UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
( | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended | |
OR | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT |
For the transition period from ______________ to ______________ | |
Commission File No. 001-33531
AEROGROW INTERNATIONAL, INC.
(Exact Namename of Registrantregistrant as specified in its charter)
NEVADA | 46-0510685 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) |
6075 Longbow Drive, Suite 200, Boulder, Colorado | 80301 |
(Address of principal executive offices) | (Zip Code) |
(303) 444-7755
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large“large accelerated filer," "accelerated filer"” “accelerated filer” and "smaller“smaller reporting company"company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ |
Non-accelerated filer Emerging growth company ☐ | Smaller reporting company ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Number of shares of issuer's common stock outstanding as of November August 6 2017: 34,328,036
AeroGrow International, Inc.
FORM 10-Q REPORT
June 30, 2017
PART I Financial Information | ||
Item 1. | 3 | |
3 | ||
4 | ||
5 | ||
7 | ||
Item 2. | 16 | |
Item 3. | 23 | |
Item 4. | 24 | |
PART II Other Information | ||
Item 1. | 25 | |
Item 1A. | 25 | |
Item 2. | 25 | |
Item 3. | 25 | |
Item 4. | 25 | |
Item 5. | 25 | |
Item 6. | 25 | |
27 | ||
PART I - FINANCIAL INFORMATION
AEROGROW INTERNATIONAL, INC.
September 30, 2017 | March 31, 2017 | |||||||
| (in thousands, except share and per share data) | (Unaudited) | (Derived from Audited Statements) | ||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 1,420 | $ | 8,804 | ||||
| Restricted cash | 15 | 15 | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $58 and $20 at September 30, 2017 and March 31, 2017, respectively | 5,838 | 2,484 | ||||||
| Other receivables | 111 | 258 | ||||||
| Inventory, net | 8,381 | 2,921 | ||||||
| Prepaid expenses and other | 1,494 | 511 | ||||||
| Total current assets | 17,259 | 14,993 | ||||||
| Property and equipment and intangible assets, net of accumulated depreciation of $4,219 and $4,020 at September 30, 2017 and March 31, 2017, respectively | 313 | 415 | ||||||
| Other assets | ||||||||
| Deposits | 110 | 106 | ||||||
| Total assets | $ | 17,682 | $ | 15,514 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 2,954 | $ | 1,853 | ||||
| Accrued expenses | 2,181 | 1,520 | ||||||
| Customer deposits | 60 | 106 | ||||||
| Debt associated with sale of intellectual property | 98 | 117 | ||||||
| Total current liabilities | 5,293 | 3,596 | ||||||
| Long term liabilities | ||||||||
| Capital lease liability | 15 | 19 | ||||||
| Total liabilities | 5,308 | 3,615 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders' equity | ||||||||
Common stock, $.001 par value, 750,000,000 shares authorized, 34,328,036 and 33,477,287, shares issued and outstanding at September 30, 2017 and March 31, 2017, respectively | 34 | 33 | ||||||
| Additional paid-in capital | 140,817 | 138,757 | ||||||
| Stock dividend to be distributed for Scotts Miracle-Gro transactions | - | 2,595 | ||||||
| Accumulated deficit | (128,477 | ) | (129,486 | ) | ||||
| Total stockholders' equity | 12,374 | 11,899 | ||||||
| Total liabilities and stockholders' equity | $ | 17,682 | $ | 15,514 | ||||
June 30, 2018 | March 31, 2018 | |||||||
(in thousands, except share and per share data) | (Unaudited) | (Derived from Audited Statements) | ||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash | $ | 7,005 | $ | 7,482 | ||||
Restricted cash | 15 | 15 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $23 and $39 at June 30, 2018 and March 31, 2018, respectively | 2,013 | 4,296 | ||||||
Other receivables | 195 | 281 | ||||||
Inventory | 4,208 | 5,047 | ||||||
Prepaid expenses and other | 2,867 | 493 | ||||||
Total current assets | 16,303 | 17,614 | ||||||
Property and equipment and intangible assets, net of accumulated depreciation of $4,480 and $4,386 at June 30, 2018 and March 31, 2018, respectively | 441 | 514 | ||||||
Other assets | ||||||||
Deposits | 39 | 39 | ||||||
Total assets | $ | 16,783 | $ | 18,167 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 920 | $ | 1,227 | ||||
Accounts payable related party | 1,782 | 1,521 | ||||||
Accrued expenses | 1,550 | 2,231 | ||||||
Customer deposits | 146 | 163 | ||||||
Debt associated with sale of intellectual property | 71 | 80 | ||||||
Total current liabilities | 4,469 | 5,222 | ||||||
Long term liabilities | ||||||||
Capital lease liability | 9 | 12 | ||||||
Other liability | 196 | 190 | ||||||
Total liabilities | 4,674 | 5,424 | ||||||
Commitments and contingencies | ||||||||
Stockholders' equity | ||||||||
Common stock, $.001 par value, 750,000,000 shares authorized, 34,328,036 shares issued and outstanding at June 30, 2018 and March 31, 2018 | 34 | 34 | ||||||
Additional paid-in capital | 140,817 | 140,817 | ||||||
Accumulated deficit | (128,742 | ) | (128,108 | ) | ||||
Total stockholders' equity | 12,109 | 12,743 | ||||||
Total liabilities and stockholders' equity | $ | 16,783 | $ | 18,167 | ||||
See accompanying notes to the condensed financial statements.
AEROGROW INTERNATIONAL, INC.
(Unaudited)
Three Months ended September 30, | Six Months ended September 30, | |||||||||||||||
| (in thousands, except per share data) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Net revenue | $ | 5,741 | $ | 2,242 | $ | 8,204 | $ | 4,398 | ||||||||
| Cost of revenue | 4,079 | 1,551 | 5,720 | 2,863 | ||||||||||||
| Gross profit | 1,662 | 691 | 2,484 | 1,535 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Research and development | 141 | 114 | 233 | 211 | ||||||||||||
| Sales and marketing | 1,012 | 729 | 1,844 | 1,549 | ||||||||||||
| General and administrative | 638 | 475 | 1,265 | 1,055 | ||||||||||||
| Total operating expenses | 1,791 | 1,318 | 3,342 | 2,815 | ||||||||||||
| (Loss) from operations | (129 | ) | (627 | ) | (858 | ) | (1,280 | ) | ||||||||
| Other income (expense), net | ||||||||||||||||
| Fair value changes in derivative warrant liability | - | (458 | ) | - | (903 | ) | ||||||||||
| Interest expense – related party | - | (27 | ) | (1 | ) | (31 | ) | |||||||||
| Other income (expense) | 8 | (16 | ) | 48 | (41 | ) | ||||||||||
| Total other income (expense), net | 8 | (501 | ) | 47 | (975 | ) | ||||||||||
| Net loss | $ | (121 | ) | $ | (1,128 | ) | $ | (811 | ) | $ | (2,255 | ) | ||||
| Change in fair value of stock to be distributed for Scotts Miracle-Gro transactions | (47 | ) | (317 | ) | 534 | (767 | ) | |||||||||
| Net loss attributable to common stockholders | $ | (168 | ) | $ | (1,445 | ) | $ | (277 | ) | $ | (3,022 | ) | ||||
| Net loss per share, basic and diluted | $ | (0.00 | ) | $ | (0.17 | ) | $ | (0.01 | ) | $ | (0.37 | ) | ||||
| Weighted average number of common shares outstanding, basic and diluted | 34,041 | 8,576 | 33,761 | 8,138 | ||||||||||||
Three Months ended June 30, | ||||||||
2018 | 2017 | |||||||
(in thousands, except per share data) | ||||||||
Net revenue | $ | 3,743 | $ | 2,462 | ||||
Cost of revenue | 2,310 | 1,640 | ||||||
Gross profit | 1,433 | 822 | ||||||
Operating expenses | ||||||||
Research and development | 160 | 91 | ||||||
Sales and marketing | 1,242 | 832 | ||||||
General and administrative | 685 | 627 | ||||||
Total operating expenses | 2,087 | 1,550 | ||||||
Loss from operations | (654 | ) | (728 | ) | ||||
Other income (expense), net | ||||||||
Other income (expense), net | 20 | 39 | ||||||
Total other income (expense) income, net | 20 | 39 | ||||||
Net loss | $ | (634 | ) | $ | (689 | ) | ||
Change in fair value of stock to be distributed for Scotts Miracle-Gro transactions | - | 581 | ||||||
Net loss attributable to common stockholders | $ | (634 | ) | $ | (108 | ) | ||
Net loss per common share, basic and diluted | $ | (0.02 | ) | $ | (0.00 | ) | ||
Weighted average number of common shares outstanding, basic and diluted | 34,328 | 33,477 | ||||||
See accompanying notes to the condensed financial statements.
AEROGROW INTERNATIONAL, INC.
(Unaudited)
Six months ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| (in thousands) | ||||||||
| Cash flows from operating activities: | ||||||||
| Net (loss) | $ | (811 | ) | $ | (2,255 | ) | ||
| Adjustments to reconcile net (loss) to cash used by operations: | ||||||||
| Issuance of common stock and options under equity compensation plans | - | 92 | ||||||
| Depreciation and amortization expense | 180 | 185 | ||||||
| Bad debt (recovery) expense | 39 | 3 | ||||||
| Inventory allowance | (76 | ) | - | |||||
| Fair value remeasurement of derivative warrant liability | - | 903 | ||||||
| Accretion of debt associated with sale of intellectual property | (19 | ) | (22 | ) | ||||
| Loss on write-off of assets | 19 | - | ||||||
| SMG intellectual property royalty and branding license | - | 217 | ||||||
| Change in operating assets and liabilities: | ||||||||
| (Increase) in accounts receivable | (3,393 | ) | (201 | ) | ||||
| Decrease in other receivable | 147 | 147 | ||||||
| (Increase) in inventory | (5,384 | ) | (2,361 | ) | ||||
| (Increase) in prepaid expense and other | (983 | ) | (752 | ) | ||||
| (Increase) decrease in deposits | (4 | ) | 50 | |||||
| Increase in accounts payable | 2,387 | 1,589 | ||||||
| Increase (decrease) in accrued expenses | 661 | (114 | ) | |||||
| Increase in accrued interest-related party | - | 13 | ||||||
| (Decrease) in customer deposits | (46 | ) | (157 | ) | ||||
| Net cash used by operating activities | $ | (7,283 | ) | $ | (2,663 | ) | ||
| Cash flows from investing activities: | ||||||||
| Purchases of equipment | (97 | ) | (88 | ) | ||||
| Net cash (used) by investing activities | $ | (97 | ) | $ | (88 | ) | ||
| Cash flows from financing activities: | ||||||||
| Proceeds from notes payable-related party | - | 2,750 | ||||||
| Repayment of notes payable-related party | - | (1,000 | ) | |||||
| Repayment of capital lease | (4 | ) | (1 | ) | ||||
| Net cash (used) provided by financing activities | $ | (4 | ) | $ | 1,749 | |||
| Net (decrease) in cash | (7,384 | ) | (1,002 | ) | ||||
| Cash, cash equivalents and restricted cash, beginning of period | 8,819 | 1,416 | ||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 1,435 | $ | 414 | ||||
Three Months Ended June 30, | ||||||||
2018 | 2017 | |||||||
(in thousands) | ||||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (634 | ) | $ | (689 | ) | ||
Adjustments to reconcile net loss to net cash used by operations: | ||||||||
Depreciation and amortization expense | 95 | 102 | ||||||
Bad debt (recovery) expense | (16 | ) | (10 | ) | ||||
Inventory allowance | - | (16 | ) | |||||
Accretion of debt associated with sale of intellectual property | (9 | ) | (10 | ) | ||||
Change in operating assets and liabilities: | ||||||||
Decrease in accounts receivable | 2,299 | 1,248 | ||||||
Decrease in other receivable | 86 | 82 | ||||||
Decrease (increase) in inventory | 839 | (27 | ) | |||||
(Increase) in prepaid expense and other | (2,374 | ) | (634 | ) | ||||
(Increase) in deposits | - | (4 | ) | |||||
(Decrease) increase in accounts payable | (46 | ) | 116 | |||||
(Decrease) in accrued expenses | (676 | ) | (654 | ) | ||||
(Decrease) in customer deposits | (17 | ) | (21 | ) | ||||
Net cash (used) by operating activities | (453 | ) | (517 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchases of equipment | (21 | ) | (51 | ) | ||||
Net cash (used) by investing activities | (21 | ) | (51 | ) | ||||
Cash flows from financing activities: | ||||||||
Repayment of capital lease | (3 | ) | (2 | ) | ||||
Net cash (used) by financing activities | (3 | ) | (2 | ) | ||||
Net (decrease) in cash | (477 | ) | (570 | ) | ||||
Cash and cash equivalents and restricted cash, beginning of period | 7,497 | 8,819 | ||||||
Cash and cash equivalents and restricted cash, end of period | $ | 7,020 | $ | 8,249 | ||||
See supplemental disclosures below and the accompanying notes to the condensed financial statements.
Continued from previous page
Six months ended September 30, (in thousands) | ||||||||
| 2017 | 2016 | |||||||
| Cash paid during the year for: | ||||||||
| Interest | $ | - | $ | 18 | ||||
| Income taxes | $ | - | $ | - | ||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Property and equipment acquired through capital lease | $ | - | $ | 22 | ||||
| Decrease in liability due to issuance of stock to SMG on notes payable – related party | $ | - | $ | 297 | ||||
| Fair value of common stock issued for payment of interest on notes payable-related party | - | 480 | ||||||
| Change in fair value of common stock issued for payment of interest on notes payable-related party at issuance | - | 183 | ||||||
| Change in fair value of SMG intellectual property royalty, branding license and interest on notes payable-related party | $ | 485 | $ | (946 | ) | |||
| Change in fair value of stock dividends for common stock issued on convertible preferred stock | - | 530 | ||||||
| Change in fair value of stock dividends accrued on convertible preferred stock | $ | 49 | $ | (534 | ) | |||
| Decrease in liability due to issuance of stock to SMG for intellectual property and branding license | $ | 1,286 | $ | 1,006 | ||||
Three Months Ended June 30, (in thousands) | ||||||||
2018 | 2017 | |||||||
Cash paid during the year for: | ||||||||
Interest | $ | - | $ | - | ||||
Income taxes | $ | - | $ | - | ||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||
Change in fair value of SMG intellectual property royalty, branding license and interest on notes payable-related party | $ | - | $ | 570 | ||||
Change in fair value of stock dividends accrued on convertible preferred stock | $ | - | $ | 11 | ||||
(Unaudited)
1. Description of the Business
AeroGrow International, Inc. (collectively, the "Company," "AeroGrow," "we," "our,"“Company,” “AeroGrow,” “we,” “our” or "us"“us”) was formed as aincorporated in the State of Nevada corporation on March 25, 2002. The Company'sCompany’s principal business is developing, marketing, and distributing advanced indoor aeroponic garden systems designed and priced to appeal to the consumer gardening, cooking and small indoor appliance markets worldwide. The Company manufactures, distributes and markets nineten different models of its AeroGarden systems in multiple colors, as well as over 40 varieties of seed pod kits and a full line of accessory products through multiple channels, including retail distribution via online retail outlets(brick and brick-and-mortar storefronts,mortar and online), catalogue and direct-to-consumer sales primarily in the United States and Canada, as well as selected countries in Europe.
2. Basis of Presentation, Liquidity and Summary of Significant Accounting Policies
Basis of Presentation
The unaudited interim financial statements of the Company included herein have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"(“SEC”) for interim reporting including the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These condensed statements do not include all disclosures required by accounting principles generally accepted in the United States of America ("(“U.S. GAAP"GAAP”) for annual audited financial statements and should be read in conjunction with the Company'sCompany’s audited financial statements and related notes included in the Company'sCompany’s Annual Report on Form 10-K for the year ended March 31, 2017,2018 (“Fiscal 2018”), as filed with the SEC on June 26, 2017.
In the opinion of management, the accompanying unaudited interim financial statements reflect all adjustments, including recurring adjustments, necessary to present fairly the financial position of the Company at SeptemberJune 30, 2017,2018, the results of operations for the three and six months ended SeptemberJune 30, 20172018 and 2016,2017, and the cash flows for the sixthree months ended SeptemberJune 30, 20172018 and 2016.2017. The results of operations for the three and six months ended SeptemberJune 30, 20172018 are not necessarily indicative of the expected results of operations for the full year or any future period. In this regard, the Company'sCompany’s business is highly seasonal, with approximately 65.7%60.1% of revenues in the fiscal year ended March 31, 2017 ("Fiscal 2017")2018 occurring in the four consecutive calendar months from October through January. Furthermore, duringDuring the six-monththree-month period ended SeptemberJune 30, 2017,2018, the Company has further expanded its distribution channels and invested in necessary overhead in anticipation of the Fiscal 2019 peak sales season. The balance sheet as of March 31, 20172018 is derived from the Company'sCompany’s audited financial statements.
Liquidity
Sources of funding to meet prospective cash requirements during Fiscal 2019 include the Company'sCompany’s existing cash balances, cash flow from operations, and borrowings under the Company'sCompany’s debt arrangements. We may need to seek additional debt or equity capital, however, to address the seasonal nature of our working capital needs, increase the scale of our business and provide a cash reserve against contingencies. There can be no assurance we will be able to raise this additional capital. See Note 10 for subsequent events.
Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. It is reasonably possible that a change in the Company'sCompany’s estimates could occur in the near term as additional or new information becomes available.
Net Income (Loss) per Share of Common Stock
The Company computes net income (loss) per share of common stock in accordance with Accounting Standards Codification ("ASC"(“ASC”) 260. ASC 260 requires companies with complex capital structures to present basic and diluted earnings per share ("EPS"(“EPS”). Basic EPS is measured as the income or loss available to common stockholders divided by the weighted average shares of common stock outstanding for the period. Diluted EPS is similar to basic EPS, but presents the dilutive effect on a per share basis of potential common stock equivalents (e.g., convertible securities, options, and warrants) as if such securities had been converted into common stock at the beginning of the periods presented. Potential shares of common stockSecurities that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. Securities are not included in the computation of EPS because to do so would have been anti-dilutive wereinclude: (i) employee stock options to purchase 175,000125,000 shares and warrants to purchase 2,000 shares of common stock for the period ended SeptemberJune 30, 20172018; and (ii) employee stock options to purchase 656,000175,000 shares and warrants to purchase 3,093,0002,000 shares for the three months ended SeptemberJune 30, 2016.2017.
ASC 825-10-50-20requires disclosure of significant concentrations of credit risk regardless of the degree of such risk.
Cash:
The Company maintains cash depository accounts with financial institutions. The amount on deposit with several financial institutions exceeded the $250,000 federally insured limit as of SeptemberJune 30, 2017.2018. The Company has not historically incurred any losses related to these deposits. The financial institutions are highly rated, financially sound and the risk of loss is minimal.
Customers and Accounts Receivable:
For the three months ended SeptemberJune 30, 2018 and 2017, one customer, Amazon.com, represented 41.8% and 23%, respectively, of the Company had four customers, Bed, Bath & Beyond, Amazon.ca, Macy's and Kohl's, which represented 25.8%, 22.5%, 12.5% and 11.0%Company’s net revenue.
As of net revenue, respectively. For the three months ended SeptemberJune 30, 2016,2018, the Company had three customers, Amazon.com, Sur La Table and Ace Hardware, which represented 33.3%, 20.1% and 16.8% of the Company's net revenue, respectively. For the six months ended September 30, 2017, the Company had three customers, Bed, Bath & Beyond Amazon.caand Kohl’s, that represented 26.1%, 18.5% and 11.6% of the Company’s outstanding accounts receivable, respectively. As of March 31, 2018, the Company had two customers, Canadian Tire Corporation and Amazon.com, which represented 18.1%, 17.5%27.3% and 12.0% of the Company's net revenue. For the six months ended September 30, 2016, the Company had had one customer, Amazon.com that represented 34.6% of the Company's net revenue.
Suppliers:
For the three months ended SeptemberJune 30, 2017,2018, the Company purchased $7.6 million of inventories and other inventory-related items from two suppliers, as we increase inventory levels for the holiday season. For the three months ended September 30, 2016, the Company purchased $3.6 million of inventories and other inventory-related items from four suppliers. For the six months ended September 30, 2017, the Company purchased $8.8 million of inventories and other inventory-related items from one supplier.supplier totaling $2.7 million. For the sixthree months ended SeptemberJune 30, 2016,2017, the Company purchased $4.1 million of inventories and other inventory-related items from one supplier.supplier totaling $1.7 million. The purchase of inventories and other inventory-related items is dependent ontied to the anticipated timing and amount of purchasessales for our highly seasonal business and payment terms with our suppliers.
The Company'sCompany’s primary contract manufacturers are located in China. As a result, the Company may be subject to political, currency, regulatory, transportation/shipping and weather/natural disaster risks. Although the Company believes alternate sources of manufacturing could be obtained, the riskthese risks and any potential loss of an interruption in product sourcingsupply could have an adverse impact on operations.
Fair Value of Financial Instruments
The Company follows the guidance in ASC 820, Fair Value Measurements and Disclosures ("“ASC 820"820”), as it relates to the fair value of its financial assets and liabilities. ASC 820 provides for a standard definition of fair value to be used in new and existing pronouncements. This guidance requires disclosure of fair value information about certain financial instruments (insurance contracts, real estate, goodwill and taxes are excluded) for which it is practicable to estimate such values, whether or not these instruments are included in the balance sheet at fair value. The fair values presented for certain financial instruments are estimates, which, in many cases, may differ significantly from the amounts that could be realized upon immediate liquidation.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants. ASC 820 also provides a hierarchy for determining fair value, which emphasizes the use of observable market data whenever available. The three broad levels defined by the hierarchy are as follows, with the highest priority given to Level 1 as these are the most reliable, and the lowest priority given to Level 3.
Level 1 – Quoted prices in active markets for identical assets.
Level 2 – Quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, or other inputs that are observable or can be corroborated by observable market data, including model-derived valuations.
Level 3 – Unobservable inputs that are supported by little or no market activity.
The carrying value of financial instruments including cash, receivables and accounts payable and accrued expenses, approximates their fair value at SeptemberJune 30, 20172018 and March 31, 20172018 due to the relatively short-term nature of these instruments.
The Company'sCompany’s intellectual property liability carrying value was determined byutilizing Level 3 inputs. As discussed below in Notes 3 and 4, each of these liabilitiesthis liability was incurred in conjunction with the Company'sCompany’s strategic alliance with Scotts Miracle-Gro. As of SeptemberJune 30, 20172018 and March 31, 2017,2018, the fair value of the Company's note payable and sale of the intellectual property liability werewas estimated using the discounted cash flow method, which is based on expected future cash flows, discounted to present value using a discount rate of 15%. As of SeptemberJune 30, 2017,2018, the Company did not have any financial assets or liabilities that were measured at fair value on a recurring basis, subsequent to initial recognition, except for the derivative warrant liability. recognition.
The Company sells its products to retailers and directly to consumers. Direct-to-consumer transactions are primarily paid by credit card. Retailer sales terms vary by customer, but generally range from net 30 days to net 60 days.days, while direct-to-consumer transactions are primarily paid by credit card. Accounts receivable are reported at net realizable value and net of the allowance for doubtful accounts. The Company uses the allowance method to account for uncollectible accounts receivable. The Company's allowance estimate is based on a review of the current status of trade accounts receivable, which resulted in an allowance of $58,000$23,000 and $20,000$39,000 at SeptemberJune 30, 20172018 and March 31, 2017,2018, respectively.
Other Receivables
In conjunction with the Company'sCompany’s processing of credit card transactions for its direct-to-consumer sales activities and as security with respect to the Company'sCompany’s performance for credit card refunds and charge backs, the Company is required to maintain a cash reserve with Litle and Company,Vantiv, the Company'sCompany’s credit card processor. This reserve is equal to 5% of the credit card sales processed during the previous six months. As of SeptemberJune 30, 20172018 and March 31, 2017,2018, the balance in this reserve account was $111,000$195,000 and $258,000,$281,000, respectively.
Advertising and Production Costs
The Company expenses all production costs related to advertising, including print, television, and radio advertisements when the advertisement has been broadcast or otherwise distributed. In contrast, the Company records media and marketing costs related to its direct-to-consumer advertisements, inclusive of related postage and printing costs incurred in conjunction with mailings of direct-response catalogues, and related direct-response advertising costs, in accordance with ASC 340-20 Capitalized Advertising Costs. As prescribed by ASC 340-20-25, direct-to-consumercosts. Direct-to-consumer advertising costs incurred are reported as assets and should be amortized over the estimated period of the benefits, based on the proportion of current period revenue from the advertisement to probable future revenue.
As the Company has continued to expand its retail distribution channel, the Company has expanded its advertising to include online gateway and portal advertising, as well as placement in third party catalogues.
Advertising expense for the three and six months ended SeptemberJune 30, 20172018 and 2016June 30, 2017, were as follows:
Three Months Ended September 30, (in thousands) | Six Months Ended September 30, (in thousands) | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Direct-to-consumer | $ | 50 | $ | 36 | $ | 121 | $ | 115 | ||||||||
| Retail | 115 | 107 | 301 | 302 | ||||||||||||
| Other | 9 | 7 | 19 | 15 | ||||||||||||
| Total advertising expense | $ | 174 | $ | 150 | $ | 441 | $ | 432 | ||||||||
Three Months Ended June 30, (in thousands) | ||||||||
2018 | 2017 | |||||||
Direct-to-consumer | $ | 89 | $ | 72 | ||||
Retail | 372 | 185 | ||||||
Other | $ | 15 | $ | 10 | ||||
Total advertising expense | $ | 476 | $ | 267 | ||||
As of SeptemberJune 30, 20172018 and March 31, 2017,2018, the Company had deferred $1,000$3,000 and $24,000,$14,000, respectively, related to such media and advertising costs includingwhich include the catalogue costcosts described above. The costs are included inwithin the prepaid“prepaid expenses and otherother” line of the condensed balance sheets.
Inventory
Inventories are valued at the lower of cost, determined on the basis of standard costing, which approximates the first-in, first-out method, or net realizable value. When the Company is the manufacturer, raw materials, labor and manufacturing overhead are included in inventory costs. The Company records the raw materials at delivered cost. Standard labor and manufacturing overhead costs are applied to the finished goods based on normal production capacity as prescribed under ASC 330 Inventory Pricing.capacity. A majority of the Company'sCompany’s products are manufactured overseas and are recorded at standard cost, which includes product costs for purchased and manufactured products, and freight and transportation costs for inbound freight from manufacturers. Inventory values at SeptemberJune 30, 20172018 and March 31, 20172018 were as follows:
June 30, | March 31, | |||||||
2018 (in thousands) | 2018 (in thousands) | |||||||
Finished goods | $ | 3,078 | $ | 4,117 | ||||
Raw materials | 1,130 | 930 | ||||||
| $ | 4,208 | $ | 5,047 | |||||
| September 30, | March 31, | |||||||
2017 (in thousands) | 2017 (in thousands) | |||||||
| Finished goods | $ | 7,413 | $ | 2,274 | ||||
| Raw materials | 968 | 647 | ||||||
| $ | 8,381 | $ | 2,921 | |||||
The Company determines an inventory obsolescence reserve based on management'smanagement’s historical experience and establishes reserves against inventory according to the age of the product. As of SeptemberJune 30, 20172018 and March 31, 2017,2018, the Company had reserved $286,000 and $362,000$66,000 for inventory obsolescence, respectively.obsolescence. The inventory values are shown net of these reserves.
Revenue Recognition
The Company recognizes revenueadopted ASU No. 2014-09, "Revenue from productContracts with Customers", and all the related amendments (collectively “ASC 606”) on April 1, 2018 using the modified retrospective method. The adoption did not have a material impact to the nature and timing of its revenues, results of operations, cash flows and statement of financial position. The comparative information has not been restated and continues to be reported under the accounting standards in effect in those periods.
The following table summarizes the impacts of adopting ASC 606 on the Company’s unaudited consolidated balance sheets as of June 30, 2018:
As reported (in thousands) | Adjustments | Balance without adoption of ASC 606 | ||||||||||
(in thousands) | ||||||||||||
Assets | ||||||||||||
Accounts receivable, net | $ | 2,013 | $ | (376 | ) | $ | 2,389 | |||||
Liabilities | ||||||||||||
Accrued expenses | $ | 1,550 | $ | (376 | ) | $ | 1,926 | |||||
The Company currently has two operating and reportable segments, (i) the Direct to Consumer segment, which composed of sales netdirectly from our website, mail order or customer calls to our customer service department and (ii) the Retail segment, which is comprised of estimated returns, when persuasive evidenceall sales related to retailers, including where possession of a sale exists, including the following; (i) aour product is shipped under an agreement withtaken and sold by the retailer in store or online, and drop ship orders that process from the retailer and drop directly to our warehouse for us to ship on behalf of the retailer.
The majority of the Company’s revenue is recognized when it satisfies a customer; (ii)single performance obligation by transferring control of its products and the risk of loss to a customer. Control is generally transferred when the Company’s products are either shipped or delivered based on the terms contained within the underlying contracts or agreements. The Company’s general payment terms are short-term in duration. The Company does not have significant financing components or payment terms. The Company did not have any material unsatisfied performance obligations as of June 30, 2018 or March 31, 2018.
The Company excludes from revenues all taxes assessed by a governmental authority that are imposed on the sale of its products and title has passedcollected from customers.
There were no changes to the customer; (iii)Company’s accounting for variable consideration under ASC 606. However, the fee is fixedclassification from a liability to a contra asset to show net realizable accounts receivable results in a change in presentation on the balance sheet. Promotional and other allowances (variable consideration) recorded as a reduction to net sales, primarily include consideration given to retail customers including, but not limited to the following:
● | discounts granted off list prices to support price promotions to end-consumers by retailers; | |
● | the Company’s agreed share of fees given directly to retailers for advertising, in-store marketing and promotional activities; and | |
● | incentives given to the Company’s retailers for achieving or exceeding certain predetermined purchases (i.e., rebates). |
The Company’s promotional allowance programs with its retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or determinable; and (iv) collectionmore of the resulting receivable is reasonably assured.arrangements described above and are of varying durations, ranging from one day to one year. The Company’s promotional and other allowances are calculated based on various programs with retail customers, and accruals are established during the year for its anticipated liabilities. These accruals are based on agreed upon terms, as well as the Company’s historical experience with similar programs, and require management’s judgment with respect to estimating consumer participation and retail customer performance levels. Differences between such estimated expense and actual expenses for promotional and other allowance costs have historically been insignificant and are recognized in earnings in the period such differences are determined.
The Company records estimated reductions to revenue for customer and distributor programs and incentive offerings, including promotions, rebates, and other volume-based incentives.incentives, based on historical rates. Certain incentive programs require the Company to estimate the number of customers who will actually redeem the incentive based on historical industry experience. As of SeptemberJune 30, 20172018 and March 31, 2017,2018, the Company hadreduced accounts receivable $434,000 and accrued $634,000 and $304,000,$430,000, respectively, as an estimate for the foregoing deductions and allowances within the "accrued expenses"“accounts receivable, net” and “accrued expenses” line of the balance sheets.
Warranty and Return Reserves
The Company records warranty liabilities at the time of sale for the estimated costs that may be incurred under its basic warranty program. The specific warranty terms and conditions vary depending upon the product sold, but generally include technical support, repair parts, and labor for periods up to one year. Factors that affect the Company'sCompany’s warranty liability include the number of installed units currently under warranty, historical and anticipated rates of warranty claims on those units, and cost per claim to satisfy the Company'sCompany’s warranty obligation. Based upon the foregoing, the Company has recorded a provision for potential future warranty costs of $116,000$122,000 and $125,000$111,000 as of SeptemberJune 30, 20172018 and March 31, 2017,2018, respectively.
The Company reserves for known and potential returns from customers and associated refunds or credits related to such returns based upon historical experience. In certain cases, retailerretail customers are provided a fixed allowance, usually in thea range of 1% to 2% range,, to cover returned goods and this allowance is deducted from payments made to us by such customers. As of SeptemberJune 30, 20172018 and March 31, 2017,2018, the Company has recorded a reserve for customer returns of $183,000 and $175,000,$293,000, respectively.
Segments of an Enterprise and Related Information
U.S. GAAP utilizes a management approach based on allocating resources and assessing performance as the source of the Company's reportable segments. U.S. GAAP also requires disclosures about products and services, geographic areas and major customers. At present, the Company operates in two segments, Direct-to-Consumer and Retail Sales.
Recently Issued Accounting Pronouncements
In NovemberJune 2016, the FASB issued ASU 2016-13, “Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-18, "StatementInstruments – Credit Losses: Measurement of Cash Flows."Credit Losses on Financial Instruments,” which requires entities to estimate all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The newupdated guidance will requirealso expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses over the entire contractual term of the instrument from the date of initial recognition of that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents are required to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The newinstrument. This guidance is effective for interim and annual periodsfiscal years beginning after December 15, 20172019, including interim periods within that reporting period, and early adoption is permitted. The amendment should be adopted retrospectively. The Company early adoptedis in the process of evaluating the potential impact of this new guidance in the first quarter of fiscal year 2018 and the adoption did not have a material impact on our financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases."“Leases.” The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The adoption of this ASU is expected to result in all operating leases being capitalized and a current and long-term liability recorded in the Company'sCompany’s financial statements.
In August 2015, the FASB issued ASU 2015-14 to defer the effective date by one year of previously issued ASU 2014-09, "Revenue“Revenue from Contracts with Customers,"” which amended revenue recognition guidance to clarify the principles for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This accounting guidance isThe standard became effective for the Company beginningus in the first quarter of fiscal yearFiscal Year 2019 using one of two prescribed retrospective methods. Early adoption is permitted but not before annual periods beginning after December 15, 2016. We anticipate we will adopt the full retrospective transition method and are currently evaluating the impact of adoption of this ASU on our consolidated financial statements and disclosures.
3. Notes Payable, Long Term Debt and Current Portion – Long Term Debt
The following represents the changes to our Notes Payable, Long Term Debt and Current Portion – Long Term Debt for the periods presented. For a more detailed discussion on our previously outstanding Notes Payable, Long Term Debt and Current Portion – Long Term Debt, refer to the Company'sCompany’s Annual Report on Form 10-K for the year ended March 31, 2017,2018, as filed with the SEC on June 26, 2017. The following are the changes to our Notes Payable, Long Term Debt and Current Portion – Long Term Debt for the periods presented.
As of SeptemberJune 30, 20172018 and March 31, 2017,2018, the outstanding balance of the Company's notesCompany’s note payable and debt, including accrued interest, is as follows:
September 30, 2017 (in thousands) | March 31, 2017 (in thousands) | |||||||
| Sale of intellectual property liability (see Note 4) | 98 | 117 | ||||||
| Total debt | 98 | 117 | ||||||
| Less current portion – long term debt | 98 | 117 | ||||||
| Long term debt | $ | - | $ | - | ||||
June 30, 2018 | March 31, 2018 | |||||||
(in thousands) | (in thousands) | |||||||
Sale of intellectual property liability (see Note 4) | 71 | 80 | ||||||
Total debt | 71 | 80 | ||||||
Less notes payable and current portion – long term debt | 71 | 80 | ||||||
Long term debt | $ | - | $ | - | ||||
Liability Associated with Scotts Miracle-Gro Transaction
The Company and Scotts Miracle-Gro also agreed to enter an Intellectual Property Sale Agreement, a Technology License Agreement, a Brand License Agreement, and a Supply Chain Services Agreement. The Intellectual Property Sale Agreement and the Technology License constitute an agreement of sales of future revenues. BecauseSince the Company received cash from Scotts Miracle-Gro and agreed to pay for a defined period a specified percentage of revenue, and because the Company has significant involvement in the generation of its revenue, the excess paid over net book value is classified as debt and is being amortized under the effective interest method. As of SeptemberJune 30, 20172018 and March 31, 2017,2018, a liability of $98,000$71,000 and $117,000,$80,000, respectively, was recorded on the balance sheets for the Intellectual Property Sale Agreement. As of SeptemberJune 30, 20172018 and March 31, 2017,2018, the accrued liability for shares to be distributed at $1.51 per share: (i) the Technology Licensing Agreement was at $0 and $935,000, respectively; (ii) the Brand License Agreement at $0 and $1.6 million, respectively. Accrued liabilities for the Technology Licensing Agreement, the accrual is calculated as 2% of the annual net sales and recorded as a liability and amounts to $725,000 and $648,000, respectively. The accrued liability for the Brand License Agreement werewhich is calculated at an amount equal to 5% of incremental growth and is recorded as a stock dividendliability and amounts to be distributed at period end, based on a value$1.3 million and $1.3 million as of $1.51 per share. However, the Scotts Miracle-GroJune 30, 2018 and the Company settled their respective obligations under the Technology Licensing Agreement and Brand License Agreement in August 2017 and no further liabilities will be accrued that require shares to be distributed or a periodic fair value calculation to occur.
4. Scotts Miracle-Gro Transactions – Convertible Preferred Stock, Warrants and Other Transactions
Series B Convertible Preferred Stock and Related Transactions
On April 22, 2013, the Company entered into a Securities Purchase Agreement with SMG Growing Media, Inc., a wholly owned subsidiary of Scotts Miracle-Gro (NYSE: "SMG"“SMG”), a worldwide marketer of branded consumer lawn and garden products. Pursuant to the Securities Purchase Agreement, Scotts Miracle-Gro acquired 2,649,007 shares of the Company'sCompany’s Series B Convertible Preferred Stock, par value $0.001 per share (the "Series“Series B Preferred Stock"Stock”) and (ii) a warrant to purchase sharesup to 80% of the Company'sCompany’s common stock (the "Warrant," as described in greater detail below)“Warrant”) for an aggregate purchase price of $4.0 million. The Securities Purchase Agreement, Certificates of Designations for the Series B Preferred Stock, Form of Warrant, Indemnification Agreement, Investor'sInvestor’s Rights Agreement and Voting Agreement have beenwere filed as exhibits to a Current Report on Form 8-K that was filed with the SEC on April 23, 2013. After deducting offering expenses, including commissions and expenses paid to the Company's advisor, net cash proceeds totaled to $3.8 million. The Company used $950,000 of the net proceeds to repay "in full" (with concessions) the Promissory Note due to a former supplier. The Company used the remaining net proceeds for working capital and general corporate purposes. On November 29, 2016, Scotts Miracle-Gro fully exercised the Warrant and, upon exercise of the Warrant the Series B Preferred Stock converted into shares of common stock.
Upon demand by Scotts Miracle-Gro, the Company must use its best efforts to file a Registration Statement on Form S-3, or, if the Company is not eligible for Form S-3, on Form S-1 (collectively, the "Registration Statement"“Registration Statement”), covering the shares of the Company's common stock issued upon conversion/exercise of the Preferred Stock and the Warrant, within 120 calendar days after receipt of Scotts Miracle-Gro'sMiracle-Gro’s demand for registration and shallregistration. The Company must use its best efforts to cause the Registration Statement to become effective as soon as possible thereafter.
In conjunction with the private offering described above, the Company and Scotts Miracle-Gro also agreed to enter an Intellectual Property Sale Agreement, a Technology License Agreement, a Brand License Agreement, and a Supply Chain Services Agreement. The Intellectual Property Sale Agreement and the Technology License constitute an agreement of sales of future revenues. For more details regarding these agreements, please refer to Note 3 "Scotts“Scotts Miracle-Gro Transactions"Transactions” to the financial statements included in the Company'sCompany’s Annual Report on Form 10-K, as filed with the SEC on June 26, 2017.28, 2018. See also Note 310 for the Term Loan with Scotts Miracle-Gro.
5. Equity Compensation Plans
For the three and six months ended SeptemberJune 30, 20172018 and SeptemberJune 30, 2016,2017, the Company did not grant any options to purchase shares ofthe Company’s common stock under the Company'sCompany’s 2005 Equity Compensation Plan (the "2005 Plan"“2005 Plan”) and no new options will be granted under this plan until a new plan is adopted.
During the three and six months ended SeptemberJune 30, 20172018, 50,000 options to purchase shares of common stock were cancelled or expired, and Septemberno shares of common stock were issued upon exercise of outstanding stock options. During the three months ended June 30, 2016,2017, no options to purchase shares of common stock were cancelled or expired, and no shares of common stock were issued upon exercise of outstanding stock options under the 2005 Plan.
As of SeptemberJune 30, 2017,2018, the Company had no unvested outstanding options to purchase shares of the Company'sCompany’s common stock.
Information regarding all stock options outstanding under the Company’s 2005 Plan as of SeptemberJune 30, 20172018 is as follows:
| OPTIONS OUTSTANDING AND EXERCISABLE | ||||||||||||||||||
| Exercise price | Options (in thousands) | Weighted-average Remaining Contractual Life (years) | Weighted-average Exercise Price | Aggregate Intrinsic Value (in thousands) | ||||||||||||||
| $ | 1.10 | 50 | 0.50 | $ | 1.10 | |||||||||||||
| $ | 1.55 | 11 | 2.88 | $ | 1.55 | |||||||||||||
| $ | 2.20 | 21 | 1.04 | $ | 2.20 | |||||||||||||
| $ | 5.31 | 93 | 1.85 | $ | 5.31 | |||||||||||||
| 175 | 1.44 | $ | 3.50 | $ | 93 | |||||||||||||
OPTIONS OUTSTANDING AND EXERCISABLE | |||||||||||||||||||
Weighted- | |||||||||||||||||||
average | Weighted- | Aggregate | |||||||||||||||||
Remaining | average | Intrinsic | |||||||||||||||||
Exercise | Options | Contractual | Exercise | Value | |||||||||||||||
price | (in thousands) | Life (years) | Price | (in thousands) | |||||||||||||||
| $ | 1.55 | 11 | 2.14 | $ | 1.55 | ||||||||||||||
| $ | 2.20 | 21 | 0.31 | $ | 2.20 | ||||||||||||||
| $ | 5.31 | 93 | 1.10 | $ | 5.31 | ||||||||||||||
| 125 | 1.07 | $ | 4.47 | $ | 17 | ||||||||||||||
The aggregate intrinsic value in the preceding table represents the difference between the Company'sCompany’s closing stock price and the exercise price of each in-the-money option on the last trading day of the period presented, which was SeptemberJune 29, 2017.
6. Income Taxes
The Company follows the guidance in ASC 740, Accounting for Uncertainty in Income Taxes (" (“ASC 740"740”) which clarifies the accounting for uncertainty in income taxes recognized in an enterprise'senterprise’s financial statements. This interpretation defines the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.
Deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at the end of each period, based on enacted laws and statutory rates applicable to the periods in which the differences are expected to affect taxable income. Amounts payableAny liability for actual taxes to taxing authorities areis recorded as income tax liability. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
A valuation allowance is established against such assets where management is unable to conclude more likely than not that such asset will be realized. As of SeptemberJune 30, 20172018 and March 31, 2017,2018, the Company recognized a valuation allowance equal to 100% of the net deferred tax asset balance and the Company has no unrecognized tax benefits related to uncertain tax positions.
7. Related Party Transactions
See Note 6 "Related“Related Party Transactions"Transactions” of Form 10-K for the year ended March 31, 2017,2018, as filed with the SEC on June 26, 201728, 2018 for a detailed discussion of related party transactions.
8. Stockholders' Equity
A summary of the Company'sCompany’s common stock warrant activity for the period from April 1, 20172018 through SeptemberJune 30, 20172018 is presented below:
Warrants Outstanding (in thousands) | Weighted Average Exercise Price | Aggregate Intrinsic Value (in thousands) | ||||||||||
| Outstanding, April 1, 2017 | 396 | $ | 6.97 | $ | 2 | |||||||
| Granted | - | - | ||||||||||
| Exercised | - | - | ||||||||||
| Expired | (394 | ) | 7.00 | |||||||||
| Outstanding, September 30, 2017 | 2 | $ | 2.10 | $ | 1 | |||||||
Warrants Outstanding (in thousands) | Weighted Average Exercise Price | Aggregate Intrinsic Value | ||||||||||
Outstanding, April 1, 2018 | 2 | $ | 2.10 | $ | 1 | |||||||
Granted | - | - | ||||||||||
Exercised | - | - | ||||||||||
Expired | - | - | ||||||||||
Outstanding, June 30, 2018 | 2 | $ | 2.10 | $ | 1 | |||||||
As of SeptemberJune 30, 2017,2018, the Company had the following outstanding warrants to purchase shares of its common stock:
| Weighted Average | ||||||||||
Warrants Outstanding (in thousands) | Exercise Price | Remaining Life (Years) | ||||||||
| 2 | $ | 2.10 | 1.02 | |||||||
| 2 | $ | 2.10 | 1.02 | |||||||
Weighted Average | ||||||||||
Warrants Outstanding (in thousands) | Exercise Price | Remaining Life (years) | ||||||||
| 2 | $ | 2.10 | 0.27 | |||||||
| 2 | $ | 2.10 | 0.27 | |||||||
9. Segment Information
The Company has determined that its reportable segments are those that are based on its method of internal reporting and the perspective of the chief operating decision maker. The company has two reportable segments, Retail Sales and Direct-to-Consumers. The Company evaluates performance based on the primary financial measure of contribution margin ("(“segment profit"profit”). Segment profit reflects the income or loss from operations before corporate expenses, non-operating income, net interest expense, and income taxes. The Company does not have any individually identified assets regarding specific segments as all processes to manufacture products are not different based on segment.
| Three Months Ended September 30, 2017 | ||||||||||||||||
| (in thousands) | Direct-to-consumer | Retail | Corporate/Other | Consolidated | ||||||||||||
| Net sales | $ | 911 | $ | 4,830 | $ | - | $ | 5,741 | ||||||||
| Cost of revenue | 602 | 3,477 | - | 4,079 | ||||||||||||
| Gross profit | 309 | 1,353 | - | 1,662 | ||||||||||||
| Gross profit percentage | 33.9 | % | 28.0 | % | - | 28.9 | % | |||||||||
| Sales and marketing (1) | 3 | 181 | 89 | 273 | ||||||||||||
| Segment profit | 306 | 1,172 | (89 | ) | 1,389 | |||||||||||
| Segment profit percentage | 33.6 | % | 24.3 | % | - | 24.2 | % | |||||||||
Three Months Ended June 30, 2018 | ||||||||||||||||
(in thousands) | Direct-to-consumer | Retail | Corporate/Other | Consolidated | ||||||||||||
Net sales | $ | 1,454 | $ | 2,289 | $ | - | $ | 3,743 | ||||||||
Cost of revenue | 889 | 1,421 | - | 2,310 | ||||||||||||
Gross profit | 565 | 868 | - | 1,433 | ||||||||||||
Gross profit percentage | 38.9 | % | 37.9 | % | - | 38.3 | % | |||||||||
Sales and marketing (1) | 75 | 432 | 111 | 618 | ||||||||||||
Segment profit | 490 | 436 | (111 | ) | 815 | |||||||||||
Segment profit percentage | 33.7 | % | 19.0 | % | - | 21.8 | % | |||||||||
(1) Sales and marketing includes advertising, trade shows, media production and promotional products and other as discussed in the sales and marketing section of the MD&A.
| Three Months Ended September 30, 2016 | ||||||||||||||||
| (in thousands) | Direct-to-consumer | Retail | Corporate/Other | Consolidated | ||||||||||||
| Net sales | $ | 825 | $ | 1,417 | $ | - | $ | 2,242 | ||||||||
| Cost of revenue | 545 | 1,006 | - | 1,551 | ||||||||||||
| Gross profit | 280 | 411 | - | 691 | ||||||||||||
| Gross profit percentage | 33.9 | % | 29.0 | % | - | 30.8 | % | |||||||||
| Sales and marketing (1) | 3 | 156 | 66 | 225 | ||||||||||||
| Segment profit | 277 | 255 | (66 | ) | 466 | |||||||||||
| Segment profit percentage | 33.6 | % | 18.0 | % | - | 20.8 | % | |||||||||
Three Months Ended June 30, 2017 | ||||||||||||||||
(in thousands) | Direct-to-consumer | Retail | Corporate/Other | Consolidated | ||||||||||||
Net sales | $ | 1,425 | $ | 1,037 | $ | - | $ | 2,462 | ||||||||
Cost of revenue | 936 | 704 | - | 1,640 | ||||||||||||
Gross profit | 489 | 333 | - | 822 | ||||||||||||
Gross profit percentage | 34.3 | % | 32.1 | % | - | 33.4 | % | |||||||||
Sales and marketing (1) | 20 | 251 | 69 | 340 | ||||||||||||
Segment profit | 469 | 82 | (69 | ) | 482 | |||||||||||
Segment profit percentage | 32.9 | % | 7.9 | % | - | 19.6 | % | |||||||||
(1) Sales and marketing includes advertising, trade shows, media production and promotional products and other as discussed in the sales and marketing section of the MD&A.
| Six Months Ended September 30, 2017 | ||||||||||||||||
| (in thousands) | Direct-to-consumer | Retail | Corporate/Other | Consolidated | ||||||||||||
| Net sales | $ | 2,336 | $ | 5,868 | $ | - | $ | 8,204 | ||||||||
| Cost of revenue | 1,538 | 4,182 | - | 5,720 | ||||||||||||
| Gross profit | 798 | 1,686 | - | 2,484 | ||||||||||||
| Gross profit percentage | 34.2 | % | 28.7 | % | - | 30.3 | % | |||||||||
| Sales and marketing (1) | 23 | 430 | 158 | 611 | ||||||||||||
| Segment profit | 775 | 1,256 | (158 | ) | 1,873 | |||||||||||
| Segment profit percentage | 33.2 | % | 21.4 | % | - | 22.8 | % | |||||||||
10. Subsequent Events
On July 6, 2018, AeroGrow entered into a Term Loan Agreement (“Term Loan”) in the sales and marketing sectionprincipal amount of the MD&A.
| Six Months Ended September 30, 2016 | ||||||||||||||||
| (in thousands) | Direct-to-consumer | Retail | Corporate/Other | Consolidated | ||||||||||||
| Net sales | $ | 1,967 | $ | 2,431 | $ | - | $ | 4,398 | ||||||||
| Cost of revenue | 1,243 | 1,620 | - | 2,863 | ||||||||||||
| Gross profit | 724 | 811 | - | 1,535 | ||||||||||||
| Gross profit percentage | 36.8 | % | 33.4 | % | - | 34.9 | % | |||||||||
| Sales and marketing (1) | 22 | 426 | 121 | 569 | ||||||||||||
| Segment profit | 702 | 385 | (121 | ) | 966 | |||||||||||
| Segment profit percentage | 35.7 | % | 15.8 | % | - | 22.0 | % | |||||||||
The Term Loan Agreement has been filed as an exhibit to a Current Report on Form 8-K filed with the SEC on July 11, 2018.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
The discussion contained herein is for the three and six months ended SeptemberJune 30, 20172018 and SeptemberJune 30, 2016.2017. The following discussion should be read in conjunction with the financial statements of AeroGrow International, Inc. (the "Company," "AeroGrow," "we," "our,"“Company,” “AeroGrow,” “we,” “our,” or "us"“us,”) and the notes to the financial statements included elsewherein Item 1 above in this Quarterly Report on Form 10-Q for the period ended SeptemberJune 30, 20172018 (this "Quarterly Report"“Quarterly Report”). The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”), including statements that include words such as "anticipates," "expects," "intends," "plans," "believes," "may," "will,"“anticipates,” “expects,” “intends,” “plans,” “believes,” “may,” “will,” or similar expressions that are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Such statements include, but are not limited to, statements regarding our intent, belief, or current expectations regarding our strategies, plans, and objectives, our product release schedules, our ability to design, develop, manufacture, and market products, the ability of our products to achieve or maintain commercial acceptance, our ability to obtain financing and/or generate cash flow sufficient to fund our future operations, and our ability to continue as a going concern. Such statements are not guarantees of future performance and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. Factors that could cause or contribute to the differences are discussed in this Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations and in Item 1A. "Risk Factors"“Risk Factors” of our Annual Report on Form 10-K for the year ended March 31, 2017.2018. Except as required by applicable law or regulation, we undertake no obligation to revise or update any forward-looking statements contained in this Quarterly Report. The information contained in this Quarterly Report is not a complete description of our business or the risks associated with an investment in our common stock. Each reader should carefully review and consider the various disclosures we made in this Quarterly Report and in our other filings with the U.S. Securities and Exchange Commission ("SEC"(“SEC”).
Overview
AeroGrow International, Inc. was formed as a Nevada corporation onin March 25, 2002. The Company'sCompany’s principal business is developing, marketing, and distributing advanced indoor aeroponic garden systems designed and priced to appeal to the consumer gardening, cooking and small indoor appliance markets worldwide. The Company'sCompany’s principal activities from its formation through March 2006 consisted of product research and development, market research, business planning, and raising the capital necessary to fund these activities. In December 2005, the Company commenced initial production of its AeroGarden system and, in March 2006, began shipping these systems to retail and catalogue customers. The Company manufactures, distributes and markets nineten different models of its AeroGarden systems in multiple colors, as well as over 40 varieties of seed pod kits and a full line of accessory products through multiple channels including online retail distribution, in-store retail distribution, catalogue and direct-to-consumer sales primarily in the United States and Canada, as well as selected countries in Europe.
In April 2013, we entered into a Securities Purchase Agreement and strategic alliance with a wholly owned subsidiary of The Scotts Miracle-Gro Company (collectively with its subsidiary, "Scotts Miracle-Gro"“SMG” or “Scotts Miracle-Gro”). Pursuant to the Securities Purchase Agreement, we issued (i) 2.6 million shares of Series B Convertible Preferred Stock, par value $0.001 per share (the "Series“Series B Preferred Stock); and (ii) a warrant to purchase sharesup to 80% of ourthe Company’s common stock for an aggregate purchase price of $4.0 million. In addition, as part of the strategic alliance, we entered into several other agreements with Scotts Miracle-Gro, including: (i) an Intellectual Property Sale Agreement; (ii) a Technology Licensing Agreement; (iii) a Brand License Agreement; and (iv) a Supply Chain Management Agreement.
Pursuant to the Intellectual Property Agreement, we agreed to sell all intellectual property associated with our hydroponic products (the "Hydroponic IP"“Hydroponic IP”), other than the AeroGrow and AeroGarden trademarks, free and clear of all encumbrances, to Scotts Miracle-Gro for $500,000. Scotts Miracle-Gro has the right to use the AeroGrow and AeroGarden trademarks in connection with the sale of products incorporating the Hydroponic IP. In addition to the total working capital infusion of approximately $4.5 million from the Securities Purchase Agreement and Intellectual Property Sale Agreement, as amended, the strategic alliance allowsaffords us to use the globally recognized and highly trusted Miracle-Gro brand name. We believe that the strategic alliance also gives Scotts Miracle-Gro an entry into the burgeoning indoor gardening market, while providing AeroGrow a broad base of support in marketing, distribution, supply chain logistics, R&D, and sourcing. We usedintend to use our strategic alliance with Scotts Miracle-Gro to re-establish our presence in the retail and international sales channels.
Results of Operations
Three Months Ended SeptemberJune 30, 20172018 and SeptemberJune 30, 2016
Summary Overview
For the three months ended SeptemberJune 30, 2017,2018, we generated $3.7 million of total revenue, was $5.7 million, an increase of 156.1%52.0%, or $3.5$1.3 million, relative to the same period in the prior year. The increase wasRetail sales increased by 131.1% to $2.3 million primarily due to nearly $2.0 million of in-store retail channelthe continued sales with our newly acquired retail accounts, including Bed Bath and Beyond, Macy's and Kohl's. Additionally, we also experienced increased sales at Amazon.ca and other online retailers. This is consistent with our current strategy to build through online retailers while refocusing on in-store tests marketing primarily ininto the housewares channel that may lead to company-wide roll-outs. We anticipate that quarterly sales results during the first six months of our fiscal year (April-September), may continue to be inconsistent as the Company tests various retail channel strategies in an effort to optimize sales and profitability throughout the year, as well as the impact of load-in timing before the holiday season. Additionally, sales in our direct-to-consumer channel also increased 10.4%, or $86,000, primarily due to growing enthusiasm about new gardens that were first introduced in the prior year. Direct-to-consumer sales increased 2.1%, to $1.5 million, reflecting increased visibility and continued momentum from our general advertising and marketing campaign, and an increase in our user-base. We believe that we benefit from more visibility from our increased presence on Amazon platforms and other select online retail distribution channels.
For the three months ended SeptemberJune 30, 2017,2018, total dollar sales of AeroGarden units increased by 302.8%69.9% from the prior year period due to earlier load-in of large AeroGarden orders to retailers in the current period, in advance of the peak holiday season. Sales in the prior year period did not have comparable retail load-in sales for items that will be carried in-store during the holiday season. Seedand seed pod kit and accessory sales increased by 67.3%40.2% over prior year period as our established base of AeroGardeners continues to grow.period. AeroGarden sales net of allowances represented 78.1%75.0% of total revenue, as compared to 66.5%67.1% in the prior year period. This percentage increase, on a product line basis, was attributable to sales to expanded and newly acquiredgrowth in the retail accounts including many retail sales due to earlier load-in product sales prior to the holiday season. Seedchannel, which typically results in new customers purchasing AeroGardens before seed pod kit and accessory sales decreasedaccessories. Sales of seed pod kits increased from 46,000 to 75,000 units, primarily as a percentresult of the total to 21.8% from 33.5% due toincreased size of our active customer database as new customers entered the increased sales of AeroGarden this quarter. However, as noted above the total dollar sales increased $505,000.
The Company continues to spend advertising dollars in order to strategically build market awareness and enhance initiatives implemented in the prior year. For Fiscal 2018,2019, we intend to expand consumer awareness of the AeroGrow brand and product line. DuringAs a result, during the three months ended SeptemberJune 30, 2017,2018, we spent $174,000 inincurred $476,000 of advertising expenditures,expenses to support our direct-to-consumer and retail channels, a $24,000$209,000 or 15.8%78.6% year-over-year increase compared to the same period ended September 30, 2016. This was primarily due to an increase in our retail marketing campaigns and expanded email programs.Fiscal 2018. The advertising expenditures were divided as follows:
● | Retail advertising increased |
● | Direct-to-consumer advertising increased $17,000 to $89,000 during the three months ended June 30, 2018. The increase is negligible compared to the prior year and reflects increases in specific pay-per-click advertising geared toward the direct-to-consumer customer base and direct advertising campaigns. Efficiency, as measured by dollars of direct-to-consumer sales per dollar of related advertising expense, decreased to $16.37 for the three months ended June 30, 2018, as compared to $20.13 for the same period in Fiscal 2018. |
Our gross profit for the three months ended SeptemberJune 30, 20172018 was 28.9%38.3%, downup from 30.8%33.4% in the prior year period, primarily due to increasedchanges in customer and product mix and less aggressive pricing and the change in the Brand Agreement. In the prior year, we also incurred several one-time fees in establishing new customers and additional shipping costs for international and direct-to-consumer sales into the retail channel, which requires much higher return allowances, particularly for load-in sales, and traditionally carries lower margins.
In aggregate, our total operating expenses increased 35.9%34.6%, or $473,000$536,000, year-over-year, principally as a resultbecause we spent more in anticipation of aligning our growth Company initiatives in support of anticipatedcurrent and future revenue growth. Gross spending fluctuatedincreased in the following areas:
● | a $209,000 increase in sales and marketing costs to promote all sales channels; |
● | a $120,000 increase in personnel expenses due to |
● | a $72,000 increase in contracting fees such as product testing and certification, quality control and consulting services; |
● | a $55,000 increase in general |
● | a $37,000 increase in travel |
As a result of efforts to prepare fordrive growth and timing of load-in orders,increase sales, our operating loss improved to $129,000was $654,000 for the three months ended SeptemberJune 30, 2017,2018, as compared to an operating loss of $627,000$728,000 in the prior year period.
Net other income and expense for the three months ended SeptemberJune 30, 20172018 totaled to a net other income of $8,000,$20,000, as compared to net other expenseincome of $502,000$39,000 in the prior year period. The current year other income is attributable to interest income, other income from consulting related revenue, and foreign exchange losses. In the prior year period, net other expense iswas primarily attributable to non-cash expenses relating to the fair value revaluation of the warrant held by Scotts Miracle-Gro.
Net loss for the three months ended SeptemberJune 30, 2017 decreased to $121,000,2018 was $634,000, as compared to the $689,000 loss a $1.1 millionyear earlier. The net loss inreflected the prior year. The decline in net loss is due to higher overallincreased sales which are a result newly acquired retail accounts and earlier pre-holiday load-in sales to retailers,revenue, decreased operating expenses as a percentage of revenue and no fair value changes associated with the Scotts Miracle-Gro warrant liability as the warrant was fully exercised offset by decreasesincreases in margins.
The following table sets forth, as a percentage of sales, our financial results for the three months ended SeptemberJune 30, 20172018 and the three months ended SeptemberJune 30, 2016:
| Three Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Net revenue | ||||||||
| Direct-to-consumer | 15.8 | % | 36.8 | % | ||||
| Retail | 82.7 | % | 61.6 | % | ||||
| International | 1.5 | % | 1.6 | % | ||||
| Total net revenue | 100.0 | % | 100.0 | % | ||||
| Cost of revenue | 71.1 | % | 69.2 | % | ||||
| Gross profit | 28.9 | % | 30.8 | % | ||||
| Operating expenses | ||||||||
| Research and development | 2.5 | % | 5.1 | % | ||||
| Sales and marketing | 17.6 | % | 32.5 | % | ||||
| General and administrative | 11.1 | % | 21.2 | % | ||||
| Total operating expenses | 31.2 | % | 58.8 | % | ||||
| Loss from operations | (2.3 | )% | (28.0 | )% | ||||
Three Months Ended June 30, | ||||||||
2018 | 2017 | |||||||
Net revenue | ||||||||
Direct-to-consumer | 38.9 | % | 57.9 | % | ||||
Retail | 60.1 | % | 39.6 | % | ||||
International | 1.0 | % | 2.5 | % | ||||
Total net revenue | 100.0 | % | 100.0 | % | ||||
Cost of revenue | 61.7 | % | 66.6 | % | ||||
Gross profit | 38.3 | % | 33.4 | % | ||||
Operating expenses | ||||||||
Research and development | 4.3 | % | 3.7 | % | ||||
Sales and marketing | 33.2 | % | 33.8 | % | ||||
General and administrative | 18.3 | % | 25.5 | % | ||||
Total operating expenses | 55.8 | % | 63.0 | % | ||||
Loss from operations | (17.5 | )% | (29.6 | )% | ||||
Revenue
For the three months ended SeptemberJune 30, 2017,2018, revenue totaled $5.7$3.7 million, a year-over-year increase of 156.1%52.0% or $3.5$1.3 million, from the three months ended SeptemberJune 30, 2016.
Three Months Ended September 30, (in thousands) | ||||||||
| Net Revenue | 2017 | 2016 | ||||||
| Direct-to-consumer | $ | 911 | $ | 825 | ||||
| Retail | 4,746 | 1,381 | ||||||
| International | 84 | 36 | ||||||
| Total | $ | 5,741 | $ | 2,242 | ||||
Three Months Ended June 30, (in thousands) | ||||||||
2018 | 2017 | |||||||
Net revenue | ||||||||
Direct-to-consumer | $ | 1,454 | $ | 1,425 | ||||
Retail | 2,253 | 974 | ||||||
International | 36 | 63 | ||||||
Total | $ | 3,743 | $ | 2,462 | ||||
Direct-to-consumer sales for the three months ended SeptemberJune 30, 20172018 totaled $911,000, up $86,000$1.5 million, an increase of $29,000, or 10.4%2.1%, from the prior year period. TheThis increase in sales to direct-to-consumer channels was caused by increased visibilitydriving direct-to-consumer awareness and the resulting sales during our non-peak season, follow-on direct sales to customers that have previously purchased AeroGardens, and continued momentum from our general advertising and marketing campaign, including our increased presence on select online retail distribution channels.
Sales to retailer customers for the three months ended SeptemberJune 30, 20172018 totaled $4.7$2.3 million, up $3.4$1.3 million, from the prior-year period,or 131.2%, principally reflecting load-in sales to newly acquired brick-and-mortar stores in advance of the peak holiday season, as well asorganic growth in theour existing Amazon.ca account.retail accounts, namely Amazon.com. International sales totaled $84,000decrease to $35,000 in comparison to sales testing in Europe in the prior year period primarily due to timing of $36,000sales while testing the European market as we continue to understand the trends that impact the international market and expand our international presence.
Our products consist of AeroGardens, and seed pod kits and accessories. A summary of the sales of these two product categories for the three months ended SeptemberJune 30, 2018 and June 30, 2017 and September 30, 2016 is as follows:
Three Months Ended September 30, (in thousands) | ||||||||
| 2017 | 2016 | |||||||
| Product Revenue | ||||||||
| AeroGardens | $ | 6,626 | $ | 1,645 | ||||
| Seed pod kits and accessories | 1,255 | 750 | ||||||
| Other | (2,140 | ) | (153 | ) | ||||
| Total | $ | 5,741 | $ | 2,242 | ||||
| % of Total Revenue | ||||||||
| AeroGardens | 115.4 | % | 73.4 | % | ||||
| Seed pod kits and accessories | 21.8 | % | 33.5 | % | ||||
| Other | (37.2 | )% | (6.9 | )% | ||||
| Total | 100.0 | % | 100.0 | % | ||||
Three Months Ended June 30, (in thousands) | ||||||||
2018 | 2017 | |||||||
Product revenue | ||||||||
AeroGardens | $ | 2,806 | $ | 1,652 | ||||
Seed pod kits and accessories | 1,162 | 829 | ||||||
Discounts, allowances and other | (225 | ) | (19 | ) | ||||
Total | $ | 3,743 | $ | 2,462 | ||||
% of total revenue | ||||||||
AeroGardens | 75.0 | % | 67.1 | % | ||||
Seed pod kits and accessories | 31.0 | % | 33.7 | % | ||||
Discounts, allowances and other | (6.0 | )% | (0.8 | )% | ||||
Total | 100.0 | % | 100.0 | % | ||||
AeroGarden sales increased $5.0$1.2 million, or 302.8%69.9%, from the prior year period, reflecting in: (i) increased retail channel sales as we sold into brick-and-mortar storescontinued our growth with existing customers to gain customer acceptance of our product in advance of the peak holiday season and expanded upon tests that were successful in the prior year; andhistorically slower sales period which was primarily related to sales to Amazon.com, (ii) increased sales of AeroGardens, primarily in our Direct-to-ConsumerRetail channel asand (iii) continued our focus on advertising and general awareness campaigns fromtoward the prior year continuedgeneral population, which continue to inform buyers about our products. The increase in seed pod kit and accessory sales, from $750,000 to $1.3 million,which increased by $333,000, or 40.2%, principally reflects the overall increaseprior period focus on acquiring new AeroGarden customers, who have historically purchased seed pod kits and accessories after purchasing and using new AeroGardens, partially offset by a decrease in our established base of AeroGardens.light bulb sales as the demand for AeroGardens with LED lighting increases. For the three months ended SeptemberJune 30, 2017,2018, sales of seed pod kits and accessories represented 21.8%31.0% of total revenue, as compared to 33.5%33.7% in the prior year period, which is a result of the increase in AeroGarden retail sales to expanded accounts in the current year.period. Other revenue, which is comprised primarily of grow club revenue, shipping revenue, accruals and deductions, decreasedincreased as a percent of the total revenue to (37.2)(6.0)% from (6.9)(0.8)% in the prior year period, primarily due to lower shippingincreases in revenue as a percentage of sales and significantly higher deductions for sales allowances and future discounts for in-store retail accounts.
Cost of Revenue
Cost of revenue for the three months ended SeptemberJune 30, 20172018 totaled $4.1$2.3 million, an increase of $2.5 million$670,000, or 40.8%, from the three months ended SeptemberJune 30, 2016, due to increased revenue.2017. Cost of revenue includes product costs for purchased and manufactured products, freight costs for inbound freight from manufacturers, costs related to warehousing and the shipping of products to customers, credit card processing fees for direct sales, and duties and customs applicable to imported products. As a percent of total revenue, cost of revenue represented 71.1%61.7% of revenue as compared to 69.2%66.6% for the quarter ended SeptemberJune 30, 2016.2017. The increasedecrease in costs as a percent of revenue reflected ourthe change in customer mix to a higher percentage of retail sales at brick-and-mortar locations, which traditionally generate lower margins.
Gross Profit
Our gross profit varies based upon the factors affecting net revenue and cost of revenue (as discussed above), as well as the mix of our revenue that comes from the retail, direct-to-consumer, and international channels. In a direct-to-consumer sale, we recognize as revenue the full consumer purchase price for the product. In retail and international sales, by comparison, we recognize as revenue the wholesale price for the product which we charge to the retailer or international distributor. Media costs associated with direct sales are included in sales and marketing expenses. As a result, retail and international sales generally have lower gross margins than direct-to-consumer sales. The gross profit for the quarter ended September 30, 2017 was 28.9% as compared to 30.8% for the quarter ended September 30, 2016. The decrease in our gross profit is due primarily to changes in customer and product mix, particularly the introduction of AeroGarden products into new brick-and-mortar stores which carry higher return allowances. Additionally, we experienced higher costs during the current quarter for, one-time fees related to establishing new retail customers and additional shipping costs for international and direct-to-consumer channels.
Three Months Ended September 30, (in thousands) | ||||||||
| 2017 | 2016 | |||||||
| Advertising | $ | 174 | $ | 150 | ||||
| Personnel | 548 | 470 | ||||||
| Sales commissions | 47 | (11 | ) | |||||
| Trade shows | - | 1 | ||||||
| Market research | 48 | - | ||||||
| Travel | 41 | 21 | ||||||
| Media production and promotional products | 8 | 6 | ||||||
| Quality control and processing fees | 55 | 24 | ||||||
| Other | 91 | 68 | ||||||
| $ | 1,012 | $ | 729 | |||||
| Three Months Ended September 30, 2017 | ||||||||||||||||
| (in thousands) | Direct-to-consumer | Retail | Corporate/Other | Consolidated | ||||||||||||
| Net sales | $ | 911 | $ | 4,830 | $ | - | $ | 5,741 | ||||||||
| Cost of revenue | 602 | 3,477 | - | 4,079 | ||||||||||||
| Gross profit | 309 | 1,353 | - | 1,662 | ||||||||||||
| Gross profit percentage | 33.9 | % | 28.0 | % | - | 28.9 | % | |||||||||
| Sales and marketing (1) | 3 | 181 | 89 | 273 | ||||||||||||
| Segment profit | 306 | 1,172 | (89 | ) | 1,389 | |||||||||||
| Segment profit percentage | 33.6 | % | 24.3 | % | - | 24.2 | % | |||||||||
| Three Months Ended September 30, 2016 | ||||||||||||||||
| (in thousands) | Direct-to-consumer | Retail | Corporate/Other | Consolidated | ||||||||||||
| Net sales | $ | 825 | $ | 1,417 | $ | - | $ | 2,242 | ||||||||
| Cost of revenue | 545 | 1,006 | - | 1,551 | ||||||||||||
| Gross profit | 280 | 411 | - | 691 | ||||||||||||
| Gross profit percentage | 33.9 | % | 29.0 | % | - | 30.8 | % | |||||||||
| Sales and marketing (1) | 3 | 156 | 66 | 225 | ||||||||||||
| Segment profit | 277 | 255 | (66 | ) | 466 | |||||||||||
| Segment profit percentage | 33.6 | % | 18.0 | % | - | 20.8 | % | |||||||||
Six Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Net revenue | ||||||||
| Direct-to-consumer | 28.5 | % | 44.7 | % | ||||
| Retail | 69.7 | % | 53.0 | % | ||||
| International | 1.8 | % | 2.3 | % | ||||
| Total net revenue | 100.0 | % | 100.0 | % | ||||
| Cost of revenue | 69.7 | % | 65.1 | % | ||||
| Gross profit | 30.3 | % | 34.9 | % | ||||
| Operating expenses | ||||||||
| Research and development | 2.8 | % | 4.8 | % | ||||
| Sales and marketing | 22.5 | % | 35.2 | % | ||||
| General and administrative | 15.4 | % | 24.0 | % | ||||
| Total operating expenses | 40.7 | % | 64.0 | % | ||||
| Loss from operations | (10.4 | )% | (29.1 | )% | ||||
Six Months Ended September 30, (in thousands) | ||||||||
| Net Revenue | 2017 | 2016 | ||||||
| Direct-to-consumer | $ | 2,336 | $ | 1,967 | ||||
| Retail | 5,722 | 2,329 | ||||||
| International | 146 | 102 | ||||||
| Total | $ | 8,204 | $ | 4,398 | ||||
| Six Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Product Revenue | (in thousands) | (in thousands) | ||||||
| AeroGardens | $ | 8,278 | $ | 2,992 | ||||
| Seed pod kits and accessories | 2,084 | 1,531 | ||||||
| Other | (2,158 | ) | (125 | ) | ||||
| Total | $ | 8,204 | $ | 4,398 | ||||
| % of Total Revenue | ||||||||
| AeroGardens | 100.9 | % | 68.0 | % | ||||
| Seed pod kits and accessories | 25.4 | % | 34.8 | % | ||||
| Other | (26.3 | )% | (2.8 | )% | ||||
| Total | 100.0 | % | 100.0 | % | ||||
Research and Development
Research and development costs for the six monthsquarter ended SeptemberJune 30, 2017,2018 totaled $233,000,$160,000, an increase of 8.4%, or $18,000,$68,000 from the six monthsquarter ended SeptemberJune 30, 2016. The increase reflects increases in Research2017. Our research and Development employee headcountdevelopment spending increased for the quarter ended June 30, 2018, particularly related to salaries and prototypewages, product certifications design and consulting service expenses for market research and new product development and shipping expenses,testing, partially offset by decreases in new product certification and testing and $60,000increased reimbursements of consulting fee reimbursements.
Sales and Marketing
Sales and marketing costs for the sixthree months ended SeptemberJune 30, 2017,2018 totaled $1.8$1.2 million, as compared to $1.5 million forrelatively flat with the six months ended September 30, 2016, an increase of 18.2%, or $283,000.prior year period. Sales and marketing costs include all costs associated with the marketing, sales, operations, customer support, and sales order processing for our products, and consisted of the following:
Six Months Ended September 30, (in thousands) | ||||||||
| 2017 | 2016 | |||||||
| Advertising | $ | 441 | $ | 432 | ||||
| Personnel | 977 | 866 | ||||||
| Sales commissions | 30 | (7 | ) | |||||
| Trade shows | 1 | 1 | ||||||
| Market research | 55 | 1 | ||||||
| Travel | 86 | 72 | ||||||
| Media production and promotional products | 11 | 13 | ||||||
| Quality control and processing fees | 85 | 47 | ||||||
| Other | 158 | 124 | ||||||
| $ | 1,844 | $ | 1,549 | |||||
Three Months Ended June 30, (in thousands) | ||||||||
2018 | 2017 | |||||||
Advertising | $ | 476 | $ | 267 | ||||
Personnel | 504 | 429 | ||||||
Sales commissions | 6 | (17 | ) | |||||
Travel | 70 | 45 | ||||||
Media production and promotional products | 5 | 3 | ||||||
Quality control and processing fees | 46 | 29 | ||||||
Other | 135 | 76 | ||||||
| $ | 1,242 | $ | 832 | |||||
Advertising expense totaled $441,000is composed primarily of catalogue development, production, printing, and postage costs, web media expenses for search and affiliate web marketing programs, and the cost of developing and employing other forms of advertising. Each is a key component of our integrated marketing strategy because it helps build consumer awareness and demand for our products in the retailer and direct-to-consumer sales channels. Total advertising expense was $476,000 for the six monthsquarter ended SeptemberJune 30, 2017,2018, a year-over-year increasechange of 2.0%78.6%, or $9,000,$209,000, primarily due to conservativebecause we increased spending on general brand awareness and marketing, promotional programs within our retail channel, while maintaining catalogues, email campaigns, and web-based advertising programs for our houseware customers.
Sales and marketing personnel costs include salaries, payroll taxes, employee benefits and other payroll costs for our sales, operations, customer service, graphics and marketing departments. For the sixthree months ended SeptemberJune 30, 2017,2018, personnel costs for sales and marketing were $977,000,$504,000, up $75,000 or 17.4% from $866,000 for the sixthree months ended SeptemberJune 30, 2016, an increase of 12.8%.2017. The increase reflected increased headcount necessary to drive what we anticipate will be increased sales to retailers and through our direct-to-consumer channel beginningthe hiring of part-time employees as full-time employees, the creation of a new marketing role in the fall of 2017. Personnel expenses include alldepartment and the related payroll including departmental incentive programs, including salaries, bonuses andincrease in employee benefits.
Other marketing expenses increased year-over-year because of increases in a variety of spending categories, including additional travel, social media,as we continue to grow our business and increase market research and other programs, retailer marketing programs, third party sales tax software and new products that were initiated during the current year quarter.
General and Administrative
General and administrative costs for the sixthree months ended SeptemberJune 30, 2017,2018 totaled $1.3 million,$685,000, as compared to $1.1 million$627,000 for the sixthree months ended SeptemberJune 30, 2016,2017, an increase of 21.7%9.2%, or $225,000.$58,000. The increase iswas attributable to increase in: (i) payroll-related expenses,a variety of areas including departmental incentive programs,increases in salaries bonuses and employee benefits; (ii)wages, travel, web hosting, electronic data processing, network consulting fees for software troubleshooting; and (iii) estimates for the allowance for bad debt.
Operating Loss
Our operating loss for the sixthree months ended SeptemberJune 30, 2017,2018 was $858,000,$654,000, a decrease of $422,000$75,000 from the $728,000 operating loss of $1.3 million for the sixthree months ended SeptemberJune 30, 2016.2017. The decreased operating loss was attributable to increasedhigher sales in both our retail and direct-to-consumer channels and increased margins, partially offset by increased marketing and brand awareness advertising expenses.
Net Income and Loss
For the retail distribution and direct-to consumer channels.
Segment Results
We report our segment information in the same way that management assesses the business and makes decision regarding the allocations of resources in accordance with the Segment Reporting Topic of the Financial Accounting Standards Board Accounting Standards Codification (ASC). We have two reportable segments. Retail and Direct-to-Consumer. Factors considered in determining our Reportable Segmentsreportable segments include the nature of the business activities, the reports provided to the Company'sCompany’s chief operating decision maker (CODM) for operating and administrative activities, available information and information that is presented to our Board of Directors.
The Company'sCompany’s CODM has been identified as the Chief Executive Officer because he has final authority over the performance assessment and resource allocation decisions. The CODM regularly receives discrete financial information about each Reportable Segment.reportable segment. The CODM uses all such information for performance assessment and resource allocation decisions. The CODM evaluates the performance of and allocates resources based upon the contribution margins of each segment.
As a result, we divide our business into two reportable segments: Direct-to-Consumer and Retail. This division of reportable segments is consistent with how the segments report to and are managed by the chief operating decision makerCODM of the Company. The Company evaluates performance based on the primary financial measure of contribution margin ("(“segment profit"profit”). Segment profit reflects the income or loss from operations before corporate expenses, non-operating income, net interest expense, and income taxes.
| Six Months Ended September 30, 2017 | ||||||||||||||||
| (in thousands) | Direct-to-consumer | Retail | Corporate/Other | Consolidated | ||||||||||||
| Net sales | $ | 2,336 | $ | 5,868 | $ | - | $ | 8,204 | ||||||||
| Cost of revenue | 1,538 | 4,182 | - | 5,720 | ||||||||||||
| Gross profit | 798 | 1,686 | - | 2,484 | ||||||||||||
| Gross profit percentage | 34.2 | % | 28.7 | % | - | 30.3 | % | |||||||||
| Sales and marketing (1) | 23 | 430 | 158 | 611 | ||||||||||||
| Segment profit | 775 | 1,256 | (158 | ) | 1,873 | |||||||||||
| Segment profit percentage | 33.2 | % | 21.4 | % | - | 22.8 | % | |||||||||
Three Months Ended June 30, 2018 | ||||||||||||||||
(in thousands) | Direct-to-consumer | Retail | Corporate/Other | Consolidated | ||||||||||||
Net sales | $ | 1,454 | $ | 2,289 | $ | - | $ | 3,743 | ||||||||
Cost of revenue | 889 | 1,421 | - | 2,310 | ||||||||||||
Gross profit | 565 | 868 | - | 1,433 | ||||||||||||
Gross profit percentage | 38.9 | % | 37.9 | % | - | 38.3 | % | |||||||||
Sales and marketing (1) | 75 | 432 | 111 | 618 | ||||||||||||
Segment profit | 490 | 436 | (111 | ) | 815 | |||||||||||
Segment profit percentage | 33.7 | % | 19.0 | % | - | 21.8 | % | |||||||||
(1) Sales and marketing includes advertising, trade shows, media production and promotional products and other as discussed in the sales and marketing section.
| Six Months Ended September 30, 2016 | ||||||||||||||||
| (in thousands) | Direct-to-consumer | Retail | Corporate/Other | Consolidated | ||||||||||||
| Net sales | $ | 1,967 | $ | 2,431 | $ | - | $ | 4,398 | ||||||||
| Cost of revenue | 1,243 | 1,620 | - | 2,863 | ||||||||||||
| Gross profit | 724 | 811 | - | 1,535 | ||||||||||||
| Gross profit percentage | 36.8 | % | 33.4 | % | - | 34.9 | % | |||||||||
| Sales and marketing (1) | 22 | 426 | 121 | 569 | ||||||||||||
| Segment profit | 702 | 385 | (121 | ) | 966 | |||||||||||
| Segment profit percentage | 35.7 | % | 15.8 | % | - | 22.0 | % | |||||||||
Three Months Ended June 30, 2017 | ||||||||||||||||
(in thousands) | Direct-to-consumer | Retail | Corporate/Other | Consolidated | ||||||||||||
Net sales | $ | 1,425 | $ | 1,037 | $ | - | $ | 2,462 | ||||||||
Cost of revenue | 936 | 704 | - | 1,640 | ||||||||||||
Gross profit | 489 | 333 | - | 822 | ||||||||||||
Gross profit percentage | 34.3 | % | 32.1 | % | - | 33.4 | % | |||||||||
Sales and marketing (1) | 20 | 251 | 69 | 340 | ||||||||||||
Segment profit | 469 | 82 | (69 | ) | 482 | |||||||||||
Segment profit percentage | 32.9 | % | 7.9 | % | - | 19.6 | % | |||||||||
(1) Sales and marketing includes advertising, trade shows, media production and promotional products and other as discussed in the sales and marketing section.
Liquidity and Capital Resources
After adjusting the net loss for non-cash items and changes in operating assets and liabilities, the net cash used by operating activities totaled $7.3 million$454,000 for the sixthree months ended SeptemberJune 30, 2017,2018, as compared to cash used of $2.7 million in$517,000 for the prior year period.
Non-cash items, comprising depreciation, amortization, loss on disposal of fixed assets, bad debt (recoveries) allowances, change in fair value of the Scotts Miracle-Gro warrant liability and non-cash compensation expense,inventory allowances, totaled to a net gain of $142,000$70,000 for the sixthree months ended SeptemberJune 30, 2017,2018, as compared to a net gain of $1.4 million$66,000 in the prior year period. The decrease principallyincrease reflected nominal non-cash charges arising from all of the change in fair value on the warrant liability in the prior year, depreciation and non-cash compensation expenses.
Changes in current assets usedprovided net cash of $9.6 million$850,000 during the sixthree months ended SeptemberJune 30, 2017,2018, principally from increases in inventory anddecreases in accounts receivable, as timing of load-in orders increasedinventory and deposit balances, as we ramp up formoved away from our peak sales season, which historically beginspartially offset by increases in the third fiscal quarter.prepaid assets.
As of SeptemberJune 30, 2017,2018, the total inventory balance was $8.4$4.2 million, representing approximately 17169 days of sales activity, and 189166 days of sales activity, at the average daily rate of product cost expensed during the twelve months and three months ended SeptemberJune 30, 2017,2018, respectively. The three months’ days in inventory calculation is based on the three months of sales activity and can varybe greatly due toimpacted by the seasonality of our sales, which are at their highest level during our quarter endedending December 31. The twelve months'months’ days in inventory calculation is based on the twelve months of sales activity and is less impacted by the seasonality of our sales.
Current operating liabilities increased $3.0 milliondecreased $740,000 during the sixthree months ended SeptemberJune 30, 2017,2018, principally because of an increaseseasonal decreases in accounts payable.all operating liability accounts. Accounts payable as of SeptemberJune 30, 2017,2018 totaled $3.0$2.7 million, representing approximately 3929 days of daily expense activity, and 4656 days of daily expense activity, at the average daily rate of expenses incurred during the twelve months and three months ended SeptemberJune 30, 2017,2018, respectively.
Net investmentinvesting activity used $97,000$21,000 of cash in the current year period, principally because of the purchases of equipment as we change our supply manufacturers and introduce new products.
Cash
As of SeptemberJune 30, 2017,2018, we had a cash balance of $1.4$7.0 million, of which $15,000 was restricted as collateral for various corporate obligations. This compares to a cash balance of $8.8$7.5 million as of March 31, 2017,2018, of which $15,000 was restricted. The decrease in cash is primarily attributable to the purchase of inventory in the current quarter to meet peak season sales demand, in particular to satisfy the current period load-in sales with new and expanded brick-and-mortar retail customers.
Borrowing Agreements
As of SeptemberJune 30, 20172018 and March 31, 2017,2018, we have no outstanding long-term debt, however,debt. See Note 10 for subsequent events as we have entered into a Term Loan Agreement in the principal amount of up to $2.0 million with Scotts Miracle-Gro.
Cash Requirements
We generally require cash to:
● | fund our operations and working capital requirements, |
● | develop and execute our product development and market introduction plans, |
● | execute our sales and marketing plans, |
● | fund research and development efforts, and |
● | pay debt obligations as they come due. |
At this time, we do not expect to enter into additional capital leases to finance major purchases. In addition, we do not currently have any binding commitments with third parties to obtain any material amount of equity or debt financing other than the financing arrangements described in this report.
Assessment of Future Liquidity and Results of Operations
Liquidity
To assess our ability to fund ongoing operating requirements, we developed assumptions regarding operating cash flow. Critical sources of funding, and key assumptions and areas of uncertainty include:
● | our cash of |
● | our cash of |
● | continued support of, and extensions of credit by, our suppliers and lenders, |
● | our historical pattern of increased sales between September and March, and lower sales volume from April through |
● | the level of spending necessary to support our planned |
● | our sales to consumers, retailers, and international distributors, and the resulting cash flow from operations, which will depend in great measure on the success of our direct-to-consumer sales initiatives, and the acceptance of the product at our various retail distribution |
Based on these facts and assumptions, we believe our existing cash and cash equivalents, along with the Term Loan Agreement and the cash generated by our anticipated results from operations, will be sufficient to meet our operating needs for the next twelve months.
There are several factors that could affect our future results of operations. These factors include, but are not limited to, the following:
● | the effectiveness of our consumer marketing efforts in generating both direct-to-consumer sales, and sales to consumers by our retailer |
● | uncertainty regarding the impact of macroeconomic conditions on consumer spending, |
● | uncertainty regarding the capital markets and our access to sufficient capital to support our current and projected scale of operations, |
● | the seasonality of our business, in which we have historically experienced higher sales volume |
● | a continued, uninterrupted supply of product from our third-party manufacturing suppliers in China, |
● | the success of the Scotts Miracle-Gro |
● | uncertainty of appropriate exit strategies with retail customers regardless of the contractual obligations. |
Off-Balance Sheet Arrangements
Other than our headquarter facility lease commitment incurred in the normal course of business, we do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interest in transferred assets, and have not entered into any contracts for financial derivative such as futures, swaps, and options.
Interest Rate Risk
Our interest income is most sensitive to fluctuations in the general level of U.S. interest rates. As such, changes in U.S. interest rates affect the interest earned on our cash, cash equivalents, and short-term investments, and the value of those investments. Due to the short-term nature of our cash equivalents and investments, we have concluded that a change in interest rates does not pose a material market risk to us with respect to our interest income. OurAs discussed above, if we acquire additional debt carries fixed interest rates and therefore changes in the general level of market interest rates will notcould impact our interest expense during the terms of our existingfuture debt arrangements.
Foreign Currency Exchange Risk
We transact business primarily in U.S. currency. Although we purchase our products in U.S. dollars, the prices charged by our suppliers in Asia are predicated upon their cost for components, labor and overhead. Therefore, changes in the valuation of the U.S. dollar in relation to the Chinese currencies may cause our manufacturers to raise prices of our products which could reduce our profit margins.
In future periods, it is possible that we could be exposed to fluctuations in foreign currency exchange rates on accounts receivable from sales and net monetary assets denominated in foreign currencies and liabilities. To date, however, virtually all of our transactions have been denominated in U.S. dollars.
Foreign Import Tariff Risk
We purchase a significant portion of supplies from suppliers outside the United States. The United States and other countries have levied tariffs and taxes on certain goods. Further tariffs, additional taxes, or trade barriers may increase our selling and/or manufacturing costs, decrease margins, reduce the competitiveness of our products, or inhibit our ability to sell products or purchase necessary supplies, which could have a material adverse effect on our business, results of operations, or financial conditions.
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted by the Company under the Securities Exchange Act of 1934 (the "Exchange Act"“Exchange Act”), is recorded, processed, summarized, and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Exchange Act is accumulated and communicated to the Company'sCompany’s management, including its principal executive and financial officer, as appropriate, to allow timely decisions regarding required disclosure.
The Company carried out an evaluation, under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company'sCompany’s disclosure controls and procedures as of the end of the period covered by this report. Based upon and as of the date of that evaluation, the Company'sCompany’s principal executive officer and financial officer concluded that the Company'sCompany’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC'sSEC’s rules and forms.
(b) Changes in Internal Controls
There were no changes in the Company'sCompany’s internal controls or in other factors that could have significantly affected those controls during the three months ended SeptemberJune 30, 2017.
PART II - OTHER INFORMATION
None.
Our operations and financial results are subject to various risks and uncertainties that could adversely affect our business, results of operations, financial condition, future results, and the trading price of our common stock. In addition to the other information set forth in this Quarterly Report, you should also carefully consider the factors described in "Part“Part I. Item 1A. Risk Factors"Factors” of our Annual Report on Form 10-K for the year ended March 31, 2017,2018, which could materially affect our business, results of operations, financial condition, future results, and the trading price of our common stock.
None.
None.
Not applicable.
Not applicable.
Exhibit Number | Description | |
3.1 | ||
3.2 | ||
3.3 | ||
3.4 | ||
3.5 | ||
3.6 | ||
3.7 | ||
3.8 | ||
3.9 | ||
3.10 | ||
3.11 |
In accordance with the requirements of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AeroGrow International, Inc. | |||
Date: | /s/J. Michael Wolfe | ||
By: J. Michael Wolfe | |||
Its: President and Chief Executive Officer (Principal Executive Officer) and Director | |||
Date: August 13, 2018 | |||
/s/Grey H. Gibbs | |||
By: Grey H. Gibbs | |||
Its: Senior Vice President Finance and Accounting (Principal Accounting Officer) | |||