RYU APPAREL INC. - FORM 10-Q/A

Attached files

file	filename
EX-31.1 - EXHIBIT 31.1 - RYU APPAREL INC.	ex31_1.htm
EX-32.1 - EXHIBIT 32.1 - RYU APPAREL INC.	ex32_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

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q /A

(Amendment No. 1)

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

For the quarterly period ended March 31, 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: 41,377,128 shares of common stock as of May 14, 2012.

EXPLANATORY NOTE

We are filing this Amendment No. 1 on Form 10-Q/A to amend and restate in their entirety the following items of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 as originally filed with the Securities and Exchange Commission on May 15, 2012 (the “Original Form 10-Q”): (i) Item 1 of Part I “Financial Information,” (ii) Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” (iii) Item 4 of Part I, “Controls and Procedures,” and (iv) Item 6 of Part II, “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-Q/A is presented as of the filing date of the Original Form 10-Q 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 quarter ended March 31, 2012 needed to be restated to correct for errors in our accounting for stock-for-services contracts. See Note 12 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.

RESPECT YOUR UNIVERSE, INC.

FOR THE THREE MONTHS ENDED

MARCH 31, 2012

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

PART I		Page

Item 1	Financial Statements (Unaudited)	4
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 4	Controls and Procedures	33

PART II

Item 6	Exhibits	35
	Signatures	36

PART I

Item 1

Financial Statements

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



	March 31, 2012
	As restated*			December 31, 2011
ASSETS	Unaudited

Current assets
Cash	$	2,006,884		$	2,698,719
Due from factor, net		22,028			-
Inventory		497,650			178,541
Deposits		794,059			194,723
Prepaid expenses		659,447			764,768
Other current assets		95,493			-
Total current assets		4,075,561			3,836,751

Property and equipment, net		49,875			47,349

Other assets
Intangible assets, net		228,541			21,768
Total other assets		228,541			21,768

Total assets	$	4,353,977		$	3,905,868


LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
Accounts payable and accrued liabilities	$	638,713		$	409,130
Accounts payable - related party		17,599			63,177
Loans payable - related party		-			25,000
Current portion of long-term capital lease		13,125			-
Total current liabilities		669,437			497,307

Long-term liabilities
Capital lease, net of current portion		108,825			-
Total long-term liabilities		108,825			-

Stockholders’ equity
Common stock, $0.001 par value, 500,000,000
shares authorized; 41,377,128 and 39,433,378
shares issued and outstanding, respectively		41,378			39,434
Additional paid in capital		13,537,851			11,420,979
Deficit accumulated during the development stage		(10,003,514	)		(8,051,852	)
Total stockholders’ equity		3,575,715			3,408,561

Total liabilities and stockholders' equity	$	4,353,977		$	3,905,868

*Refer to Note 12 to the financial statements for restatement details

See accompanying notes to the financial statements

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


							From November 21, 2008
	Three Months Ended						(Inception) to
	March 31, 2012						March 31, 2012
	As restated*			March 31, 2011			As restated*

Revenues, net	$	64,126		$	-		$	68,934

Cost of goods sold		35,912			-			45,126

Gross profit		28,214			-			23,808

Operating expenses
Marketing and advertising		634,623			-			1,464,456
Marketing and advertising - related party		-			-			63,900
Product creation		-			-			10,216
Product creation - related party		315,400			205,074			1,672,245
General and administrative		1,029,853			21,522			6,784,615
Loss on impairment of website		-			-			31,890
Total operating expenses		1,979,876			226,596			10,027,322

Net loss	$	(1,951,662	)	$	(226,596	)	$	(10,003,514	)

Net loss per common share -
basic and diluted	$	(0.05	)	$	(0.01	)	$	(0.46	)

Weighted average number of common
shares outstanding during the period -
basic and diluted		40,092,032			24,701,056			21,615,362

*Refer to Note 12 to the financial statements for restatement details

See accompanying notes to the financial statements

Respect Your Universe, Inc.
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit)
From November 21, 2008 (Inception) to March 31, 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 - 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)		1,520,809		1,521		574,619		-			-			576,140

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

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

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

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

Share-based compensation - stock ($0.97 - 0.98/share), as restated*		443,750		444		446,932		-			-			447,376

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 - options, as restated*		-		-		51,992		-			-			51,992

Share-based compensation - warrants		-		-		114,698		-			-			114,698

Net loss - period ended March 31, 2012, as restated*		-		-		-		(1,951,662	)		-			(1,951,662	)

Balance, March 31, 2012, as restated*		41,377,128	$	41,378	$	13,537,851	$	(10,003,514	)	$	-		$	3,575,715

*Refer to Note 12 to the financial statements for restatement details

See accompanying notes to the financial statements

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


							From November 21, 2008
	Three Months Ended						(Inception) to
	March 31, 2012						March 31, 2012
	As restated*			March 31, 2011			As restated*
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(1,951,662	)	$	(226,596	)	$	(10,003,514	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense		6,706			-			6,706
Share-based compensation expense - stock		447,725			-			1,227,143
Share-based compensation expense - options		51,992			-			3,675,582
Share-based compensation expense - warrants		114,698			-			161,097
Loss on impairment of website		-			-			31,890
Changes in operating assets and liabilities:
Due from factor		(22,028	)		-			(22,028	)
Inventory		(319,109	)		-			(497,650	)
Deposits		(599,336	)		-			(794,059	)
Prepaid expenses		104,971			-			(431,475	)
Other current assets		(95,492	)		-			(95,492	)
Accounts payable and accrued liabilities		229,583			168,736			638,713
Accounts payable - related party		(45,578	)		-			17,599
Net cash used in operating activities		(2,077,530	)		(57,860	)		(6,085,488	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment		(7,229	)		-			(54,578	)
Acquisition of intangible assets		(72,176	)		-			(125,834	)
Net cash used in investing activities		(79,405	)		-			(180,412	)

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		(3,000	)		-			(3,000	)
Proceeds from issuance of common stock and warrants		1,500,000			30,000			8,175,984
Offering costs		(6,900	)		-			(6,900	)
Net cash provided by financing activities		1,465,100			55,000			8,272,784

Net increase (decrease) in cash		(691,835	)		(2,860	)		2,006,884

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

Cash - end of period	$	2,006,884		$	448		$	2,006,884


Supplemental Disclosure of Non-Cash Financing Activities
Stock issued in exchange for debt	$	-		$	-		$	106,700
Prepaid expenses	$	227,972		$	-		$	227,972
Warrants issued for capital lease	$	11,650		$	-		$	11,650
Capital lease obligation incurred to acquire intangible assets	$	124,950		$	-		$	124,950

*Refer to Note 12 to the financial statements for restatement details

See accompanying notes to the financial statements

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

March 31, 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/A for the year ended December 31, 2011 and form 10-K for the year ended December 31, 2010. The unaudited interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K/A, 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 three months ended March 31, 2012 are not necessarily indicative of results for the full fiscal year.

Note 3 Liquidity and Management’s Plans

As reflected in the accompanying financial statements, the Company had a net loss of $1,951,662 and net cash used in operations of $2,077,530 for the three months March 31, 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 March 31, 2012 of approximately $2 million, the current level of 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 sales, or that unforeseen circumstances will not require additional funding sources in the future.

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

March 31, 2012

Unaudited

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.

Such estimates and assumptions impact, among others, the following: net realizable value of property, equipment and inventory and related potential obsolescence, valuation and potential impairment associated with intangible assets, 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.

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 March 31, 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.

Due 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

March 31, 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 from factor consist of the following as of March 31, 2012 and December 31, 2011:

	2012			2011

Receivables sold to factor	$	36,481		$	-
Factoring fees (1)		(14,453	)		-
Due from factor, net	$	22,028		$	-

(1)

In addition to the fee based on receivables sold to factor, this amount includes an amortization of the annual minimum aggregate factoring charge as well as one-time setup and legal fees.

Inventory

Inventory 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 three months ended March 31, 2012.

Deposits

Deposits are generally required by the manufacturer in order to produce inventory.

Prepaid Expenses

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

	2012						2011
	Cash		Common Stock		Total		Cash		Common Stock		Total

Investor relations	$	-	$	-	$	-	$	22,812	$	-	$	22,812
Marketing		395,260		227,972		623,232		460,038		228,322		688,360
Other		36,215		-		36,215		53,596		-		53,596
Total prepaid expenses	$	431,475	$	227,972	$	659,447	$	536,446	$	228,322	$	764,768

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

March 31, 2012

Unaudited

Prepaid expenses are amortized over the related service period, which are less than or equal to 1 year.

The Company notes that one of its 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.

Other Current Assets

Other current assets primarily include deferred offering costs, in the amount of $64,039, consisting of legal and filing fees relating to the Company’s initial public offering on the TSX Venture Exchange. The deferred offering costs will be offset against offering proceeds in the event the offering is successful. In the event the public offering is unsuccessful, the deferred offering costs will be expensed. The Company anticipates that the offering will either be successful or abandoned within the next twelve months. See also Note 11, Subsequent Events, regarding the offering.

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	5 years
Furniture and fixtures	7 years
Software	3 years
Tradeshow and event equipment	2 - 3 years

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

	2012			2011

Leasehold improvements	$	2,400		$	2,400
Computers and office equipment		11,997			11,998
Software		30,500			30,500
Furniture and fixtures		4,230			4,230
Tradeshow and event equipment		7,229			-
		56,357			49,128
Accumulated depreciation		(6,481	)		(1,779	)
Property and equipment, net	$	49,875		$	47,349

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

March 31, 2012

Unaudited

Intangible Assets

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

	2012		2011

Patent and trademarks	$	44,955	$	17,101
Website development, net		46,986		4,667
Domain name		136,600		-
Intangible assets, net	$	228,541	$	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. Patents and trademarks with indefinite useful lives are not amortized.

As of March 31, 2012 and December 31, 2011, the Company’s patent and trademark costs are as follows:

	2012		2011

Patent and trademarks	$	44,955	$	17,101

During the three months ended March 31, 2012 and 2011, the Company amortized $0 and $0 related to patent and trademark costs, respectively.

(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 March 31, 2012 and December 31, 2011, the Company’s website development costs are as follows:

	2012			2011

Website development	$	50,157		$	4,667
Accumulated amortization		(3,171	)		-
Website development, net	$	46,986		$	4,667

The Company’s current website was placed into service in February 2012. During the three months ended March 31, 2012 and 2011, the Company amortized $3,171 and $0 related to website development costs, respectively.

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

March 31, 2012

Unaudited

The Company capitalized the costs associated with 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.

As of March 31, 2012 and December 31, 2011, the Company’s domain name costs are as follows:

	2012		2011

Domain name	$	136,600	$	-

See also Note 6, Capital Lease, regarding the future payments required under the domain lease agreement.

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 was launched during the first quarter of 2012. See also Note 4 (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.

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 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.

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

March 31, 2012

Unaudited

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.

Marketing and Advertising

Marketing and advertising costs are generally expensed as incurred. Marketing and 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, which ranges from 1 to 2 years.

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

Product Creation

The Company expenses product design and creation costs as incurred. Product creation expenses include share based compensation and fees paid to a consultant for the design, development, merchandising, sourcing and production of a clothing line.

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 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.

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

March 31, 2012

Unaudited

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 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.

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 March 31, 2012 and December 31, 2011:

	2012		2011

Stock options, exercise price $0.69 - $2.26		4,016,170		3,242,170
Common stock warrants, conversion price $0.98 - $1.80		6,330,151		5,440,151
Unvested, forfeitable restricted stock grants		1,062,500		1,406,250
Total common stock equivalents		11,408,921		10,008,571

Since the Company incurred a net loss during 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.

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

March 31, 2012

Unaudited

The Company has a total of 820,000 unvested options that will vest through December 2015 and a total of 50,000 unvested common stock warrants that will vest through July 2012. All options and warrants are expected to vest without forfeiture.

Fair Value of Financial Instruments

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

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

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

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

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

The Company's financial instruments consisted primarily of cash, due from factor, 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 March 31, 2012 and December 31, 2011, respectively, due to the short-term nature of these instruments.

Reclassifications

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

Recent Accounting Pronouncements

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

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

March 31, 2012

Unaudited

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 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 6 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.

The Company has capitalized the acquisition cost of the domain name on the balance sheet as an intangible asset at March 31, 2012. See also Note 4 (C), Domain Name, regarding the Company’s capitalization and amortization policies.

The future minimum lease payments required under the capital lease as of March 31, 2012, are as follows:

	2012

2012	$	13,125
2013		13,125
2014		12,900
2015		12,900
2016		12,900
2017 and thereafter		57,000
Total minimum lease payments		121,950
Less: Current maturities of capital lease obligations		(13,125	)
Long-term capital lease obligations	$	108,825

During the three months ended March 31, 2012 and 2011, the Company expensed $2,000 and $0 related to the capital lease, respectively.

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

March 31, 2012

Unaudited

Note 7 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.

(B)	Stock Issued for Cash and Warrants

Year Ended December 31, 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.

Three Months Ended March 31, 2012

In February 2012, the Company issued 1,500,000 shares for $1,500,000 ($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

March 31, 2012

Unaudited

Year Ended December 31, 2009

The Company issued 3,058,500 shares of common stock to consultants, in exchange for services rendered, for a 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).

Year Ended December 31, 2011

The Company issued 1,520,809 shares of common stock, in exchange for services rendered having a fair value of $576,140 ($0.10 - $1.16/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

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.

Three Months Ended March 31, 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.

The following is a summary of activity during 2012 for stock payments to non-employees reported as prepaid expenses on the Company’s balance sheet:

Prepaid balance - December 31, 2011	$	228,322
Issuances of stock for future services		167,308
Amortization of prepaid balance		(167,658	)
Prepaid balance - March 31, 2012	$	227,972

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

March 31, 2012

Unaudited

There were no restricted stock grants issued in Q1 subject to vesting or forfeiture.

During the three months ended March 31, 2012 and 2011 the Company expensed $447,725 and $0 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 Note 9 (A), Commitments - Related Party, the Company had the following stock option grants:

	Quantity
	of Shares		Fair Market		Share Vesting Schedule
Grant Date	Granted		Value		2011		2012		2013 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		12,500		37,500	Over 3years			10	Years
January 2012		770,000		722,924		-		192,500		577,500	Over 3years			10	Years
March 2012		4,000		3,292		-		4,000		-		-		10	Years
		4,016,170	$	4,402,565		3,192,170		209,000		615,000

The Black-Scholes assumptions used are as follows:

	March 31, 2012	December 31, 2011

Exercise price	$0.97 - $1.00	$0.69 - $2.26
Expected dividends	0%	0%
Expected volatility	145%	127% - 136%
Risk free interest rate	0.39% - 0.46%	1.92% - 3.22%
Expected term of option	5-10 years	5 - 10 years
Expected forfeitures	0%	0%

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

March 31, 2012

Unaudited

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	8.58 years
Exercised	-
Forfeited/Cancelled	-
Balance - December 31, 2011	3,242,170		1.24		$	-
Granted	774,000		1.00	9.76 years
Exercised	-		-
Forfeited/Cancelled	-		-
Outstanding - March 31, 2012	4,016,170	$	1.19	8.60 years	$	504,000
Exercisable - March 31, 2012	3,196,170	$	1.24	8.51 years	$	462,000

	Quarter ended March 31, 2012		Year ended December 31, 2011

Grant date fair value of options	$	4,402,566	$	3,676,349
Weighted average grant date fair value	$	1.10	$	1.18

Outstanding options held by related parties		2,332,670		1,928,670
Exercisable options held by related parties		1,832,670		1,928,670
Fair value of stock options held by related parties	$	3,058,905	$	2,696,995

During the three months ended March 31, 2012 and 2011, the Company expensed $51,992 and $0 related to stock option grants, respectively.

(E)

Warrants

In addition to the 5,415,151 warrants issued in connection with the June 2011 private placement and the 750,000 warrants issued in connection with the February 2012 private placement discussed in Note 7 (B), the Company also granted the following warrants:

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

August 2011		50,000		$	92,798		25,000		25,000		3	Years
January 2012		15,000			11,650		-		15,000		10	Years
January 2012 (1)		100,000			86,859		-		100,000		5	Years
		165,000		$	191,307		25,000		140,000

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

March 31, 2012

Unaudited

(1)

The Company has also committed to grant an additional 400,000 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 April 2012, July 2012, October 2012 and January 2013. See also 11, Subsequent Events, regarding the April 2012 issuance.

During the three months ended March 31, 2012 and 2011, the Company expensed $114,699 and $0 related to stock warrants issued for services, respectively.

The Black-Scholes assumptions used are as follows:

	Quarter ended March 31, 2012	Year ended December 31, 2011

Exercise price	$0.98 - 1.20	$1.20 - 1.27
Expected dividends	0%	0%
Expected volatility	145%	145%
Risk free interest rate	0.30 – 0.77%	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	865,000		1.72
Exercised	-		-
Forfeited/Cancelled	-		-
Outstanding - March 31, 2012	6,330,151	$	1.78	1.66 years	$	-
Exercisable - March 31, 2012	6,330,151	$	1.78	1.65 years	$	-

Note 8 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 March 31, 2012, officers made advances on behalf of the Company for $17,599, which is included in Accounts payable - related party on the balance sheet. In April 2012, this amount was repaid.

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

March 31, 2012

Unaudited

Note 9 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 expires June 30, 2012.

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		1,304,937		1,654,937
January 2012		386,000		-		-		-		-		386,000
	$	1,635,860		2,000,000	$	200,000		600,000	$	1,304,937	$	3,140,797

(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:

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 March 31, 2012 and December 31, 2011, the Company owed $0 and $52,312, to this vendor respectively. This amount is included in Accounts payable - related party on the balance sheet.

(B) Marketing Commitment

In March 2012, the Company executed an agreement with an athletic center whereby such center will use the Company's brand and sell its products. The term of the agreement is three years, and the Company will pay $150,000 in fees, which may be recouped through the sale of Company products at the center's retail center. A total of $100,000 became due and paid in April 2012.

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

March 31, 2012

Unaudited

Note 10 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 11 Subsequent Events

In April 2012, the Company filed a registration statement to list on the TSX Venture Exchange (“TSXV”). The listing will be subject to fulfillment of all listing requirements of the TSXV, and there can be no assurance that we will be able to fulfill those listing requirements. See Note 4, Other Current Assets, regarding the deferred offering costs associated with this offering.

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

Date

Quantity Granted

Fair Value

Vesting Schedule

Expiration

April 2012

100,000

80,192

100,000 upon issuance

Years

The Black-Scholes assumptions used are as follows:

Exercise price	$1.20
Expected dividends	0%
Expected volatility	121%
Risk free interest rate	0.82%
Expected life of warrant	5 years
Expected forfeitures	0%

Note 12 Restatement of Previously Issued Financial Statements

Subsequent to the issuance of our financial statements for the quarter ended March 31, 2012 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 quarter ended March 31, 2012.

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

March 31, 2012

Unaudited

During further review of multiple stock for service contracts, the Company discovered the following errors:

With respect to a separate 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.

Another stock for services arrangement was entered into on January 26, 2012 and has a 12-month service period. Consideration paid for the services included 100,000 shares of stock issued up front, and 500,000 shares of warrants. Issuance of the warrants is as follows: 100,000 up front and 100,000 each of the following 4 quarters (every 3 months until the end of the term for a total of 500,000 warrants). The 100,000 shares of stock do not include vesting or forfeiture clauses, nor does the contract include a claw-back provision in the event of non-performance. Consequently, the Company treated the measurement date at performance commitment and recognized the corresponding expense up front. Regarding the Company’s accounting for the warrants, given they were issued over the term and fully vest upon issuance, we determined the measurement date to be at performance completion, at each of the dates of issuance. The Company recognized the fair value of warrants as an expense in the month they were issued. Per ASC 505-50-30-21, because the measurement dates differ from our reporting dates, at each reporting date the Company should have accrued an expense for services received. The expense should be based on the fair value of the warrants at the reporting. The Company should have then recorded an adjustment to the expense at the subsequent measurement date. The table below reflects the adjustments necessary to correct this error.

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

March 31, 2012

Unaudited

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.

The effect of the restatement on the balance sheet at March 31, 2012 is as follows:

	As Previously Reported				Adjustments			As Restated

ASSETS

Current assets
Prepaid expenses		$	1,716,709		$	(1,057,262	)	$	659,447
Total current assets			5,132,822			(1,057,261	)		4,075,561

Other assets
Prepaid expenses, net of current portion			178,594			(178,594	)		-
Total other assets			407,135			(178,594	)		228,541

Total assets		$	5,589,832		$	(1,235,855	)	$	4,353,977


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities
Accounts payable and accrued liabilities			538,563			100,150			638,713
Total current liabilities			569,287			100,150			669,437

Stockholders’ equity
Common stock, $0.001 par value, 500,000,000
shares authorized; 42,439,628 shares issued
and outstanding, as previously reported, and 41,377,128 as restated			42,440			(1,062	)		41,378
Additional paid in capital			15,033,090			(1,495,239	)		13,537,851
Deficit accumulated during the development stage			(10,163,810	)		160,296			(10,003,514	)
Total stockholders’ equity			4,911,720			(1,336,005	)		3,575,715

Total liabilities and stockholders' equity		$	5,589,832		$	(1,235,855	)	$	4,353,977

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

March 31, 2012

Unaudited

The effect of the restatement on the statement of operations for the three months ended March 31, 2012 is as follows:

	As Previously Reported			Adjustments			As Restated
Operating expenses
Marketing and advertising	$	660,847		$	(26,224	)	$	634,623
General and administrative		990,501			39,352			1,029,853
Total operating expenses		1,966,748			13,128			1,979,876

Net loss	$	(1,938,534	)	$	(13,128	)	$	(1,951,662	)

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

Weighted average number of common
shares outstanding during the period -
basic and diluted		41,455,013			(1,362,981	)		40,092,032

The effect of the restatement on the statement of operations from November 21, 2008 (inception) to March 31, 2012 is as follows:

	As Previously Reported			Adjustments			As Restated
Operating expenses
Marketing and advertising	$	1,560,357		$	(95,901	)	$	1,464,456
General and administrative		6,849,010			(64,395	)		6,784,615
Total operating expenses		10,187,618			(160,296	)		10,027,322

Net loss	$	(10,163,810	)	$	160,296		$	(10,003,514	)

Net loss per common share -
basic and diluted	$	(0.46	)	$	-		$	(0.46	)

Weighted average number of common
shares outstanding during the period -
basic and diluted		21,951,674			(336,312	)		21,615,362

Respect Your Universe, Inc.

(A Development Stage Company)

Notes to Financial Statements

March 31, 2012

Unaudited

The effect of the restatement on the statement of cash flows for the three months ended March 31, 2012 is as follows:

	As Previously Reported				Adjustments			As Restated

CASH FLOWS FROM OPERATING ACTIVITIES

Net loss		$	(1,938,534	)	$	(13,128	)	$	(1,951,662	)
Share-based compensation - stock			486,723			(38,998	)		447,725
Share-based compensation			170,651			(3,961	)		166,690
Accounts payable and accrued liabilities			173,496			56,087			229,583
Net cash used in operating activities		$	(2,077,530	)	$	-		$	(2,077,530	)

Supplemental Disclosures of Non-Cash Financing Activity
Prepaid expenses		$	-		$	227,972		$	227,972

The effect of the restatement on the statement of cash flows from November 21, 2008 (inception) to March 31, 2012 is as follows: is as follows:

	As Previously Reported				Adjustments			As Restated

CASH FLOWS FROM OPERATING ACTIVITIES

Net loss		$	(10,163,810	)	$	160,297		$	(10,003,513	)
Share-based compensation - stock			1,401,911			(174,768	)		1,227,143
Share-based compensation			3,922,356			(85,677	)		3,836,679
Accounts payable and accrued liabilities			538,563			100,150			638,713
Net cash used in operating activities		$	(6,085,488	)	$	-		$	(6,085,488	)

Supplemental Disclosures of Non-Cash Financing Activity
Prepaid expenses*		$	2,183,440		$	(1,955,468	)	$	227,972

*Stock issued for future services, as previously reported.

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/A. 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/A, 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/A 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 include: 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 in the second half 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; supply and demand for our products; and our need for and ability to raise, capital, including completing an initial public offering on the TSX Venture Exchange during the second or third quarter of 2012. 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.

We have generated limited revenues to date and during the quarter ended March 31, 2012. As a result, we continue to depend upon funding from various sources to continue operations and to implement our growth strategy.

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 (“Summer”) 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 executed a one-year lease agreement on July 31, 2011.

We have contracted with Exit 21, a consulting firm controlled by our former Chief Executive Officer and current Chief Operating Officer, to design, develop and source all of our products to date. Starting with Fall 2013 product creation which commenced in April 2012, we 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 Spring 2012 line of men’s performance and lifestyle apparel, and accessories. During the same month, we launched an updated web site and store, ryu.com. During the quarter, we had nominal sales 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 quarter of 2012.

Our Fall 2012 product lines are in production at our factories, with delivery to our warehouse expected in late 2nd quarter and early 3rd quarter of 2012. The new season will include an expanded line of men’s apparel, the launch of our women’s apparel and additional accessories. Sales samples have been produced that we anticipate will be utilized to obtain Fall 2012 orders.

Our Spring 2013 product line has been designed and is anticipated to include new styles for our men’s and women’s product lines, additional accessories, as well as carryover styles from prior seasons. Orders for sales samples have been placed with our factories, and production orders are expected to be placed in the second quarter of 2012.

Product Line

Our premium athletic products include competition, training, sportswear and outerwear, as well as headwear and accessories that are designed to keep up with 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 respect, strength, honor and sustainability as the foundation of their apparel and accessories.

Crafted from organic and/or recycled materials utilizing some of 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.

As discussed in Note 12 of the interim financial statements, we have restated our previously issued financial statements as of and for the three months ended March 31, 2012. Accordingly, this management’s discussion and analysis of financial condition and results of operations has been revised for the effects of the restatement.

For the three months ended March 31, 2012 and 2011 and the period from November 21, 2008 (inception) to March 31, 2012:

Revenue

We generated nominal net revenues in the amount of $68,394 during the period from November 21, 2008 (inception) to March 31, 2012. Net revenues during the three months ended March 31, 2012 and 2011 were $64,126 and $0, respectively. The increase is a result of the launch of our Spring 2012 product line and ryu.com in February 2012.

Gross Profit

Gross Profit from November 21, 2008 (inception) to March 31, 2012 was $23,808. For the three months ended March 31, 2012 and 2011, gross profit was $28,214 and $0, respectively.

Operating Expenses

During the three months ended March 31, 2012, total operating expenses for the Company were $1,978,876 compared to $226,596 for the three months ended March 31, 2011. Total operating expenses for the period from November 21, 2008 (inception) through March 31, 2012 were $10,027,322. A significant portion of our operating expenses incurred during this period were from non-cash transactions comprised of share-based payments for services valued at $5,063,822. This total includes incentive stock options and warrants valued at $3,836,679. Personnel compensation costs including salaries, benefits and incentive compensation are included in the expense categories below based on the employee’s function.

We incurred $634,623 in marketing and advertising expenses during the three months ended March 31, 2012 for digital media, brand and sports marketing initiatives and communications. We had no marketing expenses for the comparable period of 2011 and marketing and advertising expenses in the amount of $1,528,356 for the period from November 21, 2008 (inception) through March 31, 2012. Of the total amount expensed to date, $63,900 was for related party development of brand and marketing media.

During the three months ended March 31, 2012, we incurred product creation expenses of $315,400 compared to $205,074 during the three months ended March 31, 2011. The increase is due to additional services needed to support the expansion of our product lines, including the addition of a women’s category. For the period from November 21, 2008 (inception) through March 31, 2012, total product creation expenses were $1,682,461 of which $1,672,245 was paid to Exit 21, an entity controlled by our former Chief Executive Officer and current Chief Operation Officer.

General and administrative expenses for the three months ended March 31, 2012 were $1,029,853 compared to $21,522 for the three months ended March 31, 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 these respective periods were investor relations expenses of $343,234 ($297,645 of which was from share-based compensation) and $0, employee compensation expense $309,353 ($42,880 from share-based compensation) and $0, legal, professional and consulting fees of $87,688 ($2,476 from share-based-compensation) and $16,705, and travel expenses of $80,948 and $0.

For the period from November 21, 2008 (inception) through March 31, 2012, general and administrative expenses were $6,784,615.

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.

Net Loss

Our net loss for the quarter ended March 31, 2012 was $1,951,662 as compared to a net loss of $226,596 for the three months ended March 31, 2011. Our accumulative net loss for the period from November 21, 2008 (inception) to March 31, 2012 was $10,003,514.

Liquidity and Financial Condition

As of March 31, 2012, we had current assets of $4,075,561, current liabilities of $669,437 and working capital of $3,406,124, compared to current assets of $3,836,751, current liabilities of $497,307 and working capital of $3,339,444 at December 31, 2011.

In February 2012, we successfully raised $1,500,000 in additional capital though equity financing. Our cash balance as of March 31, 2012 was $2,006,884 compared to $2,698,719 at December 31, 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, we filed a prospectus in April 2012 in order to become listed on the Canadian TSX Venture Exchange through an initial public offering. The offering is for CDN $5,000,000 and includes an option for over-allotment of up to CDN $750,000. If the offering is abandoned or delayed, we believe the Company will be able to raise sufficient capital from other sources to support operations through the remainder of 2012.

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 March 31, 2012, the Company used cash in the amount of $2,077,530 for operating activities. The major components of operating activities include a net loss of $1,951,662, offset by share-based compensation of $614,415, an increase in inventory of $319,109, an increase in deposits for inventory purchased of $599,336, a decrease in prepaid expenses of $104,971, and an increase in accounts payable and accrued liabilities of $184,005.

By comparison, during the three months ended March 31, 2011, the Company used cash in the amount of $57,860 for operating activities. Cash used in operating activities included a net loss of $226,596, offset by an increase in accounts payable of $168,736.

Investing Activities

The Company used cash in the amount of $79,405 in investing activities during the quarter ended March 31, 2012. Investing activities during that period included $7,229 for property and equipment purchases and $72,176 for the acquisition of intangible assets including 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 live will be amortized over the expected useful lives of the assets. Depreciation and amortization during the quarter ended March 31, 2012 totaled $6,706.

By contrast, there were no investing activities for the three months ended March 31, 2011. For the period from November 21, 2008 (inception) to March 31, 2012, cash used in investing activities was $180,412 and included $54,578 for property and equipment purchases and $125,834 for the acquisition of intangible assets.

Financing Activities

During the quarter ended March 31, 2012, the Company repaid $25,000 to related parties, paid $3,000 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 $1,465,100.

During the three months ended March 31, 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 $30,000 for total cash provided by financing activities of $55,000.

From November 21, 2008 (inception) to March 31, 2012, the Company received proceeds from a loan due to a stockholder of $151,700, received related party advances in the amount of $45,000, repaid $45,000 to related parties, paid $3,000 on capital lease obligations, and received proceeds from sale of common stock and warrants of $8,175,984 for total net cash provided by financing activities of $8,272,784. The loan of $151,700 was subsequently exchanged for shares of common stock.

We presently have a credit line (credit card) of $25,000 with approximately $8,600 outstanding as of March 31, 2012. 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 $1,951,662 and net cash used in operations of $2,077,530 for the three months March 31, 2012.

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 March 31, 2012, of approximately $2 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.

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 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

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.

Recent Accounting Pronouncements

There are no recent accounting pronouncements that are expected to have an 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 4

Controls and Procedures

Disclosure Controls and Procedures

In connection with the May 2012 filing of our original Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, our former Chief Executive Officer and current Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2012, 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 current 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 current Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2012 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 current 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 12 to the financial statements included in this Form 10−Q/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−Q/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 II

Item 6 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



Date: November 19, 2012	/s/ Steven H. Eklund
	Steven H. Eklund, Chief Financial Officer

Attached files

RYU APPAREL INC. Reports

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