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RYUN > SEC Filings for RYUN > Form 10-Q on 13-Aug-2013All Recent SEC Filings

Show all filings for RESPECT YOUR UNIVERSE, INC.

Form 10-Q for RESPECT YOUR UNIVERSE, INC.


13-Aug-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"). 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. Examples of forward-looking statements include statements pertaining to, among other things:
(1) our product line; (2) our business plan; (3) future capital expenditure; (4) the enforceability of our intellectual property rights; (5) projections of market prices and costs; (6) supply and demand for our products; and (7) our need for, and our ability to raise, capital.

The material assumptions supporting these forward-looking statements include, among other things: (1) our ability to obtain any necessary financing on acceptable terms; (2) timing and amount of capital expenditures; (3) the enforcement of our intellectual property rights; (4) our ability to launch new product lines; (5) retention of skilled personnel; (6) continuation of current tax and regulatory regimes; (7) current exchange rate and interest rates; and
(8) general economic and financial market conditions.

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 this quarterly report on Form 10-Q, 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

our ability to renew leased retail facilities

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. We undertake no obligation to update or revise any forward-looking statements after the date on which the statement is made.

As used in this Form 10-Q and unless otherwise indicated, the terms "we", "us" and "our" refer to Respect Your Universe, Inc. Unless otherwise specified, all dollar amounts are expressed in United States dollars.

Overview

We are a vertically integrated, active lifestyle apparel brand focused on the needs of individuals and athletes alike. Our men's and women's performance and active wear lines are specially designed for people who love to move, feel comfortable and look great. Crafted from organic and/or recycled materials, our products are also designed to help nurture the 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 retail and apparel industry. All products are designed, developed and tested at our corporate headquarters, and production takes place in top-grade 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, our management determined that we were no longer a development stage enterprise based on the following three circumstances:

(i) principal operations were underway,

(ii) we were producing and marketing a full line of men's and women's apparel, and

(iii) we were generating revenues through all three of our 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 apparel lines are comprised of up to 90 percent organic and recycled materials, utilizing top-grade yarn and fabric suppliers throughout the world. We currently market two commercial product lines targeted 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 have received the majority of these styles at our warehouse as of July 2013, and expect to receive the remainder in August 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 June 30, 2013 and 2012 were $295,912 and $107,522, respectively. Revenues during the six months ended June 30, 2013 and 2012 were $683,604 and $171,648, respectively. The increase is primarily due to generating $111,546 and $252,559 of revenue through our retail sales channel during the three and six months ended June 30, 2013, which began its operations in the fourth quarter of 2012. Additionally, we generated approximately $125,000 and $230,000 in revenue associated with the sale of closeout product during the three and six months ended June 30, 2013. We did not closeout any product during the three and six months ended June 30, 2012. The increase in revenue described above is directly attributed to an increase in sales volume during the six months ended June 30, 2013.

Cost of Goods Sold

Cost of goods sold during the three months ended June 30, 2013 and 2012 were $190,000 and $61,796. Cost of goods sold during the six months ended June 30, 2013 and 2012 were $465,370 and $97,708. The increase in cost of goods sold for the six months ended June 30, 2013 is primarily comprised of approximately $138,000 related to the increase in sales and $230,000(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 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, we 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, we 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 $230,000 closeout sale and related cost of goods sold described above represents closeout inventory sold at market-value during the three and six months ended June 30, 2013.

Gross Profit

Gross profit during the three months ended June 30, 2013 and 2012 was $105,912 and $45,726, respectively. Gross profit during the six months ended June 30, 2013 and 2012 was $218,234 and $73,940, respectively.

The table below presents our actual results by operating segment, as they relate to our revenue, cost of goods sold, gross (loss) profit and gross margin. The closeout sale described above is included within Wholesale, as we closed out the related goods through our wholesale channel. Factory surcharges and excess inventory write-offs are included in Other.


Three months ended June 30, 2013

                                              Segment
                        Wholesale       Retail       Ecommerce       Other        Total
            Revenue     $  143,317     $ 111,546     $   41,049     $     0     $  295,912
 Cost of goods sold       (139,605 )     (32,482 )      (19,611 )     1,698       (190,000 )
Gross (loss) profit     $    3,712     $  79,064     $   21,438     $ 1,698     $  105,912
       Gross margin              3 %          71 %           52 %                       36 %

Six months ended June 30, 2013

                                               Segment
                        Wholesale       Retail       Ecommerce        Other         Total
            Revenue     $  312,813     $ 252,559     $  118,232     $       0     $  683,604
 Cost of goods sold       (286,311 )     (87,286 )      (68,822 )     (22,951 )     (465,370 )
Gross (loss) profit     $   26,502     $ 165,273     $   49,410     $ (22,951 )   $  218,234
       Gross margin              8 %          65 %           42 %                         32 %

Three months ended June 30, 2012

                                             Segment
                        Wholesale      Retail      Ecommerce       Other         Total
            Revenue     $   52,050     $     0     $   55,438     $     34     $ 107,522
 Cost of goods sold        (32,514 )        (0 )      (22,298 )     (6,984 )     (61,796 )
Gross (loss) profit     $   19,536     $     0     $   33,140     $ (6,950 )   $  45,726
       Gross margin             38 %                       60 %                       43 %

Six months ended June 30, 2012

                                             Segment
                        Wholesale      Retail      Ecommerce       Other         Total
            Revenue     $   87,083     $     0     $   84,531     $     34     $ 171,648
 Cost of goods sold        (58,108 )        (0 )      (32,394 )     (7,206 )     (97,708 )
Gross (loss) profit     $   28,975     $     0     $   52,137     $ (7,172 )   $  73,940
       Gross margin             33 %                       62 %                       43 %

Selling and Marketing Costs

We incurred $305,987 and $749,151 in selling and marketing expenses during the three months ended June 30, 2013 and 2012, respectively. Selling and marketing expenses were $715,923 and $1,383,774 in the six months ended June 30, 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 $286,753 and $581,392 in marketing expense during the three and six months ended June 30, 2012 respectively.

Of the total selling and marketing expense discussed above, selling expense was $59,729 and $167,461 for the three and six months ended June 30, 2013 and $244,893 and $381,004 for the three and six months ended June 30, 2012, respectively. Of the total selling and marketing expense for the three and six months ended June 30, 2013, $29,964 was share-based (non-cash) expense. Of the total amount expensed for the three and six months ended June 30, 2012, $247,879 and $491,328 was share-based (non-cash) expense primarily related to stock-for-services marketing arrangements.


Product Creation Costs

During the three and six months ended June 30, 2013, we incurred product creation expenses of $101,663 and $238,706, compared to $317,061 and $632,461 during the three and six months ended June 30, 2012, respectively. Of the total amounts expensed, $0 and $475,821 were paid to Exit 21 Global Solutions, LLC ("Exit 21"), an entity controlled by our former Chief Executive Officer and current Chief Operating Officer, during the six months ended June 30, 2013 and 2012 respectively. The decrease is due to our contract with Exit 21 ending in June 2012. Product creation expenses incurred during the three and six months ended June 30, 2013 consisted of formulating product concepts, construction of prototypes related to our proposed new product lines.

General and Administrative Costs

General and administrative expenses for the three and six months ended June 30, 2013 were $840,730 and $1,759,029, compared to $1,415,311 and $2,445,164 for the three and six months ended June 30, 2012, respectively.

Three months ended June 30, 2013 and 2012

The $574,581 decrease between the three months ended June 30, 2013 and 2012 is primarily due to a $553,925 decrease in investor relations expense. For the three months ended June 30, 2012, investor relations expense consisted of $618,286 of which $590,250 was non-cash stock-based compensation expense. The significant expense in 2012 was due to multiple stock and option-for-service contracts with third party consultants. For the three months ended June 30, 2013, investor relations expense was $64,360, of which $32,600 was non-cash stock-based compensation expense.

Six months ended June 30, 2013 and 2012

The $686,135 decrease between the six months ended June 30, 2013 and 2012 is primarily due to a $822,554 decrease in investor relations expense. This decrease was partially offset by a $140,247 increase in professional fees from the six months ended June 30, 2013 to 2013. For the six months ended June 30, 2012, investor relations expense consisted of $965,618 of which $887,682 was non-cash stock-based compensation expense. The significant expense in 2012 was due to multiple stock and option-for-service contracts with third party consultants. For the six months ended June 30, 2013, investor relations expense was $143,064, of which $83,907 was non-cash stock-based compensation expense.

Net Loss

As a result of the above, our net loss for the three and six months ended June 30, 2013 was $1,142,468 and $2,495,424, as compared to a net loss of $2,435,797 and $4,387,459 for the three and six months ended June 30, 2012, respectively.

Financial Condition

As of June 30, 2013, we had current assets of $2,977,880, current liabilities of $745,952 and working capital of $2,231,928 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 and six months ended June 30, 2013, we raised $3,153,638, net of direct offering costs.

Operating Activities

During the six months ended June 30, 2013, we used cash in the amount of $2,133,139 in operating activities. The principal adjustments to reconcile the net loss of $2,495,424 to net cash used in operating activities were share-based compensation of $192,899, partially offset by an increase in due from factor, net of $58,255, and an increase in accounts payable and accrued liabilities of $134,522. Depreciation and amortization during the six months ended June 30, 2013 totaled $116,713.

By comparison, during the six months ended June 30, 2012, we used cash in the amount of $3,562,480 in operating activities. The major components of operating activities include a net loss of $4,387,459, offset by share-based compensation of $1,503,801, an increase in inventory of $1,908,615, an increase in deposits for inventory purchased of $237,573, a decrease in prepaid expenses of $290,491, an increase in other current assets of $228,740 and an increase in accounts payable and accrued liabilities of $1,381,400. Depreciation and amortization during the six months ended June 30, 2012 totaled $18,081.

Investing Activities

Net cash used in investing activities was $15,230 during the six months ended June 30, 2013. Investing activities during the period included $7,789 for property and equipment, and $7,441 for intangible assets, which included the development of patents and trademarks.

By contrast, we used cash in the amount of $142,468 in investing activities during the six months ended June 30, 2012. Investing activities during that period included $16,684 for property and equipment purchases and $109,414 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. We also paid $16,370 as a security deposit for the retail location in Las Vegas, NV.


Financing Activities

During the six months ended June 30, 2013, we paid $5,600 towards capital lease obligations and received gross proceeds from the sale of common stock and warrants of $3,077,500, of which $118,862 was paid in offering costs for net cash provided by financing activities of $3,148,038.

During the six months ended June 30, 2012, we repaid $25,000 to related parties, paid $5,167 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 $1,462,933.

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 $2,495,424 and had net cash used in operating activities of $2,133,139 during the six months ended June 30, 2013. As of June 30, 2013, our cash balance is $1,294,880. Management believes that we will need to raise additional equity capital during the remainder of 2013 in order to fund current operations and planned development. Our capital requirements 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 below expectations due to the following two factors:

(i) our initial positioning as a premium performance apparel brand within the niche sport of Mixed Martial Arts (MMA), and

(ii) lower than expected sales generated from (1) our association with a major MMA promoter and (2) 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 the shortfall described above, we are taking the following steps to improve sales:

(i) repositioning of our brand to reach larger consumer markets,

(ii) developing a retail pop-up location strategy, which will allow us to gain marketplace insight and product feedback in various regions and demographics,

(iii) 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, and

(iv) continued focus on e-commerce and wholesale channels, based on repositioned brand.

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 raise additional capital to expand its operations. During the first and second quarter of 2013, Management raised $3,153,638 through the issuance of equity securities as discussed in Note 13 to the financial statements. While management plans to increase revenues and raise capital through the issuances of its equity securities, there can be no assurance that sufficient revenue or financing will occur to meet our 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 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 we determine that the estimated market value of its inventory is less than the carrying value of such inventory, we record a charge to cost of goods sold to reflect the lower of cost or market.

Impairment of Long Lived Assets

We 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

We recognize 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 historical experience with its direct-to-consumer sales. The allowance for estimated returns related to wholesale sales is currently 4% based on our historical wholesale customer returns. The allowance is reflected as an accrued liability on the balance sheet.

Share-Based Payments

We estimate 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. We 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, we have 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.

? We have 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.

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