RYU APPAREL INC. - FORM 10-K/A

Attached files

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

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

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

For the fiscal year ended December 31, 2011

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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o Yes ý No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

o Yes ý No

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 

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). oYes ýNo

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $62,045,607 as of June 30, 2011.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 41,127,128 shares of common stock as of March 9, 2012.

EXPLANATORY NOTE

We are filing this Amendment No. 1 on Form 10-K/A to amend and restate in their entirety the following items of our Annual Report on Form 10-K for the year ended December 31, 2011 as originally filed with the Securities and Exchange Commission on March 12, 2012 (the “Original Form 10-K”): (i) Item 7 of Part II “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” (ii) Item 8 of Part II, “Financial Statements and Supplementary Data,” (iii) Item 9A of Part II, “Controls and Procedures,” and (iv) Item 15 of Part IV, “Exhibits”. We have also updated the signature page, the certifications of our Chief Executive Officer and Chief Financial Officer in Exhibits 31.1, 31.2, 32.1 and 32.2, and our financial statements formatted in Extensible Business Reporting Language (XBRL) in Exhibits 101. This report on Form 10-K/A is presented as of the filing date of the Original Form 10-K and does not reflect events occurring after that date, or modify or update disclosures in any way other than as required to reflect the restatement described below.

We have determined that our previously reported results for the year ended December 31, 2011 to be restated to correct for errors in our accounting for stock-for-services contracts. See Note 11 to the Financial Statements.

We have made necessary conforming changes in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” resulting from the correction of these errors.

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K/A contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objections of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements or belief; and any statements of assumptions underlying any of the foregoing.

Forward-looking statements may include the words “may,” “could,” “estimate,” “intend,” “continue,” “believe,” “expect” or “anticipate” or other similar words. These forward-looking statements present our estimates and assumptions only as of the date of this report. Except for our ongoing securities laws, we do not intend, and undertake no obligation, to update any forward-looking statement.

Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any or our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. The factors impacting these risks and uncertainties include, but are not limited to:

·	increased competitive pressures from existing competitors and new entrants;

·	our ability to efficiently and effectively finance our operations;

·	deterioration in general or regional economic conditions;

·	adverse state or federal legislation or regulation that increases the costs of compliance;

·	ability to achieve future sales levels or other operating results;

·	operational inefficiencies in distribution or other systems;

·	the fact that our accounting policies and methods are fundamental to how we report our financial condition and results of operations, and they may require management to make estimates about matters that are inherently uncertain;

·	the MMA and apparel industry and market;

·	the availability of capital to fund our business plan and the resulting dilution caused by the raising of capital through the sale of shares;

·	product manufacturing and sourcing;

·	changes in U.S. GAAP or in the legal, regulatory and legislative environments in the markets in which we operate;

·	inability to efficiently manage our operations;

·	the inability of management to effectively implement our strategies and business plans; and

·	the other risks and uncertainties detailed in this report.

Throughout this Annual Report on Form 10-K/A references to “we”, “our”, “us”, “RYU”, “the Company”, and similar terms refer to Respect Your Universe, Inc.

RESPECT YOUR UNIVERSE, INC.

FOR THE FISCAL YEAR ENDED

DECEMBER 31, 2011

INDEX TO FORM 10-K/A (Amendment No. 1)

PART II

Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	5
Item 8	Financial Statements and Supplementary Data	10
Item 9A	Controls and Procedures	11

PART IV

Item 15	Exhibits, Financial Statement Schedules	12

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.

As discussed in Note 11 of the financial statements, we have restated our previously issued financial statements as of and for the year ended December 31, 2011. Accordingly, this Management's Discussion and Analysis of Financial Condition and Results of Operations has been revised for the effects of the restatement.

Year ended December 31, 2011 and 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 $6,480,237 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, 2011 were due to non-cash transactions comprised of share-based compensation expense valued at $4,012,112. This total includes incentive stock options and warrants valued at $3,669,989.

Total operating expenses for the period from November 21, 2008 (inception) through December 31, 2011 were $8,047,446.

The Company incurred $824,763 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 incurred marketing expenses of $0 for the comparable period of 2010 and marketing and advertising expenses in the amount of $893,733 for the period from November 21, 2008 (inception) through December 31, 2011.

During the year ended December 31, 2011, the Company incurred product creation 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 product creation expenses were $1,367,061, of which $1,356,845 was paid to Exit 21, an entity controlled by the Company’s former Chief Executive Officer and current Chief Operating Officer.

General and administrative expenses for the year ended December 31, 2011 were $5,257,224 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 of $513,982 ($234,888 of which was from share-based compensation) and $0, employee compensation expense of $1,657,294 ($1,407,806 share-based compensation) and $0, legal, professional and consulting fees of $2,643,421 ($2,274,875 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 $5,754,762.

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 $6,477,416 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, 2011 was $8,051,852.

Liquidity and Financial Condition

As of December 31, 2011, the Company had current assets of $3,836,751, current liabilities of $497,307 and working capital of $3,339,444 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, 2011 was $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 through 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 $2,695,411. During this period we used cash in the amount of $3,324,290 for operating activities. The major components of operating activities include a net loss of $6,477,416, offset by share-based compensation expense of $4,017,807 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 $347,688, 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 share-based compensation expense in the amount of $200,000, an increase in accounts payable of $61,442, and an increase in accounts payable – related party of $406,252.

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, 2011 discussed 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 $6,124,234, for total cash provided by financing activities of $6,129,234.

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 $6,675,984 for total cash provided by financing activities of $6,807,684. 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 $6,477,416 and net cash used in operations of $3,324,290 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 former Chief Executive Officer and current 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 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, 2011 and 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

Share-Based Payments

The Company estimates the cost of share-based payments to employees based on the award’s fair value on the grant date, and recognizes the associated expense ratably over the requisite period. The estimated cost is derived at using the Black-Scholes option-pricing model, which includes assumptions that are highly subjective. The Company may adjust these assumptions periodically to reflect changes in market conditions and historical experience. Consequently, expenses reported for share-based payments to employees in the future may differ significantly from those reported in the current period.

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

●	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 life of the award 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 an estimate of awards not expected to fully vest.

The straight-line attribution method is used for awards that include vesting provisions. If an award is granted, but vesting does not occur, any previously recognized expense is reversed in the period in which the termination of service occurs.

The Company measures the fair value of share-based payments to non-employees at the measurement date, which occurs at the earlier of the date performance commitment, is reached or performance is completed. Recognition of share-based payments occurs as services are received. The Company treats fully-vested, non-forfeitable shares issued to non-employees in the same manner as if it had paid for the services received with cash. Unvested, forfeitable shares are accounted for as unissued until the point vesting occurs.

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 8

Financial Statements and Supplementary Data

See F-1.

Item 9A

Controls and Procedures

Disclosure Controls and Procedures

In connection with the March 2012 filing of our original Annual Report on Form 10-K for the year ended December 31, 2011, our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2011, and based on that evaluation they concluded that our disclosure controls and procedures were effective. In connection with the restatement of its financial statements, our management has re-evaluated, under the supervision and with the participation of our Chief Executive Officer 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 re-evaluation due to a material weakness identified below, the Company’s management, including its Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2011 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, because of material weaknesses in its internal controls over financial reporting. Notwithstanding the material weaknesses, management, including our Chief Executive Officer and Chief Financial Officer, has concluded that the financial statements included in this amendment present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness identified is insufficient resources in the accounting and finance organization to ensure appropriate application of GAAP in the area of accounting for certain of the Company’s non−routine transactions. This material weakness resulted in the restatement outlined in Note 11 to the financial statements included in this Form 10−K/A.

Remediation of Material Weakness

The Company plans to implement, certain measures to remediate the identified material weakness and to enhance the Company’s internal control over its quarterly and year−end financial reporting processes. As of the date of the filing of this Form 10−K/A, the Company plans to implement the following measure:

• Increase the size, expertise and training of the finance and accounting staff to include adequate resources for ensuring GAAP compliance in the area of accounting for certain of the Company’s non−routine transactions.

The Company anticipates that this remediation action will represent ongoing improvement measures. Furthermore, while the Company has taken steps to remediate the material weakness, additional measures may be required.

PART IV

Item 15

Exhibits, Financial Statement Schedules

Number	Exhibit
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: November 19, 2012		/s/ David Campisi
		David Campisi, 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	Director and Secretary	November 19, 2012
Kristian J. Andresen
/s/ David Campisi	Director and Chief Executive Officer	November 19, 2012
David Campisi	(Principal Executive Officer)

/s/ John Wood	President and Director	November 19, 2012
John Wood
/s/ Emmanuel K. Brown	Director	November 19, 2012
Emmanuel K. Brown
/s/ Munir Ali	Director	November 19, 2012
Munir Ali
/s/ Steven H. Eklund	Chief Financial Officer	November 19, 2012
Steven H. Eklund	(Principal Financial and Accounting Officer)

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.

Boca Raton, Florida

March 5, 2012 except for note 11 as to which the date is November 19, 2012

F-1

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


	December 31, 2011
	As Restated *			December 31, 2010

ASSETS

Current assets
Cash	$	2,698,719		$	3,308
Inventory		178,541			-
Deposits		194,723			-
Prepaid expenses		764,768
Total current assets		3,836,751			3,308

Property and equipment - net		47,349			-

Other assets
Patents and trademarks - net		17,101			-
Website development - net		4,667			-
Total other assets		21,768			-

Total assets	$	3,905,868		$	3,308


LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities
Accounts payable and accrued liabilities	$	409,130		$	61,442
Accounts payable - related party		63,177			406,252
Loans payable - related party		25,000			20,000
Total current liabilities		497,307			487,694

Stockholders’ equity (deficit)
Common stock, $0.001 par value, 500,000,000
shares authorized; 39,433,378 and 23,995,500
shares issued and outstanding, respectively		39,434			23,996
Additional paid in capital		11,420,979			1,066,054
Deficit accumulated during the development stage		(8,051,852	)		(1,574,436	)
Total stockholders’ equity (deficit)		3,408,561			(484,386	)

Total liabilities and stockholders' equity (deficit)	$	3,905,868		$	3,308

*Refer to Note 11 to the financial statements for restatement details.

See accompanying notes to financial statements

F-2

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


							From November 21, 2008
							(Inception) to
	December 31, 2011						December 31, 2011
	As Restated *			December 31, 2010			As Restated*

Revenue	$	2,821		$	-		$	4,808

Cost of revenue		-			-			9,214

Gross profit (loss)		2,821			-			(4,406	)

Operating expenses
Marketing and advertising		760,863			-			829,833
Marketing and advertising - related party		63,900			-			63,900
Product creation		10,216			-			10,216
Product creation - related party		356,144			1,000,701			1,356,845
General and administrative		5,257,224			156,517			5,754,762
Loss on impairment of website		31,890			-			31,890
Total operating expenses		6,480,237			1,157,218			8,047,446

Net loss	$	(6,477,416	)	$	(1,157,218	)	$	(8,051,852	)

Net loss per common share -
basic and diluted	$	(0.20	)	$	(0.05	)	$	(0.40	)

Weighted average number of common
shares outstanding during the period -
basic and diluted		32,260,909			22,052,911			20,133,972

*Refer to Note 11 to the financial statements for restatement details

See accompanying notes to financial statements

F-3

Respect Your Universe, Inc.
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit)
From November 21, 2008 (Inception) to December 31, 2011
							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 - 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

Share-based compensation - stock ($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

Share-based compensation - stock ($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		6,110,317		-			-			6,124,234

Share-based compensation - stock ($0.10 - $1.27/share), as restated		1,520,809		1,521		574,619		-			-			576,140

Share-based compensation - options, as restated		-		-		3,623,590		-			-			3,623,590

Share-based compensation - warrants		-		-		46,399		-			-			46,399

Net loss - year ended December 31, 2011, as restated		-		-		-		(6,477,416	)		-			(6,477,416	)

Balance, December 31, 2011, as restated		39,433,378	$	39,434	$	11,420,979	$	(8,051,852	)	$	-		$	3,408,561

*Refer to Note 11 to the financial statements for restatement details

See accompanying notes to financial statements

F-4

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


							From
							November 21, 2008
	Year Ended						(Inception) to
	December 31, 2011						December 31, 2011
	As Restated *			December 31, 2010			As Restated *
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(6,477,416	)	$	(1,157,218	)	$	(8,051,852	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		8,526			-			14,221
Share-based compensation expense - stock		347,818			200,000			773,723
Share-based compensation expense - options		3,623,590			-			3,623,590
Share-based compensation expense - warrants		46,399			-			46,399
Loss on impairment of website		31,890			-			31,890
Changes in operating assets and liabilities:
Inventory		(178,541	)		-			(178,541	)
Deposits		(194,723	)		-			(194,723	)
Prepaid expenses		(536,446	)		-			(536,446	)
Accounts payable and accrued liabilities		347,688			61,442			409,130
Accounts payable and accrued liabilities - related party		(343,075	)		406,252			63,177
Net cash used in operating activities		(3,324,290	)		(489,524	)		(3,999,432	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment		(49,127	)		-			(49,127	)
Patents and trademarks		(18,269	)		-			(18,269	)
Website development		(42,137	)		-			(42,137	)
Net cash used in investing activities		(109,533	)		-			(109,533	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans payable - related party		25,000			20,000			151,700
Repayment of loans payable - related party		(20,000	)		-			(20,000	)
Proceeds from issuance of common stock and warrants		6,124,234			409,500			6,675,984
Net cash provided by financing activities		6,129,234			429,500			6,807,684

Net increase (decrease) in cash		2,695,411			(60,024	)		2,698,719

Cash - beginning of period		3,308			63,332			-

Cash - end of period	$	2,698,719		$	3,308		$	2,698,719


Supplemental Disclosure of Non-Cash Financing Activity
Stock issued in exchange for debt	$	-		$	-		$	106,700
Prepaid expenses	$	228,322		$	-		$	228,322

*Refer to Note 11 to the financial statements for restatement details.

See accompanying notes to financial statements

F-5

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 $6,477,416 and net cash used in operations of $3,324,290 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.

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 associated with intellectual property and website development costs, the fair value of share-based payments, and related estimates and the valuation allowance for deferred tax assets due to continuing and expected future operating losses.

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.

F-6

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

December 31, 2011 and 2010

Cash and Cash Equivalents

The Company considers all highly liquid instruments purchased with 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.

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.

F-7

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

December 31, 2011 and 2010

The estimated useful lives are:

Leasehold improvements	1 year
Computers and office equipment	5 years
Software	3 years
Furniture and fixtures	7 years

Property and equipment consist of the following as of December 31, 2011 and 2010:

	2011			2010

Leasehold improvements	$	2,400		$	-
Computers and office equipment		11,998			-
Computer software		30,500			-
Furniture and fixtures		4,230			-
		49,128			-
Accumulated depreciation		(1,779	)		-
	$	47,349		$	-

Patents and Trademarks

As of December 31, 2011 and 2010, the Company’s patent and trademark costs are as follows:

	2011			2010

Patent and trademark costs	$	18,269		$	-
Accumulated amortization		(1,168	)		-
	$	17,101		$	-

Website Development

F-8

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

December 31, 2011 and 2010

As of December 31, 2011 and 2010, the Company’s website development costs are as follows:

	2011		2010

Website development costs	$	4,667	$	-
Accumulated amortization		-		-
	$	4,667	$	-

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.

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

Marketing and Advertising

F-9

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

December 31, 2011 and 2010

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 in which the former Chairman of the Board has an ownership interest 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 former Chief Executive Officer and current 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.

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.

F-10

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

December 31, 2011 and 2010

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 estimates the cost of share-based payments to employees based on the award’s fair value on the grant date, and recognizes the associated expense ratably over the requisite period. The estimated cost is derived at using the Black-Scholes option pricing model, which includes assumptions that are highly subjective. The Company may adjust these assumptions periodically to reflect changes in market conditions and historical experience. Consequently, expenses reported for share-based payments to employees in the future may differ significantly from those reported in the current period.

When estimating fair value, the Company 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 does not anticipate paying dividends on our common stock in the foreseeable future.

●	The expected term of the award 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 an estimate of awards not expected to fully vest.

The Company measures the fair value of share-based payments to non-employees at the measurement date, which occurs at the earlier of the date performance commitment is reached or performance is completed. Recognition of share-based payments occurs as services are received. The Company treats fully-vested, non-forfeitable shares issued to non-employees in the same manner as if it had paid for the services received with cash. Unvested, forfeitable shares are accounted for as unissued until the point vesting occurs.

F-11

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

December 31, 2011 and 2010

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 December 31, 2011 and 2010:

	2011		2010

Stock options, exercise price $0.69 - $2.26		3,242,170		-
Common stock warrants, conversion price $1.27 - $1.80		5,440,151		-
Unvested, forfeitable restricted stock grants		1,406,250		-
Total common stock equivalents		10,088,571		-

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 50,000 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. The Company’s unvested stock grants will vest evenly through August 2013. All equity instruments 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.

F-12

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

December 31, 2011 and 2010

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, 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.

Recent Accounting Pronouncements

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 former Chief Executive Officer and current Chief Operating Officer, to assist the Company in the development of a clothing line.

As of December 31, 2011 and 2010 this vendor represents 13% 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:

			Common Stock Shares				Common Stock Options
	Cash		Quantity		Fair Market Value		Quantity		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
July 2011 (2)		350,000		-		-		600,000		1,304,937		1,654,937
	$	1,249,860		2,000,000	$	200,000		600,000	$	1,304,937	$	2,754,797

(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:

F-13

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

December 31, 2011 and 2010

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

As of December 31, 2011, these options were fully vested.

Note 5 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 the former 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 former Chairman of the Board, loaned the Company $25,000. The loan is non-interest bearing, unsecured and was repaid on March 8, 2012.

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.

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.

F-14

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

December 31, 2011 and 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.

Year Ended December 31, 2009

The Company issued to non-employees 3,058,500 shares of common stock having a fair value of $231,600 ($0.001 - $0.10/share).

Year Ended December 31, 2010

The Company issued to non-employees 2,000,000 shares of common stock having a fair value of $200,000 ($0.10/share).

Year Ended December 31, 2011

The Company issued to non-employees 1,520,809 shares of common stock having a fair value of $576,140 ($0.10 - $1.27/share). 227,041 shares, or $234,017, of which are payments for future services.

The following is a summary of the Company’s 2011 restricted stock grants that are subject to vesting and forfeiture, and as such are treated as unissued for accounting purposes until vested:

			Vesting Schedule
Date	Quantity Granted		2011		2012 and Thereafter

August 2011		750,000		93,750		656,250
December 2011		1,000,000		250,000		750,000
		1,750,000		343,750		1,406,250

F-15

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

December 31, 2011 and 2010

Stock payments to non-employees for future services that are fully vested and non-forfeitable are recorded as a prepaid expense on the measurement date, and expensed evenly over the period services are provided.

The following is a summary of activity during 2011 for stock payments to non-employees reported as a component of prepaid expenses on the Company’s balance sheet:

Prepaid balance - December 31, 2010	$	-
Issuances of stock for future services		234,017
Amortization of prepaid balance		(5,695	)
Prepaid balance - December 31, 2011	$	228,322

During the year ended December 31, 2011 and 2010 the Company expensed $347,818 and $200,000 related to restricted stock issued for services, respectively.

(D) 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.

Including the 600,000 options issued for services discussed in 4, the Company had the following stock option grants during 2011:

	Quantity				Vesting Schedule
Date	Granted		Fair Value		2011		2012 and Thereafter		Expiration

June 2011		1,800,000	$	1,149,652		1,800,000				5 – 10	Years
July 2011		950,000		1,991,263		950,000	-			10	Years
August 2011		228,670		246,415		228,670	-			10	Years
September 2011		13,500		17,301		13,500	-			10	Years
October 2011		250,000		271,718		200,000	50,000			10	Years
		3,242,170	$	3,676,349		3,192,170		50,000

The Black-Scholes assumptions used are as follows:

Exercise price	$0.69 - $2.26
Expected dividends	0%
Expected volatility	127% - 136%
Risk free interest rate	1.92% - 3.22%
Expected term of option	5 - 10 years
Expected forfeitures	0%

F-16

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:

	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	-	$	-
Outstanding - December 31, 2011	3,242,170	$	1.24	8.28 years	$	558,000
Exercisable - December 31, 2011	3,192,170	$	1.26	8.76 years	$	511,500

Grant date fair value of options - 2011	$	3,676,349
Weighted average grant date fair value - 2011	$	1.18

Outstanding options held by related parties – 2011		1,928,670
Exercisable options held by related parties – 2011		1,928,670
Fair value of stock options held by related parties - 2011	$	2,696,995

The Company expensed $3,623,590 and $0 related to stock option grants on December 31, 2011 and 2010, respectively.

(E)

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:

	Quantity					Vesting Schedule
Date	Granted		Fair Value			2011		2012		Expiration

August 2011		50,000		$	92,798		25,000		25,000	3 Years

The Company expensed $46,399 and $0 related to stock warrants issued for services on December 31, 2011 and 2010, respectively. The remaining unamortized $46,399 associated with the grant of 50,000 warrants noted above will be recognized as a general and administrative expense during 2012.

The Black-Scholes assumptions used are as follows:

Exercise price	$1.27
Expected dividends	0%
Expected volatility	128%
Risk free interest rate	0.55%
Expected term of warrant	3 years
Expected forfeitures	0%

F-17

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:

	Warrants	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life

Outstanding - December 31, 2010	-	$	-	-
Exercisable - December 31, 2010	-	$	-	-
Granted	5,465,151	$	1.80	-
Exercised	-	$	-	-
Forfeited/Cancelled	-	$	-	-
Outstanding - December 31, 2011	5,465,151	$	1.80	1.49
Exercisable - December 31, 2011	5,440,151	$	1.80	1.47

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 $4,382,000 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:

	2011			2010
Gross deferred tax assets:
Net operating loss carry forwards	$	(954,525	)	$	(388,000	)
Total deferred tax assets		954,525			388,000
Less: valuation allowance		(954,525	)		(388,000	)
Net deferred tax asset recorded	$	-		$	-

F-18

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 $388,000. The net change in valuation allowance during the year ended December 31, 2011 was an increase of $566,525. 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:

	2011			2010

Expected tax expense (benefit) – federal	$	(2,202,321	)	$	(393,000	)
Non-deductible stock compensation		1,247,796			68,000
Impairment loss		11,000			-
Valuation allowance		943,525			325,000
Actual tax expense (benefit)	$	-		$	-

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.

F-19

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:

Date	Quantity Granted		Fair Value		Vesting Schedule	Expiration

January 2012		15,000	$	11,650	15,000 upon issuance	10 Years

The Black-Scholes assumptions used are as follows:

Exercise price	$0.98
Expected dividends	0%
Expected volatility	145%
Risk free interest rate	0.30%
Expected term of warrant	10 years

(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 former Chief Executive Officer and current 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.

Effective January 1, 2012, the Company executed an employment agreement with its former Chief Executive Officer as follows:

Term of agreement	1 year
Annual salary	$180,000
Number of options	100,000
Severance	$180,000

Through December 31, 2011, the former 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 one-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.

F-20

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

December 31, 2011 and 2010

(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 having a fair value of $98,000 ($0.98/share).

(F) Stock Options

On January 24, 2012, the Company had the following stock option grants:

Date	Quantity Granted		Fair Value		Vesting Schedule	Expiration

January 2012		770,000	$	722,924	770,000 over 4 years	10 Years

The Black-Scholes assumptions used are as follows:

Exercise price	$1.00
Expected dividends	0%
Expected volatility	145%
Risk free interest rate	0.39%
Expected term of option	6 -10 years
Expected forfeitures	0%

(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 consulting services rendered in January 2012:

Date	Quantity Granted		Fair Value		Vesting Schedule	Expiration

January 2012		100,000(1)	$	86,859	100,000 upon issuance	5 Years

(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 for the January 2012 grant are as follows:

Exercise price	$1.20
Expected dividends	0%
Expected volatility	145%
Risk free interest rate	0.77%
Expected term of warrant	5 years
Expected forfeitures	0%

F-21

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

December 31, 2011 and 2010

Note 11 Restatement of Previously Issued Financial Statements

Subsequent to the issuance of our financial statements for the year ended December 31, 2011 the Company determined that errors were included in the previously issued financial statements as described below. As a result, we restated our financial statements for the year ended December 31, 2011.

During further review of multiple stock for services contracts, the Company discovered the errors listed below. The restatement corrects those errors.

With respect to a stock for services arrangement entered into in December of 2011, which included payment of cash and 1,000,000 shares of stock in exchange for future marketing services over a 13 month period, the Company noted the agreement included a quarterly vesting schedule for the shares granted, and in the event of termination any unvested shares would be forfeited. The Company’s original accounting treated the 1,000,000 shares as issued and recorded a prepaid expense at the outset of the arrangement, based on the fair value of the shares at the contract start date. The Company had treated the shares in the same manner as if it had paid cash, in line with ASC 505-50-25-4. However, the Company did not take into account SEC Staff Announcement ASC 505-50-S99-1, which requires that public registrants treat unvested, forfeitable shares as unissued until the future services are received. The Company also incorrectly concluded a performance commitment was achieved as of the contract start date. However, since there is no sufficiently large disincentive for non-performance present in the contract, a performance commitment and therefore a measurement date was not reached upon the contract start date. Alternatively, the Company was required to defer measurement until completion of services by the counterparty. Based on the preceding, the Company concluded the original accounting for this contract is incorrect for the measurement date and for treating the shares as issued and recording a prepaid expense as of December 31, 2011 for the value of unvested, forfeitable shares. The table below reflects the adjustments necessary to correct this error.

With respect to a separate stock for services arrangement entered into in August 2011 for 750,000 shares of stock for future services over a two-year period, the Company has reviewed and concluded that the accounting for this contract should have been treated similar to the contract discussed in item 1 above. The measurement date should have been based on performance completion given there was no sufficiently large disincentive for non-performance and therefore no performance commitment at the contract start date. Performance completion occurs ratably over eight quarters whereupon a corresponding portion of the total shares is no longer subject to forfeiture. Based on the preceding, the Company concluded that the shares under the arrangement should not have been considered issued and therefore no prepaid balance should have been recorded at the contract start date. Additionally, because the measurement dates differ from our reporting dates, the Company should have recognized an expense based on the estimated fair value of the stock at the reporting dates and subsequently re-measured the stock at the measurement dates, adjusting the expense accordingly. The table below reflects the adjustments necessary to correct this error.

Additionally, upon review of the Company’s accounting for employee stock options, it was determined that the formula used to calculate the expected term under the simplified method, within the Black-Scholes fair market valuation model for 2011 employee stock options was incorrectly and inconsistently applied. The table below reflects the adjustments necessary to correct this error.

F-22

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

December 31, 2011 and 2010

The effect of the restatement on the balance sheet at December 31, 2011 is as follows:

	As Previously Reported				Adjustments			As Restated

ASSETS

Current assets:
Prepaid expenses*		$	2,091,341		$	(1,326,573	)	$	764,268
Total current assets			5,163,324			(1,326,573	)		3,836,751

Other assets:
Prepaid stock compensation			297,656			(297,656	)		-
Total other assets			319,424			(297,656	)		21,768

Total assets		$	5,530,097		$	(1,624,229	)	$	3,905,868


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable and accrued liabilities			365,067			44,063			409,130
Total current liabilities			453,244			44,063			497,307

Stockholders’ equity:
Common stock, $0.001 par value, 500,000,000
shares authorized; 40,839,628 shares issued
and outstanding, as previously reported, and 39,433,378 as restated			40,840			(1,406	)		39,434
Additional paid in capital			13,261,289			(1,840,310	)		11,420,979
Deficit accumulated during the development stage			(8,225,276	)		173,424			(8,051,852	)
Total stockholders’ equity			5,076,853			(1,668,292	)		3,408,561

Total liabilities and stockholders' equity		$	5,530,097		$	(1,624,229	)	$	3,905,868

* As previously reported, amount is comprised of prepaid stock compensation of 1,554,895 and cash related prepaid expenses of 536,446.

F-23

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

December 31, 2011 and 2010

The effect of the restatement on the statement of operations for the year ended December 31, 2011 is as follows:

	As Previously Reported			Adjustments			As Restated
Operating expenses:
Marketing and advertising	$	830,540		$	(69,677	)	$	760,863
General and administrative		5,360,971			(103,747	)		5,257,224
Total operating expenses		6,653,661			(173,424	)		6,480,237

Net loss	$	(6,650,840	)	$	173,424		$	(6,477,416	)

Net loss per common share -
basic and diluted	$	(0.20	)	$	-		$	(0.20	)

Weighted average number of common
shares outstanding during the period -
basic and diluted		33,742,783			(1,481,874	)		32,260,909

The effect of the restatement on the statement of operations from November 21, 2008 (inception) to December 31, 2011 is as follows:

	As Previously Reported			Adjustments			As Restated
Operating expenses:
Marketing and advertising	$	899,510		$	(69,677	)	$	829,833
General and administrative		5,858,509			(103,747	)		5,754,762
Total operating expenses		8,220,870			(173,424	)		8,047,446

Net loss	$	(8,225,276	)	$	173,424		$	(8,051,852	)

Net loss per common share -
basic and diluted	$	(0.41	)	$	0.01		$	(0.40	)

Weighted average number of common
shares outstanding during the period -
basic and diluted		20,263,232			(129,260	)		20,133,972

F-24

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

December 31, 2011 and 2010

The effect of the restatement on the statement of cash flows for the year ended December 31, 2011 is as follows:

	As Previously Reported				Adjustments			As Restated

CASH FLOWS FROM OPERATING ACTIVITIES

Net loss		$	(6,650,840	)	$	173,424		$	(6,477,416	)
Share-based compensation - stock*			483,588			(135,770	)		347,818
Share-based compensation - options			3,751,705			(128,115	)		3,623,590
Accounts payable and accrued liabilities			303,625			44,063			347,688
Net cash used in operating activities		$	(3,324,291	)	$	1		$	(3,324,290	)

Supplemental Disclosures of Non-Cash Financing Activity
Prepaid Expenses		$	2,183,440		$	(1,955,118	)	$	228,322

*As previously reported, amount is comprised of amortization of prepaid stock compensation of $330,889 and stock issued for services of $152,699.

The effect of the restatement on the statement of cash flows from November 21, 2008 (inception) to December 31, 2011 is as follows:

	As Previously Reported				Adjustments			As Restated

CASH FLOWS FROM OPERATING ACTIVITIES

Net loss		$	(8,225,276	)	$	173,424		$	(8,051,852	)
Share-based compensation - stock*			915,188			(135,770	)		779,418
Share-based compensation - options			3,751,705			(128,115	)		3,623,590
Accounts payable and accrued liabilities			365,067			44,063			409,130
Net cash used in operating activities		$	(3,999,433	)	$	(1	)	$	3,999,432

Supplemental Disclosures of Non-Cash Financing Activity
Prepaid Expenses		$	2,183,440		$	1,955,118		$	228,322

*As previously reported, amount is comprised of amortization of prepaid stock compensation of $584,299 and stock issued for services of $330,899.

F-25

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RYU APPAREL INC. Reports

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