; 
overall industry and market performance; 
operations outside the U.S.; 
the impact of accounting pronouncements; 
our ability to maintain compliance with the listing requirements of NYSE MKT LLC;
our ability to improve manufacturing efficiency at our production facilities;
our ability to improve efficiency and control costs at our distribution facility located in La Mirada, California;
management's goals and plans for future operations; 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

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materially from those expressed in or implied by the forward-looking statements and future results could differ materially from those expressed in or implied by the forward-looking statements and future results could differ materially from historical performance.

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performance and those expressed in or implied by the forward-looking statements. Such assumptions, events, risks, uncertainties and other factors include, among others, those described underare found in Item IA. Risk Factors in Part II Item IA and elsewhere in this reportQuarterly Report on Form 10-Q, and in the Company's Annual Report on Form 10-K for the year ended December 31, 2013, (filed with the United States Securities and Exchange Commission (the “SEC”) on April 1, 2014) as well as in other reports and documents we file with the SECSecurities and Exchange Commission (the "SEC") and include, without limitation, the following:
our ability to generate or obtain from external sources sufficient liquidity for operationssuspension and debt service;
our financial condition, operating results and projected cash flows;
consequencespossible termination of our significant indebtedness,chief executive officer and consequences related thereto, including the pending internal investigation related thereto, any litigation or regulatory investigations or any impact on our relationship with our lenders and our ability to comply with our debt agreements and generate cash flow to service our debt, and the risk of acceleration of borrowings thereunder as a result of noncompliance;
disruptions in the global financial markets;
our ability to maintain compliance with the exchange rules of the NYSE MKT, LLC;
adverse changes in our credit ratingssales or brand, and any related impact on financial costs and structure;
continued compliancefuture determinations that may be made with U.S. and foreign government regulations, legislation, and regulatory environments, 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, and other risks associated with our foreign operations and foreign supply sources, including disruption of markets and foreign supply sources, changes in import and export laws, currency restrictions, and currency exchange rate fluctuations;
the highly competitive and evolving nature of our business in the U.S. and internationally;
changes in the level of consumer spending or preferences or demand for our products;
our ability to pass on the added cost of raw materials and labor to customers;
our ability to attract customers to our stores;
the availability of store locations at appropriate terms and our ability to identify locations and negotiate new store leases effectively and to open new stores and expand internationally;
loss or reduction in sales to our wholesale or retail customers or financial nonperformance by our wholesale customers;
risks that our suppliers or distributors may not timely produce or deliver our products;
changes in the cost of materials and labor, including increases in the price of raw materials in the global market and increases in minimum wages;
our ability to effectively carry out and manage our strategy, including growth and expansion both in the U.S. and internationally;
technological changes in manufacturing, wholesaling, or retailing;
our ability to successfully implement our strategic, operating, financial and personnel initiatives;respect thereto;
changes in key personnel, our ability to hire and retain key personnel, and our relationship with our employees;
voting control by our executive officers, directors, lenders and other affiliates;
ability to successfully implement our strategic, operating, financial and personnel initiatives;
ability to effectively carry out and manage our strategy including growth and expansion in the U.S. and internationally;
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 business in the U.S. and internationally;
risks associated with the recent downturn in apparel spending in the U.S.;
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;
our ability to pass on the added cost of raw materials and labor to customers;
changes in the price of raw materials in the global market and labor costs including increases in minimum wages;
ability to effectively manage inventory levels;
ability to operate our distribution facility located in La Mirada, California without further unanticipated costs or, negative sales impacts, including the ability to achieve, as and when planned, labor cost reductions;
locationrisks that our suppliers or distributors may not timely produce or deliver products;
ability to renew leases on economic terms;
ability to identify store locations and negotiate new leases effectively; ability to open new stores and expand internationally; and the availability of store locations at appropriate terms;
ability to generate or obtain from external sources sufficient liquidity for operations and debt service;
consequences of our facilities in the same geographic area;
significant indebtedness including relationship with lenders; ability to comply with debt agreements; ability to generate cash flow to serve our debt; and the risk includingof acceleration of borrowings thereunder as a result of noncompliance;
adverse changes in our credit ratings and any related impact on financial costs and timely delivery issues associated therewith, that information technology systemsstructure;
continued compliance with U.S. and foreign government regulations and legislation; and regulatory environments including environmental, immigration, labor, and occupational health and safety laws and regulations;
loss of U.S. import protections; changes may disrupt our supply chain or operationsin duties, tariffs and could impact our cash flow and liquidity, and our ability to upgrade our information technology infrastructure andquotas; other risks associated with the systems that operate our online retail operations;
our ability to effectively manage inventory levels;

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our ability to renew leases at existing locations on economic terms;
risks associated with the recent downturnforeign operations and supply sources under market disruption; changes in apparel spending in the United States;import and export laws; 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 coverages;coverage;
tax assessments by domestic or foreign governmental authorities, including import or export duties on our products and the applicable rates for any such taxes or duties;
ability to maintain compliance with the exchange rules of the NYSE MKT LLC;
the adoption of new accounting standards or changes in interpretations of accounting principles;
seasonalityadverse weather conditions or natural disaster, including those which may be related to climate change;
technological changes in manufacturing, wholesaling, or retailing;
the risk, including costs and fluctuations in comparable store salestimely delivery issues associated therewith, that information technology systems changes may disrupt our supply chain or operations and wholesale net sales,could impact cash flow and liquidity, and ability to upgrade information technology infrastructure and other risks associated margins;with the systems that operate our online retail operations; and

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general economic conditions, including increases in interest rates, geopolitical events, other regulatory changes


the risk of failure to protect the integrity and inflation or deflation;
disruptions due to severe weather or climate change;security of our information systems and
disruptions due to earthquakes, flooding, tsunamis or other natural disasters. our 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.

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PART I-FINANCIAL INFORMATION
Item 1.Financial Statements (unaudited)
American Apparel, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Amounts and shares in thousands, except per shareper-share amounts)
(unaudited)
 
March 31, 2014 December 31, 2013*June 30, 2014 December 31, 2013
ASSETS      
CURRENT ASSETS   
Current assets:   
Cash$16,683
 $8,676
$10,160
 $8,676
Trade accounts receivable, net of allowances of $2,281 and $2,229 at March 31, 2014 and December 31, 2013, respectively22,041
 20,701
Trade accounts receivable (net of allowances $2,592; $2,229)26,214
 20,701
Prepaid expenses and other current assets13,367
 15,636
15,832
 15,636
Inventories, net163,652
 169,378
150,751
 169,378
Income taxes receivable and prepaid income taxes350
 306
476
 306
Deferred income taxes, net of valuation allowance604
 599
620
 599
Total current assets216,697
 215,296
204,053
 215,296
PROPERTY AND EQUIPMENT, net65,607
 69,303
DEFERRED INCOME TAXES, net of valuation allowance2,425
 2,426
OTHER ASSETS, net46,761
 46,727
Property and equipment, net61,659
 69,303
Deferred income taxes, net of valuation allowance2,317
 2,426
Other assets, net46,336
 46,727
TOTAL ASSETS$331,490
 $333,752
$314,365
 $333,752
LIABILITIES AND STOCKHOLDERS' DEFICIT 
  
 
  
CURRENT LIABILITIES 
  
Current liabilities: 
  
Cash overdraft$4
 $3,993
$0
 $3,993
Revolving credit facilities and current portion of long-term debt29,469
 44,042
30,568
 44,042
Accounts payable40,174
 38,290
34,818
 38,290
Accrued expenses and other current liabilities53,952
 50,018
47,364
 50,018
Fair value of warrant liability8,287
 20,954
16,489
 20,954
Income taxes payable1,837
 1,742
1,897
 1,742
Deferred income tax liability, current1,241
 1,241
1,233
 1,241
Current portion of capital lease obligations1,177
 1,709
1,186
 1,709
Total current liabilities136,141
 161,989
133,555
 161,989
LONG-TERM DEBT, net of unamortized discount of $5,631 and $5,779 at March 31, 2014 and December 31, 2013, respectively214,586
 213,468
CAPITAL LEASE OBLIGATIONS, net of current portion5,866
 5,453
DEFERRED TAX LIABILITY529
 536
DEFERRED RENT, net of current portion15,891
 18,225
OTHER LONG-TERM LIABILITIES12,149
 11,485
Long-term debt (net of unamortized discount $5,475; $5,779)215,797
 213,468
Capital lease obligations, net of current portion4,172
 5,453
Deferred tax liability546
 536
Deferred rent, net of current portion15,137
 18,225
Other long-term liabilities12,760
 11,485
TOTAL LIABILITIES385,162
 411,156
381,967
 411,156
COMMITMENTS AND CONTINGENCIES

 



 

STOCKHOLDERS' DEFICIT 
  
 
  
Preferred stock, $0.0001 par value per share, authorized 1,000 shares; none issued—
 —
Common stock, $0.0001 par value per share, authorized 230,000 shares; 175,229 shares issued and 173,377 shares outstanding at March 31, 2014 and 113,469 shares issued and 111,330 shares outstanding at December 31, 201317
 11
Preferred stock, $0.0001 par value per-share: authorized 1,000 shares; none issued0
 0
Common stock, $0.0001 par value per-share: authorized 230,000 shares;
Issued 175,537; 113,469, Outstanding 174,052; 111,330

17
 11
Additional paid-in capital215,135
 185,472
216,537
 185,472
Accumulated other comprehensive loss(4,777) (4,306)(3,904) (4,306)
Accumulated deficit(261,890) (256,424)(278,095) (256,424)
Less: Treasury stock, 304 shares at cost(2,157) (2,157)(2,157) (2,157)
TOTAL STOCKHOLDERS' DEFICIT(53,672) (77,404)(67,602) (77,404)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT$331,490
 $333,752
$314,365
 $333,752
* Condensed from audited financial statements.

See accompanying condensed notes to condensed consolidated financial statements.

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

Three Months Ended March 31,Three Months Ended June 30, Six Months Ended June 30,
2014 20132014 2013 2014 2013
Net sales$137,096
 $138,060
$162,397
 $162,236
 $299,493
 $300,296
Cost of sales65,122
 65,192
80,010
 78,366
 145,132
 143,558
Gross profit71,974
 72,868
82,387
 83,870
 154,361
 156,738
Selling expenses54,062
 55,463
52,443
 57,790
 106,505
 113,253
General and administrative expenses (including related party charges of $160 and $217 for the three months ended March 31, 2014 and 2013, respectively)24,909
 27,804
General and administrative expenses (including related party charges of
$222; $227, $382; $444)
27,135
 27,994
 52,044
 55,798
Retail store impairment499
 78
229
 0
 728
 78
   
Loss from operations(7,496) (10,477)
   
Income (loss) from operations2,580
 (1,914) (4,916) (12,391)
Interest expense10,039
 11,214
10,019
 8,220
 20,058
 19,434
Foreign currency transaction loss132
 713
0
 158
 132
 871
Unrealized (gain) loss on change in fair value of warrants(12,667) 23,645
Other income(8) (5)
Unrealized loss (gain) on change in fair value of warrants8,202
 (5,498) (4,465) 18,147
Loss on extinguishment of debt0
 32,101
 0
 32,101
Other expense (income)60
 (11) 52
 (16)
Loss before income taxes(4,992) (46,044)(15,701) (36,884) (20,693) (82,928)
Income tax provision474
 467
504
 620
 978
 1,087
Net loss$(5,466) $(46,511)$(16,205) $(37,504) $(21,671) $(84,015)
          
Basic and diluted loss per share$(0.05) $(0.42)
Weighted average basic and diluted shares outstanding111,554 109,918
Basic and diluted loss per-share$(0.09) $(0.34) $(0.14) $(0.76)
Weighted-average basic and diluted shares outstanding173,643
 110,241
 152,987
 110,080
          
Net loss (from above)
$(5,466) $(46,511)$(16,205) $(37,504) $(21,671) $(84,015)
Other comprehensive loss item:
   
Foreign currency translation loss, net of tax(471) (1,504)
Other comprehensive loss, net of tax(471) (1,504)
Other comprehensive income (loss) items:
       
Foreign currency translation873
 (726) 402
 (2,230)
Other comprehensive income (loss), net of tax873
 (726) 402
 (2,230)
Comprehensive loss$(5,937) $(48,015)$(15,332) $(38,230) $(21,269) $(86,245)

See accompanying condensed notes to condensed consolidated financial statements.
 

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

Three Months Ended March 31,Six Months Ended June 30,
2014 20132014 2013
CASH FLOWS FROM OPERATING ACTIVITIES      
Cash received from customers$136,815
 $137,654
$295,135
 $297,293
Cash paid to suppliers, employees and others(130,984) (139,649)(276,024) (305,435)
Income taxes (paid) refunded(403) 9
Income taxes paid(902) (724)
Interest paid(1,521) (4,040)(16,938) (5,067)
Other8
 18
32
 30
Net cash provided by (used in) operating activities3,915
 (6,008)1,303
 (13,903)
      
CASH FLOWS FROM INVESTING ACTIVITIES      
Capital expenditures(3,958) (7,354)(7,087) (13,637)
Proceeds from sale of fixed assets30
 12
29
 30
Restricted cash—
 (622)178
 1,756
Net cash used in investing activities(3,928) (7,964)(6,880) (11,851)
      
CASH FLOWS FROM FINANCING ACTIVITIES      
Cash overdraft(3,989) 1,340
(3,993) 4,117
(Repayments) borrowings under revolving credit facilities, net(14,557) 7,624
Repayments of expired revolving credit facilities, net0
 (28,513)
(Repayments) borrowings under current revolving credit facilities, net(13,457) 29,830
Repayments of term loans and notes payable(50) (3)(53) (25,507)
Repayment of Lion term loan0
 (144,149)
Issuance of Senior Secured Notes0
 199,820
Payments of debt issuance costs(372) (1,678)(699) (11,651)
Net proceeds from issuance of common stock28,554
 —
28,446
 0
Payment of payroll statutory tax withholding on share-based compensation associated with issuance of common stock(125) (112)(301) (2,119)
Repayments of capital lease obligations(137) (176)(1,828) (1,081)
Net cash provided by financing activities9,324
 6,995
8,115
 20,747
      
EFFECT OF FOREIGN EXCHANGE RATE ON CASH(1,304) (300)
   
NET INCREASE (DECREASE) IN CASH8,007
 (7,277)
Effect of foreign exchange rate on cash(1,054) (502)
Net increase (decrease) in cash1,484
 (5,509)
CASH, beginning of period8,676
 12,853
8,676
 12,853
CASH, end of period$16,683
 $5,576
$10,160
 $7,344

See accompanying condensed notes to condensed consolidated financial statements.

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American Apparel, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (continued)
(Amounts in thousands)
(unaudited)
Three Months Ended March 31,Six Months Ended June 30,
2014 20132014 2013
RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES      
Net loss$(5,466) $(46,511)$(21,671) $(84,015)
Depreciation and amortization of property and equipment, and other assets6,715
 6,031
13,418
 12,417
Retail store impairment499
 78
728
 78
Loss on disposal of property and equipment—
 13
76
 15
Share-based compensation expense1,115
 3,547
2,658
 6,816
Unrealized (gain) loss on change in fair value of warrants(12,667) 23,645
(4,465) 18,147
Amortization of debt discount and deferred financing costs597
 2,610
1,264
 3,126
Loss on extinguishment of debt0
 32,101
Accrued interest paid-in-kind1,030
 4,564
2,078
 4,653
Foreign currency transaction loss132
 713
132
 871
Allowance for inventory shrinkage and obsolescence121
 254
818
 1,346
Bad debt expense139
 139
517
 301
Deferred income taxes108
 39
Deferred rent(2,222) (448)(3,141) (1,120)
Changes in cash due to changes in operating assets and liabilities:      
Trade accounts receivables(420) (545)(4,876) (3,304)
Prepaid expenses and other current assets(107) (4,040)
Inventories5,445
 (4,811)18,118
 (1,809)
Prepaid expenses and other current assets2,288
 220
Other assets(235) (1,825)(157) (3,737)
Accounts payable2,424
 3,999
(2,560) (5,562)
Accrued expenses and other liabilities4,349
 1,859
(1,603) 9,483
Income taxes receivable / payable71
 460
(32) 291
Net cash provided by (used in) operating activities$3,915
 $(6,008)$1,303
 $(13,903)
      
NON-CASH INVESTING AND FINANCING ACTIVITIES      
Property and equipment acquired, and included in accounts payable$1,040
 $3,433
$628
 $2,767

See accompanying condensed notes to condensed consolidated financial statements.


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American Apparel, Inc. and Subsidiaries
Condensed Notes to Condensed Consolidated Financial Statements
For the Three and Months Ended March 31, 2014 and 2013
(Amounts and shares in thousands, except per shareper-share amounts)
(unaudited)

Note 1. Organization and Business
American Apparel, Inc. and its subsidiaries (collectively the “Company”"Company") is a vertically-integrated manufacturer, distributor, and retailer of branded fashion basic apparel products and designs,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 direct to customers through its retail stores located in the United States,U.S. and internationally. In addition, the Company operates an online retail e-commerce website. At March 31,June 30, 2014, the Company operated a total of 249247 retail stores in 20 countries:countries; the United States,U.S., Canada, and 18 other countries.
LiquidityThe Company Highlights
Recent Developments - On June 18, 2014, the Board of Directors suspended Dov Charney as President and Management's PlanChief Executive Officer ("CEO") as well as Chairman of the Board of Directors.
In connection with the suspension of Mr. Charney, the Company might be deemed to have triggered an event of default under the loan agreement (the "Lion Loan Agreement") with Lion Capital LLP ("Lion"). On July 16, 2014, Lion assigned its rights and obligations as a lender under the Lion Loan Agreement to an entity affiliated with Standard General Group ("Standard General").
Standard General has waived any default under the Lion Loan Agreement that may have resulted or which might result from Mr. Charney not being the CEO of the Company and has agreed to amend the Lion Loan Agreement (the "Standard General Amendment").
In connection with a Nomination, Standstill and Support Agreement with Standard General and Mr. Charney dated July 9, 2014, five directors, including Mr. Charney, resigned from the Company's Board of Directors (the "Board"), effective as of August 2, 2014, and five new directors were appointed to the Board, three of which were designated by Standard General and two of which were appointed by the mutual agreement of Standard General and the Company.
Liquidity - As of March 31,June 30, 2014, the Company had approximately $16,68310,160 in cash, and $16,76230,554 of availability for additional borrowings underoutstanding on a $50,000 asset-backed revolving credit facility with Capital One Business Credit Corp. ("Capital One" and such facility, the "Capital One Credit Facility") (as defined in Note 6). Asand $16,891 of April 30, 2014, the Company had $18,261 availableavailability for borrowing under the revolving credit agreement.additional borrowings.
OnIn March 25, 2014, the Company entered into the Fifth Amendment to the Capital One Credit Facility which, effective upon the receipt of net proceeds from the March 31, 2014 equity offering (see below), among other things:(the "Fifth Amendment") and waived the obligation to maintain the minimum fixed charge coverage and maximum leverage ratios for the three month periodsmonths ended December 31, 2013 and March 31, 2014; reset for future periods2014. Based on the fixed charge coverage ratio, the maximum leverage ratio and the maximum capital expenditures allowed; added a minimum EBITDA covenant; increasedFifth Amendment, the interest rate payablerates on borrowings under the credit agreement by 0.5% per annumCapital One Credit Facility equal to either LIBOR plus 5.0% or the bank's prime rate plus 4.0% (at at the Company's option);option and increasedare subject to specified borrowing requirements and covenants. In addition, the fees payable upon early termination.
On March 31,Fifth Amendment reset a minimum fixed charge coverage ratio, a maximum leverage ratio, and a maximum capital expenditures allowed, and added a minimum EBITDA covenant. For the three months ended June 30, 2014, the Company completedwas required to maintain a public offeringminimum fixed charge coverage ratio of approximately 61,645 sharesnot less than 0.85 to 1.00 and achieve a minimum EBITDA of its common stock at $0.50 per share for net proceeds of $28,554.
On April 14, 2014, the Company paid $13,390 in interest on Senior Secured Notes due 2020 (the "Notes")$9,000.
The Company believes that it has sufficient financing commitments to meet funding requirements forwas in compliance with the next twelve months.covenant at June 30, 2014.
Management's Plan - The Company continues to develop other initiatives intended to either increase sales, reduce costs or improve liquidity. InBeginning with the fourth quarter of 2013, and continuing through the first quarter of 2014, significant reductions were made inCompany instituted various programs to reduce costs such as payroll and related costs associated with manufacturing and administrative overhead. The Company also instituted a program towards the end oflimited capital expenditures starting the first quarter of 2014 to limit capital expenditures. Additionally,2014. In addition, the Company intends to continuecontinues to drive productivity improvements from its new distribution center, reduce inventories, reduce storeinventory reductions, other labor costs,cost reductions, and evaluate further consolidation of administrative and manufacturing functions. Efforts to identify additional ways to reduce costs and improve productivity will beare ongoing.
Although the Company has made significant improvements under this plan,these programs, the Company operates in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. The Company's cash flows are dependent upon meeting future sales growth projections and reducing certain expenses. ThereAccordingly, there can be no assurance that the Company's planned improvements will be successful.

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Note 2. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of American Apparel, Inc. and its wholly-owned100% owned subsidiaries. All intercompany accounts and transactions have been eliminated upon consolidation. Certain reclassifications have been made to the prior year'sThe condensed consolidated financial statements and related footnotes to conform them to the 2014 presentation.
The accompanying unaudited condensed consolidated financial statements of the Company and its wholly owned subsidiaries have been prepared by the Company, in accordance with U.S. generally accepted accounting principles generally accepted in the United States (“GAAP”("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, and have not been audited. Accordingly, these unauditedS-X.
The financial data of the Company included herein is unaudited. The condensed consolidated financial

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statements do not include all ofcontain certain information that was included in the information and notes required by GAAP for completeannual financial statements and should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended December 31, 2013 included in the Company's Annual Report on Form 10-K.10-K for the year ended December 13, 2013. Readers are urged to review the Company's Annual Report on Form 10-K for the year ended December 31, 2013 as well as other publicly filed documents for more complete descriptions and discussions. In the opinion of management, the interim unaudited 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.
All intercompany balances and transactions have been eliminated upon consolidation. Certain prior year amounts have been reclassified to conform to the current year presentation.
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 at the date of the financial statements,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 complex and subjectivesignificant estimates include: inventory valuation and obsolescence; valuation and recoverability of long-lived assets, including the values assigned to goodwill and property and equipment; fair value calculations, including derivative liabilities such as the Lion warrants;liabilities; contingencies, including accruals for the outcome of current litigation and assessments and self-insurance; income taxes, including uncertain income tax positions and recoverability of deferred income taxes;taxes and any limitations as to net operating losses ("NOL"); and cash flow projections in assessing future performance related to financial standards requiring a prospective analysis in valuing and classifying assets and liabilities.
On a regular basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience, and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments whichthat 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’sCompany's U.S. Wholesale segment. TheCash is managed within established guidelines, and the Company mitigates its risk by investing through major financial institutions. The Company had approximately $5,7587,843 and $7,374 held in foreign banks at March 31,June 30, 2014 and December 31, 2013, respectively.
The Company mitigates its risks relatedConcentration of credit risk with respect to trade receivablesaccounts receivable is limited by performing on-going credit evaluations of its customers and adjustsadjusting credit limits based upon payment history and the customer’scustomer's current credit worthiness, as determined by the review of their current credit information.worthiness. The Company also maintains an insurance policy for certain customers based on a customer’scustomer's credit rating and established limits. Collections and payments from customers are continuously monitored. As of June 30, 2014, Onetwo customercustomers in the Company's U.S. Wholesale segment accounted for 19.7%18.5% and 10.3% of the Company's total trade accounts receivable. As of December 31, 2013, one customer accounted for 14.2% of the Company’s total trade accounts receivables as of March 31, 2014 and December 31, 2013, respectively.receivable. 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 Company’s financial instruments are primarily composed ofrecorded in the consolidated balance sheets include cash, restricted cash,trade accounts receivable (including credit card receivables), accounts payable, revolving credit borrowings, itsfacilities, senior secured notes, term loans and warrants. Due to their short-term maturity, the carrying values of cash, trade accounts receivables, accounts payable and accrued expenses 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 cash, restricted cash, accounts receivablea 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

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use in pricing the asset or liability at the measurement date. Assets and accounts payable closely approximates their carrying value due to their short maturities and variable rates. Theliabilities recorded on the consolidated balance sheets at fair value of fixed-rate borrowings notare categorized based on quoted prices is estimated using a discounted cash flow analysis.
The valuation techniques utilized are based upon observable and unobservable inputs. Observablethe level of judgment associated with inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the followingused to measure their fair value hierarchy:and the level of market price observability, as follows:
Level 1 – QuotedUnadjusted quoted prices are available in active markets for identical assets or liabilities.liabilities as of the reporting date.
Level 2 – ObservablePricing inputs are other than Level 1unadjusted quoted prices such as quotedin active markets, which are based on the following:
•Quoted prices for similar assets or liabilities; quotedliabilities in active markets;
•Quoted prices for identical or similar assets or liabilities in markets that are not activenon-active markets; or other
•Either directly or indirectly observable inputs that are observable or can be corroborated by observable market data for substantially the full termas of the related asset or liabilities.reporting date.
Level 3 – UnobservablePricing inputs that are supported by little or no market activityunobservable and that are significant to the overall fair value of assets or liabilities.

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Whenever possible,measurement, and the Company utilizes observable market inputs (quoted market prices) when measuring fair value.
Fordetermination of fair value measurements categorized within Level 3 of the fair value hierarchy,requires significant management judgment or estimation. The valuation policies and procedures underlying are determined by the Company's accounting and finance department determines its valuation policiesteam and procedures. Their determinations are approved by the Chief Financial Officer.
In certain cases, inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Thus, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) and unobservable (Level 3). The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset or liability.
The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2, or from Level 2 to Level 3. The Company recognizes transfers between levels at either the actual date of the event or a change in circumstances that caused the transfer.
As of March 31,June 30, 2014, there were no transfers in or outbetween Levels 1, 2, and 3 of the fair value hierarchy.
Summary of Significant Valuation Techniques
Level 2 and Level 3 from other levels.Measurements:
The fair value of fixed rate borrowings notSenior secured notes: Estimated based on quoted prices are estimatedfor identical senior secured notes in non-active market.
Level 3 Measurements:
Term notes (Lion Loan Agreement): Estimated using a projected discounted cash flow analysis based on unobservable inputs including principal and interest payments, principal payments and discount rate. A yield rate and is classified within Level 3was estimated using yields rates for publicly traded debt instruments of the valuation hierarchy. An increase or decrease in the stock price and the discount rate assumption can significantly decrease or increase the fair value of the fixed rate borrowings.comparable companies with similar features. See Note 8.
The fair value of each warrant is estimatedWarrants: 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, and were classified within Level 3 of the valuation hierarchy. An increase or decrease in these inputs could significantly increase or decrease the fair value of the warrants.volatility. See Notes 8 and 11.
The fair value of indefinite-livedIndefinite-lived assets which consists exclusively of goodwill, is measured in connection with the Company’s annual goodwill impairment test or when events occur that indicate a potential for impairment.  The fair value of the reporting unit to which goodwill has been assigned, is determined- 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, and are classified within Level 3 of the valuation hierarchy. 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.assumptions.
Retail stores that have indicators of impairment and whose carrying value of assets are greater than their related projected undiscounted future cash flows, are measured for impairment by comparing the fair value of the assets against their carrying value. Fair value of the assets is estimatedstores: Estimated using a projected discounted cash flow analysis based on unobservable inputs including gross profit and discount rate, and is classified within Level 3 of the valuation hierarchy.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
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements.  Deferred tax assets and liabilities are determined based onrecognized for the differenceestimated future tax consequences attributable to differences between the financial statementreporting 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

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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.
During the three months ended March 31, 2014 and 2013, the Company incurred losses from operations. Based upon these results, and trends in the Company's performance projected through 2014, it is more likely than not that the Company will not realize any benefit from the deferred tax assets recorded by the Company in previous periods arising from net operating loss carry-forwards.  The Company did not record income tax benefits in the condensed consolidated financial statements for the three months ended March 31, 2014 and 2013 as the Company determined that it was more likely than not that sufficient taxable income in the future will not be generated in the respective jurisdictions to realize the deferred income tax assets. 
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. In management's opinion,Management believes that adequate provisions for income taxes have been made for all years.years, but the outcome of tax audits cannot be predicted with certainty. If actual taxableany 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 by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.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, Spain,Ireland, Italy, IrelandSouth Korea, and South Korea,Spain, consolidated in the Company's U.S. federal income tax return. The Company willis generally be eligible to receive tax credits on its U.S. federal income tax return for most of the foreign taxes paid by the Company's entitiessubsidiaries included in the United States FederalU.S. federal income tax return.

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TheFor financial statement purposes, the Company accounts forrecognizes 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 accordance with ASC 740 - “Income Taxes.”its financial statements. Gross unrecognized tax benefits at March 31, 2014 and December 31, 2013 are included in current liabilities in the accompanying condensed consolidated balance sheets.  The Company accruessheets, and interest and penalties on unrecognized tax benefits as components ofare recorded in the income tax provision in the accompanying condensed consolidated statements of operations. In accordance with ASC 740, the Company evaluates whether a valuation allowance should be established against the net deferred tax assets based upon the consideration of all available evidence and using a “more likely than not” standard. 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. In conducting the analysis, the Company utilizes an approach, which considers the current year loss, including an assessment of the degree to which any losses are driven by items that are unusual in nature and 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.
Accounting Standards Updates
RecentlyIn June 2014, the Financial Accounting Standards Board ("FASB") issued a new standard on accounting for share-based payments. The new standard clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. As such, the performance target should not be reflected in estimating the grant date fair value of the award. The new standard also clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period for which the requisite service has already been rendered. The new standard will be effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company is in the process of evaluating the impact of adoption on the Company's condensed consolidated financial statements.
In May 2014, the FASB issued a new standard on recognizing revenue in contracts with customers. The new standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The new standard creates a five-step process to recognize revenue that requires entities to exercise judgment when considering contract terms and relevant facts and circumstances. The new standard also requires expanded disclosures surrounding revenue recognition. The new standard will be effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2016. The Company is in the process of evaluating the impact of adoption on the Company's condensed consolidated financial statements.
Other recently issued accounting standards updates are not expected to have a material effect on the Company's condensed consolidated financial statements.
Subsequent Events
The Company has evaluated events that occurred subsequent to March 31, 2014 and through the date the financial statements were available to be issued. Management concluded that no additional subsequent events required disclosure in these financial statements other than those disclosed in these notes to these financial statements.
Note 3. Inventories
The components of inventories are as follows:  
March 31, 2014 December 31, 2013June 30, 2014 December 31, 2013
Raw materials$20,134
 $23,199
$18,580
 $23,199
Work in process3,382
 2,596
3,084
 2,596
Finished goods143,036
 146,361
132,693
 146,361
166,552
 172,156
154,357
 172,156
Less reserve for inventory shrinkage and obsolescence(2,900) (2,778)(3,606) (2,778)
Total, net of reserves$163,652
 $169,378
$150,751
 $169,378
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. The cost elements of inventories include materials, labor and overhead. For the three and six months ended March 31,June 30, 2014 and 2013, no one supplier provided more than 10% of the Company’sCompany's raw material purchases.
The Company identifies potentially excess and slow-moving inventories by evaluating turn rates, inventory levels and other factors and provides reserves forrecords lower of cost or market reserves for such identified excess and slow-moving inventories. At March 31, 2014 and December 31, 2013, theThe Company had a lower of cost or market reserve for excess and slow-moving inventories of $1,9211,928 and $1,951 at June 30, 2014 and December 31, 2013, respectively.
The Company establishes a reserve for inventory shrinkage for each of its retail locations and its warehouse. The reserve iswarehouse based on the historical results of physical inventory cycle counts. The Company had a reserve for inventoryInventory shrinkage in the amount of $979reserves were $1,678 and $827 atas of March 31,June 30, 2014 and December 31, 2013, respectively.

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Note 4. Property and Equipment
Depreciation and amortization expense relating to property and equipment (including capitalized leases) is recorded in cost of sales and operating expenses. Forgeneral and administrative expenses in the consolidated statements of operations. Depreciation and amortization expenses were $6,703 and $6,386 for the three months ended March 31,June 30, 2014 and 2013, depreciationrespectively, and amortization expense was $6,715$13,418 and $6,031,$12,417 for the six months ended June 30, 2014 and 2013, respectively.
Based uponon the results of itsCompany's retail store impairment analysis, for the three months ended March 31, 2014 and 2013, the Companyit recorded impairment charges of $499$229 and $0 for the three months ended June 30, 2014 and 2013, respectively, and $728 and $78 for the six months ended June 30, 2014 and 2013, respectively.

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Note 5. Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities are as follows:
March 31, 2014 December 31, 2013June 30, 2014 December 31, 2013
Compensation, bonuses and related taxes$10,479
 $11,773
$8,865
 $11,773
Accrued interest12,953
 6,064
5,842
 6,064
Workers' compensation and other self-insurance reserves (Note 14)6,372
 6,383
6,623
 6,383
Sales, value and property taxes1,912
 3,868
2,002
 3,868
Gift cards and store credits6,612
 7,391
6,600
 7,391
Loss contingencies1,177
 1,177
2,479
 1,177
Deferred revenue942
 1,258
578
 1,258
Deferred rent3,479
 3,363
3,385
 3,363
Other10,026
 8,741
10,990
 8,741
Total accrued expenses$53,952
 $50,018
Total accrued expenses and other current liabilities$47,364
 $50,018
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:
 March 31, 2014 December 31, 2013
Revolving credit facility (Capital One), maturing April 2018$29,452
 $43,526
Revolving credit facility (Bank of Montreal), matured on March 31 2014—
 443
Current portion of long-term debt (Note 7)17
 73
Total revolving credit facilities and current portion of long-term debt$29,469
 $44,042
 Lender Expiration June 30, 2014 December 31, 2013
Revolving credit facilityCapital One April 14, 2018 $30,554
 $43,526
Revolving credit facilityBank of Montreal March 31, 2014 0
 443
Current portion of long-term debt    14
 73
Total    $30,568
 $44,042
The Company incurred interest charges of $10,03910,019 and $11,214$8,220 for the three months ended March 31,June 30, 2014 and 2013, respectively, and $20,058 and $19,434 for the six months ended June 30, 2014 and 2013, respectively, for all outstanding borrowings. The interest charges subject to capitalization were not significant for the three and six months ended March 31,June 30, 2014 and 2013 were not significant.2013.
Revolving Credit Facility - Capital One
As of In March 31, 2014,, the Company had $29,452 outstanding on a $50,000 asset-backed revolving credit facility with Capital One and $16,762 available for additional borrowings. Theentered into the Fifth Amendment to the Capital One Credit Facility matureswhich waived the obligation to maintain the minimum fixed charge coverage and maximum leverage ratios for the three months ended December 31, 2013 and March 31, 2014. Based on April 4, 2018, subject to a January 15, 2018 maturity if excess availability is less than $15,000 at the time of notice to Capital One of a determination byFifth Amendment, the Company that an Applicable High Yield Discount Obligation ("AHYDO") redemption will be required pursuant to Section 3.01(e) of the indenture governing the Notes (as defined in Note 7). Borrowingsinterest rates on borrowings under the Capital One Credit Facility bear interest equal to LIBOR plus 5.0% or the bank's prime rate plus 4.0% (at at the Company's option)option and are subject to maintenance of specified borrowing base requirements and covenants. In addition, the Fifth Amendment reset a minimum fixed charge coverage ratio, a maximum leverage ratio, and a maximum capital expenditures allowed and added a minimum EBITDA covenant. For the three months ended June 30, 2014, the Company was required to maintain a minimum fixed charge coverage ratio of not less than 0.85 to 1.00 and achieve a minimum EBITDA of $9,000. The Company was in compliance with the covenants at June 30, 2014.
The Capital One Credit Facility is secured by a lien on substantially all of the assets of the Company's domestic subsidiaries and equity interests in certain of the Company's foreign subsidiaries, subject to some exceptions. As of March 31, 2014, the Company had $1,230 of outstanding letters of credit secured against the Capital One Credit Facility.
Among other provisions, the Capital One Credit Facilityrestrictions. It requires that the Company maintain a lockbox arrangement and contains certain subjective acceleration clauses. In addition, Capital One may at its discretion, adjust the advance restriction and criteria for eligible inventory and accounts receivable.receivable at its discretion. The Capital One Credit Facility contains cross-default provisions whereby an event of default under the indenture governing theSenior Notes Indenture (the "Indenture") or other indebtedness, in each case of an amount greater than a specified threshold, would cause an event of default under the Capital One Credit Facility.
The Company is required to maintain a minimum fixed charge coverage ratio As of not less than 0.85 to 1.00 for the period of April 1, 2014 to June 30, 2014, and 1.00 to 1.00 for the remainder of 2014 and is also required to not exceed certain maximum leverage ratio thresholds, both determined as at the end of each fiscal quarter. Additionally, the Company's domestic subsidiaries are subject to an annual limitation of certain specified capital expenditure amounts as determined at the end of each fiscal year.
On March 25, 2014, the Company entered into the Fifth Amendment tohad $1,230 of outstanding letters of credit secured against the Capital One Credit Facility which, effective upon the receipt of net proceeds from the March 31, 2014 equity offering (see Note 11), among other things: waived the obligation to maintain the minimum fixed charge coverage and maximum leverage ratios for the three month periods ended December 31, 2013Facility.

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The Company had $30,554and March$43,526 outstanding on a $50,000 asset-backed revolving credit facility with Capital One as of June 30, 2014 and December 31, 2014; reset2013, respectively. The amount available for future periodsadditional borrowings on June 30, 2014 was $16,891. The Capital One Credit Facility matures on April 14, 2018 and is subject to a January 15, 2018 maturity if excess availability is less than $15,000 at the fixed charge coverage ratio,time of notice to Capital One that an Applicable High Yield Discount Obligation redemption will be required pursuant to Section 3.01(e) of the maximum leverage ratio andIndenture governing the maximum capital expenditures allowed; added a minimum EBITDA covenant; increased the interest rate payable under the credit agreement by 0.5% per annum to either LIBOR plus 5.0% or the bank's prime rate plus 4.0% (at the Company's option); and increased the fees payable upon early termination.Notes (as defined in Note 7).
Revolving Credit Facility - Bank of Montreal
The Company's wholly-owned100% owned Canadian subsidiaries had a revolving credit facility with Bank of Montreal. Outstanding amounts under thethis credit facility were repaid, and the agreement expired on March 31, 2014 the agreement expired by its terms.

2014.
Note 7. Long-Term Debt
Long-term debt consists of the following:
March 31, 2014 December 31, 2013June 30, 2014 December 31, 2013
Senior Secured Notes due 2020 (a)$204,443
 $203,265
$205,647
 $203,265
Long-term debt with Lion, maturing October 2018 (b)9,865
 9,865
Lion Loan Agreement (b)
9,865
 9,865
Other295
 411
299
 411
Total long-term debt214,603
 213,541
215,811
 213,541
Current portion of debt(17) (73)(14) (73)
Long-term debt, net of current portion$214,586
 $213,468
$215,797
 $213,468
(a) Includes accrued interest paid in-kind of $4,074$5,122 and $3,044 and net of unamortized discount of $5,631$5,475 and $5,779 at March 31,June 30, 2014 and December 31, 2013, respectively.
(b) IncludingIncludes accrued interest paid in-kind of $365 at both March 31,June 30, 2014 and December 31, 2013.2013.
      
Senior Secured Notes due 2020
On April 4, 2013, the Company issued the Notessenior secured notes (the "Notes") in an aggregate principal amount of $206,000 at 97% of par value. The Notes mature on April 15, 2020 and bearsbear interest at 15% per annum, of which 2% is payable in-kind until April 14, 2018 and in cash on subsequent interest dates. As of March 31, 2014, the amount outstanding under the Notes was $204,443, which includes accrued interest paid in-kind of $4,074 and is net of unamortized discount of $5,631.
Interest on the Notes approximatingof approximately $13,500 per payment period (in 2014),in 2014 is payable semi-annually, in arrears, on April 15 and October 15 of each year, beginning on October 15, 2013. On April 14, 2014, the Company paid $13,390 in interest on the Notes.
On or after April 15, 2017, the Company may, at its option, redeem some or all of the Notes at a premium, decreasing ratably over time to zero as specified in the indenture,Indenture, plus accrued and unpaid interest to but not including, the redemption date. Prior to April 15, 2017, the Company may, at its option, redeem up to 35% of the aggregate principal amount of the Notes with the net cash proceeds of certain equity offerings at a redemption price of 113% of the aggregate principal amount of the redeemed notes plus accrued and unpaid interest to but not including, the redemption date. In addition, at any time prior to April 15, 2017, the Company may, at its option, redeem some or all of the Notes by paying a "make whole" premium, plus accrued and unpaid interest to but not including, the redemption date. If the Company experiences certain change of control events, the holders of the Notes will have the right to require the Company to purchase all or a portion of the Notes at a price in cash equal to 101% of the principal amount of such Notes, plus accrued and unpaid interest to, but not including, the date of purchase. In addition, the Company is required to use the net proceeds of certain asset sales, if not used for specified purposes, to purchase some of the Notes at 100% of the principal amount, plus accrued and unpaid interest to, but not including, the date of purchase. On each interest payment date after April 4, 2018, the Company will be required to redeem, for cash, a portion of each Note then outstanding equal to the amount necessary to prevent such Note from being treated as an “applicable"applicable high yield discount obligation”obligation" within the meaning of the Internal Revenue Code. The redemption price will be 100% of the principal amount plus accrued and unpaid interest thereon on the date of redemption.
The Notes are guaranteed, jointly and severally, on a senior secured basis by the Company's existing and future domestic subsidiaries. The Notes and the related guarantees are secured by a first-priority lien on the Company's and its domestic subsidiaries' assets (other than the Credit Facility Priority Collateral, as defined below, subject to some exceptions and permitted liens). The Notes and the related guarantees also are secured by a second-priority lien on all of Company's and its domestic subsidiaries' cash, trade accounts receivable, inventory cash, 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

15

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.
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

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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.
As of March 31,June 30, 2014, the Company was in compliance with the required covenants of the Senior Notes Indenture.
Lion Loan Agreement
The Company has a loan agreement with Lion (the “Lion Loan Agreement”). The term loans under the Lion Loan Agreement are scheduled to mature on October 4, 2018 and bear interest at 20% per annum. Interest under the loan agreementLion Loan Agreement is payable in cash or in-kind. The interest was being paid in cash.
On July 7, 2014, Lion issued a notice of acceleration to the extent permitted byCompany under the Company’s other debt agreements, in-kind. AsLion Loan Agreement as a result of March 31, 2014, the amountBoard of Directors' decision to suspend Mr. Charney as CEO of the Company (see Note 1). The notice accelerated and declared the amounts outstanding under the Lion Loan Agreement was $9,865, which includesand any accrued interest paid in-kindimmediately due and payable. On July 14, 2014, Lion issued a notice rescinding the notice of $365.accelerations.
TheIn connection with the suspension of Mr. Charney, the Company might be deemed to have triggered an event of default under the loan agreement (the "Lion Loan Agreement") with Lion Capital LLP ("Lion"). On July 16, 2014, Lion assigned its rights and obligations as a lender under the Lion Loan Agreement contains cross-default provisions whereby a paymentto an entity affiliated with Standard General Group ("Standard General"). Standard General has waived any default or acceleration of any indebtedness in an aggregate amount greater than a specified threshold would cause an event of default. As of March 31, 2014, the Company was in compliance with the required covenants ofunder the Lion Loan Agreement that may have resulted or which might result from Mr. Charney not being the CEO of the Company and has agreed to amend the Lion Loan Agreement.

.
Note 8. Fair Value of Financial Instruments
The fair value of the Company's financial instruments at fair value are measured on a recurring basis. The carrying amount reportedRelated unrealized gains or losses are recognized in the accompanying condensed consolidated balance sheets for cash, accounts receivable, accounts payable and accrued expenses approximates fair value because of the short-term maturity of those instruments. The carrying amount for borrowings from Capital One approximates fair value because of the variable market interest rate charged to the Company for these borrowings. The fair value of the Notes was calculated basedunrealized loss (gain) on the quoted market price of the Notes. The fair value of the Lion Loan Agreement was estimated using a discounted cash flow analysis and a yield rate that was estimated using yield rates for publicly traded debt instruments of comparable companies with similar features. Thechange in fair value of warrants was estimated using Binomial Lattice optionin the consolidated statements of operations. For additional disclosures regarding methods and assumptions used in estimating fair values of these financial instruments, see Note 2.
The following tables present carrying amounts and fair values of the Company's financial instruments as of June 30, 2014 and December 31, 2013, and indicate the fair value hierarchy of the valuation model.  
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 March 31,June 30, 2014.
The following table presents carrying amounts and fair values of the Company's financial instruments as of March 31, 2014 and December 31, 2013:
  March 31, 2014
  Carrying Amount Fair Value
Senior Secured Notes due 2020, net of discount of $5,631 and including interest paid-in-kind of $4,074Level 2 Liability$204,443
 $184,113
Lion Loan due 2018 including interest paid-in-kind of $365Level 3 Liability9,865
 8,949
Lion WarrantLevel 3 Liability—
(a)8,287
  $214,308
 $201,349
     
  December 31, 2013
  Carrying Amount Fair Value
Senior Secured Notes due 2020, net of discount of $5,779 and including interest paid-in-kind of $3,044Level 2 Liability$203,265
 $191,065
Lion Loan due 2018 including interest paid-in-kind of $365Level 3 Liability9,865
 9,773
Lion WarrantLevel 3 Liability—
(a)20,954
  $213,130
 $221,792
  June 30, 2014
  Carrying Amount Fair Value
Senior Secured Notes due 2020Level 2 Liability$205,647
 $198,018
Lion Loan AgreementLevel 3 Liability9,865
 9,372
Lion WarrantLevel 3 Liability(a)
 16,489
  $215,512
 $223,879
     
  December 31, 2013
  Carrying Amount Fair Value
Senior Secured Notes due 2020Level 2 Liability$203,265
 $191,065
Lion Loan AgreementLevel 3 Liability9,865
 9,773
Lion WarrantLevel 3 Liability(a)
 20,954
  $213,130
 $221,792
(a) No cost is associated with these liabilities (see Note 11).


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The following table summarizespresents the activity of Level 3 inputs measured on a recurring basis:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)Three Months Ended March 31,
 2014 2013
Balance at January 1,$20,954
 $17,241
Adjustment resulting from change in value recognized in earnings (a)(12,667) 23,645
Balance at March 31,$8,287
 $40,886
 Three Months Ended June 30, Six Months Ended June 30, 2014
 2014 2013 2014 2013
Beginning balance$8,287
 $40,886
 $20,954
 $17,241
Adjustments included in earnings (a)
8,202
 (5,498) (4,465) 18,147
Balance at June 30,$16,489
 $35,388
 $16,489
 $35,388
(a) Adjustment resulting from change in fair value is theThe 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 gaingains or loss islosses are recorded in unrealized loss (gain) on change in fair value of warrants in the accompanying condensed consolidated statements of operations.
At June 30, 2014, the Company did not have any nonrecurring fair value measurements of nonfinancial assets or nonfinancial liabilities.
Note 9. Income Taxes
Income taxes for the three and six months ended March 31,June 30, 2014 and 2013 were computed using thean 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 a losslosses from operations for the three and six months ended March 31,June 30, 2014 and 2013. Based upon these results and the recent history of cumulative losses for the prior three years, combined withas well as trends in the loss from operations for the three months ended March 31,Company's performance projected through 2014, and 2013, 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 a partial valuation allowanceallowances in certain foreign jurisdictions, is required.
Section 382 of theThe Internal Revenue Code, Section 382, as amended, in the United States imposes annual limitation on the utilization of net operating losses ("NOL")NOL carryforwards, other tax carryforwards, and certain built-in losses as defined under that Section, upon an ownership change. The Company performed an analysis determining it iswas more likely than not that an ownership change hashad not occurred through December 31, 2013, and accordingly, NOL carryforwards through such date are not subject to an annual Section 382 limitation. On March 31, 2014, the Company completed a public offering of approximately 61,645 shares of its common stock. On June 25, 2014 Standard General entered into an agreement with Mr. Charney to purchase shares of the Company's common stock and then loan Mr. Charney the funds necessary to acquire those shares from Standard General. On June 27, 2014, Standard General sold 27,351 shares of the Company's common stock to Mr. Charney. As of March 31,June 30, 2014, the Company has not completed an analysis whether an ownership change occurred under Section 382, which, if it did occur, could substantially limit its ability in the future to utilize its NOLs and other tax carryforwards.
Management makes judgments as toThe Internal Revenue Service completed its audit on the interpretation of theCompany's tax lawsyear 2011, and there was no assessment. Tax years 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 isremain subject to audit in these jurisdictions.
The Company is currently open to audit under the statute of limitationsaudits by the Internal Revenue Service for the calendar years ended December 31, 2010are 2012 through December 31, 2013. The IRS is currently auditing the Company's tax return for the year ended December 31, 2011. The Company completed an audit with the IRS through December 31, 2010. The Company's state and foreign tax returns are open to audit under similar statute of limitations for the calendar years ended December 31, 2008 through 2013.
In management's opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.

Note 10. Related Party Transactions
See Note 7 for a description of loans made by Lion to the Company and Note 11 for a description of the warrants issued by the Company to Lion.
Personal Guarantees by the Company’s CEOMr. Charney
As of March 31,June 30, 2014, the CEO of the Company hasMr. Charney had personally guaranteed the obligations of American Apparelthe Company under seventhree property leases aggregating $16,63910,130 in obligations. Additionally, the CEO of the Company hasMr. Charney had personally guaranteed the obligations of the Company with twothree vendors aggregating $1,0001,970. The personal guarantees will expire on December 31, 2014.

17

Lease Agreement Between the Company and a Related Party
The Company is party to an operating lease, expiring in November 2016, for its knitting facility with a related company (“American Central Plaza LLC”),LLC, which is partially owned by Mr. Charney and Marty Bailey, the CEO and theCompany's Chief Manufacturing Officer ("CMO") of the Company. The Company's CEO. Mr. Charney holds an 18.75% ownership interest in American Central Plaza LLC while the CMO holds a 6.25% interest. The remaining members of American Central Plaza LLC are not affiliated with the Company. Rent expenseexpenses (including property taxes and insurance payments) related to this lease were $207 and $155 for the three months ended March 31,June 30, 2014 and 2013, were $104respectively, and $155,$311 and $310 for the six months ended June 30, 2014 and 2013, respectively.

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Payments to Morris Charney
Morris Charney (“("Mr. M. Charney”Charney"), is the father of the Company's CEOMr. Charney and servesserved as a director of American Apparel Canada Wholesale Inc. and a director of American Apparel Canada Retail Inc.Inc until June 28, 2014. Day to day operations of these two Canadian subsidiaries are handled by their management and other employees, of these subsidiaries, none of whom performs any policy making functions for the Company. Management of American Apparel sets the policies for American Apparel and its subsidiaries as a whole. Mr. M. Charney doesdid not perform any policy making functions for the Company or any of its subsidiaries. Instead, Mr. M. Charney only providesprovided architectural consulting services primarily for stores located in Canada and, in limited cases, in the U.S.Canada. Mr. M. Charney was paid architectural consulting and director fees amounting to $5615 and $62$72 for the three months ended March 31,June 30, 2014 and 2013, respectively, and $71 and $134 for the six months ended June 30, 2014 and 2013, respectively.

See Note 7 for a description of loans made by Lion to the Company and Note 11 for a description of warrants issued by the Company to Lion.
Note 11. Stockholders' Deficit
Public Offering
On March 31, 2014, the Company completed a public offering of approximately 61,645 shares of its common stock at $0.50 per share for net proceeds of $28,554.$28,446.
Common Stock Warrants
Lion Warrants
As a result of the public offering in March 31, 2014,, Lion received the right to purchase an additional 2,905 shares of the Company's common stock, and the exercise price of all of Lion held warrants (the "Lion Warrants") was adjusted from $0.75 per share to $0.66 per share. Such adjustments were required by the terms of the existing Lion Warrants. As of June 30, 2014, Lion held warrants to purchase 24,511 shares of the Company's common stock, with an exercise price of $0.66 per share. These warrants will expire on February 18, 2022.
On March 31, 2014, as a result of the public offering of the Company's common shares, Lion received the right to purchase an additional 2,905 shares of the Company's common stock under their existing warrants to purchase 21,606 shares of the Company's common stock and the exercise price of all of Lion's warrants was adjusted from $0.75 per share to approximately $0.66 per share. Such adjustments were required by the terms of the existing Lion warrants.
The Lion Warrants, as amended, 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 Warrant, 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 of March 31,June 30, 2014, the fair value of the 24,511 Lion Warrants, estimated using the Binomial Lattice option valuation model, was $8,28716,489 and was recorded as a current liability in the accompanying condensed consolidated balance sheets. The calculation as of March 31, 2014 assumed a stock price of $0.500.90, exercise price of $0.66, volatility of 71.92%71.55%, annual risk free interest rate of 2.44%2.23%, a contractual remaining term of 87.8 years and no dividends.
The following table summarizespresents a summary of common stock warrants issued, forfeited, expired and outstanding (shares in thousands):activity as of June 30, 2014:
Number of Shares Weighted Average Exercise Price Weighted Average Contractual Life (Years)
Shares
(in thousands)
 Weighted-Average Exercise Price 
Weighted-Average Contractual Life
(in years)
Outstanding - January 1, 201421,606
 $0.75
 8.2
 21,606
 $0.75
 8.2 
Issued (1)(a)24,511
 0.66
 8.0
 24,511
 $0.66
 8.0 
Forfeited (1)(a)(21,606) 0.75
 —
 (21,606) $0.75
 0.0 
Expired—
 —
 —
 0
 $0.00
 0.0 
Outstanding - March 31, 201424,511
 $0.66
 8.0
 
Fair value - March 31, 2014$8,287
     
Outstanding - June 30, 201424,511
 $0.66
 7.8 
Fair value - June 30, 2014$16,489
   
(1)(a) Issued and forfeited warrants represents repriced shares.


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Earnings Per Share
The Company presents earnings per share (“EPS”("EPS") utilizing a dual presentation of basic and diluted EPS. Basic EPS includes noexcludes dilution and is computed by dividingreflects net loss available to common stockholdersdivided by the weighted average numberweighted-average shares of common sharesstock outstanding for the period.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 March 31,June 30, 2014 and 2013.December 31, 2013. The weighted averageweighted-average effects of 40,38540,018 and 53,45653,451 shares at March 31,June 30, 2014 and 2013, respectively, were excluded from the calculations of net loss per share for the three and six months ended March 31,June 30, 2014 and 2013, because their impact would have been anti-dilutive.

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A summary of the potential stock issuances under various options, warrants and other agreements that could have a dilutive effect on the shares outstanding as of March 31, 2014 and 2013are as follows:
 2014 2013
SOF warrants—
 1,000
Lion warrants24,511
 21,606
Shares issuable to Mr. Charney based on market conditions (1)13,611
 20,416
Contingent shares issuable to Mr. Charney based on market conditions (2)
—
 2,112
Contingent shares issuable to Mr. Charney based on performance factors (3)—
 5,000
Employee options & restricted shares2,263
 3,322
 40,385
 53,456
 June 30,
 2014 2013
SOF warrants0
 1,000
Lion warrants24,511
 21,606
Shares issuable to Mr. Charney based on market conditions (a)
13,611
 20,416
Contingent shares issuable to Mr. Charney based on market conditions (b)
0
 2,112
Contingent shares issuable to Mr. Charney based on performance conditions (c)
0
 5,000
Employee options and restricted shares1,896
 3,317
 40,018
 53,451
(1)(a) Charney Anti-Dilution Rights pursuant to the April 26, 2011 Investor Purchase Agreement, of which 6,805 expired unexercised on April 15, 2014.
(2)(b) Pursuant to the March 24, 2011 conversion of debt to equity, which expired unexercised on March 24, 2014.
(3)(c) Pursuant to Mr. Charney's employment agreement commencingcommenced April 1, 2012
The table above does not include additional warrants that may be issuable to Lion pursuant to the anti-dilution provisions under the Lion Loan Agreement such as in the event anti-dilutive shares are issued to Mr. Charney pursuant to the Charney Anti-Dilution Rights. (Note 12).
Note 12. Share-Based Compensation
Plan Description - The American Apparel, Inc. 2011 Omnibus Stock Incentive Plan (the "2011 Plan") authorizes the granting of a variety of incentive awards, the exercise or vesting of which would allow up to an aggregate of 17,500 shares of the Company's common stock to be acquired by the holders of such awards and authorizes up to 3,000 shares that may be awarded to any one participant during any calendar year. The purpose of the 2011 Plan is to provide an incentive to selected employees, directors, independent contractors, and consultants of the Company or its affiliates, and provides that the Company may grant options, stock appreciation rights, restricted stock, and other stock-based and cash-based awards. As of March 31,June 30, 2014, there were approximately 13,30112,993 shares available for future grants under the 2011 Plan.
Restricted Share Awards - The following table summarizes sharespresents a summary of the restricted stock that were granted, vested, forfeited and outstanding (shares in thousands):share awards activity as of June 30, 2014:
Number of Restricted Shares Weighted Average Grant Date Fair Value Weighted Average Remaining Vesting Period (in years)
Shares
(in thousands)
 Weighted-Average Grant Date Fair Value Per-Share Weighted-Average Remaining Vesting Period (in years)
Non-vested - January 1, 20141,850
 $1.46
 0.91,850
 $1.46
 0.9
Granted285
 0.64
 704
 $0.68
 
Vested(402) 1.18
 (1,077) $0.93
 
Forfeited(170) 1.61
 (281) $1.65
 
Non-vested - March 31, 20141,563
 $1.36
 0.9
Non-vested - June 30, 20141,196
 $1.43
 0.6
Vesting of the restricted share awards to employees are generally either immediately upon grant or over a period of three to five years of continued service by the employee in equal annual installments. Vesting is immediate in the case of members of the Board of Directors. Share-based compensation is recognized over the vesting period based on the grant-date fair value.

19

Stock Option Awards - The following table summarizespresents a summary of the stock options granted, forfeited, expired and outstanding (shares in thousands):option activity as of June 30, 2014:
Number of Shares Weighted Average Exercise Price Weighted Average Contractual Remaining Life (Years) Aggregate Intrinsic Value
Shares
(in thousands)
 Weighted-Average Exercise Price 
Weighted-Average Contractual Remaining Life
(in years)
 Aggregate Intrinsic Value
Outstanding - January 1, 2014700
 $0.82
 7.8
  700
 $0.82
 7.8  
Granted—
 —
 —
  0
    
Forfeited—
 —
 —
  0
    
Expired—
 —
 —
  0
    
Outstanding - March 31, 2014700
 $0.82
 7.5
  
Vested - March 31, 2014700
 $0.82
 7.5
 $—
Non-vested - March 31, 2014—
 $—
 

 $—
Outstanding - June 30, 2014700
 $0.82
 7.3 $56
Vested - June 30, 2014700
 $0.82
 7.3 $56
Non-vested - June 30, 20140
 $0.00
  

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Share-Based Compensation Expense - During the three months ended March 31, 2014 and 2013, theThe Company recorded share-based compensation expenseexpenses of $1,1151,543 and $3,547,$3,263 for the three months ended June 30, 2014 and 2013, respectively, and $2,658 and $6,816 for the six months ended June 30, 2014 and 2013, respectively, related to its share-based compensation awards that are expected to vest. No amounts have been capitalized. As of March 31,June 30, 2014, unrecorded compensation cost related to non-vested awards was $3,8522,218, which is expected to be recognized through 2017.
CEOMr. Charney Anti-Dilution Rights - During the three months ended March 31, 2014 and 2013, theThe Company recorded share-based compensation expense (included in the above) associated with Mr. Charney's certain anti-dilution rights of $689687 and $2,071 for the three months ended June 30, 2014 and 2013, respectively, and $2,0711,376, and $4,142 for the six months ended June 30, 2014 and 2013, respectively. As of March 31,June 30, 2014, unrecorded compensation cost related to non-vested awards was $1,295608, which is expected to be recognized through 2015. On April 15, 2014, the last day of the first measurement period, the Company determined that the vesting requirements for such period were not met, and as a result, 6,805 of the 20,416 anti-dilution rights expired unexercised.
CEOMr. Charney Performance-Based Award - Pursuant to an employment agreement with Mr. Charney commencing onEffective April 1, 2012, the Company provided toMr. Charney the CEO rights to 7,500 shares of the Company's stock. The shares arestock which were issuable in three equal installments, one per each measurement period, only upon the achievement of certain EBITDA targets for each of fiscal 2012, 2013 and 2014. The fair value of the award was based on the grant-date share price of $0.75 per share. For the fiscal 2012, measurement period, the Company achieved the target EBITDA and Mr. Charney received 2,500 shares, on June 25, 2013. For the fiscal 2013 measurement period, the Companybut did not achieve the target EBITDA.EBITDA for 2013. For 2014, the fiscal 2014 measurement period, based on currently available information,achievement of the Company doesperformance condition was not believe that the target EBITDA will be achieved.considered probable as of June 30, 2014. As of March 31,June 30, 2014, there was no unrecorded compensation cost related to this EBITDA award.
The grant date fair value of the award was based on the share price of $0.75. During the three months ended March 31, 2014 and 2013, the Company recorded share-based compensation expense of $0 and $859,$391 for the three months ended June 30, 2014 and 2013, respectively, and $0 and $1,250 for the six months ended June 30, 2014 and 2013, respectively.
Non-Employee Directors
-On July 1, April 1 and January 2, 2014, the Company issued a quarterly stock grant to each non-employee director for services performed of approximately 11, 20 and 8 shares of the Company's common stock, based on grant date fair values of $0.87, $0.50 and $1.21 per share, respectively.
Note 13. Commitments and Contingencies
Operating Leases
The Company conducts retail operations under operating leases whichthat expire at various dates through November 2023. The Company's primary manufacturing facilities and executive offices are currently under a long-term lease whichthat expires on July 31, 2019. Operating leaseThe rent expenseexpenses (including real estate taxes and common area maintenance costs) was approximately $19,012were $18,328 and $19,902$19,462 for the three months ended March 31,June 30, 2014 and 2013, respectively, and $37,340 and $39,364 for the six months ended June 30, 2014 and 2013, respectively. The Company did not incur any significant contingent rent during these periods. Rent expense is allocated to cost of sales (forfor production-related activities),activities, selling expenses (primarily for retail stores)stores, and general and administrative expenses in the accompanying condensed consolidated statements of operations.

20

Customs and dutiesDuties
The Company is being auditedcurrently under audit by German customs authorities for the years ended December 31, 2009 through December 31, 2011. In connection with the audit, theThe German customs has issued retroactive assessments on the Company's imports totalingof $4,9974,958 at the March 31,June 30, 2014 exchange rates (assessment was issued in Euros). The size of the retroactive assessments are largely due to member countries of the European Union (“E.U.”)who have limited rightrights to impose retaliatory duties on certain imports of U.S. origin goods, into the E.U., based upon the World Trade Organization's (“WTO”) Dispute Settlementdispute settlement procedures and the related WTO arbitrator rulings brought into place as a result of EU complaint against the U.S. "Continued Dumping and Subsidy Offset Act of 2000" (the "CDSOA") usually referred to as "the Byrd Amendment."rulings. Consequently, the German customs authorities are attempting to impose a substantially higher tariff rate than the original rate that the Company had paid on the imports, approximately doubling the amount of the tariff that the Company would have to pay. Despite the ongoing appeals of the German customs assessment, German customs has indicated it will begin collection enforcement proceedings if the Company does not soon reach acceptable payment terms for the amounts assessed. Negotiations as to payment terms are ongoing.
The Company believes that it has valid arguments to challenge the merit of the German customs assessment and has filed litigation in German courts to contest such assessment. However, asAt this time, the case is ongoing,outcome of legal proceedings against the Company is unablesubject to reasonably estimate the financial outcome of the matter at this time as it cannot predict whether the outcome will be favorable or unfavorable to the Company, or if the Company will be required to advance material amounts during the pendency of the litigation, and accordingly has not recorded a provision for this matter.significant uncertainty. No assurance can be made that this matter will not result in a material financial exposure, in connection with the audit, which could have a material adverse effect on the Company's financial condition, results of operations, orand cash flows.
New York Stock ExchangeCharney Investigation
In connection with the June 18, 2014 suspension of the Company's CEO, Dov Charney, a committee of the Board of Directors is charged with investigating potential misconduct by Mr. Charney. As the investigation is ongoing, no assurance can be made regarding the outcome of the investigation.
Tuan Phan OSHA Matter
In 2011, an industrial accident at the Company's facility in Orange County, California resulted in the fatality of a Company employee. In accordance with law, a mandatory criminal investigation into the matter was initiated. In August 2014, the Company and the district attorney's office began to negotiate a resolution of potential claims related to the accident. Based upon these

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discussions, the Company has accrued $1,000 in costs representing its best estimate of the cost to settle this matter. As the negotiations are ongoing, no assurances can be given as to their ultimate outcome or as to the impact on the Company, which could be material.
NYSE MKT LLC Compliance
In February 2014, the Company received a letter from NYSE MKT LLC indicating that it was not in compliance with listing guidance set forth in Section 1003(a)(iv). The Company submitted a remediation plan, and on April 15, 2014, the NYSE MKT LLC issued a letter to the Company indicating it regained compliance with the NYSE MKT LLC. The Company's common stock is currently traded on the NYSE MKT. On February 28, 2014, the Company received a letter from NYSE MKT indicating that it was not in compliance with the continued listing standards of NYSE MKT set forth in Section 1003(a)(iv) of the NYSE MKT LLC Company Guide. In order to maintain its listing, the Company submitted a plan of compliance by addressing how it intended to regain compliance with Section 1003(a)(iv) of the Company Guide by April 15, 2014. On April 15, 2014 the Exchange issued a letter to the Company indicating the Company had regained compliance with the Exchange's listing standards.LLC.
Advertising
At March 31, 2014 theThe Company had approximately $1,7531,711 in open advertising commitments at June 30, 2014, which were primarily relate toallocated among print advertisements in various newspapers andor magazines as well asand outdoor advertising. The majority of these commitments are expected to be paid during the remainder of 2014.
Note 14. Workers' Compensation and Other Self-Insurance Reserves
The Company uses a combination of third-party insurance and/orand self-insurance for a number of risks including workers’workers' compensation, medical benefits provided to employees, and general liability claims. General liability costs relate primarily relates to litigation that arises from store operations. Self-insurance reserves include estimates of both filed claims carried at their expected ultimate settlement value and claims incurred but not yet reported.
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’s estimated claim amounts are discounted using a rate of 1.03% with a duration that approximates the duration of the Company’s self-insurance reserve portfolio. As of March 31, 2014 the undiscountedCompany estimates liability amount was $16,910. The Company’s liability reflected on the accompanying condensed consolidated balance sheets represents an estimate of the ultimate cost of claims incurred as of the balance sheet dates. In estimating this liability, the Company utilizesby utilizing loss development factors based on Companyits specific data to project the future development of incurred losses. Loss estimates are adjusted based upon actual claim settlements and reported claims. These projections are subject to a high degree of variability based upon future inflation rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns. Although the Company does not expect the amounts ultimately paid to differ significantly from its estimates, self-insurance reserves could be affected if future claim experience differs significantly from the historical trends and the assumptions applied. The Company's estimated claims are discounted using a rate of 1.54% with a duration that approximates the duration of its self-insurance reserve portfolio. The undiscounted liabilities were $18,342 and $15,809 as of June 30, 2014 and December 31, 2013, 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, as of March 31, 2014 and December 31, 2013, the Company had issued standby letters of credit in the amount of $450, with insurance companies being the beneficiaries through a bank, and cash deposits of $16,124 in favor of insurance company beneficiaries.beneficiaries as of both June 30, 2014 and December 31, 2013. At March 31,June 30, 2014, the Company recorded a total reserve of $16,43217,565, of which $4,2834,876 is included in accrued expenses and $12,14912,689 is included in other long-term liabilities on the accompanying condensed consolidated balance sheets. At December 31, 2013, the Company recorded a total reserve of $15,356, of which $3,871 is included in accrued expenses and $11,485 is included in other long-term liabilities on the accompanying condensed 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

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period. Funding is made directly to the providers and/or claimants by the insurance company. AtThe Company's total reserve of March 31,$1,747 and $2,512 was included in accrued expenses in the consolidated balance sheets at June 30, 2014 and December 31, 2013, the Company's total reserve of $2,089 and $2,512, respectively, was included in accrued expenses in the accompanying condensed consolidated balance sheets.respectively.
Note 15. Business Segment and Geographic Area Information
The Company reports the following four operating segments:segments based on the management approach: U.S. Wholesale, U.S. Retail, Canada, and International. The Company believes this methodmanagement approach designates the internal reporting used by management for making decisions and assessing performance as the source of segment reporting reflects both the way its business segments are managed and the way the performance of each segment is evaluated. Company's reportable segments.
The U.S. Wholesale segment consists of the Company's wholesale operations of sales of undecorated apparel products to distributors and third party screen printers in the United States,U.S. as well as the Company'sits online consumer sales generated in the U.S. The U.S. Retail segment consists of the Company's retail operations in the United States,U.S., which comprised 140137 retail stores operating in the United States, as of March 31,June 30, 2014. The Canada segment includes wholesale, retail wholesale and online consumer operations in Canada. As of March 31,June 30, 2014, the retail operations in the Canada segment comprised 3231 retail stores. The International segment includes wholesale, retail, wholesale and online consumer operations outside of the United StatesU.S. and Canada. As of March 31,June 30, 2014, the retail operations in the International segment comprised 7779 retail stores operating in 18 countries outside the United StatesU.S. and Canada. All of the Company's retail stores sell the Company'sits apparel products directly to consumers.
The Company's managementCompany evaluates the performance of its operating segments primarily based on a number of factors; however, the primary measures of performance are net sales and operating income or loss from operations of each business segment, as these are the key performance indicators reviewed by management.operations. Operating income or loss for each segment does not include unallocated corporate general and administrative expenses, interest expense and other miscellaneous income/expense items. Corporate general and administrative expenses include,

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but are not limited to: human resources, legal, finance, information technology, accounting, executive compensation and various other corporate level expenses.
The following tables representpresent key financial information of the Company's reportable segments before unallocated corporate expenses:
Three Months Ended March 31, 2014Three Months Ended June 30, 2014
U.S. Wholesale 
 U.S. Retail Canada International Consolidated
U.S. Wholesale 
 U.S. Retail Canada International Consolidated
Wholesale net sales$38,237
 $—
 $1,909
 $1,800
 $41,946
$48,945
 $0
 $2,826
 $2,200
 $53,971
Retail net sales—
 42,465
 7,759
 29,678
 79,902
0
 48,970
 9,421
 35,534
 93,925
Online consumer net sales10,500
 —
 792
 3,956
 15,248
9,309
 0
 770
 4,422
 14,501
Total net sales to external customers48,737
 42,465
 10,460
 35,434
 137,096
58,254
 48,970
 13,017
 42,156
 162,397
Gross profit17,305
 26,766
 5,609
 22,294
 71,974
16,056
 32,033
 7,051
 27,247
 82,387
Income (loss) from segment operations9,720
 (4,714) (345) (899) 3,762
Income from segment operations9,147
 1,919
 941
 3,550
 15,557
Depreciation and amortization2,178
 3,114
 401
 1,022
 6,715
2,187
 3,051
 454
 1,011
 6,703
Capital expenditures1,205
 1,139
 112
 1,502
 3,958
952
 1,333
 81
 763
 3,129
Retail store impairment—
 49
 —
 450
 499
0
 66
 0
 163
 229
Deferred rent benefit(447) (1,632) (48) (95) (2,222)
Deferred rent expense (benefit)47
 (720) (51) (195) (919)
  
  
Three Months Ended March 31, 2013Three Months Ended June 30, 2013
U.S. Wholesale U.S. Retail Canada International Consolidated
U.S.
 Wholesale
 U.S. Retail Canada International Consolidated
Wholesale net sales$34,708
 $—
 $2,579
 $1,941
 $39,228
$43,219
 $0
 $3,613
 $2,631
 $49,463
Retail net sales—
 44,344
 9,112
 30,452
 83,908
0
 51,164
 11,231
 35,899
 98,294
Online consumer net sales9,714
 —
 666 4,544
 14,924
9,522
 0
 608 4,349
 14,479
Total net sales to external customers44,422
 44,344
 12,357
 36,937
 138,060
52,741
 51,164
 15,452
 42,879
 162,236
Gross profit12,327
 29,191
 7,420
 23,930
 72,868
14,634
 33,302
 9,347
 26,587
 83,870
Income (loss) from segment operations5,383
 (2,447) (652) 813
 3,097
Income from segment operations6,097
 525
 1,153
 2,491
 10,266
Depreciation and amortization1,603
 2,970
 433
 1,025
 6,031
1,790
 3,089
 448
 1,059
 6,386
Capital expenditures3,076
 2,900
 183
 1,195
 7,354
1,411
 4,090
 247
 535
 6,283
Retail store impairment—
 78
 —
 —
 78
Deferred rent expense (benefit)20
 (212) (131) (125) (448)18
 (564) (82) (44) (672)

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 Six Months Ended June 30, 2014
 U.S. Wholesale  U.S. Retail Canada International Consolidated
Wholesale net sales$87,182
 $0
 $4,735
 $4,000
 $95,917
Retail net sales0
 91,435
 17,180
 65,212
 173,827
Online consumer net sales19,809
 0
 1,562
 8,378
 29,749
Total net sales to external customers106,991
 91,435
 23,477
 77,590
 299,493
Gross profit33,361
 58,799
 12,660
 49,541
 154,361
Income (loss) from segment operations18,867
 (2,795) 596
 2,651
 19,319
Depreciation and amortization4,365
 6,165
 855
 2,033
 13,418
Capital expenditures2,157
 2,472
 193
 2,265
 7,087
Retail store impairment0
 115
 0
 613
 728
Deferred rent benefit(400) (2,352) (99) (290) (3,141)
  
 Six Months Ended June 30, 2013
 
U.S.
Wholesale
 U.S. Retail Canada International Consolidated
Wholesale net sales$77,927
 $0
 $6,192
 $4,572
 $88,691
Retail net sales0
 95,508
 20,343
 66,351
 182,202
Online consumer net sales19,236
 0
 1,274
 8,893
 29,403
Total net sales to external customers97,163
 95,508
 27,809
 79,816
 300,296
Gross profit26,969
 62,493
 16,767
 50,509
 156,738
Income (loss) from segment operations11,480
 (1,922) 501
 3,304
 13,363
Depreciation and amortization3,393
 6,059
 881
 2,084
 12,417
Capital expenditures4,487
 6,990
 430
 1,730
 13,637
Retail store impairment0
 78
 0
 0
 78
Deferred rent expense (benefit)38
 (776) (213) (169) (1,120)
Reconciliation of reportable segments combined income from operations for the three and six months ended March 31,June 30, 2014 and 2013 to the consolidated loss before income taxes is as follows:  
Three Months Ended March 31,Three Months Ended June 30, Six Months Ended June 30,
2014 20132014 2013 2014 2013
Consolidated income from operations of reportable segments$3,762
 $3,097
$15,557
 $10,266
 $19,319
 $13,363
Unallocated corporate expenses(11,258) (13,574)(12,977) (12,180) (24,235) (25,754)
Interest expense(10,039) (11,214)(10,019) (8,220) (20,058) (19,434)
Foreign currency transaction loss(132) (713)0
 (158) (132) (871)
Unrealized gain (loss) on change in fair value of warrants12,667
 (23,645)
Other income8
 5
Unrealized (loss) gain on change in fair value of warrants(8,202) 5,498
 4,465
 (18,147)
Loss on extinguishment of debt0
 (32,101) 0
 (32,101)
Other (expense) income(60) 11
 (52) 16
Consolidated loss before income taxes$(4,992) $(46,044)$(15,701) $(36,884) $(20,693) $(82,928)







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Net sales by geographic location of customers for the three and six months ended March 31,June 30, 2014 and 2013, are as follows:
Three Months Ended March 31,Three Months Ended June 30, Six Months Ended June 30,
2014 20132014 2013 2014 2013
United States$91,202
 $88,766
$107,224
 $103,901
 $198,426
 $192,671
Canada10,460
 12,357
13,017
 15,452
 23,477
 27,809
Continental Europe15,021
 15,069
Europe (excluding United Kingdom)17,644
 17,862
 32,665
 32,931
United Kingdom9,461
 9,595
10,908
 10,588
 20,369
 20,183
South Korea2,331
 2,169
3,249
 2,937
 5,580
 5,106
China1,528
 1,494
2,212
 2,082
 3,740
 3,576
Japan3,337
 4,438
3,726
 5,006
 7,063
 9,444
Australia2,092
 2,575
2,493
 2,637
 4,585
 5,208
Other foreign countries1,664
 1,597
1,924
 1,771
 3,588
 3,368
Total consolidated net sales$137,096
 $138,060
$162,397
 $162,236
 $299,493
 $300,296
Note 16. Litigation
The Company is subject to various claims and contingencies in the ordinarynormal course of business including those related tothat arise from litigation, business transactions, employee-related matters, or taxes. The Company establishes reserves when it believes a loss is probable and taxes, and others. Whenis able to estimate its potential exposure. For loss contingencies believed to be reasonably possible, the Company is aware of a claim or potential claim, it assessesalso discloses the likelihood of any loss or exposure. If it is probable that a loss will result and the amountnature of the loss cancontingency and an estimate of the possible loss, range of loss, or a statement that such an estimate cannot be reasonably estimated,made. While actual losses may differ from the amounts recorded and the ultimate outcome of our pending actions is generally not yet determinable, the Company does not believe the ultimate resolution of currently pending legal proceedings, either individually or in the aggregate, will recordhave a liability for the loss. In addition to the estimated loss, the recorded liability includes probable and estimable legal costs associated with the claim or potential claim. There is no assurance that such matters will not materially and adversely affect the Company'smaterial adverse effect on its business, financial position, and results of operations, or cash flows. In all cases, the Company vigorously defends itself unless a reasonable settlement appears appropriate.
IndividualWage and Hour Actions
On November 5, 2009, Guillermo Ruiz, aIn April 2014, the five former employee of American Apparel, filed suit against the Company on behalf of putative classes of all current and former non-exempt California employees (Guillermo Ruiz, on behalf of himself and all others similarly situated v. American Apparel, Inc., Case Number BC425487) in the Superior Court of the State of California for the County of Los Angeles, alleging the Company failed to pay certain wages due for hours worked, to provide meal and rest periods or compensation in lieu thereof and to pay wages due upon termination to certain of the Company's employees. The complaint further alleges that the Company failed to comply with certain itemized employee wage statement provisions and violations of unfair competition law.  The plaintiff is seeking compensatory damages and economic and/or special damages in an unspecified amount, premium pay, wages and penalties, injunctive relief and restitution, and reimbursement for attorneys' fees, interest and the costs of the suit.
On June 21, 2010, Antonio Partida, a former employee of American Apparel, filed suit against the Company on behalf of putative classes of current and former non-exempt California employees (Antonio Partida, on behalf of himself and all others similarly situated v. American Apparel (USA), LLC, Case No. 30-2010-00382719-CU-OE-CXC) in the Superior Court of the State of California for the County of Orange, alleging the Company failed to pay certain wages for hours worked, to provide meal and rest periods or compensation in lieu thereof, and to pay wages due upon separation. The complaint further alleges that

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the Company failed to timely pay wages, unlawfully deducted wages and failed to comply with certain itemized employee wage statement provisions and violations of unfair competition law. The plaintiff is seeking compensatory damages and economic and/or special damages in an unspecified amount, premium pay, wages and penalties, injunctive relief and restitution, and reimbursement of attorneys' fees, interest and the costs of the suit.
On or about December 2, 2010, Emilie Truong, a former employee of American Apparel, filed suit against the Company on behalf of putative classes of current and former non-exempt California employees (Emilie Truong, individually and on behalf of all others similarly situated v. American Apparel, Inc. and American Apparel LLC, Case No. BC450505) in the Superior Court of the State of California for the County of Los Angeles, alleging the Company failed to timely provide final paychecks upon separation.  Plaintiff is seeking unspecified premium wages, attorneys' fees and costs, disgorgement of profits, and an injunction against the alleged unlawful practices.
On or about February 9, 2011, Jessica Heupel, a former retail employee filed suit on behalf of putative classes of current and former non-exempt California employees (Jessica Heupel, individually and on behalf of all others similarly situated v. American Apparel Retail, Inc., Case No. 37-2011-00085578-CU-OE-CTL) in the Superior Court of the State of California for the County of San Diego, alleging the Company failed to pay certain wages for hours worked, to provide meal and rest periods or compensation in lieu thereof, and to pay wages due upon separation.  The plaintiff is seeking monetary damages as follows: (1) for alleged meal and rest period violations; (2) for alleged failure to timely pay final wages, as well as for punitive damages for the same; and (3) unspecified damages for unpaid minimum wage and overtime.  In addition, Plaintiff seeks premium pay, wages and penalties, injunctive relief and restitution, and reimbursement of attorneys' fees, interest and the costs of the suit. This matter is now proceeding in arbitration. On or about September 9, 2011, Anthony Heupel, a former retail employee initiated arbitration proceedings on behalf of putative classes of current and former non-exempt California employees, alleging the Company failed to pay certain wages for hours worked, to provide meal and rest periods or compensation in lieu thereof, and to pay wages due upon separation.  The plaintiff is seeking monetary damages in an amount in excess of $3,600, as follows: (1) for alleged meal and rest period violations; (2) for alleged failure to timely pay final wages, as well as for punitive damages for the same; and (3) unspecified damages for unpaid minimum wage and overtime.  In addition, Plaintiff seeks premium pay, wages and penalties, injunctive relief and restitution, and reimbursement of attorneys' fees, interest and the costs of the suit.
The Company does not have insurance coverage for the above matters. Each of the aforementionedemployees' wage and hour cases have been proceeding in arbitration. All of these casesincluding Guillermo Ruiz, Antonio Partida, Emily Truong, Jessica Heupel, and Anthony Heupel have been settled on an aggregate and class-wide basis for $850, and a paymentfinal approval was granted by the Companypresiding arbitrator. The parties are now seeking final court approval in the total amount of $875, most of which will be paidSeptember 2014 in order to class members and to their attorneys. Certain class members have opted out of the settlement and so may proceed with individualbinding claim preclusion on future similar claims. Also, the settlement has been approved by the arbitrator and also is subject to approval of one or more of the California Superior Courts. There is no guarantee that such approvals will be obtained.
Additionally, the Company is currently engaged in other employment-related claims and other matters incidental to the Company's business. The Company believes that all such claims against the Company are without merit ordoes not material, and the Company intends to vigorously dispute the validity of the plaintiffs' claims. While the ultimate resolution of such claims cannot be determined, based on information athave insurance coverage for this time, the Company believes, but the Company cannot provide assurance that, the amount, and ultimate liability, if any, with respect to these actions will not materially affect the Company's business, financial position, results of operations, or cash flows. Should any of these matters be decided against the Company, the Company could not only incur liability but also experience an increase in similar suits and suffer reputational harm.matter.
Derivative Matters
Two shareholder derivative lawsuits (Case No. CV106576 GAF (JCx) and Case No. CV107518 RSWL (FFMx)) were filed in the United States District Court for the Central District of California (the "Court") which were subsequently consolidated for all purposes into a case entitled In re American Apparel, Inc. Shareholder Derivative Litigation, Lead Case No. CV106576 (the “Federal"Federal Derivative Action”Action"). Plaintiffs in the Federal Derivative Action allegealleged 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 over 1,500 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”"Nominal Defendant" in the actions reflects the fact that the lawsuits are 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 Federal 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.

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Four shareholder derivative lawsuits (Case No. BC 443763, Case No. BC 443902, Case No. BC 445094, and Case No. BC 447890) were filed in fall of 2010 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 allegealleged 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

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state and federal immigration laws in connection with the previously disclosed termination of over 1,500 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 the case is duplicative of the Federal Derivative Action, as well as the Federal Securities Action currently pending in the United States District Court for the Central District of California (see below).
Both the Federal Derivative Action and State Derivative Actions are covered under the Company's Directors and Officers Liability insurance policy, subject to a deductible and a reservation of rights.
Other ProceedingsIn July 2014, two shareholder derivative lawsuits were filed in the Court and 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 lawsuits primarily seek to recover damages and reform corporate governance and internal procedures. The Company has tendered these matters to its insurance carriers and is awaiting coverage positions.
Should the above matters (i.e., the Federal Derivative Action or the State Derivative Action) be decided against the Company in an amount that exceeds the Company's insurance coverage, or if liability is imposed on grounds which fall outside the scope of the Company's 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. 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 upon the Company's financial condition, results of operations, or cash flows.
Federal Securities Action
Four putative class action lawsuits (Case No. CV106352 MMM (RCx), Case No. CV106513 MMM (RCx), Case No. CV106516 MMM (RCx), and Case No. CV106680 GW (JCGx)) were filed in fall of 2010 in the United States District Court for the Central District of California in the Fall of 2010 against American Apparel and certain of the Company's officers and executives on behalf of American Apparel shareholders. On December 3, 2010, the four lawsuits("USDC") which were subsequently consolidated for all purposes into a case entitled In re American Apparel, Inc. Shareholder Litigation, Lead Case No. CV106352 MMM (JCGx) (the “Federal"Federal Securities Action”Action"). The lead plaintiff filed a consolidated class action complaint on April 29, 2011 on behalf of shareholders who purchasedappointed by the Company's common stock between November 28, 2007 and August 17, 2010. The lead plaintiffUSDC alleges two causes of action for violations of Section 10(b) and 20(a) of the 1934 Act, and Rule 10b-5 promulgated under Section 10(b), arising out of alleged misrepresentations contained in the Company's press releases, public filings with the SEC, and other public statements relating to (i) the adequacy of the Company's internal and financial control policies and procedures; (ii) the Company's employment practices; and (iii) the effect that the dismissal of over 1,500 employees following an Immigration and Customs Enforcement inspection would have on the Company. Plaintiff seeks damages in an unspecified amount, reasonable attorneys' fees and costs, and equitable relief as the CourtUSDC may deem proper.  The Company filed two motions to dismiss the Federal Securities Action which the court granted with leave to amend. Plaintiffs filed a Second Amended Complaint on February 15, 2013. The Company filed a motion to dismiss the complaint on March 15, 2013. The hearing on the motion was held on June 3, 2013, at which time, the Court took the matter under submission. On August 8, 2013, the court issued its final order granting the motion to dismiss in regards to certain claims. Defendants answered the complaint's remaining claims on September 27, 2013. On November 6, 2013, the CourtUSDC issued an order staying the case pending ongoing settlement discussions between the parties. Plaintiff filed an unopposed Motionmotion of Preliminary Approvalpreliminary approval which was granted on April 16, 2014 without oral argument. The court set a settlement fairness hearing forOn July 28, 2014. If2014, the USDC approved the settlement, and final judgment was entered on July 30, 2014. The settlement will result in a payment by the Company's insurance carrier of $4,800.
Should any of the above matters (i.e., the Federal Derivative Action, the State Derivative Action, or the Federal Securities Action) be decided against the Company in an amount that exceeds the Company's insurance coverage, or if liability is imposed on grounds which fall outside the scope of the Company's 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. 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 upon the Company's financial condition, results of operations, or cash flows.
Employment Matters
The Company has previously disclosed arbitrations filed by the Company on or about February 17, 2011, related to cases filed in the Supreme Court of New York, County of Kings (Case No. 5018-1) and Superior Court of the State of California for the County of Los Angeles (Case Nos. BC457920 and BC460331) against American Apparel, DovMr. Charney and certain members of the Board of Directors asserting claims of sexual harassment, assault and battery, impersonation through the internet, defamation and other related claims. The Company settled one of these cases with no monetary liability to the Company. In another case, the Company prevailed on its argument that certain claims had been released by the plaintiff, and the remaining claims were recently settled. In another case, the arbitrator rejected the Company’s argument that certain claims had been released, and a hearing will be held in the future on the merits of the parties’parties' claims. In another case, the arbitrator ruled that both American Apparel and the

25
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plaintiff had established certain claims and damages against one another resulting in a net

25

inconsequential amount awarded to the plaintiff and in June 2014, the arbitrator is considering a request to award attorneys’awarded attorneys' fees and costs to the plaintiff. The Company is awaitingand its insurance carrier are currently in dispute about insurance coverage of the arbitrator's ruling on the outstanding attorney's fees and cost issue in this case.costs. In a different case, the arbitrator has held an evidentiary hearing on the parties’ respective claims and the Company is waiting for the arbitrator’sarbitrator's ruling. The Company cannot provide assurance that, the amount and ultimate liability, if any, with respect to these remaining cases will not materially affect the Company's business, financial position, results of operations, or cash flows. 

In addition, the Company is currently engaged in other employment-related claims and other matters incidental to the Company’s business. The Company believes that all such claims are without merit or not material and intends to vigorously dispute the validity of the plaintiffs’ claims. While the final resolution of such claims cannot be determined based on information at this time, the Company believes, but cannot provide assurance that, the amount and ultimate liability, if any, with respect to these actions will not materially affect its business, financial position, results of operations, or cash flows. Should any of these matters be decided against the Company, it could not only incur liability but also experience an increase in similar suits and suffer reputational harm.
Note 17. Condensed Consolidating Financial Information
The Notes (see Note 7), which constitute debt obligations of American Apparel Inc. (the "Parent") are fully and unconditionally guaranteed, jointly and severally, and on a senior secured basis, by the Company's existing and future 100% owned direct and indirect domestic subsidiaries, subject to customary automatic release provisions, including the satisfaction and discharge, or defeasance, or payment in full of the principal of, premium, if any, accrued and unpaid interest on the Notes, or, in certain circumstances, the sale or other disposition of substantially all of the assets of the subsidiary guarantor. No guarantor subsidiaries are less than 100% owned, directly or indirectly, by the Company.
The following presents the condensedParent's consolidating balance sheets as of March 31,June 30, 2014 and December 31, 2013 the condensedand its consolidating statements of operations for the three and six months ended March 31,June 30, 2014 and 2013, and the condensed consolidating statements of cash flows for the threesix months ended March 31,June 30, 2014 and 2013, of the Parent, the Company'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. These condensed consolidating financial information should be read in conjunction with the accompanying condensedCompany's consolidated financial statements of the Company.statement.


26
Table of Contents

Condensed Consolidating Balance Sheets
March 31,June 30, 2014
(Amounts in thousands)
(Unaudited)(unaudited)
Parent Combined Guarantor Subsidiaries Combined Non-Guarantor Subsidiaries Elimination Entries ConsolidatedParent Combined Guarantor Subsidiaries Combined Non-Guarantor Subsidiaries Elimination Entries Consolidated
ASSETS                  
CURRENT ASSETS                  
Cash$—
 $10,471
 $6,212
 $—
 $16,683
$0
 $1,676
 $8,484
 $0
 $10,160
Trade accounts receivable, net—
 17,812
 4,229
 —
 22,041
0
 21,840
 4,374
 0
 26,214
Intercompany accounts receivable, net275,589
 (254,707) (20,882) —
 —
262,292
 (242,289) (20,003) 0
 0
Inventories, net—
 126,005
 37,668
 (21) 163,652
0
 115,102
 35,655
 (6) 150,751
Other current assets953
 8,055
 5,313
 —
 14,321
665
 10,175
 6,088
 0
 16,928
Total current assets276,542
 (92,364) 32,540
 (21) 216,697
262,957
 (93,496) 34,598
 (6) 204,053
PROPERTY AND EQUIPMENT, net—
 50,562
 15,045
 —
 65,607
INVESTMENTS IN SUBSIDIARIES(103,710) 18,077
 —
 85,633
 —
OTHER ASSETS, net9,014
 28,353
 11,819
 —
 49,186
Property and equipment, net0
 46,985
 14,674
 0
 61,659
Investments in subsidiaries(101,268) 18,806
 0
 82,462
 0
Other assets, net8,905
 28,449
 11,299
 0
 48,653
TOTAL ASSETS$181,846
 $4,628
 $59,404
 $85,612
 $331,490
$170,594
 $744
 $60,571
 $82,456
 $314,365
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY         LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY        
CURRENT LIABILITIES                  
Revolving credit facilities and current portion of long-term debt$—
 $29,456
 $13
 $—
 $29,469
$0
 $30,555
 $13
 $0
 $30,568
Accounts payable—
 36,771
 3,403
 —
 40,174
0
 31,553
 3,265
 0
 34,818
Accrued expenses and other current liabilities12,927
 28,585
 12,440
 —
 53,952
6,194
 28,464
 12,706
 0
 47,364
Fair value of warrant liability8,287
 —
 —
 —
 8,287
16,489
 0
 0
 0
 16,489
Other current liabilities—
 2,489
 1,770
 —
 4,259
0
 2,404
 1,912
 0
 4,316
Total current liabilities21,214
 97,301
 17,626
 —
 136,141
22,683
 92,976
 17,896
 0
 133,555
LONG-TERM DEBT, net214,308
 —
 278
 —
 214,586
OTHER LONG-TERM LIABILITIES—
 28,693
 5,742
 —
 34,435
Long-term debt, net215,513
 0
 284
 0
 215,797
Other long-term liabilities0
 27,051
 5,564
 0
 32,615
TOTAL LIABILITIES235,522
 125,994
 23,646
 —
 385,162
238,196
 120,027
 23,744
 0
 381,967
STOCKHOLDERS' (DEFICIT) EQUITY                  
Common stock17
 100
 492
 (592) 17
17
 100
 492
 (592) 17
Additional paid-in capital215,135
 6,726
 7,716
 (14,442) 215,135
216,537
 6,726
 7,746
 (14,472) 216,537
Accumulated other comprehensive (loss) income(4,781) (407) (1,137) 1,548
 (4,777)(3,904) (203) (290) 493
 (3,904)
(Accumulated deficit) retained earnings(261,890) (127,785) 28,687
 99,098
 (261,890)(278,095) (125,906) 28,879
 97,027
 (278,095)
Less: Treasury stock(2,157) —
 —
 —
 (2,157)(2,157) 0
 0
 0
 (2,157)
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY(53,676) (121,366) 35,758
 85,612
 (53,672)(67,602) (119,283) 36,827
 82,456
 (67,602)
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY$181,846
 $4,628
 $59,404
 $85,612
 $331,490
$170,594
 $744
 $60,571
 $82,456
 $314,365

27
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Condensed Consolidating Balance Sheets
December 31, 2013
(Amounts in thousands)
Parent Combined Guarantor Subsidiaries Combined Non-Guarantor Subsidiaries Elimination Entries ConsolidatedParent Combined Guarantor Subsidiaries Combined Non-Guarantor Subsidiaries Elimination Entries Consolidated
ASSETS                  
CURRENT ASSETS                  
Cash$—
 $512
 $8,164
 $—
 $8,676
$0
 $512
 $8,164
 $0
 $8,676
Trade accounts receivable, net—
 15,109
 5,592
 —
 20,701
0
 15,109
 5,592
 0
 20,701
Intercompany accounts receivable, net247,414
 (224,181) (23,233) —
 —
247,414
 (224,181) (23,233) 0
 0
Inventories, net—
 129,716
 39,736
 (74) 169,378
0
 129,716
 39,736
 (74) 169,378
Other current assets97
 10,442
 6,002
 —
 16,541
97
 10,442
 6,002
 0
 16,541
Total current assets247,511
 (68,402) 36,261
 (74) 215,296
247,511
 (68,402) 36,261
 (74) 215,296
PROPERTY AND EQUIPMENT, net—
 53,424
 15,879
 —
 69,303
INVESTMENTS IN SUBSIDIARIES(94,161) 18,158
 —
 76,003
 —
OTHER ASSETS, net9,282
 27,934
 11,937
 —
 49,153
Property and equipment, net0
 53,424
 15,879
 0
 69,303
Investments in subsidiaries(94,161) 18,158
 0
 76,003
 0
Other assets, net9,282
 27,934
 11,937
 0
 49,153
TOTAL ASSETS$162,632
 $31,114
 $64,077
 $75,929
 $333,752
$162,632
 $31,114
 $64,077
 $75,929
 $333,752
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY         LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY        
CURRENT LIABILITIES                  
Revolving credit facilities and current portion of long-term debt$—
 $43,586
 $456
 $—
 $44,042
$0
 $43,586
 $456
 $0
 $44,042
Accounts payable—
 34,738
 3,552
 —
 38,290
0
 34,738
 3,552
 0
 38,290
Accrued expenses and other current liabilities5,952
 28,344
 15,722
 —
 50,018
5,952
 28,344
 15,722
 0
 50,018
Fair value of warrant liability20,954
 —
 —
 —
 20,954
20,954
 0
 0
 0
 20,954
Other current liabilities—
 6,830
 1,855
 —
 8,685
0
 6,830
 1,855
 0
 8,685
Total current liabilities26,906
 113,498
 21,585
 —
 161,989
26,906
 113,498
 21,585
 0
 161,989
LONG-TERM DEBT, net213,130
 47
 291
 —
 213,468
OTHER LONG-TERM LIABILITIES—
 29,711
 5,988
 —
 35,699
Long-term debt, net213,130
 47
 291
 0
 213,468
Other long-term liabilities0
 29,711
 5,988
��0
 35,699
TOTAL LIABILITIES240,036
 143,256
 27,864
 —
 411,156
240,036
 143,256
 27,864
 0
 411,156
STOCKHOLDERS' (DEFICIT) EQUITY                  
Common stock11
 100
 492
 (592) 11
11
 100
 492
 (592) 11
Additional paid-in capital185,472
 6,726
 7,685
 (14,411) 185,472
185,472
 6,726
 7,685
 (14,411) 185,472
Accumulated other comprehensive (loss) income(4,306) (543) (671) 1,214
 (4,306)(4,306) (543) (671) 1,214
 (4,306)
(Accumulated deficit) retained earnings(256,424) (118,425) 28,707
 89,718
 (256,424)(256,424) (118,425) 28,707
 89,718
 (256,424)
Less: Treasury stock(2,157) —
 —
 —
 (2,157)(2,157) 0
 0
 0
 (2,157)
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY(77,404) (112,142) 36,213
 75,929
 (77,404)(77,404) (112,142) 36,213
 75,929
 (77,404)
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY$162,632
 $31,114
 $64,077
 $75,929
 $333,752
$162,632
 $31,114
 $64,077
 $75,929
 $333,752







28
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Condensed Consolidating Statement of Operations and Comprehensive (Loss) Income
For the Three Months Ended March 31,June 30, 2014
(Amounts in thousands)
(Unaudited)(unaudited)
Parent Combined Guarantor Subsidiaries Combined Non-Guarantor Subsidiaries Elimination Entries ConsolidatedParent Combined Guarantor Subsidiaries Combined Non-Guarantor Subsidiaries Elimination Entries Consolidated
Net sales$—
 $99,997
 $45,893
 $(8,794) $137,096
$0
 $122,758
 $55,169
 $(15,530) $162,397
Cost of sales—
 59,100
 14,878
 (8,856) 65,122
0
 72,824
 22,703
 (15,517) 80,010
Gross profit—
 40,897
 31,015
 62
 71,974
0
 49,934
 32,466
 (13) 82,387
Selling expenses—
 32,072
 21,990
 —
 54,062
0
 29,577
 22,866
 0
 52,443
General and administrative expenses237
 16,211
 8,461
 —
 24,909
648
 17,991
 8,505
 (9) 27,135
Retail store impairment—
 49
 450
 —
 499
0
 66
 163
 0
 229
(Loss) income from operations(237) (7,435) 114
 62
 (7,496)(648) 2,300
 932
 (4) 2,580
Interest expense and other expense(3,842) 1,553
 (215) —
 (2,504)17,124
 1,001
 156
 0
 18,281
Equity in loss (earnings) of subsidiaries9,071
 242
 4
 (9,317) —
Equity in (earnings) loss of subsidiaries(1,567) (495) (4) 2,066
 0
(Loss) income before income taxes(5,466) (9,230) 325
 9,379
 (4,992)(16,205) 1,794
 780
 (2,070) (15,701)
Income tax provision—
 129
 345
 —
 474
Income tax (benefit) provision0
 (84) 588
 0
 504
Net (loss) income$(5,466) $(9,359) $(20) $9,379
 $(5,466)$(16,205) $1,878
 $192
 $(2,070) $(16,205)
Other comprehensive (loss) income, net of tax(471) 136
 (466) 330
 (471)
Other comprehensive income (loss), net of tax873
 204
 847
 (1,051) 873
Comprehensive (loss) income$(5,937) $(9,223) $(486) $9,709
 $(5,937)$(15,332) $2,082
 $1,039
 $(3,121) $(15,332)


Condensed Consolidating Statement of Operations and Comprehensive (Loss) Income
For the Three Months Ended March 31,June 30, 2013
(Amounts in thousands)
(Unaudited)(unaudited)
Parent Combined Guarantor Subsidiaries Combined Non-Guarantor Subsidiaries Elimination Entries ConsolidatedParent Combined Guarantor Subsidiaries Combined Non-Guarantor Subsidiaries Elimination Entries Consolidated
Net sales$—
 $95,404
 $49,889
 $(7,233) $138,060
$0
 $118,348
 $59,096
 $(15,208) $162,236
Cost of sales—
 57,111
 15,798
 (7,717) 65,192
0
 71,166
 23,006
 (15,806) 78,366
Gross profit—
 38,293
 34,091
 484
 72,868
0
 47,182
 36,090
 598
 83,870
Selling expenses—
 32,242
 23,221
 —
 55,463
0
 33,499
 24,291
 0
 57,790
General and administrative expenses376
 18,120
 9,324
 (16) 27,804
130
 17,559
 10,293
 12
 27,994
Retail store impairment—
 78
 —
 —
 78
(Loss) income from operations(376) (12,147) 1,546
 500
 (10,477)(130) (3,876) 1,506
 586
 (1,914)
Interest expense and other expense31,962
 3,632
 (27) —
 35,567
28,323
 6,394
 253
 0
 34,970
Equity in (earnings) loss of subsidiaries14,173
 (1,219) —
 (12,954) —
Equity in loss (earnings) of subsidiaries9,051
 (372) 0
 (8,679) 0
(Loss) income before income taxes(46,511) (14,560) 1,573
 13,454
 (46,044)(37,504) (9,898) 1,253
 9,265
 (36,884)
Income tax (benefit) provisions—
 (43) 510
 —
 467
Income tax provisions0
 0
 620
 0
 620
Net (loss) income$(46,511) $(14,517) $1,063
 $13,454
 $(46,511)$(37,504) $(9,898) $633
 $9,265
 $(37,504)
Other comprehensive (loss) income, net of tax(1,504) (1,227) (1,577) 2,804
 (1,504)(726) (121) (681) 802
 (726)
Comprehensive (loss) income$(48,015) $(15,744) $(514) $16,258
 $(48,015)$(38,230) $(10,019) $(48) $10,067
 $(38,230)







29
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Condensed Consolidating Statement of Cash FlowsOperations and Comprehensive (Loss) Income
For the ThreeSix Months Ended March 31,June 30, 2014
(Amounts in thousands)
(Unaudited)(unaudited)
 Parent Combined Guarantor Subsidiaries Combined Non-Guarantor Subsidiaries Elimination Entries Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES         
Net cash (used in) provided by operating activities$(1,241) $1,777
 $3,379
 $—
 $3,915
CASH FLOWS FROM INVESTING ACTIVITIES         
Capital expenditures—
 (2,340) (1,618) —
 (3,958)
Proceeds from sale of fixed assets—
 —
 30
 —
 30
Restricted cash—
 —
 —
 —
 —
Net cash used in investing activities—
 (2,340) (1,588) —
 (3,928)
CASH FLOWS FROM FINANCING ACTIVITIES         
Cash overdraft—
 (3,989) —
 —
 (3,989)
Repayments under revolving credit facilities, net—
 (14,128) (429) —
 (14,557)
Repayments of term loans and notes payable—
 (47) (3) —
 (50)
Net proceeds from issuance of common stock28,554
 —
 —
 —
 28,554
Payment of payroll statutory tax withholding on share-based compensation associated with issuance of common stock(125) —
 —
 —
 (125)
Payments of debt issuance costs(69) (303) —
 —
 (372)
Repayments of capital lease obligations—
 (121) (16) —
 (137)
Advances to/from affiliates(27,119) 29,110
 (1,991) —
 —
Net cash provided by (used in) financing activities1,241
 10,522
 (2,439) —
 9,324
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH—
 —
 (1,304) —
 (1,304)
NET INCREASE (DECREASE) IN CASH—
 9,959
 (1,952) —
 8,007
CASH, beginning of period
—
 512
 8,164
 —
 8,676
CASH, end of period
$—
 $10,471
 $6,212
 $—
 $16,683
          
NON-CASH INVESTING AND FINANCING ACTIVITIES         
Property and equipment acquired, and included in accounts payable$—
 $917
 $123
 $—
 $1,040
 Parent Combined Guarantor Subsidiaries Combined Non-Guarantor Subsidiaries Elimination Entries Consolidated
Net sales$0
 $222,755
 $101,062
 $(24,324) $299,493
Cost of sales0
 131,924
 37,581
 (24,373) 145,132
Gross profit0
 90,831
 63,481
 49
 154,361
Selling expenses0
 61,649
 44,856
 0
 106,505
General and administrative expenses885
 34,202
 16,966
 (9) 52,044
Retail store impairment0
 115
 613
 0
 728
(Loss) income from operations(885) (5,135) 1,046
 58
 (4,916)
Interest expense and other expense13,282
 2,554
 (59) 0
 15,777
Equity in loss (earnings) of subsidiaries7,504
 (253) 0
 (7,251) 0
(Loss) income before income taxes(21,671) (7,436) 1,105
 7,309
 (20,693)
Income tax provision0
 45
 933
 0
 978
Net (loss) income$(21,671) $(7,481) $172
 $7,309
 $(21,671)
Other comprehensive income (loss), net of tax402
 340
 381
 (721) 402
Comprehensive (loss) income$(21,269) $(7,141) $553
 $6,588
 $(21,269)


Condensed Consolidating Statement of Operations and Comprehensive (Loss) Income
For the Six Months Ended June 30, 2013
(in thousands)
(unaudited)
 Parent Combined Guarantor Subsidiaries Combined Non-Guarantor Subsidiaries Elimination Entries Consolidated
Net sales$0
 $213,752
 $108,985
 $(22,441) $300,296
Cost of sales0
 128,277
 38,804
 (23,523) 143,558
Gross profit0
 85,475
 70,181
 1,082
 156,738
Selling expenses0
 65,741
 47,512
 0
 113,253
General and administrative expenses506
 35,679
 19,617
 (4) 55,798
Retail store impairment0
 78
 0
 0
 78
(Loss) income from operations(506) (16,023) 3,052
 1,086
 (12,391)
Interest expense and other expense60,285
 10,026
 226
 0
 70,537
Equity in loss (earnings) of subsidiaries23,224
 (1,591) 0
 (21,633) 0
(Loss) income before income taxes(84,015) (24,458) 2,826
 22,719
 (82,928)
Income tax (benefit) provisions0
 (43) 1,130
 0
 1,087
Net (loss) income$(84,015) $(24,415) $1,696
 $22,719
 $(84,015)
Other comprehensive (loss) income, net of tax(2,230) (1,348) (2,258) 3,606
 (2,230)
Comprehensive (loss) income$(86,245) $(25,763) $(562) $26,325
 $(86,245)






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Condensed Consolidating Statement of Cash Flows
For the ThreeSix Months Ended March 31, 2013June 30, 2014
(Amounts in thousands)
(Unaudited)(unaudited)
 Parent Combined Guarantor Subsidiaries Combined Non-Guarantor Subsidiaries Elimination Entries Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES         
Net cash (used in) provided by operating activities$(15,489) $9,647
 $7,145
 $0
 $1,303
CASH FLOWS FROM INVESTING ACTIVITIES         
Capital expenditures0
 (4,629) (2,458) 0
 (7,087)
Proceeds from sale of fixed assets0
 0
 29
 0
 29
Restricted cash0
 0
 178
 0
 178
Net cash used in investing activities0
 (4,629) (2,251) 0
 (6,880)
CASH FLOWS FROM FINANCING ACTIVITIES         
Cash overdraft0
 (3,993) 0
 0
 (3,993)
(Repayments) borrowing under revolving credit facilities, net0
 (13,025) (432) 0
 (13,457)
Repayments of term loans and notes payable0
 (47) (6) 0
 (53)
Net proceeds from issuance of common stock28,446
 0
 0
 0
 28,446
Payment of payroll statutory tax withholding on share-based compensation associated with issuance of common stock(301) 0
 0
 0
 (301)
Payments of debt issuance costs(345) (354) 0
 0
 (699)
Repayments of capital lease obligations0
 (1,796) (32) 0
 (1,828)
Advances to/from affiliates(12,311) 15,361
 (3,050) 0
 0
Net cash provided by (used in) financing activities15,489
 (3,854) (3,520) 0
 8,115
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH0
 0
 (1,054) 0
 (1,054)
NET INCREASE (DECREASE) IN CASH0
 1,164
 320
 0
 1,484
CASH, beginning of period
0
 512
 8,164
 0
 8,676
CASH, end of period
$0
 $1,676
 $8,484
 $0
 $10,160
          
NON-CASH INVESTING AND FINANCING ACTIVITIES         
Property and equipment acquired, and included in accounts payable$0
 $407
 $221
 $0
 $628

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Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2013
(in thousands)
(unaudited)
 Parent Combined Guarantor Subsidiaries Combined Non-Guarantor Subsidiaries Elimination Entries Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES         
Net cash (used in) provided by operating activities$(1,528) $(11,617) $7,249
 $—
 $(5,896)
CASH FLOWS FROM INVESTING ACTIVITIES         
Capital expenditures—
 (5,976) (1,378) —
 (7,354)
Proceeds from sale of fixed assets—
 11
 1
 —
 12
Restricted cash—
 588
 (1,210) —
 (622)
Net cash used in investing activities—
 (5,377) (2,587) —
 (7,964)
CASH FLOWS FROM FINANCING ACTIVITIES         
Cash overdraft—
 1,340
 —
 —
 1,340
Borrowings (repayments) under current revolving credit facilities, net—
 11,480
 (3,856) —
 7,624
Repayments of term loans and notes payable—
 —
 (3) —
 (3)
Payment of payroll statutory tax withholding on share-based compensation associated with issuance of common stock(112) —
 —
 —
 (112)
Payments of debt issuance costs(730) (948) —
 —
 (1,678)
(Repayments) proceeds of capital lease obligations—
 (209) 33
 —
 (176)
Advances to/from affiliates2,370
 1,999
 (4,369) —
 —
Net cash provided by (used in) financing activities1,528
 13,662
 (8,195) —
 6,995
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH—
 —
 (300) —
 (300)
NET DECREASE IN CASH—
 (3,332) (3,833) —
 (7,165)
CASH, beginning of period
—
 3,796
 9,057
 —
 12,853
CASH, end of period
$—
 $464
 $5,224
 $—
 $5,688
          
NON-CASH INVESTING AND FINANCING ACTIVITIES         
Property and equipment acquired, and included in accounts payable$—
 $3,197
 $236
 $—
 $3,433




 Parent Combined Guarantor Subsidiaries Combined Non-Guarantor Subsidiaries Elimination Entries Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES         
Net cash (used in) provided by operating activities$732
 $(25,339) $10,704
 $0
 $(13,903)
CASH FLOWS FROM INVESTING ACTIVITIES         
Capital expenditures0
 (11,477) (2,160) 0
 (13,637)
Proceeds from sale of fixed assets0
 27
 3
 0
 30
Restricted cash0
 3,265
 (1,509) 0
 1,756
Net cash used in investing activities0
 (8,185) (3,666) 0
 (11,851)
CASH FLOWS FROM FINANCING ACTIVITIES         
Cash overdraft0
 4,117
 0
 0
 4,117
Repayments of expired revolving credit facilities, net0
 (28,513) 0
 0
 (28,513)
Borrowings (repayments) under current revolving credit facilities, net0
 32,758
 (2,928) 0
 29,830
Repayments of term loans and notes payable4,500
 (30,000) (7) 0
 (25,507)
Repayment of Lion term loan(144,149) 0
 0
 0
 (144,149)
Issuance of Senior Secured Notes199,820
 0
 0
 0
 199,820
Payment of payroll statutory tax withholding on share-based compensation associated with issuance of common stock(2,119) 0
 0
 0
 (2,119)
Payments of debt issuance costs(11,237) (414) 0
 0
 (11,651)
Repayments of capital lease obligations—
 (1,059) (22) 0
 (1,081)
Advances to/from affiliates(47,547) 55,087
 (7,540) 0
 0
Net cash provided by (used in) financing activities(732) 31,976
 (10,497) 0
 20,747
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH0
 0
 (502) 0
 (502)
NET DECREASE IN CASH0
 (1,548) (3,961) 0
 (5,509)
CASH, beginning of period
0
 3,796
 9,057
 0
 12,853
CASH, end of period
$0
 $2,248
 $5,096
 $0
 $7,344
          
NON-CASH INVESTING AND FINANCING ACTIVITIES         
Property and equipment acquired, and included in accounts payable$0
 $2,334
 $433
 $0
 $2,767















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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
(All dollar and share amounts in the Item 2 are presented in thousands, except for per shareper-share items and unless otherwise specified.)
OverviewOVERVIEW
General
We are a vertically-integrated manufacturer, distributor, and retailer of branded fashion basic apparel and accessories for women, men, children and babies. We are based in downtown Los Angeles, California. As of March 31,June 30, 2014, we had approximately 10,000 employees and operated 249247 retail stores in 20 countries: the United States,U.S., Canada, Mexico, Brazil, United Kingdom, Ireland,the U.K., Australia, Austria, Belgium, Brazil, China, France, Germany, Ireland, Israel, Italy, Japan, Mexico, Netherlands, South Korea, Spain, Sweden, Switzerland, Israel, Australia, Japan, South Korea, and China.Switzerland. We also operate a global e-commerce site that serves over 60 countries worldwide at www.americanapparel.com. In addition, American Apparel operateswe operate a leading wholesale business that supplies high quality T-shirts and other casual wear to distributors and the imprintable industry.
We conduct our primary apparel manufacturing operations out of an 800,000 square footsquare-foot facility in the warehouse district of downtown Los Angeles, California. The facility houses our executive offices, as well as cutting, sewing and warehousing operations. We conduct knitting operations in Los Angeles and Garden Grove, California, which produce a majority of the fabric we use in our products. We also operate dye houses in Hawthorne, California that currently provide dyeing and finishing services for nearly all of the raw fabric used in production. We operate a fabric dyeing and finishing facility in Hawthorne, California. We also operate a cutting, sewing, garment dyeing and finishing facility located in South Gate, California. We operate a fabric dyeing and finishing facility located in Garden Grove, California, which also includes cutting, sewing and knitting operations. Since 2013, we have conducted our warehousing and distribution operations out ofat La Mirada, California.
Because we manufacture domestically and are vertically integrated, we believe this enables us to more quickly respond to customer demand and changing fashion trends and to closely monitor product quality. Our products are noted for their quality and fit, and together with our distinctive branding, these attributes have differentiated our products in the marketplace. “American"American Apparel®”" is a registered trademark of American Apparel (USA), LLC.
The resultsWe experience seasonality in our operations; sales during the third and fourth fiscal quarters have generally been the highest while sales during the first fiscal quarter have been the lowest. This reflects the combined impact of the respective business segments exclude unallocated corporate expenses, which consistseasonality of our shared overhead costs. These costs are presented separatelywholesale and generally include corporate costs suchretail channels. Generally, our retail segment has not experienced the same pronounced sales seasonality as human resources, legal, finance, information technology, accounting, and executive management.other retailers.
The following table details,presents, by segment, the change in retail store count during the three and six months ended March 31,June 30, 2014 and 2013.
U.S. Retail Canada International TotalU.S. Retail Canada International Total
Three Months Ended March 31, 2014       
Open at January 1, 2014139
 32
 77
 248
Three Months Ended June 30, 2014       
Open at March 31, 2014140
 32
 77
 249
Opened2
 —
 1
 3
0
 0
 2
 2
Closed(1) —
 (1) (2)(3) (1) 0
 (4)
Open at March 31, 2014140
 32
 77
 249
Open at June 30, 2014137
 31
 79
 247
              
Three Months Ended March 31, 2013       
Open at January 1, 2013140
 35
 76
 251
Three Months Ended June 30, 2013       
Open at March 31, 2013139
 34
 76
 249
Opened1
 —
 1
 2
0
 0
 1
 1
Closed(2) (1) (1) (4)(1) (1) (3) (5)
Open at March 31, 2013139
 34
 76
 249
Open at June 30, 2013138
 33
 74
 245


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 U.S. Retail Canada International Total
Six Months Ended June 30, 2014       
Open at December 31, 2013139
 32
 77
 248
Opened2
 0
 3
 5
Closed(4) (1) (1) (6)
Open at June 30, 2014137
 31
 79
 247
        
Six Months Ended June 30, 2013       
Open at December 31, 2012140
 35
 76
 251
Opened1
 0
 2
 3
Closed(3) (2) (4) (9)
Open at June 30, 2013138
 33
 74
 245
B. Comparable Store Sales
The table below shows the increasechanges in comparable store sales for our retail and online stores forduring the three and six months ended March 31,June 30, 2014 and 2013, and the number of retail stores included in the comparison at the end of each period. Comparable store sales are defined as the percentage change in sales for stores that have been open for more than twelve full months. Remodeled and expanded stores are excluded from the determination of comparable stores forduring the following twelve month periodmonths if the remodel or expansion results in a change of greater than 20% of selling square footage. Closed stores are excluded from the base of comparable stores following their last full month of operation. 

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In calculating constant currency amounts, we convert the results of our foreign operations both induring the three and six months ended March 31,June 30, 2014 and the prior year comparable periods2013 by using the weighted-average foreign exchange rate for the current comparable periods to achieve a consistent basis for comparison.
Three Months Ended March 31,Three Months Ended June 30, Six Months Ended June 30,
2014 20132014 2013 2014 2013
Comparable store sales (1)(a)
(5)% 8%(6)% 7% (5)% 7%
Number of stores in comparison236
 238
233
 237
 234
 237
(1)(a) Comparable store sales results includeInclude the impact of online store sales.

C. Executive Summary
Results of Operations
Net sales for the threesix months ended March 31,June 30, 2014 decreased $964,$803, or 0.7%0.3%, to $137,096 from $138,060 for the three months ended March 31,corresponding period in 2013 due to lower sales at our U.S. Retail, Canada and International segments.
Net sales at oursegments which decreases were substantially offset by an increase in the U.S. Wholesale segmentsegment.
U.S. Wholesale net sales, excluding online consumer net sales, increased by $4,315,$9,255, or 9.7%11.9%, to $48,737 for the threesix months ended March 31,June 30, 2014 as comparedfrom the corresponding period in 2013 mainly due to $44,422 for the three months ended March 31, 2013, driven by higher sales order volume from our new and existing customers. This increase was attributed to the continued strength of our product offerings and improved service levels. Additionally, in early 2013,In addition, during the second quarter of 2014, we releasedadded a significant new wholesale catalogdistributor and updated the catalog with quarterly style guides.began to ship its initial stock order. We continue our focus on increasing our customer base by targeting direct sales, particularly sales to third party screen printers. OurU.S. online consumer net sales increased 3.0% primarily due to targeted online advertising and promotional efforts in the earlier part of the year.
U.S. Retail net sales for the six months ended June 30, 2014 decreased $4,073, or 4.3%, from the corresponding period in 2013 mainly due to a decrease in comparable store sales as a result of targeted promotion efforts and improved merchandising.
Net sales for the U.S. Retail segment decreased $1,879, or 4.2%, to $42,465 for the three months ended March 31, 2014 as compared to $44,344 for the three months ended March 31, 2013, primarily due to the unseasonably cool temperatures throughout much ofacross the country during the first quarter of 2014 and later timing of Easter in 2014.lower mall traffic.
NetCanada net sales for the Canada segment decreased $1,897, or 15.4%, to $10,460 for the threesix months ended March 31,June 30, 2014 as compareddecreased $4,332, or 15.6%, from the corresponding period in 2013 due to $12,357 forapproximately $2,500 in lower sales, primarily in the three months ended March 31, 2013,retail and wholesale channels, and approximately $1,900 as a result of lower sales volumes from store closures, lower wholesale orders and the negativeunfavorable impact of foreign currency fluctuations.exchange rate changes.
NetInternational net sales for the International segment decreased $1,503, or 4.1%, to $35,434 for the threesix months ended March 31, 2014 as compared to $36,937 forJune 30, 2013 decreased $2,226, or 2.8%, from the three months ended March 31,corresponding period in 2013, mainly due to approximately $4,500 lower sale volumesales in Japan and Australia as well asall three sales channels, partially offset by $2,200 from the negativefavorable impact of foreign currency fluctuations.
Gross margin for the three months ended March 31, 2014 was 52.5% as compared to 52.8% for the three months ended March 31, 2013.
Operating expenses decreased $3,875 to $79,470 for the three months ended March 31, 2014 from $83,345 for the three months ended March 31, 2013. Operating expenses include selling, general and administrative costs, and retail store impairment charges, and as a percentage of sales were approximately 58.0% for the three months ended March 31, 2014 and 60.4% for the three months ended March 31, 2013. Excluding the effects of share-based compensation and depreciation, amortization and impairment charges, operating expenses as a percentage of sales decreased from 54.2% to 51.9% from the three months ended March 31, 2013 to the same period in 2014. The decrease is due to a reduction in payroll and related costs of $1,042 from the effect of our cost reduction efforts. Additionally, tight control over advertising expenditures resulted in a decrease in advertising and marketing expenses of $1,021.
Loss from operations was $7,496 for the three months ended March 31, 2014 as compared to $10,477 for the three months ended March 31, 2013. Lower sales volume was offset by decrease in our operating expenses as discussed above.
Net loss for the three months ended March 31, 2014 was $5,466 as compared to $46,511 for the three months ended March 31, 2013 primarily as a result of lower operating expenses and unrealized gain on change in fair value of warrants. See Results of Operations for the three months ended March 31, 2014 for further details.
Liquidity Trends
As of March 31, 2014, we had approximately $16,683 in cash and $16,762 of availability for additional borrowings under the credit facility with Capital One Business Credit Corp. ("Capital One" and such facility, the "Capital One Credit Facility"). Additionally, we had $29,452 outstanding on a $50,000 asset-backed revolving credit facility under the Capital One Credit Facility. See Note 6 to our condensed consolidated financial statements under Part I, Item 1. As of April 30, 2014, we had $18,261 available for borrowing under the revolving credit agreement.exchange rate changes.

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OnGross margin for the six months ended June 30, 2014 was 51.5% as compared to 52.2% for the six months ended June 30, 2013.
Operating expenses include selling, general and administrative expenses, and retail store impairment. Operating expenses for the six months ended June 30, 2014 decreased $9,852, or 5.8%, from the corresponding period in 2013, and were 53.2% and 56.3% of total net sales, respectively. Excluding the effects of share-based compensation, depreciation and amortization, and impairment charges, operating expenses as a percentage of total net sales were 47.6% and 49.9% for the six months ended June 30, 2014 and 2013, respectively. The decrease was primarily due to lower payroll from our cost reduction efforts and lower other operating expenditures, partially offset by a $1,000 charge for an estimated settlement related to an industrial accident.
Loss from operations was $4,916 for the six months ended June 30, 2014 as compared to $12,391 for the six months ended June 30, 2013. Lower sales volume was offset by decreases in our operating expenses as discussed above.
Net loss for the six months ended June 30, 2014 was $21,671 as compared to $84,015 for the six months ended June 30, 2013 primarily as a result of the $7,475 reduction in loss from operations, the $32,101 loss in the 2013 period on the extinguishment of debt and the change in fair value of warrants between periods, which reduced the comparable net loss in 2014 by $22,612. See Results of Operations for the six months ended June 30, 2014 for further details.
Liquidity
As of June 30, 2014, we had $10,160 in cash, $30,554 outstanding on our $50,000 asset-backed revolving credit facility with Capital One, and $16,891 of availability for additional borrowings under the Capital One Credit Facility. As of August 1, 2014, we had $22,942 available for additional borrowings under the Capital One Credit Facility.
In March 25, 2014, we entered into the Fifth Amendment to the Capital One Credit Facility which, effective upon our receipt of net proceeds from the March 31, 2014 equity offering (see below), among other things:and waived the obligation to maintain the minimum fixed charge coverage and maximum leverage ratios for the three month periodsmonths ended December 31, 2013 and March 31, 2014;2014. Based on the Fifth Amendment, the interest rates on borrowings under the Capital One Credit Facility equal to LIBOR plus 5.0% or the bank's prime rate plus 4.0% at our option and are subject to specified borrowing requirements and covenants. In addition, the Fifth Amendment reset for future periods the minimum fixed charge coverage ratio, the maximum leverage ratio, and the maximum capital expenditures allowed;allowed, and added a minimum EBITDA covenant; increasedcovenant. For the interest rate payable underthree months ended June 30, 2014, we were required to maintain a minimum fixed charge coverage ratio of not less than 0.85 to 1.00 and achieve a minimum EBITDA of $9,000. We were in compliance with the credit agreement by 0.5% per annum to either LIBOR plus 5.0% or the bank's prime rate plus 4.0% (at the Company's option); and increased the fees payable upon early termination.
On March 31,covenant at June 30, 2014 we completed a public offering of approximately 61,645 shares of our common stock at $0.50 per share for net proceeds of $28,554.
On April 14, 2014, we paid $13,390 in interest on the Notes..
Management Plan
We continue to develop initiatives intended to either increase sales, reduce costs or improve liquidity. InBeginning with the fourth quarter of 2013, and continuing through today, significant reductions were made inwe instituted various programs to reduce costs such as payroll and related costs associated with manufacturing and administrative overhead. We also instituted a program towards the end oflimited capital expenditures starting the first quarter of 2014 to limit capital expenditures. Additionally,2014. In addition, we intend to continue to drive productivity improvements from our new distribution center, further reduce inventories, reduce storeinventory reductions, other labor costs,cost reductions, and evaluate further consolidation of administrative and manufacturing functions. Efforts to identify additional ways to reduce costs and improve productivity will beare ongoing.
Some of our key initiatives recently completed and/or in progress include:
Completed RFID implementation - As ofIn the endfourth quarter of 2013, we completed the enhancement of our stores by installing sales conversion tracking device and radio frequency identification (RFID) tracking systems at all of our stores worldwide. We believe that these systems will enhanceworldwide, which enhanced sales through improvements in stock positions and replenishment activities.
New e-commerce platform – During the third quarter of 2012 we implementedThe e-commerce software platform speeds response times and enables us to deliver a new online store platform for our U.S. online stores that resulted in functional improvementspersonalized customer buying experience, which contributes to our financial growth as our website and fulfillment processes and will allow ushas the potential to tailor the look and feel of thenot only increase online store to enhance the customer online shopping experience. The new store platform willsales but also enable faster deployment of online stores to new international regions.in-store sales. As of the end of 2013, we have implemented this system for ourextended the new platform to online stores in Canada, United Kingdom,the U.K., Continental Europe, (Euro zone countries), Australia, Hong Kong and Singapore online stores. We intend to implement this system to our remaining online stores by the middle ofthroughout 2014. The new system offers a complete e-commerce software platform that speeds response timesimproves distributors' ability to place sales order and enables us to deliver a personalized customer buying experience andis mobile optimized, which we believe that these improvements will contribute toenhances the shopping experience for our continued financial growth as our website has the potential to not only increase online sales but also in-store sales.distributors.
In conjunction with the implementation of the Oracle ATG Web Commerce application discussed above,2013, we replaced our existing payment processing system with new electronic payment services from CyberSource. In addition, weCyberSource, and also implemented a payment fraud detection solution. We intend to complete the upgrade of our payment processing system by the middle ofthroughout 2014.
In addition to completing the implementation of the Oracle ATG Web Commerce application for our retail online stores, we intend to roll-out a new business-to-business online platform for our wholesale channel in 2014. The new system will improve distributors' ability to place sales order and will be mobile optimized, which we believe will enhance the shopping experience for our distributors.
During 2012 and 2013, we successfully completed the virtualization of over 300 servers, including all of our key servers. We plan to complete the virtualization of our servers and move our data center to an off-site location during 2014. We believe that this not only maximizes our server resources but will also enhanceenhances system performance and enableenables faster uptime in a disaster recovery situation.

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New distribution center - In June 2012, we entered into a newan operating lease agreement for a new distribution center located in La Mirada, California and fully transitioned our distribution operations into this new facility during 2013. Related to these efforts, we installed the High Jump warehouse management system for all distribution activities. Although we incurred significant transition costs and implementation delays associated with this transition, we believe that the new distribution center will contribute to processing efficiencies and effectiveness and will reduce operating expenses and cost of sales as it offers an improved distribution platform to scale both retail and wholesale sales channels. The transition to the new center was successfully completed during the fourth quarter of 2013. The center is now fully operational and labor costs have been reduced.
Although we have made significant improvements under this plan, there can be no assurance that further planned improvement will be successful.
D. Critical Accounting Policies and Estimates
As discussed in Part II, Item 8. Management Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2013, we consider our most critical accounting policies and estimates to include:
•revenue recognition;
•inventory valuation, obsolescence;
•fair value calculations including derivative liabilities;
•valuation and recoverability of long-lived assets including the values assigned to acquired intangible assets, goodwill,
and property and equipment;
•income taxes;
•legal accruals; and
•self-insurance liabilities.
In general, estimates are based on historical experience, information from third party professionals and various other sources, and assumptions that are believed to be reasonable under the facts and circumstances at the time such estimates are made. On a continual basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience, and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results may vary from these estimates and assumptions. Our management considers an accounting estimate to be critical if:
•it requires assumptions to be made that were uncertain at the time the estimate was made; and
•changes in the estimate, or the use of different estimating methods that could have been selected, could have a material
impact on our consolidated results of operations or financial condition.


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Results of OperationsRESULTS OF OPERATIONS
The results of operations of the interim periods are not necessarily indicative of results for the entire year.

Three Months Ended March 31,June 30, 2014 Comparedcompared to the Three Months Ended March 31,June 30, 2013
The following table sets forth our results of operations from ourthe unaudited condensed consolidated statements of operations by dollar and as a percentage of net sales for the periods indicated (dollars in(in thousands):
Three Months Ended March 31,Three Months Ended June 30,
2014 % of net sales 2013 % of net sales2014 % of net sales 2013 % of net sales
U.S. Wholesale$48,737
 35.5 % $44,422
 32.2 %$58,254
 35.9% $52,741
 32.5 %
U.S. Retail42,465
 31.0 % 44,344
 32.1 %48,970
 30.1% 51,164
 31.6 %
Canada10,460
 7.6 % 12,357
 9.0 %13,017
 8.0% 15,452
 9.5 %
International35,434
 25.8 % 36,937
 26.8 %42,156
 26.0% 42,879
 26.4 %
Total net sales137,096
 100.0 % 138,060
 100.0 %162,397
 100.0% 162,236
 100.0 %
Cost of sales65,122
 47.5 % 65,192
 47.2 %80,010
 49.3% 78,366
 48.3 %
Gross profit71,974
 52.5 % 72,868
 52.8 %82,387
 50.7% 83,870
 51.7 %
              
Selling expenses54,062
 39.4 % 55,463
 40.2 %52,443
 32.3% 57,790
 35.6 %
General and administrative expenses24,909
 18.2 % 27,804
 20.1 %27,135
 16.7% 27,994
 17.3 %
Retail store impairment499
 0.4 % 78
 0.1 %229
 0.1% 0
 0.0 %
              
Loss from operations(7,496) (5.5)% (10,477) (7.6)%
Income (loss) from operations2,580
 1.6% (1,914) (1.2)%
              
              
Interest expense10,039
 

 11,214
  10,019
 

 8,220
  
Foreign currency transaction gain132
 

 713
  
Unrealized (gain) loss on change in fair value of warrants(12,667) 

 23,645
  
Other expense(8) 

 (5)  
Foreign currency transaction loss (a)
0
 

 158
  
Unrealized loss (gain) on change in fair value of warrants (b)
8,202
 

 (5,498)  
Loss on extinguishment of debt0
   32,101
  
Other expense (income)60
 

 (11)  
Loss before income tax(4,992) 

 (46,044)  (15,701) 

 (36,884)  
Income tax provision474
 

 467
  504
 

 620
  
Net loss$(5,466) 

 $(46,511)  $(16,205) 

 $(37,504)  
(a) Related to the exchange rate fluctuations of the U.S. Dollar relative to functional currencies used by our subsidiaries.
(b) Mark-to-market adjustments associated with our warrants.
(1) U.S. Wholesale
U.S. Wholesale: TotalWholesale net sales for the U.S. Wholesale segment increased $4,315, or 9.7%, to $48,737 for the three months ended March 31,June 30, 2014, as compared to $44,422 for the three months ended March 31, 2013.
Wholesale net sales, excluding online consumer net sales, increased $3,5295,726, or 10.2%13.2%, to $38,237 forfrom the three months ended March 31, 2014 as comparedcorresponding period in 2013 mainly due to$34,708 for the three months ended March 31, 2013, driven by higher sales order volume from our new and existing customers. This increase was attributed to the continued strength of our product offerings and improved service levels. Additionally, in early 2013,In addition, during the second quarter of 2014, we releasedadded a significant new wholesale catalogdistributor and updated the catalog with quarterly style guides.began to ship its initial stock order. We continue our focus on increasing our customer base by targeting direct sales, particularly sales to third party screen printers.
Online consumer net sales increased $786, or 8.1%, to $10,500for the three months ended March 31,June 30, 2014 as compared to $9,714 for the three months ended March 31, 2013, primarily due to targeted online advertising and promotional efforts as well as improved merchandising of the web store.
U.S. Retail: Net sales for the U.S. Retail segment decreased $1,879213, or 4.2%2.2%, from the corresponding period in 2013 mainly due to lower sales order volume.
(2) U.S. Retail
$42,465U.S. Retail net sales for the three months ended March 31,June 30, 2014 decreased $2,194, or 4.3%, from the corresponding period in 2013 mainly due to a decrease of approximately $3,000 in comparable store sales as compareda result of lower store foot traffic. Net sales also decreased approximately $1,300 due to $the closure of six stores offset by an increase of approximately $1,800 from four new stores added after June 2013.


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(3) Canada
44,344Canada net sales for the three months ended March 31, 2013June 30, 2014 decreased $2,435, primarilyor 15.8%, from the corresponding period in 2013 mainly due to a $3,683 or 8.7% decreaselower sales of approximately $1,570 in comparable store sales duethe retail and wholesale channels. In addition, the impact of foreign currency exchange rate changes contributed approximately $860 to the unseasonably cool temperatures throughout much of the country and later timing of Easter in 2014. The decrease of $614 in net sales relating to closures of our six stores was offset by an increase of $1,986 from our nine new stores.decrease.
Canada:TotalRetail net sales for the Canada segmentthree months ended June 30, 2014 decreased $1,897$1,810, or 16.1%, from the corresponding period in 2013. Comparable store sales decreased approximately $340 due to lower store foot traffic. The closure of retail stores and less warehouse sales also resulted in decreased net sales of approximately $450 and $360, respectively. In addition, the impact of foreign currency exchange rate changes contributed approximately $620 to the sales decrease.
Wholesale net sales for the three months ended June 30, 2014 decreased $787, or 15.4%21.8%, from the corresponding period in 2013 mainly due to timing of orders from a large wholesale customer. Additionally, the impact of foreign currency exchange rate changes contributed approximately $190 to the sales decrease.
Online consumer net sales for the three months ended June 30, 2014 increased $162, or 26.6%, from the corresponding period in 2013 mainly due to continuing targeted promotion efforts and email advertising campaigns as well as enhanced functionality of the website. The impact of foreign currency exchange rate changes contributed approximately $50 to the sales decrease.
(4) International
$10,460International net sales for the three months ended March 31,June 30, 2014 as compareddecreased $723, or 1.7%, from the corresponding period in 2013 mainly due to $lower sales of approximately $2,500 in the wholesale and retail channels offset by the favorable impact of foreign currency exchange rate changes of approximately $1,800.
12,357Retail net sales for the three months ended March 31, 2013June 30, 2014, 2014 decreased by $365, or 1.0%, from the corresponding period in 2013. The decrease was due to lower comparable store sales of approximately $2,300 and lower sales of approximately $800 from store closures. The decrease was offset by approximately $1,200 higher sales due to new stores and approximately $1,500 from the favorable impact of foreign currency exchange rate changes.
Wholesale net sales for the three months ended June 30, 2014 decreased $431, or 16.4%, from the corresponding period in 2013 mainly due to lower sales order volume in the retailU.K. and wholesale channels. Additionally,Continental Europe offset by the favorable impact of foreign currency exchange rate changes contributedof approximately $130.
Online consumer net sales for the three months ended June 30, 2014 increased $73, or 1.7%, from the corresponding period in 2013 mainly due to favorable impact of foreign currency exchange rate changes.
(5) Gross Profit
Gross profit for the three months ended June 30, 2014 decreased 1.8% from $83,870, or 51.7% of net sales, to $82,387, or 50.7% of net sales.
(6) Selling expenses
Selling expenses for the three months ended June 30, 2014 decreased $5,347, or 9.3%, from the corresponding period in 2013 mainly due to lower selling payroll of approximately $3,000 and advertising costs of approximately $2,000. The decreases were the result of reductions in both retail headcount and store hours as well as reduced advertising commitments.
(7) General and administrative expenses
General and administrative expenses for the three months ended June 30, 2014 decreased $859, or 3.1%, from the corresponding period in 2013 mainly due to reduced salaries, wages, and benefits of approximately $1,000 coupled with a decreased in leased equipment, utilities, travel, and other miscellaneous expenses totaling of approximately $1,300. These reductions were substantially due to our cost reduction efforts. In addition, share-based compensation expense decreased by approximately $1,600 primarily relating to the sales decrease: holdingexpiration and forfeiture of certain market-based and performance-based share awards. The decrease was partially offset by a $1,000 charge for an estimated settlement related to an industrial accident and higher legal and consulting professional fees of approximately $2,000, the majority of which was related to costs associated with the suspension of Mr. Charney.
(8) Interest expense
Interest expense for the three months ended June 30, 2014 increased $1,799, or 21.9% from the corresponding period in 2013 mainly due to accrued interest on the Notes.
(9) Income tax provision
Although we incurred a loss before income tax on a consolidated basis for the three months ended June 30, 2014, some of our foreign currencydomiciled subsidiaries reported income before income tax and will be taxable on a stand-alone reporting basis in their

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exchange rates constant to those prevailing in the comparable period in 2013, total revenuerespective foreign jurisdictions. As a result, we recorded a provision for income tax expense for the current period would have been approximately $11,439three months ended June 30, 2014,. There were no charges or benefits recorded to income tax expense for valuation allowances.


7.4% lower whenSix Months Ended June 30, 2014 compared to the sameSix Months Ended June 30, 2013
The following table sets forth our results of operations from the unaudited condensed consolidated statements of operations by dollar and as a percentage of net sales for the periods indicated (in thousands):
 Six Months Ended June 30,
 2014 % of net sales 2013 % of net sales
U.S. Wholesale$106,991
 35.7 % $97,163
 32.4 %
U.S. Retail91,435
 30.5 % 95,508
 31.8 %
Canada23,477
 7.8 % 27,809
 9.3 %
International77,590
 25.9 % 79,816
 26.6 %
Total net sales299,493
 100.0 % 300,296
 100.0 %
Cost of sales145,132
 48.5 % 143,558
 47.8 %
Gross profit154,361
 51.5 % 156,738
 52.2 %
        
Selling expenses106,505
 35.6 % 113,253
 37.7 %
General and administrative expenses52,044
 17.4 % 55,798
 18.6 %
Retail store impairment728
 0.2 % 78
 0.0 %
        
Loss from operations(4,916) (1.6)% (12,391) (4.1)%
        
        
Interest expense20,058
   19,434
  
Foreign currency transaction loss (a)
132
   871
  
Unrealized (gain) loss on change in fair value of warrants (b)
(4,465)   18,147
  
Loss on extinguishment of debt0
   32,101
  
Other expense (income)52
   (16)  
Loss before income tax(20,693)   (82,928)  
Income tax provision978
   1,087
  
Net loss$(21,671)   $(84,015)  
(a) Related to the exchange rate fluctuations of the U.S. Dollar relative to functional currencies used by our subsidiaries.
(b) Mark-to-market adjustments associated with our warrants.
(1) U.S. Wholesale
U.S. Wholesale net sales for the six months ended June 30, 2014, excluding online consumer net sales, increased by $9,255, or 11.9%, from the corresponding period lastin 2013 mainly due to higher sales order volume from our new and existing customers. This increase was attributed to the continued strength of our product offerings and improved service levels. In addition, during the second quarter of 2014, we added a significant new distributor and began to ship its initial stock order. We continue our focus on increasing our customer base by targeting direct sales, particularly sales to third party screen printers.
Online consumer net sales increased by $573, or 3.0%, for the six months ended June 30, 2014 from the corresponding period in 2013 mainly due to targeted online advertising and promotional efforts in the earlier part of the year.
(2) U.S. Retail
U.S. Retail net sales decreased by $1,353, or 14.8% to $7,759for the threesix months ended March 31,June 30, 2014 as compared to $9,112 in 2013. Holding foreign currency exchange rates constant to those prevailing indecreased $4,073, or 4.3%, from the comparablecorresponding period in 2013, retail sales for the current period would have been mainly due to a decrease of approximately $8,485, or 6.9% lower when compared to the same period last year. Comparable$6,600 in comparable store sales decreased by $281, or 3.6%, primarily due toas a result of the unseasonably cool temperatures and later timing of Easter in 2014. Additionally,across the closure of retail stores in the Canada segment resulted in decreased sales of $396. These decreases were partially offset by warehouse salescountry during the first quarter of 2014 which generated $228 in net sales; there were no warehouseand lower store foot traffic. Net sales duringalso decreased approximately $1,900 due to the comparable quarter inclosure of eight stores, offset by an increase of approximately $3,600 from four new stores added after January 2013.

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(3) Canada
Wholesale net sales decreased by $670, or 26.0%, to $1,909 for the three months ended March 31, 2014 as compared to $2,579 for the three months ended March 31, 2013. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2013, total wholesaleCanada net sales for the currentsix months ended June 30, 2014 decreased $4,332, or 15.6%, from the corresponding period would have beenin 2013 mainly due to approximately $2,088$2,500 in lower sales, primarily in the retail and wholesale channels and approximately $1,900 as a result of the unfavorable impact of foreign currency exchange rate changes.
Retail net sales for the six months ended June 30, 2014 decreased $3,163, or 15.5%, or 19.0%from the corresponding period in 2013. The decrease was due to $1,000 lower when comparedsales resulting the closure of three retail stores and $600 from lower comparable store sales. Additionally, the impact of foreign currency exchange rate changes contributed to the same period last year.sales decrease of approximately $1,400. The decrease isin comparable store sales was due to unseasonably cool temperatures.
Wholesale net sales for the six months ended June 30, 2014 decreased $1,457, or 23.5%, from the corresponding period in 2013. The decrease was due to lower sales order resulting from a tightening focus on customers that can generate higher margins as well as a dip in sales orders as a result ofand order fulfillment delays associated with transition issues at the La Mirada distribution center during the fourth quarter of 2013.
Online consumer net sales increased by $126, or 18.9%, to $792 for In addition, the three months ended March 31, 2014 as compared to $666 for the three months ended March 31, 2013. Holdingimpact of foreign currency exchange rates constantrate changes contributed to those prevailing in the comparable period in 2013, total onlinesales decrease of approximately $380.
Online consumer net sales for the currentsix months ended June 30, 2014 increased $288, or 22.6%, from the corresponding period would have been approximately $866, or 30.1% higher when comparedin 2013 mainly due to the same period last year. The increase is primarily attributable to the implementation of a new e-commerce platform for our Canadian online sales portal in late 2013. The enhanced functionality of the website drove an increase in sales orders. Additionally, sales benefited from morecontinuing targeted promotion efforts and email advertising campaigns.campaigns as well as enhanced functionality of the website. The absolute increase in sales was partially muted by the impact of foreign currency exchange rate changes of approximately $120.
International: Total(4) International
International net sales for the International segmentsix months ended June 30, 2013 decreased $1,503$2,226, or 2.8%, or 4.1%,from the corresponding period in 2013 due to $35,434approximately $4,400 lower sales in all three sales channels. The favorable impact of foreign currency exchange rate changes offset the decrease by approximately $2,200.
Retail net sales for the threesix months ended March 31, 2014 as comparedJune 30, 2013 decreased $1,139, or 1.7%, from the corresponding period in 2013. The decrease was due to $36,937lower comparable store sales of approximately $3,700 and lower sales of approximately $1,400 from the closure of six retail stores. The decrease was offset by $2,200 higher sales due to new stores and $1,700 from the favorable impact of foreign currency exchange rate changes.
Wholesale net sales for the threesix months ended March 31,June 30, 2013 decreased $572, or 12.5%, from the corresponding period in 2013 mainly due to lower sales in the wholesaleU.K. and retail channels. HoldingContinental Europe offset by the favorable impact of foreign currency exchange rates constant to those prevailing in the comparable period in 2013, total revenue for the current period would have beenrate changes of approximately $34,955, or 5.4% lower when compared to the same period last year.$210.
RetailOnline consumer net sales decreased $774, or 2.5%, to $29,678 for the three months ended March 31, 2014 as compared to $30,452 for the three months ended March 31, 2013. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2013, retail sales for the currentsix months ended June 30, 2013 decreased $515, or 5.8%, from the corresponding period would have been approximately $29,352, or 3.6% lower when compared to the same period last year. The decrease wasin 2013 mainly due to the unseasonably cool temperatures and later timing of Easter in 2014. Lower sales of $736 in Japan and $484 in Australia due to lower sales order volume were partiallyin Japan, the U.K. and Continental Europe, offset by the favorable impact of foreign currency exchange rate changes of approximately $280.
(5) Gross Profit
Gross profit decreased 1.5% from $156,738, or 52.2% of net sales to $154,361 or 51.5% of net sales. The decrease was primarily due to lower retail sales volume at our U.S. Retail, Canada and International segments, offset by higher sales of $467at our U.S. Wholesale segment. The decrease in Continental Europegross profit as a resultpercentage of new store openings. .
Wholesale net sales decreased $141, or 7.3%,is due to $1,800higher sales discounts at our retail operations and a mix shift to lower margin wholesale net sales.
(6) Selling expenses
Selling expenses for the threesix months ended March 31,June 30, 2014 as compared to $1,941 fordecreased $6,748, or 6.0%, from the three months ended March 31, 2013, primarily as a result of a decrease in wholesale sales in Continental Europe. Holding foreign currency exchange rates constant to those prevailing in the comparablecorresponding period in 2013, sales for the current period would have been approximately $1,716, or 11.6% lower when compared to the same period last year.
Online consumer net sales decreased $588, or 12.9% to $3,956 for the three months ended March 31, 2014 as compared to $4,544 for the three months ended March 31, 2013. Holding foreign currency exchange rates constant to those prevailing in the comparable period in 2013, sales for the current period would have been approximately $3,887, or 14.4% lower when compared to the same period last year. The decrease is primarily mainly due to lower sales order volume for Japan, United Kingdom and Continental Europe.
Gross margin: Gross margin for the three months ended March 31, 2014 was 52.5% as compared to 52.8% for the three months ended March 31, 2013.
Selling expenses: Selling expenses decreased $1,401, or 2.5%, to $54,062 for the three months ended March 31, 2014 as compared to $55,463 for the three months ended March 31, 2013. As a percentage of sales, selling expenses decreased from 40.2% to 39.4%. The decrease is due to $1,042 lower distribution and selling payroll from our costof approximately $5,000 and advertising costs of approximately $3,000. The decreases were the result of reductions in both retail headcount and store hours as well as a reduction efforts. Additionally, tight control overin advertising expenditures resulted in a $1,021 reduction of such costs.commitments.
(7) General and administrative expenses:expenses
General and administrative expenses decreased $2,895 to $24,909for the threesix months ended March 31,June 30, 2014 as compared decreased $3,754, or 6.7%, from the corresponding period in 2013 mainly due a decrease in share-based compensation expense of approximately $3,900 primarily relating to $27,804the expiration and forfeiture of certain market-based and performance-based share awards. In addition, there were decreases in salaries, wages, and benefits of approximately $1,500. The decrease was offset by a $1,000 charge for an estimated settlement related to an industrial accident and higher legal and consulting professional fees of approximately $1,300, which were primarily related to costs associated with the suspension of Mr. Charney.
(8) Interest expense
Interest expense for the threesix months ended March 31, 2013. As a percentage of sales, general and administrative expenses decreased to 18.2% forJune 30, 2014 increased by $624, or 3.2% from the three months ended March 31, 2014 from 20.1% for the three monthscorresponding period in 2013.

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ended March 31, 2013. The change was mainly due to a decrease in stock compensation expenses of $2,306 and a reduction in legal and accounting professional fees of $827, partially offset by higher leased equipment expenses of $1,008.
Retail store impairment: For the three months ended March 31, 2014 and 2013, we recorded an impairment charges of $499 and $78, respectively.
Interest expense: Interest expense decreased $1,175 to $10,039 for the three months ended March 31, 2014 from $11,214 for the three months ended March 31, 2013, primarily due to a lower average interest rate on our debt outstanding. Interest expense for the three months ended March 31, 2014 related primarily to interest accrued on the Notes. Amortization of debt discount and deferred financing cost were approximately $597. Interest paid in cash was $1,521 and related primarily to interest on the Capital One Credit Facility.
Foreign currency transaction loss: For the three months ended March 31, 2014, our foreign currency transaction loss totaled $132 as compared to a loss of $713 for the three months ended March 31, 2013. The change related to the exchange rate fluctuations of the U.S. Dollar relative to functional currencies used by our subsidiaries.
Unrealized (gain) loss on change in fair value of warrants: We recorded a $12,667 gain in the fair value of the Lion warrants for the three months ended March 31, 2014 associated with the fair value measurements of our warrants. We recorded a $23,645 loss in the fair value of the Lion and SOF warrants for the three months ended March 31, 2013.
(9) Income tax provision: The provision for income taxes was $474 for the three months ended March 31, 2014 as compared to $467 for the three months ended March 31, 2013. Although
Though we incurred a loss before income taxestax on a consolidated basis for the threesix months ended March 31,June 30, 2014,, some of our foreign domiciled subsidiaries reported income before income taxestax and will be taxable on a stand-alone reporting basis in their respective foreign jurisdictions. As a result, we recorded a provision for income tax expense for the threesix months ended March 31, 2014.June 30, 2014. There were no charges or benefits recorded to income tax expense for valuation allowances.









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LiquidityLIQUIDITY AND CAPITAL RESOURCES
Over the past years, our operations have been funded through a combination of borrowings from related and Capital Resourcesunrelated parties, banks and other debt, lease financing, and proceeds from the exercise of purchase rights and issuance of common stock. We continue to develop initiatives intended to either increase sales, reduce costs or improve liquidity. Beginning with the fourth quarter of 2013, we instituted various programs to reduce costs such as payroll and related costs associated with manufacturing and administrative overhead. We also limited capital expenditures starting the first quarter of 2014. In addition, we continue to drive productivity improvements from our new distribution center, inventory reductions, other labor cost reductions, and consolidation of administrative and manufacturing functions. Efforts to identify additional ways to reduce costs and improve productivity are ongoing.
Our principal liquidity requirements are for operations, working capital interest payments, and capital expenditures. We fund liquidity requirements primarily through cash on hand, cash flow from operations, and borrowings under our credit facilities. Our credit agreements contain covenants requiring us to meet specified targets for measures related to earnings, capital expenditures, and minimum fixed charge coverage ratio and maximum leverage ratio requirements. Our inability to achieve such targets or to obtain a waiver of compliance would negatively impact the availability of credit under our credit facilities or result in an event of default.
We are currently under audit by German customs for years 2009 through 2011. The German customs issued retroactive assessments on our imports of $4,958 at the June 30, 2014 exchange rates (assessment was issued in Euros). The size of the retroactive assessments are largely due to member countries of the European Union who have limited rights to impose retaliatory duties on U.S. origin goods, based upon the World Trade Organization's dispute settlement procedures and the related arbitrator rulings. Consequently, the German customs are attempting to impose a substantially higher tariff rate than the original rate that we had paid on the imports, approximately doubling the amount of the tariff that we would have to pay. Despite the ongoing appeals of the German customs assessment, German customs has indicated it will begin collection enforcement proceedings if we do not soon reach acceptable payment terms for the amounts assessed. Negotiations as to payment terms are ongoing.
We believe that we have valid arguments to challenge the merit of the German customs assessment and have filed litigation in German courts to contest such assessment. At this time, the outcome of legal proceedings against us is subject to significant uncertainty. No assurance can be made that this matter will not result in a material financial exposure, which could have a material effect on our financial condition, results of operations, and cash flows.
As of March 31,June 30, 2014, we had approximately $16,68310,160 in cash, $30,554 outstanding on our $50,000 asset-backed revolving credit facility with Capital One and $16,76216,891 of availability for additional borrowings under the credit facility with Capital One Business Credit Corp. ("Capital One" and such facility, the "Capital One Credit Facility"). Additionally,Facility. As of August 1, 2014, we had $29,452 outstanding on a $50,000 asset-backed revolving credit facility$22,942 available for additional borrowings under the Capital One Credit Facility. See Note 6
The Company and Standard General are in the process of negotiating an unsecured credit agreement (the "Standard General Credit Agreement") between one or more entities affiliated with Standard General and one or more foreign subsidiaries of the Company as borrowers. The Company expects to our condensed consolidated financial statementsenter into the Standard General Credit Agreement as soon as practicable. The Company expects that the Standard General Credit Agreement will (i) be guaranteed by the Company, (ii) provide for multiple borrowings by the borrowers thereunder in an aggregate amount not to exceed $15,000, which amounts will not be permitted to be reborrowed once repaid, (iii) bear interest at 14% per annum, and (iv) mature on October 15, 2020. The Company expects that amounts under Part I, Item 1. As of April 30, 2014, we had $18,261the Standard General Credit Agreement would be available for borrowing underwith the revolving credit agreement.approval of the Board of Directors.
We believe that we have sufficient financing commitments to meet funding requirements for the next twelve months.
A. Cash Flow
 Six Months Ended June 30,
2014 2013
Net cash provided by (used in):   
Operating activities$1,303
 $(13,903)
Investing activities(6,880) (11,851)
Financing activities8,115
 20,747
Effect of foreign exchange rate on cash(1,054) (502)
Net increase (decrease) in cash$1,484
 $(5,509)
Cash provided by operating activities increased for the six months ended June 30, 2014 from the corresponding period in 2013. The increase was mainly due to decreased inventory levels and improved operating income, partially offset by an increase in interest payments.

On March 25,
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Cash used in investing activities decreased for the six months ended June 30, 2014 we entered intofrom the Fifth Amendmentcorresponding period in 2013, mainly due to the Capital One Credit Facility which, effective upon our receipt of net proceedsCompany's ongoing efforts to reduce capital expenditures.
Cash provided by financing activities decreased for the six months ended June 30, 2014 from the corresponding period in 2013. In March 31, 2014 equity offering (see below), among other things: waived the obligation to maintain the minimum fixed charge coverage and maximum leverage ratios for the three month periods ended December 31, 2013 and March 31, 2014; reset for future periods the fixed charge coverage ratio, the maximum leverage ratio and the maximum capital expenditures allowed; added a minimum EBITDA covenant; increased the interest rate payable under the credit agreement by 0.5% per annum to either LIBOR plus 5.0% or the bank's prime rate plus 4.0% (at the Company's option); and increased the fees payable upon early termination.
On March 31, 2014, we completed a public offering of approximately 61,645 shares of our common stock at $0.50 per share for net proceeds of $28,554.
On April 14,$28,446. During the six months ended June 30, 2014, we paid $13,390 in interest on the Notes.
Over the past years, our operations have been funded throughrepaid a combinationnet amount of borrowings from related and unrelated parties, bank and other debt, lease financing, proceeds from the exercise of purchase rights and issuance of common stock. As discussed under Management Plan above, we continue to develop initiatives intended to either increase sales, reduce costs or improve liquidity. In the fourth quarter of 2013 and continuing into January of 2014, significant reductions were made in payroll and related costs associated with manufacturing and administrative overhead. We also instituted a program towards the end of the first quarter of 2014 to limit capital expenditures. Additionally, we intend to continue to drive productivity improvements from our new distribution center, further reduce inventories, reduce store labor costs, and evaluate further consolidation of administrative and manufacturing functions. Efforts to identify additional ways to reduce costs and improve productivity are ongoing.
Our principal liquidity requirements are for working capital interest payments, capital expenditures and to fund operations. We fund our liquidity requirements primarily through cash on hand, cash flow from operations and borrowings under our credit facilities. Our credit agreements have from time to time contained covenants requiring us to meet specified targets for measures related to earnings, limits on capital expenditures, minimum fixed charge coverage ratios and maximum leverage ratios, and our inability to achieve such targets or to obtain a waiver of compliance would negatively impact the availability of credit under those credit facilities or result in an event of default.
We believe that we have sufficient financing commitments to meet funding requirements for the next twelve months.
Cash Flow Overview
 Three Months Ended March 31,
2014 2013
Net cash provided by (used in):   
Operating activities$3,915
 $(6,008)
Investing activities(3,928) (7,964)
Financing activities9,324
 6,995
Effect of foreign exchange rate on cash(1,304) (300)
Net increase (decrease) in cash$8,007
 $(7,277)
Three Months Ended March 31, 2014 Compared to the Three Months Ended March 31, 2013
Cash provided by operating activities was $3,915 for the three months ended March 31, 2014 as compared with cash used by operating activities of $6,008 for the three months ended March 31, 2013.
The increase in cash flow from operating activities is due primarily to decreases in inventory levels and reductions in operating expenses. These were partially offset by a decrease in gross profits as a result of lower sales and a decrease in trade payables.
Cash used in investing activities was $3,928 for the three months ended March 31, 2014 as compared with $7,964 for the three months ended March 31, 2013.

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The decrease in cash used in investing activities is due primarily to reductions in capital expenditures from $7,354 in the first quarter of 2013 to $3,958 for the same quarter in 2014 as we embarked on our program to limit capital expenditures.
Capital expenditures during the quarter relate primarily to store improvements, as well as new store openings in the U.S. and in Continental Europe.
Cash provided by financing activities increased from $6,995 during the three months ended March 31, 2013 to $9,324 for the same period in 2014.
On March 31, 2014, we completed a public offering of approximately 61,645 shares of our common stock at $0.50 per share for net proceeds of $28,554.
Debt Agreements and Other Capital Resources
Capital One Credit Facility - We have a $50,000 asset-based revolving facility with Capital One. The Capital One Credit Facility matures on April 4, 2018, subject to a January 15, 2018 maturity if excess availability is less than $15,000 at the time of notice to Capital One of a determination by the Company that an Applicable High Yield Discount Obligation ("AHYDO") redemption will be required pursuant to Section 3.01(e) of the indenture governing the Notes. Borrowings$13,457 borrowed under the Capital One Credit Facility bears interest equalFacility. On April 4, 2013, we issued the Notes for aggregate net proceeds of $199,820 and entered into a new asset-backed revolving credit agreement with Capital One. The net proceeds of the Notes, together with borrowings under the new credit facility, were used to repay and terminate the outstanding amounts with Lion of $144,149 and with Crystal Financial LLP of $66,411.
B. Debt
The following is an overview of our total debt as of June 30, 2014:
Description of Debt Lender Interest Rate June 30, 2014 Covenant Violations
Revolving credit facility Capital One (1) $30,554
 No (2)
Senior Secured Notes   15.0% 205,647
 No
Long-term debt with Lion Lion 20.0% 9,865
 No
Capital lease obligations (3) 0.4% ~ 23.5% 5,358
 N/A
Other     299
 N/A
Total     $251,723
  
(1) LIBOR plus 5.0% or the bank's prime rate plus 4.0% (at our option) and are subjectat the Company's option according to maintenance of specified borrowing base requirements and covenants.the Fifth Amendment.
On March 25, 2014, we entered into(2) Violations prior to the Fifth Amendment towere waived. Instead, the Capital One Credit Facility which, effective upon our receipt of net proceeds from the March 31, 2014 equity offering (see Sale of Common Shares below), among other things: waived the obligationCompany was required to maintain thea minimum fixed charge coverage ratio of not less than 0.85 to 1.00 and maximum leverage ratios forachieve a minimum EBITDA of $9,000.
(3) 25 individual leases ranging between from $2 to $3,832
For additional disclosure regarding debts, see Notes 6 and 7 of Condensed Notes to the three month periods ended December 31, 2013Consolidated Financial Statements under Part I. Item 1. Financial Statements.
Financial Covenants
Capital One Credit Facility - Under the Fifth Amendment, we are subject to specified borrowing requirements and March 31, 2014; reset for future periods thecovenants. The Fifth Amendment requires a minimum fixed charge coverage ratio, thea maximum leverage ratio, and thea maximum capital expenditures allowed; addedallowed and adds a minimum EBITDA covenant; increasedcovenant. For the interest rate payable underthree months ended June 30, 2014, the credit agreement by 0.5% per annumwe were required to either LIBOR plus 5.0% or the bank's prime rate plus 4.0%;maintain a minimum fixed charge coverage ratio of not less than 0.85 to 1.00 and increased the fees payable upon early termination.achieve a minimum EBITDA of $9,000. We were in compliance with these covenants at June 30, 2014.
The Capital One Credit Facility is secured by a lien on substantially all of the assets of our domestic subsidiaries and equity interests in certain of our foreign subsidiaries, subject to some exceptions. The amount available for additional borrowings on March 31, 2014 was $16,762. As of April 30, 2014, we had $18,261 available for borrowing under the revolving credit agreement.
See Financial Covenants below and Note 6, Revolving Credit Facilities and Current Portion of Long-Term Debt to our condensed consolidated financial statements under Part I, Item 1.
Senior Secured Notes due 2020 - On April 4, 2013, we issued the Notes in an aggregate principal amount of $206,000 at 97% of par value. The Notes mature on April 15, 2020 and bears interest at 15% per annum, of which 2% is payable in-kind until until April 14, 2018 and in cash on subsequent interest dates. Interest on the Notes approximating $13,500 per payment period (in 2014), is payable semi-annually, in arrears, on April 15 and October 15 of each year, beginning on October 15, 2013. On April 14, 2014, we paid $13,390 in interest on the Notes.
On or after April 15, 2017, we may redeem some or all of the Notes at a premium decreasing ratably to zero as specified in the indenture, plus accrued and unpaid interest to, but not including, the redemption date. Prior to April 15, 2017, we may redeem up to 35% of the aggregate principal amount of the Notes with the net cash proceeds of certain equity offerings at a redemption price of 113% of the aggregate principal amount of the redeemed notes plus accrued and unpaid interest to, but not including, the redemption date. In addition, at any time prior to April 15, 2017 we may redeem some or all of the Notes by paying a premium, plus accrued and unpaid interest to, but not including, the redemption date. If we experience certain change of control events, the holders of the Notes will have the right to require us to purchase all or a portion of the Notes at a price in cash equal to 101% of the principal amount of such Notes, plus accrued and unpaid interest to, but not including, the date of purchase. In addition, we are required to use the net proceeds of certain asset sales, if not used for specified purposes, to purchase some of the Notes at 100% of the principal amount, plus accrued and unpaid interest to, but not including, the date of purchase. On each interest payment date after April 4, 2018, we will be required to redeem, for cash, a portion of each Note then outstanding equal to the amount necessary to prevent such Note from being treated as an “applicable high yield discount obligation” within the meaning of the Internal Revenue Code. The redemption price will be 100% of the principal amount plus accrued and unpaid interest thereon on the date of redemption.
The Notes are guaranteed, jointly and severally, on a senior secured basis by our existing and future domestic restricted subsidiaries. See Financial Covenants below and Note 7, Long-Term Debt to our condensed consolidated financial statements under Part I, Item 1.

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Lion Loan Agreement - We have a loan agreement with Lion (the "Lion Loan Agreement"). The term loans under the Lion Loan Agreement mature on October 4, 2018 and bear interest at 20% per annum. Interest under the loan agreement is payable in cash or, to the extent permitted by our other debt agreements, in-kind.
Bank of Montreal Credit Facility - Our wholly-owned Canadian subsidiaries had a revolving credit facility with Bank of Montreal. Outstanding amounts under the Bank of Montreal Credit Agreement were repaid, and on March 31, 2014 the agreement expired by its terms.
Lion Warrants - As of March 31, 2014, Lion held warrants to purchase 24,511 shares of our common stock, with an exercise price of $0.66 per share. These warrants expire on February 18, 2022. The estimated fair value of $8,287 at March 31, 2014 is recorded as a current liability in our condensed consolidated balance sheets under Part I, Item 1.
On March 31, 2014, as a result of the public offering of our common shares as discussed below, Lion received the right to purchase approximately 2,905 shares of our common stock under their existing warrants to purchase 21,606 shares of our common stock and the exercise price of all of Lion's warrants was adjusted from $0.75 to approximately $0.66 per share. Such adjustments were required by the terms of the existing Lion 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 our common stock issuable upon exercise of the Lion Warrant, 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. See Note 11, Stockholders' Deficit to our condensed consolidated financial statements under Part I, Item 1.
Sale of Common Shares - On March 31, 2014, we completed a public offering of approximately 61,645 shares of our common stock at $0.50 per share for net proceeds of $28,554.
Summary of Debt
The following is an overview of our total debt as of March 31, 2014 (dollars in thousands):
Description of Debt Lender Name Interest Rate March 31, 2014 Covenant Violations
Revolving credit facility Capital Leverage Finance Corp. 1) 30-day LIBOR of 0.15% plus 5.0% plus unused facility fee of 0.5% or 2) bank's prime rate of 3.25% plus 4.0% plus unused facility fee of 0.5% $29,452
 
Yes (1)
Senior Secured Notes, net of discount and including 2% interest paid in-kind   15.0% 204,443
 No
Term loan including interest paid in-kind Lion 20.0% 9,865
 No
Other     295
  
Capital lease obligations 25 individual leases ranging between $2-$3,832 From 0.4% to 23.5% 7,043
 N/A
Cash overdraft     4
 N/A
Total debt including cash overdraft     $251,102
  
(1) Violations were waived in connection with Amendment No. 5 to the Capital One Credit Facility. See Note 6, Revolving Credit Facilities and Current Portion of Long-Term Debt to our condensed consolidated financial statements under Part I, Item 1.
Financial Covenants
Our credit agreements, the Lion Loan Agreement and the indenture under which our Notes were issued contain certain restrictive covenants. Significant covenants are summarized below.
Capital One Credit Facility - We are required to maintain a minimum fixed charge coverage ratio of not less than 0.85 to1.00 for the period of April 1, 2014 to June 30, 2014 and 1.00 to 1.00 for the remainder of 2014, and we are also required to not exceed certain maximum leverage ratio thresholds, both determined at the end of each fiscal quarter. Additionally, our domestic subsidiaries are subject to an annual limitation of certain specified capital expenditure amounts as determined at the end of each fiscal year.

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On March 25, 2014, we entered into the Fifth Amendment to the Capital One Credit Facility which, effective upon our receipt of net proceeds from the March 31, 2014 equity offering (see above), among other things: waives the obligation to maintain the minimum fixed charge coverage and maximum leverage ratios for the three month periods ended December 31, 2013 and March 31, 2014; resets for future periods the fixed charge coverage ratio, the maximum leverage ratio and the maximum capital expenditures allowed; adds a minimum EBITDA covenant; increases the interest rate payable under the credit agreement by 0.5% per annum; and increases the fees payable upon early termination.
Among other provisions, the Capital One Credit Facilityrestrictions. It requires that we maintain a lockbox arrangement and containscontain certain subjective acceleration clauses. In addition, Capital One may at its discretion, adjust the advance restriction and criteria for eligible inventory and accounts receivable.receivable at its discretion. The Capital One Credit Facility contains cross-default provisions whereby an event of default under the indentureIndenture governing the Notes or other indebtedness, in each case of an amount greater than a specified threshold, would cause an event of default under the Capital One Credit Facility. As of June 30, 2014, we had $1,230 of outstanding letters of credit secured against the Capital One Credit Facility.
Senior Secured Notes due 2020 - The indentureIndenture governing our Notes imposes certain limitations on our ability 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 our capital stock or certain indebtedness, enter into transactions with affiliates, create dividend and 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 our assets or adopt a plan of liquidation. We must annually report to the trustee on compliance with such limitations. The indentureIndenture also 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 with respect to the Notes. As of March 31, 2014, weWe were in compliance with the required covenants of the Senior Notes Indenture.at June 30, 2014.
Lion Loan Agreement - The Lion Loan Agreement contains restrictive covenants that incorporate by reference several of the covenants contained in the indentureIndenture governing our Notes, including covenants restricting our ability to incur additional indebtedness or issue disqualified capital stock or preferred stock (with respect to restricted subsidiaries), grant liens, make payments in respect of our capital stock or certain indebtedness, enter into transactions with affiliates, create dividend and other payment

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restrictions affecting subsidiaries, merge or consolidate with any other person, sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets or adopt a plan of liquidation. The Lion Loan Agreement also 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. As of March 31,June 30, 2014, we were in compliance with the required covenants of the Lion Loan Agreement.
Future Capital Requirements
On March 31,July 16, 2014, we completedLion assigned its rights and obligations as a public offeringlender under the Lion Loan Agreement to Standard General. Standard General has waived any default under the Lion Loan Agreement that may have resulted or which might result from Mr. Charney not being the CEO of approximately 61,645 sharesthe Company and has agreed to amend the Lion Loan Agreement (the "Standard General Amendment") to, among other things, (i) extend the maturity of our common stock at $0.50the loan through October 4, 2021, (ii) reduce the interest rate to 17% per share for net proceedsannum, which may be paid in cash or in-kind, and (iii) eliminate the provision that specifies that it is an event of $28,554.
default if Mr. Charney is no longer the CEO of the Company. We believe that we have sufficient financing commitmentsintend to meet our funding requirements forexecute the next twelve months.Standard General Amendment upon receipt of a fairness opinion in accordance with the Indenture.
Off-Balance Sheet Arrangements and Contractual ObligationsOFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Our material off-balance sheet contractual commitments are mainly operating lease obligations and letters of credit.
Operating lease commitments mainly consist principally of leases for our retail stores, manufacturing facilities, main distribution centers, and corporate office. These leases frequently include options which permit us to extend the terms beyond the initial fixed lease term. As appropriate, we intend to negotiate lease renewals as the leases approach expiration. We also have capital lease obligations which consist of our manufacturing equipment leases.
Issued and outstanding letters of credit were $1,230 at March 31,June 30, 2014, related primarily to workers’ compensation insurance and store leases. We also

Item 3.Quantitative and Qualitative Disclosures about Market Risk
There have capital lease obligations, which consist principally of leases for our manufacturing equipment.
Seasonality
We experience seasonalitybeen no material changes in our operations. Historically, salesmarket risk during the thirdthree and fourth fiscal quarters have generally been the highest, with sales during the first fiscal quarter the lowest. This reflects the combined impact of the seasonality of our wholesalesix months ended June 30, 2014. For additional information, see Item 7A. Quantitative and retail channels. Generally, our retail segment has not experienced the same pronounced sales seasonality as other retailers.

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Critical Accounting Estimates and Policies
Qualitative Disclosures About Market RiskAs discussed in Part II Item 8. Management Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2013, we consider our most critical accounting estimates and policies to include:2013.
revenue recognition;
inventory valuation, obsolescence;
fair value calculations, including derivative liabilities such as the Lion warrants;
valuation and recoverability of long-lived assets including the values assigned to acquired intangible assets, goodwill, and property and equipment;
income taxes;
accruals for the outcome of current litigation; and
self-insurance liabilities.
In general, estimates are based on historical experience, on information from third party professionals and on various other sources, and assumptions that are believed to be reasonable under the facts and circumstances at the time such estimates are made. On a continual basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience, and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results may vary from these estimates and assumptions under different and/or future circumstances. Our management considers an accounting estimate to be critical if:
it requires assumptions to be made that were uncertain at the time the estimate was made; and
changes in the estimate, or the use of different estimating methods that could have been selected, could have a material impact on our consolidated results of operations or financial condition.
Inflation
Inflation affects the cost of raw materials, goods and services used in our operations. In 2010, the price of yarn and the cost of certain related fabrics began to increase as a result of the compounding effect of added demand, supply shortages primarily from the effect of severe weather conditions in certain cotton producing countries, and a ban on cotton exports imposed by the government of India. Prices continued to increase throughout 2010 and through the first quarter of 2011. During the first half of 2012 prices started to decline and from the second quarter of 2012 through the first quarter of 2014, prices have stabilized. We cannot predict if the current cost of cotton is sustainable. In addition, high oil costs can affect the cost of all raw materials and components. The competitive environment can limit the ability of American Apparel to recover higher costs resulting from inflation by raising prices. Although we cannot precisely determine the effects of inflation on our business, we believe that the effects on revenues and operating results have not been significant. We seek to mitigate the adverse effects of inflation primarily through improved productivity and strategic buying initiatives. We do not believe that inflation has had a material impact on our results of operations for the periods presented. We are unable to predict if we will be able to successfully pass on the added cost of any future raw material cost increases by further increasing the price of our products to our wholesale and retail customers.

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Item 4. Controls and Procedures
(a)Disclosure Controls and Procedures
Disclosure Controls and Procedures
Under the supervision and participation of our management, including our interim Chief Executive Officer and Officer/Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as such term is defined under Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).amended. Based upon that evaluation, our interim Chief Executive Officer and our Officer/Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2014.  the end of the quarter covered by this Quarterly Report on Form 10-Q.  

Changes in Internal Control over Financial Reporting
We regularly review our system of internal control over financial reporting to ensure we maintain an effective internal control environment. As we expand globally, we are increasingly dependent on information systems to operate our website, process transactions, respond to customer inquiries, manage inventory and production, purchase, well and ship goods on a timely basis and maintain cost-efficient operations. In connection with the process of upgrading our information technology infrastructure and resulting business process changes, we continue to create and enhance the design and documentation of our internal control processes to ensure effective controls over financial reporting.
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934)1934, as amended) other than discussed above during the firstour most recent fiscal quarter of 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies which may be identified during this process.


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PART II-OTHER INFORMATION
Item 1.Legal Proceedings
We are subject to various claims and contingencies in the ordinary courseFor a discussion of business, including those related to litigation, business transactions, employee-relatedlegal matters, and taxes, and others. When we are awaresee Note 16 of a claim or potential claim, we assesses the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, we will record a liability for the loss. In additionCondensed Notes to the estimated loss, the recorded liability includes probable and estimable legal costs associated with the claim or potential claim. There is no assurance that such matters will not materially and adversely affect our business, financial position, and results Consolidated Financial Statements in Part I. Item 1. Financial Statements of operations or cash flows.
Individual Actions
On November 5, 2009, Guillermo Ruiz, our former employee, filed suit against usthis Quarterly Report on behalf of putative classes of all current and former non-exempt California employees (Guillermo Ruiz, on behalf of himself and all others similarly situated v. American Apparel, Inc., Case Number BC425487) in the Superior Court of the State of California for the County of Los Angeles, alleging we failed to pay certain wages due for hours worked, to provide meal and rest periods or compensation in lieu thereof and to pay wages due upon termination to certain of our employees. The complaint further alleges that we failed to comply with certain itemized employee wage statement provisions and violations of unfair competition law.  The plaintiff is seeking compensatory damages and economic and/or special damages in an unspecified amount, premium pay, wages and penalties, injunctive relief and restitution, and reimbursement for attorneys' fees, interest and the costs of the suit.
On June 21, 2010, Antonio Partida, our former employee, filed suit against us on behalf of putative classes of current and former non-exempt California employees (Antonio Partida, on behalf of himself and all others similarly situated v. American Apparel (USA), LLC, Case No. 30-2010-00382719-CU-OE-CXC) in the Superior Court of the State of California for the County of Orange, alleging we failed to pay certain wages for hours worked, to provide meal and rest periods or compensation in lieu thereof, and to pay wages due upon separation. The complaint further alleges that we failed to timely pay wages, unlawfully deducted wages and failed to comply with certain itemized employee wage statement provisions and violations of unfair competition law. The plaintiff is seeking compensatory damages and economic and/or special damages in an unspecified amount, premium pay, wages and penalties, injunctive relief and restitution, and reimbursement of attorneys' fees, interest and the costs of the suit.
On or about December 2, 2010, Emilie Truong, our former employee, filed suit against us on behalf of putative classes of current and former non-exempt California employees (Emilie Truong, individually and on behalf of all others similarly situated v. American Apparel, Inc. and American Apparel LLC, Case No. BC450505) in the Superior Court of the State of California for the County of Los Angeles, alleging we failed to timely provide final paychecks upon separation.  Plaintiff is seeking unspecified premium wages, attorneys' fees and costs, disgorgement of profits, and an injunction against the alleged unlawful practices.
On or about February 9, 2011, Jessica Heupel, a former retail employee filed suit on behalf of putative classes of current and former non-exempt California employees (Jessica Heupel, individually and on behalf of all others similarly situated v. American Apparel Retail, Inc., Case No. 37-2011-00085578-CU-OE-CTL) in the Superior Court of the State of California for the County of San Diego, alleging we failed to pay certain wages for hours worked, to provide meal and rest periods or compensation in lieu thereof, and to pay wages due upon separation.  The plaintiff is seeking monetary damages as follows: (1) for alleged meal and rest period violations; (2) for alleged failure to timely pay final wages, as well as for punitive damages for the same; and (3) unspecified damages for unpaid minimum wage and overtime.  In addition, Plaintiff seeks premium pay, wages and penalties, injunctive relief and restitution, and reimbursement of attorneys' fees, interest and the costs of the suit. This matter is now proceeding in arbitration. On or about September 9, 2011, Anthony Heupel, a former retail employee initiated arbitration proceedings on behalf of putative classes of current and former non-exempt California employees, alleging we failed to pay certain wages for hours worked, to provide meal and rest periods or compensation in lieu thereof, and to pay wages due upon separation.  The plaintiff is seeking monetary damages in an amount in excess of $3,600, as follows: (1) for alleged meal and rest period violations; (2) for alleged failure to timely pay final wages, as well as for punitive damages for the same; and (3) unspecified damages for unpaid minimum wage and overtime.  In addition, Plaintiff seeks premium pay, wages and penalties, injunctive relief and restitution, and reimbursement of attorneys' fees, interest and the costs of the suit.
We do not have insurance coverage for the above matters. Each of the aforementioned wage and hour cases have been proceeding in arbitration. All of these cases have been settled on an aggregate and class-wide basis for a payment by us in the total amount of $875, most of which will be paid to class members and to their attorneys. Certain class members have opted out of the settlement and so may proceed with individual claims. Also, the settlement has been approved by the arbitrator and also is subject to approval of one or more of the California Superior Courts. There is no guarantee that such approvals will be obtained.
Additionally, we are currently engaged in other employment-related claims and other matters incidental to our business.  We believe that all such claims against us are without merit or not material, and we intend to vigorously dispute the validity of the

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plaintiffs' claims. While the ultimate resolution of such claims cannot be determined, based on information at this time, we believe, but we cannot provide assurance that, the amount, and ultimate liability, if any, with respect to these actions will not materially affect our business, financial position, results of operations, or cash flows. Should any of these matters be decided against us, we could not only incur liability but also experience an increase in similar suits and suffer reputational harm.
Derivative Matters
Two shareholder derivative lawsuits (Case No. CV106576 GAF (JCx) and Case No. CV107518 RSWL (FFMx)) were filed in the United States District Court for the Central District of California which were subsequently consolidated for all purposes into a case entitled In re American Apparel, Inc. Shareholder Derivative Litigation, Lead Case No. CV106576 (the “Federal Derivative Action”).  Plaintiffs in the Federal Derivative Action allege a cause of action for breach of fiduciary duty arising out of (i) our alleged failure to maintain adequate accounting and internal control policies and procedures; (ii) our alleged violation of state and federal immigration laws in connection with the previously disclosed termination of over 1,500 employees following an Immigration and Customs Enforcement inspection; and (iii) our alleged failure to implement controls sufficient to prevent a sexually hostile and discriminatory work environment.  We do not maintain any direct exposure to loss in connection with these shareholder derivative lawsuits. Our status as a “Nominal Defendant” in the actions reflects the fact that the lawsuits are maintained by the named plaintiffs on our behalf and that plaintiffs seek damages on our behalf. We filed a motion to dismiss the Federal 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.
Four shareholder derivative lawsuits (Case No. BC 443763, Case No. BC 443902, Case No. BC 445094, and Case No. BC 447890) were filed in fall of 2010 in the Superior Court of the State of California for the County of Los Angeles 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 allege causes of action for breach of fiduciary duty arising out of (i) our alleged failure to maintain adequate accounting and internal control policies and procedures; and (ii) our alleged violation of state and federal immigration laws in connection with the previously disclosed termination of over 1,500 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 Court issued an order granting a stay (which currently remains in place) of the State Derivative Action on the grounds that the case is duplicative of the Federal Derivative Action, as well as the Federal Securities Action currently pending in the United States District Court for the Central District of California (see below).
Both the Federal Derivative Action and State Derivative Actions are covered under the Company's Directors and Officers Liability insurance policy, subject to a deductible and a reservation of rights.
Other Proceedings
Four putative class action lawsuits, (Case No. CV106352 MMM (RCx), Case No. CV106513 MMM (RCx), Case No. CV106516 MMM (RCx), and Case No. CV106680 GW (JCGx)) were filed in the United States District Court for the Central District of California in the Fall of 2010 against us and certain of our officers and executives on behalf of our shareholders. On December 3, 2010, the four lawsuits were consolidated for all purposes into a case entitled In re American Apparel, Inc. Shareholder Litigation, Lead Case No. CV106352 MMM (JCGx) (the “Federal Securities Action”). The lead plaintiff filed a consolidated class action complaint on April 29, 2011 on behalf of shareholders who purchased our common stock between November 28, 2007 and August 17, 2010. The lead plaintiff alleges two causes of action for violations of Section 10(b) and 20(a) of the 1934 Act, and Rule 10b-5 promulgated under Section 10(b), arising out of alleged misrepresentations contained in our press releases, public filings with the SEC, and other public statements relating to (i) the adequacy of our internal and financial control policies and procedures; (ii) our employment practices; and (iii) the effect that the dismissal of over 1,500 employees following an Immigration and Customs Enforcement inspection would have on us. Plaintiff seeks damages in an unspecified amount, reasonable attorneys' fees and costs, and equitable relief as the Court may deem proper.  We filed two motions to dismiss the Federal Securities Action which the court granted with leave to amend. Plaintiffs filed a Second Amended Complaint on February 15, 2013. We filed a motion to dismiss the complaint on March 15, 2013. The hearing on the motion was held on June 3, 2013, at which time, the Court took the matter under submission. On August 8, 2013, the court issued its final order granting the motion to dismiss in regards to certain claims. Defendants answered the complaint's remaining claims on September 27, 2013. On November 6, 2013, the Court issued an order staying the case pending ongoing settlement discussions between the parties. Plaintiff filed an unopposed Motion of Preliminary Approval which was granted on April 16, 2014 without oral argument. The court set a settlement fairness hearing for July 28, 2014. If approved, the settlement will result in a payment by our insurance carrier of $4,800.

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Should any of the above matters (i.e., the Federal Derivative Action, the State Derivative Action, or the Federal Securities Action) be decided against us in an amount that exceeds our insurance coverage, or if liability is imposed on grounds which fall outside the scope of our insurance coverage, we could not only incur a substantial liability, but also experience an increase in similar suits and suffer reputational harm.  We are 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. 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 upon our financial condition, results of operations, or cash flows.
We have previously disclosed arbitrations filed by us on or about February 17, 2011, related to cases filed in the Supreme Court of New York, County of Kings (Case No. 5018-1) and Superior Court of the State of California for the County of Los Angeles (Case Nos. BC457920 and BC460331) against us, Dov Charney and certain members of the Board of Directors asserting claims of sexual harassment, assault and battery, impersonation through the internet, defamation and other related claims.  We settled one of these cases with no monetary liability to us.  In another case, we prevailed on our argument that certain claims had been released by the plaintiff, and the remaining claims were recently settled.  In another case, the arbitrator rejected our argument that certain claims had been released, and a hearing will be held in the future on the merits of the parties’ claims.  In another case, the arbitrator ruled that both we and the plaintiff had established certain claims and damages against one another resulting in a net inconsequential amount awarded to the plaintiff, and the arbitrator is considering a request to award attorneys’ fees and costs to the plaintiff.  We are awaiting the arbitrator's ruling on the outstanding attorney's fees and cost issue in this case.  In a different case, the arbitrator has held an evidentiary hearing on the parties’ respective claims and we are waiting for the arbitrator’s ruling.  We cannot provide assurance that, the amount and ultimate liability, if any, with respect to these remaining cases will not materially affect our business, financial position, results of operations, or cash flows. Form 10-Q.



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Item 1A.Risk Factors
Before deciding to invest in us or to maintain or increase your investment, in addition to the risks described under this Item 1A, you should carefully consider the risks and uncertainties described in the "Special Note Regarding Forward-Looking Statements" under Part I of this report and our other filings with the SEC.SEC, as well as the other information in this report and such other filings. The risks and uncertainties described in this report are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect us. If any of these risks actually materialize, our business, financial position, results of operations, andor cash flows could be adversely impacted. In that event, the market price of our common stock could decline and you may lose all or part of your investment.
During the three months ended March 31, 2014, thereThere have been no material changes in theour risk factors previouslyfrom those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013. Please refer2013, except for the following:
The suspension and possible termination of our chief executive officer could have a material adverse impact on our business.
On June 18, 2014, our Board of Directors voted to replace Mr. Charney as Chairman of our Board of Directors, suspended him and notified him of its intent to terminate his employment as our President and Chief Executive Officer ("CEO") for cause. In connection with the nomination, standstill and support agreement (the "Support Agreement"), dated July 9, 2014, with Standard General, Standard General Master Fund L.P., P. Standard General Ltd. and Mr. Charney, the Board of Directors formed a new special committee (the "Suitability Committee") for the purpose of overseeing the continuing investigation into the alleged misconduct by Mr. Charney (the "Internal Investigation"), and Mr. Charney agreed that pending his suspension, he would not serve as our CEO or an officer or employee of us or our subsidiaries until the Internal Investigation is completed. Based on the findings of the Internal Investigations, the Suitability Committee will determine whether it is appropriate for Mr. Charney to be reinstated as our CEO or serve as an officer or employee of us or any of our subsidiaries.
The Board of Directors has appointed Mr. Luttrell as interim CEO. If Mr. Luttrell should choose to not continue as interim CEO and/or the Suitability Committee determines it is not appropriate to reinstate Mr. Charney as CEO, we may have difficulty maintaining or developing our business as we seek to find a permanent CEO. In addition, as a result of the Internal Investigation and/or the Suitability Committee's determination, we could become subject to litigation and regulatory investigations, which could have a material adverse impact on our business.

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We depend on key personnel, and our ability to grow and compete will be harmed if we do not retain the continued services of such personnel, or we fail to identify, hire and retain additional qualified personnel.
We depend on the efforts and skills of our management team and other key personnel, and the loss of services of one or more members of this team, each of whom have substantial experience in the apparel industry, could have an adverse effect on our business. Our senior officers closely supervise all aspects of our business, in particular the design and production of merchandise and the operation of our stores.
If we are unable to hire and retain qualified management or if any member of our management leaves, such departure could have an adverse effect on our operations and could adversely affect our ability to design new products and to maintain and grow the distribution channels for our products. In addition, the pendency and outcome of the Internal Investigation and the determination made by the Suitability Committee as to whether or not to reinstate Mr. Charney as our CEO could result in departure of additional members of our management or other key employees.
Our ability to anticipate and effectively respond to changing fashion trends depends in part on our ability to attract and retain key personnel in our design, merchandising and marketing areas, and other functions. In addition, if we experience material growth, we will need to attract and retain additional qualified personnel. The market for qualified and talented design and marketing personnel in the apparel industry is intensely competitive, and we cannot be sure that we will be able to attract and retain a sufficient number of qualified personnel in future periods. If we are unable to attract or retain qualified personnel as needed, our growth will be hampered and our operating results could be materially adversely affected.
Litigation exposure could exceed expectations and have a material adverse effect on our financial condition and results of operations.
We are subject to regulatory inquiries, investigations, claims and suits, including, among others, a consolidated putative shareholder class action, consolidated shareholder derivative actions, wage and hour suits, and numerous employment related claims and suits. In addition, on or about June 23, 2014, Mr. Charney submitted a demand in arbitration against us in connection with his suspension, which has been stayed pending the determination of the Suitability Committee in the Internal Investigation. If the Suitability Committee determines that it is not appropriate to reinstate Mr. Charney as our CEO, Mr. Charney could reinstate his demand for arbitration or file additional lawsuits against us.
In the event that any current or future inquiries, investigations, claims or suits are decided against us, we may incur substantial liability, experience an increase in similar suits or suffer reputational harm. We are unable to predict the financial outcome that could result from these matters at this time and any views we form as to the Company's Annual Report on Form 10-K (filedviability of these claims or the financial exposure in which they could result could change from time to time as the matters proceed through their course, as facts are established and various judicial determinations are made. No assurance can be made that these matters will not result in material financial exposure, which together with the SECpotential for similar suits and reputational harm, could have a material adverse effect upon our financial condition and results of operations. See Notes 16 of Condensed Notes to the Consolidated Financial Statements under Part I. Item 1. Financial Statements.
If we fail to maintain the value and image of our brand, our sales are likely to decline.
Our success depends on April 1, 2014)the value and image of our brand. Our name is integral to our business as well as to the implementation of our strategies for expanding our business. Maintaining, promoting and positioning our brand depend largely on the year endedsuccess of our marketing and merchandising efforts and our ability to provide a consistent, high quality customer experience. Our brand could be adversely affected if we fail to achieve these objectives or if our public image or reputation or those of our senior personnel were to be tarnished by negative publicity. Any of these events, including the publicity surrounding the suspension of Mr. Charney as our CEO, the pendency and results of the Internal Investigation and the determination made by the Suitability Committee, could result in decreases in sales.
The terms of our indebtedness contain various covenants that may limit our business activities, and our failure to comply with these covenants could have material adverse consequences to us.
The terms of our indebtedness contain, and our future indebtedness may contain, various restrictive covenants that limit our management's discretion in operating our business. In particular, these agreements include, or may include, covenants relating to limitations on: 
dividends on, and redemptions and repurchases of, capital stock;
payments on subordinated debt;
liens and sale-leaseback transactions;
loans and investments;
debt and hedging arrangements;
mergers, acquisitions and asset sales;
transactions with affiliates;
disposals of assets;

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changes in business activities conducted by us and our subsidiaries; and
capital expenditures, including to fund future store openings.
We have amended the Capital One Credit Facility from time to time in order to waive certain obligations relating to, among other things, financial ratio covenants, including the third amendment, dated November 14, 2013, the fifth amendment, dated March 25, 2014. As of June 30, 2014, we were in compliance with the financial covenants under the Capital One Credit Facility. There can be no assurance that we will maintain compliance with the Capital One Credit Facility and we may need to make further amendments with the facility to avoid an event of default under the facility.
Under the indenture governing our senior secured notes, a special interest trigger event occurred as of December 31, 2013 because our consolidated total net leverage ratio, as calculated under the indenture, exceeded 4.50 to 1.00. As a result, interest on the senior secured notes now accrues at a rate of 15% annum, with the interest in excess of 13% per annum payable in-kind for any interest payment date prior to April 15, 2018 and in cash for any interest payment date thereafter. The additional 2% per annum of interest accrues retroactively from the issue date of the senior secured notes. Similarly, because of the special interest trigger event, the interest rate on the Lion Loan Agreement also increased from 18% to 20% per annum with the additional 2% payable retroactively from the date of the loan agreement. Interest under the loan agreement is payable in cash or, to the extent permitted by our other debt agreements, in-kind. We are currently paying the interest under the Lion Loan Agreement in cash as the terms of our other debt agreements do not currently permit payment in-kind. On July 16, 2014, Lion assigned its rights and obligations as a lender under the Lion Loan Agreement to an entity affiliated with Standard General.
In addition, our credit agreements contain, and any future credit agreements or loan agreements may contain, certain financial and maintenance covenants, including covenants relating to our capital expenditures, fixed charge coverage, borrowing availability and leverage, some of which may be tied to consolidated EBITDA, in each case as defined in the applicable debt agreements. Such restrictive and other covenants could limit our ability to respond to market conditions, to provide for unanticipated capital requirements or to take advantage of business or acquisition opportunities.
In addition, our failure to comply with the various covenants under our indebtedness could have material adverse consequences to us. Such failure may result in our being unable to borrow under our revolving credit facility, which we utilize to access our working capital, and as a result may adversely affect our ability to finance our operations or pursue our expansion plans. Our debt agreements contain cross-default or cross-acceleration provisions by which non-compliance with covenants, or the acceleration of other indebtedness of at least a specified outstanding principal amount, could also constitute an event of default under such debt agreements. Accordingly, such a failure could result in the acceleration of all of our outstanding debt, and may adversely affect our ability to obtain financing that may be necessary to effectively operate our business and grow the business going forward. In addition, substantially all of our assets are used to secure our indebtedness, including loans under our credit agreements, our senior secured notes and certain equipment leasing agreements. In the event of a default on these agreements, substantially all of our assets could be subject to liquidation by the creditors, which liquidation could result in no assets being left for the stockholders after the creditors receive their required payment. In such an event, we would be required to seek alternative sources of liquidity, and there can be no assurance that any alternative source of liquidity would be available on terms acceptable to us, or at all.
If we are unable to maintain the listing of our common stock on the NYSE MKT or any other securities exchange, it may be more difficult for you to sell your securities.
Our common stock is currently traded on the NYSE MKT. We are currently in compliance with the continued listing standards of the NYSE MKT, however, in the past we have failed to meet such standards. We are subject to periodic review by NYSE MKT and no assurance can be given that we will continue to meet the listing requirements of NYSE MKT in the future. If for any reason the NYSE MKT should delist our common stock, and we are unable to obtain listing on another national securities exchange, we could face significant material adverse consequences, including:
a limited availability of market quotations for our securities;
a limited amount of news and analyst coverage;
a decreased ability to issue additional securities or obtain additional financing in the future; and
a determination that the common stock is a "penny stock," if the securities sell for a complete listsubstantial period of time at a low price per share which would require brokers trading in the common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for the common stock.
Voting control by our executive officers, directors, lenders and other affiliates may limit your ability to influence the outcome of director elections and other matters requiring stockholder approval.
In connection with the Support Agreement, five directors resigned from our Board of Directors, effective as of August 2, 2014, and five new directors were appointed to the Board, three of which were designated by Standard General and two of which were appointed by the mutual agreement of Standard General and us.
As of August 1, 2014, Mr. Charney owned approximately 42.8% of our risk factors.outstanding common stock and Mr. Charney and Standard General collectively controlled the right to vote such common stock. On July 9, 2014, Mr. Charney and Standard General, on

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behalf of one or more of its funds, entered into a cooperation agreement (the "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 Mr. Charney may vote certain of his shares in favor of his own election to the Board of Directors and may vote all of such shares pursuant to the Investment Voting Agreement (defined below). In addition, according to Mr. Charney's Schedule 13D/A, dated June 25, 2014, 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 shares representing approximately 18.4% of our currently outstanding common stock (consisting of the 27,351,407 shares purchased by Mr. Charney from Standard General using the proceeds of a loan from Standard General and 10% of Mr. Charney’s 47,209,407 original shares which original shares also are pledged as security for such loan, which shares are further referenced in the Cooperation Agreement).
As of August 1, 2014, Lion beneficially owned approximately 14.1% of our outstanding common stock. Mr. Charney and Lion have the right to acquire additional beneficial ownership under certain circumstances. In addition, Mr. Charney and Lion are parties to an investment agreement pursuant to which Lion has the right to designate up to two directors on our Board of Directors and a board observer (or, if we increase our board size to 12, up to three directors and no board observers), subject to maintaining certain minimum ownership thresholds of common stock or shares of common stock issuable under Lion's warrants. The investment agreement also restricts us from increasing the size of our Board of Directors to more than 10 directors (or 13 directors in the event we elect to increase the size of our Board of Directors to 12 directors as described above). The two Lion designees on our Board of Directors and Lion's board observer resigned on March 30, 2011. Lion retains its ability to re-designate directors to our Board of Directors and a board observer.
Mr. Charney and Lion also are parties to an investment voting agreement, dated March 13, 2009 (the "Investment Voting Agreement") which provides that, for so long as Lion has the right to designate any person or persons to the Board of Directors, Mr. Charney will vote his shares of common stock in favor of Lion's designees, and Lion will vote its shares of common stock in favor of Mr. Charney and each other designee of Mr. Charney, in each case subject to Mr. Charney maintaining certain minimum ownership thresholds of common stock.
This concentration of share ownership, agreements allowing Standard General and Lion to appoint members to our Board of Directors, and voting agreements between Mr. Charney and Standard General and Mr. Charney and Lion, may adversely affect the trading price for the common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. Also, some or all of our significant stockholders, if they were to act together, would be able to control our management and affairs and matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, this concentration of ownership may have the effect of delaying or preventing a change of control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquire from making a tender offer or otherwise attempting to obtain control, even if that change of control would benefit our other stockholders and may prevent our stockholders from realizing a premium over the current market price for their shares of common stock. Furthermore, our significant stockholders may also have interests that differ from yours and may vote their shares of common stock in a way with which you disagree and which may be adverse to your interests.
Item  2.Unregistered Sales of Equity Securities and Use of Proceeds
None.

Item  3.Defaults Upon Senior Securities
None.

Item  4.Mine Safety Disclosures
Not applicable.

Item  5.Other Information
None.

Item  6.Exhibits
In reviewing the agreements included as exhibits to this Quarterly Report on Form 10-Q, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements. Some agreements contain representations and warranties by each of

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the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
•should not in all instances be treated as categorical statements of fact, but rather as a way of allocating
the risk to one of the parties if those statements prove to be inaccurate;
•have been qualified by disclosures that were made to the other party in connection with the negotiation of
the applicable agreement, which disclosures are not necessarily reflected in the agreement;
•may apply standards of materiality in a way that is different from what may be viewed as material to you
or other investors; and
•were made only as of the date of the applicable agreement or such other date or dates as may be specified
in the agreement and are subject to more recent developments.
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about the Company may be found elsewhere in this Quarterly Report on Form 10-Q and in the Company's other public filings, which are available without charge through the SEC's website at http://www.sec.gov.

    Incorporated by Reference
Exhibit No. Description Form Exhibits Filing Date/Period End Date
         
3.1 Certificate of Designation of Series A Junior Participating Preferred Stock of American Apparel, Inc. filed with the Secretary of State of the State of Delaware on June 30, 2014. 8-K 3.1 6/30/2014
         
3.2 Amended and Restated Bylaws of American Apparel, Inc., as amended, effective as of July 31, 2014. 8-K 3.2 8/6/2014
         
3.3 Amended and Restated Bylaws of American Apparel, Inc., as amended, effective as of June 28, 2014. 8-K 3.2 6/30/2014
         
4.1 Amendment No.1 to Rights Agreement, dated as of July 9, 2014, by and between American Apparel, Inc. and Continental Stock Transfer & Trust Company as rights agent. 8-K 4.1 7/9/2014
         
4.2 Rights Agreement, dated as of June 27, 2014, between American Apparel, Inc. and Continental Stock Transfer & Trust Company, as Rights Agent, including the form of Certificate of Designations as Exhibit A, the form of Rights Certificate as Exhibit B and the form of Summary of Rights to Purchase Preferred Stock as Exhibit C. 8-K 4.1 6/30/2014
         
10.1 Employment Agreement, effective as of July 14, 2014, between American Apparel, Inc. and John J. Luttrell. 8-K 10.1 7/14/2014
         
10.2 Nomination, Standstill and Support Agreement, dated as of July 9, 2014, by and among the Company, Standard General L.P., Standard General Master Fund L.P., P Standard General Ltd. and Doc Charney 8-K 10.1 7/9/2014
         
10.3 Separation Agreement and General Release of All Claims, dated May 16, 2014 by and between Glenn A. Weinman and American Apparel, Inc. 8-K 10.1 5/13/14
         
31.1* Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002      
         
32.1* 
Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
      
         
101.INS* XBRL Instance Document      
         
101.SCH* XBRL Taxonomy Extension Schema Document      
         
101.CAL* XBRL Taxonomy Calculation Linkbase Document      
         
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document      
         
101.LAB* XBRL Taxonomy Extension Label Linkbase Document      
         
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document      
* Filed herewith.

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Exhibit No.Description
10.1
Amendment No. 5 to Credit Agreement and Limited Waiver, dated as of March 25, 2014, by and among the Company, the Borrowers, Fresh Air Freight, Inc., Capital One Business Credit Corp. (f/k/a Capital One Leverage Finance Corp.), as Administrative Agent, and the Lenders party thereto (included as Exhibit 10.1 of the Current Report on Form 8-K (File No. 001-32697) filed on March 25, 2014 and incorporated by reference herein).
31.1*
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document

*Filed herewith.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 12,August 18, 2014

AMERICAN APPAREL, INC.
Signature Title Date
     
/s/ DOV CHARNEY
Chief Executive Officer and Director
(Principal Executive Officer)
May 12, 2014
Dov Charney
/s/ JOHN LUTTRELL  
Interim Chief Executive Officer, Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
 May 12,August 18, 2014
John Luttrell   
 

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