Stock Update (NYSE MKT:APP): American Apparel Inc Reports Second Quarter 2015 Financial Results


American Apparel Inc (NYSEMKT:APP), a vertically-integrated manufacturer, distributor, and retailer of branded fashion basic apparel, announced financial results for its second quarter ended June 30, 2015.

Operating Results – Second Quarter 2015

Net sales for the second quarter of 2015 decreased 17.2% to $134.4 million from $162.4 million for the same period in 2014. Excluding the year over year impact from foreign exchange and stores closed in 2014, net sales decreased 14% from the same period in 2014. The decline in comparable sales was attributable to the lack of new style introduction for the spring and summer selling season. Net sales also decreased approximately $3 million due to the store closures. In addition, the unfavorable impact of foreign currency exchange rate changes contributed to the sales decrease of approximately 4% or $6.2 million.

Gross profit for the second quarter of 2015 decreased 25.3% to $61.5 million from $82.4 million for the same period in 2014. Gross margin for the second quarter of 2015 was 45.8% compared to 50.7% for the same period in 2014. The decrease was primarily related to lower retail sales coupled with the negative effects of foreign currency exchange rate changes and an increase in workers compensation and health benefit costs.

Operating expense for the second quarter of 2015 decreased 10.2% to $71.4 million from $79.6 million for the same period in 2014 due primarily to lower payroll and reduced shipping, rent, supplies and miscellaneous activities, all primarily as a result of our cost reduction efforts. Excluding the effects of the significant charges described below, operating expenses decreased 12.8% to $65.1 million from the same period in 2014.

Net loss for the second quarter of 2015 was $19.4 million or $0.11 per share, compared to net loss of $16.2 million, or $0.09 per share for the second quarter of 2014. Results for the second quarter of 2015 include $8.3 million, or $0.05 per share, related to significant charges.

Liquidity and Capital Resources

Under the $10 million “at-the-market” offering program, we may, from time to time and at our discretion, offer and sell shares of our common stock having an aggregate gross sales price of up to $10 million (but in no event more than 15 million shares). We have used the net proceeds generated through the program for working capital and general corporate purposes. As of June 30, 2015, we had issued 4 million shares of our common stock for net proceeds of $2.0 million. Sales of common stock under the “at-the-market” offering program are at our sole discretion and subject to the terms and conditions of the sales agreement related thereto, and there are no assurances that such sales will continue in the future.

As of June 30, 2015, we had $6.9 million in cash, $38.4 million outstanding on our $50.0 million asset-backed revolving credit facility with Capital One and $6.1 million of availability for additional borrowings as of such date. On August 11, 2015, we had $11.2 million in cash. As of June 30, 2015, we had $210.6 millionaggregate principal amount of senior secured notes (the “Notes”) outstanding. On April 14, 2015, we paid $13.8 million in interest on the Notes. The next scheduled interest payment on the Notes due on October 15, 2015 is approximately $13.9 million.

As of June 30, 2015, we were not in compliance with the minimum fixed charge coverage ratio and the minimum adjusted EBITDA covenants under the Capital One Credit Facility. For the April 1, 2015 through June 30, 2015 covenant reference period, our fixed charge coverage ratio (as defined in the Capital One Credit Facility) was 0.07 to 1.00 as compared with the covenant minimum of 0.33 to 1.00, and our adjusted EBITDA (as defined in the Capital One Credit Facility) was$4.1 million as compared with the covenant minimum of $7.4 million.

On August 17, 2015, Capital One assigned its rights and obligations as a lender to a syndicate of lenders that includes certain of our existing creditors, including funds associated with Standard General L.P., Monarch Alternative Capital L.P., Coliseum Capital LLC and Goldman Sachs Asset Management, L.P., and was replaced by Wilmington Trust, National Association (“Wilmington Trust”) as administrative agent. Additionally, on August 17, the Capital One Credit Facility was amended pursuant to an amended and restated credit agreement among us, the new syndicate of lenders and Wilmington Trust (the “Wilmington Trust Credit Facility”). In connection with such amendment, the syndicate of lenders received certain amendment and closing fees and reimbursement of closing expenses. The covenant violations existing at June 30, 2015 were waived under the Wilmington Trust Credit Facility.

The Wilmington Trust Credit Facility provides for a $90 million asset-based revolving credit facility and matures on April 4, 2018, subject to a January 15, 2018maturity in limited circumstances. Borrowings under the Wilmington Trust Credit Facility are subject to specified borrowing base requirements which is increased by $15 million, but such $15 million increase cannot increase the borrowing base above $60 million. Amounts repaid under the Wilmington Trust Credit Facility cannot be re-borrowed.

Borrowings currently outstanding under the Capital One Credit Facility will continue under the Wilmington Trust Credit Facility and bear interest at a LIBOR based rate plus 5.00% or a rate based on the prime rate plus 4.00%. New borrowings under the Wilmington Trust Credit Facility bear interest at a LIBOR based rate plus 7.00% or a rate based on the prime rate plus 6.00%.

Additionally, on August 17, 2015, we entered into amendments to the indenture agreement governing the Senior Notes and the Standard General Loan Agreement to permit us to enter into the Wilmington Trust Credit Facility.

We incurred losses from operations and negative cash flows from operating activities for the six months ended June 30, 2015 and such losses might continue for the remainder of 2015. Based upon the trends occurring in our operations since June 30, 2015 and through the date of this release, together with our current expectations and projections for the next four fiscal quarters, we believe that we may not have sufficient liquidity necessary to sustain operations for the next twelve months. These factors, among others, raise substantial doubt that we may be able to continue as a going concern.

As a result of the Capital One Credit Facility covenant default and the liquidity uncertainty described above, we have been working with our advisers and have begun discussions with certain key financial stakeholders to analyze potential strategic and financial alternatives, which may include, among other things, refinancing or new capital raising transactions, amendments to or restructuring of our existing indebtedness and other obligations, and consideration of other restructuring and recapitalization transactions. As of the date of this release, substantial uncertainty exists as to the ultimate outcome of those discussions, and there are no assurances that such efforts will result in any transaction or agreement, or that any such transaction or agreement, if proposed and/or implemented, will be successful. In addition, whether or not any such transactions or agreements were implemented or successful, our existing and any new investors could suffer substantial or total losses of their investment in our common stock.

Unrealized Gain/Loss on Change in Fair Value of Warrants

As of June 30, 2015, Lion Capital LLP held warrants to purchase 24.5 million shares of our common stock. As a result of the “at-the-market” offering program, Lion received the right to purchase an additional 12,000 shares of our common stock with an adjusted exercise price of all of the Lion-held warrants at $0.66.

As the share price of our stock increases, the fair value of warrant liability recorded on the balance sheet increases, and we record an expense to recognize the increase in fair value of the warrant liability. Conversely, when the share price of our stock decreases, we record a gain to recognize the related reduction in the fair value of the warrant liability on the balance sheets. Although the income statement impacts associated with warrants are appropriate and required under GAAP, they do not impact our operating performance nor do the credits and charges have an impact on the cash balances since the liability recorded is not an obligation that will be settled with cash. Instead, these warrants will be reclassified to equity when they are exercised. (Original Source)

Shares of American Apparel closed today at $0.15, up $0.01 or 7.38%. APP has a 1-year high of $1.20 and a 1-year low of $0.10. The stock’s 50-day moving average is $0.29 and its 200-day moving average is $0.59.

American Apparel Inc is amanufacturer, distributor, and retailer of branded fashion basic apparel and accessories for women, men, children and babies.The Companyoperates ane-commerce site that serves over50countries.