RYU APPAREL INC. - FORM 10-Q

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EX-31.2 - EXHIBIT 31.2 - RYU APPAREL INC.	ex31_2.htm
EX-31.1 - EXHIBIT 31.1 - RYU APPAREL INC.	ex31_1.htm
EX-10.1 - EXHIBIT 10.1 - RYU APPAREL INC.	ex10_1.htm
EX-32.1 - EXHIBIT 32.1 - RYU APPAREL INC.	ex32_1.htm
EX-32.2 - EXHIBIT 32.2 - RYU APPAREL INC.	ex32_2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2012

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

For the transition period from _______ to _______

Commission File No. 333-166171

Respect Your Universe, Inc.

(Exact name of registrant as specified in its charter)

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

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

1-888-455-6183

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

ý Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

o Yes ý No (Not required)

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

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

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

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

RESPECT YOUR UNIVERSE, INC.

FOR THE SIX MONTHS ENDED

JUNE 30, 2012

INDEX TO FORM 10-Q

PART I		Page

Item 1	Financial Statements (Unaudited)	3
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4	Controls and Procedures	29

PART II

Item 1	Legal Proceedings	30
Item 1A	Risk Factors	30
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3	Defaults Upon Senior Securities	30
Item 4	Mine Safety Disclosures	30
Item 5	Other Information	30
Item 6	Exhibits	31
	Signatures	32

PART I

Item 1

Financial Statements

Respect Your Universe, Inc.
(A Development Stage Company)
Balance Sheets


	June 30, 2012			December 31, 2011
Assets	Unaudited

Current assets
Cash	$	456,704		$	2,698,719
Inventory		2,087,156			178,541
Deposits		432,296			194,723
Prepaid expenses		1,234,510			2,091,341
Other current assets		228,740			-
Total current assets		4,439,406			5,163,324

Property and equipment, net		54,225			47,349

Other assets
Intangible assets, net		249,050			21,768
Prepaid expenses, net of current portion		59,531			297,656
Deposits		16,370			-
Total other assets		324,951			319,424

Total assets	$	4,818,582		$	5,530,097


Liabilities and Stockholders’ Equity

Current liabilities
Accounts payable and accrued liabilities	$	1,656,795		$	365,067
Accounts payable and accrued liabilities - related party		106,768			63,177
Due to factor, net		6,134			-
Loans payable - related party		-			25,000
Current portion of capital lease		11,260			-
Total current liabilities		1,780,957			453,244

Long-term liabilities
Capital lease, net of current portion		98,064			-
Total long-term liabilities		98,064			-

Stockholders’ equity
Common stock, $0.001 par value, 500,000,000
shares authorized; 42,439,628 and 40,839,628
shares issued and outstanding, respectively		42,440			40,840
Additional paid in capital		15,671,578			13,261,289
Deficit accumulated during the development stage		(12,774,457	)		(8,225,276	)
Total stockholders’ equity		2,939,561			5,076,853

Total liabilities and stockholders' equity	$	4,818,582		$	5,530,097

See accompanying notes to financial statements

Respect Your Universe, Inc.
(A Development Stage Company)
Statements of Operations
Unaudited


													From November 21, 2008
	Three Months Ended						Six Months Ended						(Inception) to
	June 30, 2012			June 30, 2011			June 30, 2012			June 30, 2011			June 30, 2012

Revenues, net	$	107,522		$	-		$	171,648		$	-		$	176,456

Cost of goods sold		61,796			-			97,708			-			106,922

Gross profit		45,726			-			73,940			-			69,534

Operating expenses
Marketing and advertising		783,259			213,955			1,444,106			213,955			2,343,616
Marketing and advertising - related party		-			-			-			-			63,900
Product creation		156,640			-			156,640			9,912			166,856
Product creation - related party		160,421			24,000			475,821			154,162			1,832,666
General and administrative		1,556,053			1,323,557			2,546,554			1,345,079			8,405,063
Loss on impairment of website		-			-			-			-			31,890
Total operating expenses		2,656,373			1,561,512			4,623,121			1,723,108			12,843,991

Net loss	$	(2,610,647	)	$	(1,561,512	)	$	(4,549,181	)	$	(1,723,108	)	$	(12,774,457	)

Net loss per common share -
basic and diluted	$	(0.06	)	$	(0.06	)	$	(0.11	)	$	(0.07	)	$	(0.54	)

Weighted average number of common
shares outstanding during the period -
basic and diluted		42,439,628			27,090,922			41,947,320			25,656,545			23,504,599

See accompanying notes to financial statements

Respect Your Universe, Inc.
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit)
From November 21, 2008 (Inception) to June 30, 2012
Unaudited

							Deficit
							Accumulated						Total
							During the			Stock			Stockholders'
	Common Stock, $0.001 Par Value				Additional		Development			Subscriptions			Equity
	Shares		Amount		Paid in Capital		Stage			Receivable			(Deficit)

Issuance of common stock for cash - founders ($0.001/share)		6,250,000	$	6,250	$	-	$	-			(6,250	)	$	-

Net loss - period ended December 31, 2008		-		-		-		(49,831	)		-			(49,831	)

Balance, December 31, 2008		6,250,000		6,250		-		(49,831	)		(6,250	)		(49,831	)

Receipt of cash on subscription receivable		-		-		-		-			6,250			6,250

Issuance of common stock for cash and subscription
receivable ($0.001, 0.01 and $0.10/share)		7,855,000		7,855		161,145		-			(33,000	)		136,000

Issuance of common stock for services ($0.001 and $0.10/share)		3,058,500		3,059		228,541		-			-			231,600

Issuance of common stock in conversion of debt ($0.10/share)		1,067,000		1,067		105,633		-			-			106,700

Net loss - year ended December 31, 2009		-		-		-		(367,387	)		-			(367,387	)

Balance, December 31, 2009		18,230,500		18,231		495,319		(417,218	)		(33,000	)		63,332

Receipt of cash on subscription receivable		-		-		-		-			33,000			33,000

Issuance of common stock for cash ($0.10/share)		3,765,000		3,765		372,735		-			-			376,500

Issuance of common stock for services ($0.10/share)		2,000,000		2,000		198,000		-			-			200,000

Net loss - year ended December 31, 2010		-		-		-		(1,157,218	)		-			(1,157,218	)

Balance, December 31, 2010		23,995,500		23,996		1,066,054		(1,574,436	)		-			(484,386	)

Issuance of common stock and warrants for cash
($0.10 - $1.00/share)		13,917,069		13,917		6,110,318		-			-			6,124,235

Issuance of common stock for services ($0.10 - $1.16/share)		1,123,095		1,123		151,576		-			-			152,699

Issuance of common stock for future services ($1.12 - 1.27/share)		1,803,964		1,804		2,181,636		-			-			2,183,440

Share-based compensation		-		-		3,751,705		-			-			3,751,705

Net loss - year ended December 31, 2011		-		-		-		(6,650,840	)		-			(6,650,840	)

Balance, December 31, 2011		40,839,628		40,840		13,261,289		(8,225,276	)		-			5,076,853

Issuance of common stock for services ($0.98/share)		100,000		100		97,900		-			-			98,000

Issuance of common stock and warrants for cash
($1.00/share), net of offering costs of $6,900		1,500,000		1,500		1,491,600		-			-			1,493,100

Issuance of warrants for capital lease						11,650								11,650

Share-based compensation		-		-		809,139		-			-			809,139

Net loss - period ended June 30, 2012		-		-		-		(4,549,181	)		-			(4,549,181	)

Balance, June 30, 2012		42,439,628	$	42,440	$	15,671,578	$	(12,774,457	)	$	-		$	2,939,561

See accompanying notes to financial statements

Respect Your Universe, Inc.
(A Development Stage Company)
Statements of Cash Flows
Unaudited


							From November 21, 2008
	Six Months Ended						(Inception) to
	June 30, 2012			June 30, 2011			June 30, 2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(4,549,181	)	$	(1,723,108	)	$	(12,774,457	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		18,081			233			18,081
Amortization of stock issued for future services		799,670			-			1,130,559
Stock issued for services rendered		98,000			119,500			682,299
Share-based compensation expense - options		595,689			1,136,708			4,300,995
Share-based compensation expense - warrants		213,450			-			259,849
Loss on impairment of website		-			-			31,890
Changes in operating assets and liabilities
Inventory		(1,908,615	)		-			(2,087,156	)
Deposits		(237,573	)		-			(432,296	)
Prepaid expenses		295,286			-			(241,160	)
Other current assets		(228,740	)		-			(228,740	)
Accounts payable and accrued liabilities		1,291,728			(55,502	)		1,656,795
Accounts payable and accrued liabilities - related party		43,591			(16,252	)		106,768
Due to factor, net		6,134			-			6,134
Net cash used in operating activities		(3,562,480	)		(538,421	)		(7,570,439	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment		(16,684	)		-			(64,033	)
Acquisition of intangible assets		(109,414	)		(16,765	)		(163,072	)
Deposits		(16,370	)		-			(16,370	)
Net cash used in investing activities		(142,468	)		(16,765	)		(243,475	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans payable - related party		-			25,000			151,700
Repayments on loans payable - related party		(25,000	)		-			(45,000	)
Payments on capital lease obligations		(5,167	)		-			(5,167	)
Proceeds from issuance of common stock and warrants		1,493,100			3,614,795			8,169,085
Net cash provided by financing activities		1,462,933			3,639,795			8,270,618

Net increase (decrease) in cash		(2,242,015	)		3,084,609			456,704

Cash - beginning of year/period		2,698,719			3,308			-

Cash - end of year/period	$	456,704		$	3,087,917		$	456,704

Supplemental Disclosure of Cash Flow Information
Cash paid during the year/period for:
Interest	$	833		$	-		$	833
Taxes	$	-		$	-		$	-

Supplemental Disclosure of Non-Cash Financing Activities
Stock issued in exchange for debt	$	-		$	-		$	106,700
Stock subscriptions receivable	$	-		$	253,000		$	-
Stock issued for future services	$	-		$	-		$	2,183,440
Warrants issued for capital lease	$	11,650		$	-		$	11,650
Capital lease obligation incurred to acquire intangible assets	$	114,491		$	-		$	114,491

See accompanying notes to financial statements

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.

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.

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

June 30, 2012

Unaudited

Deposits

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

Property and Equipment

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

The estimated useful lives are:


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

Impairment of Long Lived Assets

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

Revenue Recognition

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

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

Cost of Goods Sold

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

Shipping and Handling Costs

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

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.

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.

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

June 30, 2012

Unaudited

When computing fair value, we have considered the following variables:

●

The risk-free interest rate assumption is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant.

●

The Company has not paid any dividends on common stock since inception and does not anticipate paying dividends on common stock in the foreseeable future.

●

The expected option term is computed using the “simplified” method.

●

The expected volatility is based on the historical volatility of our common stock based on the daily quoted closing trading prices.

●

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

Earnings (Loss) per Share

Basic earnings (loss) per share is computed by dividing net income (loss) by weighted average number of shares of common stock outstanding during each period. Diluted earnings (loss) per share is computed by dividing net income (loss), adjusted for changes in income or loss that resulted from the assumed conversion of convertible shares, by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period.

The Company had the following potential common stock equivalents at June 30, 2012 and 2011:

	2012		2011

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

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

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

Fair Value of Financial Instruments

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

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

June 30, 2012

Unaudited

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

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

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

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

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

Reclassifications

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

Recent Accounting Pronouncements

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

Note 5 Prepaid Expenses

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

	2012									2011
	Cash			Common Stock			Total			Cash			Common Stock			Total

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

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

June 30, 2012

Unaudited

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

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

Note 6 Other Current Assets

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

Note 7 Property and Equipment

Property and equipment consist of the following as of June 30, 2012 and December 31, 2011:

	2012			2011

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

Note 8 Intangible Assets

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

	2012		2011

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

(A) Patents and Trademarks

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

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

June 30, 2012

Unaudited

(B) Website Development

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

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

	2012			2011

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

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

Provision for Impairment

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

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.

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

June 30, 2012

Unaudited

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

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

	2012			2011

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

(1)

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

Note 10 Credit Facility

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

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

Note 11 Loans Payable - Related Party

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

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

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

Note 12 Capital Lease

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

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

June 30, 2012

Unaudited

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

Note 13 Stockholders’ Equity (Deficit)

(A)	Stock Issued for Cash

Year Ended December 31, 2008

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

Year Ended December 31, 2009

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

Year Ended December 31, 2010

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

Year Ended December 31, 2011

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

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

Six Months Ended June 30, 2012

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

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

June 30, 2012

Unaudited

(B)	Stock Issued for Services

Year Ended December 31, 2009

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

Year Ended December 31, 2010

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

Year Ended December 31, 2011

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

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

Stock issued for future services is recorded as a component of prepaid expenses on the balance sheet.

Amortization of common stock issued for future services consists of the following as of June 30, 2012:

	Short-Term			Long-Term			Total

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

Six Months Ended June 30, 2012

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

(E) Stock Options

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

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

June 30, 2012

Unaudited

As of June 30, 2012 and December 31, 2011, the Company had the following stock option grants:

	Quantity
	of Shares			Fair Market			Share Vesting Schedule														Expiration
Grant Date	Granted			Value			2011		2012			2013			2014			2015			(Years)

June 2011		1,800,000		$	1,149,664			1,650,000		75,000			75,000			-			-		5 – 10
June 2011 (1)		600,000			1,305,054			600,000		-			-			-			-		10
July 2011		350,000			761,282			350,000		-			-			-			-		10
August 2011		228,670			282,067			228,670		-			-			-			-		10
September 2011		13,500			19,816			13,500		-			-			-			-		10
October 2011		250,000			298,836			203,125		12,500			12,500			12,500			9,375		10
Subtotal		3,242,170			3,816,719			3,045,295		87,500			87,500			12,500			9,375

January 2012		770,000			609,967			-		192,500			192,500			192,500			192,500		10
March 2012		4,000			3,075			-		4,000			-			-			-		10
April 2012		600,000			496,760			-		600,000			-			-			-		5
May 2012 (2)		(200,000	)		(79,216	)				(125,000	)		(25,000	)		(25,000	)		(25,000	)
Subtotal		1,174,000			1,030,585			-		671,500			167,500			167,500			167,500
		4,416,170		$	4,847,303			3,045,295		759,000			255,000			180,000			176,875

(1)

Options issued for services discussed in Note 15 (A), Commitments - Related Party.

(2)

Options forfeited, upon termination of employment. During the six months ended June 30, 2012, the Company reversed $5,529 relating to the unvested portion of the forfeited stock options.

The Black-Scholes assumptions used are as follows:

	June 30, 2012		December 31, 2011

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

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

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

Balance - December 31, 2010		-		$	-		-	$	-
Granted		3,242,170			1.24		-		-
Exercised		-			-		-		-
Forfeited/Cancelled		-			-		-		-
Balance - December 31, 2011		3,242,170			1.24	8.58 years		$	558,000
Granted		1,374,000			0.96		-		-
Exercised		-			-		-		-
Forfeited/Cancelled		(200,000	)		1.12		-		-
Outstanding - June 30, 2012		4,416,170		$	1.15	7.83 years		$	378,000
Exercisable - June 30, 2012		3,546,170		$	1.20	7.66 years		$	346,500

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

June 30, 2012

Unaudited

	June 30, 2012		December 31, 2011

Grant date fair value of options	$	4,847,303	$	3,816,718
Weighted average grant date fair value	$	1.10	$	1.18

Outstanding options held by related parties		2,332,670		1,728,670
Exercisable options held by related parties		1,832,670		1,728,670
Fair value of stock options held by related parties	$	3,156,861	$	2,638,169

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

(F)

Warrants

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

	Quantity
	of Shares		Fair Market		Share Vesting Schedule				Expiration
Grant Date	Granted		Value		2011		2012		(Years)

June 2011 (1)		5,415,151	$	-		5,415,151		-	2
August 2011		50,000		92,798		25,000		25,000	3
Subtotal		5,465,151		92,798		5,440,151		25,000

January 2012 (2)		15,000		11,650		-		15,000	10
January 2012 (3)		100,000		86,859		-		100,000	5
February 2012 (4)		750,000		-		-		750,000	2
April 2012 (3)		100,000		80,192		-		100,000	5
Subtotal		965,000		178,701		-		965,000

Total		6,430,151	$	271,499		5,440,151		990,000

(1)

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

(2)

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

(3)

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

(4)

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

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

June 30, 2012

Unaudited

The Black-Scholes assumptions used are as follows:

	June 30, 2012		December 31, 2011

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

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

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

Outstanding - December 31, 2010		-	$	-		-	$	-
Granted		5,465,151		1.80		-		-
Exercised		-		-		-		-
Forfeited/Cancelled		-		-		-		-
Outstanding - December 31, 2011		5,465,151		1.80	1.49 years		$	-
Granted		965,000		0.60		-		-
Exercised		-		-		-		-
Forfeited/Cancelled		-		-		-		-
Outstanding - June 30, 2012		6,430,151	$	1.78	1.26 years		$	-
Exercisable - June 30, 2012		6,430,151	$	1.78	1.26 years		$	-

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

Note 14 Related Party Transactions

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

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

Note 15 Commitments

(A) Related Party

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

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

June 30, 2012

Unaudited

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

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

February 2010 (1)	$	314,860		500,000	$	50,000		-	$	-	$	364,860
May 2010 (1)		585,000		1,500,000		150,000		-		-		735,000
June 2011 (2)		350,000		-		-		600,000		1,305,054		1,655,054
January 2012		386,000		-		-		-		-		386,000
	$	1,635,860		2,000,000	$	200,000		600,000	$	1,305,054	$	3,110,914

(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:

Exercise price	$2.26
Expected dividends	0%
Expected volatility	127%
Risk free interest rate	3.22%
Expected life of option	10 years
Expected forfeitures	0%

All options fully vested upon issuance.

As of June 30, 2012 and December 31, 2011, the Company accrued $100,000 and $52,312, respectively, to this vendor. This amount is included in Accounts payable and accrued liabilities - related party on the balance sheet.

(B) Marketing Commitment – House of RYU

In March 2012, the Company executed an agreement with an athletic center in Las Vegas, Nevada, whereby such center, rebranded as the House of RYU, is licensed to use the Company's brand and sell its products. In exchange, the Company may use the center for various sports marketing initiatives. The term of the agreement is three years, and the Company will pay $150,000 in rebranding fees. A total of $100,000 had been paid as of June 2012 and an additional $25,000 was paid in July 2012. The rebranding fees are expensed as incurred.

The Company has obligations under operating leases for its corporate office facility and for its retail store that has not yet opened but for which a lease agreement has been executed. The leases expire at various dates through 2014. Amounts in the table below reflect a rent escalation clause for the retail store but does not include contingent rent the Company may incur based on future sales above approximately $105,000 per month.

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

June 30, 2012

Unaudited

The Company also entered into a capital lease agreement to lease the domain name ryu.com through 2022. The future minimum lease payments required under the operating and capital leases as of June 30, 2012, are as follows:

	Operating Leases			Capital Lease			Total Lease Obligations

2012 (6 months remaining)	$	83,675		$	5,325		$	89,000
2013		186,695			11,339			198,034
2014		100,506			11,307			111,813
2015		-			11,503			11,503
2016		-			11,703			11,703
2017 and thereafter		-			58,147			58,147
Total minimum lease payments		370,876			109,324			480,200
Less: current maturities		(182,165	)		(11,260	)		(193,425	)
Long-term lease obligations	$	188,711		$	98,064		$	286,775

Note 16 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 17 Subsequent Events

(A)	Equity Offering

In April 2012, the Company completed a registration statement to list on Canadian TSX Venture Exchange (“TSXV”). In connection with the listing, in August 2012 the Company completed an initial public offering and issued 5,882,500 shares of common stock for $4,588,516 ($0.84/share), net of direct offering costs of $368,483. See Note 6, Other Current Assets, regarding the deferred offering costs associated with the offering as of June 30, 2012.

Pursuant to the June 2012 agreement between the Company and its placement agent, the Company will pay a 5% cash commission on the gross proceeds to the agent as part of the offering. In addition, the agent will receive warrants as follows:

Date

Quantity Granted

Fair Value

Vesting Schedule

Expiration

August 2012

294,125

118,264

294,125 upon issuance

Years

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

June 30, 2012

Unaudited

The Black-Scholes assumptions used are as follows:

Exercise price	$1.50
Expected dividends	0%
Expected volatility	111%
Risk free interest rate	0.24%
Expected life of warrant	2 years
Expected forfeitures	0%

The warrants are treated as direct equity offering costs and the net effect to additional paid in capital is $0.

(B)

Warrants

In July 2012, the Company granted the following warrants for services rendered:

Date

Quantity Granted

Fair Value

Vesting Schedule

Expiration

July 2012

100,000

68,300

100,000 upon issuance

Years

The Black-Scholes assumptions used are as follows:

Exercise price	$1.20
Expected dividends	0%
Expected volatility	111%
Risk free interest rate	0.65%
Expected life of warrant	5 years
Expected forfeitures	0%

On August 13, 2012, the Company entered into a separation agreement whereby Christopher Martens resigned as Chief Executive Officer and Director of the Company effective August 6, 2012. As part of the separation agreement the Company has agreed to pay Mr. Martens four months salary ($60,000) as severance.

On August 13, 2012, the Board of Directors appointed David Campisi as Chief Executive Officer of the Company and entered into an at-will employment relationship with Mr. Campisi effective August 8, 2012. Mr. Campisi was concomitantly appointed as Chairman of the Board of Directors, replacing Kristian Andresen, who remains a Director.

In connection with the employment of Mr. Campisi, the Company granted the following options on August 14, 2012:

Quantity Granted		Vesting Schedule

100,000		Upon issuance
500,000		Over 4 years
600,000

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

This information should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Item 1 of Part I of this Quarterly Report on Form 10-Q. This discussion highlights key information as determined by management, but may not contain all of the information that is important to you. For a more complete understanding, the following should be read in conjunction with the Company’s 2011 Annual Report on Form 10-K, including the audited financial statements therein (and notes to such financial statements) and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in that report.

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended. Forward-looking statements may also be made in the Company’s other reports filed with or furnished to the United States Securities and Exchange Commission (the “SEC”) and in other documents. In addition, from time to time, the Company through its management may make oral forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from such statements. The words “believe,” “expect,” “anticipate,” “optimistic,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely” and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance, and therefore, you should not put undue reliance upon them. Some of the statements that are forward-looking relate to: our product line, including that we intend to launch additional product lines in the future; our business plan, including opening a RYU retail store in Las Vegas, Nevada during the third or fourth quarter of 2012; capital expenditure programs; the enforceability of our intellectual product rights; the popularity, and expected popularity, of Mixed Martial Arts (“MMA”); projections of market prices and costs; sales of our products; our marketing, branding and sponsorship initiatives; and our need for and ability to raise capital. The Company undertakes no obligation to update or revise any forward-looking statements.

History and Overview

We were incorporated in the State of Nevada on November 21, 2008. Our business plan is to capitalize on the increasing popularity of MMA by designing, commercializing and marketing a line of premium performance athletic apparel and accessories drawing insights from MMA and athletes.

Plan of Operations

We are a development stage company in the process of designing, commercializing and marketing a line of premium performance athletic apparel. We follow the apparel industry norm of launching two commercial product lines each year for the Spring/Summer (“Spring”) and Fall/Holiday (“Fall”) seasons.

We have 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 extended our lease agreement through August 1, 2013.

In August 2012, we appointed David Campisi, a then-current Director of the Company, to be our Chief Executive Officer, replacing Christopher Martens, who resigned. Mr. Campisi is a Senior Retail Industry Executive who was the former Chairman, President and CEO of The Sports Authority from 2004-2011.

We had contracted with Exit 21 Global Solutions, LLC (“Exit 21”), a consulting firm controlled by our former Chief Executive Officer and our current Chief Operating Officer, to design, develop and source all of our products through our Spring 2013 product line. Starting with our Fall 2013 product line creation, for which work commenced in April 2012, we are no longer contracting with Exit 21 and have shifted to a direct model, and are managing product creation directly using internal resources supplemented with independent contractors as required.

In February 2012, we launched our product line with our Spring 2012 line of men’s performance and lifestyle apparel, and accessories. During the same month, we launched an updated web site and store at ryu.com. During the first and second quarters of 2012, we had nominal but increasing sales of product through multiple channels: retail, through our online store and wholesale, through a limited number of retail partners. We anticipate expanding our sales channels by opening our first retail store in Las Vegas, Nevada during the third or fourth quarter of 2012.

Delivery of our Fall 2012 product lines to our warehouse began during the second quarter of 2012 and will continue into the fourth quarter. The new season includes an expanded line of men’s apparel, the launch of our women’s apparel and additional accessories.

Our Spring 2013 product line has been designed and is anticipated to include new styles for our men’s and women’s categories, as well as additional accessories. Orders for sales samples have been placed with our factories, and production orders will be placed during the third quarter.

Our Fall 2013 product line is in process of being designed and is anticipated to include new styles for our men’s and women’s categories, as well as additional accessories.

Product Line

Our premium athletic products include competition, training, sportswear and outerwear, as well as headwear and accessories that are designed to meet the demands of an active lifestyle. RYU’s premium high performance line embodies the art of the sport of mixed martial arts and places emphasis on the values of respect, strength, honor and sustainability as the foundation of our company and its products.

Crafted from organic and/or recycled materials utilizing the best yarn and fabric suppliers in the world, we believe we are 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.

Results of Operations

The following discussion of the financial condition and results of operations should be read in conjunction with the unaudited interim 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.

For the three months ended June 30, 2012 and 2011:

For the three months ended June 30, 2012 we generated $107,522 in revenues, net of discounts and an allowance for estimated returns, as compared to $0 for the three months ended June 30, 2011. The increase in net revenues is attributed to the launch of our Spring 2012 product line and ryu.com in February 2012.

Our cost of goods sold for the three months ended June 30, 2012 was $61,796, or 57.5% of net revenues, resulting in gross profit of $45,726, as compared to $0 cost of goods sold and $0 gross profit during the three months ended June 30, 2011.

We incurred $783,259 in marketing and advertising expenses during the three months ended June 30, 2012, as compared to $213,955 for the comparable period of 2011. This increase is a result of our increased digital media, brand and sports marketing initiatives and communications during 2012.

During the three months ended June 30, 2012, we incurred product creation expense of $317,061, of which $160,421 was paid to Exit 21, an entity controlled by our former Chief Executive Officer and our current Chief Operation Officer. By contrast we paid $24,000 in product creation expense to Exit 21 during the three months ended June 30, 2011. The increase in product creation expense is due to the design and development our Spring 2013 and Fall 2013 product lines.

General and administrative expenses for the three months ended June 30, 2012 were $1,556,053 compared to $1,323,577 for the three months ended June 30, 2011. The primary components of general and administrative expense during the 2012 period were investor relations expenses of $791,250, employee compensation expense $312,123, legal, professional and consulting fees of $391,783, sales expense $199,013, and travel expenses of $56,736.

During the three months ended June 30, 2012, our total operating expenses were $2,656,373 compared to $1,561,512 for the three months ended June 30, 2011 resulting in a net loss of $2,610,647 and $1,561,512 for the three months ended June 30, 2012 and 2011, respectively.

For the six months ended June 30, 2012 and 2011:

For the six months ended June 30, 2012 we generated $171,648 in revenues, net of discounts and an allowance for estimated returns, as compared to $0 for the six months ended June 30, 2011. Our net revenues during the 2012 periods resulted from the launch of our Spring 2012 product line and ryu.com in February 2012.

Our cost of goods sold for the six months ended June 30, 2012 was $97,708, or 56.9% of net revenues, resulting in gross profit of $73,940, as compared to $0 cost of goods sold and $0 gross profit during the six months ended June 30, 2011.

We incurred $1,444,106 in marketing and advertising expenses during the six months ended June 30, 2012, as compared to $213,955 for the comparable period of 2011. This increase is a result of our increased digital media, brand and sports marketing initiatives and communications during 2012.

During the six months ended June 30, 2012, we incurred product creation expense of $632,461, of which $475,821 was paid to Exit 21, an entity controlled by our former Chief Executive Officer and our current Chief Operation Officer. By contrast we paid $164,074 in product creation expense, of which $154,162 was paid to Exit 21 during the six months ended June 30, 2011. The increase in product creation expense is due to the design and development our Fall 2012, Spring 2013 and Fall 2013 product lines.

General and administrative expenses for the six months ended June 30, 2012 were $2,546,554 compared to $1,345,079 for the six months ended June 30, 2011. This increase reflects our investment in organization and infrastructure to support our business objectives for 2012. The primary components of general and administrative expense during the 2012 period were investor relations expenses of $1,149,384, employee compensation expense $668,387, legal, professional and consulting fees of $793,792, sales expense $255,733, and travel expenses of $137,685.

During the six months ended June 30, 2012, our total operating expenses were $4,623,121 compared to $1,723,108 for the six months ended June 30, 2011 resulting in a net loss of $4,549,181 and $1,723,108 for the six months ended June 30, 2012 and 2011, respectively.

For the period from November 21, 2008 (inception) to June 30, 2012:

We have generated nominal but increasing revenues during the period from November 21, 2008 (inception) to June 30, 2012 of $176,456 and cost of goods sold of $106,922, or 60.6% of net revenues, resulting in a gross profit of $69,534.

We incurred marketing and advertising expenses in the amount of $2,407,516 for the period from November 21, 2008 (inception) through June 30, 2012. Of the total amount expensed to date, $63,900 was paid to a related party for development of brand and marketing media.

For the period from November 21, 2008 (inception) through June 30, 2012, total product creation expenses were $1,999,522 of which $1,832,666 was paid to Exit 21, an entity controlled by our former Chief Executive Officer and current Chief Operation Officer.

For the period from November 21, 2008 (inception) through June 30, 2012, general and administrative expenses were $8,405,063. A significant portion of our operating expenses during this period were from non-cash transactions comprised of amortization of stock paid for future services $1,130,559, stock issued for services $682,299, incentive stock options $4,300,995 and warrants valued at $259,849.

As a result of the February 2012 launch of our new e-commerce website, ryu.com, we recognized an impairment loss in December 2011 related to our previous website in the amount of $31,890. The amount was based on the net asset value as of December 31, 2011.

Total operating expenses for the period from November 21, 2008 (inception) through June 30, 2012 were $12,843,991 and our accumulative net loss for the period was $12,774,457.

Liquidity and Financial Condition

As of June 30, 2012, we had current assets of $4,439,406, current liabilities of $1,780,957 and working capital of $2,658,449, compared to current assets of $5,163,324, current liabilities of $453,244 and working capital of $4,710,080 at December 31, 2011.

In February 2012, we successfully raised $1,500,000 in additional capital though equity financing. In April 2012, we filed a prospectus to become listed on the Canadian TSX Venture Exchange and a concurrent initial public offering. The offering was successfully closed in August 2012 and we raised $4,588,516, net of direct offering costs. As a result of the offering, our cash balance increased to $4,609,187 as of August 3, 2012 compared to $456,704 at June 30, 2012. On August 10, 2012 our shares began trading on the TSX Venture Exchange under the ticker symbol RYU and we continue to be listed on the OTCBB under the ticker symbol RYUN.

The Company believes it currently has sufficient funds to execute its business plan through the second quarter of 2013. We anticipate that additional capital will be required to implement our business plan beyond the second quarter of 2013 and to purchase inventory to support our revenue forecast for 2014. We believe the Company will be able to raise sufficient capital from other sources to supplement cash flow from operations through the remainder of 2014.

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 quarter ended June 30, 2012, the Company used cash in the amount of $3,562,480 for operating activities. The major components of operating activities include a net loss of $4,549,181, amortization of stock paid for future services $799,670, stock issued for service $98,000, incentive stock options $595,689, warrants valued at $213,450, an increase in inventory of $1,908,615, an increase in deposits for inventory purchased of $237,573, a decrease in prepaid expenses of $295,286, an increase in other current assets $228,740, and an increase in accounts payable and accrued liabilities of $1,291,728.

By comparison, during the six months ended June 30, 2011, the Company used cash in the amount of $538,421 for operating activities. The major components of operating activities included a net loss of $1,723,108, stock issued for service $119,500, and share based compensation - options $1,136,708.

During the period from November 21, 2008 (inception) through June 30, 2012, the Company used cash in the amount of $7,570,439 for operating activities. The major components of operating activities include a net loss of $12,774,457, amortization of stock paid for future services $1,130,559, stock issued for service $682,299, incentive stock options $4,300,995, warrants valued at $259,849, an increase in inventory of $2,087,156, an increase in deposits for inventory purchased of $432,296, and an increase in accounts payable and accrued liabilities of $1,656,795.

Investing Activities

The Company used cash in the amount of $142,468 in investing activities during the six months ended June 30, 2012. Investing activities during that period included $16,684 for property and equipment purchases and $109,414 for intangible assets, which included the development of its patents and trademarks, website development costs and the acquisition of our new domain name. All of the costs have been capitalized and those with finite life will be amortized over the expected useful lives of the assets. Depreciation and amortization during the six months ended June 30, 2012 totaled $18,081. We also paid $16,370 as a security deposit for our upcoming retail location in Las Vegas, NV.

By contrast, investing activities for the six months ended June 30, 2011 included $16,765 for the acquisition of intangible assets. For the period from November 21, 2008 (inception) to June 30, 2012, total cash used in investing activities was $243,475 and included $64,033 for property and equipment purchases, $163,072 for the acquisition of intangible assets and $16,370 in security deposits.

Financing Activities

During the six months ended June 30, 2012, the Company repaid $25,000 to related parties, paid $5,167 towards capital lease obligations and received net proceeds from the sale of common stock and warrants of $1,493,100 for net cash provided by financing activities of $1,462,933.

During the six months ended June 30, 2011, the Company received related party advances in the amount of $25,000 and proceeds from the sale of common stock in the amount of $3,614,795 for total cash provided by financing activities of $3,639,795.

From November 21, 2008 (inception) to June 30, 2012, the Company received related party advances in the amount of $151,700, repaid $45,000 to related parties, paid $5,167 on capital lease obligations, and received proceeds from sale of common stock and warrants of $8,169,085 for total net cash provided by financing activities of $8,270,618. During 2008, related party advances of $106,700 were exchanged for shares of common stock.

In order to obtain future capital, we may need to draw on our line of credit, sell additional shares of common stock or borrow funds from private lenders. However, any downturn in the 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

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 of direct offering costs, received through the Canadian Initial Public Offering of equity securities in August 2012 will be sufficient to sustain operations for the next twelve months.

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 4 of our unaudited interim 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 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 unaudited interim financial statements:

Cash and Cash Equivalents

We consider all highly liquid instruments purchased with maturity of three months or less to be cash equivalents.

Inventory

Property and Equipment

Revenue Recognition

We recognize 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 liability.

In instances where final acceptance of the product is specified by the customer, revenue is deferred until all acceptance criteria have been met.

Share-Based Payments

We recognize 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.

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.

●

We have not paid any dividends on common stock since our inception and do not anticipate paying dividends on our common stock in the foreseeable future.

●

We expected option term is computed using the “simplified” method.

●

The expected volatility is based on the historical volatility of our common stock based on the daily quoted closing trading prices.

●

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

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.

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 3

Quantitative and Qualitative Disclosures About Market Risk

Not required for a smaller reporting company.

Item 4

Controls and Procedures

Disclosure Controls and Procedures.

Our management has evaluated, under the supervision and with the participation of our President and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) and 15d-15 (b) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our management, including our President and Chief Financial Officer have concluded that, as of the end of the period covered by this report, 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 President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1

Legal Proceedings

None.

Item 1A

Risk Factors

Not required for a smaller reporting company.

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

Use of Proceeds from Public Offering of Common Stock

The Form S-1 Registration Statement (Registration No. 333-180818) relating to our public offering of common stock was declared effective by the SEC on June 26, 2012, and the offering commenced the following day. The offering did not terminate before all of the securities registered in the registration statement were sold. Salman Partners Inc. acted as our placement agent for the offering.

The securities registered were 5,882,500 shares of common stock. The aggregate public offering price of the offering amount registered was USD$4,956,999 (CDN$5,000,125). On August 3, 2012 we closed the offering in which we sold 5,882,500 shares of common stock.

The shares sold and issued in the offering did not include the exercise of an over-allotment option. All sales were at the offering price of USD$0.843 (CDN$0.85) per share, for an aggregate offering price of USD$4,956,999 (CDN$5,000,125). Expenses incurred in connection with the issuance and distributions of the securities registered were as follows:

* Placement agent commissions	USD$247,849
* Other expenses -- approximately	USD$311,044
* Total expenses -- approximately	USD$558,893

The other expenses and total expenses provided above are estimates. None of such payments were direct or indirect payments to any of our directors or officers or their associates, to persons owning 10% or more of our common stock, or to our affiliates. None of such payments were direct or indirect payments to others. The net offering proceeds to us after deducting placement agent commissions and the other expenses described above was approximately USD$4,508,516. The principal purposes of the offering were to obtain additional capital for brand marketing, opening retail stores for our products, general and administrative expenses and working capital. As of June 30, 2012, we had not used any of the proceeds from the offering. Our management has broad discretion in the application of the net proceeds from the offering and investors will be relying on the judgment of our management regarding the application of the proceeds.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

Item 3

Defaults Upon Senior Securities

None.

Item 4

Mine Safety Disclosures

N/A.

Item 5

Other Information

On May 18, 2012, the our Board of Directors approved certain revisions to our 2012 Stock Option Plan (“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. The revised Plan has not yet been ratified by the shareholders of the Company.

A copy of the revised Plan is attached hereto as Exhibit 10.1.

PART IV

Item 15

Exhibits, Financial Statement Schedules

Number	Exhibit
10.1	Revised 2012 Stock Option Plan
31.1	Rule 13a-14(a) Certification of Principal Executive Officer
31.2	Rule 13a-14(a) Certification of Principal Financial Officer
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Principal Executive Officer
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Principal Financial Officer
101.INS*	Interactive data files pursuant to Rule 405 of Regulation S-T

* To be provided by amendment

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: August 14, 2012	/s/ John Wood
	John Wood, President (Principal Executive Officer) and Director



Date: August 14, 2012	/s/ Steven H. Eklund
	Steven H. Eklund, Chief Financial Officer (Principal Accounting and Financial Officer)

Attached files

RYU APPAREL INC. Reports

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