ex10_2.htm


Exhibit 10.2


 



Respect Your Universe, Inc.


(the “Company”)


 


Management’s Discussion and Analysis of Operations


for the three months ended March 31, 2014


 


May 30, 2014


 


INTRODUCTION


 


The following management’s discussion and analysis (“MD&A”) is a review of operations, current financial position and outlook for the Company and should be read in conjunction with the Company’s unaudited consolidated financial statements for the three months ended March 31, 2014 and the Company’s audited consolidated financial statements for the year ended December 31, 2013. Readers are encouraged to review the Company’s financial statements in conjunction with this document, copies of which are filed on the SEDAR website at www.sedar.com. The Company prepares its financial statements in accordance with generally accepted accounting principles in the United States. All dollar figures included herein are quoted in U.S. dollars unless otherwise noted. This discussion and analysis is prepared as of May 30, 2014.


 


This information should be read in conjunction with the condensed financial statements and notes thereto. 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 management’s discussion and analysis (“MD&A”) contains forward-looking statements. 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”) or Canadian securities commissions. 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 MD&A, 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 MD&A reflect our views and assumptions only as of the date of this MD&A. 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 MD&A 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.


 


BUSINESS OF THE COMPANY


 


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:


 


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.


 




  





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Our Spring 2014 line has been designed and developed. It includes approximately 20 new men’s and 20 new 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.


 


OVERALL PERFORMANCE


 


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.


 


Sales generated in 2012 fell significantly short of expectations. Management attributes this shortfall primarily to the Company’s initial positioning as a premium performance apparel brand within the niche sport of Mixed Martial Arts (MMA), lower than expected sales generated through our association with a major MMA promoter, as well as an emphasis on generating a significant percentage of total sales through an undeveloped wholesale channel. Consequently, we carried significant excess inventory as of December 31, 2012. 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, the Company adopted plans and began implementation in early 2013 to rebrand the 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 and equity capital goals have fallen short of target. Accordingly, management has adjusted and expanded their plans for 2014 and can be summarized as follows:


 


1. Reposition the brand to support our customer’s active lifestyles


 


2. Reduced quantity of inventory purchases of our branded product


 


3. Offering third-party brands that enhance and complement the brand


 


4. Sourcing more product from North American production facilities


 


5. Fabric differentiation


 


6. Enhanced retail store experience incorporating virtual shopping


 


7. Enhanced web experience and target markets


 


8. Liquidation of slow-moving and excess inventories


 


9. Explore license agreements to accelerate growth


 


10. Continue to focus on equity and debt capital raising


 


11. Increase opening of new physical retail stores including outlets


 


12. Develop and evaluate an acquisition strategy, commence implementation if viable


 




  





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While we continue to believe that our wholesale channel will play a major role in our long-term growth plans, we also anticipate that we will need to shift our growth strategy in the near term and place greater emphasis on developing our brand through our retail and e-commerce channels.


 


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 February 2014 totaling $1,334,683 through the issuance of equity securities as discussed in Note 10 to the condensed financial statements, and in May 2014, we raised gross proceeds totaling $3,160,000 as discussed in Note 15 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 QUARTERLY RESULTS


 


The following table sets out selected financial information for the Company for its eight most recent quarters:








	  	
March 31, 2014


($)

	
December 31, 2013


($)

	
September 30, 2013


($)

	
June 30, 2013


($)


	
Revenues

	
$297,946

	
263,827

	
216,895

	
$295,912


	
Gross Profit (loss)

	
39,324

	
(357,306)

	
66,415

	
105,912


	
Operating Expenses

	
867,811

	
1,383,342

	
1,193,716

	
1,248,380


	
Other

	
23,840

	
2,000

	
nil

	
nil


	
Net Loss

	
(852,327)

	
(1,742,648)

	
(1,127,301)

	
(1,142,468)


	
Loss per Share


(Basic and Diluted)

	
(0.01)

	
(0.03)

	
(0.02)

	
(0.02)


	  	
March 31, 2013


($)

	
December 31, 2012


($)

	
September 30, 2012


($)

	
June 30, 2012


($)


	
Revenue

	
$387,692

	
433,792

	
$243,541

	
$107,522


	
Gross Profit (loss)

	
112,322

	
(1,276,606)

	
87,509

	
45,726


	
Operating Expenses

	
1,464,761

	
2,265,414

	
2,025,133

	
2,481,523


	
Other

	
517

	
1,500

	
nil

	
nil


	
Net Loss

	
(1,352,956)

	
(3,543,520)

	
(1,937,624)

	
(2,435,797)


	
Loss per Share


(Basic and Diluted)

	
(0.03)

	
(0.01)

	
(0.05)

	
(0.06)







 


Our Las Vegas, Nevada store was opened in October 2012 and it was closed in late February 2014. Our Seattle, Washington store was open in late December 2013 as a temporary store and operated for the full 2014 quarter.


 


During the fourth quarter of 2012, under prior leadership, we identified specific inventories to sell through our wholesale channel at closeout prices. We generated approximately $125,000 in the three months ended June 30, 2013 and $105,000 in the three months ended March 31, 2013 due to a closeout sale.


 


As of December 31, 2012, we assessed the market value of a significant portion of its inventory on hand and determined that the market value was significantly less than its cost. As such, we recorded a lower of cost-or-market (“LCM”) adjustment of $1,401,220 in December 2012.


 




  





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As of December 31, 2013, we assessed the market value of a significant portion of our inventory on hand and determined that the market value was significantly less than its cost. As such, we recorded LCM adjustment of $387,947 in December 2013.


 


The decrease in operating expenses is primarily due to cost cutting measures taken by management to decrease our spend on general and administrative expenses.


 


DISCUSSION OF OPERATIONS


 


Three Months Ended March 31, 2014 Compared to the Three Months Ended March 31, 2013


 


Revenue


 


Revenues during the three months ended March 31, 2014 and 2013 were $ 297,946 and $387,692, respectively. The decrease is primarily due to generating $83,718 less retail sales in 2014 compared to the comparable period in 2013. Our Las Vegas, Nevada store was closed in late February 2014 and accordingly generated less sales compared to operating a full quarter in 2013. Our Seattle, Washington store was open in late December 2013 as a temporary store and operated for the full 2014 quarter.


 


Cost of Goods Sold


 


Cost of goods sold during the three months ended March 31, 2014 and 2013 were $258,622 and $275,370, respectively.  The decrease in cost of goods sold for 2014 is primarily due to lower sales in 2014.


 


Gross Profit


 


Gross profit during the three months ended March 31, 2014 and 2013 was $39,324 and $112,322, respectively.        Gross margins were negatively impacted primarily due to decrease 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 March 31, 2014



	  	 	 	 	 	
Segment

	 	 	 	 	 	 	 	 
	  	 	
Wholesale

	 	 	
Retail

	 	 	
Ecommerce

	 	 	
Total

	 	 
	
Revenue

	 	$	151,390	 	 	$	57,296	 	 	$	89,260	 	 	$	297,946	 	 
	
Cost of goods sold

	 	 	144,328	 	 	 	41,364	 	 	 	72,930	 	 	 	258,622	 	 
	
Gross profit

	 	$	7,062	 	 	$	15,932	 	 	$	16,330	 	 	$	39,324	 	 
	
Gross margin

	 	 	5	%   	 	 	28	%  	 	 	18	%  	 	 	13	%   	 





 


Three months ended March 31, 2013



	  	 	 	 	 	
Segment

	 	 	 	 	 	 	 
	  	 	
Wholesale

	 	 	
Retail

	 	 	
Ecommerce

	 	 	
Other

	 	 	
Total

	 
	
Revenue

	 	$	169,496	 	 	$	141,013	 	 	$	77,183	 	 	$	-	 	 	$	387,692	 
	
Cost of goods sold

	 	 	146,706	 	 	 	54,804	 	 	 	49,211	 	 	 	24,649	 	 	 	275,370	 
	
Gross profit (loss)

	 	$	22,790	 	 	$	86,209	 	 	$	27,972	 	 	$	(24,649	)	 	$	112,322	 
	
Gross margin

	 	 	13	%   	 	 	61	%  	 	 	36	%  	 	 	 	 	 	 	29	%   





 




  





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Selling and Marketing Costs


 


We incurred $177,985 and $409,936 in selling and marketing expenses during the three months ended March 31, 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, direct advertising, consulting fees, and travel and entertainment expenses.


 


Product Creation Costs


 


During the three months ended March 31, 2014, we incurred product creation expenses of $60,249 compared to $137,043 during the three months ended March 31, 2013. The decrease is primarily related to expense reductions in the areas of contractor expenses and consulting fees.


 


General and Administrative Costs


 


General and administrative expenses for the three months ended March 31, 2014 were $629,577 compared to $917,782 for the three months ended March 31, 2013. The decrease is primarily related to expense reductions in the areas of staff and contractor expenses, professional fees, investor relations, and depreciation and amortization, offset by an increase in travel and entertainment expenses.


 


Interest expense


 


Interest expense was $23,840 and $517 for the three months ended March 31, 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 the assets of the Company. In connection with the issuance of the note, the Company issued warrants to purchase up to 300,000 share of common stock at an exercise price of $0.25 per share until January 1, 2015.


 


Net Loss


 


As a result of the above, our net loss for the three months ended March 31, 2014 was $852,327 as compared to a loss of $1,352,956 for the comparable 2013 period.


 


LIQUIDITY AND CAPITAL RESOURCES


 


Financial Condition


 


As of March 31, 2014, we had current assets of $1,644,633, current liabilities of $1,919,869 and a working capital deficit of $275,236 compared to current assets of $1,378,984, current liabilities of $1,744,771 and working capital deficit of $365,787 at December 31, 2013.


 


Our cash balance as of March 31, 2014 was $251,977 compared to $252,153 at December 31, 2013. In the three months ended March 31, 2014, we raised $1,334,683 (including conversion of $130,000 in loans), net of direct offering costs. In the three months ended March 31, 2013, we raised $1,377,855, net of direct offering cost.


 


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


 


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 Company’s 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.


 




  





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Operating Activities


 


During the three months ended March 31, 2014, we used cash in the amount of $978,701 in operating activities.        The principal adjustments to reconcile the net loss of $852,327 to net cash used in operating activities a decrease in due to factor of $114,236, a reduction of inventory of $164,168, and a decrease in accounts payable and accrued liabilities of $194,340. Depreciation and amortization during the three months ended March 31, 2014 totaled $10,077.


 


By comparison, during the three months ended March 31, 2013, we used cash in the amount of $1,329,836 in operating activities. The major components of operating activities include a net loss of $1,352,956, offset by share-based compensation of $176,746, a decrease in due to factor of $103,642 and a decrease in accounts payable and accrued liabilities of $123,894. Depreciation and amortization during the quarter ended March 31, 2013 totaled $45,153.


 


Investing Activities


 


Net cash used in investing activities was $55,906 during the three months ended March 31, 2014. Investing activities during the period were $55,906 for property and equipment, attributed to the Seattle Washington retail store. Net cash used in investing activities was $11,895 during the three months ended March 31, 2013.     Investing activities during the period included $4,501 for property and equipment, $7,394 for intangible assets, which included the development of patents and trademarks.


 


Financing Activities


 


During the three months ended March 31, 2014, we paid $2,636 towards capital lease obligations and received gross proceeds from the sale of common stock and warrants of $1,334,683, including $130,000 of notes payable paid by issuance of common stock and warrants, of which $167,616 was paid in offering costs for net cash provided by financing activities of $1,034,431.


 


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


 


Liquidity


 


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 $852,327 in 2014, had a working capital deficit of $275,236 as of March 31, 2014, and had net cash used in operating activities of $978,701 during the three months ended March 31, 2014.


 


As of March 31, 2014, our cash balance was $251,977, and management determined that the Company would have to raise significant 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 continue as a going concern.







Contractual Commitments


 


The following table presents our non-cancelable contractual commitments:









	  	  	
2014

	  	  	
2015

	  	  	
2016

	  	  	
2017

	  	  	
2018

	  	  	
Thereafter

	  
	
Inventory purchase  obligations (1)

	  	
$

	
353,207

	  	  	 	  	  	 	  	  	 	  	  	 	  	  	 	  
	
Operating leases (2)

	  	
$

	
103,990

	  	  	
$

	
132,563

	  	  	
$

	
134,162

	  	  	
$

	
135,808

	  	  	
$

	
125,914

	  	  	
$

	
0

	  
	
Capital lease (2)

	  	
$

	
8,189

	  	  	
$

	
11,115

	  	  	
$

	
11,314

	  	  	
$

	
11,516

	  	  	
$

	
11,723

	  	  	
$

	
36,012

	  





	
  

	
(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.







 




  





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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).


 


RELATED PARTY TRANSACTIONS


 


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 paid through the issuance of common stock and warrants as part of the February 2014 equity raise as further described in Note 10.


 


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 months ended March 31, 2013, total expense related to this transaction was $38,461.


 


During the three months ended March 31, 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 March 31, 2013, the Company issued 100,000 stock warrants to this entity, with a fair value of $30,020. For the three months ended March 31, 2013, total expense related to this transaction was $30,020.


 


PROPOSED TRANSACTIONS


 


The Company has no proposed transaction as of the date of this MD&A.


 


RECENT ACCOUNTING PRONOUNCEMENTS







Our significant accounting policies are summarized in Note 3 in the Company’s 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.


 




  





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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.







 




  





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•

	
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.


 


RISK FACTORS







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


 


As of March 31, 2014, we had cash and cash equivalents in the approximate amount of $251,977 and a net loss of $852,327 for the three months ended March 31, 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:


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·

	
Our ability to market and sell our product to the levels anticipated;


	  	
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our ability to generate profits from the sale of those products; and


	  	
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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 March 31, 2014, we had current liabilities of $1,919,869 of which a significant portion was and 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.


 




  





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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, 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.


 




  





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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.


 




  





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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.


 




  





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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.


 




  





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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:








	  	
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Identify suitable store locations, the availability of which is outside of our control;


	
  

	
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negotiate acceptable lease terms, including desired tenant improvement allowances;


	  	
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hire, train and retain store personnel and field management;


	  	
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immerse new store personnel and field management into our corporate culture;


	  	
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source sufficient inventory levels; and


	  	
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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 have an employment agreement with our CEO, which is due to expire on December 31, 2014. The agreement will automatically renew if neither party gives notice of termination. We do not have any employment agreement with our 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 have 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.


 




  





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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


 


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.


 




  





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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.


 


DISCLOSURE OF OUTSTANDING SHARE DATA


 


The Company’s shares are quoted for trading on the OTCQB under the symbol “RYUN”. As of May 29, 2014, the share capital of the Company was as follows:


 


As of May 29, 2014, the share capital of the Company was as follows:


 




	
Class of Shares

	
Par Value

	
Number Authorized

	
Number Issued


	
Common Shares

	
$0.001

	
500,000,000

	
107,873,500









 


Stock Option Plan


 


As at May 29, 2014, the following stock options were outstanding:









	
Number Outstanding

	
Exercise Price per Share

	
Expiry Date


	
6,376,420

	
US$0.21 to US$2.26

	
June 9, 2016 to September 16, 2013














 


Warrants


 


As at May 29, 2014, the following warrants were outstanding:









	
Number Outstanding

	
Exercise Price

	
Expiry Date


	
58,662,995

	
US$0.25 to US$1.80

	
July 31, 2014 to February 1, 2022









 


ADDITIONAL INFORMATION


 


The Company files annual and other reports and other information with Canadian securities regulatory authorities and with the SEC in the United States. The documents filed with the SEC are available to the public from the SEC’s website at http://www.sec.gov. The documents filed with Canadian securities regulatory authorities are available to the public at http://www.sedar.com.


 




  





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APPROVAL


 


The Board of Directors of the Company has approved the disclosure contained in this interim Management Discussion and Analysis.


 


 


 


 


 


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