RYU APPAREL INC. CONDENSED CONSOLIDATED INTERIM … · NOTES TO THE CONDENSED CONSOLIDATED INTERIM...

RYU APPAREL INC. CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS - UNAUDITED

SEPTEMBER 30, 2019 (Expressed in Canadian dollars)

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NOTICE OF NO AUDITOR REVIEW OF INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Under National Instrument 51-102 “Continuous Disclosure Obligations”, if an auditor has not performed a review of the interim financial statements, the financial statements must be accompanied by a notice indicating that they have not been reviewed by an auditor. The accompanying unaudited interim condensed consolidated financial statements of the Company have been prepared by and are the responsibility of the Company’s management. The Company’s independent auditor has not performed a review of these financial statements in accordance with standards established by CPA (Chartered Professional Accountants) Canada for a review of interim financial statements by an entity’s auditor. November 28, 2019

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RYU APPAREL INC. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF FINANCIAL POSITION (Unaudited - Expressed in Canadian dollars) As at

September 30, December 31,

2019 2018

ASSETS Current

Cash $ 72,729 $ 1,205,446 Accounts receivable (note 3) 349,510 333,989 Inventory (note 4) 3,393,296 4,023,747 Prepaid expenses and deposits (note 5) 1,155,159 1,945,979

4,970,694 7,509,161 Non-current

Deposits (note 5) 380,778 730,774 Property and equipment (note 6) 3,872,987 4,789,637 Right-of-use assets (Note 7) 8,548,790 - Intangible assets (note 8) 334,766 336,960

$ $18,108,015 $ 13,366,532

LIABILITIES AND EQUITY Current

Accounts payable $ 2,930,896 $ 1,171,650 Accrued liabilities 506,066 623,297 Loans payable (note 12) 906,000 - Current portion of lease obligations (note 9) 1,644,228 22,222 Deferred revenue 118,197 140,017

6,105,387 1,957,186 Non-current

Lease obligations (note 9) 8,792,862 52,800 Deferred operating lease obligations (note 2) - 347,230

14,898,249 2,357,216

Equity Share capital (note 10) 81,145,101 74,093,318 Share subscriptions received in advance 79,000 1,700,000 Equity reserve (note 10) 10,320,634 10,167,446 Deficit (88,648,662) (75,018,542) Accumulated other comprehensive income 313,693 67,094

3,209,766 11,009,316

$ 18,108,015 $ 13,366,532

Nature of operations and going concern (note 1) Subsequent events (note 14) Approved and authorized for issue by the Board of Directors on November 27, 2019.

“Martino Ciambrelli” Director “Bill Marcus” Director

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

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RYU APPAREL INC. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE LOSS (Unaudited - Expressed in Canadian dollars) For the three and nine months ended September 30,

Three months ended Nine months ended

September 30 September 30

2019 2018 2019 2018

Revenue $ 1,473,136 $ 1,223,524 $ 4,184,549 $ 3,274,011

Cost of sales 738,894 512,979 2,181,519 1,539,885

Gross profit 734,242 710,545 2,003,030 1,734,126

50% 58% 48% 53%

Expenses Depreciation (notes 6, 7, 8) 1,039,019 189,877 3,102,403 565,384

Foreign exchange (gain) loss 108,715 36,266 107,848 13,967

Interest and bank charges 325,053 31,232 1,095,737 87,651

Investor relations 140,490 215,106 313,241 480,734

Office and general 775,584 1,323,582 1,819,606 3,035,017

Product creation 65,075 76,188 259,616 163,979

Professional fees 81,464 380,826 885,741 1,117,801

Salaries and benefits 1,500,657 1,578,664 5,352,845 4,323,451

Selling and marketing 448,285 866,586 1,078,656 3,165,089

Share-based payments (notes 10) 5,744 66,636 260,023 2,544,021

Travel and entertainment 49,911 112,039 149,761 267,363

4,539,997 4,877,002 14,425,477 15,764,457

Net loss (3,805,755) (4,166,457) (12,422,447) (14,030,331)

Other comprehensive loss Currency translation differences 36,045 - (246,599) -

Comprehensive loss $ (3,769,710) $ (4,166,457) $ (12,669,046) $ (14,030,331)

Loss per share - Basic and diluted $ (0.01) $ (0.01) $ (0.02) $ (0.03)

Weighted average number of common shares outstanding - basic and diluted 576,921,559 461,835,263 569,895,404 432,370,203


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RYU APPAREL INC. CONDENSED CONSOLIDATED INTERIM STATEMENT OF CHANGES IN EQUITY (Unaudited - Expressed in Canadian dollars)

Number of common

shares Share capital

Share subscriptions

received in advance Equity reserve

Accumulated other

comprehensive income Deficit

Total equity (deficiency)

Balance, January 1, 2018 286,528,487 $ 53,008,315 $ 355,000 $ 7,469,620 $ 67,094 $ (55,691,865) $ 5,208,164 Issuance of common stock for cash (note 10) 114,057,138 9,649,753 (355,000) - - - 9,294,753

Share issuance costs (note 10) 1,104,167 (539,790) - 300,747 - - (239,043)

Exercise of warrants (note 10) 59,215,115 11,103,208 - (41,428) - - 11,061,780

Exercise of stock options (note 10) 287,500 58,073 - (14,948) - - 43,125

Release of RSUs (note 10) 642,856 170,357 - (170,357) - - -

Share-based payments (note 10) - - - 2,554,021 - - 2,554,021

Comprehensive loss - - - - - (14,040,331) (14,040,331)

Balance, September 30, 2018 461,835,263 $ 73,449,916 $ - $ 10,097,655 $ 67,094 $ (69,732,196) $ 13,882,469

Balance, January 1, 2019 466,662,167 $ 74,093,318 $ 1,700,000 $ 10,167,446 $ 67,094 $ (75,018,542) $ 11,009,316 Impact of change in accounting policy (note 2) - - - - - (1,207,673) (1,207,674) Issuance of common stock for cash (note 10) 107,117,840 6,782,760 (1,700,000) - - - 5,082,760 Issuance of common stock for service (note 10) 7,900,000 389,945 - - - - 389,945

Share issuance costs (note 10) - (227,757) - - - (227,757)

Release of RSUs (note 10) 537,000 106,835 - (106,835) - - -

Exercise of stock options (note 10) - - - - - - - Share subscription received in advance (note 10) - - 79,000 - - - 79,000

Share-based payments (note 10) - - - 260,023 - - 260,023

Comprehensive loss - - - - 246,599 (12,422,447) (12,175,848)

Balance, September 30, 2019 582,217,007 $ 81,145,101 $ 79,000 $ 10,320,634 $ 313,693 $ (88,648,662) $ 3,209,766


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RYU APPAREL INC. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS (Unaudited - Expressed in Canadian dollars) For the nine months ended September 30,

2019 2018

Cash flows from operating activities Net loss $ (12,422,447) $ (14,040,331)

Items not affecting cash: Depreciation 3,102,403 565,384

Share-based payments 260,023 2,554,021

Accrued interest - 2,008

Unrealized foreign exchange loss 630,072 -

Changes in non-cash working capital Accounts receivable (15,521) (11,086)

Inventory 630,451 (2,019,886)

Prepaid expenses and deposits 1,140,815 (1,038,992)

Accounts payable and accrued liabilities 1,666,033 (370,681)

Deferred revenue (21,820) 27,875

Interest paid - (5,340)

Net cash flows used in operating activities (5,029,991) (14,337,028)

Cash flows from investing activities Property and equipment (148,235) (2,091,406)

Intangible assets (49,309) (271,713)

Net cash flows used in investing activities (197,544) (2,363,119)

Cash flows from financing activities Issuance of common shares 5,551,705 9,294,753

Share issuance costs (227,757) (239,043)

Exercise of warrants - 11,061,780

Exercise of stock options - 43,125

Loan received 906,000 -

Finance lease - (14,258)

Repayment of lease principal (1,165,952) -

Interest paid (964,164) -

Net cash flows provided by financing activities 4,099,832 20,146,357

Change in cash (1,127,703) 3,446,210

Effect of exchange rate on cash (5,014) -

Cash – beginning 1,205,446 466,809

Cash - end $ 72,729 $ 3,913,019

Supplemental cash flow disclosure

Unpaid intangible asset additions $ - $ -

Unpaid property and equipment additions $ (176,439) $ (223,187)

The accompanying notes are an integral part of these condensed consolidated interim financial statements

RYU APPAREL INC. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Unaudited - Expressed in Canadian dollars) September 30, 2019

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1. NATURE OF OPERATIONS AND GOING CONCERN

RYU Apparel Inc. (the “Company”) is an urban athletic apparel brand that engages in the development, marketing, and distribution of apparel, bags and accessories. The Company’s products are engineered for the fitness, training and performance of the multi-discipline athlete. The Company’s products are designed, developed and tested at the Company’s corporate headquarters in Vancouver, British Columbia, Canada. Production takes place in factories located in North America and Asia and the Company’s products are sold through retail, e-commerce and wholesale channels. The Company was incorporated in the Province of British Columbia (“BC”), Canada on December 4, 2014 and its registered address is 1672 West 2nd Ave, Vancouver, BC, V6J 1H4, Canada. The Company’s shares are listed on the TSX-Venture Exchange (“TSX-V”) under the symbol “RYU.V”, in the United States on the OTCQB under symbol “RYPPF”, and in Germany on the Frankfurt Stock Exchange under the symbol “RYA”. The Company has incurred losses and has had negative cash flows from operations from inception that have primarily been funded through financing activities. The Company will need to raise additional capital during the next twelve months and beyond to support current operations and planned development. These factors indicate the existence of a material uncertainty that may cast significant doubt as to the Company’s ability to continue as a going concern. Management intends to finance operating costs over the next twelve months with cash on hand and through the private placement of common shares. Subsequent to the nine months ended September 30, 2019, the Company completed transactions as outlined in note 14. These condensed consolidated interim financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. These financial statements do not reflect the adjustments to the carrying values of assets and liabilities, the reported revenues and expenses, and the statement of financial position classifications used, that would be necessary if the Company were unable to realize its assets and settle its liabilities as a going concern in the normal course of operations. Such adjustments could be material.

2. ACCOUNTING POLICIES

Basis of presentation and statement of compliance

These condensed consolidated interim financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and interpretations of the International Financial Reporting Issues Committee (“IFRIC”) applicable to the preparation of interim financial statements, including International Accounting Standard (“IAS”) 34 Interim Financial Reporting.

The notes presented in these condensed consolidated interim financial statements include only significant events and transactions occurring since the Company’s last fiscal year end and they do not include all of the information required in the Company’s most recent annual consolidated financial statements. Except as noted below, these condensed consolidated interim financial statements follow the same accounting policies and methods of application as the Company’s annual financial statements and should be read in conjunction with the Company’s annual financial statements for the year ended December 31, 2018, which were prepared in accordance with IFRS as issued by IASB. There have been no significant changes in judgement or estimates from those disclosed in the consolidated financial statements for the year ended December 31, 2018.

As of January 1, 2019, the Company’s subsidiary in the United States, Respect Your Universe Inc., (the “Subsidiary”) changed from Canadian dollars (CAD) to US dollars (USD). The change was made to reflect that USD has become the predominant currency in the Subsidiary, accounting for a significant part of the company’s cash flow, cash flow management and financing. The change has been implemented with prospective effect.

New standard IFRS 16 Leases

IFRS 16 ''Leases'' ("IFRS 16") was issued in January 2016 and is effective for annual periods beginning on or after January 1, 2019. IFRS 16 replaces IAS 17 "Leases" ("IAS 17"), International Financial Reporting Interpretations Committee ("IFRIC") 4 "Determining Whether an Arrangement Contains a Lease" ("IFRIC 4"), Standards Interpretation Committee ("SIC") 15 "Operating Leases-Incentives", and SIC 27 "Evaluating the Substance of Transactions Involving the Legal Form of a Lease".


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2. ACCOUNTING POLICIES (CONTINUED)

IFRS 16 sets out the principles for the recognition, measurement, presentation, and disclosure of leases which requires lessees to account for operating leases under a single on-balance sheet model in a manner similar to the previous accounting for finance leases under IAS 17. At the commencement date of a lease, a lessee recognizes a liability to make lease payments and a right-of-use asset ("ROU asset") representing the right to use the underlying asset during the lease term.

The Company adopted IFRS 16 using the modified retrospective transition approach, whereby the ROU asset was measured at the value of the lease liability on the date of initial application. The modified retrospective approach does not require restatement of prior periods. Comparative financial results for 2018 were not restated and have been presented as previously reported under IAS 17 and related interpretations

The Company applied the following practical expedients available for transition to IFRS 16 under this approach:

• Used a single discount rate for portfolios of leases with reasonably similar characteristics;

• Relied on our assessment of whether leases were onerous immediately before the date of initial application as an alternative to performing an impairment review;

• Applied the recognition and measurement exemption available for low-value and short-term leases, or leases for which the term ended within 12 months of the date of initial application;

• Used hindsight in determining the lease term if the contract contained options to extend or terminate the lease;

• Excluded initial direct costs in the measurement of the ROU asset; and

• Applied IFRS 16 only to contracts that were previously identified as leases under IAS 17 and IFRIC 4. Impact to the Financial Statements

The following tables summarize the impact of adoption of IFRS 16 on the Interim Condensed Consolidated Statements of Financial Position ("Statements of Financial Position") at the date of initial application and the Interim Condensed Consolidated Statements of Comprehensive Loss ("Statements of Comprehensive Loss") for the nine months ended September 30, 2019.

Consolidated Statement of Financial Position

As at Description December 31,

2018 IFRS 16

Adjustment January 1, 2019

Assets Property and equipment Capital leases (IAS 17) $ 23,710 $ (23,710) $ - Right-of-use assets ROU assets (IFRS 16) - 9,419,244 9,419,244

$ 23,710 $ 9,393,236 $ 9,419,244 Liabilities Deferred lease obligations Operating leases (IAS 17) $ 347,230 $ (347,230) $ - Finance lease Capital leases (IAS 17) 75,022 (75,022) - Lease obligations Obligations under leases - 10,626,917 10,626,917

$ 75,022 $ 10,204,665 $ 10,626,917 Equity Impact of IFRS 16 adoption $ 1,207,673

Consolidated Statement of Comprehensive Loss

For the nine months ended September 30, 2019 Description Increase (decrease) to net loss

Leases under IFRS 16 Depreciation Depreciation $ 2,034,329 Finance costs Interest on finance leases 964,164

Increase to net loss $ 2,998,493 Leases under IAS 17 Office and general Rent expense $ (2,130,116)

Decrease to net loss $ (2,130,116) Increase to net loss $ 868,377


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3. ACCOUNTS RECEIVABLE

September 30, 2019 December 31, 2018

Trade accounts receivable $ 308,883 $ 260,660 GST Input tax credits 40,627 73,329

$ 349,510 $ 333,989

4. INVENTORY

Inventory consisted primarily of ready to wear clothing, bags and accessories, which were either at retail locations or in either of the two third party logistics warehouses and raw materials.


Finished goods $ 3,064,394 $ 3,900,773 Raw materials 328,902 122,974

$ 3,393,296 $ 4,023,747

During the nine months ended September 30, 2019, $2,144,554 (2018 - $1,539,885) of inventory was sold and recognized in cost of sales, and $173,914 (2018 - $491,218) of inventory was used for promotional purposes and recognized in other expense categories, such as selling and marketing and investor relations.

5. PREPAID EXPENSES AND DEPOSITS


Prepaid expenses $ 300,405 $ 600,370 Deposits and other current assets 854,754 1,345,609

1,155,159 1,945,979 Long-term rent deposits 380,778 730,774

$ 1,535,937 $ 2,676,753

6. PROPERTY AND EQUIPMENT

Leasehold Improvements

Furniture and Equipment

Computers and Software

Vehicles

Total

Cost Balance at January 1, 2018 $ 3,213,322 $ 46,157 $ 81,513 $ - $ 3,340,992 Additions 2,794,458 102,265 90,950 30,759 3,018,432 Balance at December 31, 2018 6,007,780 148,422 172,463 30,759 6,359,424 Additions 131,709 15,376 1,150 - 148,235 Reclassification (IFRS 16) (4,977) - - (30,759) (35,736)

Balance at September 30, 2019 $ 6,134,512 $ 163,798 $ 173,613 $ - $ 6,471,923

Accumulated depreciation Balance at January 1, 2018 $ 730,269 $ 19,655 $ 44,339 $ - $ 794,263 Depreciation 721,966 21,812 24,697 7,049 775,524

Balance at December 31, 2018 1,452,235 41,467 69,036 7,049 1,569,787 Depreciation 969,369 34,450 32,379 - 1,036,198 Reclassification (IFRS 16) - - - (7,049) (7,049) Balance at September 30, 2019 $ 2,421,604 $ 75,917 $ 101,415 $ - $ 2,598,936

Net book value December 31, 2018 $ 4,555,545 $ 106,955 $ 103,427 $ 23,710 $ 4,789,637 September 30, 2019 $ 3,712,908 $ 87,881 $ 72,198 $ - $ 3,872,987


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7. RIGHT-OF-USE ASSETS

Buildings Intangibles Vehicles Equipment Total

Cost Balance at January 1, 2019 $ 12,420,834 $ 107,096 $ 30,758 $ 30,724 $ 12,589,412 Additions 1,130,240 - - 35,934 1,166,174 Balance at September 30, 2019 $ 13,551,074 $ 107,096 $ 30,758 $ 66,658 $ 13,755,586

Accumulated depreciation Balance at January 1, 2019 $ 3,082,891 $ 61,020 $ 7,049 $ 21,507 $ 3,172,467 Depreciation 2,003,781 11,208 5,767 13,573 2,034,329

Balance at September 30, 2019 $ 5,086,672 $ 72,228 $ 12,816 $ 35,080 $ 5,206,796

Net book value January 1, 2019 $ 9,337,943 $ 46,076 $ 23,709 $ 9,217 $ 9,416,945 September 30, 2019 $ 8,464,402 $ 34,868 $ 17,942 $ 31,578 $ 8,548,790

8. INTANGIBLE ASSETS

Website Costs (1)

Patents

Total

Cost Balance at January 1, 2018 $ 32,432 $ 32,608 $ 65,040 Additions 304,528 - 304,528

Balance at December 31, 2018 336,960 32,608 369,568 Additions 49,309 - 49,309

Balance at September 30, 2019 $ 386,269 $ 32,608 $ 418,877

Accumulated depreciation Balance at January 1, 2018 $ - $ 32,608 $ 32,608 Depreciation - - -

Balance at December 31, 2018 - 32,608 32,608 Depreciation 51,503 - 51,503

Balance at September 30, 2019 $ 51,503 $ 32,608 $ 84,111

Net book value December 31, 2018 $ 336,960 $ - $ 336,960 September 30, 2019 $ 334,766 $ - $ 334,766

(1) Website Costs

The Company launched its website, www.ryu.com, in January 2019, and, as such, began recording depreciation on web costs in 2019.

http://www.ryu.com/


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9. LEASES

The following table details the movement in the Company's lease obligations for the period ended September 30, 2019:

As at January 1, 2019 $ 10,626,918 Additions 1,178,947 Interest expense 964,164 Lease payments (2,130,116) Effects of movements in exchange rates (202,823)

As at September 30, 2019 10,437,090 Current portion $ 1,644,228 Non-current portion 8,792,862

$ 10,437,090

Future minimum lease payments outstanding under the Company’s lease obligations as at September 30, 2019 are as follows:

Less than 1 year $ 2,803,194 1-3 Years 5,056,787 4-5 Years 2,935,900 Beyond 5 Years 4,473,701

Total lease payments 15,269,582 Amount representing implicit interest 4,832,492

Lease obligations $ 10,437,090

10. EQUITY

Common shares The authorized capital of the Company consists of an unlimited number of common shares without par value. Common shares issued for cash

On February 12, 2019, the Company closed a non-brokered private placement financing of $2,863,257 consisting of the issuance of 38,176,764 units of the Company at a price of $0.075 per unit. Each unit consists of one common share of the Company and one share purchase warrant. Each warrant is exercisable into one common share at a price of $0.15 for a period of three years. The fair value of the warrants was determined to be $nil. In connection with the private placement the Company paid a cash finder’s fee of $33,101. On February 28, 2019, the Company closed a non-brokered private placement financing of $779,900 consisting of the issuance of 10,398,663 units of the Company at a price of $0.075 per unit. Each unit consists of one common share of the Company and one share purchase warrant. Each warrant is exercisable into one common share at a price of $0.15 for a period of three years. The fair value of the warrants was determined to be $nil. In connection with the private placement the Company paid a cash finder’s fee of $58,250. On March 28, 2019, the Company closed a non-brokered private placement financing of $637,447 consisting of the issuance of 8,499,290 units of the Company at a price of $0.075 per unit. Each unit consists of one common share of the Company and one share purchase warrant. Each warrant is exercisable into one common share at a price of $0.15 for a period of three years. The fair value of the warrants was determined to be $nil. In connection with the private placement the Company paid a cash finder’s fee of $3,960. On May 17, 2019, the Company closed a non-brokered private placement financing of $1,869,772 consisting of the issuance of 37,395,443 units of the Company at a price of $0.05 per unit. Each unit consists of one common share of the Company and one share purchase warrant. Each warrant is exercisable into one common share at a price of $0.10 for a period of three years. The fair value of the warrants was determined to be $nil. In connection with the private placement the Company paid a cash finder’s fee of $20,000.


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10. EQUITY (CONTINUED)

Common shares issued for cash (continued) On June 6, 2019, the Company closed a non-brokered private placement financing of $249,500 consisting of the issuance of 4,990,000 units of the Company at a price of $0.05 per unit. Each unit consists of one common share of the Company and one share purchase warrant. Each warrant is exercisable into one common share at a price of $0.10 for a period of three years. The fair value of the warrants was determined to be $nil. In connection with the private placement the Company paid a cash finder’s fee of $10,600. On July 8, 2019, the Company closed a non-brokered private placement financing of $382,884 consisting of the issuance of 7,657,680 units of the Company at a price of $0.05 per unit. Each unit consists of one common share of the Company and one share purchase warrant. Each warrant is exercisable into one common share at a price of $0.10 for a period of three years. The fair value of the warrants was determined to be $nil. In connection with the private placement the Company paid a cash finder’s fee of $8,000. In connection with the above share issuances the Company incurred a total of $227,757 in share issuance costs.

Year ended December 31, 2018:

On January 19, 2018, the Company closed a non-brokered private placement financing of $5,651,945, of which $355,000 was received during the year ended December 31, 2017, consisting of the issuance of 80,742,068 units of the Company at a price of $0.07 per unit. Each unit consists of one common share of the Company and one share purchase warrant. Each warrant is exercisable into one common share at a price of $0.20 for a period of five years. The fair value of the warrants was determined to be $nil. In connection with the private placement the Company paid a cash finder’s fee of $125,000 and issued 1,785,714 finder warrants on the same terms of the warrants issued in the financing with the fair value of $300,747.

The finder warrants were measured using the Black-Scholes option pricing model and the following input assumptions:

Weighted average fair value of finder warrants issued on January 19, 2018 $ 0.17

Risk-free interest rate 2.45% Estimated life 5 years Expected volatility 130.94% Expected dividend yield 0.00% Forfeiture rate 0%

On February 19, 2018, the Company closed a financing of $3,997,808 consisting of the issuance of 33,315,070 common shares at a price of $0.12 per share. The Company issued 1,104,167 common shares to a finder.

In connection with the above share issuances, the Company incurred a total of $540,698 in share issuance costs, including legal fees of $63,452.

Stock options

On June 9, 2014, January 27, 2015, November 30, 2016 and December 12, 2018, the Board of Directors approved certain revisions to the 2013 Stock Option Plan, resulting in the Company’s revised 2014 stock option plan (the “revised 2014 Plan”) whereby the aggregate number of securities reserved for issuance set aside and made available for issuance under the Plan was set at 92,367,052 shares of the Company’s common stock. Each stock option permits the holder to purchase one share at the stated exercise price. The options vest at the discretion of the Board of Directors.


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10. EQUITY (CONTINUED)

Stock options (continued)

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

Number of Options

Weighted Average Exercise Price

Outstanding at January 1, 2018 11,806,250 $ 0.25 Granted 11,535,000 0.29 Exercised (287,500) 0.15 Cancelled/forfeited (2,142,500) 0.33 Outstanding at December 31, 2018 20,911,250 $ 0.29 Granted (1) 6,300,000 0.16 Exercised/Repriced (1) (6,300,000) 0.32 Cancelled/forfeited (830,000) 0.26 Expired (225,000) 0.13 Outstanding at September 30, 2019 19,856,250 $ 0.24 Exercisable at September 30, 2019 19,631,250 $ 0.24

(1) The Company approved an amendment to the exercise price of stock options previously granted to Marcello Leone by

the Company, to reduce the exercise price of stock options granted on August 18, 2014, March 16, 2015 and March 2, 2018 to CAD$0.16.

Stock options at September 30, 2019 were as follows:

Outstanding Exercisable

Exercise Price ($)

Number of Options

Weighted Average Remaining

Contractual Life (years)

Number of Options

Weighted Average Remaining

Contractual Life (years)

$0.10 - $0.15 2,437,500 6.26 2,212,500 6.25 $0.16 - $0.18 6,300,000 6.49 6,300,000 6.49 $0.19 - $0.27 1,616,250 1.62 1,616,250 1.62 $0.28 - $0.29 8,072,500 5.54 8,072,500 5.54 $0.30 - $1.05 1,430,000 3.66 1,430,000 3.66

19,856,250 5.48 19,631,250 5.47

Estimated fair value of stock options During the nine months ended September 30, 2019, the Company granted (see footnote (1) above) 6,300,000 options (September 30, 2018 – 11,535,000) to acquire common shares. Share-based payments relating to options vesting during the period, using the Black-Scholes option pricing model, was $199,646 (September 30, 2018 - $2,348,181).


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10. EQUITY (CONTINUED) Details of the fair value of options granted and the assumptions used in the Black-Scholes option pricing model are as follows:

September 30, 2019 September 30, 2018

Weighted average fair value of options granted $ 0.03 $ 0.21

Risk-free interest rate 1.87% 1.92% Estimated life 2.94 years 3.85 years Expected volatility 95.63% 117.85% Expected dividend yield 0.00% 0.00% Forfeiture rate – for the first year 73.75% 8.18% Forfeiture rate – after the first year 73.75% 8.18%

Restricted Share Units At the 2017 Annual General Meeting, the Company’s shareholders approved a Long-Term Incentive Performance Plan (the “LTIP”) that allows the Company to grant Restricted Share Units (“RSUs”), Performance Share Units (“PSUs”), and Deferred Share Units (“DSUs”) to consultants, directors, officers, and key employees. The aggregate number of common shares issuable under the LTIP is shared with the Company’s stock options. Therefore, it cannot exceed the amount approved under the revised 2014 Plan. The RSUs, DSUs and PSUs vest at the discretion of the Board of Directors. As at September 30, 2019 only RSUs have been granted under the LTIP and the following is a summary of their activity:

Number of RSUs

Outstanding at January 1, 2018 - Granted 1,199,856 Released (642,856) Outstanding at December 31, 2018 557,000 Granted 1,147,000 Released (537,000) Forfeited (952,000) Outstanding at September 30, 2019 215,000

Estimated fair value of RSUs

During the nine months ended September 30, 2019, the Company granted 1,147,000 RSUs (September 30, 2018 – $1,002,856) to issue common shares. Share-based payments relating to RSUs vesting during the period was $60,187 (September 30, 2018 – $205,840).

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

Number of Warrants

Weighted Average Exercise Price

Outstanding at January 1, 2018 186,586,906 $ 0.22 Issued 82,527,782 0.12 Issued (64,042,019) 0.18 Expired (15,993,830) 0.34 Outstanding at December 31, 2018 189,078,839 0.16 Issued 107,117,840 0.13 Exercised - - Expired (73,469,169) 0.23 Outstanding at September 30, 2019 222,727,510 $ 0.12


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10. EQUITY (CONTINUED) Warrants (Continued) Warrants outstanding at September 30, 2019 were as follows:

Exercise Price Expiration Date Number of Warrants

Outstanding

CDN$1.96 February 1, 2022 7,500 CDN$0.15 February 11, 2022 38,176,764 CDN$0.15 February 28, 2022 10,398,663 CDN$0.15 March 27, 2022 6,459,999 CDN$0.15 March 28, 2022 2,039,291 CDN$0.10 May 17, 2022 37,395,443 CDN$0.10 June 6, 2022 4,990,000 CDN$0.10 July 8, 2022 7,657,680 CDN$0.13 December 4, 2022 25,578,283 CDN$0.12 December 22, 2022 7,796,105 CDN$0.12 January 19, 2023 82,227,782

222,727,510

The weighted average remaining contractual life of warrants outstanding as of September 30, 2019 was 2.91 years (December 31, 2018 – 2.64 years).

11. SEGMENTED INFORMATION

The Company operates in one reportable operating segment, being the development, marketing, and distribution of apparel, bags and accessories. Geographic information related to the Company’s assets and location of its customers is as follows:

September 30, 2019 December 31, 2018 Canada USA Total Canada USA Total

Revenue $ 2,910,002 $ 1,274,547 $ 4,184,549 $ 4,339,836 $ 707,764 $ 5,047,600 Inventory $ 2,280,566 $ 1,112,731 $ 3,393,296 $ 3,016,478 $ 1,007,269 $ 4,023,747 Property and equipment $ 1,750,147 $ 2,122,840 $ 3,872,987 $ 2,662,028 $ 2,127,609 $ 4,789,637

Right-of-use assets $ 2,879,024 $ 5,669,766 $ 8,548,790 $ - $ - $ -

Intangible assets $ 334,766 $ - $ 334,766 $ 336,960 $ - $ 336,960

12. RELATED PARTY TRANSACTIONS

Key management personnel include those persons having authority and responsibility for planning, directing and controlling the activities of the Company as a whole. The Company has determined that key management personnel consist of members of the Company's Board of Directors and corporate officers. The remuneration of directors and key management personnel during the nine months ended September 30, 2019 and 2018 was as follows:

September 30, 2019

September 30, 2018

Salaries and benefits $ 383,556 $ 478,173

Share-based payments 168,259 958,908

$ 551,815 $ 1,437,081


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12. RELATED PARTY TRANSACTIONS (CONTINUED) Remuneration paid to related parties other than key personnel during the six months ended September 30, 2019 and 2018 was as follows:

September 30, 2019

September 30, 2018

Consulting fees (included in professional fees) $ 139,200 $ 126,000

Salaries and benefits 8,840 22,260

Share-based payments - 103,277

$ 148,040 $ 251,537

As at September 30, 2019, the following is included in accounts payable and loans payable in relation to transactions with related parties, which are non-interest bearing, unsecured and due on demand:

i. $136,386 (December 31, 2018 - $6,302), is included in accounts payable from amounts owing for products and services provided by a company owned by the CEO.

ii. $506,000 (December 31, 2018 – Nil), is included in loans payable from amounts owing for loans provided by a company owned by the CEO.

On July 25, 2019, the Company obtained financing of $400,000 through a promissory note payable on demand from a company owned by a family member of the CEO.

Transactions with related parties:

During the nine months ended September 30, 2019, the Company had sales to a company owned by the CEO of $25,043 (2018 – $24,431) and purchased goods and services from the same company totaling $41,677 (2018 – $29,304).

On November 1, 2014, the Company entered into a sublease agreement with a company owned by the CEO for its corporate office at 1672 W. 2nd Avenue in Vancouver, BC. Under the agreement, the Company is required to make lease payments for a term of 5 years (note 9). During the nine months ended September 30, 2019, the Company made rent payments of $113,341 (2018 – $106,771) to the related party.

Equity:

On February 12, 2019 the Company issued 29,399,999 units of the Company at a price of $0.075 per unit to the CEO of the Company, two family members of the CEO and to a company owned by the CEO, for gross proceeds of $2,205,000. Each unit consists of one common share and one warrant. Each warrant is exercisable into one common share at a price of $0.15 for a period of three years. On March 28, 2019, the Company issued 4,705,957 common shares of the Company at a price of $0.075 per unit to the CEO of the Company, one family member of the CEO and to a company owned by the CEO, for gross proceeds of $352,947. Each unit consists of one common share and one warrant. Each warrant is exercisable into one common share at a price of $0.15 for a period of three years. On May 17, 2019, the Company issued 774,000 and 13,300,000 common shares of the Company at a price of $0.05 per unit to two family members of the CEO for total gross proceeds of $703,700. Each unit consists of one common share and one warrant. Each warrant is exercisable into one common share at a price of $0.10 for a period of three years. On July 8, 2019, the Company issued 4,600,000 common shares of the Company at a price of $0.05 per unit to a family member of the CEO for total gross proceeds of $230,000. Each unit consists of one common share and one warrant. Each warrant is exercisable into one common share at a price of $0.10 for a period of three years. On September 23, 2019, the Company received $97,000 in subscriptions received in advance of a financing from a family member of the CEO of the Company.


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13. RELATED PARTY TRANSACTIONS (CONTINUED)

Year ended December 31, 2018:

On January 19, 2018, the Company issued 456,356 units of the Company at a price of $0.07 per unit to two family members of the CEO of the Company and to a company owned by the CEO, for gross proceeds of $31,945. Each unit consists of one common share and one warrant. Each warrant is exercisable into one common share at a price of $0.20 for a period of five years.

On February 19, 2018, the Company issued 523,333 common shares of the Company at a price of $0.12 per share to a family member of the CEO of the Company for gross proceeds of $62,800.

13. FINANCIAL INSTRUMENT RISK MANAGEMENT

Classification of financial instruments Financial assets included in the statement of financial position are as follows:

September 30, 2019

December 31, 2018

Loans and receivables: Cash $ 72,729 $ 1,205,446 Trade accounts receivable 308,883 260,660 Deposits (current and long-term) 1,235,533 2,076,383

$ 1,617,145 $ 3,542,489

Financial liabilities included in the statement of financial position are as follows:

September 30, 2019

December 31, 2018

Non-derivative financial liabilities: Accounts payable $ 2,930,896 $ 1,171,650 Lease obligations (current and long-term) 10,437,090 75,022

$ 13,367,986 $ 1,246,672

Fair value Financial instruments measured at fair value are classified into one of three levels in the fair value hierarchy according to the relative reliability of the inputs used to estimate the fair values. The three levels of the fair value hierarchy are:

• Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities;

• Level 2 – Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly; and

• Level 3 – Inputs that are not based on observable market data. The carrying value of Company’s financial assets and liabilities as at September 30, 2019 and December 31, 2018 approximate their fair value due to their short terms to maturity. The Company is exposed in varying degrees to a variety of financial instrument related risks. The Board of Directors approves and monitors the risk management processes, inclusive of documented investment policies, counterparty limits, and controlling and reporting structures.

14. SUBSEQUENT EVENTS

The following events occurred subsequent to September 30, 2019:

a. On October 2, 2019 the Company received $21,000 in subscriptions received in advance of a financing. b. On October 7, 2019 the Company received $98,000 in subscriptions received in advance of a financing from a family

member of the CEO of the Company. c. On November 1, 2019 the Company received $20,000 in subscriptions received in advance of a financing. d. On November 1, 2019 the Company received $97,000 in subscriptions received in advance of a financing from a family

member of the CEO of the Company.

RYU APPAREL INC. CONDENSED CONSOLIDATED INTERIM … · NOTES TO THE CONDENSED CONSOLIDATED INTERIM...

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