RYU APPAREL INC. - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - RYU APPAREL INC.	Financial_Report.xls
EX-31.1 - EXHIBIT 31.1 - RYU APPAREL INC.	ex31_1.htm
EX-32.1 - EXHIBIT 32.1 - RYU APPAREL INC.	ex32_1.htm
EX-31.2 - EXHIBIT 31.2 - RYU APPAREL INC.	ex31_2.htm
EX-32.2 - EXHIBIT 32.2 - RYU APPAREL INC.	ex32_2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission File No. 000-54885

Respect Your Universe, Inc.

(Exact name of registrant as specified in its charter)

Nevada	68-0677944
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

550-1188 West Georgia Street, Vancouver, BC	97227
(Address of principal executive offices)	(Zip Code)

1-888-455-6183

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

ý Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

ý Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes ý No

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 55,336,750 shares of common stock as of August 12, 2014

Explanatory Note

On June 30, 2014, we implemented a one-for-two reverse stock split of our common stock. As a result of the reverse stock split, each two outstanding shares of pre-split common stock were automatically combined into one share of post-split common stock. Fractional shares are rounded up to reflect the reverse stock split. The financial statements for all prior periods have been retroactively adjusted to reflect this stock split for both common stock issued and options and warrants outstanding.

RESPECT YOUR UNIVERSE, INC.

FOR THE THREE AND SIX MONTHS ENDED

JUNE 30, 2014

INDEX TO FORM 10-Q

PART I		Page

Item 1	Condensed Financial Statements (Unaudited)	4
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4	Controls and Procedures	26

PART II

Item 1	Legal Proceedings	28
Item 1A	Risk Factors	28
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3	Defaults Upon Senior Securities	36
Item 4	Mine Safety Disclosures	36
Item 5	Other Information	36
Item 6	Exhibits	36
	Signatures	37

PART I

Item 1 Financial Statements

RESPECT YOUR UNIVERSE, INC.

CONDENSED BALANCE SHEETS

(UNAUDITED)

	June 30, 2014			December 31, 2013

ASSETS
Current assets
Cash	$	2,248,304		$	252,153
Due from factor, net		21,991			31,602
Inventory, net		1,550,065			845,188
Deposits		58,051			107,395
Prepaid expenses		22,896			59,337
Other current assets		41,458			83,309
Total current assets		3,942,765			1,378,984

Property and equipment, net		251,107			168,417

Other assets
Non-current inventory, net		-			951,966
Intangible assets, net		163,896			167,587
Total other assets		163,896			1,119,553

Total assets	$	4,357,768		$	2,666,954


LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
Accounts payable and accrued liabilities	$	968,311		$	1,603,852
Note payable		499,934			-
Loans payable - related party		-			130,000
Current portion of capital lease		10,521			10,919
Total current liabilities		1,478,766			1,744,771

Other liabilities
Note payable, long-term		-			499,934
Capital lease, net of current portion		73,392			81,746
Total other liabilities		73,392			581,680

Commitments & Contingencies

Stockholders’ equity
Common stock, $0.001 par value, 250,000,000 shares authorized; 55,336,750 and 31,463,335 shares issued and outstanding, respectively		55,336			31,463
Additional paid in capital		27,822,736			23,594,868
Accumulated deficit		(25,072,462	)		(23,285,828	)
Total stockholders’ equity		2,805,610			340,503

Total liabilities and stockholders' equity	$	4,357,768		$	2,666,954

See accompanying notes to condensed financial statements

RESPECT YOUR UNIVERSE, INC.

CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended						Six Months Ended
	June 30, 2014			June 30, 2013			June 30, 2014			June 30, 2013


Revenue	$	119,578		$	295,912		$	417,524		$	683,604

Cost of Goods Sold		106,633			190,000			365,255			465,370

Gross profit		12,945			105,912			52,269			218,234

Operating expenses
Selling and Marketing		123,789			305,987			301,774			715,923
Product creation		9,556			101,663			69,805			238,706
General and administrative		795,077			840,338			1,424,654			1,758,120
Total operating expenses		928,422			1,247,988			1,796,233			2,712,749

Loss before interest expense		(915,477	)		(1,142,076	)		(1,743,964	)		(2,494,515	)

Interest expense		18,830			392			42,670			909

Net loss	$	(934,307	)	$	(1,142,468	)	$	(1,786,634	)	$	(2,495,424	)

Net loss per common share - basic and diluted	$	(0.02	)	$	(0.04	)	$	(0.04	)	$	(0.10	)

Weighted average number of common shares outstanding during the period - basic and diluted		45,011,475			26,620,947			40,339,534			25,770,816

See accompanying notes to condensed financial statements

RESPECT YOUR UNIVERSE, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)

										Total
	Common Stock, $0.001 Par Value				Additional		Accumulated			Stockholders'
	Shares		Amount		Paid in Capital		Deficit			Equity


Balance, January 1, 2014		31,463,335	$	31,463	$	23,594,868	$	(23,285,828	)	$	340,503

Issuance of common stock and warrants for cash ($0.20/share), net of offering costs of $167,616)		6,673,415		6,673		1,160,394		-			1,167,067
						-
Issuance of common stock and warrants for cash ($0.20/share), net of offering costs of $363,538)		15,800,000		15,800		2,780,662		-			2,796,462

Issuance of common stock and warrants for cash ($0.20/share), net of offering costs of $29,674)		1,400,000		1,400		248,926		-			250,326

Share-based compensation - options		-		-		37,886		-			37,886

Net loss								(1,786,634	)		(1,786,634	)

Balance, June 30, 2014		55,336,750	$	55,336	$	27,822,736	$	(25,072,462	)	$	2,805,610

See accompanying notes to condensed financial statements

RESPECT YOUR UNIVERSE, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months Ended
	June 30, 2014			June 30, 2013

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(1,786,634	)	$	(2,495,424	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		20,779			116,713
Share-based compensation expense - stock		-			79,688
Share-based compensation expense - options		37,886			83,191
Share-based compensation expense - warrants		-			30,020
Loss on impairment/disposal of fixed assets		-			6,120
Changes in operating assets and liabilities
Due from factor, net		9,611			(58,255	)
Accounts receivable, net		-			(6,095	)
Inventory		247,089			(54,172	)
Deposits		49,344			7,058
Prepaid expenses		36,441			23,742
Other current assets		41,851			6,107
Accounts payable and accrued liabilities		(635,541	)		134,522
Accounts payable - related party		-			(6,354	)
Net cash used in operating activities		(1,979,174	)		(2,133,139	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment		(99,778	)		(7,789	)
Acquisition of intangible assets		-			(7,441	)
Net cash used in investing activities		(99,778	)		(15,230	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from note payable		-			195,000
Payments on capital lease obligations		(8,752	)		(5,600	)
Proceeds from issuance of common stock and warrants		4,644,683			3,077,500
Offering costs		(560,828	)		(118,862	)
Net cash provided by financing activities		4,075,103			3,148,038

Net increase in cash		1,996,151			999,669

Cash - beginning of year/period		252,153			295,211

Cash - end of year/period	$	2,248,304		$	1,294,880

Supplemental Disclosure of Cash Flow Information
Cash paid during the year/period for:
Interest	$	42,670		$	909
Taxes	$	2,000		$	1,500

Supplemental Disclosure of Non-Cash Activities
Stock issued as repayment of loans payable	$	130,000		$	195,000

See accompanying notes to condensed financial statements

RESPECT YOUR UNIVERSE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2014

(UNAUDITED)

Note 1 Organization and Nature of Operations

Respect Your Universe, Inc. (the “Company”), which was incorporated in 2008, is a vertically integrated active lifestyle apparel brand that engages in the development, marketing and distribution of apparel and accessories. With operations based in Vancouver BC, Canada, and in Portland, Oregon, USA, the Company’s products are sold through wholesale, retail and e-commerce channels.

Note 2 Liquidity and Management’s Plan

The Company commenced operations as a development stage enterprise in 2009 and has incurred losses from inception that has primarily been funded through financing activities. As shown in the accompanying condensed financial statements, the Company incurred a net loss of $934,307 and $1,786,634, for the three and six months ended June 31, 2014, and had net cash used in operating activities of $1,979,174, and $2,133,139 for the six months ended June 30, 2014 and 2013, respectively. As of June 30, 2014, the Company’s cash balance was $2,248,304. Although the Company raised $4,774,683 in 2014 (including $130,000 of loans payable issued for stock), the Company expects it will need to raise additional capital during the next 12 months and beyond to support current operations and planned development. These factors raise substantial doubt as to our ability to continue as a going concern.

The accompanying condensed financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that could result should the Company be unable to continue as a going concern.

Note 3 Basis of Presentation

The accompanying unaudited, interim condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange Commission for interim financial information.

The financial information as of December 31, 2013 is derived from the audited financial statements presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The unaudited interim condensed financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K, which contains the audited financial statements and notes thereto.

Certain information or footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted, pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is management's opinion, however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation. The interim results for the three and six months ended June 30, 2014 are not necessarily indicative of results for the full fiscal year.

The financial statements for all prior periods have been retroactively adjusted to reflect the June 30, 2014 one-for-two reverse stock split of the Company’s common stock (Note 10).

Summary of Significant Accounting Policies

There have been no material changes during 2014 in the Company’s significant accounting policies to those previously disclosed in the 2013 Form 10-K except for the following new accounting pronouncements.

New Accounting Pronouncements

On June 19, 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments when the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The adoption of this standard is expected not to have a material impact on the Company’s consolidated financial position and results of operations.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled to when products and services are transferred to customers. ASU 2014-09 will be effective for the Company beginning in its first quarter of 2017. Early adoption is not permitted. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is currently evaluating the impact of adopting the new revenue standard on its consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the condensed financial statements, which management considered in formulating its estimate could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from estimates. Some of the more significant estimates relate to revenue recognition, including sales returns and claims from customers, slow-moving and closeout inventories, income taxes and stock-based compensation.

Reclassifications

Interest expense for the three and six months ended June 30, 2013 was reclassified from general and administrative expenses to conform to the current year’s presentation.

Note 4 Earnings (Loss) per Share

Basic loss per share is computed by dividing net loss by weighted average number of shares of common stock outstanding during each period. Diluted loss per share is computed by dividing net loss, adjusted for changes in income or loss that result from the assumed conversion of convertible shares, by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period.

The Company had the following potential common stock equivalents:

	June 30, 2014		June 30, 2013
Stock options, exercise price $0.42 - $4.52		2,563,085		2,111,804
Common stock warrants, conversion price $0.50 - $3.60		30,731,499		4,500,813
Unvested forfeitable restricted stock grants				46,875
Total common stock equivalents		33,294,584		6,659,492

Since the Company incurred a net loss during the periods, the effect of considering any common stock equivalents, if exercisable, would have been anti-dilutive. Therefore, a separate computation of diluted earnings (loss) per share is not presented.

Note 5 Inventories

Inventories, net, consist of finished goods inventory of $1,550,065 ($0 of which has been classified as non-current) and $1,797,154 ($951,966 of which has been classified as non-current) as of June 30, 2014 and December 31, 2013, respectively. Inventories not expected to be sold within 12 months have been classified as non-current.

Note 6 Property and Equipment

Property and equipment consist of the following as of June 30, 2014 and December 31, 2013:

	2014			2013
Leasehold improvements	$	4,373		$	6,773
Construction in progress		202,636			103,461
Computers and office equipment		40,190			41,809
Furniture and fixtures		19,689			19,689
Software		41,004			41,004
Tradeshow and event equipment		8,522			7,229
		316,414			219,965
Accumulated depreciation		(65,307	)		(51,548	)
Property and equipment, net	$	251,107		$	168,417

Depreciation expense for the three and six months ended June 30, 2014 was $8,279 and $17,088, respectively, and $25,579 and $51,406, respectively, for the three and six months ended June 30, 2013.

Note 7 Intangible Assets

Intangible assets consist of the following as of June 30, 2014 and December 31, 2013:

	2014		2013
Patent and trademarks, net	$	40,361	$	44,052
Domain name		123,535		123,535
Intangible assets, net	$	163,896	$	167,587

Amortization expense for the three and six months ended June 30, 2014 was $2,691 and $3,691, and $45,980 and $65,306, respectively, for the three and six months ended June 30, 2013.

Note 8 Note Payable

In December 2013, the Company entered into a term note (“Note”) in the principal amount of $500,000, net of discounts of $66. The interest only Note has a maturity date of January 1, 2015 and bears interest of 15% per annum, which is payable quarterly, and is secured by all of the assets of the Company. In connection with the issuance of the Note, the Company issued warrants to purchase up to 150,000 shares of common stock at an exercise price of $0.50 which expire on January 1, 2015.

Note 9 Loans payable – related party

During 2013, the Company was advanced funds totaling $130,000 from a related party in anticipation of participating in a private placement financing. Under the terms of the private placement subscription agreement, the Company is entitled to utilize the proceeds as an interest free loan until the subscription is accepted and the certificates delivered. The advances were repaid through the issuance of common stock and warrants as part of the February 2014 equity raise as further described in Note 10.

Note 10 Stockholders’ Equity

Reverse Stock Split

On June 30, 2014, the Company implemented a one-for-two reverse stock split of its common stock. As a result of the reverse stock split, each two (2) outstanding shares of pre-split common stock were automatically combined into one (1) share of post-split common stock. Fractional shares are rounded up to reflect the reverse stock split. All option and share information in the accompanying financial statements for all prior periods have been retroactively adjusted to reflect this stock split.

Stock Issued for Cash

In February 2014, as a continuation of the November 2013 offering, the Company issued 6,673,415 shares of common stock as part of a private placement offering for proceeds of $1,167,067 ($0.20/share), net of direct offering costs of $167,616. The Company, in this private placement, repaid a total of $130,000 of advances – related parties through the issuance of stock and warrants – see Note 9. In conjunction with this offering, one warrant for each share issued was granted. Details of the warrants issued are shown in the table below:

Date	Quantity Granted	Vesting Schedule	Exercise Price	Expiration
February 2014	6,673,415	Fully vested upon issuance	$0.50	3 Years

In May 2014, the Company issued 15,800,000 shares of common stock as part of a private placement offering for proceeds of $2,796,462 ($0.20/share), net of direct offering costs of $363,538. In conjunction with this offering, one warrant for each share issued was granted. Details of the warrants issued are shown in the table below:

Date	Quantity Granted	Vesting Schedule	Exercise Price	Expiration
May 2014	15,800,000	Fully vested upon issuance	$0.50	3 Years

In June 2014, as a continuation of the May 2014 offering, the Company issued 1,400,000 shares of common stock as part of a private placement offering for proceeds of $250,326 ($0.20/share), net of direct offering costs of $29,674. In conjunction with this offering, one warrant for each share issued was granted. Details of the warrants issued are shown in the table below:

Date	Quantity Granted	Vesting Schedule	Exercise Price	Expiration
June 2014	1,400,000	Fully vested upon issuance	$0.50	3 Years

Stock Options

On June 9, 2014, the Board of Directors approved certain revisions to the 2013 Stock Option Plan, resulting in the Company’s 2014 Stock Option Plan (the “2014 Plan”) whereby the aggregate number of securities reserved for issuance set aside and made available for issuance under the Plan was revised from (i) 11,702,425 shares of the Company’s common stock at the time of granting the options (including all options granted by our Company to date) to (ii) 16,181,025 shares of the Company’s common stock.

The following is a summary of the Company’s stock option activity, for the six months ended June 30, 2014:

	Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Average Intrinsic Value
Balance - December 31, 2013		3,300,710		$	1.78	8.48 Years	$	-
Granted		-
Exercised		-
Forfeited/Cancelled		(278,875	)		1.18
Outstanding - June 30, 2014		3,021,835		$	1.84	8.82 Years	$
Exercisable - June 30, 2014		2,563,085		$	1.60	7.71 Years	$	-

During the three and six months ended June 30, 2014, the Company expensed $25,248 and $37,886 related to stock option grants, respectively, as compared to $14,811 and $83,191 for the three and six months ended June 30, 2013, respectively. At June 30, 2014 approximately $235,000 of stock based compensation expense was expected to be amortized over 2.9 years.

Warrants

The following is a summary of the Company’s warrant activity for the six months ended June 30, 2014:

	Warrants		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Average Intrinsic Value
Balance - December 31, 2013		6,858,084	$	1.08	2.45 Years	$	-
Granted (1)		23,873,415		0.50	2.83 Years
Exercised
Forfeited/Cancelled
Outstanding - June 30, 2014		30,731,499	$	0.63	2.64 Years	$	-
Exercisable - June 30, 2014		30,731,499	$	0.63	2.64 Years	$	-

(1)

Warrants issued in connection with the 2014 private placements discussed in Note 10, Stockholders’ Equity - Stock Issued for Cash.

During the six months ended June 30, 2014 and 2013, the Company expensed $0 and $30,020 respectively, related to stock warrants issued for services.

Note 11 Related Party Transactions

In January 2013, the Company granted 500,000 stock options for services to a third-party consultant that is wholly owned by a former member of the Company’s Board of Directors. The options vest over a one-year period and will expire if unexercised, ten years from the date of grant. The fair value of these options on grant date was $227,101. The Company used the Black-Scholes-pricing model to determine the fair value of the options. For the three and six months ended June 30, 2013, total expense related to this transaction was $18,315 and $56,775, respectively. In June 2013, the Company terminated the consulting agreement, in accordance with provisions allowed for in the contract.

During the three months ended June 30, 2013, the Company contracted with an investor relations consulting entity, which is 50% owned by a member of the Company’s Board of Directors. During the three months ended June 30, 2013, the Company issued 100,000 stock warrants to this entity, with a fair value of $30,020. For the three months ended June 30, 2013, total expense related to this transaction was $30,020.

In April 2014, the Company issued and repaid a $30,000 unsecured promissory note to an entity owned by a related party, including $2,000 of interest expense.

During the three months ended June 30, 2014, the Company reimbursed a company of which the President of the Company is a director and major shareholder for expenses incurred in connection with the February 2014 and May 2014 private placement offerings. These expenses totaled $18,792 and were classified as offering costs. Also during the quarter, the Board of Director approved the reimbursement of $74,349 of expenses incurred by the President of the Company. These expenses were incurred prior to employment of the President on May 23, 2014 for purposes of raising capital during 2014 and were expensed and paid during the three months ended June 30, 2014.

During the three months ended June 30, 2014, the Company had sales to an entity affiliated with the President of the Company and owned by one of the Directors of the Company. During the three months ended June 30, 2014, sales totaled $9,832 and resulted in a gross margin of $185. In addition, credits totaling $3,241 during the three month ended June 30, 2014, were issued to this entity for products used for equity fundraising purposes. As of June 30, 2014, approximately $3,100 is due from this affiliated entity.

During the three months ended June 30, 2014, the Company had sales to an entity affiliated/owned by the President of the Company. During the three months ended June 30, 2014, sales totaled $613 and resulted in a gross margin loss of $732.

Note 12 Commitments

Lease Obligations

The Company has obligations under operating leases for its corporate office facility and for its retail stores. The leases expire at various dates through 2018. Rent expense classified in General and Administrative expense associated with the Company’s operating leases was $40,643 and $83,800 for the three and six months ended June 30, 2014, respectively, as compared to $56,993 and $114,930, respectively, for the three and six months ended June 30, 2013. Amounts in the table below reflect a rent escalation clause for the retail store but does not include contingent rent the Company may incur based on future sales above approximately $105,000 per month.

Inventory Purchase Obligations

As of June 30, 2014, the Company had commitments to purchase approximately $492,000, net of deposits, of inventory related to the Company’s future product lines.

Note 13 Contingencies

From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm its business. The Company is currently not aware of any such legal proceedings or claims that they believe will have, individually or in the aggregate, a material adverse effect on its business, financial condition or operating results and cash flows.

Note 14 Segment Information

The Company’s operating segments are based on how its chief operating decision maker analyzes and makes decisions about the business and allocates resources. Its reportable segments are comprised of four channels: wholesale, retail, e-commerce and other. The Company’s wholesale channel generates revenues and incurs expenses in connection with selling the Company’s product to other retailers. The retail channel generates revenues and incurs expenses in connection with the Company’s retail location. Additionally, the e-commerce channel generates revenues and incurs expenses in connection with the Company’s web store. Other includes license and tradeshow related sales and the write-off of excess materials and other production surcharges. All reportable segments operate within the same industry.

The following table represents the Company’s activity by operating segment for the three months ending June 30, 2014:

	Channel
	Wholesale			Retail			Ecommerce			Other			Total
Revenue	$	37,806		$	30,179		$	51,593			-		$	119,578
Cost of goods sold		47,359			20.916			31,456			6,902			106,633
Gross profit (loss)		(9,553	)		9,263			20,137			(6,902	)		12,945
Gross margin percent		-25	%		31	%		39	%					11	%

Reconciliation of gross profit (loss) to net loss:
Operating expenses
Selling and marketing														123,789
Product creation														9,556
General and administrative														795,077
Interest expense														18,830
Net loss													$	(934,307	)

The following table represents the Company’s activity by operating segment for the six months ending June 30, 2014:

	Channel
	Wholesale			Retail			Ecommerce			Other			Total
Revenue	$	189,196		$	87,475		$	140,853		$	-		$	417,524
Cost of goods sold		191,687			62,280			104,386			6,902			365,255
Gross profit (loss)		(2,491	)		25,195			36,467			(6,902	)		52,269
Gross margin percent		(1	%)		29	%		26	%					13	%

Reconciliation of gross profit (loss) to net loss:
Operating expenses
Selling and marketing														301,774
Product creation														69,805
General and administrative														1,424,654
Interest expense														42,670
Net loss													$	(1,786,634	)

The following table represents the Company’s activity by operating segment for the three months ended June 30, 2013:

	Channel
	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 profit		3,712			79,064			21,438			1,698			105,912
Gross margin percent		3	%		71	%		52	%					36	%

Reconciliation of gross profit (loss) to net loss:
Operating expenses
Selling and marketing														305,987
Product creation														101,663
General and administrative														840,338
Interest														392
Net loss													$	(1,142,468	)

The following table represents the Company’s activity by operating segment for the six months ended June 30, 2013:

	Channel
	Wholesale			Retail			Ecommerce			Other			Total
Revenue	$	312,813		$	252,559		$	118,232		$	-		$	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 percent		8	%		65	%		42	%					32	%

Reconciliation of gross (loss) profit to net loss:
Operating expenses
Selling and marketing														715,923
Product creation														238,706
General and administrative														1,758,120
Interest														909
Net loss													$	(2,495,424	)

The Company does not allocate its assets among its channels, and as such, no asset allocation is shown in the table above.

Note 15 Subsequent Events

On July 16, 2014, the Company advanced $10,000 to the President of the Company for future expense reimbursement.

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

This information should be read in conjunction with the condensed 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 our 2013 Annual Report on Form 10-K, as amended, 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 this Form 10-Q, and also include without limitation:

our dependence on additional financing to sustain our business;

our cash flow problems have caused us to be delinquent in payments to vendors and other creditors;

our failure to comply with the agreements relating to our outstanding indebtedness, including as a result of events beyond our control, could result in an event of default that could materially and adversely affect our results of operations and our financial condition;

unique difficulties and uncertainties inherent in the apparel business;

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

our sales and profitability may decline as a result of increasing product costs and decreasing selling prices;

risks associated with our product lines, including our ability to launch additional product lines in the future, the fluctuating cost of raw materials, and our dependence on third party suppliers;

our ability to execute on our business plan;

our ability to compete with other companies with greater resources than we have;

the enforceability of our intellectual product rights;

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

our ability to sell excess inventory; and

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. The Company undertakes no obligation to update or revise any forward-looking statements after the date on which the statement is made, except as required by applicable law, including the securities laws of the United States and Canada.

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

Overview

We are an 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 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 located at The Shoppes at the Palazzo in Las Vegas, Nevada, and in December 2013, we opened our second retail store located at Westlake Center in downtown Seattle, Washington. The Las Vegas landlord elected to terminate our lease so our retail store was closed in February 2014. We continue to operate and evolve our wholesale channel through a variety of customers.

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.

During the second quarter of 2014, certain changes were made to our management and Board of Directors as follows.

The Board of Directors appointed Marcello Leone as President of our Company, effective May 23, 2014. As of August 12, 2014, the terms of this employment relationship have not yet been finalized. Mr. Leone was concurrently appointed as a Director of our company.

The Board of Directors appointed Maria Leone, and Peter Pan as Directors of our Company, effective May 23, 2014.

Dale Wallster resigned as Director of our Company, effective May 23, 2014.

Dr. Craig Brod was not re-elected to the Board of Directors at the June 26, 2014 annual shareholders meeting.

Subsequent to the second quarter of 2014, Marcello Leone was appointed as our Chief Executive Officer and the chairman of our board of directors. Mr. Leone replaced Dr. Craig Brod who is no longer an officer of our Company.

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.

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 have received these styles at our warehouse as of September 2013.

Our Spring 2014 line has been designed and developed. It includes approximately 20 new men’s and women’s styles as well as additional accessories and a limited number of carryover styles. Many of these styles have been received at our warehouse and will continue to be received as funds are available to satisfy purchase obligations. Our Fall 2014 line has been designed and production is expected to begin as funds become available.

Results of Operations

Revenue

Revenues during the three months ended June 30, 2014 and 2013 were $119,578 and $295,912, respectively. Wholesale and retail sales both decreased for the quarter which was offset by an increase in Ecommerce sales of approximately 25% over the comparable prior year period. The decrease in wholesale sales was primarily due to less distressed sales in 2014 compared with 2013. Retail sales in the three months ended June 30, 2014 were generated by our Seattle, Washington store and were not as strong as the comparable 2013 period which was generated by our initial Las Vegas, Nevada store. Our Seattle, Washington store was opened in late December 2013 as a temporary store and has not yet been remodeled to date.

Revenues during the six months ended June 30, 2014 and 2013 were $417,524 and $683,604, respectively. Wholesale and retail sales both decreased for the quarter which was offset by an increase in Ecommerce sales of approximately 19% over the comparable prior year period. The decrease in wholesale sales was primarily due to less distressed sales in 2014 compared with 2013. Retail sales in the six months ended June 30, 2014 were generated by our Seattle, Washington store which operated for the full six months as a temporary store and our Las Vegas Nevada store which operated for less than two months and was closed at the end of February 2014. Our Seattle, Washington store was opened in late December 2013 as a temporary store and has not yet been remodeled to date.

Cost of Goods Sold

Cost of goods sold during the three months ended June 30, 2014 and 2013 was $106,633 and $190,000, respectively. Cost of goods sold during the six months ended June 30, 2014 and 2013 was $365,255 and $465,370, respectively. The decrease in cost of goods sold for 2014 is primarily due to lower and less profitable sales in 2014 compared to 2013.

Gross Profit

Gross profit during the three months ended June 30, 2014 and 2013 was $12,945 and $105,912, respectively. Gross profit percentage during the three months ended June 30, 2014 and 2013 was 11% and 36%, respectively. Gross profit during the six months ended June 30, 2014 and 2013 was $52,269 and $218,234, respectively. Gross profit percentage during the six months ended June 30, 2014 and 2013 was 13% and 32%, respectively. Gross margins were negatively impacted by lower sales and gross margin percentages were impacted by promotional selling prices management deemed necessary to liquidate excess inventories.

The table below presents our 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 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, 2014:

	Channel
	Wholesale			Retail			Ecommerce			Other			Total
Revenue	$	37,806		$	30,179		$	51,593			-		$	119,578
Cost of goods sold		47,359			20.916			31,456			6,902			106,633
Gross profit (loss)		(9,553	)		9,263			20,137			(6,902	)		12,945
Gross margin (loss) percentage		-25	%		31	%		39	%					11%

Six months ending June 30, 2014:

	Channel
	Wholesale			Retail			Ecommerce			Other			Total
Revenue	$	189,196		$	87,475		$	140,853		$	-		$	417,524
Cost of goods sold		191,687			62,280			104,386			6,902			365,255
Gross profit (loss)		(2,491	)		25,195			36,467			(6,902	)		52,269
Gross margin (loss) percentage		(1	%)		29	%		26	%					13%

Three months ended June 30, 2013:

	Channel
	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 profit		3,712			79,064			21,438			1,698			105,912
Gross margin (loss) percentage		3	%		71	%		52	%					36%

Six months ended June 30, 2013:

	Channel
	Wholesale			Retail			Ecommerce			Other			Total
Revenue	$	312,813		$	252,559		$	118,232		$	-		$	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%

Selling and Marketing Costs

We incurred $123,789 and $305,987 in selling and marketing expenses during the three months ended June 30, 2014 and 2013, respectively. We incurred $301,774 and $715,923 in selling and marketing expenses during the six months ended June 30, 2014 and 2013, 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 expense reductions in the areas of staff and contractor expenses, public relations, direct advertising, consulting fees, and travel and entertainment expenses.

Product Creation Costs

During the three months ended June 30, 2014 and 2013, we incurred product creation expenses of $9,556 and $101,663, respectively, compared to $69,805 and $238,706, respectively, during the six months ended June 30, 2014 and 2013. The decrease is primarily related to reduction in staff and expense reductions in the areas of contractor expenses and consulting fees.

General and Administrative Costs

General and administrative expenses for the three months ended June 30, 2014 and 2013 were $795,077 and $840,338 compared to $1,424,654 and $1,758,120 for the six months ended June 30, 2014 and 2013, respectively. The decrease is primarily related to expense reductions in the areas of staff expenses, investor relations, and depreciation and amortization, offset by an increase for professional fees including reimbursement of $74,349 related party legal fees reimbursement further described in Note 11 to the condensed financial statements, and travel and entertainment expenses.

Interest expense

Interest expense was $18,830 and $392 for the three months ended June 30, 2014 and 2013, respectively. Interest expense was $42,670 and $909 for the six months ended June 30, 2014 and 2013, respectively. The increase in interest expense was primarily due to the note payable entered into during late December 2013. The interest only note has a maturity date of January 1, 2015 and bears interest of 15% per annum, which is payable quarterly, and is secured by all of our assets. In connection with the issuance of the note, we issued warrants to purchase up to 150,000 share of common stock at an exercise price of $0.50 per share until January 1, 2015.

Net Loss

As a result of the above, our net loss for the three and six months ended June 30, 2014 was $934,307and $1,786,634 as compared to a net loss of $1,142,468 and $2,495,424 for the comparable 2013 periods.

Financial Condition

As of June 30, 2014, we had current assets of $3,942,765, current liabilities of $1,478,766 and working capital of $2,463,999 compared to current assets of $1,378,984, current liabilities of $1,744,771 and a working capital deficit of $365,787 at December 31, 2013. Our cash balance as of June 30, 2014 was $2,248,304 compared to $252,153 at December 31, 2013. In the six months ended June 30, 2014, we raised $4,083,855 (excluding conversion of $130,000 in loans), net of direct offering costs.

On August 10, 2012, our shares began trading on the TSX Venture Exchange under the ticker symbol “RYU” and we continue to be quoted on the OTCQB under the ticker symbol “RYUN”.

Our financial statements have been prepared assuming that we will continue as a going concern. We have incurred recurring net losses, negative cash flows from operations, and accumulated deficit which raise substantial doubt about our ability to continue as a going concern. Management has developed plans concerning these matters which are discussed in Note 2 to the condensed financial statements. The condensed financial statements do not include any adjustments that might results from the outcome of this uncertainty.

Operating Activities

During the six months ended June 30, 2014, we used cash in the amount of $1,979,174 in operating activities. The principal adjustments to reconcile the net loss of $1,786,634 to net cash used in operating activities was a reduction of inventory of $247,089, and a decrease in accounts payable and accrued liabilities of $635,541. Depreciation and amortization during the six months ended June 30, 2014 totaled $20,779.

By comparison, during the six months ended June 30, 2013, we used cash in the amount of $2,133,139 in operating activities. The principal adjustment 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 to factor 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.

Investing Activities

Net cash used in investing activities was $99,778 during the six months ended June 30, 2014. Investing activities during the period were $99,778 for property and equipment, attributed to the Seattle, Washington retail store.

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, $7,441 for intangible assets, which included the development of patents and trademarks.

Financing Activities

During the six months ended June 30, 2014, we paid $8,752 towards capital lease obligations and received gross proceeds from the sale of common stock and warrants of $4,644,683, including $130,000 of notes payable paid by issuance of common stock and warrants, of which $560,828 was paid in offering costs for net cash provided by financing activities of $4,075,103.

During the six months ended June 30, 2013, we paid $5,600 towards a capital lease obligation 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.

Liquidity and Management’s Plan

We commenced operations as a development stage enterprise in 2009 and have incurred losses from inception. As shown in the accompanying financial statements, we incurred a net loss of $1,786,634 in 2014, had working capital of $2,463,999 as of June 30, 2014, and had net cash used in operating activities of $1,979,174 during the six months ended June 30, 2014.

As of June 30, 2014, our cash balance was $2,248,304, and management determined that we would have to raise additional equity and or debt capital during the remainder of 2014 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. This 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.

After assessing the market value of our inventory on hand at year-end, management determined that significant write-downs were appropriate in 2012 and in 2013. In light of these findings, disappointing operating results and weakened cash position, we adopted plans and began implementation in early 2013 to rebrand our Company and expand the operations with the objective of rebranding the Company to a broader customer base with a focus on e-commerce and retail channels.

While progress has been made on the 2013 plan, overall results have been disappointing. Accordingly, management has adjusted and expanded their plans for 2014 which can be summarized as follows:

1.	Build superior products that differentiate us from our competitors

2.	Reposition the brand to our martial arts roots, including original logo

3.	Develop a clear cultural identity for our company and brand

4.	Rebuild e-commerce platform to align with our cultural identity and streamline ordering for international markets

5.	Control excess inventory by selling old inventory by 4th quarter of 2014 and move into real in-time inventory in 2015 to avoid risk of carrying excess inventory

6.	Roll out of physical RYU stores in 2015 (minimum store size 2,000 sq. ft.)

7.	Sales division for the following revenue streams: (i) RYU’s exclusive retail stores (ii) e-commerce platform (iii) wholesale accounts and (iv) cobranding products with international brands

8.	Continue to focus on equity and debt capital raising

9.	Explore license agreements to accelerate growth

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, e-commerce channels, and business to business strategy.

Management’s plans in 2013 was to seek additional capital to support and expand its operations and raised a total of $3,713,954 (including conversion of a $195,000 note payable) of capital and $499,934 from the proceeds of a note payable during 2013. Additional amounts were raised in the six months ended June 30, 2014 totaling $4,774,683 through the issuance of equity securities as discussed in Note 10 to the condensed financial statements. While management plans to generate increasing revenues and to continue financing our company through the issuances of additional equity securities or debt instruments, there can be no assurance that sufficient revenue or financing will occur to meet our cash needs for the next 12 months. The ability to achieve our projected future operating results is based on a number of assumptions which involve significant judgment and estimates, which cannot be assured. If we are unable to achieve our projected operating results, our liquidity could be adversely impacted and we may need to seek additional sources of liquidity. Our operating results could adversely affect our ability to raise additional capital to fund our operations and there is no assurance that debt or equity financing will be available in sufficient amount, on acceptable terms, or in a timely basis. Therefore, a continuation of our recent historical operating results could result in our inability to continue as a going concern.

Summary of Significant Accounting Policies - Critical Accounting Policies

Our significant accounting policies are summarized in Note 3 in our Annual Report on Form 10-K for the year ended December 31, 2013. 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 our 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. The market value estimates are based on a number of factors, including assumptions and estimates for projected sales and other operating performance measures. Changes in estimates or the application of alternative assumptions could produce significantly different results. These assumptions and estimates may change in the future due to changes in economic conditions, changes in our ability to meet sales and profitability objectives or changes in our business operations or strategic direction.

Impairment of Long-Lived Assets

Long-lived assets are amortized over their estimated useful lives and are measured for impairment only when events or circumstances indicate the carrying value may be impaired. In these cases, we estimate the future undiscounted cash flows to be derived from the asset or asset group to determine whether a potential impairment exists. If the sum of the estimated undiscounted cash flows is less than the carrying value of the asset, we recognize an impairment loss, measured as the amount by which the carrying value exceeds the estimated fair value of the asset.

We review and test our intangible assets with indefinite useful lives for impairment in the fourth quarter of each year and when events or changes in circumstances indicate that the carrying amount of such assets may be impaired. Our intangible assets with indefinite lives consist of trademarks and domain name. In the impairment tests for trademarks and domain name, we compare the estimated fair value of each asset to its carrying amount. The fair values are generally estimated using a discounted cash flow model under the income approach. If the carrying amount of the asset exceeds its estimated fair value, we calculate impairment as the excess of carrying amount over the estimate of fair value.

If events or circumstances indicate the carrying value of intangible assets with finite lives may be impaired, we estimate the future undiscounted cash flows to be derived from the asset or asset group to determine whether a potential impairment exists. If the sum of the estimated undiscounted cash flows is less than the carrying value of the asset, we recognize an impairment loss, measured as the amount by which the carrying value exceeds the estimated fair value of the asset.

Impairment charges are classified as a component of operating expenses. The impairment tests and related fair value estimates are based on a number of factors, including assumptions and estimates for projected sales, income, cash flows, discount rates, remaining useful lives and other operating performance measures. Changes in estimates or the application of alternative assumptions could produce significantly different results. These assumptions and estimates may change in the future due to changes in economic conditions, changes in our ability to meet sales and profitability objectives or changes in our business operations or strategic direction.

Revenue Recognition

We recognize product revenue when persuasive evidence of an arrangement exists, when title passes and the risks and reward of ownership have passed to the customer, 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 our return policy on our 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 recognize 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.

•

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.

We measure 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. We treat 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 our 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 non-cancelable contractual commitments:

	2014		2015		2016		2017		2018		Thereafter
Inventory purchase obligations (1)	$	492,000
Operating leases (2)	$	73,067	$	132,563	$	134,162	$	135,808	$	125,913		-
Capital lease (2)	$	5,261	$	10,603	$	10,803	$	11,007	$	11,214	$	35,025

(1)

See inventory purchase obligations in Note 12 to condensed Financial Statements.

(2)

See operating and capital leases in Note 12 to condensed Financial Statements.

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).

Item 3 Quantitative and Qualitative Disclosures About Market Risk

Not required for a smaller reporting company.

Item 4 Controls and Procedures

Disclosure Controls and Procedures

Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Rules 13a-15(b) and 15d-15(b) under the Exchange Act, requires us to carry out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2014. This evaluation was implemented under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer.

Based on this evaluation, management concluded that, as of June 30, 2014, our disclosure controls and procedures are not effective. The ineffectiveness of our disclosure controls and procedures was due to the existence of material weaknesses identified in our annual report on Form 10-K filed with the SEC on April 15, 2014.

Changes in Internal Control over Financial Reporting

During fiscal quarter ended June 30, 2014, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1 Legal Proceedings

We know of no material pending legal proceedings to which our company or our subsidiary is a party or of which any of our properties, or the properties of our subsidiary, is the subject. In addition, we do not know of any such proceedings contemplated by any governmental authorities.

We know of no material proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder is a party adverse to our company or our subsidiary or has a material interest adverse to our company or our subsidiary.

Item 1A Risk Factors

If we do not obtain additional financing our business may fail.

As of June 30, 2014, we had cash and cash equivalents of $2,248,304 and a net loss of $1,786,634 for the six months ended June 30, 2014. As such, we will require additional financing in the very near future to sustain our business operations. We currently do not have any arrangements for such financing and we may not be able to obtain financing when required. The decline in the price of our shares and our poor credit history has and will impact our ability to obtain future financing. Obtaining additional financing would be subject to a number of factors, including our ability to initially attract investments prior to substantial revenue generation, and thereafter our ability to grow our brand. We can provide investors with no assurance that we will ever achieve profitable operations, and thus we face a high risk of business failure. Our ability to achieve and maintain profitability and positive cash flow is dependent upon:

	·	Our ability to market and sell our product to the levels anticipated;
	·	our ability to generate profits from the sale of those products; and
	·	our ability to create a successful brand.

We have a history of operating losses and negative cash flow that will continue into the foreseeable future. If we fail to execute our strategy to achieve and maintain profitability in the future, investors could lose confidence in the value of our common shares, which could cause our stock price to further decline and adversely affect our ability to raise additional capital. If we fail to obtain additional short-term financing, we would not have adequate liquidity to fund our operations, would not be able to continue as a going concern and could be forced to seek relief through a filing under U.S. Bankruptcy Code.

Our cash flow problems have caused us to be delinquent in payments to vendors and other creditors.

Our lack of financial resources has caused us to delay payment of our obligations as they became due in the ordinary course of our business. Such delays have damaged some of our vendor and professional relationships, and have caused us to incur additional expenses in the payment of late charges and penalties. As of June 30, 2014, we had current liabilities of $1,478,766 of which a portion remains past due. If we are unable to make timely future payments to our vendors or repair the relationships with our current vendors, we may be unable to find vendors suitable to us.

Our failure to comply with the agreements relating to our outstanding indebtedness, including as a result of events beyond our control, could result in an event of default that could materially and adversely affect our results of operations and our financial condition.

On December 9, 2013, we issued a promissory note to one investor in the amount of $500,000, net of discounts, which is secured against all of our property and is due in full on January 1, 2015. If there were an event of default under this note or any of the agreements relating to our outstanding indebtedness, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable immediately. Our assets or cash flow may not be sufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon an event of default. Further, if we are unable to repay, refinance or restructure our indebtedness under our secured debt, the holders of such debt could proceed against the collateral securing that indebtedness. In addition, any event of default or declaration of acceleration under one debt instrument could also result in an event of default under one or more of our other debt instruments. Last, we could be forced into bankruptcy or liquidation. As a result, any default by us on our indebtedness could have a material adverse effect on our business and could impact our ability to make payments under the notes.

Because of the unique difficulties and uncertainties inherent in the apparel business, we face a high risk of business failure.

Potential investors should be aware of the difficulties normally encountered by apparel companies and the high rate of failure of such enterprises. The likelihood of success must be considered in light of the problems, expenses, difficulties, complications and delays encountered in connection with the design, manufacture and sale of the products that we plan to offer, as well as the highly competitive landscape of the apparel industry. These potential problems include, but are not limited to, unanticipated problems relating to manufacturing and sales, lack of branding and marketing traction with consumers, and additional costs and expenses that may exceed current estimates.

Our success depends on our ability to maintain the value and reputation of our brand.

Our success depends on the value and reputation of our brand. Our brand is integral to our business as well as to the implementation of our strategies for expanding our business. We have repositioned and will continue to reposition our brand from primarily targeting a mixed martial arts consumer to a broader performance and lifestyle consumer. The market’s acceptance of our repositioned brand is a key factor to our success. Maintaining, promoting and positioning our brand will depend largely on the success of our marketing and merchandising efforts and our ability to provide a consistent, high quality guest experience. We rely on social media, as one of our marketing strategies, to have a positive impact on both our brand value and reputation. Our brand could be adversely affected if we fail to achieve these objectives or if our public image or reputation were to be tarnished by negative publicity. Negative publicity regarding the production methods of any of our suppliers or manufacturers could adversely affect our reputation and sales and force us to locate alternative suppliers or manufacturing sources.

An economic downturn or economic uncertainty in our key markets may adversely affect consumer discretionary spending and demand for our products.

Many of our products may be considered discretionary items for consumers. Factors affecting the level of consumer spending for such discretionary items include general economic conditions, particularly those in North America and other factors such as consumer confidence in future economic conditions, fears of recession, the availability of consumer credit, levels of unemployment, tax rates and the cost of consumer credit. As global economic conditions continue to be volatile or economic uncertainty remains, trends in consumer discretionary spending also remain unpredictable and subject to reductions due to credit constraints and uncertainties about the future. The current volatility in the United States economy in particular has resulted in an overall slowing in growth in the retail sector because of decreased consumer spending, which may remain depressed for the foreseeable future. These unfavorable economic conditions may lead consumers to delay or reduce purchase of our products. Consumer demand for our products may not reach our sales targets, or may decline, when there is an economic downturn or economic uncertainty in our key markets, particularly in North America. Our sensitivity to economic cycles and any related fluctuation in consumer demand may have a material adverse effect on our financial condition.

Our sales and profitability may decline as a result of increasing product costs and decreasing selling prices.

Our business is subject to significant pressure on pricing and costs caused by many factors, including intense competition, constrained sourcing capacity and related inflationary pressure, pressure from consumers to reduce the prices we charge for our products and changes in consumer demand. These factors may cause us to experience increased costs, reduce our sales prices to consumers or experience reduced sales in response to increased prices, any of which could cause our operating margin to decline if we are unable to offset these factors with reductions in operating costs and could have a material adverse effect on our financial conditions, operating results and cash flows.

If we are unable to anticipate consumer preferences and successfully develop and introduce new, innovative and updated products, we may not be able to achieve profitability.

Our success depends on our ability to identify and originate product trends as well as to anticipate and react to changing consumer demands in a timely manner. All of our products are subject to changing consumer preferences that cannot be predicted with certainty. If we are unable to introduce new products or novel technologies in a timely manner or our new products or technologies are not accepted by our customers, our competitors may introduce similar products in a more timely fashion, which could hurt our goal to be viewed as a leader in apparel innovation. Our new products may not receive consumer acceptance as consumer preferences could shift rapidly to different types of apparel or away from these types of products altogether, and our future success depends in part on our ability to anticipate and respond to these changes. Failure to anticipate and respond in a timely manner to changing consumer preferences could lead to, among other things, lower sales, excess inventory levels, and further deterioration of operating results. Even if we are successful in anticipating consumer preferences, our ability to adequately react to and address those preferences will in part depend upon our continued ability to develop and introduce innovative, high-quality products. Our failure to effectively introduce new products that are accepted by consumers could result in a decrease in net revenue and excess inventory levels, which could have a material adverse effect on our financial condition.

Our results of operations could be materially harmed if we are unable to accurately forecast customer demand for our products.

To ensure adequate inventory supply, we must forecast inventory needs and place orders with our manufacturers based on our estimates of future demand for particular products. Our ability to accurately forecast demand for our products could be affected by many factors, including our ability to raise sufficient equity or debt capital in a timely manner, an increase or decrease in customer demand for our products or for products of our competitors, our failure to accurately forecast customer acceptance of new products, product introductions by competitors, unanticipated changes in general market conditions, and weakening of economic conditions or consumer confidence in future economic conditions. If we fail to accurately forecast customer demand, we may experience excess inventory levels or a shortage of products available for sale in our stores or for delivery to customers.

Inventory levels in excess of customer demand or purchased in excess quantities, may result in inventory write-downs or write-offs and the sale of excess inventory at discounted prices, which would cause our gross margin to suffer and could impair the strength and exclusivity of our brand. Conversely, if we underestimate customer demand for our products, our manufacturers may not be able to deliver products to meet our requirements, and this could result in damage to our reputation and customer relationships.

The fluctuating cost of raw materials could increase our cost of goods sold and cause our results of operations and financial condition to suffer.

Our costs for raw materials are affected by, among other things, weather, consumer demand, speculation on the commodities market, the relative valuations and fluctuations of the currencies of producer versus consumer countries, and other factors that are generally unpredictable and beyond our control. Increases in the cost of raw materials or the prices we pay for our cotton yarn and cotton-based textiles, could have a material adverse effect on our cost of goods sold, results of operations, financial condition and cash flows.

We rely on third-party suppliers to provide fabrics for and to produce our products, and we have limited control over them and may not be able to obtain quality products on a timely basis or in sufficient quantity.

We do not manufacture our products or the raw materials for them and rely instead on third-party suppliers. Due to our financial condition, we have delayed payments to our manufactures, which has had a negative impact on our relationships with them. If we fail to make or delay payments to our manufactures, those manufactures may refuse to work for us and we may have difficulties finding other manufactures that are willing to make our products on terms acceptable to us or which are competitive in the marketplace.

Many of the specialty fabrics used in our products are technically advanced textile products developed and manufactured by third parties and may be available, in the short-term, from only one or a very limited number of sources. We have no long-term contracts with our suppliers or manufacturing sources, and we compete with other companies for fabrics, raw materials, production and import quota capacity.

We have occasionally received, and may in the future continue to receive, shipments of products that fail to comply with our technical specifications or that fail to conform to our quality control standards. We have also received, and may in the future continue to receive, products that meet our technical specifications but that are nonetheless unacceptable to us. Under these circumstances, unless we are able to obtain replacement products in a timely manner, we risk the loss of net revenue resulting from the inability to sell those products and related increased administrative and shipping costs. Additionally, if defects in the manufacture of our products are not discovered until after such products are purchased by our customers, our customers could lose confidence in the technical attributes of our products and our results of operations could suffer and our business could be harmed.

We may in the future experience a significant disruption in the supply of fabrics or raw materials from current sources and we may be unable to locate alternative materials suppliers of comparable quality at an acceptable price, or at all. In addition, if we experience significant increased demand, or if we need to replace an existing supplier or manufacturer, we may be unable to locate additional supplies of fabrics or raw materials or additional manufacturing capacity on terms that are acceptable to us, or at all, or we may be unable to locate any supplier or manufacturer with sufficient capacity to meet our requirements or to fill our orders in a timely manner. Identifying a suitable supplier is an involved process that requires us to become satisfied with its quality control, responsiveness and service, financial stability and labor and other ethical practices. Even if we are able to expand existing or find new manufacturing or fabric sources, we may encounter delays in production and added costs as a result of the time it takes to train our suppliers and manufacturers in our methods, products and quality control standards. Delays related to supplier changes could also arise due to an increase in shipping times if new suppliers are located farther away from our markets or from other participants in our supply chain. Any delays, interruption or increased costs in the supply of fabric or manufacture of our products could have an adverse effect on our ability to meet customer demand for our products and our results in lower net revenue and income from operations both in the short and long term.

Our reliance on third-party providers for all warehouse and fulfillment functions reduces our ability to control the warehousing and fulfillment processes, which could harm our sales, reputation, and overall business.

We have entered into an agreement to outsource most of our warehouse and fulfillment functions to third-party providers where our inventory is held at sites managed by an independent contractor who will then perform most of our warehousing, packaging and fulfillment services. We depend on independent contractor fulfillers to properly fulfill customer orders in a timely manner and to properly protect our inventories. The contractor's failure to ship products to customers in a timely manner, to meet the required quality standards, to correctly fulfill orders, to maintain appropriate levels of inventory, or to provide adequate security measures and protections against excess shrinkage could cause us to miss delivery date requirements of our customers or incur increased expense to replace or replenish lost or damaged inventory or inventory shortfall. The failure to make timely and proper deliveries may cause our customers to cancel orders, refuse to accept deliveries, impose non-compliance charges through invoice deductions or other charge-backs, demand reduced prices or reduce future orders, any of which could harm our sales, reputation and overall profitability. Our excess inventory held at these facilities may be damaged due to the length of time that they are at the facility, which may not be covered by the contractor or our insurance.

We operate in a highly competitive market and the size and resources of some of our competitors may allow them to compete more effectively than we can, resulting in a decrease in our net revenue.

The market for apparel is highly competitive. Competition may result in pricing pressures, reduced profit margins or lost market share or a failure to grow our market share, any of which could substantially harm our business and results of operations. We compete directly against wholesalers and direct retailers of athletic apparel, including large, diversified apparel companies with substantial market share and established companies expanding their production and marketing of technical athletic apparel, as well as against retailers specifically focused on athletic, active, lifestyle, and other categories of apparel. We also face competition from wholesalers and direct retailers of traditional commodity athletic apparel, such as cotton T-shirts and sweatshirts. Many of our competitors are large apparel and sporting goods companies with strong worldwide brand recognition, such as Nike, Inc., Lululemon Athletica Inc., adidas AG, which includes the adidas and Reebok brands, and The Gap, Inc., which includes the Athleta brand. Because of the fragmented nature of the industry, we also compete with other apparel sellers. Many of our competitors have significant competitive advantages, including longer operating histories, larger and broader customer bases, more established relationships with a broader set of suppliers, greater brand recognition and greater financial, research and development, store development, marketing, distribution and other resources than we do. In addition, our athletic and other categories of apparel are sold at a price premium to comparable apparel.

Our competitors may be able to achieve and maintain brand awareness and market share more quickly and effectively than we can. Many of our competitors promote their brands through traditional forms of advertising, such as print media and television commercials, and through celebrity endorsements, and have substantial resources to devote to such efforts. Our competitors may also create and maintain brand awareness using traditional forms of advertising more quickly than we can. Our competitors may also be able to increase sales in their new and existing markets faster than we do by emphasizing different distribution channels than we do, such as catalog sales or an extensive franchise network, as opposed to distribution through retail stores, wholesale or internet, and many of our competitors have substantial resources to devote toward increasing sales in such ways.

In addition, because we own no patents or exclusive intellectual property rights in the technology, fabrics or processes underlying our products, our current and future competitors are able to manufacture and sell products with performance characteristics, fabrication techniques and styling similar to our products.

Our fabrics and manufacturing technology are not patented and can be imitated by our competitors.

The intellectual property rights in the technology, fabrics and processes used to manufacture our products are owned or controlled by our suppliers and are generally not unique to us. Our ability to obtain intellectual property protection for our products is therefore limited and we currently own no patents or exclusive intellectual property rights in the technology, fabrics or processes underlying our products. As a result, our current and future competitors are able to manufacture and sell products with performance characteristics, fabrics and styling similar to our products. Because many of our competitors have significantly greater financial, distribution, marketing and other resources than we do, they may be able to manufacture and sell products based on our fabrics and manufacturing technology at lower prices than we can. If our competitors do sell similar products to ours at lower prices, our net revenue and profitability could suffer.

Our failure or inability to protect our intellectual property rights could diminish the value of our brand and weaken our competitive position.

We currently rely on a combination of copyright, trademark, trade dress and unfair competition laws, as well as confidentiality procedures and licensing arrangements, to establish and protect our intellectual property rights. We cannot assure you that the steps taken by us to protect our intellectual property rights will be adequate to prevent infringement of such rights by others, including imitation of our products and misappropriation of our brand. In addition, intellectual property protection may be unavailable or limited in some foreign countries where laws or law enforcement practices may not protect our intellectual property rights as fully as in the United States or Canada, and it may be more difficult for us to successfully challenge the use of our intellectual property rights by other parties in these countries. If we fail to protect and maintain our intellectual property rights, the value of our brand could be diminished and our competitive position may suffer.

We may not be able to successfully open profitable new store locations in a timely manner, if at all, which could harm our results of operations.

Our growth will depend on our ability to successfully open and operate new stores. Sales at these stores are derived, in part, from the volume of foot traffic in these locations. Our ability to successfully open and operate new stores depends on many factors, including, among others, our ability to:

	•	Identify suitable store locations, the availability of which is outside of our control;
	•	negotiate acceptable lease terms, including desired tenant improvement allowances;
	•	hire, train and retain store personnel and field management;
	•	immerse new store personnel and field management into our corporate culture;
	•	source sufficient inventory levels; and
	•	successfully integrate new stores into our existing operations and information technology systems.

Successful new store openings may also be affected by our ability to initiate our marketing efforts in advance of opening our first store in a new market. We typically rely on our marketing efforts to build awareness of our brand and demand for our products. There can be no assurance that we will be able to successfully implement our marketing efforts in a particular market in a timely manner, if at all. Additionally, we may be unsuccessful in identifying new markets where our apparel and other products and brand image will be accepted or the performance of our stores will be considered successful.

Our ability to source our merchandise profitably or at all could be hurt if new trade restrictions are imposed or existing trade restrictions become more burdensome.

The United States and the countries in which our products are produced or sold internationally have imposed and may impose additional quotas, duties, tariffs, or other restrictions or regulations, or may adversely adjust prevailing quota, duty or tariff levels. We have expanded our relationships with suppliers outside of China, which, among other things, has resulted in increased costs and shipping times for some products. Countries impose, modify and remove tariffs and other trade restrictions in response to a diverse array of factors, including global and national economic and political conditions, which make it impossible for us to predict future developments regarding tariffs and other trade restrictions. Trade restrictions, including tariffs, quotas, embargoes, safeguards and customs restrictions, could increase the cost or reduce the supply of products available to us or may require us to modify our supply chain organization or other current business practices, any of which could harm our business, financial condition and results of operations

Our employees are critical to our success, and the loss of key personnel could harm our business.

Our performance is substantially dependent on the continued services and performance of our executive officers and other key personnel. We do not have any employment agreement with our President and CEO or CFO. No key man life insurance has been purchased on any of our executive officers. Our performance also depends on our ability to retain and motivate our officers. The loss of the services of any of our officers could have a material adverse effect on our business, prospects, financial condition and results of operations.

Our financial condition has caused us to lose key employees and we have experienced a high turnover of employees. In addition, our financial condition may prevent us from hiring additional key employees. The loss of the members of our product design team has resulted in a loss of continuity in our product. As a result of these factors, we may be unable to develop and introduce new products successfully and in a cost-effective and timely manner, and any new products we develop and offer may never achieve market acceptance. Competition for such personnel is intense, and we cannot assure you that we will be successful in attracting and retaining such personnel. The failure to attract and retain the necessary technical, managerial and marketing personnel could have a material adverse effect on our business, prospects, financial condition and results of operations. Our future success also depends on our ability to identify, attract, hire, train, retain and motivate other highly skilled technical, managerial and marketing personnel.

We are dependent on our information technology systems and third-party servicers, and systems failures, interruptions or breaches of security could have an adverse effect on our financial condition and results of operations.

Our business is dependent on the successful and uninterrupted functioning of our information technology systems setup by third-party providers, as we outsource many of our major systems. We rely on the controls of these provides in lieu of controls set up by us. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions.

Risks Relating to our Common Shares

If we fail to remain current on our reporting requirements, we could be removed from the OTCQB, which would limit the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.

Companies trading on the OTCQB, such as us, generally must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTCQB. If we fail to be current in our reports under Section 13, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.

Our stock is a penny stock. Trading of our stock may be restricted by the SEC’s penny stock regulations, which may limit our shareholders’ ability to buy and sell our stock.

Our stock is a penny stock. The SEC has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC, which provides information about penny stocks and the nature and level of risks in the penny stock market.

The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common shares.

The Financial Industry Regulatory Authority sales practice requirements may also limit our shareholders’ ability to buy and sell our stock.

In addition to the “penny stock” rules described above, the Financial Industry Regulatory Authority, or “FINRA”, has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common shares, which may limit your ability to buy and sell our stock and have an adverse effect on the market for common shares.

The exercise of outstanding options and warrants may have a dilutive effect on the price of our common shares.

To the extent that outstanding stock options and warrants are exercised, dilution to our shareholders will occur. Moreover, the terms upon which we will be able to obtain additional equity capital may be adversely affected, since the holders of the outstanding options and warrants can be expected to exercise them at a time when we would, in all likelihood, be able to obtain any needed capital on terms more favorable to us than the exercise terms provided by the outstanding options and warrants.

We do not expect to pay dividends in the future. Any return on investment may be limited to the value of our common shares.

We do not currently anticipate paying cash dividends in the foreseeable future. The payment of dividends on our common shares will depend on earnings, financial condition and other business and economic factors affecting it at such time as the board of directors may consider relevant. Our current intention is to apply net earnings, if any, in the foreseeable future to increasing our capital base and development and marketing efforts. There can be no assurance that our company will ever have sufficient earnings to declare and pay dividends to the holders of our common shares, and in any event, a decision to declare and pay dividends is at the sole discretion of our board of directors. If we do not pay dividends, our common shares may be less valuable because a return on your investment will only occur if its stock price appreciates.

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

Since the beginning of the three month period ended June 30, 2014, we have not sold any equity securities that were not registered under the Securities Act of 1933 that were not previously reported in an annual report on Form 10-K, in a quarterly report on Form 10-Q or in a current report on Form 8-K.

Item 3 Defaults Upon Senior Securities

None.

Item 4 Mine Safety Disclosures

N/A.

Item 5 Other Information

None.

Item 6 Exhibits, Financial Statement Schedules

Number	Exhibit
31.1	Rule 13a-14(a) Certification of Principal Executive Officer
31.2	Rule 13a-14(a) Certification of Principal Financial Officer
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Principal Executive Officer
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Principal Financial Officer
101.INS	Interactive Data Files Pursuant to Rule 405 of Regulation S-T

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Respect Your Universe, Inc.

Date: August 14, 2014	/s/ Marcello Leone
	Marcello Leone Chief Executive Officer and Chairman of the Board (Principal Executive Officer)



Date: August 14, 2014	/s/ James Nowodworski
	James Nowodworski Chief Financial Officer (Principal Financial and Accounting Officer)

Attached files

RYU APPAREL INC. Reports

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