Exhibit 10.1

 

 
RESPECT YOUR UNIVERSE, INC.

Interim Financial Statements

For the three months ended March 31, 2014 and 2013

 
 

 
 
 
 

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Notice of disclosure of non-auditor review of interim financial statements
pursuant to National Instrument 51-102, Part 4, subsection 4.3(3)(a) issued by
the Canadian Securities Administrators.

The accompanying interim financial statements Respect Your Universe, Inc. (the
“Company”) for the period ended March 31, 2014 have been prepared in accordance
with U.S. GAAP and are the responsibility of the Company’s management.  The
Company’s independent auditors have not performed an audit or review of these
interim financial statements.
 

 
 
 
 
 
 

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RESPECT YOUR UNIVERSE, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)

                 
March 31, 2014
   
December 31, 2013
               
 ASSETS
                         
Current assets
           
Cash
  $ 251,977     $ 252,153  
Due from factor
    145,838       31,602  
Inventory, net
    992,096       845,188  
Deposits
    123,715       107,395  
Prepaid expenses
    69,537       59,337  
Other current assets
    61,470       83,309  
Total current assets
    1,644,633       1,378,984                    
Property and equipment, net
    215,514       168,417                    
Other assets
               
Non-current inventory, net
    640,890       951,966  
Intangible assets, net
    166,319       167,587  
Total other assets
    807,209       1,119,553                    
Total assets
  $ 2,667,356     $ 2,666,954                    
LIABILITIES AND STOCKHOLDERS' EQUITY
                                 
Current liabilities
               
Accounts payable and accrued liabilities
    1,409,512       1,603,852  
Note payable
    499,934       -  
Loans payable - related party
    -       130,000  
Current portion of capital lease
    10,423       10,919  
Total current liabilities
    1,919,869       1,744,771                    
Other liabilities
               
Note payable, long-term
    -       499,934  
Capital lease, net of current portion
    79,606       81,746  
Total other liabilities
    79,606       581,680                    
Stockholders’ equity
               
Common stock, $0.001 par value, 500,000,000 shares
               
authorized; 76,273,500 and 62,926,670 shares issued
               
and outstanding, respectively
    76,274       62,927  
Additional paid in capital
    24,729,762       23,563,404  
Accumulated deficit
    (24,138,155 )     (23,285,828 )
Total stockholders’ equity
    667,881       340,503                    
Total liabilities and stockholders' equity
  $ 2,667,356     $ 2,666,954  

 See accompanying notes to condensed financial statements

 
 
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RESPECT YOUR UNIVERSE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)

                 
Three Months Ended
     
March 31, 2014
   
March 31, 2013
                             
Revenue
  $ 297,946     $ 387,692                    
Cost of Goods Sold
    258,622       275,370                    
Gross profit
    39,324       112,322                    
Operating expenses
               
Selling and Marketing
    177,985       409,936  
Product creation
    60,249       137,043  
General and administrative
    629,577       917,782  
Total operating expenses
    867,811       1,464,761                    
Loss before interest expense
    (828,487 )     (1,352,439 )                  
Interest expense
    23,840       517                    
Net loss
  $ (852,327 )   $ (1,352,956 )                  
Net loss per common share -
               
basic and diluted
  $ (0.01 )   $ (0.03 )    
#REF!
   
#REF!
 
Weighted average number of common
           
shares outstanding during the period -
               
basic and diluted
    71,231,364       49,822,475  

 See accompanying notes to condensed financial statements

 
 
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RESPECT YOUR UNIVERSE, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)

                                                                               
 
   
Total
     
Common Stock, $0.001 Par Value
   
Additional
   
Accumulated
   
Stockholders'
     
Shares
   
Amount
   
Paid in Capital
   
Deficit
   
Equity
                                                                 
Balance, January 1, 2014
    62,926,670     $ 62,927     $ 23,563,404     $ (23,285,828 )   $ 340,503    
                                       
Issuance of common stock and warrants for cash
                                       
     ($0.10/share), net of offering costs of $167,616
    13,346,830       13,347       1,153,720       -       1,167,067            
                               
Share based compensation - options
    -       -       12,638       -       12,638                                
           
Net loss
                            (852,327 )     (852,327 )                          
               
Balance, March 31, 2014
    76,273,500     $ 76,274     $ 24,729,762     $ (24,138,155 )   $ 667,881  

 See accompanying notes to condensed financial statements

 
 
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RESPECT YOUR UNIVERSE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)

                               
Three Months Ended
     
March 31, 2014
   
March 31, 2013
               
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net loss
  $ (852,327 )   $ (1,352,956 )
Adjustments to reconcile net loss to net cash used in
operating activities
               
Depreciation and amortization
    10,077       45,153  
Share-based compensation expense - stock
    -       48,750  
Share-based compensation expense - options
    12,638       97,976  
Share-based compensation expense - warrants
    -       30,020  
Loss on impairment/disposal of fixed assets
    -       6,073  
 Changes in operating assets and liabilities
               
Due from factor
    (114,236 )     (103,642 )
Accounts receivable, net
    -       (484 )
Inventory
    164,168       (14,496 )
Deposits
    (16,320 )     41,113  
Prepaid expenses
    (10,200 )     320  
Other current assets
    21,839       1,107  
Accounts payable and accrued liabilities
    (194,340 )     (123,894 )
Accounts payable - related party
    -       (4,876 )
Net cash used in operating activities
    (978,701 )     (1,329,836 )                  
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchases of property and equipment
    (55,906 )     (4,501 )
Acquisition of intangible assets
    -       (7,394 )
Net cash used in investing activities
    (55,906 )     (11,895 )                  
CASH FLOWS FROM FINANCING ACTIVITIES
               
Payments on capital lease obligations
    (2,636 )     (3,000 )
Proceeds from issuance of common stock and warrants
    1,204,683       1,450,000  
Offering costs
    (167,616 )     (72,145 )
Net cash provided by financing activities
    1,034,431       1,374,855                    
Net (decrease) increase in cash
    (176 )     33,124                    
Cash - beginning of year/period
    252,153       295,211                    
Cash - end of year/period
  $ 251,977     $ 328,335                    
Supplemental Disclosure of Cash Flow Information
               
Cash paid during the year/period for:
               
Interest
  $ 5,090     $ 460  
Taxes
  $ 800     $ 1,500                    
Supplemental Disclosure of Non-Cash Activities
               
Stock issued as repayment of loans payable
  $ 130,000     $ -  
Warrants issued for capital lease
  $ -     $ -  

 
 
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RESPECT YOUR UNIVERSE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2014
(UNAUDITED)

 
 
Note 1   Organization and Nature of Operations

Respect Your Universe, Inc. (“the Company”), which was incorporated in 2008, is
a vertically integrated active lifestyle apparel brand that engages in the
development, marketing and distribution of apparel and accessories. With
operations based in Portland, Oregon, the Company’s products are sold through
wholesale, retail and e-commerce channels.

Note 2   Liquidity and Management’s Plan

The Company commenced operations as a development stage enterprise in 2009 and
has incurred losses from inception.  As shown in the accompanying condensed
financial statements, the Company incurred a net loss of $852,327 and had net
cash used in operating activities of $978,701 for the three months ended March
31, 2014.   As of March 31, 2014, the Company’s cash balance was $251,977.
Although the Company has successfully raised $3,160,000 in 2014 as discussed in
Note 15 - Subsequent Events, the Company will need to raise sufficient capital
during 2014 in order to support current operations and planned
development.  These factors raise substantial doubt as to our ability to
continue as a going concern.

In 2012, the Company emerged from the development stage by launching its initial
men’s apparel line in January and its initial women’s apparel line in July, and
by opening its first retail store in Las Vegas, Nevada in October.  Sales
generated in 2012 and 2013 fell significantly short of expectations.  During
2013, management began efforts to reposition the brand to appeal to a broader
market, and has developed a plan to improve the business operations which will
require additional issuance of equity securities or placement of debt.  There
can there be no assurance that sufficient revenue or financing will occur to
meet the Company’s cash needs for the next 12 months. Therefore, a continuation
of our recent historical operating results could result in our inability to
continue as a going concern.
  
The accompanying condensed financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classifications of liabilities that could result should the Company be unable to
continue as a going concern.
 
Note 3   Basis of Presentation

The accompanying unaudited, interim condensed 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, 2013 is derived from the audited
financial statements presented in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2013.  The unaudited interim condensed financial
statements should be read in conjunction with the Company’s Annual Report on
Form 10-K, which contains the audited financial statements and notes thereto.
 
 
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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, 2014 are not necessarily indicative
of results for the full fiscal year.

Summary of Significant Accounting Policies

There have been no material changes during 2014 in the Company’s significant
accounting policies to those previously disclosed in the 2013 Form 10-K.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes.
 
Making estimates requires management to exercise significant judgment. It is at
least reasonably possible that the estimate of the effect of a condition,
situation or set of circumstances that existed at the date of the condensed
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. Some
of the more significant estimates relate to revenue recognition, including sales
returns and claims from customers, slow-moving and closeout inventories, income
taxes and stock-based compensation.

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, inventory,
deposits, prepaid expenses, other current assets, accounts payable and accrued
liabilities, due from factor. The carrying amounts of the Company's financial
instruments generally approximated their fair values as of March 31, 2014 and
December 31, 2013, respectively, due to the short-term nature of such items.
 
Reclassifications
 
Certain reclassifications have been made in prior years’ condensed financial
statements to conform to the current year’s presentation.
 
 
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Note 4  Earnings (Loss) per Share
 
Basic loss per share is computed by dividing net loss by weighted average number
of shares of common stock outstanding during each period.  Diluted loss per
share is computed by dividing net 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,
2014 and December 31, 2013:
 

   
March 31, 2014
   
December 31, 2013
 
Stock options, exercise price $0.21 - $2.26
    5,556,420       5,161,420  
Common stock warrants, conversion price $0.25 - $1.80
    27,062,996       13,716,167  
Total common stock equivalents
    32,619,416       18,877,587  

 
 
Since the Company incurred a net loss during the three months ended March 31,
2014 and 2013, the effect of considering any common stock equivalents, if
exercisable, would have been anti-dilutive.  Therefore, a separate computation
of diluted earnings (loss) per share is not presented.

Note 5   Inventories
 
Inventories, net, consist of finished goods inventory of $1,632,986 ($640,890 of
which has been classified as non-current) and $1,797,154 ($951,966 of which has
been classified as non-current) as of March 31, 2014 and December 31, 2013,
respectively.  Inventories not expected to be sold within 12 months have been
classified as non-current.
 
Adjustment for Lower of Cost-or-Market
 
As of December 31, 2013, the Company assessed the market value of its inventory
on hand.  The Company determined that the market value of the product was less
than its cost. As such, the Company recognized an LCM adjustment to inventory of
$387,947 in December 2013.  The Company did not record an adjustment to
inventory in the quarter ended March 31, 2014.
 
Note 6   Property and Equipment
 
Property and equipment consist of the following as of March 31, 2014 and
December 31, 2013:
 

   
2014
   
2013
 
Leasehold improvements
  $ 6,773     $ 6,773  
Construction in progress
    158,074       103,461  
Computers and office equipment
    41,809       41,809  
Furniture and fixtures
    19,689       19,689  
Software
    41,004       41,004  
Tradeshow and event equipment
    8,522       7,229         275,871       219,965  
Accumulated depreciation
    (60,357 )     (51,548 )
Property and equipment, net
  $ 215,514     $ 168,417  

Depreciation expense for the three months ended March 31, 2014 and 2013 was
$8,809 and $25,827, respectively.
 
 
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Note 7     Intangible Assets
 
Intangible assets consist of the following as of March 31, 2014 and December 31,
2013:
 

   
2014
   
2013
 
Patent and trademarks, net
  $ 42,784     $ 44,052  
Domain name
    123,535       123,535  
Intangible assets, net
  $ 166,319     $ 167,587  

 

Patents and Trademarks
 
The Company capitalizes legal fees and filing costs associated with the
development of its patents and trademarks.  Patents and trademarks are amortized
over an estimated useful life using the straight-line method, however, patents
and trademarks with indefinite useful lives are not amortized.  

Domain Name
 
In February 2012, the Company capitalized the costs associated with the
acquisition of its domain name, ryu.com.  The estimated useful life of the
website domain is indefinite and accordingly related capitalized costs are not
amortized.

Amortization expense for the three months ended March 31, 2014 and 2013 was
approximately $1,000 and $19,000, respectely. 
 
 Note 8   Note Payable

In December 2013, the Company entered into a term note (“Note”) in the principal
amount of $499,934.  The interest only Note has a maturity date of January 1,
2015 and bears interest of 15% per annum, which is payable quarterly, and is
secured by all of the assets of the Company. In connection with the issuance of
the Note, the Company issued warrants to purchase up to 300,000 shares of common
stock at an exercise price of $0.25 until January 1, 2015.  

Note 9   Loans payable – related party
 
During 2013, the Company was advanced funds totaling $130,000 from a related
party in anticipation of participating in a private placement financing.  Under
the terms of the private placement subscription agreement, the Company is
entitled to utilize the proceeds as an interest free loan until the subscription
is accepted and the certificates delivered.  The advances were paid through the
issuance of common stock and warrants as part of the February 2014 equity raise
as further described in Note 10.

Note 10   Stockholders’ Equity
 
Stock Issued for Cash
 
Three months ended March 31, 2014
 
In February 2014, as a continuation of the November 2013 offering, the Company
issued 13,346,830 shares of common stock as part of a private placement offering
for proceeds of $1,167,067 ($0.10/share), net of direct offering costs of
$167,616.  Included in this private placement the company paid a total of
$130,000 of advances – related parties through the issuance of stock and
warrants – see Note 9.  In conjunction with this offering, one warrant for each
share issued was granted.  Only the holders of these warrants have the right to
exercise the warrants at the specified fixed strike price, according to the
terms outlined above.  Details of the warrants issued are shown in the table
below:
 
Date
Quantity Granted
Vesting Schedule
Exercise
Price
Expiration
February 2014
13,346,830
Fully vested upon issuance
$0.25
3
Years

 
 
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Three months ended March 31, 2013
 
In January 2013, the Company issued 2,000,000 shares of common stock for gross
proceeds of $936,360 ($0.50/share), net of direct offering costs of
$63,640.  The offering included a finder’s fee of 5% cash and 5% warrants on
total gross proceeds. Details of the warrants issued are shown in the table
below:
 
Date
Quantity
Granted
Vesting Schedule
Exercise Price
Expiration
January 2013
100,000
Fully vested upon issuance
$0.50
2
Years

 
In March 2013, as a continuation of the January 2013 offering, the Company
issued 900,000 shares of common stock for gross proceeds of $441,595
($0.50/share), net of direct offering costs of $8,505.  The offering included a
finder’s fee of 5% cash and 5% warrants on $50,000 of the gross proceeds.
Details of the warrants issued are shown in the table below:
 
Date
Quantity
Granted
Vesting Schedule
Exercise Price
Expiration
March 2013
2,500
Fully vested upon issuance
$0.50
2
Years

 
Only the holders of these warrants have the right to exercise the warrants at
the specified fixed strike price, according to the terms outlined above.
 
Stock Options
 
On June 10, 2011, the Company adopted the 2011 Incentive Award Plan (the “2011
Plan”) and on May 18, 2012, the Board of Directors approved certain revisions to
the 2011 Plan, resulting in our 2012 Incentive Award Plan (the “2012 Plan”)
whereby the aggregate number of securities reserved for issuance, set aside and
made available for issuance under the Plan was revised from (i) not to exceed
10% of the issued and outstanding of our common stock at the time of granting of
options (including all options granted by our Company to date) to (ii) 8,487,925
shares of our common stock.
 
On June 7, 2013, the Board of Directors approved certain revisions to the 2012
Plan, resulting in the Company’s 2013 Stock Option Plan (the “2013 Plan”)
whereby the aggregate number of securities reserved for issuance set aside and
made available for issuance under the Plan was revised from (i) 8,487,925 shares
of the Company’s common stock at the time of granting the options (including all
options granted by our Company to date) to (ii) 11,702,425 shares of the
Company’s common stock.
 
The Company had no stock grants for the three months ended March 31, 2014.
 
 
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The Black-Scholes assumptions used for the three months ended March 31, 2013 are
as follows:
 

 
March 31, 2013
 
Exercise price
$0.40 - $0.52
 
Expected dividends
0%
 
Expected volatility
100%
 
Risk free interest rate
1.17% - 2.03%
 
Expected term of option
4.88 – 8.78 years
 
Expected forfeitures
11 - 12%
 

 
The following is a summary of the Company’s stock option activity, for the
months ended March 31, 2014:
 
Three months ended March 31, 2014
 

   
Options
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Life
   
Average
Intrinsic
Value
 
Balance - December 31, 2013
    6,601,420     $ 0.89    
8.48 Years
    $ -  
Granted
    -                        
Exercised
    -                        
Forfeited/Cancelled
    (135,000 )     0.72                
Outstanding - March 31, 2014
    6,466,420     $ 0.90    
8.39 Years
    $    
Exercisable - March 31, 2014
    5,556,420     $ 0.78    
7.31 Years
    $ -  

 
 
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Three months ended
     
March 31, 2014
   
March 31, 2013
 
Grant date fair value of options
 
$
5,220,165
   
$
658,369
 
Weighted average grant date fair value
 
$
0.81
   
$
0.33
 
Outstanding options held by related parties
   
3,552,670
     
1,800,000
 
Exercisable options held by related parties
   
2,582,670
     
-
 
Fair value of stock options held by related parties
 
$
3,444,697
   
$
614,201
 

 
During the three months ended March 31, 2014 and 2013, the Company expensed
$12,638 and $97,976 related to stock option grants, respectively. At March 31,
2014 approximately $234,000 of stock based compensation expense was expected to
be amortized over 2.4 years.
 
Warrants
 
The Company granted the following warrants:
 
 
 
 
 
 
 
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The following is a summary of the Company’s warrant activity for the three
months ended March 31, 2014:
 

   
Warrants
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Life
   
Average
Intrinsic
Value
 
Balance - December 31, 2013
    13,716,167     $ 0.89    
8.48 Years
    $ -  
Granted (1)
    13,346,829       0.25    
3 Years
         
Exercised
                             
Forfeited/Cancelled
    -                        
Outstanding - March 31, 2014
    27,062,996     $ 0.39    
2.55 Years
    $ -  
Exercisable - March 31, 2014
    27,062,996     $ 0.39    
2.55 Years
    $ -  

 

 
(1)
Warants issued in connection with the January/March 2013 private placement.
discussed in Note 10, Stockholders’ Equity - Stock Issued for Cash.

 
The Black-Scholes assumptions used for the three months ending March 31, 2013
are as follows:
 

   
March 31, 2013
Exercise price
 
$1.20
Expected dividends
 
0%
Expected volatility
 
100%
Risk free interest rate
 
0.89%
Expected term of warrant
 
 5 years
Expected forfeitures
 
0%

 
 
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During the three months ended March 31, 2014 and 2013, the Company expensed $0
and $30,020 respectively, related to stock warrants issued for services.

Note 11   Related Party Transactions
 
In January 2013, the Company granted 500,000 stock options for services to a
third-party consultant that is wholly owned by a former member of the Company’s
Board of Directors. The options vest over a one-year period and will expire if
unexercised, ten years from the date of grant. The fair value of these options
on grant date was $227,101.  The Company used the Black-Scholes-pricing model to
determine the fair value of the options.  For the three months ended March 31,
2013, total expense related to this transaction was $38,461.
 
During the three months ended March 31, 2013, the Company contracted with an
investor relations consulting entity, which is 50% owned by a member of the
Company’s Board of Directors.  During the three months ended March 31, 2013, the
Company issued 100,000 stock warrants to this entity, with a fair value of
$30,020. For the three months ended March 31, 2013, total expense related to
this transaction was $30,020.

Note 12   Commitments
 
Lease Obligations

The Company has obligations under operating leases for its corporate office
facility and for its retail stores.  The leases expire at various dates through
2018.  Rent expense classified in General and Administrative expense associated
with the Company’s operating leases was $43,157 and $51,204 for the three months
ended March 31, 2014 and 2013, respectively. Amounts in the table below reflect
a rent escalation clause for the retail store but does not include contingent
rent the Company may incur based on future sales above approximately $105,000
per month.

The Company also entered into a capital lease agreement to lease the domain name
ryu.com through 2022, as discussed in Note 7 to the financial statements.  The
future minimum lease payments required under the operating and capital leases as
of March 31, 2013 are as follows:
 

   
Operating
Leases
   
Capital
Lease
   
Total Lease
Obligations
 
2014 (9 months remaining)
  $
103,990
    $
8,189
    $
112,179
 
2015
   
132,563
     
11,115
     
143,678
 
2016
   
134,162
     
11,314
     
145,476
 
2017
   
135,808
     
11,516
     
147,324
 
2018
   
125,913
     
11,723
     
137,636
 
Thereafter
           
36,012
     
36,012
 
Total minimum lease payments
   
632,436
     
89,869
     
722,305
 
Less current maturities
   
103,990
     
8,189
     
112,179
 
Long-term lease obligations
  $
528,446
    $
81,680
    $
610,126
 

 
 
Inventory Purchase Obligations
 
As of March 31, 2014, the Company had commitments to purchase $353,207, net of
deposits, of inventory related to the Company’s future product lines.
 
Note 13   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 and cash flows.
 
 
15

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Note 14   Segment Information
 
The Company’s operating segments are based on how its chief operating decision
maker analyzes and makes decisions about the business and allocates
resources.  Its reportable segments are comprised of four channels: wholesale,
retail, e-commerce and other.  The Company’s wholesale channel generates
revenues and incurs expenses in connection with selling the Company’s product to
other retailers. The retail channel generates revenues and incurs expenses in
connection with the Company’s retail location.  Additionally, the e-commerce
channel generates revenues and incurs expenses in connection with the Company’s
web store. Other includes license and tradeshow related sales and the write-off
of excess materials and other production surcharges.  All reportable segments
operate within the same industry.

The following table represents the Company’s activity by operating segment for
the three months ending March 31, 2014:
 

   
Channel
     
Wholesale
   
Retail
   
Ecommerce
   
Total
 
Revenue
 
$
151,390
    $
57,296
    $
89,260
    $
297,946
 
Cost of goods sold
   
144,328
     
41,364
     
72,930
     
258,622
 
Gross profit
   
7,062
     
15,932
     
16,330
     
39,324
 
Gross margin
   
5%
     
28%
     
18%
     
13%
                                   
Reconciliation of gross profit to net loss:
                               
Operating expenses
                               
Selling and marketing
                           
177,985
 
Product creation
                           
60,249
 
General and administrative
                           
629,577
 
Interest expense
                           
23,840
                                   
Net loss
                         
$
(852,327
)

 
The following table represents the Company’s activity by operating segment for
the three months ending March 31, 2013:
 

   
Channel
           
Wholesale
   
Retail
   
Ecommerce
   
Other
   
Total
 
Revenue
 
$
169,496
   
$
141,013
   
$
77,183
   
$
0
   
$
387,692
 
Cost of goods sold
   
146,706
     
54,804
     
49,211
     
24,649
     
275,370
 
Gross profit (loss)
   
22,790
     
86,209
     
27,972
     
(24,649
)
   
112,322
 
Gross margin
   
13%
     
61%
     
36%
             
29%
                                           
Reconciliation of gross profit (loss) to net loss:
                                       
Operating expenses
                                       
Selling and marketing
                                   
409,936
 
Product creation
                                   
137,043
 
General and administrative
                                   
917,782
  Interest expense                                     517                      
                     
Net loss
                                 
$
(1,352,956
)

The Company does not allocate its assets among its channels, and as such no
asset allocation is shown in the table above.
 
 
16

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Note 15   Subsequent Events
 
Note Payable, related party
 
In April 2014, the Company issued an unsecured promissory note with a
shareholder of the Company. The principle amount of the note is $30,000 and
bears interest at 15% per annum with a minimum payment of $2,000.  The note was
repaid in April 2014, including $2,000 of interest expense.
 
Management and Director Resignations and Appointments
 
The following list includes activity related to changes to the Company’s
management and Board of Directors on May 23, 2014.
 
 
·
The Board of Directors appointed Marcello Leone as President of the Company
effective May 23, 2014.  As of May 28, 2014, the terms of this employment
relationship have not yet been finalized.  Mr. Leone was concomitantly appointed
as a Director of  the Company.

 
·
The Board of Directors also appointed Maria Leone, and Peter Pan as Directors of
the Company effective May 23, 2014.

 
·
Dale Wallster resigned as Director of the Company effective May 23, 2014.

Equity Offering
 
As of May 23, 2014, the Company completed a private placement offering for gross
proceeds of $3,160,000, priced at $0.10 per unit. The terms of the offering
include the issuance of the Company’s common stock at $0.10/share. In addition,
each share of common stock purchased contains a warrant to purchase an
additional share of common stock at $0.25/share. The warrants will expire three
years from the date of issuance.  In connection with this private placement, the
Company paid a finder’s fee of $316,000 to one finder.

As of May 29, 2014, the Company has signed subscription agreements for gross
proceeds of $280,000 on the same terms as the offering described above.