Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
RYUN > SEC Filings for RYUN > Form 10-K on 1-Apr-2013All Recent SEC Filings

Show all filings for RESPECT YOUR UNIVERSE, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-K for RESPECT YOUR UNIVERSE, INC.


1-Apr-2013

Annual Report


Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of the financial condition and results of operations should be read in conjunction with the financial statements included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future.


Overview

Respect Your Universe is a performance lifestyle brand that engages in the development, marketing and distribution of apparel and accessories. Our fiscal 2012 results demonstrates our continued focus on the development of our brand, products and positioning ourselves for sustainable, profitable long-term growth.

Results of Operations

Revenue

Revenues during the years ended December 31, 2012 and 2011 were $848,981 and $2,821, respectively. The significant increase is due to 2012 being the first year the Company launched its product lines. Our first season of product became available to retailers in January 2012, and to consumers through our web site in February 2012. We opened our first retail store in Las Vegas, Nevada in October 2012. By contrast, during 2011, we had produced only a limited quantity of graphic tee shirts and headwear for sale on our website.

Cost of Goods Sold

Cost of goods sold during the year ended December 31, 2012 was $1,964,138. By contrast, we did not recognize any cost of goods sold during the year ended December 31, 2011, due to nominal sales.

During the fourth quarter of 2012, we identified specific inventories to sell through our wholesale channel at close-out prices. Several factors led us to this decision. First, we acquired the services of a third party consultant in September to assist us with expanding our wholesale channel and with strategically evaluating the salability of our current brand and product lines. Second, with the opening of our first retail store in late October, we completed the introduction of our brand and product line to the market through all three of our sales channels. Lastly, we initiated a rebranding strategy in December that no longer aligned with certain attributes of our current product lines. Based on the collective input received during the quarter, we concluded that it was necessary to close-out a significant portion of our inventory. As of December 31, 2012, the Company assessed the market value of a significant portion of its inventory on hand and determined that the market value was significantly less than its cost. As such, the Company recorded a lower of cost-or-market ("LCM") adjustment of $1,401,220 in December 2012, as discussed in Note 5 to the financial statements.

Gross (Loss) Profit

Gross (loss) profit during the years ended December 31, 2012 and 2011 was ($1,115,157) and $2,821, respectively. The gross loss in 2012 was driven by the LCM inventory adjustment described above. Additionally, in 2012 the Company recorded a write-off of $87,889 related to excess materials purchased in connection with the production of its product lines.

The table below presents the Company's actual results by operating segment, as they relate to its revenue, cost of goods sold, gross (loss) profit and gross margin. The LCM write-down described above is included within Wholesale, as the Company expects to close out the related goods through its wholesale channel. The write-off of excess inventory is included in Other.

                                               Segment
                        Wholesale        Retail       Ecommerce        Other           Total
 Revenue               $    421,050     $ 129,280     $  295,823     $    2,828     $    848,981
 Cost of goods sold      (1,665,384 )     (40,762 )     (136,429 )     (121,563 )     (1,964,138 )
 Gross (loss) profit   $ (1,244,334 )   $  88,518     $  159,394     $ (118,735 )   $ (1,115,157 )
 Gross margin                 -296%           68%            54%         -4199%            -131%


Selling and Marketing Costs

We incurred $3,390,574 and $824,763 in selling and marketing expenses during the years ended December 31, 2012 and 2011, respectively. We used significant resources during these periods to generate sales and create awareness and demand for our products through sports marketing agreements, product seeding, digital marketing and social media. The increase in 2012 is primarily related to our selling efforts and marketing initiatives in connection with the launch of our initial product line, brand development and the opening of our retail store in 2012. The Company did not have selling expense in 2011 as the Company's product had not been introduced to the market, and sales in 2011 were nominal. Selling expense for 2012 and 2011 was $745,629 and $0, respectively. Of the total selling and marketing expense for 2012, $878,155 was share-based (non-cash) expense primarily related to stock-for-services marketing contracts. Of the total amount expensed in 2011, $63,900 was for related party development of brand and marketing media, and $116,618 was share-based (non-cash) expense primarily related to stock-for-services marketing arrangements.

Product Creation Costs

During the year ended December 31, 2012, we incurred product creation expenses of $905,737 compared to $366,360 during the year ended December 31, 2011. Of the total amounts expensed, $513,426 and $356,144 were paid to Exit 21, an entity controlled by our former Chief Executive Officer and current Chief Operation Officer, respectively. The increase from 2011 to 2012 is a result of significant resources being allocated to design, development, and formulation of the Company's Spring and Fall 2013 product lines. Product creation expenses incurred in 2012 consisted of formulating product concepts, construction of prototypes related to the Company's proposed new product lines.

General and Administrative Costs

General and administrative expenses for the year ended December 31, 2012 were $4,455,635 compared to $5,257,224 for the year ended December 31, 2011. This decrease is the result of significantly less share-based expense, as the Company incurred significant share-based compensation in 2011 for its then contracted former chief executive and current chief operating officers. The Company's chief executive and chief operating officers were not contracted in 2012, and as such the Company did not incur similar expense in 2012. The primary components of general and administrative expense during the 2012 period were employee compensation of $1,500,785 ($379,102 share-based), investor relations expense of $1,278,362 ($1,083,160 share-based) and professional fees of $769,963 related to audit, legal, and retail consulting services. The primary components of general and administrative expense for 2011 were professional and consulting fees of $2,643,421 ($2,274,875 from share-based compensation), employee compensation expense of $1,657,294 ($1,407,806 from share-based compensation), and investor relations expense of $513,982 ($234,888 from share-based compensation).

In December 2011, we executed an agreement for the development of a new website to support the expanded web store, which launched during the first quarter of 2012. As a result, we recognized an impairment loss in the amount of $31,890 based on the net asset value of the original site as of December 31, 2011.

Net Loss

As a result of the above, our net loss for the year ended December 31, 2012 was $9,868,603, as compared to a loss of $6,477,416 for the comparable 2011 period.

Financial Condition

As of December 31, 2012, we had current assets of $1,896,595, current liabilities of $617,050 and working capital of $1,279,545 compared to current assets of $3,836,751, current liabilities of $497,307 and working capital of $3,339,444 at December 31, 2011.


Our cash balance as of December 31, 2012 was $295,211 compared to $2,698,719 at December 31, 2011. In the third quarter of 2011, we received $6,124,234 in net proceeds from the issuance of common stock and warrants pursuant to private placements. In February 2012, we successfully raised $1,500,000 in additional capital though equity financing. In April 2012, we filed a prospectus to become listed on the Canadian TSX Venture Stock Exchange and a concurrent initial public offering. The offering was successfully closed in August 2012 and we raised $4,476,930, net of direct offering costs. On August 10, 2012, our shares began trading on the TSX Venture Stock Exchange under the ticker symbol RYU and we continue to be listed on the OTCQB under the ticker symbol RYUN.

Operating Activities

During the year ended December 31, 2012, we used cash in the amount of $8,015,690 in operating activities. The principal adjustments to reconcile the net loss to net cash used in operating activities were share-based compensation
- stock of $1,088,000, share-based compensation - options of $741,796, share-based compensation - warrants of $297,076, an increase in inventory of $1,232,533, and a decrease in prepaid expenses of $684,207.

By comparison, during the year ended December 31, 2011, we used cash in the amount of $3,324,290 in operating activities. The principal adjustments to reconcile the net loss to net cash used in operating activities were share-based compensation - stock of $347,818, share-based compensation - options of $3,623,590, an increase in prepaid expenses of $536,446, an increase in accounts payable and accrued liabilities of $347,688, and a decrease in accounts payable
- related party of $343,075.

Investing Activities

We used cash in the amount of $322,590 in investing activities during the year ended December 31, 2012. Investing activities during the period included $171,072 for property and equipment purchases primarily related to the opening of our retail store, $135,148 for intangible assets, which included the development of patents and trademarks, website development costs and the acquisition of our new domain name. All costs have been capitalized and depreciated or amortized over the expected useful lives of the assets. Depreciation and amortization during the year ended December 31, 2011 totaled $55,957. We also paid $16,370 as a security deposit for our retail store.

By contrast, we used cash in the amount of $109,533 in investing activities during the year ended December 31, 2011. Investing activities during the period included $49,127 for property and equipment purchases, $60,406 for the acquisition of intangible assets. All costs have been capitalized and amortized over the expected useful lives of the assets. Depreciation and amortization during the year ended December 31, 2011 totaled $8,526.

Financing Activities

During the year ended December 31, 2012, we borrowed $200,005 against our line of credit as a bridge loan until proceeds from the IPO in Canada became available. The balance including interest of $712 was subsequently repaid in the same quarter. We also repaid $25,000 to related parties, paid $10,258 towards capital lease obligations and received gross proceeds from the sale of common stock and warrants of $6,441,300, of which $471,270 was paid in offering costs for net cash provided by financing activities of $5,934,772. Non-cash financing activities during the 2012 period included warrants issued for capital lease of $9,044 and capital lease obligations incurred to acquire intangible assets of $114,490.

During the year ended December 31, 2011, we received related party advances in the amount of $25,000, repaid $20,000 to related parties, and received net proceeds from the issuance of common stock and warrants of $6,124,234 for total cash provided by financing activities of $6,129,234. Non-cash financing activities during the 2011 period included prepayment of expenses of $228,322 with stock issuances.

Liquidity and Management's Plan

The Company commenced operations as a development stage enterprise in 2009 and has incurred losses from inception. As shown in the accompanying consolidated financial statements, we incurred a net loss of $9,868,603 and had net cash used in operating activities of $8,015,690 during 2012. As of December 31, 2012, our cash balance was $295,211, and management believes that the Company will need to raise substantial additional equity capital during 2013 in order to support current operations and planned development. These factors raise substantial doubt as to our ability to continue as a going concern.


Although our operations began in 2009, we did not emerge from a development stage until the fourth quarter of 2012. Activities before 2012 included product research and development, establishing supply sources, developing markets, recruiting personnel and raising capital. In January 2012, we launched our initial men's line with a limited number of styles of apparel and accessories. The line was made available to retailers in January 2012 and direct-to-consumers through our web store in February 2012. In July 2012, we added to our men's line and introduced our first line of women's apparel and accessories. In late October 2012, we opened our first retail store in Las Vegas, Nevada.

Sales generated in 2012 fell significantly short of expectations. Management attributes the shortfall primarily to the Company's initial positioning as a premium performance apparel brand within the niche sport of Mixed Martial Arts (MMA), lower than expected sales generated through our association with a major MMA promoter, as well as an emphasis on generating a significant percentage of total sales through an undeveloped wholesale channel. Consequently, we carried significant excess inventory as of December 31, 2012. As described in Note 5 to the financial statements, after assessing the market value of our inventory on hand at year-end, management determined that a significant write-down was appropriate.

In light of our findings, we are in process of implementing a rebranding strategy that we believe will appeal to a broader consumer base. While we continue to believe that our wholesale channel will play a major role in our long-term growth plans, we also anticipate that we will need to shift our growth strategy in the near term and place greater emphasis on developing our brand through our retail and ecommerce channels.

Management plans to seek additional capital to support and expand its operations and, during the first quarter of 2013, raised $1,380,818 through the issuance of equity securities as discussed in Note 18 to the financial statements. While management plans to generate increasing revenues and to continue financing the Company through the issuances of additional equity securities, there can be no assurance that sufficient revenue or financing will occur to meet the Company's cash needs for the next 12 months.

Critical Accounting Policies

Our significant accounting policies are summarized in Note 3 to the financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would affect our results of operations, financial position or liquidity for the periods presented in this report.

We believe the following critical accounting policies and procedures, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

Inventory

Inventory is valued on a lower of cost or market basis based upon the weighted average method of inventory costing. Market value is estimated based upon assumptions made about future demand and retail market conditions. If the Company determines that the estimated market value of its inventory is less than the carrying value of such inventory, it records a charge to cost of goods sold to reflect the lower of cost or market.


Impairment of Long Lived Assets

The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful lives of property, equipment and intangible assets or whether the remaining balance of property, equipment and intangible assets should be evaluated for possible impairment.

Revenue Recognition

The Company recognizes product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable.

Revenue is recorded net of discounts and an allowance for estimated returns. The allowance for estimated returns related to web sales and retail sales is currently 3% of sales based on the Company's return policy on its direct-to-consumer sales. The allowance for estimated returns related to wholesale sales is currently 4% based on the Company's historical wholesale customer returns. The allowance is reflected as an accrued liability on the balance sheet.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at tax rates expected to be in effect when such assets or liabilities are realized or settled. Deferred income tax assets are reduced by valuation allowances when necessary.

Assessing whether deferred tax assets are realizable requires significant judgment. The Company considers all available positive and negative evidence, including historical operating performance and expectations of future operating performance. The ultimate realization of deferred tax assets is often dependent upon future taxable income and therefore can be uncertain. To the extent the Company believes it is more likely than not that all or some portion of the asset will not be realized, valuation allowances are established against the Company's deferred tax assets, which increase income tax expense in the period when such a determination is made.

Income taxes include the largest amount of tax benefit for an uncertain tax position that is more likely than not to be sustained upon audit based on the technical merits of the tax position. Settlements with tax authorities, the expiration of statutes of limitations for particular tax positions, or obtaining new information on particular tax positions may cause a change to the effective tax rate.

Share-Based Payments

The Company estimates the cost of share-based payments to employees based on the award's fair value on the grant date and recognizes the associated expense ratably over the requisite period. The estimated cost is derived using the Black-Scholes option-pricing model, which includes assumptions that are highly subjective. The Company may adjust these assumptions periodically to reflect changes in market conditions and historical experience. Consequently, expenses reported for share-based payments to employees in the future may differ significantly from those reported in the current period.

When estimating fair value, the Company has considered the following variables:

? The risk-free interest rate assumption is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant.

? The Company has not paid any dividends on common stock since our inception and do not anticipate paying dividends on our common stock in the foreseeable future.

? The expected life of the award is computed using the "simplified" method as permitted under the provisions of Staff Accounting Bulletin ("SAB") 107.


? The expected volatility is based on the historical volatility of our common stock based on the daily quoted closing trading prices and comparison to peer data.

? The forfeiture rate is based on an estimate of awards not expected to fully vest.

The straight-line attribution method is used for awards that include vesting provisions. If an award is granted, but vesting does not occur, any previously recognized expense is reversed in the period in which the termination of service occurs.

The Company measures the fair value of share-based payments to non-employees at the measurement date, which occurs at the earlier of the date performance commitment is reached or performance is completed. Recognition of share-based payments occurs as services are received. The Company treats fully-vested, non-forfeitable shares issued to non-employees in the same manner as if it had paid for the services received with cash. Unvested, forfeitable shares are accounted for as unissued until the point vesting occurs.

Regarding warrants issued in connection with stock offerings and those issued to non-employees as consideration for services, the Company's warrant contracts are accounted for in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification 815-40, Derivatives and Hedging - Contracts in Entity's Own Equity. All such warrant agreements contain fixed strike prices and number of shares that may be issued at the fixed strike price, and do not contain exercise contingencies that adjust the strike price or number of shares issuable upon settlement of the warrants. All such warrant agreements are exercisable at the option of the holder and settled in shares of the Company. All such warrant agreements are initially measured at fair value on the grant date and accounted for as part of permanent equity.

Contractual Commitments

The following table presents our estimated contractual commitments:

                          2013          2014          2015          2016          2017         Thereafter
   Inventory purchase
      obligations (1)   $ 193,679     $       -     $       -     $       -     $       -     $          -
 Operating leases (2)     186,695       100,506
    Capital lease (2)      10,863        11,307        11,503        11,703        11,007           47,140

(1) See inventory purchase obligations in Note 15 to Financial Statements.

(2) See operating and capital leases in Note 15 to Financial Statements.

Recent Accounting Pronouncements

In May 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. This ASU was issued concurrently with International Financial Reporting Standards ("IFRS") 13 Fair Value Measurements, to provide a consistent definition of fair value and to ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. The guidance also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance should be applied prospectively and are effective for interim and annual periods beginning after December 15, 2011. Early adoption by public entities is not permitted. The Company adopted this guidance as of January 1, 2012 without a material impact on its financial position, results of operations or cash flows.


In July 2012, the FASB issued ASU No. 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This ASU permits an entity to make a qualitative assessment of whether it is more likely than not that indefinite-lived intangible assets are impaired before calculating the fair value of the assets. After assessment of certain qualitative factors, if it is determined to be more likely than not that an indefinite-lived asset is impaired, entities must perform the quantitative impairment test. Otherwise, the quantitative test becomes optional. The amended guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company adopted this guidance in 2012 without a material impact on its financial position, results of operations or cash flows.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as "special purpose entities" (SPEs).

  Add RYUN to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for RYUN - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.