News Column

Note 2 Liquidity and Management's Plan

June 6, 2014

The Company commenced operations as a development stage enterprise in 2009 and has incurred losses from inception. As shown in the accompanying condensed financial statements, the Company incurred a net loss of $852,327 and had net cash used in operating activities of $978,701 for the three months ended March 31, 2014. As of March 31, 2014, the Company's cash balance was $251,977. Although the Company has successfully raised $3,160,000 in 2014 as discussed in Note 15 - Subsequent Events, the Company will need to raise sufficient capital during 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. In 2012, the Company emerged from the development stage by launching its initial men's apparel line in January and its initial women's apparel line in July, and by opening its first retail store in Las Vegas, Nevada in October. Sales generated in 2012 and 2013 fell significantly short of expectations. During 2013, management began efforts to reposition the brand to appeal to a broader market, and has developed a plan to improve the business operations which will require additional issuance of equity securities or placement of debt. There can there be no assurance that sufficient revenue or financing will occur to meet the Company's cash needs for the next 12 months. Therefore, a continuation of our recent historical operating results could result in our inability 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. 7 -------------------------------------------------------------------------------- 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 months ended March 31, 2014 are not necessarily indicative of results for the full fiscal year.



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.

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 months ended March 31, 2013 was reclassified to conform to the current year's presentation.

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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 resulted 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 at March 31, 2014 and March 31, 2013: March 31, 2014 March 31, 2013 Stock options, exercise price $0.21 - $2.26 5,556,420 3,795,170 Common stock warrants, conversion price $0.25 - $1.80 27,062,996 7,126,776 Unvested forfeitable restricted stock grants 187,500 Total common stock equivalents 32,619,416 11,109,446 Since the Company incurred a net loss during the three months ended March 31, 2014 and 2013, 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 $1,632,986 ($640,890 of which has been classified as non-current) and $1,797,154 ($951,966 of which has been classified as non-current) as of March 31, 2014 and December 31, 2013, respectively. Inventories not expected to be sold within 12 months have been classified as non-current.



Adjustment for Lower of Cost-or-Market

As of December 31, 2013, the Company assessed the market value of its inventory on hand. The Company determined that the market value of inventory was less than its cost. As such, the Company recognized an LCM adjustment to inventory of $387,947 in December 2013. The Company did not record an adjustment to inventory in the quarter ended March 31, 2014.



Note 6 Property and Equipment

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

2014 2013 Leasehold improvements $ 6,773$ 6,773 Construction in progress 158,074 103,461 Computers and office equipment 41,809 41,809 Furniture and fixtures 19,689 19,689 Software 41,004 41,004 Tradeshow and event equipment 8,522 7,229 275,871 219,965 Accumulated depreciation (60,357 ) (51,548 ) Property and equipment, net $ 215,514$ 168,417



Depreciation expense for the three months ended March 31, 2014 and 2013 was $8,809 and $25,827, respectively.

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Note 7 Intangible Assets

Intangible assets consist of the following as of March 31, 2014 and December 31, 2013: 2014 2013 Patent and trademarks, net $ 42,784$ 44,052 Domain name 123,535 123,535 Intangible assets, net $ 166,319$ 167,587



Amortization expense for the three months ended March 31, 2014 and 2013 was approximately $1,000 and $19,000, respectely.

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 300,000 shares of common stock at an exercise price of $0.25 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 paid 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

Stock Issued for Cash

Three months ended March 31, 2014

In February 2014, as a continuation of the November 2013 offering, the Company issued 13,346,830 shares of common stock as part of a private placement offering for proceeds of $1,167,067 ($0.10/share), net of direct offering costs of $167,616. Included in this private placement the company paid 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. Only the holders of these warrants have the right to exercise the warrants at the specified fixed strike price, according to the terms outlined above. Details of the warrants issued are shown in the table below: Exercise Date Quantity Granted Vesting Schedule Price Expiration February 2014 13,346,830 Fully vested upon issuance $0.25 3 Years 10

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Only the holders of these warrants have the right to exercise the warrants at the specified fixed strike price, according to the terms outlined above.

Stock Options

On June 7, 2013, the Board of Directors approved certain revisions to the 2012 Plan, resulting in the Company's 2013 Stock Option Plan (the "2013 Plan") whereby the aggregate number of securities reserved for issuance set aside and made available for issuance under the Plan was revised from (i) 8,487,925 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) 11,702,425 shares of the Company's common stock. 11

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The following is a summary of the Company's stock option activity, for the three months ended March 31, 2014:

Weighted Weighted Average Average Remaining Average Exercise Contractual Intrinsic Options Price Life Value



Balance - December 31, 2013 6,601,420 $ 0.89 8.48 Years

$ - Granted - Exercised - Forfeited/Cancelled (135,000 ) 0.72



Outstanding - March 31, 2014 6,466,420 $ 0.90 8.39 Years

$

Exercisable - March 31, 2014 5,556,420 $ 0.78 7.31 Years

$ - 12

-------------------------------------------------------------------------------- During the three months ended March 31, 2014 and 2013, the Company expensed $12,638 and $97,976 related to stock option grants, respectively. At March 31, 2014 approximately $234,000 of stock based compensation expense was expected to be amortized over 2.4 years. 13

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Warrants

The following is a summary of the Company's warrant activity for the three months ended March 31, 2014:

Weighted Weighted Average Average Remaining Average Exercise Contractual Intrinsic Warrants Price Life Value



Balance - December 31, 2013 13,716,167 $ 0.89 8.48 Years $ -

Granted (1) 13,346,829 0.25 3 Years



Exercised

Forfeited/Cancelled -



Outstanding - March 31, 2014 27,062,996 $ 0.39 2.55 Years $ -

Exercisable - March 31, 2014 27,062,996 $ 0.39 2.55 Years $ -

(1) Warants issued in connection with the February 2014 private placement.

discussed in Note 10, Stockholders' Equity - Stock Issued for Cash. 14

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During the three months ended March 31, 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 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.



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 $43,157 and $51,204 for the three months ended March 31, 2014 and 2013, respectively. 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.



The future minimum lease payments required under the operating and capital leases as of March 31, 2013 are as follows:

Operating Capital Total Lease Leases Lease Obligations 2014 (9 months remaining) $ 103,990$ 8,189$ 112,179 2015 132,563 11,115 143,678 2016 134,162 11,314 145,476 2017 135,808 11,516 147,324 2018 125,913 11,723 137,636 Thereafter 36,012 36,012 Total minimum lease payments 632,436 89,869 722,305 Less current maturities 103,990 8,189 112,179 Long-term lease obligations $ 528,446$ 81,680$ 610,126



Inventory Purchase Obligations

As of March 31, 2014, the Company had commitments to purchase approximately $398,000, 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 affect on its business, financial condition or operating results and cash flows. 15 --------------------------------------------------------------------------------



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 March 31, 2014:

Channel 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% Reconciliation of gross profit to net loss: Operating expenses Selling and marketing 177,985 Product creation 60,249 General and administrative 629,577 Interest expense 23,840 Net loss $ (852,327 )



The following table represents the Company's activity by operating segment for the three months ending March 31, 2013:

Channel Wholesale Retail Ecommerce Other Total Revenue $ 169,496$ 141,013$ 77,183$ 0$ 387,692 Cost of goods sold 146,706 54,804 49,211 24,649 275,370 Gross profit (loss) 22,790 86,209 27,972 (24,649 ) 112,322 Gross margin 13% 61% 36% 29% Reconciliation of gross profit (loss) to net loss: Operating expenses Selling and marketing 409,936 Product creation 137,043 General and administrative 917,782 Interest expense 517 Net loss $ (1,352,956 )



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

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Note 15 Subsequent Events Note Payable, related party In April 2014, the Company issued an unsecured promissory note to a shareholder of the Company. The principle amount of the note is $30,000 and bears interest at 15% per annum with a minimum payment of $2,000. The note was repaid in April 2014, including $2,000 of interest expense.



Management and Director Resignations and Appointments

The following list includes activity related to changes to the Company's management and Board of Directors on May 23, 2014.

The Board of Directors appointed Marcello Leone as President of the Company

effective May 23, 2014. As of May 28, 2014, the terms of this employment

relationship have not yet been finalized. Mr. Leone was concomitantly appointed as a Director of the Company.



The Board of Directors also appointed Maria Leone, and Peter Pan as Directors

of the Company effective May 23, 2014.



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

Equity Offering As of May 23, 2014, the Company completed a private placement offering for gross proceeds of $3,160,000, priced at $0.10 per unit. The terms of the offering include the issuance of the Company's common stock at $0.10/share. In addition, each share of common stock purchased contains a warrant to purchase an additional share of common stock at $0.25/share. The warrants will expire three years from the date of issuance. In connection with this private placement, the Company paid a finder's fee of $316,000 to one finder.



As of May 29, 2014, the Company has signed subscription agreements for gross proceeds of $280,000 on the same terms as the offering described above.

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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. 18 --------------------------------------------------------------------------------



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 WestlakeCenter 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. 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 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.



Results of Operations

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. 19

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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$ 0$ 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% 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. 20

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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 our assets. In connection with the issuance of the note, we 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.

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 $1,204,683 (excluding 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 costs.



On August 10, 2012, our shares began trading on the TSX Venture 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 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 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. 21 --------------------------------------------------------------------------------



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 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 $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 we 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 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. Sales generated in 2012 fell significantly short of expectations. Management attributes this shortfall primarily to our 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, 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 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

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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

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 Significant Accounting Policies - Critical Accounting Policies

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. 23 --------------------------------------------------------------------------------



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:

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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) $ 398,000 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.



Recent Accounting Pronouncements

No recent accounting pronouncments.

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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).


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