PINX:RYUN Respect Your Universe, Inc. Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2012

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

For the transition period from _______ to _______

Commission File No. 333-166171

Respect Your Universe, Inc.
(Exact name of registrant as specified in its charter)

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

5940 South Rainbow Boulevard, Las Vegas, Nevada
89118
(Address of principal executive offices)
(Zip Code)

1-888-455-6183
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 ý Yes           o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
o Yes                      ý No (Not required)

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

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

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

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:  48,322,128 shares of common stock as of August 13, 2012
 


 
 

 

RESPECT YOUR UNIVERSE, INC.
FOR THE SIX MONTHS ENDED
JUNE 30, 2012

INDEX TO FORM 10-Q

 
PART I
 
Page
     
Item 1
Financial Statements (Unaudited)                                                                                                                                
3
Item 2
Management’s Discussion and Analysis of Financial Condition and
Results of Operations                                                                                                                                
24
Item 3
Quantitative and Qualitative Disclosures About Market Risk                                                                                                                                
29
Item 4
Controls and Procedures                                                                                                                                
29
     
PART II
   
     
Item 1
Legal Proceedings                                                                                                                                
30
Item 1A
Risk Factors                                                                                                                                
30
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                                                
30
Item 3
Defaults Upon Senior Securities                                                                                                                                
30
Item 4
Mine Safety Disclosures                                                                                                                                
30
Item 5
Other Information                                                                                                                                
30
Item 6
Exhibits                                                                                                                                
31
 
Signatures                                                                                                                                
32
 
 
 
 
 
 
2

 
 
PART I

Item 1
Financial Statements
 
Respect Your Universe, Inc.
 
(A Development Stage Company)
 
Balance Sheets
 
             
             
   
June 30, 2012
   
December 31, 2011
 
Assets
 
Unaudited
       
             
Current assets
           
Cash
  $ 456,704     $ 2,698,719  
Inventory
    2,087,156       178,541  
Deposits
    432,296       194,723  
Prepaid expenses
    1,234,510       2,091,341  
Other current assets
    228,740       -  
Total current assets
    4,439,406       5,163,324  
                 
Property and equipment, net
    54,225       47,349  
                 
Other assets
               
Intangible assets, net
    249,050       21,768  
Prepaid expenses, net of current portion
    59,531       297,656  
Deposits
    16,370       -  
Total other assets
    324,951       319,424  
                 
Total assets
  $ 4,818,582     $ 5,530,097  
                 
                 
Liabilities and Stockholders’ Equity
               
                 
Current liabilities
               
Accounts payable and accrued liabilities
  $ 1,656,795     $ 365,067  
Accounts payable and accrued liabilities - related party
    106,768       63,177  
Due to factor, net
    6,134       -  
Loans payable - related party
    -       25,000  
Current portion of capital lease
    11,260       -  
Total current liabilities
    1,780,957       453,244  
                 
Long-term liabilities
               
Capital lease, net of current portion
    98,064       -  
Total long-term liabilities
    98,064       -  
                 
Stockholders’ equity
               
Common stock, $0.001 par value, 500,000,000
               
    shares authorized; 42,439,628 and 40,839,628
               
    shares issued and outstanding, respectively
    42,440       40,840  
Additional paid in capital
    15,671,578       13,261,289  
Deficit accumulated during the development stage
    (12,774,457 )     (8,225,276 )
Total stockholders’ equity
    2,939,561       5,076,853  
                 
Total liabilities and stockholders' equity
  $ 4,818,582     $ 5,530,097  

See accompanying notes to financial statements
 
 
3

 
 
Respect Your Universe, Inc.
 
(A Development Stage Company)
 
Statements of Operations
 
Unaudited
 
                               
                               
                           
From November 21, 2008
 
   
Three Months Ended
   
Six Months Ended
   
(Inception) to
 
   
June 30, 2012
   
June 30, 2011
   
June 30, 2012
   
June 30, 2011
   
June 30, 2012
 
                               
Revenues, net
  $ 107,522     $ -     $ 171,648     $ -     $ 176,456  
                                         
Cost of goods sold
    61,796       -       97,708       -       106,922  
                                         
Gross profit
    45,726       -       73,940       -       69,534  
                                         
Operating expenses
                                       
Marketing and advertising
    783,259       213,955       1,444,106       213,955       2,343,616  
Marketing and advertising - related party
    -       -       -       -       63,900  
Product creation
    156,640       -       156,640       9,912       166,856  
Product creation - related party
    160,421       24,000       475,821       154,162       1,832,666  
General and administrative
    1,556,053       1,323,557       2,546,554       1,345,079       8,405,063  
Loss on impairment of website
    -       -       -       -       31,890  
Total operating expenses
    2,656,373       1,561,512       4,623,121       1,723,108       12,843,991  
                                         
Net loss
  $ (2,610,647 )   $ (1,561,512 )   $ (4,549,181 )   $ (1,723,108 )   $ (12,774,457 )
                                         
Net loss per common share -
                                       
     basic and diluted
  $ (0.06 )   $ (0.06 )   $ (0.11 )   $ (0.07 )   $ (0.54 )
                                         
Weighted average number of common
                                       
     shares outstanding during the period -
                                       
     basic and diluted
    42,439,628       27,090,922       41,947,320       25,656,545       23,504,599  
 
See accompanying notes to financial statements
 
 
4

 
 
Respect Your Universe, Inc.
 
(A Development Stage Company)
 
Statement of Stockholders' Equity (Deficit)
 
From November 21, 2008 (Inception) to June 30, 2012
 
Unaudited
 
                                     
                     
Deficit
             
                     
Accumulated
         
Total
 
               
During the
   
Stock
   
Stockholders'
 
   
Common Stock, $0.001 Par Value
   
Additional
   
Development
   
Subscriptions
   
Equity
 
   
Shares
   
Amount
   
Paid in Capital
   
Stage
   
Receivable
   
(Deficit)
 
                                     
Issuance of common stock for cash - founders ($0.001/share)
    6,250,000     $ 6,250     $ -     $ -       (6,250 )   $ -  
                                                 
Net loss - period ended December 31, 2008
    -       -       -       (49,831 )     -       (49,831 )
                                                 
Balance, December 31, 2008
    6,250,000       6,250       -       (49,831 )     (6,250 )     (49,831 )
                                                 
Receipt of cash on subscription receivable
    -       -       -       -       6,250       6,250  
                                                 
Issuance of common stock for cash and subscription
                                               
     receivable ($0.001, 0.01 and $0.10/share)
    7,855,000       7,855       161,145       -       (33,000 )     136,000  
                                                 
Issuance of common stock for services ($0.001 and $0.10/share)
    3,058,500       3,059       228,541       -       -       231,600  
                                                 
Issuance of common stock in conversion of debt ($0.10/share)
    1,067,000       1,067       105,633       -       -       106,700  
                                                 
Net loss - year ended December 31, 2009
    -       -       -       (367,387 )     -       (367,387 )
                                                 
Balance, December 31, 2009
    18,230,500       18,231       495,319       (417,218 )     (33,000 )     63,332  
                                                 
Receipt of cash on subscription receivable
    -       -       -       -       33,000       33,000  
                                                 
Issuance of common stock for cash ($0.10/share)
    3,765,000       3,765       372,735       -       -       376,500  
                                                 
Issuance of common stock for services ($0.10/share)
    2,000,000       2,000       198,000       -       -       200,000  
                                                 
Net loss - year ended December 31, 2010
    -       -       -       (1,157,218 )     -       (1,157,218 )
                                                 
Balance, December 31, 2010
    23,995,500       23,996       1,066,054       (1,574,436 )     -       (484,386 )
                                                 
Issuance of common stock and warrants for cash
                                               
     ($0.10 - $1.00/share)
    13,917,069       13,917       6,110,318       -       -       6,124,235  
                                                 
Issuance of common stock for services ($0.10 - $1.16/share)
    1,123,095       1,123       151,576       -       -       152,699  
                                                 
Issuance of common stock for future services ($1.12 - 1.27/share)
    1,803,964       1,804       2,181,636       -       -       2,183,440  
                                                 
Share-based compensation
    -       -       3,751,705       -       -       3,751,705  
                                                 
Net loss - year ended December 31, 2011
    -       -       -       (6,650,840 )     -       (6,650,840 )
                                                 
Balance, December 31, 2011
    40,839,628       40,840       13,261,289       (8,225,276 )     -       5,076,853  
                                                 
Issuance of common stock for services ($0.98/share)
    100,000       100       97,900       -       -       98,000  
                                                 
Issuance of common stock and warrants for cash
                                               
     ($1.00/share), net of offering costs of $6,900
    1,500,000       1,500       1,491,600       -       -       1,493,100  
                                                 
Issuance of warrants for capital lease
                    11,650                       11,650  
                                                 
Share-based compensation
    -       -       809,139       -       -       809,139  
                                                 
Net loss - period ended June 30, 2012
    -       -       -       (4,549,181 )     -       (4,549,181 )
                                                 
Balance, June 30, 2012
    42,439,628     $ 42,440     $ 15,671,578     $ (12,774,457 )   $ -     $ 2,939,561  
 
See accompanying notes to financial statements
 
 
5

 
 
Respect Your Universe, Inc.
 
(A Development Stage Company)
 
Statements of Cash Flows
 
Unaudited
 
                   
                   
               
From November 21, 2008
 
   
Six Months Ended
   
(Inception) to
 
   
June 30, 2012
   
June 30, 2011
   
June 30, 2012
 
CASH FLOWS FROM OPERATING ACTIVITIES
                 
Net loss
  $ (4,549,181 )   $ (1,723,108 )   $ (12,774,457 )
Adjustments to reconcile net loss to net cash used in operating activities
                       
Depreciation and amortization
    18,081       233       18,081  
Amortization of stock issued for future services
    799,670       -       1,130,559  
Stock issued for services rendered
    98,000       119,500       682,299  
Share-based compensation expense - options
    595,689       1,136,708       4,300,995  
Share-based compensation expense - warrants
    213,450       -       259,849  
Loss on impairment of website
    -       -       31,890  
Changes in operating assets and liabilities
                       
Inventory
    (1,908,615 )     -       (2,087,156 )
Deposits
    (237,573 )     -       (432,296 )
Prepaid expenses
    295,286       -       (241,160 )
Other current assets
    (228,740 )     -       (228,740 )
Accounts payable and accrued liabilities
    1,291,728       (55,502 )     1,656,795  
Accounts payable and accrued liabilities - related party
    43,591       (16,252 )     106,768  
Due to factor, net
    6,134       -       6,134  
Net cash used in operating activities
    (3,562,480 )     (538,421 )     (7,570,439 )
                         
CASH FLOWS FROM INVESTING ACTIVITIES
                       
Purchases of property and equipment
    (16,684 )     -       (64,033 )
Acquisition of intangible assets
    (109,414 )     (16,765 )     (163,072 )
Deposits
    (16,370 )     -       (16,370 )
Net cash used in investing activities
    (142,468 )     (16,765 )     (243,475 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES
                       
Proceeds from loans payable - related party
    -       25,000       151,700  
Repayments on loans payable - related party
    (25,000 )     -       (45,000 )
Payments on capital lease obligations
    (5,167 )     -       (5,167 )
Proceeds from issuance of common stock and warrants
    1,493,100       3,614,795       8,169,085  
Net cash provided by financing activities
    1,462,933       3,639,795       8,270,618  
                         
Net increase (decrease) in cash
    (2,242,015 )     3,084,609       456,704  
                         
Cash - beginning of year/period
    2,698,719       3,308       -  
                         
Cash - end of year/period
  $ 456,704     $ 3,087,917     $ 456,704  
                         
Supplemental Disclosure of Cash Flow Information
                       
Cash paid during the year/period for:
                       
Interest
  $ 833     $ -     $ 833  
Taxes
  $ -     $ -     $ -  
                         
Supplemental Disclosure of Non-Cash Financing Activities
                       
Stock issued in exchange for debt
  $ -     $ -     $ 106,700  
Stock subscriptions receivable
  $ -     $ 253,000     $ -  
Stock issued for future services
  $ -     $ -     $ 2,183,440  
Warrants issued for capital lease
  $ 11,650     $ -     $ 11,650  
Capital lease obligation incurred to acquire intangible assets
  $ 114,491     $ -     $ 114,491  
 
See accompanying notes to financial statements
 
 
6

 
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
June 30, 2012
Unaudited

 
Note 1 Organization and Nature of Operations

Respect Your Universe, Inc. (“the Company”) was incorporated in the State of Nevada on November 21, 2008 to design, commercialize and market a line of premium athletic apparel.

Note 2 Basis of Presentation

The accompanying unaudited interim 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, 2011 is derived from the audited financial statements presented in the Company’s Annual Report on Form 10-K for the years ended December 31, 2011 and 2010.  The unaudited interim 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, together with the Plan of Operations for the year ended December 31, 2011.

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 six months ended June 30, 2012 are not necessarily indicative of results for the full fiscal year.

Note 3 Liquidity and Management’s Plan
 
As reflected in the accompanying financial statements, the Company had a net loss of $4,549,181 and net cash used in operations of $3,562,480 for the six months June 30, 2012.  The Company has nominal revenue and is in the development stage.

The Company does not yet have a history of financial stability. Historically, the principal source of liquidity has been the issuance of equity securities. 

Management believes that the cash balance on June 30, 2012, current level of working capital, anticipated cash that will be received from expected future sales, and the additional $4,588,516 net proceeds received through the issuance of equity securities in August 2012 will be sufficient to sustain operations for the next twelve months.  See Note 17 (A), Equity Offering.

 
7

 
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
June 30, 2012
Unaudited


However, there can be no assurance that the plans and actions proposed by management will be successful, that the Company will generate anticipated sales, or that unforeseen circumstances will not require additional funding sources in the future.

Note 4 Summary of Significant Accounting Policies
 
Development Stage

The Company's financial statements are presented as those of a development stage enterprise. Activities during the development stage primarily include implementation of the business plan, and obtaining additional debt and/or equity related financing.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 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.

Cash

The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents.  There were no cash equivalents at June 30, 2012 and December 31, 2011, respectively.

The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The Company believes it is not exposed to any significant credit risk on cash and short-term investments due to the temporary unlimited deposit insurance coverage at all FDIC-insured depository institutions through December 31, 2012.

Inventory

Inventory primarily consists of finished goods. The cost of finished goods inventory includes all costs incurred to bring inventory to its existing condition and location including product costs, inbound freight and duty.

Inventory is valued on a lower of cost or market basis based upon the weighted average method of inventory costing.  Market value is estimated based upon assumptions made about future demand and retail market conditions.  If the Company determines that the estimated market value of its inventory is less than the carrying value of such inventory, it records a charge to cost of goods sold to reflect the lower of cost or market.  The Company has not recorded any adjustments for net realizable value during the six months ended June 30, 2012.
 
 
8

 
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
June 30, 2012
Unaudited


Deposits

Short term deposits are generally required by the manufacturer in order to produce inventory.  Long term deposits consist of a security deposit for our upcoming retail location.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation.   The cost of repairs and maintenance is expensed as incurred.  Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets.  Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected as a gain or loss from operations.

The estimated useful lives are:

   
Leasehold improvements
1 year
Computers and office equipment
3 years
Furniture and fixtures
7 years
Software
3 years
Tradeshow and event equipment
2 - 3 years

Impairment of Long Lived Assets

The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful lives of property, equipment and intangible assets or whether the remaining balance of property, equipment and intangible assets should be evaluated for possible impairment. 
 
Revenue Recognition

The Company recognizes product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable.

Revenue is recorded net of discounts and an allowance for estimated returns. The allowance for estimated returns, currently 3% of web sales based on our 90 day return policy on web store sales, is reflected as an accrued liability on the balance sheet.

Cost of Goods Sold

Cost of goods sold includes the cost of purchased finished goods, including inbound freight and duty costs associated with the delivery of goods to our locations.

Shipping and Handling Costs

Costs associated with the Company’s third-party warehouse and outbound shipping and handling costs are included as a component of general and administrative expenses.  Any shipping and handling costs billed to customers is offset against shipping costs included in general and administrative expenses. These amounts are not material for the six months ended June 30, 2012.
 
 
9

 
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
June 30, 2012
Unaudited


Marketing and Advertising

Marketing and advertising costs are generally expensed as incurred.  Marketing and advertising costs include athletic endorsement expenses and marketing contracts.  Accounting for endorsement costs and marketing contracts is based upon the specific contract provisions and are generally expensed over the term of the contract, which ranges from 1 to 2 years.

Of the total amount expensed, and as reflected on the statement of operations, an allocation has been made to a related party classification for amounts incurred with an entity that the Chairman of the Board has ownership in.

Product Creation

The Company expenses product design and creation costs as incurred.  Product creation expenses include fees and share-based compensation paid to contractors for the design, development, merchandising and sourcing of the Company’s product lines.

Of the total amount expensed, and as reflected on the statement of operations, an allocation has been made to a related party classification for amounts incurred with an entity that is controlled by the Company’s former Chief Executive Officer and current Chief Operating Officer.  See Note 17(C), CEO Resignation and Appointment.

Risks and Uncertainties

The Company intends to operate in an industry that is subject to intense competition and change in consumer demand. The Company's operations are subject to significant risk and uncertainties including financial and operational risks and the potential risk of business failure. Also see Note 3, Liquidity and Management’s Plan.
 
Share-Based Payments
 
The Company recognizes all forms of share-based payments, including stock option grants, warrants, and restricted stock grants, at their fair value on the grant date, which are based on the estimated number of awards that are ultimately expected to vest.
 
Share-based payments, excluding restricted stock, are valued using a Black-Scholes option pricing model. Share-based payment awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable. The grants are amortized on a straight-line basis over the requisite service periods, which is generally the vesting period.
 
 
10

 
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
June 30, 2012
Unaudited
 
 
When computing 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.

 
The Company has not paid any dividends on common stock since inception and does not anticipate paying dividends on common stock in the foreseeable future.
 
 
The expected option term is computed using the “simplified” method.
         
 
The expected volatility is based on the historical volatility of our common stock based on the daily quoted closing trading prices.

 
The forfeiture rate is based on the historical forfeiture rate for unvested stock options.

Earnings (Loss) per Share

Basic earnings (loss) per share is computed by dividing net income (loss) by weighted average number of shares of common stock outstanding during each period.  Diluted earnings (loss) per share is computed by dividing net income (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 June 30, 2012 and 2011:

   
2012
   
2011
 
             
Stock options, exercise price $0.69 - $2.26
    3,546,170       1,650,000  
Common stock warrants, conversion price $0.98 - $1.80
    6,430,151       5,415,151  
Total common stock equivalents
    9,976,321       7,065,151  

Since the Company incurred a net loss during the six months ended June 30, 2012 and 2011, the effect of considering any common stock equivalents, if exercisable, would have been anti-dilutive.  A separate computation of diluted earnings (loss) per share is not presented.

The Company has a total of 870,000 unvested options that will vest through December 2015.  All options and warrants are expected to vest without forfeiture.

Fair Value of Financial Instruments

The Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or non-recurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.
 
 
11

 
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
June 30, 2012
Unaudited


The following are the hierarchical levels of inputs to measure fair value:

 
·
Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

 
·
Level 2: Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 
·
Level 3: Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

The Company's financial instruments consisted primarily of cash, inventory, deposits, prepaid expenses, accounts payable and accrued liabilities, accounts payable - related party, due to factor and loans payable - related party. The carrying amounts of the Company's financial instruments generally approximated their fair values as of June 30, 2012 and December 31, 2011, respectively.

Reclassifications

Certain prior period amounts have been reclassified to conform to current year presentation.  The reclassifications had no effect on financial condition, operations or cash flows.

Recent Accounting Pronouncements

There are no recent accounting pronouncements that are expected to have a material effect on the Company’s interim unaudited financial statements.

Note 5 Prepaid Expenses

Prepaid expenses consist of the following as of June 30, 2012 and December 31, 2011:

   
2012
   
2011
 
   
Cash
   
Common Stock
   
Total
   
Cash
   
Common Stock
   
Total
 
                                     
Investor relations
  $ -     $ 535,781     $ 535,781     $ 22,812     $ 773,906     $ 796,718  
Marketing
    225,270       517,100       742,370       460,038       1,078,645       1,538,683  
Other
    15,890       -       15,890       53,596       -       53,596  
Total prepaid expenses
    241,160       1,052,881       1,294,041       536,446       1,852,551       2,388,997  
Less current portion
    (241,160 )     (993,350 )     (1,234,510 )     (536,446 )     (1,554,895 )     (2,091,341 )
Prepaid expenses,
  net of current portion
  $ -     $ 59,531     $ 59,531     $ -     $ 297,656     $ 297,656  

 
12

 
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
June 30, 2012
Unaudited


Prepaid expenses are generally amortized over the related service period which ranges from 1 to 2 years.

One of the arrangements reported within prepaid expenses was modified during the quarter ending March 31, 2012.  Although the contract term did not change, the modification resulted in a change in the timing of benefits to be received over the remaining term.  As a result, the Company revised the related amortization method from specific identification to straight-line basis.  The change has no material impact on net loss for the current period.  Additionally, the Company believes the change will not have a material impact on net income (loss) in future periods during 2012.

Note 6 Other Current Assets

Other current assets primarily include deferred offering costs in the amount of $190,411 consisting of legal and filing fees relating to the Company’s initial public offering on the TSX Venture Exchange.  The deferred offering costs were offset against offering proceeds.  See Note 17(A), Equity Offering.

Note 7 Property and Equipment

Property and equipment consist of the following as of June 30, 2012 and December 31, 2011:
 
   
2012
   
2011
 
             
Leasehold improvements
  $ 2,400     $ 2,400  
Computers and office equipment
    11,998       11,998  
Furniture and fixtures
    5,850       4,230  
Software
    38,335       30,500  
Tradeshow and event equipment
    7,229       -  
      65,812       49,128  
Accumulated depreciation
    (11,587 )     (1,779 )
Property and equipment, net
  $ 54,225     $ 47,349  

Note 8 Intangible Assets

Intangible assets consist of the following as of June 30, 2012 and December 31, 2011:

   
2012
   
2011
 
             
Patent and trademarks
  $ 82,193     $ 17,101  
Website development, net
    40,716       4,667  
Domain name
    126,141       -  
Intangible assets, net
  $ 249,050     $ 21,768  

(A)           Patents and Trademarks

The Company capitalizes legal fees and filing costs associated with the development of its patents and trademarks.  Patents and trademarks are generally amortized over an estimated useful life of 5 years using the straight-line method beginning on the registration or grant date, however, patents and trademarks with indefinite useful lives are not amortized.  No amortization expense was recorded as of June 30, 2012 and December 31, 2011, respectively.
 
 
13

 
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
June 30, 2012
Unaudited


(B)           Website Development

The Company capitalizes certain costs associated with the development of its websites.  Other costs related to the planning and maintenance of the websites are expensed as incurred.  Amortization is provided over the estimated useful life of 2 years using the straight-line method for financial statement purposes.

As of June 30, 2012 and December 31, 2011, the Company’s website development costs are as follows:

   
2012
   
2011
 
             
Website development
  $ 50,156     $ 4,667  
Accumulated amortization
    (9,440 )     -  
Website development, net
  $ 40,716     $ 4,667  

The Company’s current website was placed into service in February 2012.  Amortization expense for the six months ended June 30, 2012 and 2011 was $9,440 and $0, respectively.

Provision for Impairment

In December 2011, the Company executed an agreement for the development of a new website to support the expanded web store which was launched during the first quarter of 2012.  See also Note 8 (B), Website Development.  As a result, the Company determined that there was a significant decrease in the market value of the original website and a significant adverse change in the extent or manner in which the original website would be used in subsequent periods.  Therefore, an impairment loss of $31,890 was recognized for the year ended December 31, 2011.

(C)           Domain Name

The Company capitalized the costs associated with the acquisition of its domain name, ryu.com.  The estimated useful life of the website domain is indefinite and accordingly related capitalized costs are not amortized. See Note 12, Capital Lease.

Note 9 Due (to) from Factor

In January 2012, the Company entered into a factoring agreement whereby it sells its wholesale trade accounts receivable to a factor without recourse. Under the agreement, the factor assumes the risk of loss resulting from a customer’s financial inability to pay at maturity, in exchange for a fee of 1.25% on the first $5,000,000 in gross factored receivables.  The fee for factored receivables in excess of $5,000,000 is 1.00%.  The minimum aggregate factoring charge payable under the agreement is $50,000 per year.
 
 
14

 
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
June 30, 2012
Unaudited


As part of the agreement, the factor provides all credit and collections support for the Company. Upon collection, the factor reimburses the Company for purchased invoices on a semi-weekly basis, net of factoring fees and chargebacks.

Amounts due (to) from factor consist of the following as of June 30, 2012 and December 31, 2011:

   
2012
   
2011
 
             
Due from factor
  $ 18,091     $ -  
Due to factor (1)
    (24,225 )     -  
Due to factor, net
  $ (6,134 )   $ -  

 
(1)
In addition to fees owed for outstanding receivables sold to factor, this amount includes an accrual of the prorated annual minimum aggregate factoring charge as described above.

Note 10 Credit Facility

In June 2012, the Company entered into a one year, unsecured, credit facility. The credit facility has a maximum borrowing capacity of $500,000. Under this credit facility, the Company will pay interest at a rate of 6% per year.

No balance was outstanding under the revolving credit facility at June 30, 2012.  In July 2012, the Company made a $200,000 draw upon the credit facility.

Note 11 Loans Payable - Related Party

In 2008, the Company entered into an agreement with a stockholder that advanced $49,831.  The same stockholder advanced an additional $56,869 during 2009.  These advances were non-interest bearing, unsecured, and due on demand. In November 2009, the stockholder exchanged their outstanding debt, totaling $106,700, for 1,067,000 shares of common stock ($0.10/share).  There was no gain or loss recorded on this debt conversion.

On August 28, 2010, the Company’s then Chief Executive Officer, who is now a Director, loaned the Company $20,000. The loan was non-interest bearing, unsecured and was repaid on August 15, 2011.

On March 8, 2011, an entity affiliated with the Company’s then Chief Executive Officer, who is now a Director, loaned the Company $25,000. The loan is non-interest bearing, unsecured and was repaid on March 8, 2012.

Note 12 Capital Lease

On February 1, 2012, the Company entered into a capital lease agreement to lease the domain name ryu.com for 10 years.  At the end of the lease term, title to the domain name will automatically transfer to the Company.  See Note 8 (C), Domain Name.
 
 
15

 
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
June 30, 2012
Unaudited


During the six months ended June 30, 2012 and 2011, the Company incurred and paid interest in the amount of $833 and $0 related to the capital lease, respectively.

Note 13 Stockholders’ Equity (Deficit)

(A)
Stock Issued for Cash

Year Ended December 31, 2008

On November 21, 2008, the Company issued 6,250,000 shares of common stock to its founders, for a subscription receivable of $6,250 ($0.001/share), which was received in 2009.

Year Ended December 31, 2009

The Company issued 7,855,000 shares of common stock for a total of $169,000 ($0.001 - $0.10/share).  Of the total proceeds raised, $33,000 was received in 2010.

Year Ended December 31, 2010

The Company issued 3,765,000 shares of common stock for $376,500 ($0.10/share).

Year Ended December 31, 2011

The Company issued 8,501,918 shares of common stock for $2,875,140 ($0.10 - $1.00/share), net of direct offering costs of $13,478.

The Company issued 5,415,151 shares for $3,249,095 ($0.60/share), net of direct offering costs in the amount of $5,000.  The Company also issued the holders one stock purchase warrant with a maturity of 2 years. The exercise price is $1.80 and requires a mandatory conversion by the holder if the market price of the common stock reaches $3.60 for at least ten consecutive trading days. The warrants issued entitled the holders to purchase an additional 5,415,151 shares of the Company’s common stock.

Six Months Ended June 30, 2012

In February 2012, The Company issued 1,500,000 shares for $1,493,100 ($1.00/share), net of direct offering costs of $6,900.  The Company also issued the holders one half of one common share stock purchase warrant (750,000 shares) with a maturity of 2 years and 6 months. The exercise price is $1.80 and the Company may accelerate the expiry date of the warrants if the market price of the common stock reaches $4.00 for at least 20 consecutive trading days.
 
 
16

 
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
June 30, 2012
Unaudited

 
(B)
Stock Issued for Services
 
Year Ended December 31, 2009

The Company issued 3,058,500 shares of common stock to consultants, in exchange for services rendered, for at total of $231,600 ($0.001 - $0.10/share), based upon the fair value of the services rendered.

Year Ended December 31, 2010

The Company issued 2,000,000 shares of common stock to consultants, in exchange for services rendered, having a fair value of $200,000 ($0.10/share), based upon the fair value of the services rendered.

Year Ended December 31, 2011

The Company issued 1,123,095 shares of common stock, in exchange for services rendered having a fair value of $152,699 ($0.10 - $1.16/share), based upon the quoted closing trading price.

The Company issued 1,803,964 shares of common stock for future services, having a fair value of $2,183,440 ($1.12 - $1.27/share), based upon the quoted closing trading price.  

Stock issued for future services is recorded as a component of prepaid expenses on the balance sheet.
Amortization of common stock issued for future services consists of the following as of June 30, 2012:

   
Short-Term
   
Long-Term
   
Total
 
                   
Balance - December 31, 2010
  $ -     $ -     $ -  
Stock issued for future services
    1,885,784       297,656       2,183,440  
Amortization of stock issued for future services
    (330,889 )     -       (330,889 )
Balance - December 31, 2011
    1,554,895       297,656       1,852,551  
Stock issued for future services
    -       -       -  
Amortization of stock issued for future services
    (561,545 )     (238,125 )     (799,670 )
Balance - June 30, 2012
  $ 993,350     $ 59,531     $ 1,052,881  

Six Months Ended June 30, 2012

On January 26, 2012 the Company issued 100,000 shares of common stock to a consultant for services rendered, for a total of $98,000 ($0.98/share), based upon the quoted closing trading price.

(E)           Stock Options

On June 10, 2011, the Company adopted the 2011 Incentive Award Plan “the Plan” and on May 18, 2012, the Board of Directors approved certain revisions to the Plan, whereby the aggregate number of securities reserved for issuance, set aside and made available for issuance under the Plan was revised from (i) not to exceed 10% of the issued and outstanding of our common stock at the time of granting of options (including all options granted by our Company to date) to (ii) 8,487,925 shares of our common stock.
 
 
17

 
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
June 30, 2012
Unaudited
 
As of June 30, 2012 and December 31, 2011, the Company had the following stock option grants:

   
Quantity
                   
   
of Shares
   
Fair Market
   
Share Vesting Schedule
   
Expiration
 
Grant Date
 
Granted
   
Value
   
2011
   
2012
   
2013
   
2014
   
2015
   
(Years)
 
                                                 
June 2011
    1,800,000     $ 1,149,664       1,650,000       75,000       75,000       -       -     5 – 10  
June 2011 (1)
    600,000       1,305,054       600,000       -       -       -       -     10  
July 2011
    350,000       761,282       350,000       -       -       -       -     10  
August 2011
    228,670       282,067       228,670       -       -       -       -     10  
September 2011
    13,500       19,816       13,500       -       -       -       -     10  
October 2011
    250,000       298,836       203,125       12,500       12,500       12,500       9,375     10  
Subtotal
    3,242,170       3,816,719       3,045,295       87,500       87,500       12,500       9,375        
                                                               
January 2012
    770,000       609,967       -       192,500       192,500       192,500       192,500     10  
March 2012
    4,000       3,075       -       4,000       -       -       -     10  
April 2012
    600,000       496,760       -       600,000       -       -       -     5  
May 2012 (2)
    (200,000 )     (79,216 )             (125,000 )     (25,000 )     (25,000 )     (25,000 )      
Subtotal
    1,174,000       1,030,585       -       671,500       167,500       167,500       167,500        
      4,416,170     $ 4,847,303       3,045,295       759,000       255,000       180,000       176,875        

 
(1)
Options issued for services discussed in Note 15 (A), Commitments - Related Party.
 
(2)
Options forfeited, upon termination of employment.  During the six months ended June 30, 2012, the Company reversed $5,529 relating to the unvested portion of the forfeited stock options.

The Black-Scholes assumptions used are as follows:

   
June 30, 2012
   
December 31, 2011
 
             
Exercise price
  $ 0.90 - $1.00     $ 0.69 - $2.26  
Expected dividends
    0%       0%  
Expected volatility
    121% - 145%       127% - 136%  
Risk free interest rate
    0.39% - 0.83%       1.92% - 3.22%  
Expected life of option
 
5 - 10 years
   
5 - 10 years
 
Expected forfeitures
    0%       0%  

The following is a summary of the Company’s stock option activity:

   
Options
   
Weighted
Average
Exercise Price
   
Weighted Average
Remaining
Contractual Life
   
Average
Intrinsic
Value
 
                         
Balance - December 31, 2010
    -     $ -       -     $ -  
Granted
    3,242,170       1.24       -       -  
Exercised
    -       -       -       -  
Forfeited/Cancelled
    -       -       -       -  
Balance - December 31, 2011
    3,242,170       1.24    
8.58 years
    $ 558,000  
Granted
    1,374,000       0.96       -       -  
Exercised
    -       -       -       -  
Forfeited/Cancelled
    (200,000 )     1.12       -       -  
Outstanding - June 30, 2012
    4,416,170     $ 1.15    
7.83 years
    $ 378,000  
Exercisable - June 30, 2012
    3,546,170     $ 1.20    
7.66 years
    $ 346,500  
 
 
18

 
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
June 30, 2012
Unaudited


   
June 30, 2012
   
December 31, 2011
 
             
Grant date fair value of options
  $ 4,847,303     $ 3,816,718  
Weighted average grant date fair value
  $ 1.10     $ 1.18  
                 
Outstanding options held by related parties
    2,332,670       1,728,670  
Exercisable options held by related parties
    1,832,670       1,728,670  
Fair value of stock options held by related  parties
  $ 3,156,861     $ 2,638,169  

During the six months ended June 30, 2012 and 2011, the Company expensed $595,689 and $1,136,708 related to stock option grants, respectively.

(F)
Warrants

As of June 30, 2012 and December 31, 2011, the Company granted the following warrants:

   
Quantity
                   
   
of Shares
   
Fair Market
   
Share Vesting Schedule
   
Expiration
 
Grant Date
 
Granted
   
Value
   
2011
   
2012
   
(Years)
 
                               
June 2011 (1)
    5,415,151     $ -       5,415,151       -     2  
August 2011
    50,000       92,798       25,000       25,000     3  
Subtotal
    5,465,151       92,798       5,440,151       25,000        
                                       
January 2012 (2)
    15,000       11,650       -       15,000     10  
January 2012 (3)
    100,000       86,859       -       100,000     5  
February 2012 (4)
    750,000       -       -       750,000     2  
April 2012 (3)
    100,000       80,192       -       100,000     5  
Subtotal
    965,000       178,701       -       965,000        
                                       
Total
    6,430,151     $ 271,499       5,440,151       990,000        

 
(1)
Warrants issued in connection with the June 2011 private placement discussed in Note 13 (A), Stock Issued for Cash.

 
(2)
Warrants issued in connection with the domain name discussed in Note 8 (C), Domain Name.

 
(3)
The Company has also committed to grant an additional 300,000 warrants to this consultant for services to be rendered. The grants will be in increments of 100,000 warrants after 3 months of service, over the course of 1 year. The Company will value these warrants at each grant date.   All warrants under the agreement will be fully vested upon grant. Grant dates will be July 2012, October 2012 and January 2013.  See also Note 16 (B), Subsequent Events, regarding the July 2012 issuance.

 
(4)
Warrants issued in connection with the February 2012 private placement discussed in Note 13 (A), Stock Issued for Cash.
 
 
19

 
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
June 30, 2012
Unaudited


The Black-Scholes assumptions used are as follows:

   
June 30, 2012
   
December 31, 2011
 
             
Exercise price
  $ 0.98 - 1.20     $ 1.20 - 1.27  
Expected dividends
    0%       0%  
Expected volatility
    121% - 145%       145%  
Risk free interest rate
    0.30 – 0.82%       0.55 – 0.77%  
Expected life of warrant
 
5 – 10 years
   
3 – 10 years
 
Expected forfeitures
    0%       0%  

The following is a summary of the Company’s warrant activity:
 
   
 
Warrants
   
Weighted
Average
Exercise Price
   
Weighted Average
Remaining
Contractual Life
   
Average
Intrinsic
Value
 
                         
Outstanding - December 31, 2010
    -     $ -       -     $ -  
Granted
    5,465,151       1.80       -       -  
Exercised
    -       -       -       -  
Forfeited/Cancelled
    -       -       -       -  
Outstanding - December 31, 2011
    5,465,151       1.80    
1.49 years
    $ -  
Granted
    965,000       0.60       -       -  
Exercised
    -       -       -       -  
Forfeited/Cancelled
    -       -       -       -  
Outstanding - June 30, 2012
    6,430,151     $ 1.78    
1.26 years
    $ -  
Exercisable - June 30, 2012
    6,430,151     $ 1.78    
1.26 years
    $ -  

During the six months ended June 30, 2012 and 2011, the Company expensed $213,450 and $0 related to stock warrants issued for services, respectively.

Note 14 Related Party Transactions

As of December 31, 2011, a director made advances on behalf of the Company for $10,865, which is included in Accounts payable - related party on the balance sheet.  In January 2012, this amount was repaid.

As of June 30, 2012, officers made advances on behalf of the Company for $6,768, which is included in Accounts payable - related party on the balance sheet which was repaid in August 2012.

Note 15 Commitments

(A)           Related Party

Beginning in February 1, 2010, the Company entered into a consulting agreement with Exit 21 Global Solutions, LLC (“Exit 21”), an entity controlled by the Company’s former Chief Executive Officer and current Chief Operating Officer, to assist the Company with product design, creation, development, merchandising, sourcing and production.  The term of the commitment expired June 30, 2012.
 
 
20

 
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
June 30, 2012
Unaudited


The consulting agreement had both cash and non-cash components for compensation as follows:

         
Common Stock Shares
   
Common Stock Options
       
   
Cash
   
Quantity
of Shares
   
Fair Market
Value
   
Quantity
of Shares
   
Fair Market
Value
   
Total
Compensation