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RYUN > SEC Filings for RYUN > Form 10-Q on 20-May-2013All Recent SEC Filings

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Form 10-Q for RESPECT YOUR UNIVERSE, INC.


20-May-2013

Quarterly Report


Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations

This information should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Item 1 of Part I of this Quarterly Report on Form 10-Q. This discussion highlights key information as determined by management, but may not contain all of the information that is important to you. For a more complete understanding, the following should be read in conjunction with the Company's 2012 Annual Report on Form 10-K, including the audited financial statements therein (and notes to such financial statements) and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in that report.

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended. Forward-looking statements may also be made in the Company's other reports filed with or furnished to the United States Securities and Exchange Commission (the "SEC"). In addition, from time to time, the Company through its management may make oral forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from such statements. The words "believe," "expect," "anticipate," "optimistic," "intend," "plan," "aim," "will," "may," "should," "could," "would," "likely" and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance, and therefore you should not put undue reliance upon them. Some of the factors that may cause actual results to differ materially from those indicated in these statements are found in the section "Risk Factors" in our Form 10-K as filed with the SEC on April 1, 2013, and also include without limitation:

changes in general economic or market conditions that could impact consumer demand for our products;

our product lines, including that we intend to launch additional product lines in the future;

our business plan;

capital expenditure programs;

the enforceability of our intellectual product rights;

projections of market prices and fluctuations of product costs;

sales of our products;

our marketing, branding and sponsorship initiatives;

our need for and ability to raise capital;

our ability to retain the services of our senior management and key employees;

our ability to sell excess inventory

The forward-looking statements contained in this Form 10-Q reflect our views and assumptions only as of the date of this Form 10-Q. The Company undertakes no obligation to update or revise any forward-looking statements after the date on which the statement is made.

Overview

Respect Your Universe is a performance lifestyle apparel brand focused on the needs of the athlete. Our men's and women's performance and active wear lines are designed for an athletic consumer and suited for a performance lifestyle. The Respect Your Universe brand is based on respect, strength, honor and sustainability. Crafted from organic and/or recycled materials, our products are focused on performance, comfort and style, but also designed with respect toward maintaining the health of our environment.

We were incorporated in the State of Nevada in November 2008. Our corporate headquarters and operations are located in Portland, Oregon, a major hub in our industry. We have retained a senior leadership team with extensive experience in the sports apparel industry. All products are designed, developed and tested at our corporate headquarters, and all production takes place in some of the top factories in our industry.

We sell our products through three primary channels: wholesale, retail and e-commerce. Our initial product line launched in February 2012, which coincided with the roll out of our online store at ryu.com. In October 2012, we opened our first retail store at The Shoppes at the Palazzo in Las Vegas, Nevada. We continue to develop our wholesale channel through a mix of specialty retailers, e-tailers, large multi-door retailers, gyms, and international distributors.

In the fourth quarter of 2012, management concluded that it was no longer a development stage enterprise. This determination was in light of the following considerations: principal operations were underway, the Company was producing and marketing a full line of men's and women's apparel, and generating revenues through all three sales channels.

Product Lines

Our products include performance and lifestyle apparel and accessories that are environmentally friendly and meet the demands of an active lifestyle. Our men's and women's lines are comprised of up to 90 percent organic and recycled materials, utilizing some of the best yarn and fabric suppliers in the world. We currently market two commercial product lines each year for the Spring/Summer ("Spring") and Fall/Holiday ("Fall") seasons.


In February 2012, we launched a limited Spring 2012 men's line. Our Fall 2012 season included an expanded men's line and the roll out of our women's line of apparel and accessories. Delivery of our Fall lines continued into the fourth quarter of 2012 along with the introduction of a limited line of winter outerwear.

We released a limited Spring 2013 line in March 2013 that included approximately 18 new men's and women's styles. Approximately 10 additional styles were designed for the Fall 2013 season and are currently in production at our factories. We anticipate these new styles will arrive at our warehouse in June and July 2013.

Our Spring 2014 line has been designed and is currently in development. It will include approximately 20 new men's and 20 new women's styles as well as additional accessories and a limited number of carryover styles. We anticipate production will begin in October 2013 and arrival at our warehouse expected for December 2013. Our Fall 2014 line is currently in design.

Results of Operations

Revenue

Revenues during the three months ended March 31, 2013 and 2012 were $387,692 and $64,126, respectively. The increase is primarily due to generating $141,013 of revenue through our retail sales channel during the three months ended March 31, 2013, which began its operations in the fourth quarter of 2012. Additionally, the Company generated approximately $105,000 in revenue associated with the sale of closeout product during the three months ended March 31, 2013. The Company did not closeout any product during the three months ended March 31, 2012. The increase in revenue was expected given we are in a growth stage and continue to expand our customer base and brand awareness through our retail, wholesale and ecommerce sales channels and our marketing initiatives. 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.

Cost of Goods Sold

Cost of goods sold during the three months ended March 31, 2013 and 2012 were $275,370 and $35,912. The increase in cost of goods sold is primarily comprised of approximately $134,000 related to the increase in sales and $105,000 (1) related to closeout sales described above.

(1) During the fourth quarter of 2012, under new leadership, we identified specific inventories to sell through our wholesale channel at closeout 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 closeout 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 6 to the financial statements. The $105,000 closeout sale and related cost of goods sold described above represents closeout inventory sold at market-value during the three months ended March 31, 2013.

Gross Profit

Gross profit during the three months ended March 31, 2013 and 2012 was $112,322 and $28,214, respectively.

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 closeout sale described above is included within Wholesale, as the Company closed out the related goods through its wholesale channel. Factory surcharges and excess inventory write-offs are included in Other.

Three months ended March 31, 2013

                                             Segment
                      Wholesale       Retail       Ecommerce        Other         Total
            Revenue   $  169,496     $ 141,013     $   77,183     $       0     $  387,692
 Cost of goods sold     (146,706 )     (54,804 )      (49,211 )     (24,649 )     (275,370 )
Gross (loss) profit   $   22,790     $  86,209     $   27,972     $ (24,649 )   $  112,322
       Gross margin          13%           61%            36%                          29%


Three months ended March 31, 2012

                                          Segment
                      Wholesale      Retail      Ecommerce      Other        Total
            Revenue   $   35,033     $     0     $   29,093     $    0     $  64,126
 Cost of goods sold      (25,629 )        (0 )      (10,096 )     (187 )     (35,912 )
Gross (loss) profit   $    9,404     $     0     $   18,997     $ (187 )   $  28,214
       Gross margin          27%                        65%                      44%

Selling and Marketing Costs

We incurred $409,936 and $634,623 in selling and marketing expenses during the three months ended March 31, 2013 and 2012, respectively. Expenses during these periods were incurred to generate sales and create awareness and demand for our products through sports marketing agreements, product seeding, digital marketing and social media. The decrease is primarily related to one marketing contract, which ended in December 2012. This contract accounted for $238,677 in marketing expense during the three months ended March 31, 2012. Selling expense for the three months ended March 31, 2013 and 2012 was $107,732 and $133,399, respectively. Of the total selling and marketing expense for the three months ended March 31, 2013, $0 was share-based (non-cash) expense. Of the total amount expensed for the three months ended March 31, 2012, $243,449 was share-based (non-cash) expense primarily related to stock-for-services marketing arrangements.

Product Creation Costs

During the three months ended March 31, 2013, we incurred product creation expenses of $137,043 compared to $315,400 during the three months ended March 31, 2012. Of the total amounts expensed, $0 and $315,400 were paid to Exit 21, an entity controlled by our former Chief Executive Officer and current Chief Operating Officer, respectively. The decrease is due to the Company's contract with Exit 21 ending in June 2012. Product creation expenses incurred during the three months ended March 31, 2013 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 three months ended March 31, 2013 were $918,299 compared to $1,029,853 for the three months ended March 31, 2012. The primary components of general and administrative expense during the three months ended March 31, 2013 were employee compensation of $375,495 ($52,867 share-based), professional fees of $171,275 related to audit, legal, and retail consulting services, warehousing and handling costs of $106,707, investor relations expense of $78,704 ($51,306 share-based) and rent expense of $51,204. The primary components of general and administrative expense for the three months ended March 31, 2012 were investor relations expenses of $343,234 ($297,645 of which was from share-based compensation), employee compensation expense $309,353 ($42,880 from share-based compensation), legal, professional and consulting fees of $87,688 ($2,476 from share-based-compensation), and travel expenses of $80,948.

Net Loss

As a result of the above, our net loss for the three months ended March 31, 2013 was $1,352,956, as compared to a loss of $1,951,662 for the comparable 2012 period.

Financial Condition

As of March 31, 2013, we had current assets of $2,005,802, current liabilities of $488,967 and working capital of $1,516,836 compared to current assets of $1,896,595, current liabilities of $617,050 and working capital of $1,279,545 at December 31, 2012.

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. During the three months ended March 31, 2013, we raised $1,377,855, net of direct offering costs.

Operating Activities

During the three months ended March 31, 2013, we used cash in the amount of $1,329,836 in operating activities. The principal adjustments to reconcile the net loss of $1,352,956 to net cash used in operating activities were share-based compensation of $176,746, partially offset by an increase in due from factor, net of $103,642, and a decrease in accounts payable and accrued liabilities of $128,770. Depreciation and amortization during the three months ended March 31, 2013 totaled $45,153.


By comparison, during the three months ended March 31, 2012, we used cash in the amount of $2,077,530 in operating activities. The major components of operating activities include a net loss of $1,951,662, offset by share-based compensation of $614,415, an increase in inventory of $319,109, an increase in deposits for inventory purchased of $599,336, a decrease in prepaid expenses of $104,971, and an increase in accounts payable and accrued liabilities of $184,005. Depreciation and amortization during the quarter ended March 31, 2012 totaled $6,706.

Investing Activities

Net cash used in investing activities was $11,895 during the three months ended March 31, 2013. Investing activities during the period included $4,501 for property and equipment, $7,394 for intangible assets, which included the development of patents and trademarks.

By contrast, we used cash in the amount of $79,405 in investing activities during the three months ended March 31, 2012. Investing activities during that period included $7,229 for property and equipment purchases and $72,176 for the acquisition of intangible assets including the development of its patents and trademarks, website development costs and the acquisition of our new domain name.

Financing Activities

During the three months ended March 31, 2013, we paid $3,000 towards capital lease obligations and received gross proceeds from the sale of common stock and warrants of $1,450,000, of which $72,145 was paid in offering costs for net cash provided by financing activities of $1,374,855.

During the quarter ended March 31, 2012, the Company repaid $25,000 to related parties, paid $3,000 towards capital lease obligations and received net proceeds from the sale of common stock and warrants of $1,493,100 for net cash provided by financing activities of $1,465,100.

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 $1,352,956 and had net cash used in operating activities of $1,329,836 during the three months ended March 31, 2013. As of March 31, 2013, our cash balance was $328,335, and management believes that the Company will need to raise substantial additional equity capital during the remainder of 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 6 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 retail store expansion strategy that we believe will allow us to control our brand and generate sales in various regions throughout the United States and the global marketplace. While we continue to believe that our wholesale channel will play a significant role in our long-term growth plans, we anticipate that the emphasis on the expansion of our retail channel in the near term will provide greater opportunity to create brand awareness and grow our sales.

Management plans to seek additional capital to support and expand its operations and, during the first quarter of 2013, raised $1,377,855 through the issuance of equity securities as discussed in Note 12 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.

Summary of Significant Accounting Policies

Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States ("GAAP"). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.


Our significant accounting policies are summarized in Note 4 to the unaudited 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.

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.

Recent Accounting Pronouncements

No recent accounting pronouncements.

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).

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