After excluding the effects of store impairment and depreciation charges between the quarterly periods, there was a 390 basis point decrease in operating expenses as a percent of net revenues. The decrease was primarily due to a reduction in corporate overhead expenses and the fixed cost leverage as a result of increased sales.

Other expense for the third quarter of 2012 was $23.1 million versus $4.4 million in the comparable quarter last year. The $18.7 million increase was primarily due to the increase in the fair market value of our outstanding warrants at September 30, 2012 as compared with September 30, 2011, resulting in a net change in unrealized loss of $19.4 million.

As our warrant liability is deemed to be a derivative financial instrument it is marked-to-market based primarily upon the change in our stock price between accounting periods. The warrant liability will not result in a future cash outflow by the Company and classified as equity when the warrants are exercised. Additionally, we incurred higher interest expense due to a higher average balance of debt outstanding and higher interest rates related to the Crystal Credit Agreement.

The third quarter 2012 net loss included an income tax provision of $0.5 million versus $0.2 million in the 2011 third quarter. In accordance with U.S. GAAP, we discontinued recognizing potential tax benefits associated with current operating losses. As of September 30, 2012, we had available federal net operating carry forwards of approximately $73.3 million and unused federal and state tax credits of $16.2 million.

Net loss for the third quarter of 2012 was $19.0 million, or $0.18 per common share, compared to net loss for the third quarter of 2011 of $7.2 million or $0.07 per common share. The 2012 third quarter net loss and net loss per common share includes $13.3 million of expense ($0.13 per common share) associated with a non-cash charge for an increase in the fair value of outstanding warrants. The 2011 third quarter includes an income statement credit of $6.1 million ($0.06 per common share) for a non-cash reduction in the fair value of the same warrant liability. Weighted average shares outstanding were 106.2 million in the third quarter of 2012 versus 102.3 million for the third quarter of 2011.

2012 Outlook Update

For 2012, the Company is updating its adjusted EBITDA outlook to $36 to $40 million from the prior estimate of $36 million to $44 million. The adjustment to our estimate reflects in part a reduction to the business lost as a result of Hurricane Sandy, and additional investments inadvertising and store technologies. This outlook assumes net sales of $604 million to $610 million and a gross profit margin of 53% to 54%. Capital expenditures are estimated at approximately $17 million for 2012. 

American Apparel Inc