PINX:RYUN Respect Your Universe, Inc. Quarterly Report 10-Q Filing - 6/30/2012
Effective Date 6/30/2012
| • FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012 • EXHIBIT 10.1 • EXHIBIT 31.1 • EXHIBIT 31.2 • EXHIBIT 32.1 • EXHIBIT 32.2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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)
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.
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
2
PART I
See accompanying notes to financial statements
3
See accompanying notes to financial statements
4
See accompanying notes to financial statements
5
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:
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:
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:
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:
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:
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:
Note 8 Intangible Assets
Intangible assets consist of the following as of June 30, 2012 and December 31, 2011:
(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:
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:
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)
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
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:
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:
The Black-Scholes assumptions used are as follows:
The following is a summary of the Company’s stock option activity:
18
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 expensed $595,689 and $1,136,708 related to stock option grants, respectively.
As of June 30, 2012 and December 31, 2011, the Company granted the following warrants:
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:
The following is a summary of the Company’s warrant activity:
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:
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