Item 1
Business
Overview
Respect Your Universe, Inc., was incorporated in the State of Nevada on November 21, 2008 to capitalize on the increasing popularity of Mixed Martial Arts (MMA) by designing, commercializing and marketing a line of premium performance athletic apparel.
RYU is based on a very straight forward concept. We believe that in every athlete lies the heart of a warrior. No matter what sport they play or what discipline they practice; every athlete at the most basic level is essentially a fighter. They stand alone, their success motivated 100% from within themselves.
Based upon the principles of Respect, Strength, Honor and Sustainability, RYU is dedicated to creating, not only a product, but a movement and community that are inspired by a profound respect for the art of athleticism, the spirit of combat, the warrior ethic and the universe encompassing it all.
Product
RYU’s premium athletic products include competition, training and everyday sports and outerwear, as well as headwear and accessories that are designed to keep up with the demands of an active lifestyle. Built for athletes, suited for style, RYU’s premium high performance line embodies the art of the sport and places emphasis on respect, strength, honor and sustainability as the foundation of their apparel and products.
Crafted from organic and/or recycled materials utilizing some of the best yarn and fabric suppliers in the world, RYU is leading the athletic apparel industry by example, creating a product that is not only the pinnacle of athletic performance, comfort and style, but that is also designed with respect toward maintaining the health of our environment.
RYU’s debut men’s product line was introduced in February 2012. We anticipate introducing our women’s line in July 2012 and line of children’s youth in the near future.
Product Marketing
In 2011, to create brand awareness for RYU in anticipation of our commercial launch, we began marketing our brand by sponsoring prominent UFC fighters, professional athletes and martial arts tournaments to endorse our brand and the use of our products.
Product Research and Development
We believe our research and development efforts are a key factor for success. RYU strives to use technical innovation in the construction of our apparel to produce products that enhance athletic performance. Our products are manufactured with technical fabrications produced by third parties and developed in collaboration with our product development team. RYU engages athletes who test and evaluate products during the design and development process. We outsource our product design and development to an outside consulting firm.
Product Manufacturing
RYU outsources the commercial manufacturing of its product lines to factories outside of the United States. During 2011, this apparel production occurred primarily with 7 manufactures located in Asia. RYU’s independent suppliers buy raw materials in bulk for the manufacturing of our apparel and accessories.
Our international sources of supply are subject to the usual risks of doing business abroad, such as possible revaluation of currencies, import duties, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political instability and terrorism. We have not, to date, been materially affected by any such risk, but cannot predict the likelihood of such developments occurring in the future.
Product Distribution
Currently RYU apparel and accessories are available through the RYU webstore which was launched in August 2011 and selected retailers. We plan to distribute our products through a variety of retail channels including high-end retailers, MMA-specialty and sporting goods stores, menswear and sneaker boutiques and select department stores.
We have contracted with a third party to outsource our inventory receiving, warehousing and our product distribution and shipping needs.
Competition
The market for athletic apparel is highly competitive. We compete with a significant number of apparel brands, as well as wholesalers and direct sellers of general athletic and leisure athletic apparel. This includes competition from established companies as well as new entrants into the athletic apparel market.
Many of our competitors have significant advantages over our Company in terms of scale, operating histories, number of locations in operation, capital and other resources. The intense competition and the rapid changes in technology and consumer preferences constitute significant risk factors for our operations in the industry. We are a start-up company that has just begun to commence commercial operations. Accordingly, there can be no assurances that the Company can successfully compete in the market of athletic apparel and accessories.
We believe our strategy of focusing on the MMA and individual athletes as the inspiration for our product design differentiates us and will enable us to obtain a competitive position in the industry. Building our product around the athlete will provide a product that is premium in quality, more authentic, and provide better athletic performance and function. Management believes that these characteristics will provide us with the ability to compete successfully in this industry.
Patents and Trademarks
On December 10, 2008, a U.S. federal trademark registration was filed for RYU. This trademark is owned by Respect Your Universe, Inc. The U.S. Patent and Trademark Office (“USPTO”) has given the RYU trademark serial number of 77630773.
On December 10, 2008, a U.S. federal trademark registration was filed for RESPECT YOUR UNIVERSE. This trademark is owned by Respect Your Universe, Inc. The USPTO has given the RESPECT YOUR UNIVERSE trademark serial number of 77630779.
We intend to continue to strategically register, both domestically and internationally, patents, trademarks and copyrights we utilize today and those we develop in the future.
Employees
The Company currently has nine full time employees and two part-time employees. Our employees are responsible for performing or overseeing all operations of the Company. Specifically, our employee’s direct responsibilities include, but are not limited to, seeking the investment capital necessary to commence and build commercial operations, creating our marketing, branding and sales strategy, driving the overall product design strategy, directing product development, manufacturing, operations, and all financial reporting and general administrative duties.
Item 1A
Item 1A
Risk Factors
Not required for a smaller reporting company.
Item 1B
Item 1B
Unresolved Staff Comments
Not required for a smaller reporting company.
Item 2
Item 2
Properties
Our principal corporate offices are located at 5940 South Rainbow Boulevard, Las Vegas, Nevada 89118. We do not have a lease agreement for the space and our usage of the space could be terminated at any time.
Our sales, customer service and administrative offices are located at 818 North Russell Street, Suite A, Portland, Oregon 97227. We are leasing approximately 1,200 square feet of office space for a term of one year. The lease expires in August 2012 and we have the option to extend the lease term for an additional twelve months.
We outsource the manufacturing of our products and the distribution and warehousing needs for our products to third parties and as such have no current plans to lease or own space for such needs. We believe that our current locations will be sufficient for the operation of our business over the next twelve months.
Item 3
Item 3
Legal Proceedings
From time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results.
Item 4
Item 4 Mine Safety Disclosures
Not applicable.
PART II
Item 5
Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our Common Stock is listed to trade in the over-the-counter securities market through the Financial Industry Regulatory Authority ("FINRA") Automated Quotation Bulletin Board System, under the symbol “RYUN”. We have been eligible to participate in the OTC Bulletin Board since December 30, 2010 and began trading in April 2011.
The following table sets forth the quarterly high and low bid prices for our Common Stock during the last two fiscal years, as reported by a Quarterly Trade and Quote Summary Report of the OTC Bulletin Board. The quotations reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions.
On March 9, 2012, the closing price for the common stock on the OTCBB was $0.98 per share.
Holders
As of December 31, 2011, we had 510 holders of our common stock.
Dividend Policy
The payment of dividends in the future rests within the discretion of our Board of Directors and will depend upon our earnings, capital requirements and financial condition, as well as other relevant factors. We do not intend to pay any cash dividends in the foreseeable future, but intend to retain all earnings, if any, for use in our business.
Equity Compensation Plan Information
On June 10, 2011, the Company adopted the 2011 Incentive Award Plan (“the Plan”). The total number of shares of stock which may be granted by options or certain stock awards shall not exceed 5,000,000. The Plan indicates that the exercise price of an award is equivalent to the market value of the Company’s common stock on the grant date.
The following table gives information about our common stock that may be issued under our existing equity compensation plan grants as of December 31, 2011.
(1) Represents warrants to purchase common stock issued to a consultant not a part of any formal equity compensation plan.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item 6
Item 6
Selected Financial Data
Not required for smaller reporting companies.
Item 7
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
RYU designs, develops, markets and sells premium athletic apparel and accessories. Our fiscal 2011 results demonstrated our continued focus on the development of our products and positioning ourselves for sustainable, profitable long-term growth.
Results of Operations
The following discussion of the financial condition and results of operations should be read in conjunction with the financial statements included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future.
Year ended December 31, 2011and 2010 and for the period from November 21, 2008 (inception) to December 31, 2011:
Revenue
The Company generated gross revenues in the amount of $4,808 during the period from November 21, 2008 (inception) to December 31, 2011. Gross revenues during the years ended December 31, 2011 and 2010 were $2,821 and $0, respectively.
In 2009, as a test run solely for the limited purpose of gaining feedback on our brand design, we produced 400 pieces of initial designs of graphic T-shirts and sold them through a third party retail website. In 2011, we produced a limited quantity of graphic tee shirts and headwear for resale on our webstore at www.ryu.com, which launched in August 2011.
Cost of revenue during the period from November 21, 2008 (inception) to December 31, 2011 was $9,214 resulting in a negative gross margin of $4,406. During the development stage, the Company has been primarily focused on corporate organization, the initial public offering and the research, development and manufacturing of our products. We do not anticipate earning significant revenues until such time we launch our commercial product lines in spring 2012.
Expenses
During the year ended December 31, 2011, total operating expenses for the Company were $6,653,661 compared to $1,157,218 for the year ended December 31, 2010. The majority of the operating expenses incurred during the year ended December 31, 2011were non-cash transactions comprised of share based payments for services valued at $4,235,293,this total includes incentive stock options and warrants valued at $3,751,705
Total operating expenses for the period from November 21, 2008 (inception) through December 31, 2011were $8,220,870.
The Company incurred $894,440 in marketing and advertising expenses to create brand media and distribute marketing communications during the year ended December 30, 2011. Of the total amount expensed in 2011, $63,900 was for related party development of brand and marketing media.
The Company had no marketing expenses for the comparable period of 2010 and marketing and advertising expenses in the amount of $963,410 for the period from November 21, 2008 (inception) through December 31, 2011.
During the year ended December 31, 2011, the Company incurred research and development expenses of $366,360 compared to $1,000,701 during the year ended December 31, 2010. For the period from November 21, 2008 (inception) through December 31, 2011, total research and development expenses were $1,367,061 of which $1,356,845 was paid to Exit 21, an entity controlled by the Company’s Chief Executive Officer and Chief Operation Officer.
General and administrative expenses for the year ended December 31, 2011were $5,360,971 compared to $156,517 for the year ended December 31, 2010. This increase reflects the Company’s investment in organization and infrastructure to support its business objectives for 2011 and 2012. The primary components of general and administrative expense during these respective periods were investor relations expenditures $457,688 ($178,594 of which was share based compensation) and $0, employee compensation expense $1,840,153 ($1,590,665 share based compensation) and $0, legal, professional and consulting fees of $2,597,785 ($2,229,239 share based compensation) and $39,000, and travel expenses of $169,817 and $9,653.
For the period from November 21, 2008 (inception) through December 31, 2011, general and administrative expenses were $5,858,509.
In December 2011, the Company executed an agreement for the development of a new website to support the expanded web store which launched during the first quarter of 2012. As a result, the Company has recognized an impairment loss in the amount of $31,890 based on the net asset value as of December 31, 2011.
Net Loss
Our net loss for the year ended December 31, 2011 was $6,650,840 as compared to a net loss of $1,157,218 for the year ended December 31, 2010. Our accumulative net loss for the period from November 21, 2008 (inception) to December 31, 2011was $8,225,276.
Liquidity and Financial Condition
As of December 31, 2011, the Company had current assets of $5,163,324, current liabilities of $453,244 and working capital of $4,710,080 compared to current assets of $3,308, current liabilities of $487,694 and a working capital deficit of $484,386 at December 31, 2010.
Our cash balance as of December 31, 2011was $2,698,719 compared to $3,308 at December 31, 2010. The increase in cash is primarily a result of net proceeds from the sale of common stock and warrants pursuant to private placements in the third quarter of 2011. The Company believes it currently has sufficient funds to execute its business plan through the second quarter of 2012.
We anticipate that additional capital will be required to implement our business plan beyond the second quarter of 2012 and to purchase inventory to support our revenue forecast for 2013. In order to obtain the necessary capital, the Company may need to sell additional shares of common stock or borrow funds from private lenders. In February 2012 the Company successfully raised $1,500,000 in additional capital though an equity financing.
Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities as a means of raising additional capital, stockholders may experience dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock.
Operating Activities
During the year ended December 31, 2011, the Company has increased its cash position by $2,698,719. During this period we used cash in the amount of $3,324,291 for operating activities. The major components of operating activities include a net loss of $6,650,840 offset by the amortization of prepaid stock compensation $330,889, stock issued for service of $152,699, share based compensation of $3,751,705, an increase in inventory of $178,541, an increase in deposits of $194,723, an increase in prepaid expenses of $536,446, an increase in accounts payable and accrued liabilities of $303,625, and a decrease in accounts payable - related party of $343,075.
By comparison, during the year ended December 31, 2010, the Company used cash in the amount of $489,524 for operating activities. Cash used in operating activities included a net loss of $1,157,218 offset by stock issued for services in the amount of $200,000, and an increase in accounts payable of $467,694.
Investing Activities
The Company used cash in the amount of $109,533 in investing activities during the year ended December 31, 2011. Investing activities during that period included $49,127 for property and equipment purchases, $18,269 associated with the development of its patents and trademarks and $42,137 for the development of its website. All of costs have been capitalized and amortized over the expected useful lives of the assets. Depreciation and amortization during the year ended December 31, 2011 totaled $8,526.
By contrast, there were no investing activities for the year ended December 31, 2010. For the period from November 21, 2008 (inception) to December 31, 2011, cash used in investing activities was $109,533 and included the investing activities that occurred during the year ended December 31, 2011discussed above.
Financing Activities
During the year ended December 31, 2011, the Company received related party advances in the amount of $25,000, repaid $20,000 to related parties, and received net proceeds from the sale of common stock and warrants of $6,124,235 for total cash provided by financing activities of $6,129,235.
During the year ended December 31, 2010, the Company received related party advances in the amount of $20,000 and proceeds from the sale of common stock in the amount of $409,500 for total cash provided by financing activities of $429,500.
From November 21, 2008 (inception) to December 31, 2011, the Company received proceeds from a loan due to a stockholder of $106,700, received related party advances in the amount of $45,000, repaid $20,000 to related parties and received proceeds from sale of common stock and warrants of $6,675,985 for total cash provided by financing activities of $6,807,685. The shareholder loan of $106,700 was subsequently exchanged for stock.
We presently have a credit line (credit card) of $25,000 with no amounts outstanding as of December 31, 2011. In order to obtain future capital, we may need to utilize our line of credit, sell additional shares of common stock or borrow funds from private lenders. However, any downturn in the U.S. stock and debt markets is likely to make it more difficult to obtain financing through the issuance of equity or debt securities. As a result, there can be no assurance that we will be successful in obtaining additional funding.
Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock.
Liquidity and Management’s Plans
As reflected in the accompanying financial statements, the Company had a net loss of $6,650,840 and net cash used in operations of $3,324,291 for the year ended December 31, 2011.
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 December 31, 2011, of approximately $2.7 million, current level of positive working capital, anticipated cash that will be received from expected future sales, and additional funds through the issuance of equity securities will be sufficient to sustain operations for the next twelve months.
However, there can be no assurance that the plans and actions proposed by management will be successful, that the Company will generate anticipated revenues from the sale of its line of mixed martial arts apparel, or that unforeseen circumstances will not require additional funding sources in the future or effectuate plans to conserve liquidity.
Plan of Operations
We are a development stage company in the process of designing, commercializing and marketing a line of premium performance athletic apparel. Our business plan follows the apparel industry norm of launching two commercial products lines each year for the Spring and Fall seasons.
The Company has retained a senior leadership team with extensive experience in the apparel and sporting goods industry. We opened our product creation and sales office in Portland, Oregon during the second quarter of 2011 and executed a one year lease agreement on July 31, 2011.
We have contracted with Exit 21 Global Solutions, LLC (Exit 21), a consulting firm controlled by the Company’s Chief Executive Officer and Chief Operating Officer, to design, develop and source all of our products to date. We may extend our current agreement with Exit 21 to provide services for our future needs, or we may retain a different entity to provide such services, or the Company may undertake to perform such services on its own.
A limited quantity of Fall 2011 product, including graphic tee shirts and headwear, has been designed and produced. We launched these products on our webstore at www.ryu.com during the third quarter of 2011.
Our Spring 2012 product line has been designed and sales samples have been produced that will be utilized to obtain Spring 2012 orders. Factory production orders were delivered to our warehouse in January 2012 and we have launched our sell-in process for Spring 2012.
Our Fall 2012 product line has been expanded to include women’s apparel and additional headwear and accessory products. Sales samples have been produced that will be utilized to obtain Fall 2012 orders and factory production orders have been placed for delivery to our warehouse in late 2nd quarter and early 3rd quarter of 2012.
Summary of Significant Accounting Policies
Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
Our significant accounting policies are summarized in Note 3 of our financial statements. 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 cause effect on our consolidated 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:
Cash and Cash Equivalents
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 December 31, 2011and December 31, 2010, respectively.
Patents and Trademarks
The Company capitalizes the costs associated with the development of its patents and trademarks including legal fees and filing costs. In the event that legal fees are incurred to defend the patent or trademark rights, those costs are capitalized if the defense of the patent or trademark is successful. If defense of the patent or trademark is unsuccessful, the legal costs of defense and remaining unamortized costs are expensed. Amortization is provided over the estimated useful life of 5 years using the straight-line method for financial statement purposes.
Website Development
The Company capitalizes the costs associated with the development of its website. Other costs related to the maintenance of the website are expensed as incurred. Amortization is provided over the estimated useful life of 3 years using the straight-line method for financial statement purposes.
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.
In instances where final acceptance of the product is specified by the customer, revenue is deferred until all acceptance criteria have been met.
Revenue is recorded net of an allowance for estimated returns, price concessions, and other discounts. Such allowance is reflected as a reduction to accounts receivable when the Company expects to grant credits for such items; otherwise, it is reflected as a liability.
Marketing and Advertising
Marketing and advertising costs are expensed as incurred. Advertising production costs are expensed in the month the advertising runs. Media placement costs are expensed in the month during which the advertisement appears. In addition, advertising costs include 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.
Research and Development
The Company expenses research and development costs as incurred. Research and development expenses include share based compensation and fees paid to a consultant for the design, development, merchandising, sourcing and production of a clothing line.
Share Based Payments
The Company recognizes all forms of share-based payments, including stock option grants, warrants, restricted stock grants and stock appreciation rights, 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. If an award is granted, but vesting does not occur, any previously recognized compensation cost is reversed in the period related to the termination of service.
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 our inception and do not anticipate paying dividends on our common stock in the foreseeable future.
●
The expected option term is computed using the “simplified” method as permitted under the provisions of Staff Accounting Bulletin (“SAB”) 107. SAB 107’s guidance was extended indefinitely by SAB 110.
●
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 our unvested stock options.
Recent Accounting Pronouncements
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The guidance in ASU 2011-04 changes the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements, including clarification of the FASB's intent about the application of existing fair value and disclosure requirements and changing a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this ASU should be applied prospectively and are effective for interim and annual periods beginning after December 15, 2011. Early adoption by public entities is not permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (SPEs).
Item 7A
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting companies.
Item 8
Item 8
Financial Statements and Supplementary Data
See.
Item 9
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A
Item 9A
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Rules 13a-15(b) and 15d-15(b) under the Exchange Act, requires us to carry out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2011, being the date of our most recently completed fiscal year end. This evaluation was implemented under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer.
Based on this evaluation, management concluded that, as of December 31, 2011, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of our financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our officers have assessed the effectiveness of our internal controls over financial reporting as of December 31, 2011. In making this assessment, management used the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon its assessment, management concluded that, as of December 31, 2011, our internal control over financial reporting was effective.
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to an exemption for smaller reporting companies under Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Changes in Internal Control over Financial Reporting
During the fourth quarter of the year ended December 31, 2011, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B
Item 9B
Other Information
None.
PART III
Item 10
Item 10
Directors, Executive Officers and Corporate Governance
Below are the names and certain information regarding our executive officers and directors during 2011.
Directors are elected to serve until the next annual meeting of stockholders and until their successors are elected and qualified. Currently there are three seats on our Board of Directors.
The biographies of each of the officer and directors are listed below and contain information regarding the person’s service as a director, business experience, public company director positions currently held or held at any time during the last five years, information regarding involvement in certain legal or administrative proceedings, if applicable, and the experiences, qualifications, attributes or skills that caused the Board to determine that the person should serve as a director in light of our business and structure.
Kristian J. Andresen, Chairman of the Board and Secretary
As our Chairman of the Board, Kristian J. Andresen is responsible for the continued strategic evolution of its business. He brings to the Board his several years of experience in organizing and managing corporations, as well as advertising and marketing.
Kristian J. Andresen is an experienced producer and entrepreneur. Mr. Andresen currently owns and operates Transmission Films, which has been in business since June 2007. Prior to his current venture, Mr. Andresen worked as an Executive Producer and Managing Partner at Circle Productions Limited, where he was responsible for managing all aspects of company business and overseeing marketing. Mr. Andresen’s current work for Transmission Films does not present a conflict of interest with his role for the Company.
John Wood, President and Director
As our President, Mr. Wood is responsible for all sports marketing initiatives of the Company. He brings to the Board an insight into the entertainment industry, specifically in Las Vegas.
John Wood is currently the Director of Customer Development for two nightclubs in Las Vegas, ‘Tryst’ and ‘XS’. Being that Las Vegas is the epicenter of the Mixed Martial Arts (MMA) Universe in North America, Mr. Wood is positioned as one of RYU’s direct contacts with super-stars, fighters, managers, promoters and the UFC organization itself. John’s strategic position in Las Vegas allows RYU to make major marketing in-roads within the Mixed Martial Arts industry. John also holds a black belt in Judo, studies Muay Thai, Jujitsu and continues to train, which places him along side the athletes and super-stars of yesterday, today and tomorrow. Mr. Wood’s current work for Tryst Nightclub and XS Nightclub do not present a conflict of interest with his role for the Company.
Emmanuel K. Brown, Director
As a Director, Mr. Brown brings a wealth of experience in the marketing of sports apparel and the operations of larger successful competitive companies to the Board of Directors.
Mr. Brown is the former Marketing Director for Jordan Brand, a division of Nike, Inc. Here, he drove local, national, and global market executions in order to support brand initiatives throughout the key categories and consumer segmentations development. He also provided in-depth analysis to identify opportunities, gaps, and points of over-distribution for distribution strategy development, ensuring the commercial landscape reflected the overall brand principles and values. His development of sustainable marketing strategies helped to leverage the Jordan brand within specific gender and ethnic markets for all apparel and footwear products. He continued to leverage relationships to enhance the branding of the athletes, products, and communications on a national and international scale by developing campaigns for TV, Print, Digital realms, which impact the brand’s endorsement relations by assisting in the overall key branding direction. He was also instrumental in developing the branding presence for basketball, soccer, and consumer events, including creating strategic plans, and coordinating events, promotions, and tie-ins for the brand of Jordan. His strategic planning creations provided leadership in the completion of research and analytical support related to initiatives and special projects for the strategic planning function for the entire brand. He has worked independently to design and lead research projects related to market trends, consumer profiles, and competitive intelligence, and has also provided direction, ensuring alignment with corporate strategic objectives. Mr. Brown’s current work for Creative Spark does not present a conflict of interest with his role for the Company.
Christopher S. Martens, Chief Executive Officer
Mr. Martens is the former GM/Merchandise Director at Nike Inc., Global Director of Apparel for the 2008 Beijing Olympics Nike, Inc., Divisional Merchandise Manager for Global Nike ACG and Global Nike Outerwear, Nike, Inc. He also has 11 years of retail experience at Eastern Mountain Sports. Mr. Martens is recognized within the industry for successfully capitalizing on new opportunities and reigniting mature businesses with dramatic results. Mr. Martens is known for identifying global trends, and creating product and brand strategies that maximize profits as well as brand appeal.
Erick E. Siffert, Chief Operating Officer
Mr. Siffert is the former Director of Operations at Lululemon Athletica, Mr. Siffert created processes, protocols and business practices for a high growth company. His results have played a large role in lululemon’s current success and buoyant bottom line. Over 19 years of experience at Nike Inc. leading Global Sourcing Strategies for Nike Outdoor and Global ACG. Managed European Liaison Office and created product process innovations such as Mfg. Center of Excellence concept now used in various forms by Nike Mfg.
Steven H. Eklund, Chief Financial Officer
Mr. Eklund is the former CFO Nike Apparel and Equipment, CFO Nike Golf, and COO/CFO Nike ACG. He has also held senior executive positions at Hanna Andersson Corporation, Kistler-Morse Corporation, Eddie Bauer and General Mills Inc. Mr. Eklund is a seasoned finance and strategy executive who has successfully grown both top and bottom line results, optimized capital structures and increased cash flow while implementing disciplined planning processes and financial controls.
Kevin J. Hyland, Vice President of Sales
Mr. Hyland has over 27 years of experience in the sporting goods and sporting apparel industry. His experience in the development of product sales strategy and retail presentation have been key components to success of several major brands across Western Europe, Asia and the United States. Recent key positions included Director of Sales for Equipment, Soccer and Team Sales for Nike in Asia-Pacific, and Director of Sales for the US Strategic Sporting Goods Group at Adidas. Mr. Hyland has also served as a consultant for Gatorade.
Family Relationships
There are no family relationships among our officer and directors.
Directors
Our bylaws authorize no less than one (1) director. At December 31, 2011, we had three directors on the board and in January 2012, we appointed Christopher S. Martens, our CEO, as a fourth director.
Board of Director Committees
Currently our Board of Directors does not have an audit, compensation or nomination committee. Our Board as a whole fulfills these functions.
Board of Director Independence
While the Company is not subject to any director independence requirements, none of our Directors qualify as independent.
Term of Office
Our Directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until the next annual meeting or until removed by the board.
Compliance with Section 16(a) of the Exchange Act
Not applicable.
Code of Ethics.
The Company has adopted a code of ethics which is available for viewing on its website at www.ryu.com.
Item 11
Item 11
Executive Compensation
The following table sets forth the compensation paid to the officers, directors and key employees of the Company for the fiscal years ended December 31, 2011 and 2010:
(1)
Chairman of the Board and Secretary.
(2)
President and Director.
(3)
Director.
(4)
Chief Executive Officer and Director.
(5)
Chief Operating Officer.
(6)
Chief Financial Officer.
(7)
Vice President of Sales.
(8)
From June 1, 2011 through December 31, 2011, our Chief Executive Officer and Chief Executive Officer served their respective roles in a consulting capacity through Exit 21 Global Solutions, LLC, an entity they control.
(9)
Consists of health insurance and dental insurance premiums paid by the Company.
Employment Arrangements
From June 1, 2011 to December 31, 2011, we contracted for our Chief Executive Officer and Chief Operating Officer services via a consulting agreement with Exit 21 Global Solutions, LLC. Per the terms of the agreement, Christopher S. Martens and Erick E. Siffert each received monthly compensation of $13,000 from June 1, 2011 through December 31, 2011 for their CEO and COO consulting services, respectively.
Effective January 1, 2012, the Company executed an employment agreement with Christopher S. Marten, its Chief Executive Officer, as follows:
For all other officers, we have entered into our standard at-will employment letter agreements.
The following table set forth information regarding the outstanding equity awards as of December 31, 2011 for our officers:
Outstanding Equity Awards At Fiscal Year-End
(1)
All options granted are fully vested at December 31, 2011.
During the fiscal year ended December 31, 2011, there were no exercises of stock options by the named officers.
Compensation of Directors
We do not pay any cash compensation to any of our non-employee directors for their service on the board during the years ended December 31, 2011 and 2010.
Item 12
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth certain information regarding beneficial ownership of our common stock as of March 6, 2012.
·
By each person who is known by us to beneficially own more than 5% of our common stock;
·
By each of our officers and directors; and
·
By all of our officers and directors as a group.
(1)
Includes options to purchase 510,550 shares of common stock.
(2)
Includes options to purchase 518,120 shares of common stock.
(3)
Includes 1,000,000 shares as owned indirectly of the 2,000,000 shares owned by Exit 21 Global Consulting LLC, and options to purchase 300,000 shares of common stock.
(4)
Includes 1,000,000 shares as owned indirectly of the 2,000,000 shares owned by Exit 21 Global Consulting LLC, and options to purchase 300,000 shares of common stock.
(5)
Includes 250,000 shares owned indirectly by Xcel Advisors LLC, and options to purchase 200,000 shares of common stock.
(6)
Option to purchase shares of common stock.
(7)
Includes options to purchase 1,928,670 shares of common stock.
As used in this table, "beneficial ownership" means the sole or shared power to vote, or to direct the voting of, a security, or the sole or shared investment power with respect to a security (i.e., the power to dispose of, or to direct the disposition of, a security). In addition, for purposes of this table, a person is deemed, as of any date, to have "beneficial ownership" of any security that such person has the right to acquire within 60 days after such date.
Other than the shareholders listed above, we know of no other person who is the beneficial owner of more than five percent (5%) of our common stock.
The persons named above have full voting and investment power with respect to the shares indicated. Under the rules of the Securities and Exchange Commission, a person (or group of persons) is deemed to be a "beneficial owner" of a security if he or she, directly or indirectly, has or shares the power to vote or to direct the voting of such security, or the power to dispose of or to direct the disposition of such security. Accordingly, more than one person may be deemed to be a beneficial owner of the same security. A person is also deemed to be a beneficial owner of any security, which that person has the right to acquire within 60 days, such as options or warrants to purchase our common stock.
Item 13
Item 13
Certain Relationships and Related Transactions, and Director Independence
Other than listed below, during the last two fiscal years, there have been no transactions, or proposed transactions, which have materially affected or will materially affect us in which any director, executive officer or beneficial holder of more than 5% of the outstanding common or preferred stock, or any of their respective relatives, spouses, associates or affiliates, has had or will have any direct or material indirect interest. We have no policy regarding entering into transactions with affiliated parties.
Exit 21 Global Consulting LLC
On February 1, 2010, the Company entered into a consulting agreement with Exit 21 Global Solutions, LLC, an entity controlled by the Company’s Chief Executive Officer and Chief Operating Officer, to assist the Company in the development of our clothing line. The agreement had both cash and non-cash components for compensation. The agreement was initially for six months. Under the terms of the agreement, total cash compensation due was $314,860, which has been paid in full. In connection with the agreement, the Company also issued 500,000 shares of our common stock.
On May 3, 2010, the parties extended the consulting agreement until May 31, 2011. The extension had both cash and non-cash components for compensation. The total cash compensation was $780,000 to be paid in monthly increments of $65,000 from June 1, 2010 through May 1, 2011. In June 2011, the parties agreed to waive the cash payments for the months of March, April and May 2011, thereby reducing the cash compensation to $585,000, which has been fully paid. In connection with the extension, the Company issued 1,500,000 shares of our common stock.
On June 1, 2011, the parties entered into a new consulting agreement to assist the Company in the continued development and production of our clothing line and to provide us outsourced CEO and COO consulting services. The contract had both cash and non-cash components for compensation. The total cash compensation is $350,000 which is paid in monthly increments of $50,000 from June 1, 2011 through December 31, 2011. In connection with the agreement, on July 1, 2011 the Company issued options to purchase 600,000 shares of our common stock.
Transmission Holdings, Inc.
On March 8, 2011, Transmission Holdings, Inc., an entity affiliated with the Company’s Chairman of the Board, loaned the Company $25,000. The loan is non-interest bearing, unsecured and was repaid on March 5, 2012.
During the year ended December 31, 2011, the Company paid $63,900 to Transmission Holdings, Inc. for brand and marketing media.
Xcel Advisors, LLC
On May 19, 2010, the Company entered into a consulting agreement with Xcel Advisors, LLC, an entity controlled by the Company’s current Chief Financial Officer, to provide financial consulting services. Under the terms of the agreement, the Company issued 250,000 shares of our common stock for services rendered.
Item 14
Item 14
Principal Accounting Fees and Services
The fees billed for professional services rendered by our principal accountant are as follows:
Pre-Approval Policies and Procedures
The board of directors must pre-approve any use of our independent accountants for any non-audit services. All services of our auditors are approved by our whole board and are subject to review by our whole board.
PART IV
Item 15
Item 15
Exhibits, Financial Statement Schedules
(1)
Incorporated by reference to the exhibits to the registrant’s registration statement on Form S-1, file number 333-166171, filed April 20, 2010.
·
Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Respect Your Universe, Inc.
Date: March 9, 2012
/s/ Christopher S. Martens
Christopher S. Martens, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Kristian J. Andresen
Kristian J. Andresen
Chairman of the Board and Secretary March 9, 2012
/s/ Christopher S. Martens
Director and Chief Executive Officer
Christopher S. Martens
(Principal Executive Officer) March 9, 2012
/s/ John Wood
John Wood
President and Director March 9, 2012
/s/ Emmanuel K. Brown
Emmanuel K. Brown
Director March 9, 2012
/s/ Steven H. Eklund
Chief Financial Officer
Steven H. Eklund
(Principal Financial and Accounting Officer) March 9, 2012
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of:
Respect Your Universe, Inc.
We have audited the accompanying balance sheets of Respect Your Universe, Inc. (a development stage company) as of December 31, 2011 and 2010, and the related statements of operations, stockholders’ equity (deficit) and cash flows for the years ended December 31, 2011 and 2010 and from November 21, 2008 (inception) to December 31, 2011. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Respect Your Universe, Inc. (a development stage company) as of December 31, 2011 and 2010, and the results of its operations and its cash flows for the years ended December 31, 2011 and 2010 and from November 21, 2008 (inception) to December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.
Berman & Company, P.A.
/s/ Berman & Company, P.A.
Boca Raton, Florida
March 5, 2012
See accompanying notes to financial statements
See accompanying notes to financial statements
See accompanying notes to financial statements
See accompanying notes to financial statements
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2011 and 2010
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 market a line of athletic apparel.
Note 2 Liquidity and Management’s Plans
As reflected in the accompanying financial statements, the Company had a net loss of $6,650,840 and net cash used in operations of $3,324,291 for the year ended December 31, 2011.
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 December 31, 2011, of approximately $2.7 million, current level of positive working capital, anticipated cash that will be received from expected future sales, and additional funds through the issuance of equity securities will be sufficient to sustain operations for the next twelve months.
However, there can be no assurance that the plans and actions proposed by management will be successful, that the Company will generate anticipated revenues from the sale of its line of mixed martial arts apparel, or that unforeseen circumstances will not require additional funding sources in the future or effectuate plans to conserve liquidity.
Note 3 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.
Such estimates and assumptions impact, among others, the following: net realizable value of inventory and potential impairment, valuation and potential impairment of future services to be provided from prepaid stock compensation, valuation and potential impairment associated with intellectual property and website development costs, the fair value of share-based payments, estimates and the valuation allowance for deferred tax assets due to continuing and expected future operating losses.
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2011 and 2010
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 and Cash Equivalents
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 December 31, 2011 and December 31, 2010, respectively.
The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. At December 31, 2011 the cash in the Company’s bank accounts exceeded the federally insured limits by $2,472,180. 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
At December 31, 2011, the Company had purchased inventory items that it does not yet physically control. The items purchased are in route but in the possession of the carrier.
Inventory is valued on a lower of cost or market basis based upon the weighted average method of costing inventory. Inventory consists of finished goods. A provision will be made to reduce excess or obsolete inventory to its net realizable value. The Company has not recorded any adjustments for net realizable value for the year ended December 31, 2011.
Deposits
Deposits are generally required from the manufacturer in order to produce inventory. At December 31, 2011, the Company had paid deposits for inventory items received in 2012.
Prepaid Expenses
Includes costs incurred for prepaid commissions, insurance, marketing, promotions and professional fees. All prepaid expenses are amortized over the estimated useful life, which ranges from 1 to 2 years.
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2011 and 2010
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Expenditures for property acquisitions, development, construction, improvements and major renewals are capitalized. 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:
Property and equipment consist of the following as of December 31, 2011 and 2010:
Patents and Trademarks
The Company capitalizes the costs associated with the development of its patents and trademarks including legal fees and filing costs. In the event that legal fees are incurred to defend the patent or trademark rights, those costs are capitalized if the defense of the patent or trademark is successful. If defense of the patent or trademark is unsuccessful, the legal costs of defense and remaining unamortized costs are expensed. Amortization is provided over the estimated useful life of 5 years using the straight-line method for financial statement purposes.
As of December 31, 2011 and 2010, the Company‘s patent and trademark costs are as follows:
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2011 and 2010
Website Development
The Company capitalizes the costs associated with the development of its website. Other costs related to the maintenance of the website are expensed as incurred. Amortization is provided over the estimated useful life of 3 years using the straight-line method for financial statement purposes.
As of December 31, 2011 and 2010, the Company‘s website development costs are as follows:
The new website was placed into service in February 2012.
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 and equipment or whether the remaining balance of property and equipment should be evaluated for possible impairment.
In December 2011, the Company executed an agreement for the development of a new website to support the expanded web store which is expected to launch during the first quarter of 2012 (see website development note above). As a result, the Company has determined 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 will be used in subsequent periods. An impairment loss, of $31,890, has been recognized for the year ended December 31, 2011.
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 an allowance for estimated returns, price concessions, and other discounts. Such allowance is reflected as a reduction to accounts receivable when the Company expects to grant credits for such items; otherwise, it is reflected as a liability.
In instances where final acceptance of the product is specified by the customer, revenue is deferred until all acceptance criteria have been met.
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2011 and 2010
Marketing and Advertising
Marketing and advertising costs are expensed as incurred. Advertising production costs are expensed in the month the advertising runs. Media placement costs are expensed in the month during which the advertisement appears. In addition, advertising costs include 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. The Company recognized marketing and advertising expense of $894,440 and $0 for the years ended December 31, 2011 and 2010, respectively.
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.
The Company had prepaid marketing and advertising assets of $460,038 and $0 at December 31, 2011 and December 31, 2010, respectively, which is a component of prepaid expenses on the balance sheet.
Research and Development
The Company expenses research and development costs as incurred. Research and development expenses include share based compensation and fees paid to a consultant for the design, development, merchandising, sourcing and production of a clothing line. Research and development costs for the years ended December 31, 2011 and 2010 were $366,360 and $1,000,701, respectively.
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 Chief Executive Officer and Chief Operating Officer.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at tax rates expected to be in effect when such assets or liabilities are realized or settled. Deferred income tax assets are reduced by valuation allowances when necessary.
Assessing whether deferred tax assets are realizable requires significant judgment. The Company considers all available positive and negative evidence, including historical operating performance and expectations of future operating performance. The ultimate realization of deferred tax assets is often dependent upon future taxable income and therefore can be uncertain. To the extent the Company believes it is more likely than not that all or some portion of the asset will not be realized, valuation allowances are established against the Company’s deferred tax assets, which increase income tax expense in the period when such a determination is made.
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2011 and 2010
Income taxes include the largest amount of tax benefit for an uncertain tax position that is more likely than not to be sustained upon audit based on the technical merits of the tax position. Settlements with tax authorities, the expiration of statutes of limitations for particular tax positions, or obtaining new information on particular tax positions may cause a change to the effective tax rate. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes on the statements of operations.
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 2 regarding liquidity and management’s plan.
Share Based Payments
The Company recognizes all forms of share-based payments, including stock option grants, warrants, restricted stock grants and stock appreciation rights, 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. If an award is granted, but vesting does not occur, any previously recognized compensation cost is reversed in the period related to the termination of service.
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 our inception and do not anticipate paying dividends on our common stock in the foreseeable future.
●
The expected option term is computed using the “simplified” method as permitted under the provisions of Staff Accounting Bulletin (“SAB”) 107. SAB 107’s guidance was extended indefinitely by SAB 110.
●
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 our 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.
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2011 and 2010
The Company had the following potential common stock equivalents at December 31, 2011 and 2010:
Since the Company incurred a net loss during 2011 and 2010, 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 196,875 unvested options that will vest through September 2015 and a total of 25,000 unvested common stock warrants that will vest evenly at 5,000 per month through May 2012. 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.
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.
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2011 and 2010
The Company's financial instruments consisted primarily of cash, inventory, deposits, prepaid expenses, accounts payable and accrued liabilities, accounts payable - related party, and loans payable - related party. The carrying amounts of the Company's financial instruments generally approximated their fair values as of December 31, 2011 and 2010, respectively, due to the short-term nature of these instruments.
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
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The guidance in ASU 2011-04 changes the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements, including clarification of the FASB's intent about the application of existing fair value and disclosure requirements and changing a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this ASU should be applied prospectively and are effective for interim and annual periods beginning after December 15, 2011. Early adoption by public entities is not permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.
Note 4 Commitments - 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 Chief Executive Officer and Chief Operating Officer, to assist the Company in the development of a clothing line.
As of December 31, 2011 and 2010 this vendor represents 16% and 87% of accounts payable, respectively. See also Note 10 (B) for the terms of the consulting agreement with Exit 21 subsequent to December 31, 2011.
The contract had both cash and non-cash components for compensation as follows:
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2011 and 2010
(1) Fair value of $0.10/share was based upon recent cash offerings to third parties.
(2) In connection with the 600,000 stock options granted on July 1, 2011, the Black-Scholes assumptions used were as follows:
As of December 31, 2011, these options were fully vested.
Note 5 Loans Payable
(A) Loans Payable - Related Party
On August 28, 2010, the Company’s then Chief Executive Officer, who is now the Chairman of the Board, 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 the Chairman of the Board, loaned the Company $25,000. The loan is non-interest bearing, unsecured and was repaid on March 8, 2012.
(B) Loans Payable - Stockholder
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.
Note 6 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.
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2011 and 2010
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.
(B) Stock Issued for Cash and Warrants - Private Placement dated June 2011
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.
(C) 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.
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2011 and 2010
(D) Prepaid Stock Compensation
During year ended December 31, 2011, 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.
The following represents the allocation of prepaid stock compensation as of December 31, 2011:
(E) Stock Options
On June 10, 2011, the Company adopted the 2011 Incentive Award Plan (“the Plan”). The total number of shares of stock which may be granted by options or certain stock awards shall not exceed 5,000,000. The Plan indicates that the exercise price of an award is equivalent to the market value of the Company’s common stock on the grant date.
In addition to the 600,000 options issued for services discussed in Note 4, the Company had the following stock option grants during 2011:
The Black-Scholes assumptions used are as follows:
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2011 and 2010
The following is a summary of the Company’s stock option activity:
During 2011, the Company expensed $3,705,306 related to stock option grants.
(F) Warrants
In addition to the 5,415,151 warrants issued in connection with the June 2011 private placement discussed in Note 6 (B), the Company issued the following warrants for services rendered in 2011:
During 2011, the Company expensed $46,399 related to stock warrants issued for services. The remaining unamortized $46,399 associated with the grant of 50,000 warrants noted above will be recognized as selling and administrative expense during 2012.
The Black-Scholes assumptions used are as follows:
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2011 and 2010
The following is a summary of the Company’s warrant activity:
At December 31, 2011 and 2010, the total intrinsic value of warrants outstanding and exercisable was $0 and $0, respectively.
Note 7 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. In January 2012, this amount was repaid.
Note 8 Income Taxes
The Company recognized deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. The Company will establish a valuation allowance to reflect the likelihood of realization of deferred tax assets.
The Company has net operating loss carry forwards for tax purposes totaling approximately $3,526,000, at December 31, 2011, expiring through 2031. There is a limitation on the amount of taxable income that can be offset by carry forwards after a change in control (generally greater than a 50% change in ownership). Temporary differences, which give rise to a net deferred tax asset, are as follows:
Significant deferred tax assets at December 31, 2011 and 2010 are approximately as follows:
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2011 and 2010
The valuation allowance at December 31, 2010 was approximately $388,000. The net change in valuation allowance during the year ended December 31, 2011 was an increase of approximately $810,000. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not, that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
Based on consideration of these items, management has determined that enough uncertainty exists relative to the realization of the deferred income tax asset balances to warrant the application of a full valuation allowance as of December 31, 2011 and 2010, respectively.
The actual tax benefit differs from the expected tax benefit for the years ended December 31, 2011 and 2010, respectively, (computed by applying the U.S. Federal Corporate tax rate of 34% to income before taxes) approximately as follows:
Note 9 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.
Note 10 Subsequent Events
(A) Commitments
On February 1, 2012, the Company entered into a domain lease agreement to lease www.ryu.com for 10 years at $1,000 per month for a total of $120,000. During the first five years of the agreement, the Company shall also give lessor product up to $11,000 in retail value.
At the end of the lease term, title to the domain name will transfer to the Company. The Company intends to capitalize this asset and record a corresponding capital lease liability. The asset will be amortized over a life of 10 years.
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2011 and 2010
In connection with the domain lease agreement, the Company issued the following warrants:
The Black-Scholes assumptions used are as follows:
(B) Commitments - Related Party
On January 1, 2012, the Company entered into a consulting agreement with Exit 21 Global Solutions, LLC, (“Exit 21”) an entity controlled by the Company’s Chief Executive Officer and Chief Operating Officer, for product design, creation, development, merchandising, sourcing and production. The term of the agreement is for six months and expires June 30, 2012. The total cash compensation is $386,000.
(C) Employment Agreements
Effective January 1, 2012, the Company executed an employment agreement with its Chief Executive Officer as follows:
Through December 31, 2011, the Chief Executive Officer had served the same role, but in a consulting capacity through Exit 21.
(D) Stock Issued for Cash and Warrants
In February 2012, The Company issued 1,500,000 shares for $1,500,000 ($1.00/share). The Company also issued the holders a half stock purchase warrant (750,000 shares) with a maturity of 2 years and 6 months. The exercise price is $1.80 and requires a mandatory conversion by the holder if the market price of the common stock reaches $4.00.
(E) Stock Issued for Services
On January 26, 2012 the Company issued 100,000 shares of common stock to a consultant, in exchange for services rendered, for a total of $98,000 ($0.98/share), based upon the quoted closing trading price.
Respect Your Universe, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2011 and 2010
(F) Stock Options
On January 24, 2012, the Company had the following stock option grants:
The Black-Scholes assumptions used are as follows:
(G) Warrants
In addition to the 15,000 warrants issued in connection with the domain lease agreement in Note 10 (A) and the 750,000 warrants issued in connection with the February 2012 private placement discussed in Note 10 (D), the Company also granted the following warrants for services rendered in January 2012:
(1) The Company has also committed to grant an additional 400,000 warrants to this consultant. 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 for services rendered at each grant date, and these warrants will be fully vested upon grant. Grant dates will be April 2012, July 2012, October 2012 and January 2013.
The Black-Scholes assumptions used are as follows: