ex10_1.htm


Exhibit 10.1




 


















 


RESPECT YOUR UNIVERSE, INC.












Interim Financial Statements







For the three months ended March 31, 2014 and 2013







 


 




 


 




  





  











  






 


 


 


 


 


 


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.


 




 


 


 


 




  





  











  








 




	
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







 




  





3











  








 



	
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







 




  





4











  








 




	
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







 






  





5











  












	
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

	 	$	-	 	 	$	-	 





 




  





6











  






 


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.


 




  





7











  






 


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.


 






  





8











  






 


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.


 




  





9











  






 


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







 




  





10











  






 



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.


 






  





11











  






 


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

	 	 	$	-	 





 




  





12











  






 



	  	  	
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:


 


 


 


 


 


 




  





13











  




 





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%







 




  





14











  






 


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











  











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











  






 


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.