Bad news for Dov Charney’s hipster retail paradise as Marcum – who replaced Deloitte last summer – has issued its auditor’s opinion with the language that no one likes to see.
But before we get to that, if you take a quick glance at the balance sheet you’ll see that the company barely has enough money to keep the lights on as their working capital is a measly $3 million (current assets of $216 million, current liabilities of $213 million). This shockingly bad number is mostly due to the $138 million in revolving credit facilities the company has included in its current liabilities. The company is also shows an accumulated deficit of over $73 million in its equity section. APP also bled over $32 million in cash from operations, according to its cash flow statement. All this bad news has lots of people talking about bankruptcy and that doesn’t touch the thirteen (that’s Gawker’s count, I only saw twelve) ongoing lawsuits against the company. Plus there’s the subpoena the company received from the U.S. Attorney General for SDNY last August over their auditor switcheroo.
We could go on and on but you get the pic. Here’s the final paragraph from Marcum’s opinion in APP’s 10-K:
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred a substantial loss from operations and had negative cash flow from operations for the year ended December 31, 2010. As a result of noncompliance with certain loan covenants, debt with carrying value of approximately $138.0 million at December 31, 2010, could be declared immediately due and payable. Notwithstanding the foregoing, the Company has minimal availability for additional borrowings from its existing credit facilities, which could result in the Company not having sufficient liquidity or minimum cash levels to operate its business. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan in regard to these matters is also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Obviously the bad news is that investors are really spooked but the good news is that there could be a serious fire sale on hoodies and t-shirts in our future. Silver lining!
Remember the hipster drama Deloitte caused this past summer when they resigned as the auditor of American Apparel? It was quite the r s the stock took a beating (it has recovered in the meantime) and questions were raised about the company’s ability to continue as a [g]oing [c]oncern.
Some recent developments in this particular story have come to light as Dov & Co. have been providing a whole mess of information to Deloitte, as is SOP in these matters. For starters, Deloitte notified the APP audit committee that the 2009 financial statements are not kosher and anyone using them for any other purpose than lining a bird cage is nuts.
From the 8-K:
On December 15, 2010, the Audit Committee of the Company received notice from Deloitte stating that Deloitte had concluded that Deloitte’s report on the Company’s previously issued consolidated financial statements as of and for the year ended December 31, 2009 (the “2009 financials”), including Deloitte’s report on internal control over financial reporting at December 31, 2009, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 (such reports, collectively, the “Deloitte Reports”) should not be relied upon or associated with the 2009 financials.
Deloitte explained that its conclusion was based on the significance of the declines in operations and gross margin in the Company’s February 2010 monthly financial statement, combined with the January 2010 monthly financial statements, the Company’s issuance of revised projections in early May 2010 which reflected a significant decrease in the Company’s 2010 projections, and Deloitte’s disagreement with the Company’s conclusion that the results shown in the February 2010 monthly financial statements would not have required a revision to the Company’s projections as of the date of the 10-K filing and the issuance of Deloitte’s reports. Deloitte further indicated that their decision considered their inability to perform additional audit procedures, their resignation as registered public accountants and their professional judgment that they are no longer willing to rely on management’s representations due to Deloitte’s belief that management withheld from Deloitte the February 2010 monthly financial statements until after the filing of the 2009 10-K and made related misrepresentations.
So if you can get past how poorly written these paragraphs are, you can boil down Deloitte’s concerns about the 2009 10-K to a few things: 1) business was not looking good; 2) they didn’t buy APP’s notion that financial projections for February ’10 were hunky dory (which weren’t made available until after the 10-K was filed); 3) APP management was more or less full of shit. You can also read their official letter to the company, if you are so inclined.
You won’t be surprised to learn that Dov & Co. have a difference of opinion here:
The Audit Committee of the Company has commenced an investigation into the assertions that management withheld the February 2010 monthly financial statements and related misrepresentations. Management disagrees with Deloitte’s assertions and does not believe that the February 2010 monthly financial statements were withheld. The Company does not currently believe, including after discussions with Marcum, that the reaudit will result in any changes to the 2009 financials, though no assurance can be given in this regard.
So, somewhere, there are February 2010 financial statements stuffed in a drawer (but whose drawer?) that basically caused this whole fiasco. This seems like a completely plausible scenario.
SEC Accuses CHiPs Actor, Others Of Securities Fraud [Dow Jones]
“In complaints made public on Thursday, the SEC alleges that the actor, Larry Wilcox, and more than a dozen other penny stock promoters engaged in a series of kickback scheme volume and price of microcap stocks and illegally generate stock sales.
Wilcox, who starred as Officer Jon Baker on the long-running television show “CHiPs”, lives in West Hills, Calif., and is president and chief executive of The UC Hub Group, according to an SEC complaint filed in U.S. District Court for the Southern District of Florida.”
Microsoft, Boeing, Amazon Line Up Against New Washington Tax [Janet Novack/Forbes]
“The Washington State fight over whether to impose a new income tax on well-to-do residents heated up Wednesday, as the group opposing the tax released a list of employers that have joined the anti-tax cause. Companies on the list include Microsoft, Boeing, Amazon, Weyerhaeuser and Safeco Insurance.
The tax, which will appear as Initiative 1098 on the state’s November ballot, would impose a 5% tax on income of more than $400,000 per couple and a 9% levy on income exceeding $1 million per couple.”
Rep. Levin: Fate of Bush tax cuts unknown [On the Money/The Hill]
This does not sound good: “The Senate is expected to move first on the issue, but Levin said even that was not certain.
‘It’s preferable that the Senate act first because we’ve seen that if they can’t act first they won’t act second because the Republicans block it and don’t provide the 60 votes,; he said, adding, ‘I think we’ll have to wait and see.’ ”
American Apparel names Tom Casey as acting president [Reuters]
Tom Casey just left the terminal case known as Blockbuster in August.
SBA Loans Jump, Despite Unsteady Year [WSJ]
“Small-business lending still hasn’t bounced back to pre-recession levels. But despite a rocky year, the number of loans backed by the Small Business Administration jumped about 30% in 2010.
The agency, which ended its fiscal year Sept. 30, says it approved $16.84 billion, or 54,826 small business loans, in the past 12 months. That’s up from fiscal 2009, when the SBA backed about $13.03 billion during the depths of the credit crunch. In 2007, the agency backed about $20.61 billion.”
Oregon Gubernatorial Race Roiled by Candidate’s Charitable Deduction for Donation of Home to Fire Department [TaxProf Blog]
You try and do something nice…
FASB Advances EITF Proposals on Goodwill, M&A [A&A Update/Compliance Week]
“The Financial Accounting Standards Board is proposing new updates to the Accounting Standards Codification around goodwill write-downs, business combinations, and revenue recognition for health care entities based on recommendations from its Emerging Issues Task Force.
In the proposal titled Intangibles – Goodwill and Other (Topic 350): How the Carrying Amount of a Reporting Unit Should Be Calculated When Performing Step 1 of the Goodwill Impairment Test, FASB and the EITF want to settle on one starting point for all companies to follow in deciding if goodwill needs to be written down.”
U.A.E. Drops Threat to Suspend BlackBerry [NYT]
Your vacation is back on.
“He flies in the face of business sense, fashion manufacturing and retailing sense.”
~ Bryan Roberts, research director for retail analysts Planet Retail, couldn’t get through to Deloitte in time with this message.
Potash says in talks for superior deals [Reuters]
“Potash Corp’s board urged shareholders to reject BHP Billiton’s hostile $39 billion offer and said it was in talks with a number of potential suitors for a superior deal.
Potash Corp, the world’s largest producer of potash based in the Canadian province of Saskatchewan, said superior offers or other alternatives are expected to emerge.
Discussions are on with several of these third parties in order to generate superior offers, the company said in a statement.”
How to Shine in a Skype Interview [FINS ying across the country for a second round of meetings, you may be asked to interview for a job from the comfort of your living room.
While it might sound less stressful to some than an in-person meeting, such an interview can be filled with landmines for job candidates.”
The Problem With a Non-CPA CFO [FEI Financial Reporting Blog]
Francine McKenna guest-posts over at FEI for the second time, this time discussing the American Apparel situation and noting that 31 year-old CFO might be in over his head.
Goldfarb Branham LLP Investigating Shareholder Claims Against American Apparel, Inc. [Business Wire]
Speaking of APP, investigations are starting, “Goldfarb Branham LLP is investigating American Apparel, Inc. (APP 0.75, 0.00, -0.09%) due to allegations that the company may have issued materially inaccurate statements to investors concerning its 2009 financial results and the circumstances surrounding the replacement of American Apparel’s auditor.”
Movement afoot to increase diversity in accounting industry [Pittsburgh Business Times]
“Sam Stephenson, a partner at ParenteBeard LLC, a Downtown-based certified public accounting firm, brings an interesting perspective to the equation as a black man who has worked in the profession for nearly four decades. During his long tenure, he has seen improvements in efforts to recruit and promote women in the profession, but ethnic diversity still lags behind.
‘We need to bring this issue to the attention of individuals who run local and regional firms because they may not be aware that this is a problem,’ said Stephenson, who serves as a member of the Pennsylvania State Board of Accountancy, which enforces the licensing rules for CPAs. ‘A lack of diversity often means missed opportunities to attract talent and clients.’ ”
Preparer Costs Will Increase Some; Taxpayer Costs Will Increase More [Tax Update Blog]
Joe Kristan responds to fellow practitioner/blogger Robert Flach’s question of how the new tax preparer registration will affect costs for consumers more so than tax preparers.
Gays See Complex, Changing Tax Picture [Dow Jones Adviser]
“Gay couples are taking one step forward, one step back when it comes to their tax rights. Not to mention sideways.
The shifting landscape of new rules and initiatives makes it a big challenge to provide same-sex partners with good tax advice.
In Massachusetts, a successful challenge to a federal law denying gays tax breaks that heterosexual couples get could mean progress, but only if it stands up to an expected government appeal.”
Patrick Byrne Refutes Insider Trading Claims [Forbes]
“If it weren’t for the immigration bust by the Obama administration, the company would have been OK this year.”
~ “[A] source close to American Apparel” quoted in the Post obviously isn’t familiar with the company’s debt position.
When Going Concern first launched a year ago, I know we heard more than a few chortles from the audience at the very idea of an accounting news site (or tabloid, depending on who you ask) because, really, how interesting can accounting be? Of course we’ve since learned that cube-dwellers, financial professionals, college kids and accounting enthusiasts are totally into what we do because no one was doing it before and someone had to.
It’s easy to forget that we’re not only utilizing this avenue to rip on obvious boneheads who try to manipulate our precious accounting (we’re talking to you, Patrick Byrne) and make fun of