UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

Commission File No. 001-33531

AEROGROW INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

(303) 444-7755

(Registrant'sRegistrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

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 every Interactive Data File required to be submitted 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 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 accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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'sissuer’s common stock outstanding as of AugustFebruary 48,2020 202:1:  34,328,036

AeroGrow International, Inc.

TATBLEABLE OF CONTENTS

FORM 10-Q REPORT

June 30,December 31, 2020

PART I - FINANCIAL INFORMATION

Item 1. Condensed Financial Statements

AEROGROW INTERNATIONAL, INC.

CONDENSED BALANCE SHEETS

See accompanying notes to the condensed financial statements.

AEROGROW INTERNATIONAL, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

See accompanying notes to the condensed financial statements.

AEROGROW INTERNATIONAL, INC.

STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

See accompanying notes to the condensed financial statements.

AEROGROW INTERNATIONAL, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

See supplemental disclosures below and the accompanying notes to the condensed financial statements.

Continued from previous page

AEROGROW INTERNATIONAL, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1.    Description of the Business

AeroGrow International, Inc. (collectively, the “Company,” “AeroGrow,” “we,” “our”“our,” or “us”) was incorporated in the State of Nevada on March 25, 2002. The Company’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 ten 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 (viavia online retail outlets an brick-and-mortar)and brick-and-mortar storefronts, catalogue and direct-to-consumer sales primarily in the United States and Canada, as well as selected countries in Europe.

Scotts Miracle-Gro Merger

As reported in a Current Report on Form 8-K filed with the SEC on November 12, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with SMG Growing Media, Inc., an Ohio corporation (“Parent”), AGI Acquisition Sub, Inc., a Nevada corporation and direct, wholly-owned subsidiary of Parent (“Merger Sub” and, together with Parent, the “Purchaser Parties”), and, solely for the purposes stated in Section 6.4 of the Merger Agreement, The Scotts Miracle-Gro Company, an Ohio corporation (“Scotts Miracle-Gro”), relating to the proposed acquisition of the Company by Parent.

The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Merger Sub will be merged with and into the Company (the “Merger”), with the Company continuing as the surviving corporation in the Merger, and, at the effective time of the Merger (the “Effective Time”), each share of the Company’s common stock (other than Excluded Shares and Dissenting Shares (each as defined in the Merger Agreement)), issued and outstanding immediately prior to the Effective Time will be automatically converted into the right to receive $3.00 in cash, without interest thereon and subject to any required withholding of taxes (the “Merger Consideration”), and will be cancelled.

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”) 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”) for annual audited financial statements and should be read in conjunction with the Company’s audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2020, (“Fiscal 2020”), as filed with the SEC on June 23, 2020.

In the opinion of management, the accompanying unaudited interim financial statements reflect all adjustments, including normal recurring adjustments, necessary to present fairly the financial position of the Company at June 30,December 31, 2020, the results of operations for the three monthsthree- and nine–month periods ended June 30,December 31, 2020 and 2019, and the cash flows for the three monthsnine–month periods ended June 30,December 31, 2020 and 2019. Although ourThe results of operations for the three and nine months ended June 30,December 31, 2020 represent a substantial improvement over the prior year period, they are not necessarily indicative of the expected results of operations for the fiscal year ended March 31, 2021 (“Fiscal 2021”) or any future period. In this regard, the Company��sCompany’s business ishas historically been highly seasonal, with approximately 60.6% of revenues in the fiscal year ended March 31, 2020 (“Fiscal 20202020”) occurring in the five consecutive calendar months fromof September through January.   During the three-monthnine-month period ended June 30,December 31, 2020, the Company has further expanded its distribution channels and invested in necessary inventory and overhead in anticipation of the Fiscal 2021 peak sales season.  The balance sheet as of March 31, 2020 is derived from the Company’s audited financial statements.

Liquidity

Sources of funding to meet prospective cash requirements during Fiscal 2021 include the Company’s existing cash balances, cash flow from operations, and borrowings under the Company’s debt arrangements as discussed in Note 3.  We may need to seek additional debt or equity capital, however, to address the seasonal nature of our working capital needs, to enable us to 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.

On August 3, 2020, the Company renewed a Working Capital Term Loan Agreement in the principal amount of up to $7.5 million with a wholly owned subsidiary of The Scotts Miracle-Gro Company (collectively with its subsidiary, “SMG” or “Scotts Miracle-Gro”).  See Note 10 for subsequent events.3 “Notes Payable, Long Term Debt and Current Portion – Long Term Debt” below

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’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”) 260.  ASC 260 requires companies with complex capital structures to present basic and diluted earnings per share (“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. As of December 31, 2020 the Company did not have any dilutive securities. Securities 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 includeinclude: employee stock options to purchase 94,000zero and 11,000 shares of common stock three monthsfor the period ended June 30, 2019.December 31, 2020; and December 31, 2019, respectively.

Concentrations of Risk

ASC 825-10-50-20 requires disclosure of significant concentrations of credit risk regardless of the degree of such risk.  

Reclassifications

Certain prior year amounts have been reclassified to conform to current year presentation.

CashCash:

The Company maintains cash depository accounts with financial institutions.  The amount on deposit with severalone financial institutionsinstitution exceeded the $250,000 federally insured limit as of June 30,December 31, 2020 and two institutions as of March 31, 2020.  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 ReceivableReceivable:

For the three months ended June 30,December 31, 2020, and 2019,the Company had one customer, Amazon.com, which represented 28.2%27.2% of the Company’s net revenue. For the three months ended December 31, 2019, the Company had two customers, Amazon.com and 33.8%Woot.com, which represented 30.2% and 12.5%, respectively, of the Company’s net revenue. For the nine months ended December 31, 2020, the Company had one customer, Amazon.com that represented 33.2% of the Company’s net revenue. For the nine months ended December 31, 2019, the Company had one customer, Amazon.com that represented 35.8% of the Company’s net revenue.

As of June 30,December 31, 2020, the Company had two customers, Amazon.com and Amazon.ca,Kohl’s, which represented 63.4%34.6% and 12.0%15.7%, respectively, of the Company’s outstanding accounts receivable.  As of March 31, 2020, three customers, Amazon.com, Amazon.ca and Bed, Bath and Beyond, represented 39.9%, 20.7% and 10.4%, respectively, of outstanding accounts receivable.  The Company believes that all receivables from these customers are collectible.

SuppliersSuppliers:

For the three months ended June 30,December 31, 2020, the Company purchased inventories and other inventory-related items from one supplier totaling $5.8$10.6 million. For the three months ended June 30,December 31, 2019, the Company purchased inventory and other inventory-related items from one supplier totaling $4.2 million. For the nine months ended December 31, 2020, the Company purchased inventories and other inventory-related items from one supplier totaling $26.7 million. For the nine months ended December 31, 2019, the Company purchased inventories and other inventory-related items from one supplier totaling $1.3$10.5 million. The purchase of inventories and other inventory-related items is tied to the anticipated timing and amount of sales for our highly seasonal business and payment terms with our suppliers.

The Company’s primary contract manufacturers are located in China.  As a result, the Company may be subject to political, currency, regulatory, transportation/shipping, third-party labor, spread and virulence of diseases, such as the global COVID-19 pandemic and weather/natural disaster risks.  Although the Company believes alternate sources of manufacturing could be obtained, these risks and any potential loss of supply could have an adverse impact on operations especially in the short term.

Fair Value of Financial Instruments

The Company follows the guidance in ASC 820, Fair Value Measurements and Disclosures (“ASC 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 3:3.

The carrying value of financial instruments including cash, receivables, and accounts payable, and accrued expenses, and notes payable related party approximates their fair value at June 30,December 31, 2020 and March 31, 2020 due to the relatively short-term nature of these instruments. 

The Company’s intellectual property liability carrying value was determined by utilizing Level 3 inputs.  As discussed below in Notes 3 and 4, this liability was incurred in conjunction with the Company’s strategic alliance with Scotts Miracle-Gro.  As of June 30,December 31, 2020 and March 31, 2020, the fair value of the Company'sCompany’s sale of the intellectual property liability was 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 June 30,December 31, 2020, the Company did not have any financial assets or liabilities that were measured at fair value on a recurring basis subsequent to initial recognition. 

Accounts Receivable and Allowance for Doubtful Accounts

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.  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'sCompany’s allowance estimate is based on a review of the current status of trade accounts receivable, which resulted in an allowance of $540,000$823,000 and $376,000 at June 30,December 31, 2020 and March 31, 2020, respectively.

Other Receivables

In conjunction with the Company’s processing of credit card transactions for its direct-to-consumer sales activities and as security with respect to the Company’s performance for credit card refunds and charge backs, the Company is required to maintain a cash reserve with Fidelity Information Services, the Company’s credit card processor. This reserve is equal to 5% of the credit card sales processed during the previous six months. As of June 30,December 31, 2020 and March 31, 2020, the balance in this reserve account was $334,000$571,000 and $257,000, 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 and catalogues, inclusive of postage and printing costs and related direct-response advertising costs, in accordance with ASC 340-20 Capitalized Advertising Costs. As prescribed by ASC 340-20-25, direct-to-consumer advertising costs incurred are reported as assets and are 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 months ended June 30, 2020 and June 30, 2019, were as follows:

As of June 30, 2020 and March 31, 2020, the Company had deferred $5,000 and $84,000, respectively, related to media and advertising costs, including the catalogue costs described above.  The costs are included within the “prepaid expenses and other” line of the balance sheets.

Inventory

Inventories areInventory is 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.  A majority of the Company’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 June 30,December 31, 2020 and March 31, 2020 were as follows:

The Company determines an inventory obsolescence reserve based on management’s historical experience and establishes reserves against inventory according to the age of the product. As of June 30,December 31, 2020 and March 31, 2020, the Company had reserved $211,000$226,000 and $151,000, respectively for inventory obsolescence.  The inventory values are shown net of these reserves.

Leases

At lease inception, the Company determines whether an arrangement is or contains a lease. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities, and noncurrent operating lease liabilities in the financial statements. ROU assets represent the Company’s right to use leased assets over the term of the lease. Lease liabilities represent the Company’s contractual obligation to make lease payments over the lease term. For operating leases, ROU assets and lease liabilities are recognized at the commencement date. The lease liability is measured as the present value of the lease payments over the lease term using:using (i) the rate implicit in the lease if it is determinable, or (ii) alternatively, if the rate is not determinable from the lease, the Company’s incremental borrowing rate at the commencement date of the lease.lease to determine the present value of the lease payments. Operating ROU assets are calculated as the present value of the remaining lease payments, plus unamortized initial direct costs and any prepayments, less any unamortized lease incentives received. Lease terms may include renewal or extension options to the extent they are reasonably certain to be exercised. The assessment of whether renewal or extension options are reasonably certain to be exercised is made at lease commencement. Factors considered in determining whether an option is reasonably certain of exercise include, but are not limited to, the value of any leasehold improvements, the value of renewal rates compared to market rates, and the presence of factors that would cause a significant economic penalty to the Company if the option were not exercised. Lease expense is recognized on a straight-line basis over the lease term. The Company has elected not to recognize an ROU asset and obligation for leases with an initial term of twelve months or less. The expense associated with short-term leases is included in lease expense in the statement of operations.

For finance leases, after lease commencement the lease liability is measured on an amortized cost basis and increased to reflect interest on the liability and decreased to reflect the lease payment made during the period. Interest on the lease liability is determined each period during the lease term as the amount that results in a constant period discount rate on the remaining balance of the liability. The ROU asset is subsequently measured at cost, less any accumulated amortization and any accumulated impairment losses. Amortization on the ROU asset is recognized over the period from the commencement date to the earlier of:of (1) the end of the useful life of the ROU asset;asset, or (2) the end of the lease term. To determine the present value of finance leases the Company uses a 10%10.0% discount rate, which is the rate specified in the lease agreement, or the incremental borrowing rate, as appropriate. To the extent a lease arrangement includes both lease and non-lease components, the components are accounted for separately.

The Company has various operating leases primarily for office space and other distribution centers, some of which include escalating lease payments and options to extend or terminate the lease. The Company determines if a contract is a lease at the inception of the arrangement. The exercise of lease renewal option is at the Company’s sole discretion and options are recognized when it is reasonably certain the Company will exercise the option. The Company’s leases have remaining terms of less than one year to seven years. The Company does not have lease agreements with residual value guarantees, sale leaseback terms or material restrictive covenants.

Operating lease ROU assets and liabilities are recognized at commencement date of lease agreements greater than one year based on the present value of lease payments over the lease term. Lease expense is recognized on a straight-line basis over the lease term and variable lease costs are expensed as incurred.

Revenue Recognition

The Company currently has two operating and reportable segments: (i) the Direct-to-Consumer segment, which is composedcomprised of sales directly from our website, mail order or customer calls to our customer service department; and (ii) the Retail segment, which is comprised of all sales related to retailers, including where possession of our product is taken 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 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,December 31, 2020 or March 31, 2020.

The Company excludes from revenues all taxes assessed by a governmental authority that are imposed on the sale of its products and collected from customers.

There were no changes to the Company’s accounting for variable consideration under ASC 606. However, the classification of net realizable accounts receivable 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) which are recorded as a reduction to net sales, primarily include consideration given to retail customers including, but not limited to the following:

The Company executes promotional allowance programs with retailers through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the 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 estimated 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, based on historical rates.  Certain incentive programs require the Company to estimate the number of customers who will actually redeem the incentive based on our historical industry experience. As of June 30,December 31, 2020 and March 31, 2020, the Company reduced accounts receivable $934,000by $2.4 million and $744,000, respectively, as an estimate for the foregoing deductions and allowances within the “accounts receivable, net” and “accrued expenses” linesline of the balance sheets, respectively.

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’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’s warranty obligation.  Based upon the foregoing, the Company has recorded a provision for potential future warranty costs of $241,000$271,000 and $226,000 as of June 30,December 31, 2020 and March 31, 2020, respectively.  These expenses are recorded in the accrued expenses line of the condensed balance sheets.

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, retail customers are provided a fixed allowance, usually in a range ofthe 1% to 2%, range, to cover returned goods and this allowance is deducted from payments made to us by such customers. As of June 30,December 31, 2020 and March 31, 2020, the Company has recorded a reserve for customer returns of $425,000$1.0 million and $430,000, respectively. Additionally, the Company calculates specific returns for any customers that are deemed to have a right of return and the customer specific calculation is reviewed for reasonableness at the end of each period. These expenses are recorded as an offset to the accounts receivable line of the condensed balance sheets.

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.  The Company records media costs related to its direct-to-consumer advertisements, inclusive of 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 Reporting on Advertising Costs.  As prescribed by ASC 340-20-25, direct response advertising costs incurred are reported as assets and are amortized over the estimated period of the benefits, based on the proportion of current period revenue from the advertisement to probable future revenue.  

Advertising expense for the three and nine months ended December 31, 2020 and December 31, 2019, were as follows:

As of December 31, 2020 and March 31, 2020, the Company deferred $92,000 and $84,000, respectively, related to such media and advertising costs, which include the catalogue cost described above and commercial production costs.  The costs are included in the prepaid expenses and other line of the condensed balance sheets.

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'sCompany’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 June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses: Measurement of 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 updated guidance also 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 instrument. This guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within that reporting period, and early adoption is permitted. The Company is in the process of evaluating the potential impact of this new guidance on the Company’s financial statements and related disclosures.

Accounting Standards Recently Adopted

In February 2016, the FASB issued ASU 2016-02, Leases (“ASC 842”), which, among other things, requires an entity to recognize a ROU and a lease liability on the balance sheet for substantially all leases, including operating leases. The Company adopted ASC 842 effective April 1, 2019 utilizing the modified retrospective approach such that prior year financial statements were not recast under the new standard. Adoption of this standard resulted in changes to the Company’s condensed balance sheets and accounting policies for leases but did not have an impact on the condensed statements of operations or cash flows. See Note 8 for additional information regarding the new standard and its impact on the Company’s financial statements.

In addition, the Company elected the package of practical expedients permitted under the transition guidance to not reassess (1) whether any expired or existing contracts are, or contain, leases; (2) the lease classification for expired or existing leases; and (3) initial direct costs for existing leases.

The adoption of the guidance effective as of April 1, 2019 resulted in the recognition of: (i) ROU assets of $805,000 which amortization of the ROU began the quarter ended June 30, 2019; and (ii) additional lease liabilities for operating leases of $805,000. The guidance did not have an impact on the Company's condensed statements of operations from the adoption date forward based on amortization of the asset and liability. See Note 8 for disclosures related to the Company's leases.

3.    Notes Payable, Long Term Debt and Current Portion – Long Term Debt

The following represents the changes to our Notes Payable and 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’s Annual Report on Form 10-K for the year ended March 31, 2020, as filed with the SEC on June 23, 2020.  The following summarizes the changes to our Notes Payable, Long Term Debt and Current Portion – Long Term Debt for the periods presented.

As of June 30,December 31, 2020 and March 31, 2020, the outstanding balance of the Company’s notes payable and debt, including accrued interest, is as follows:

Scotts Miracle-Gro Term Loan Agreements

On August 3, 2020, the Company renewed a Working Capital Term Loan Agreement with Scotts Miracle-Gro due June 30, 2021. Under Term Loan, Scotts Miracle-Gro agreed to provide up to $7.5 million of capital in increments of $500,000. The Term Loan Agreement is secured by a lien on the assets of the Company.  Interest is charged at the stated rate of 10% per annum and is payable, in cash, quarterly in arrears at the end of each September, December, March and June. The funds provided under the Term Loan are used for general working capital and to acquire inventory to support anticipated growth as the Company expands its retail and its direct-to-consumer sales channels.  The Term Loan permits prepayment and re-borrowing without penalty or premium, and as of December 31, 2020, the Company had borrowed $6.5 million under the Term Loan.  The Term Loan Agreement was filed as an exhibit to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 11, 2020.

On June 20, 2019, the Company entered into a Real Estate Term Loan Agreement in the principal amount of up to $1.5 million with Scotts Miracle-Gro.  The funding provided capital to fund real estate related lease obligations. The proceeds were made available as needed in increments of $100,000 not to exceed $1.51.5 million, with a due date of March 31, 2022. Interest is charged at the stated rate of 10% and iswill be paid quarterly in arrears on each of April 30, July 31, October 31 and January 31. As of June 30,December 31, 2020, the Company had borrowed $900,000 under the Real Estate Term Loan.  See Note 10 for subsequent events.

Liability Associated with Scotts Miracle-GroMiracle-Gro Transaction

On April 22, 2013, theThe Company and Scotts Miracle-Gro, the owner of approximately 80.5% of the Company’s outstanding common stock, have entered into an Intellectual Property Sale Agreement, a Technology License Agreement, a Brand License Agreement, and a Supply Chain Services Agreement, each of which has been filed with the SEC.  The Intellectual Property Sale Agreement and the Technology License constitute an agreement of sales ofto sell future revenues.  Becauserevenue because: (i) the Company received cash from Scotts Miracle-Gro and agreed to pay, for a defined period, a specified percentage of its revenue,revenue; and because(ii) the Company has significant involvement in the generation of its revenue,revenue. As a result, the excess paid over net book value is classified as debt and is being amortized under the effective interest method.  As of June 30,December 31, 2020 and March 31, 2020, a liability of $19,000$10,000 and $24,000, respectively, was recorded on the condensed balance sheets for the Intellectual Property Sale Agreement.  As of June 30,December 31, 2020 and March 31, 2020, the Company has accrued $1.8$1.4 million and $1.5 million, respectively, as a liability for the Technology Licensing Agreement, and has expensed $332,000$768,000 and $87,000$367,000 for the quarters ended June 30,December 31, 2020 and June 30,December 31, 2019, respectively. The accrual is calculated as 2% of the annual net sales and recorded as a liability. The accrued liability for the Brand License Agreement, which is calculated at an amount equal to 5% of all seed pod kit and seed pod kit related sales, amountstotaled to $1.2 million$839,000 and $922,000 as of June 30,December 31, 2020 and March 31, 2020, respectively, andrespectively. In addition, the Company has expensed $291,000$384,000 and $67,000$204,000 for the quarters ended June 30,December 31, 2020 and June 30,December 31, 2019, respectively.

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”), 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’s Series B Convertible Preferred Stock, par value $0.001 per share (the “Series“Series B Preferred Stock”) and a warrant to purchase up to 80% of the Company’s common stock (the “Warrant”“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’s Rights Agreement and Voting Agreement were filed as exhibits to a Current Report on Form 8-K that was filed with the SEC on April 23, 2013.  On November 29, 2016, Scotts Miracle-Gro fully exercised the Warrant and, by its terms, the Series B Preferred Stock automatically converted into the Company’s common stock. Scotts Miracle-Gro currently owns approximately 80.5% of the Company’s outstanding 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”), within 120 calendar days after receipt of Scotts Miracle-Gro’s demand for registration. 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 Miracle-Gro Transactions” to the financial statements included in the Company’s Annual Report on Form 10-K, as filed with the SEC on June 23, 2020.  See also Note 103 above for subsequent events.the Term Loan with Scotts Miracle-Gro.

5.    Equity Compensation Plans and Employee Benefit Plans

For the three monthsthree- and nine-month periods ended June 30,December 31, 2020 and June 30,December 31, 2019, the Company did not grant any options to purchase the Company’s common stock under the Company’s 2005 Equity Compensation Plan (the “2005 Plan”) and no new options will be granted under this plan until a new plan is adopted.  

During the three and nine months ended June 30,December 31, 2020, zero and June 3011,000 options to purchase shares of common stock were cancelled or expired, respectively, and no shares of common stock were issued upon exercise of outstanding stock options under the 2005 Plan.  During the three and nine months ended December 31, 2019, nozero and 93,000 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 June 30,December 31, 2020, the Company had no unvested outstanding options to purchase shares of the Company’s common stockstock; all outstanding options have expired and therefore, no additional compensation expense will be attributable to such stock options.

Information regarding all stock options outstanding under the Company’s 2005 Plan as of June 30, 2020 is as follows:

The aggregate intrinsic value in the preceding table represents the difference between the Company’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 June 30, 2020.recognized. 

6.    Income Taxes

The Company follows the guidance in ASC 740, Accounting for Uncertainty in Income Taxes (“ASC 740”), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’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.  Any liability for actual taxes to taxing authorities is recorded as income tax liability.  

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 June 30,December 31, 2020 and March 31, 2020, 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 Party Transactions” of Form 10-K for the year ended March 31, 2020, as filed with the SEC on June 23, 2020 for a detailed discussion of related party transactions.  Additionally, see

On August 3, 2020, AeroGrow entered into a Working Capital Term Loan Agreement in the principal amount of up to $7.5 million and on June 20, 2019 AeroGrow entered in a Real Estate Term Loan Agreement in the principal amount of up to $1.5 million with Scotts Miracle-Gro.  Under both loan agreements, interest is charged at the stated rate of 10% per annum and is paid quarterly in arrears.  See Note 10 “Subsequent Events” to our financial statements for discussion related to transactions involving our officers, directors3 “Notes Payable, Long Term Debt and 5% or greater shareholders. Current Portion – Long Term Debt” above.

In addition, as set forth above, the Company and SMG Global entered into a Merger Agreement on November 12, 2020. See Note 1 “Description of the Business – Scotts Miracle-Go Merger.

8.    Leases

The Company recognized operatingoperation lease ROU assets and lease liabilities based on the present value of remaining minimum lease payments. For the discount rate assumption, the implicit rate was not readily determinable in the Company’s lease agreements. Therefore, the Company used an estimated incremental borrowing rate, in determining the present value of lease payments. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will includeincluded the extended term in the calculation of the right-of-use asset and lease liability.

The Company elected the practical expedients available under ASC 842 and applied them consistently to all applicable leases. The Company did not apply ASC 842 to any leases with a remaining term of 12 months or less. For these leases, no asset or liability was recorded and lease expense continues to be recognized on a straight-line basis over the lease term. As allowed by the practical expedients, the Company does not reassess whether any expired or existing contracts are or contain leases, does not reassess the lease classification for any expired or existing leases and does not reassess initial direct costs for existing leases.

The table below sets forth supplemental Balance Sheet information for the Company’s leases.

As of June 30,December 31, 2020, the weighted average remaining lease term for operating leases was 6 years, and the weighted average discount rate was 10%.

The table below sets forth the future cash payments under such agreements for the remaining years are as follows:

Rent expense for the three months ended June 30,December 31, 2020 and 2019 was $144,000$165,000 and $128,000,$118,000, respectively. Rent expense for the nine months ended December 31, 2020 and 2019 was $456,000 and $383,000, respectively.

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,segments; Retail Sales and Direct-to-Consumers. The Company evaluates performance based on the primary financial measure of contribution margin (“segment profit”). Segment profit, which 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.

(1) Sales and marketing expense includes advertising, trade shows, media production and promotional products and other as discussed in the sales and marketing section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations, which is included in Item 2. of this Quarterly Report on Form 10-Q (the “MD&A”).

(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.

(1) Sales and marketing expense includes advertising, trade shows, media production and promotional products and other as discussed in the sales and marketing section of the MD&A. See Item 2 below.